-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UaUaT61WeTJSK5XH0Iwi02NGCRlwnRY8Uvhz90R12LVkyt0lWnyenc1aHeUMzkdn 4Uc9fbsRLFxWsPuDtLGX/A== 0001047469-99-020580.txt : 19990517 0001047469-99-020580.hdr.sgml : 19990517 ACCESSION NUMBER: 0001047469-99-020580 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EARTHLINK NETWORK INC /DE/ CENTRAL INDEX KEY: 0001061566 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 582389244 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-52507 FILM NUMBER: 99623449 BUSINESS ADDRESS: STREET 1: 3100 NEW YORK DR CITY: PASADENA STATE: CA ZIP: 91107 MAIL ADDRESS: STREET 1: 3100 NEW YORK DR CITY: PASADENA STATE: CA ZIP: 91107 10-Q 1 FORM 10-Q 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. 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 PART I ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EARTHLINK NETWORK, INC. CONDENSED CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, 1998 MARCH 31, 1999 ----------------- -------------- (AUDITED) (UNAUDITED) (in thousands) 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 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements 1 EARTHLINK NETWORK, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, --------------------- 1998 1999 ---- ---- (UNAUDITED) (in thousands, except per share data) 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 -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements 2 EARTHLINK NETWORK, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ------------------ 1998 1999 ---- ---- (UNAUDITED) (in thousands) 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 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements 3 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 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 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 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:
THREE MONTHS ENDED MARCH 31, ------------------ 1998 1999 ---- ---- 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%) ---- ---- ---- ----
- --------------- (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
THREE MONTHS ENDED MARCH 31, ----------------------------------- INCREASE 1998 1999 (DECREASE) ---- ---- ---------- (in thousands) 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) ------ ------ ------ ------ ------ ------
7 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
THREE MONTHS ENDED MARCH 31, --------------------------------------------------------------------- PERCENT PERCENT OF TOTAL OF TOTAL 1998 REVENUES 1999 REVENUES ---- -------- ---- -------- (in thousands, except percentages) Total revenues $29,826 100% $68,243 100% Incremental revenues 392 1 1,984 3
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
THREE MONTHS ENDED MARCH 31, ----------------------------------------------------------------- PERCENT OF PERCENT OF RECURRING RECURRING 1998 REVENUES 1999 REVENUES ---- --------- ---- --------- (in thousands, except percentages) Recurring revenues $27,856 100% $64,837 100% Cost of recurring revenues 14,087 51 28,893 45
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 COST OF OTHER REVENUES
THREE MONTHS ENDED MARCH 31, --------------------------------------------------------- PERCENT PERCENT OF OTHER OF OTHER 1998 REVENUES 1999 REVENUES ---- -------- ---- -------- (in thousands, except percentages) Royalties $ 14 1% $136 9% Other 22 1% 151 11% ---- --- ---- --- Total cost of other revenues $ 36 2% $287 20% ---- --- ---- --- ---- --- ---- ---
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 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 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 "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 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 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 EX-27.1 2 EXHIBIT 27.1
5 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. 1,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 364,199 0 0 0 5,458 0 806 0 282 0 374,821 0 73,964 0 29,626 0 481,931 0 71,512 0 0 0 0 0 47 0 319 0 403,665 0 481,931 0 0 0 68,243 29,826 0 0 29,180 14,123 64,867 21,643 949 1,047 315 687 (25,889) (6,404) 0 0 (25,804) (5,940) 0 0 0 0 0 0 (25,889) (6,404) (0.82) (0.28) (0.82) (0.28) CERTAIN AMOUNTS IN PRIOR YEARS ARE RECLASSIFIED TO CONFORM TO CURRENT YEAR PRESENTATION.
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