-----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, Somp/5dPRliMQWjY/bQPigyss2vyxs6HiuLdj9gTwHGrJhNBdMWke9kU5u9o8mIm txuev0xxZAiDjZXTMl8tPg== 0001047469-99-031865.txt : 19990816 0001047469-99-031865.hdr.sgml : 19990816 ACCESSION NUMBER: 0001047469-99-031865 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99688369 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 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 JUNE 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 000-20799 EARTHLINK NETWORK, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 58-2389244 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 3100 NEW YORK DRIVE, PASADENA, CALIFORNIA 91107 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (626) 296-2400 (REGISTRANT'S TELEPHONE, INCLUDING AREA CODE) -------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value -------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ There were 32,108,684 shares of Common Stock outstanding as of June 30, 1999. =============================================================================== EARTHLINK NETWORK, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 TABLE OF CONTENTS PART I Item 1. Financial Statements and Supplementary Data....................... 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk .......12 PART II Item 4. Submission of Matters to a Vote of Security Holders...............12 Item 6. Exhibits and Reports on Form 8-K..................................13 PART I ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA EARTHLINK NETWORK, INC. CONDENSED CONSOLIDATED BALANCE SHEET ASSETS
DECEMBER 31, 1998 JUNE 30, 1999 ----------------- ------------ (AUDITED) (UNAUDITED) (in thousands) Current assets: Cash and cash equivalents $ 140,864 $ 352,372 Accounts receivable, net 4,779 7,082 Prepaid expenses 4,147 7,462 Other assets 775 1,983 --------- --------- Total current assets 150,565 368,899 Other long-term assets 564 1,899 Property and equipment, net 35,206 47,450 Intangibles, net (Note 4) 80,006 44,612 --------- --------- $ 266,341 $ 462,860 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 14,818 $ 23,033 Accrued payroll and related expenses 8,934 7,513 Other accounts payable and accrued liabilities 20,372 21,333 Current portion of capital lease obligations 8,341 9,362 Deferred revenue 8,831 11,608 --------- --------- Total current liabilities 61,296 72,849 Long-term debt 7,701 8,988 --------- --------- Total liabilities 68,997 81,837 Stockholders' equity: Preferred stock 41 47 Common stock 291 321 Stock subscriptions receivable (1,041) - Additional paid-in capital 330,911 567,576 Warrants to purchase common stock 597 597 Accumulated deficit (133,455) (187,518) --------- --------- Total stockholders' equity 197,344 381,023 --------- --------- $ 266,341 $ 462,860 ========= =========
The accompanying notes are an integral part of these financial statements 1 EARTHLINK NETWORK, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 1998 1999 1998 1999 --------- --------- --------- --------- (UNAUDITED) (in thousands, except per share data) Recurring revenues $ 35,224 $ 74,591 $ 63,080 $ 139,428 Other revenues 1,620 1,137 3,198 2,559 Incremental revenues 1,146 2,273 1,538 4,257 --------- --------- --------- --------- Total revenues 37,990 78,001 67,816 146,244 Cost of recurring revenues 17,555 33,203 31,642 62,096 Cost of other revenues 120 289 156 576 Sales and marketing 8,281 22,605 15,847 41,322 General and administrative 5,018 7,892 9,555 15,675 Operations and member support 11,630 24,840 21,170 45,534 Amortization and transaction costs (Note 4) 7,208 17,673 7,208 35,346 --------- --------- --------- --------- Total operating costs and expenses 49,812 106,502 85,578 200,549 --------- --------- --------- --------- Loss from operations (11,822) (28,501) (17,762) (54,305) Interest income 426 4,371 649 8,247 Interest expense (621) (417) (1,308) (732) --------- --------- --------- --------- Net loss (12,017) (24,547) (18,421) (46,790) Deductions for accretion dividends (Note 5) (1,054) (3,627) (1,054) (7,273) --------- --------- --------- --------- Net loss attributable to common stockholders $ (13,071) $ (28,174) $ (19,475) $ (54,063) ========= ========= ========= ========= Basic and diluted net loss per share (Note 3) $ (0.53) $ (0.88) $ (0.82) $ (1.71) ========= ========= ========= ========= Weighted average shares 24,586 31,980 23,674 31,689 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements 2 EARTHLINK NETWORK, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 1998 1999 1998 1999 --------- --------- --------- --------- (UNAUDITED) (in thousands) Net cash provided by (used in) operating activities $ 8,288 $ (9,439) $ 11,936 $ 759 --------- --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment (5,866) (8,477) (11,530) (22,203) Proceeds from sale of property and equipment - 221 - 221 Purchase of intangible assets - - (9) - Transaction costs (7,142) - (8,412) - Net cash acquired from acquisition 23,750 - 23,750 - --------- --------- --------- --------- Net cash provided by (used in) investing activities 10,742 (8,256) 3,799 (21,982) --------- --------- --------- --------- Cash flows from financing activities: Proceeds from issuance of notes payable - - 200 - Repayment of notes payable (5,385) - (4,387) (47) Proceeds from capital lease obligations 3,122 7,293 5,635 7,762 Principal payments under capital lease obligations (1,994) (2,966) (3,888) (5,456) Proceeds from issuance of common stock, net 105,329 - 105,329 183,099 Proceeds from stock options and warrants exercised 896 1,541 2,639 3,710 Proceeds from sale of redeemable preferred stock - - - 42,622 Proceeds from liquidation of subscription receivable - - - 1,041 --------- --------- --------- --------- Net cash provided by financing activities 101,968 5,868 105,528 232,731 --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 120,998 (11,827) 121,263 211,508 Cash and cash equivalents, beginning of period 16,715 364,199 16,450 140,864 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 137,713 $ 352,372 $ 137,713 $ 352,372 ========= ========= ========= ========= Acquisition, net of cash acquired (Note 4): Issuance of convertible preferred stock $ 135,000 Transaction costs 8,412 Intangible assets (119,662) --------- Net cash acquired from acquisition $ 23,750 =========
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 and six month periods ended June 30, 1999 and the related footnote information are unaudited and have been prepared on a basis substantially consistent with the Company's audited consolidated financial statements as of December 31, 1998 contained in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the "Annual Report"). All significant intercompany transactions have been eliminated. These financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) which management considers necessary to present fairly the financial position of the Company at June 30, 1999 and the results of operations and of cash flows for the three month and six month periods ended June 30, 1999. The results of operations for the three and six month periods ended June 30, 1999 are not necessarily indicative of the results for the entire year ending December 31, 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates. 2. RECLASSIFICATIONS Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. 3. NET LOSS PER SHARE The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" ("EPS"). SFAS No. 128 requires a dual presentation of basic and diluted EPS. Basic EPS represents the weighted average number of shares outstanding divided into net income attributable to common stockholders during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. However, the Company has not included potential common stock in the calculation of EPS as such inclusion would have an anti-dilutive effect. 4. INTANGIBLE ASSETS AND AMORTIZATION COSTS In June 1998, the Company consummated its strategic alliance with Sprint Corporation ("the Sprint Transaction"). The value of intangible assets acquired in the Sprint Transaction, aggregating $121.2 million is being amortized on a straight-line basis over their estimated useful lives. During the three and six month periods ended June 30, 1999, the Company incurred amortization expense of $17.7 million and $35.3 million, respectively, on these assets. 4 EARTHLINK NETWORK, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. DEDUCTIONS FOR DIVIDENDS ON CONVERTIBLE PREFERRED STOCK The Convertible Preferred Stock issued to Sprint in the Sprint Transaction as well as to Sprint pursuant to its "top up" rights in the Company's July 1998 and January 1999 follow-on public offerings will pay liquidation dividends for the first five years in the form of increases in its Liquidation Value. The adjustments of $3.6 million and $7.3 million recorded during the three and six month periods ended June 30, 1999, respectively, represent liquidation dividends of $2.2 million and $3.3 million, based on a 3% dividend and accretion dividends of $1.4 million and $4.0 million, respectively, related to the beneficial conversion feature of the Convertible Preferred Stock. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Report contains certain forward-looking statements with respect to the Company's operations, industry, financial condition and liquidity. These statements, which are typically introduced by phrases such as "the Company believes", "anticipates", "estimates" or "expects" certain conditions to exist, reflect management's best current assessment of a number of risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking financial statements as a result of certain factors described in this report. See "Safe Harbor Statement." THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. OVERVIEW We are a leading Internet service provider, or ISP, providing reliable nationwide Internet access and related value-added services to our individual and business members. Our member base has grown rapidly, making us one of the world's leading ISPs. We believe this growth is the result of our efforts to enhance our members' Internet experience through simple, rapid and reliable access to the Internet, high quality service, and member support and enhanced services. At June 30, 1999, our member base included approximately 1,335,000 paying members and an additional 62,000 members having trial accounts. We provide our members with a core set of features through our standard Internet service, which provides unlimited Internet access and several related services for a $19.95 monthly fee. We also offer a variety of premium services to both our individual and business members. Recurring revenues, which are generally paid for in advance with credit cards, consist of monthly fees charged to members for Internet access and other ongoing services including business Web site hosting, national ISDN, LAN ISDN, and frame relay connections and, in certain areas, cable access. We derive incremental revenues by leveraging the value of our member base and user traffic through promotional and content partnerships, online advertising, and electronic commerce. We recognize access fees and certain incremental revenues ratably over the period services are provided. Other revenues generally represent one-time, non-refundable set up fees and are recorded as earned. Cost of recurring revenues principally includes telecommunications costs and depreciation expense on equipment used in network operations for ongoing member services. Fees paid to third party providers for dial-up access to their respective nationwide systems of POPs are included in telecommunications costs. Cost of other revenues principally includes expenses associated with new member registration and cost of products sold. Cost of incremental revenues is immaterial and is included in cost of other revenues. 6 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- Revenues: 1998 1999 1998 1999 ---- ---- ---- ---- Recurring revenues 93% 96% 93% 95% Other revenues 4 1 5 2 Incremental revenues 3 3 2 3 ---- ---- ---- ---- Total revenues 100% 100% 100% 100% Operating costs and expenses: Cost of recurring revenues 46 43 47 43 Cost of other revenues - - - - Sales and marketing 22 29 23 28 General and administrative 13 10 14 11 Operations and member support 31 32 31 31 Amortization and transaction costs (1) 19 23 11 24 ---- ---- ---- ---- 131 137 126 137 ---- ---- ---- ---- Loss from operations (31) (37) (26) (37) Interest income 1 6 1 6 Interest expense (1) (1) (2) (1) ---- ---- ---- ---- Net loss (31%) (32%) (27%) (32%) ==== ==== ==== ==== EBITDA (2) (7%) (7%) (8%) (6%) ==== ==== ==== ====
- ------------------- (1) Represents amortization expense for the periods ending June 30, 1999 and 1998 and a one time transaction cost of $1,397,000 resulting from the June 1998 Sprint transaction. (2) Represents earnings (loss) before depreciation and amortization, interest income and expense and income tax expense. EBITDA is not determined in accordance with generally accepted accounting principles, is not indicative of cash used by operating activities and should not be considered in isolation from an alternative to, or more meaningful than measures of performance determined in accordance with generally accepted accounting principles. RECURRING REVENUES The Company experienced substantial growth in revenues for the three and six month periods ended June 30, 1999 as compared to the corresponding periods of 1998. The increase in recurring revenues of 112% from $35.2 million in the quarter ended June 30, 1998 to $74.6 million in the quarter ended June 30, 1999 was primarily due to an increase in the Company's member base from 710,000 at June 30, 1998 to 1,335,000 at June 30, 1999. 7 OTHER REVENUES
THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30, ------------------ INCREASE ------------------ INCREASE 1998 1999 (DECREASE) 1998 1999 (DECREASE) ------ ------ ---------- ------ ------ ---------- (in thousands) Dial-up set up fees $ 711 $ 468 $ (243) $1,539 $ 990 $ (549) Non dial-up set up fees 909 669 (240) 1,659 1,569 (90) ------ ------ ------- ------ ------ ------- Total other revenues $1,620 $1,137 $ (483) $3,198 $2,559 $ (639) ====== ====== ======= ====== ====== =======
The decrease in dial-up set up fees is primarily due to the Company's willingness to waive set up fees for dial-up members acquired through certain marketing programs. The Company expects this trend to continue for dial-up set up revenues. The Company has seen an increase in the number of premium services sold such as web-site hosting, national ISDN, LAN ISDN and frame relay connections and cable-modem connections. However, the Company has reduced set up fees for certain premium services, primarily web-site hosting, to remain competitive. INCREMENTAL REVENUES The Company continued to focus on deriving additional revenue from marketing activities targeted to its active member base. Incremental revenues increased 120% from $1.1 million to $2.3 million and 187% from $1.5 million to $4.3 million during the three and six month periods ended June 30, 1999, respectively, as compared to the corresponding periods of 1998. The principal component of the Company's incremental revenue strategy is its Premier Partnership Program through which the Company offers and sells promotional packages that provide advertisers with access to the multiple points of contact EarthLink has with its members. The Company also sells content space and advertising on its various online properties such as the Personal Start Page and its bi-monthly print newsletter, "bLink". COST OF RECURRING REVENUES
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, -------------------------------------------- ------------------------------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF RECURRING RECURRING RECURRING RECURRING 1998 REVENUES 1999 REVENUES 1998 REVENUES 1999 REVENUES -------- -------- -------- -------- -------- -------- ------ -------- (in thousands, except percentages) Recurring revenues $ 35,224 100% $ 74,591 100% $ 63,080 100% $139,428 100% Cost of recurring revenues 17,555 50 33,203 45 31,642 50 62,096 45
Cost of recurring revenues increased 89% and 96% during the three and six month periods ended June 30, 1999, as compared to the corresponding periods of 1998, due to the corresponding increase in the Company's member base. As a percentage of revenue, however, cost of recurring revenues decreased. The decrease in the cost of recurring revenues as a percentage of recurring revenues was primarily due to the Company's ability to negotiate more favorable contracts with third party access providers and to effectively manage and, thereby reduce, communications costs per member as the Company exploits economies of scale and to reduce per member costs as the total member base expanded. COST OF OTHER REVENUES Cost of other revenues increased 141% and 269% during the three and six months ended June 30, 1999 as compared to the corresponding period of 1998. The increase is primarily due to increases in the cost of ISDN equipment sold to members, the costs of providing advertising, content and electronic commerce to certain customers and other royalties. 8 SALES AND MARKETING Sales and marketing expenses consist primarily of advertising, sales compensation, bounties, communications costs related to trial members, salaries and the cost of promotional material. Sales and marketing expenses increased 172% from $8.3 million to $22.6 million during the three month periods ended June 30, 1998 and 1999, respectively, and 160% from $15.9 million to $41.3 million in the six months ended June 30, 1999 as compared to the same period in 1998. The increase was primarily due to management's increased emphasis on organic growth through marketing strategies including expanding sales and marketing efforts, increased sales commissions and increased marketing personnel headcount. The Company does not defer sales, marketing or other direct costs associated with the acquisition of members. These costs are expensed as incurred. OPERATIONS AND MEMBER SUPPORT Operations and member support expenses consist primarily of costs associated with technical support and member service, as well as costs associated with operating the data center and MIS functions to maintain member accounts. Operations and member support expenses increased 114% from $11.6 million to $24.8 million during the three month periods ended June 30, 1998 and 1999, respectively and 116% from $21.1 million to $45.5 million in the six months ended June 30, 1999 and 1998, respectively. These increases reflect (1) the increase in members from 710,000 as of June 30, 1998 to 1.3 million as of June 30, 1999, (2) the opening of the Company's Sacramento call center in April 1999 and (3) management's focus on retaining existing members by providing superior service and devoting significant resources to expanding technical support staff and network operations capabilities. The number of employees engaged in operations and member support activities was 775 and 1,553 at June 30, 1998 and 1999, respectively. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of costs associated with the accounting and human resources departments, professional expenses, bad debt, credit card processing and executive compensation. General and administrative expenses increased 58% from $5.0 million to $7.9 million during the three months ended June 30, 1998 and 1999, and 64% from $9.6 million to $15.7 million in the six months ended June 30, 1999 as compared to the same period in 1998. The increase was primarily due to increases in payroll, depreciation expenses and credit card fees. The rise in payroll costs was primarily due to growth in headcount. In October 1998, the Company occupied an additional 55,000 square feet of its data center facility, and monthly rent increased from $66,000 to $92,000. The increase in depreciation expense was due to the acquisition of office equipment and the build-out of leasehold improvements. The increase in credit card processing fees was due to the increase in the Company's member base and increases in fees charged by credit card companies. INTEREST INCOME Interest income increased from $426,000 to $4.4 million and from $649,000 to $8.2 million during the three and six months ended June 30, 1998 and 1999, respectively. The increases were primarily due to an increase in average cash balances available for investment. INTEREST EXPENSE Interest expense decreased from $621,000 to $417,000 and from $1.3 million to $732,000 during the three months and six months ended June 30, 1998 and 1999, respectively. The decreases were primarily due to the aging of capital lease obligations. As capital lease obligations have aged, a greater portion of lease payments has been attributed to principal payments rather than interest expense. Furthermore, management has been able to obtain lower effective interest rates on new lease obligations. 9 LIQUIDITY AND CAPITAL RESOURCES Cash used by operating activities was $9.4 million during the three month period ended June 30, 1999. Cash provided by operating activities was $759,000 during the six month period ended June 30, 1999. The decrease in cash during the three months ended June 30, 1999 was primarily due to a significant increase in cash used in the Company's sales and marketing efforts. The Company has increased its emphasis on organic growth through marketing strategies including expanding sales and marketing efforts, increased sales commissions and increased marketing personnel headcount. Overall, during the three months ended June 30, 1999, the Company's cash balances were reduced by the net loss of $24.5 million, a $1.8 million decrease in accounts payable and accrued expenses and a $2.4 million dollar increase in net accounts receivable. These factors were partially offset by depreciation and amortization expenses of $22.7 million and an increase in deferred revenue of $1.3 million. During the six months ended June 30, 1999, the Company's cash balances were reduced by the net loss of $46.8 million and an increase in net accounts receivable of $2.3 million. These factors were offset by depreciation and amortization expenses of $45.0 million, a $7.7 million net increase in accounts payable and accrued expenses and a $2.8 million increase in deferred revenue. Cash used in investing activities was $8.3 million and $22.0 million during the three and six month periods ended June 30, 1999, respectively. Capital equipment purchases were $8.5 million and $22.2 million during the three and six month periods ended June 30, 1999, respectively. Cash provided by financing activities was approximately $5.9 million and $232.7 million during the three and six month periods ended June 30, 1999, respectively. Proceeds and principal payments under capital leases were $7.3 million and $3.0 million, respectively, during the three months ended June 30, 1999. Sale leaseback transactions are recorded at cost, which approximates the fair market value of the property and, therefore, no gains or losses are recorded. The property continues to be depreciated by the Company. A financing obligation representing the proceeds is recorded and reduced based upon payments under the lease agreement. Proceeds from the exercise of stock options and warrants were $4.7 million during the six months ended June 30, 1999. In January 1999, the Company completed a follow on public offering of 2.4 million shares of its Common Stock at $73.63 per share. In conjunction with the offering, Sprint exercised its preemptive rights to maintain its existing ownership level in the Company. Accordingly, Sprint purchased 808,000 shares of which 201,000 shares were Common Stock and 607,000 shares were Series B Convertible Preferred Stock (having the same rights and preferences as the Series A Convertible Preferred Stock already held by Sprint). Net proceeds from the sale of Common Stock were $183.1 million. Net proceeds from the sale of Series B Convertible Preferred Stock to Sprint were approximately $42.6 million. Proceeds and principal payments under capital leases were $7.8 million and $5.5 million, respectively, during the six months ended June 30, 1999. As of June 30, 1999, the Company had cash and cash equivalents of approximately $352.4 million. The Company believes that available cash will be sufficient to meet the Company's operating expenses and capital requirements for the next 12 months. EarthLink has available a $50 million credit facility from Sprint in the form of convertible senior debt, increasing to $100 million by June 5, 2001, at an interest rate of 6% per annum. The Company's capital requirements depend on numerous factors, including the rate of market acceptance of the Company's services, the Company's ability to maintain and expand its member base, the rate of expansion of the Company's network infrastructure, the level of resources required to expand the Company's marketing and sales programs, information systems and research and development activities, the availability of hardware and software provided by third-party vendors and other factors. 10 YEAR 2000 Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We utilize software, computer technology and other services internally developed and provided by third-party vendors that may fail due to the year 2000 phenomenon. For example, we are dependent on the institutions involved in processing our members' credit card payments for Internet services. We are also dependent on telecommunications vendors and leased dial up access vendors to maintain network reliability. We have substantially completed our assessment of the year 2000 readiness of our third-party supplied software, computer technology and other services. Based upon the results of this assessment, we believe that all of our material third party providers are year 2000 compliant and that all other providers are substantially ready. We have assessed our own proprietary software and internal systems and determined them to be year 2000 compliant. We anticipate that our systems, including components thereof provided by third-party vendors, will be year 2000 compliant by 2000. The most reasonably likely worst-case year 2000 scenario would be for one or more of our network service providers to fail thereby making it difficult or impossible for members to dial-up and access the Internet; however, we maintain agreements with several nationwide network service providers including UUNET, Sprint, PSINet and Level 3, and have the ability to switch our members among the networks of these providers. Therefore, should any of these providers be unable to provide our members with Internet access as a result of year 2000 problems, we believe our redundant network arrangements will adequately accommodate our dial-up access needs. Total costs incurred in connection with our year 2000 compliance efforts have been and are expected to continue to be minimal. 11 "SAFE HARBOR" STATEMENT The Management's Discussion and Analysis and other portions of this Report include "forward looking" statements within the meaning of the federal securities laws that are subject to future events, risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Important factors that ether individually or in the aggregate could cause actual results to differ materially from those expressed include, without limitation, (1) that the Company will not retain or grow its member base, (2) that the Company will fail to be competitive with existing and new competitors, (3) that the Sprint alliance will not be as beneficial to the Company as management anticipates, (4) that the Company will not be able to sustain its current growth, (5) that the Company will not adequately respond to technological developments impacting the Internet, (6) that needed financing will not be available to the Company if and as needed, (7) that a significant change in the growth rate of the overall U.S. economy will occur, such that consumer and corporate spending are materially impacted, (8) that a significant reversal in the trend toward increased usage of the Internet will occur, and (9) that the Company or its vendors and suppliers may fail to timely achieve Year 2000 readiness such that there is a material adverse impact on the business, operations or financial results of the Company, (10) that a drastic negative change in the market conditions may occur, or (11) that some other unforeseen difficulties may occur. This list is intended to identify only certain of the principal factors that could cause actual results to differ materially from those describe in the forward-looking statements included herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Earthlink held its 1999 annual meeting of Stockholders (the "Annual Meeting") on April 26, 1999 for the purposes of electing directors for the ensuing year, amending its 1995 Stock Option Plan to increase the number of shares authorized for grant thereunder from 5.7 million to 7.7 million and to amend the Company's Certificate of Incorporation to increase authorized shares of the Company's Common Stock from 50,000,000 to 200,000,000. The following individuals were re-elected to the Company's Board of Directors: Sky Dayton Kevin O'Donnell Charles G. Betty Reed Slatkin Linwood A. Lacy, Jr. Sidney Azeez Robert M. Kavner Paul McNulty Each nominee received 28,089,252 votes for his election and 47,791 shares abstained from voting. There were no votes against the election of any of the nominees. Also, William T. Esrey and Len J. Lauer were appointed by Sprint to serve as Sprint's board representatives. With respect to the amendment of the Company's Stock Option Plan, 13,977,137 shares voted for the proposal, 4,035,931 voted against the proposal and there were 37,805 abstentions. With respect to the amendment of the Company's Certificate of Incorporation, 26,783,457 shares voted for the proposal, 1,314,367 voted against the proposal and there were 39,219 abstentions. All three proposals passed. 12 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: August 13, 1999 /s/ Charles G. Betty --------------- ------------------------------ Charles G. Betty, President, Chief Executive Officer and Director Date: August 13, 1999 /s/ Grayson L. Hoberg --------------- ------------------------------ Grayson L. Hoberg, Senior Vice President - Finance and Administration and Chief Financial Officer Date: August 13, 1999 /s/ Richard A. Quiroga --------------- ------------------------------ Richard A. Quiroga, Vice President, Corporate Controller 14 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 JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US DOLLARS 3-MOS 3-MOS 6-MOS 6-MOS DEC-31-1998 DEC-31-1999 DEC-31-1998 DEC-31-1999 APR-01-1998 APR-01-1999 JAN-01-1998 JAN-01-1999 JUN-30-1998 JUN-30-1999 JUN-30-1998 JUN-30-1999 1 1 1 1 0 352,372 0 0 0 0 0 0 0 7,735 0 0 0 653 0 0 0 1,411 0 0 0 368,899 0 0 0 80,614 0 0 0 33,164 0 0 0 462,860 0 0 0 72,849 0 0 0 0 0 0 0 0 0 0 0 47 0 0 0 321 0 0 0 380,655 0 0 0 462,860 0 0 0 0 0 0 37,990 78,001 67,816 146,244 0 0 0 0 17,675 33,492 31,798 62,672 32,137 73,010 53,780 137,877 591 830 1,687 1,779 621 417 1,308 732 (12,017) (24,547) (18,421) (46,790) 0 0 0 0 (11,822) (28,501) (17,762) (54,305) 0 0 0 0 0 0 0 0 0 0 0 0 (13,071) (28,174) (19,475) (54,063) (0.53) (0.88) (0.82) (1.71) (0.53) (0.88) (0.82) (1.71)
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