EarthLink to refile harsh SEC report

An unintentionally harsh SEC filing from the ISP leads to the suspension of its stock trading and sends executives scrambling to explain themselves.

3 min read
EarthLink Network's (ELNK) stock fell nearly 14 percent in early trading today after the company filed an unintentionally harsh financial report yesterday, which it then rescinded.

A quarterly report filed with the Securities and Exchange Commission by EarthLink led to the suspension of its stock trading and sent executives scrambling to explain themselves.

The company's stock dropped 1-5/8 in early trading to 10, from yesterday's halted close of 11-5/8. Volume was heavy with about 78,000 shares trading hands. The stock since gained some of the losses.

The Internet service provider, which said it was just "being conservative," stated in the SEC filing that its finances might be strained by an insufficient cash supply and that it expects to continue to incur losses at least through the end of 1997. EarthLink said it planned to continue spending to build out its infrastructure, develop new service and product offerings, and build its sales and marketing and administrative organizations.

As news of the filing spread out to the financial community, Nasdaq took action to halt trading. The security began trading again when the markets opened this morning.

The company's stock was halted yesterday at 2:09 ET, said Curtis Rimmey, an associate analyst at Nasdaq. He explained that it is not unusual for Nasdaq to halt trading on a security when there is news that could have an impact on trading. "Halting trading is neither positive nor negative," Rimmey said. "It is implemented to level the playing field" so that all investors and analysts can digest the information before making trading decisions.

EarthLink said in the filing that it does not believe available cash will be sufficient to meet the company's operating expenses and capital requirements through the end of this fiscal year, given its current burn rate.

The company plans to raise additional cash from potential sources such as debt, leases, existing investors, large institutional investors, or strategic partners. However, "the company has no formal commitments for additional financing, and there can be no assurance that any such commitments can be obtained on favorable terms, if at all," said the filing.

Afterwards, the company said that was just legalese.

Company CFO Barry Hall said, "We filed our 10Q, and a section talks about capital resources...We try to be conservative, but we worded it a bit too harshly, and one of the wire services made it look like we were about to go out of business." He added that the company will refile its 10Q today "to set the record straight." But the restatement of the filing has yet to be made.

Hall noted that the company has no formal commitments for future financing but that deals have been offered and should be closed in the near future.

Rimmey said that stocks are normally halted for an hour but that if the stoppage comes near the market's close, trading may not resume for the day--such was the case with EarthLink.

Company CEO Garry Betty said EarthLink, like other ISPs, is continuing to generate a negative cash flow. "We spend money in advance of having subscribers on board in order to be able to accommodate growth...We've grown over 50 percent this year alone."

The company expects to reach cash flow neutrality, known as EBITDA, at 500,000 customers. The company currently has 340,000 customers.

For the quarter ending in June, EarthLink reported a net loss of $7.8 million, on revenue of $18.8 million.