<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 SEPTEMBER 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-15605
EARTHLINK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2511877
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1430 WEST PEACHTREE ST. N.W., SUITE 400, ATLANTA, GEORGIA 30309
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(404) 815-0770
(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 129,920,289 shares of Common Stock outstanding
as of September 30, 2000.
================================================================================
<PAGE>
EARTHLINK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1. Financial Statements and Supplementary Data................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 17
PART II
Item 4. Submission of Matters to a Vote of Security Holders........................................... 18
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
EARTHLINK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
-------------------- -------------------
(UNAUDITED)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 685,753 $ 749,176
Accounts receivable, net 16,367 44,429
Prepaid expenses 19,596 25,786
Other assets 13,672 15,371
-------------------- -------------------
Total current assets 735,388 834,762
Investments in other companies 4,400 11,200
Other long-term assets 12,536 1,811
Property and equipment, net 151,435 265,109
Intangibles, net (Note 5) 205,388 461,351
-------------------- -------------------
$ 1,109,147 $ 1,574,233
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 47,074 $ 26,831
Other accounts payable and accrued liabilities 74,797 162,072
Current portion of capital lease obligations 11,724 18,932
Convertible notes 179,975 -
Deferred revenue 28,732 62,389
-------------------- -------------------
Total current liabilities 342,302 270,224
Long-term debt
Long-term portion of capital lease obligations 8,392 14,685
Other long-term debt - 1,815
-------------------- -------------------
Total liabilities 350,694 286,724
Stockholders' equity:
Preferred stock 76 368
Common stock 1,169 1,299
Additional paid-in capital 1,085,109 1,868,888
Warrants to purchase common stock 477 1,412
Accumulated deficit (328,378) (584,458)
-------------------- -------------------
Total stockholders' equity 758,453 1,287,509
-------------------- -------------------
$ 1,109,147 $ 1,574,233
==================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
EARTHLINK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- -----------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ----------------
(UNAUDITED)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Narrowband access $ 154,416 $ 210,631 $ 412,118 $ 592,386
Web hosting 12,981 16,535 33,629 48,797
Broadband access 6,509 15,480 16,243 34,815
Content, commerce and advertising 3,847 6,654 9,298 23,868
--------------- --------------- --------------- ----------------
Total revenues 177,753 249,300 471,288 699,866
Cost of revenues 63,525 92,398 178,369 255,201
Sales and marketing 63,705 112,466 134,317 327,339
Operations and member support 45,809 75,866 124,690 214,617
General and administrative 18,966 25,046 48,592 68,667
Merger and restructuring charges (Note 6) - - - 33,967
Acquisition-related costs (Note 7) 40,975 31,254 113,364 79,120
--------------- --------------- --------------- ----------------
Total operating costs and expenses 232,980 337,030 599,332 978,911
--------------- --------------- --------------- ----------------
Loss from operations (55,227) (87,730) (128,044) (279,045)
Interest income (expense), net 6,102 15,200 15,104 38,611
--------------- --------------- --------------- ----------------
Net loss (49,125) (72,530) (112,940) (240,434)
Deductions for accretion dividends (Note 8) (3,404) (8,035) (10,677) (15,646)
--------------- --------------- --------------- ----------------
Net loss attributable to common stockholders $ (52,529) $ (80,565) $ (123,617) $ (256,080)
=============== =============== =============== ================
Basic and diluted net loss per share (Note 4) $ (0.45) $ (0.65) $ (1.10) $ (2.11)
=============== =============== =============== ================
Weighted average common shares outstanding 115,774 123,996 112,601 121,447
=============== =============== =============== ================
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
EARTHLINK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------------
1999 2000
---------------------- ----------------------
(UNAUDITED)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (112,940) $ (240,434)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities, net of effect from acquisition:
Depreciation and amortization 142,213 126,521
Unrealized loss on investment - 300
Increase in accounts receivable, net (8,996) (15,473)
(Increase) decrease in prepaid expenses and other assets (17,816) 11,058
Increase (decrease) in accounts payable and accrued liabilities 35,975 (5,092)
Increase in deferred revenue 8,262 6,484
---------------------- ----------------------
Net cash provided by (used in) operating activities 46,698 (116,636)
---------------------- ----------------------
Cash flows from investing activities:
Purchases of property and equipment (76,850) (97,098)
Proceeds from sale of equipment 1,416 -
Acquistion of business, net of cash acquired - (155,562)
Transaction costs - (10,259)
Net cash acquired from acquisition - 2,125
Purchases of subscriber bases (226,570) (21,591)
Investments in other companies (1,500) (7,100)
---------------------- ----------------------
Net cash used in investing activities (303,504) (289,485)
---------------------- ----------------------
Cash flows from financing activities:
Proceeds from capital lease obligations 11,752 838
Principal payments under capital lease obligations (11,242) (9,407)
Proceeds from issuance of notes payable 174,005 -
Repayment of notes payable - (179,975)
Proceeds from line of credit 78,064 -
Repayment of line of credit (80,000) -
Proceeds from sale of common stock 447,168 127,163
Proceeds from issuance of redeemable preferred stock 42,622 580,604
Proceeds from liquidation of stock subscription receivable 1,041 -
Repurchase of common shares - (56,691)
Proceeds from stock options and warrants exercised 9,937 7,012
---------------------- ----------------------
Net cash provided by financing activities 673,347 469,544
---------------------- ----------------------
Net increase in cash and cash equivalents 416,541 63,423
Cash and cash equivalents, beginning of period 308,607 685,753
---------------------- ----------------------
Cash and cash equivalents, end of period $ 725,148 $ 749,176
====================== ======================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
EARTHLINK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
EarthLink, Inc., ( "EarthLink" or the "Company"), is a leading Internet
service provider, or ISP, providing reliable nationwide Internet access and
related value-added services to our individual and business members. EarthLink
was formed in February 2000 as a result of the merger of EarthLink Network, Inc.
("EarthLink Network") and MindSpring Enterprises, Inc., ("MindSpring") in a
transaction accounted for as a "pooling of interests". By combining, the two
companies formed the second largest Internet service provider in the United
States.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements of EarthLink, Inc.,
which include the accounts of its wholly-owned subsidiary, EarthLink Operations
Inc., for the three and nine month periods ended September 30, 2000 and 1999 and
the related footnote information are unaudited and have been prepared on a basis
substantially consistent with the Company's audited supplemental financial
statements as of December 31, 1999 contained in the Company's annual report on
Form 10-K, as filed with the Securities and Exchange Commission (the "Annual
Report"). All intercompany transactions have been eliminated. As discussed
previously, the condensed consolidated financial statements have been prepared
to give retroactive effect to the merger, in February 2000, of EarthLink Network
and MindSpring in a transaction accounted for as a pooling of interests.
Separate results of the combined entities for the three and nine month periods
ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
-------------------- --------------------
(In thousands, unaudited)
<S> <C> <C>
Revenue:
EarthLink Network $ 89,574 $ 235,818
MindSpring 88,179 235,470
-------------------- --------------------
$ 177,753 $ 471,288
==================== ====================
Net loss attributable to common shareholders:
EarthLink Network $ (34,769) $ (88,832)
MindSpring (10,835) (21,219)
Adjustment to reflect establishment of tax
valuation allowance (6,925) (13,566)
-------------------- --------------------
$ (52,529) $ (123,617)
==================== ====================
</TABLE>
These financial statements should be read in conjunction with the
audited supplemental 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 September 30, 2000 and the results of operations and of cash flows for the
three and nine month periods ended September 30, 2000. The results of
operations for the three and nine month periods ended September 30, 2000 are
not necessarily indicative of the results anticipated for the entire year
ending December 31, 2000.
4
<PAGE>
EARTHLINK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Investments and Hedging Activities. SFAS 133
establishes a new model for accounting for derivatives and hedging activities
and supersedes several existing standards. SFAS 133, as amended by SFAS 137 and
SFAS 138, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company does not expect that the adoption of SFAS 133 will
have a material impact on its financial statements.
In December 1999, the SEC staff issued Staff Accounting Bulletin No.
101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 explains
how the SEC staff applies by analogy the existing rules on revenue recognition
to other transactions not covered by such rules. In March 2000, the SEC issued
SAB 101A that delayed the original effective date of SAB 101 until the second
quarter of 2000 for calendar year companies. In June 2000, the SEC issued SAB
101B that further delayed the effective date of SAB 101 until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company does not expect that the adoption of SAB 101 will have a material impact
on its financial statements.
3. RECLASSIFICATIONS AND CONVERSIONS
Certain amounts in prior period financial statements have been
reclassified to conform to the current period presentation.
Each outstanding share of EarthLink Network securities was exchanged
for 1.615 shares of the equivalent security of the new Company and each
outstanding share of MindSpring securities was exchanged for one share of the
securities of the new Company. Other outstanding securities of the companies
were converted on the same basis. The accompanying financial statements have
also been retroactively adjusted to give effect to the two-for-one stock split
effected by MindSpring in June 1999. The effect of these conversions is
reflected in the earnings per share of EarthLink, Inc.
4. 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 common stock equivalents in the calculation of EPS as such inclusion
would have an anti-dilutive effect.
5. ACQUISITIONS.
On September 12, 2000, EarthLink completed its acquisition of
OneMain.com Inc., ("OneMain") by way of a merger. The aggregate of
acquisition price and costs incurred to acquire OneMain was approximately
$302.8 million. The aggregate purchase price consisted of (i) $155.4 million
in cash, (ii) $200,000 in estimated cash payments in lieu of fractional
shares, and (iii) 9,278,298 shares of EarthLink Common Stock valued at $106.7
million at a closing price of $11.50 on September 11, 2000. In addition,
EarthLink assumed capital lease liabilities of $22.1 million and other net
liabilities of $1.8 million. Transaction charges incurred in the acquisition
totaled approximately $16.6 million.
The acquistion was accounted for under the purchase method.
Accordingly the results of OneMain have been included in the financial
results of EarthLink since the date of acquisition. Assets acquired and
liabilities assumed have been recorded at their estimated fair values, and
are subject to adjustment when additional information concerning asset and
liability valuations is finalized. OneMain's accounting policies have been
conformed to those of EarthLink.
Based on an independent appraisal, $187.5 million of the purchase
price was attributed to the approximately 758,000 customers acquired from
OneMain. Approximately $5.2 million and $6.3 million of the $302.8 million
purchase cost were attributed to the value of the assembled work force
organization and non-compete agreements, respectively. The excess of cost
over the estimated fair value of net assets acquired was $103.8 million and
has been allocated to goodwill. All intangible assets acquired in the
transaction, including goodwill, will be amortized on a straight-line basis
over 36 months. Management may refine the allocation of the purchase price in
future periods as the related fair value appraisals of certain assets and
liabilities are finalized.
5
<PAGE>
EARTHLINK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Earnings for the three months ended September 30, 2000 were reduced
by $5.0 million or $0.04 per share due to losses incurred by OneMain since
the acquisition. The following unaudited pro forma information presents the
results of operations of the Company as if the acquisition had taken place on
January 1, 1999. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of
operations that actually would have resulted had the acquisition occurred on
the date indicated, or which may result in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
1999 2000
----------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Statement of operations data:
Total revenues $ 521,303 $ 812,004
Net loss (200,718) (366,895)
Deductions for accretion dividends (Note 8) (10,677) (15,646)
Net loss attributable to common stockholders (211,395) (382,541)
Basic and diluted net loss per share $ (1.78) (2.95)
Weighted average shares 118,585 129,763
</TABLE>
In connection with the acquisition of OneMain, the Company issued two
warrants to purchase a total of 164,388 shares of the Company's common stock.
The warrants have an exercise price of $18.25 per share and expire on September
12, 2005.
6. MERGER AND RESTRUCTURING CHARGES
During the three months ended March 31, 2000, the Company recorded a
charge of $34.0 million related to the merger of EarthLink Network and
MindSpring. Of that amount, approximately $622,000 remains unpaid and included
in accrued expenses on the condensed consolidated balance sheet as of September
30, 2000.
On September 12, 2000 EarthLink assumed OneMain's restructuring
liabilities of $5.4 million. OneMain had acquired 27 Internet service
providers (ISP's) and was working to consolidate the operating, general and
administrative functions of the ISPs. OneMain recognized a restructuring
charge related to employee termination benefits and certain real estate
contracts. The plan called for the net reduction of over 650 positions in
Operations and Customer Support, Sales and Marketing and General and
Administrative departments implemented. As of September 30, 2000,
approximately 215 employees have been terminated as a result of this plan. No
additional adjustments have been made to the reserve. The following table
summarizes the activity in the accruals during the nine months ended
September 30, 2000. The balance of the merger and restructuring accrual at
September 30, 2000 is expected to be paid within 12 months.
<TABLE>
<CAPTION>
MERGER AND BALANCE AT
RESTRUCTURING NON CASH SEPTEMBER 30,
CHARGES ITEMS PAYMENTS 2000
------------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Investment banking fees $ 16,411 $ - $ (16,411) $ -
Printing, filing, mailing, proxy solicitation,
legal, accounting and advisory fees 6,118 - (6,118) -
Acceleration of unamortized costs associated with
line of credit and convertible debt 6,792 (6,792) - -
Severance costs and accelerated compensation
expense 7,218 (1,076) (1,108) 5,034
Real Estate 942 - - 942
Other 1,930 - (1,930) -
------------- ------------ ------------ -----------
$ 39,411 $ (7,868) $ (25,567) $ 5,976
============= ============ ============ ===========
</TABLE>
6
<PAGE>
EARTHLINK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. ACQUISITION-RELATED COSTS
Acquisition related charges primarily represent amortization related to
(i) the acquisition of the Sprint Internet Passport business in September 1998,
(ii) the acquisition of various assets used in connection with the consumer
dial-up Internet access business of Spry, Inc., ("Spry"), in October 1998, (iii)
the acquisition of the United States Internet services business of NETCOM
On-Line Communication Services, Inc., ("NETCOM"), in February 1999, and (iv) the
acquisition of OneMain. Intangible assets acquired in connection with the Sprint
transaction are being amortized on a straight-line basis over the estimated
useful lives. The member base and goodwill acquired from Sprint in that
transaction, which represents the excess of consideration over the fair value of
net assets acquired, were fully amortized as of December 31, 1999. The Company's
Marketing and Distribution Agreement with Sprint is being amortized over 5 and
10 years, which represents the life of the portion of the contract related to
Sprint's provision of additional members and the overall contract life relative
to the co-branding feature, respectively. The member bases acquired from Spry,
NETCOM and OneMain are being amortized over three years.
8. DEDUCTIONS FOR DIVIDENDS ON CONVERTIBLE PREFERRED STOCK
Dividends on convertible preferred stock are reflected as an
increase to net loss attributable to common stockholders. The adjustments of
$8.0 million and $15.6 million recorded during the three and nine month
periods ended September 30, 2000, respectively, represent liquidation
dividends of $2.7 million and $7.9 million, respectively, based on a 3%
dividend and the accretion of $5.3 million and $7.7 million, respectively,
related to a dividend associated to the beneficial conversion feature of the
convertible preferred stock.
9. COMMON AND CONVERTIBLE PREFERRED STOCK ISSUED
In January 2000, the Company entered into a multi-year partnership
to deliver services to customers of Apple Computer, Inc. ("Apple") in the
United States. Under the terms of the partnership, EarthLink became the
exclusive default ISP in Apple's Internet Setup Software included with all
Apple Macintosh(R) computers sold in the U.S. Under this arrangement
EarthLink pays Apple one time fees for new subscribers on the Apple platform.
In addition, Apple purchased 7,083,333 shares of Series C Convertible
Preferred Stock for $200 million and appointed Mr. Philip W. Schiller to the
Earthlink board of directors in accordance with Apple's rights.
In February 2000, Sprint exercised its preemptive rights to maintain
its level of ownership in the Company after the aforementioned purchase of
shares by Apple. Accordingly, Sprint purchased 2.7 million shares of which
682,000 were common stock and 2.0 million were Series B Convertible Preferred
Stock. Proceeds from the sale of common and preferred stock to Sprint were
approximately $77 million.
7
<PAGE>
EARTHLINK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, the merger of EarthLink Network and MindSpring
constituted a change in control as defined in the Indenture Agreement of
MindSpring's 5 percent Convertible Subordinated Notes. Holders of the notes had
the right to demand payment equal to 100% of the principal amount of the notes,
plus accrued interest. Accordingly, in February 2000, the Company offered to
purchase for cash all of its 5 percent Convertible Subordinated Notes. On March
31, 2000 approximately $179.1 million of the $180.0 million aggregate principal
amount of the notes outstanding were tendered to the Company for repurchase. The
total payment of $183.4 million including interest was paid in April 2000. The
untendered notes will continue to be subject to the Indenture Agreement.
In May 2000, Sprint exercised its preemptive rights to maintain its
level of ownership in the Company after the aforementioned merger of EarthLink
Network and MindSpring. Accordingly, Sprint purchased approximately 26.0 million
shares consisting of approximately 6.0 million shares of common stock and
approximately 20.0 million shares of Series B Convertible Preferred Stock for
approximately $431.5 million.
Pursuant to a Board approved stock repurchase program, during the
period of June 2000 through August 2000 the Company repurchased 5 million shares
of its common stock for $56.7 million.
8
<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 events to occur,
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 "Forward Looking Statements."
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES THERETO AND THE AUDITED COMBINED FINANCIAL STATEMENTS AND THE NOTES
THERETO CONTAINED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1999.
OVERVIEW
EarthLink, Inc. is a leading Internet service provider, or ISP,
providing reliable nationwide Internet access and related value-added
services to our individual and business members. The Company was formed in
February 2000 as a result of the merger of EarthLink Network, Inc ("EarthLink
Network") and MindSpring Enterprises, Inc., ("MindSpring"). By combining, the
two companies formed the second largest Internet service provider in the
United States. The Company expects to achieve significant revenue, expense
and capital synergies through economies of scale, the elimination of
duplicative expenditures and the combined skills of the two companies'
management teams. The Company will also be able to take advantage of the
complementary blend of assets and capabilities contributed by the two
companies to improve and expand service offerings and achieve a higher member
growth rate than otherwise.
The Company has pursued a strategy of growth by acquisition and
organic growth. Our member base grew from approximately 3.1 million paying
members as of December 31, 1999 to approximately 4.6 million paying members
as of September 30, 2000. On September 12, 2000, EarthLink acquired 758,000
subscribers in connection with its acquisition of OneMain.com, Inc.,
("OneMain"), in a transaction accounted for under the purchase method. The
aggregate of acquisition price and costs incurred to acquire OneMain was
approximately $302.8 million. The aggregate purchase price consisted of (i)
$155.4 million in cash, (ii) $200,000 in estimated cash payments in lieu of
fractional shares, and (iii) 9,278,298 shares of EarthLink Common Stock
valued at $106.7 million. In addition, Earthlink assumed capital lease
liabilities of $22.1 million and other net liabilities of $1.8 million. Our
organic growth is a product of our efforts to enhance our members' Internet
experience through (1) simple, rapid and reliable access to the Internet, (2)
superior member service and technical support, and (3) member education and
support. As a result, we believe we have a high member retention rate for our
industry.
The Company continues to pursue revenue growth in four key business
areas:
- NARROWBAND ACCESS REVENUES which consist of monthly fees charged to
members for dial-up Internet access;
- WEB HOSTING REVENUES which we earn principally in the form of monthly
fees for providing web hosting services to companies and individuals
wishing to have a web or e-Commerce presence;
- BROADBAND ACCESS REVENUES which consist of fees charged for high-speed,
high capacity access services including cable, dedicated circuits and
digital subscriber lines, ("DSL"); and
- CONTENT, COMMERCE AND ADVERTISING REVENUES which primarily represent
revenues from Premier Partnerships. Premier Partnerships are
promotional arrangements with advertisers, retailers, service
providers, and content providers. Revenues are received in a variety
of forms, including: (i) fixed payments for placing links from our
properties to third party sites; (ii) variable payments based on the
9
<PAGE>
volume of traffic delivered to our partners in the form of customers,
page views, or e-commerce revenues; (iii) of payments for ads in our
various on-line properties and our bi-monthly magazine bLink, and
(iv) revenues from the sale of selected products to subscribers.
In January 2000, we entered into a strategic alliance with Apple
Computer, Inc., which has contributed to our member growth. In connection with
this alliance, we expanded our existing commercial relationship with Apple so
that we will serve as the default ISP for Apple's Macintosh line of computers
for a minimum of two years and our overall commercial relationship has been
extended through January 4, 2005.
RESULTS OF OPERATIONS
The following table sets forth the percent of total revenues
represented by certain items in our statement of operations for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- -----------------------------------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
1999 REVENUES 2000 REVENUES 1999 REVENUES 2000 REVENUES
--------- ---------- ----------- ---------- ---------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Narrowband access $154,416 87% $210,631 84% $ 412,118 87% $ 592,386 85%
Web hosting 12,981 7% 16,535 7% 33,629 7% 48,797 7%
Broadband access 6,509 4% 15,480 6% 16,243 3% 34,815 5%
Content, commerce and advertising 3,847 2% 6,654 3% 9,298 2% 23,868 3%
--------- ----------- ---------- ----------
Total revenues 177,753 100% 249,300 100% 471,288 100% 699,866 100%
Operating costs and expenses:
Cost of revenues 63,525 36% 92,398 37% 178,369 38% 255,201 36%
Sales and marketing 63,705 36% 112,466 45% 134,317 28% 327,339 47%
Operations and member support 45,809 26% 75,866 30% 124,690 26% 214,617 31%
General and administrative 18,966 10% 25,046 10% 48,592 10% 68,667 10%
Merger related charges (1) - 0% - 0% - 0% 33,967 5%
Acquisition-related costs (2) 40,975 23% 31,254 13% 113,364 24% 79,120 11%
--------- ----------- ---------- ----------
232,980 131% 337,030 135% 599,332 52% 978,911 140%
--------- ----------- ---------- ----------
Loss from operations (55,227) -31% (87,730) -35% (128,044) -27% (279,045) -40%
Interest income (expense), net 6,102 3% 15,200 6% 15,104 3% 38,611 6%
--------- ----------- ---------- ----------
Net loss (49,125) -28% (72,530) -29% (112,940) -24% (240,434) -34%
Deductions for accretion dividends (3) (3,404) -2% (8,035) -3% (10,677) -2% (15,646) -2%
--------- ----------- ---------- ----------
Net loss attributable to common stockholders $(52,529) -30% $(80,565) -32% $(123,617) -26% $(256,080) 36%
========= =========== ========== ==========
</TABLE>
-----------
1. Represents merger and restructuring costs related to the EarthLink
Network - MindSpring merger that were incurred during the three months
ended March 31, 2000. These costs were primarily attributable to fees
associated with investment banking, legal and accounting services, the
acceleration of unamortized costs associated with a line of credit and
convertible debt, severance costs and non-cash accelerated compensation
expense resulting from the merger. There were no such costs during the
three months ended September 30, 2000.
2. Represents acquisition and amortization related expenses for the three
and nine month periods ended September 30, 1999 and 2000 resulting from
the following:
a. the acquisition of various assets used in connection with the
consumer dial-up Internet access business of Spry, Inc., in
October 1998.
b. the acquisition of the United States Internet services business of
NETCOM On-Line Communication
c. the acquisition of the Sprint Internet Passport business in
June 1998.
d. The acquisition of OneMain in September 2000
10
<PAGE>
NARROWBAND ACCESS REVENUES
Narrowband access revenues consist of monthly fees charged to members
for dial up Internet access. EarthLink's narrowband revenues increased 36% from
$154.4 million during the three months ended September 30, 1999 to $210.6
million during the three months ended September 30, 2000. Narrowband revenues
increased 48% from $412.1 million during the nine months ended September 30,
1999 to $592.4 million during the nine months ended September 30, 2000. The
substantial growth in narrowband revenues was primarily due to an increase in
the Company's narrowband member base from 2.7 million at September 30, 1999 to
4.3 million at September 30, 2000. The growth in our member base was primarily
due to acquisitions and our efforts in sales and marketing. Approximately
387,000 members were acquired from NETCOM in February 1999 and 732,000 members
were acquired from OneMain.
WEB HOSTING REVENUES
Web hosting revenues are earned by leasing server space and providing
web services to companies and individuals wishing to present a web or e-commerce
presence. EarthLink's Web hosting revenues increased 27% from $13.0 million
during the three months ended September 30, 1999 to $16.5 million during the
three months ended September 30, 2000. Web hosting revenues increased 45% from
$33.6 million during the nine months ended September 30, 1999 to $48.8 million
during the nine months ended September 30, 2000. As of September 30, 2000 and
including the 20,000 Web sites acquired from OneMain, the Company hosted 159,000
Web sites, compared to 95,000 as of September 30, 1999.
BROADBAND ACCESS REVENUES
Broadband access revenues represent fees charged for high-speed,
high-capacity access services including cable, dedicated circuits, digital
subscriber line (DSL) and fixed wireless services. EarthLink's broadband
revenues increased 138% from $6.5 million during the three months ended
September 30, 1999 to $15.5 million during the three months ended September 30,
2000. Broadband revenues increased 115% from $16.2 million during the nine
months ended September 30, 1999 to $34.8 million during the nine months ended
September 30, 2000. The substantial growth in broadband revenues was primarily
due to an increase in the Company's broadband member base from 14,000 at
September 30, 1999 to 139,000 at September 30, 2000, including 6,000 subscribers
acquired from OneMain. We serviced 71 broadband markets nationwide as of
September 30, 2000.
CONTENT, COMMERCE AND ADVERTISING REVENUES
Content, commerce and advertising revenues primarily represent
revenues from Premier Partnerships, which are promotional arrangements with
advertisers, retailers, service providers, and content providers. Revenues
are earned through: (i) fixed payments for placing links from our properties
to third party sites; (ii) variable payments based on the volume of traffic
delivered to our partners in the form of customers, page views, or e-commerce
revenues; (iii) payments for ads in our various on-line properties and our
bi-monthly magazine bLink and (iv) the sale of selected consumer products to
the Company's subscribers. The principal component of our content, commerce
and advertising strategy is our Premier Partnership Program, through which we
offer and sell promotional packages that provide advertisers, retailers, and
content providers with access to the multiple points of contact we have with
our members. We also sell advertising and content space on our various online
properties, such as the Personal Start Page and the Mall, and through our
news magazine, bLink. Content, commerce and advertising revenues increased
76% from $3.8 million during the three months ended September 30, 1999 to
$6.7 million during the three months ended September 30, 2000. However,
content, commerce and advertising revenues declined 19% from the second
quarter. In the current soft environment for dot.com advertising,
renegotiation or termination of contracts with smaller or niche dot.coms who
could not achieve attractive customer acquisition costs slightly more than
offset growth in revenues from larger, established partners for whom
EarthLink is an effective advertising or content partner. More significantly,
our decline in revenue resulted from the absence of special promotional
opportunities as with the second quarter's EarthLink-sponsored Wheel of
Fortune week and from the loss of the last of the former MindSpring
advertising and
11
<PAGE>
commerce partners where EarthLink already had competitive relationships.
Content, commerce and advertising revenues increased 157% from $9.3 million
during the nine months ended September 30, 1999 to $23.9 million during the nine
months ended September 30, 2000.
COST OF REVENUES
Cost of revenues increased 46% from $63.5 million during the three
months ended September 30, 1999 to $92.4 million during the three months ended
September 30, 2000. Cost of revenues increased 43% from $178.4 million during
the nine months ended September 30, 1999 to $255.2 million during the nine
months ended September 30, 2000. The increases were primarily due to the
increase in our member base. However, cost of revenues as a percentage of
revenues increased from 36% to 37% during the three months ended September 30,
2000 as compared to the three months ended September 30, 1999. This increase is
primarily due to (i) the increasing percentage of our business in DSL broadband
services, which has a higher percentage cost of revenues compared to narrowband
access and (ii) the inclusion of $4.2 million in costs of revenue from OneMain.
OneMain has a higher cost of revenues as a percent of revenues due to its
participation in smaller, more rural markets where lower customer density and
less competition among telecommunications infrastructure providers leads to
higher communications costs per member. Cost of revenues as percentage of
revenues decreased from 38% to 36% during the nine months ended September 30,
2000 as compared to the nine months ended September 30, 2000. This percentage
decrease is attributable to: (i) more effective management of our network, and
(ii) our increasing ability to negotiate more favorable commercial arrangements
with our telecommunications service providers as we leverage our growing member
base.
SALES AND MARKETING
Sales and marketing expenses consist primarily of advertising,
direct response mailings, sales compensation, bounties, communications costs
related to trial members, salaries and the cost of promotional material.
Sales and marketing increased 77% from $63.7 million during the three months
ended September 30, 1999 to $112.5 million during the three months ended
September 30, 2000. Sales and marketing increased 144% from $134.3 million
during the nine months ended September 30, 1999 to $327.3 million during the
nine months ended September 30, 2000. The increases in both periods were
primarily due to the costs of growing our member base from 2.8 million at
September 30, 1999 to 3.8 million, prior to the inclusion of OneMain
subscribers, at September 30, 2000. This subscriber growth is in accordance
with management's efforts to achieve organic growth and increasing market
share through marketing strategies. These efforts include the implementation
of an ambitious advertising program to create brand awareness, expansion of
direct mail marketing programs, the development of new marketing channels,
increased third party bounties and increased marketing personnel headcount.
The increase is also a result of the cost of modems given to subscribers to
the Company's DSL service for free or significantly below EarthLink's costs.
Sales, marketing and other direct costs associated with the acquisition of
members are generally 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 customer
information systems, software development, and network operations. Operations
and member support increased 66% from $45.8 million during the three months
ended September 30, 1999 to $75.9 million during the three months ended
September 30, 2000. Operations and member support increased 72% from $124.7
million during the nine months ended September 30, 1999 to $214.6 million during
the nine months ended September 30, 2000. These increases principally reflect
(1) the increase in members from 2.5 million at September 30, 1999 to 3.8
million, prior to the acquisition of OneMain subscribers, at September 30, 2000,
(2) the opening of additional call centers and (3) management's focus on
retaining existing members by providing superior service and devoting
significant resources to expanding technical support capabilities.
GENERAL AND ADMINISTRATIVE
12
<PAGE>
General and administrative expenses consist primarily of costs
associated with the finance, legal and human resources departments, outside
professional services, and payment processing, collections and bad debt
expenses. General and administrative expense increased 32% from $19.0 million
during the three months ended September 30, 1999 to $25.0 million during the
three months ended September 30, 2000. General and administrative expense
increased 41% from $48.6 million during the nine months ended September 30, 1999
to $68.7 million during the nine months ended September 30, 2000. The increase
was primarily due to increases in salaries and wages, depreciation, credit card
processing fees, and bad debt. The rise in salaries and wages was primarily due
to growth in headcount. The increase in depreciation expense was due to the
acquisition of office equipment and the build-out of leasehold improvements. The
increases in credit card processing fees and bad debt were primarily due to the
increase in our member base.
MERGER AND RESTRUCTURING CHARGES
During the three months ended March 31, 2000, the Company recorded a
charge of $34.0 million related to the merger of EarthLink Network and
MindSpring. Of that amount, approximately $622,000 remains unpaid and included
in accrued expenses on the condensed consolidated balance sheet as of September
30, 2000.
On September 12, 2000 EarthLink assumed OneMain's restructuring
liabilities of $5.4 million. OneMain had acquired 27 Internet service
providers and was working to consolidate the operating, general and
administrative functions of the ISPs. OneMain recognized a restructuring
charge related to employee termination benefits and certain real estate
contracts. The plan called for the net reduction of over 650 positions in
Operations and Customer Support, Sales and Marketing and General and
Administrative expenses was implemented. As of September 30, 2000,
approximately 417 employees have been terminated as a result of this plan. No
additional adjustments have been made to the reserve. The following table
summarizes the activity in the accruals during the nine months ended
September 30, 2000. The balance of the merger and restructuring accrual at
September 30, 2000 is expected to be paid within 12 months.
<TABLE>
<CAPTION>
MERGER AND BALANCE AT
RESTRUCTURING NON CASH SEPTEMBER 30,
CHARGES ITEMS PAYMENTS 2000
------------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Investment banking fees $ 16,411 $ - $ (16,411) $ -
Printing, filing, mailing, proxy solicitation,
legal, accounting and advisory fees 6,118 - (6,118) -
Acceleration of unamortized costs associated with
line of credit and convertible debt 6,792 (6,792) - -
Severance costs and accelerated compensation
expense 7,218 (1,076) (1,108) 5,034
Real Estate 942 - - 942
Other 1,930 - (1,930) -
------------- ------------ ------------ -----------
$ 39,411 $ (7,868) $ (25,567) $ 5,976
============= ============ ============ ===========
</TABLE>
ACQUISITION RELATED COSTS
Intangible assets acquired in connection with our transaction with
Sprint that was closed in September of 1998 are being amortized on a
straight-line basis over their estimated useful lives. The member base and
goodwill associated with the Sprint Internet Passport business that we acquired
in that transaction, which represents the excess of consideration over the fair
value of net assets acquired, were fully amortized as of December 31, 1999. The
Marketing and Distribution Agreement which we also entered into with Sprint is
being amortized over 5 and 10 years which represents the life of the portion of
the contract related to Sprint's provision of additional members and the overall
contract life relative to the co-branding feature, respectively. The member
bases acquired from Spry, NETCOM, InfiNet and OneMain are being amortized over
three years from the date of their respective acquisitions.
13
<PAGE>
The decrease in acquisition related costs from $41.0 million during the
three months ended September 30, 1999 to $31.3 million during the three months
ended September 30, 2000 and from $113.4 million during the nine months ended
September 30, 1999 to $79.1 million during the nine months ended September
30, 2000 is primarily due to the fact that the customer base and the goodwill
acquired in connection with the Sprint transaction were fully amortized by
December 31, 1999.
NET INTEREST INCOME
Net interest income increased 149% from $6.1 million during the three
months ended September 30, 1999 to $15.2 million during the three months ended
September 30, 2000. Net interest income increased 156% from $15.1 million during
the nine months ended September 30, 1999 to $38.6 million during the nine months
ended September 30, 2000. The increase was primarily due to an increase in
average cash balances available for investment as a result of our public stock
offerings completed in 1999 as well as investments in the Company made by Apple
and Sprint during the nine months ended September 30, 2000. Interest expense
decreased due to the repayment of $180.0 million in convertible debt in early
April 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our operating activities used approximately $116.6 million in cash
during the nine months ended September 30, 2000. The Company's net loss of
$240.4 million for the nine months ended September 30, 2000, was the primary
component of cash used in operating activities. During the nine months ended
September 30, 2000, the Company's net losses were offset by (i) non-cash
depreciation and amortization expenses, relating to the Company's network and
intangible assets, of $126.5 million, and (ii) an increase in deferred
revenue of $6.5 million. Cash used in operations during the nine months ended
September 30, 2000 increased due to an increase in accounts receivable of
$15.5 million.
Our investing activities used cash of approximately $289.5 million
during the nine months ended September 30, 2000. Capital equipment purchases
were $97.1 million during the nine months ended September 30, 2000. In March
2000, the Company invested $6.0 million in eCompanies Venture Group, LP and
invested $1.1 million in eMemories Inc. In September 2000, the Company
acquired OneMain for approximately $302.8 million including transaction
costs. The aggregate purchase price included cash of $155.4 million, an
estimated $200,000 in cash payments in lieu of fractional shares and $10.3
million in cash payments related to transaction costs. The Company purchased
the subscriber bases of other small ISPs for an aggregate amount of
approximately $21.6 million.
Our financing activities provided approximately $469.5 million in cash
during the nine months ended September 30, 2000. In January 2000, the Company
entered into a multi-year partnership to deliver services to customers of Apple
in the U.S. Under the terms of the partnership, Apple purchased 7.1 million
shares of EarthLink's Series C Convertible Preferred Stock for $200 million. In
February 2000, Sprint exercised its preemptive rights to maintain its ownership
level in the Company after the aforementioned purchase of shares by Apple.
Accordingly, Sprint purchased 2.7 million shares of which 682,000 were common
stock and 2.0 million were Series B Convertible Preferred Stock. Proceeds from
the sale of common and preferred stock to Sprint were approximately $77 million.
Proceeds from the exercise of stock options and warrants were $7.0 million
during the nine months ended September 30, 2000. In April 2000, the Company
repurchased approximately $180.0 million in aggregate principal amount of its 5%
Convertible Subordinated Notes. In May 2000, Sprint exercised its preemptive
rights to maintain its ownership level in the Company after the aforementioned
merger of EarthLink Network and MindSpring. Accordingly, Sprint purchased
approximately 26.0 million shares consisting of approximately 6.0 million shares
of common stock and approximately 20.0 million shares of Series B Convertible
Preferred Stock. Proceeds from this sale of common and preferred stock to Sprint
were approximately $431.5 million. The Company repurchased 5 million shares of
its Common stock for approximately $56.7 million.
14
<PAGE>
On September 30, 2000, we had approximately $749.2 million in cash and
cash equivalents. We believe our available cash is sufficient to meet our
operating expenses and capital requirements for more than the next 12 months. We
also have a $75 million credit facility from Sprint in the form of convertible
senior debt, increasing to $100 million by June 2001, at an interest rate of 6%
per annum. We have not borrowed any funds under this credit arrangement with
Sprint and do not anticipate any such borrowings. Our capital requirements
depend on numerous factors, including the rate of market acceptance of our
services, our ability to maintain and expand our member base, the rate of
expansion of our network infrastructure, the size and types of acquisitions in
which we may engage and the level of resources required to expand our marketing
and sales programs. We cannot accurately predict the timing and amount of
capital requirements. We may require additional financing sooner than
anticipated if capital requirements vary materially from those currently
planned. We have no commitments for any additional financing other than the line
of credit from Sprint, and we cannot be sure that we can obtain additional
commitments on favorable terms, if at all. Additional equity financing may
dilute our stockholders, and debt financing, if available, may restrict our
ability to declare and pay dividends and raise future capital. If we are unable
to obtain additional needed financing, we may be required to reduce the scope of
operations or anticipated expansion, which could materially and adversely affect
us.
FORWARD LOOKING STATEMENTS
The following statements about the Company's business outlook are based
on current expectations. These statements are forward-looking, and actual
results may differ materially. The Company undertakes no obligations to update
these statements.
Based on current trends and operating plans, EarthLink expects to end the year
2000 with 4.7-4.8 million paying customers. This includes an expected increase
of approximately 65,000 broadband customers in the fourth quarter to end the
year at over 200,000 retail broadband customers. The company expects to achieve
revenues of $290-295 million in the fourth quarter, and EBITDA of negative
$47-52 million. The increased EBITDA loss in the fourth quarter versus the third
quarter reflects expenses associated with a national advertising program to
increase consumer awareness of the EarthLink brand and the inclusion of an
entire quarter of results for OneMain. OneMain is operating at an EBITDA loss
until its customer base is fully integrated onto a single billing and
administrative platform and its operating, general and administrative functions
are fully consolidated into EarthLink. Net loss before merger and
acquisition-related costs is expected to be $0.48-0.53 per share.
15
<PAGE>
By selectively focusing its marketing efforts on the most efficient channels and
continuing to improve operating expense efficiency, the Company is targeting to
achieve EBITDA-positive operation during the second half of 2001, subject to
market conditions as outlined in our forward looking statements. Further
guidance for 2001 will be provided in January 2001 after the completion of the
Company's annual business plans.
The preceding paragraph, 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 either individually or in the
aggregate could cause actual results to differ materially from those expressed
include, without limitation, (1) that the Company may fail to be competitive
with existing and new competitors, (2) that the Company may not retain or grow
its member base, (3) that the Sprint and/or the Apple alliance may not be as
beneficial to the Company as management anticipates, (4) that demand for and
availability and implementation of the Company's DSL broadband services may not
continue to grow and improve as expected, (5) that prices which the Company may
charge for its services or which are charged generally in the market may
decline, (6) churn may not improve to expected levels, (7) the expected level of
advertising, content and commerce revenues may not be achieved, (8) that prices
charged to the Company by its telecommunications providers may not continue to
decline as expected, (9) the Company may not adequately respond to technological
developments impacting the Internet, (10) that needed financing may not be
available to the Company if and as needed, (11) that a significant change in the
growth rate of the overall U.S. economy may occur, such that consumer and
corporate spending are materially impacted, (12) that a significant reversal in
the trend toward increased usage of the Internet may occur, and (13) that some
other unforeseen difficulties may occur. This list is intended to identify
certain of the principal factors that could cause actual results to differ
materially from those described in the forward-looking statements included
elsewhere herein. These factors are not intended to represent a complete list of
all risks and uncertainties inherent in the Company's business, and should be
read in conjunction with the more detailed cautionary statements included
elsewhere in the Company's most recent filings with the SEC.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not engage in trading of market-risk sensitive
instruments. The Company also does not purchase for investment, hedging or
for purposes "other than trading", instruments that are likely to expose it
to market risk, whether interest rate, foreign currency exchange, commodity
price or equity price risk. The Company has not entered into any forward nor
purchased any futures contracts, nor purchased any options or entered into
any swaps.
The Company's interest income is most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest earned on the Company's cash equivalents and
short-term investments. To mitigate the impact of fluctuations in U.S. interest
rates, the Company generally maintains the majority of its investments in fixed
rate debt instruments. Because the Company has no significant outstanding debt
balances, it is not exposed to interest rate risk in connection with its
operating expenses.
17
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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.
On February 16, 2000 EarthLink filed a Current Report on form 8-K to
report the consummation of the Merger of EarthLink Network, Inc. ("EarthLink
Network") and MindSpring Enterprises, Inc. ("MindSpring") into a newly
created company, (the "Merger"). On September 22, 1999, EarthLink Network
and MindSpring entered into an Agreement and Plan of Reorganization (the
"Merger Agreement"), as previously reported in the Current Report on Form
8-K filed by EarthLink on September 30, 1999. The Merger Agreement and the
transactions contemplated thereby were approved by EarthLink Network and
MindSpring stockholders at their respective stockholder meetings on February
4, 2000, and the merger of EarthLink Network and MindSpring into the newly
created company was consummated on such date pursuant to the Merger
Agreement. Upon the closing of the Merger, the new company was renamed
"EarthLink, Inc." As a result of the Merger, EarthLink, Inc. is the
successor registrant to EarthLink Network, Inc. and MindSpring Enterprises,
Inc., and shall for all purposes be considered the successor registrant to
such companies under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, including without limitation
for use of Form S-3 Registration Statements.
On June 29, 2000, EarthLink dismissed PricewaterhouseCoopers LLP as the
Company's independent accountants and engaged Ernst & Young LLP as its new
independent accountants. The decision to change the Company's accounting
firm was recommended and approved by the Company's Audit Committee of the
Board of Directors. This change was reported in a Form 8-K Current Report
filed on July 6, 2000.
On July 10, 2000, EarthLink filed a Current Report on Form 8-K to
file certain historical financial statements related to the merger with
MindSpring.
On August 14, 2000, EarthLink filed a Current Report on Form 8-K to
report an amendment to its Merger Agreement with OneMain.
On September 19, 2000, EarthLink filed a Current Report on Form 8-K
to announce the closing of its acquisition of One Main. The announcement
of the pending acquisition was previously reported by EarthLink in a
Form 8-K Current Report filed on June 21, 2000. OneMain is an Internet
service provider based in Reston, Virginia. The aggregate purchase price
for OneMain was approximately $262 million, or $10.06, per share, for each
of OneMain's 26,048,003 common shares outstanding. The aggregate purchase
price consisted of $155.4 million in cash and $200,000 in estimated cash
payments in lieu of fractional shares, and 9,278,298 shares of EarthLink
Common Stock valued at $106.7 at a closing price of $11.50 on September
11, 2000.
18
<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, INC.
Date: NOVEMBER 14, 2000 /s/ CHARLES G. BETTY
--------------------- -----------------------------------------------
Charles G. Betty, Chief Executive Officer
Date: NOVEMBER 14, 2000 /s/ LEE ADREAN
--------------------- -----------------------------------------------
Lee Adrean, Executive Vice President - Finance
and Administration and Chief Financial Officer
(Principal Financial Officer)
Date: NOVEMBER 14, 2000 /s/ D. CARY SMITH
--------------------- -----------------------------------------------
D. Cary Smith, Corporate Controller (Chief
Accounting Officer)
19
