<PAGE> 1
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, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-27890
-----------------------
MINDSPRING ENTERPRISES, INC.
- --------------------------------------------------------------------------------
(Exact name of issuer as specified in its charter)
Delaware 58-2113290
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1430 West Peachtree St. NW, Suite 400, Atlanta, GA 30309
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 815-0770
-----------------------------
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
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at August 9, 1996
-----------------------------
Common Stock at $.01 par value 5,125,793 Shares
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MINDSPRING ENTERPRISES, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,693,611 $ 424,834
Trade receivables 1,159,367 519,280
Prepaids and other current assets 347,129 280,950
Inventory 36,478 45,415
----------- -----------
Total current assets 7,236,585 1,270,479
----------- -----------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment 7,321,409 3,594,528
Purchased software systems 134,996 103,078
Other 260,523 96,890
----------- -----------
7,716,928 3,794,496
Less: accumulated depreciation (843,055) (255,560)
----------- -----------
Property and equipment, net 6,873,873 3,538,936
----------- -----------
PRODUCT DEVELOPMENT COSTS, NET 95,920 26,779
----------- -----------
OTHER ASSETS
Acquired customer base 3,000,000 0
Other 8,481 8,606
----------- -----------
Total other assets 3,008,481 8,606
----------- -----------
17,214,859 4,844,800
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying condensed notes to financial statements
are an integral part of these statements.
-2-
<PAGE> 3
MINDSPRING ENTERPRISES, INC.
CONDENSED BALANCE SHEETS
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Loan from preferred stockholder $ 0 $ 2,500,000
Notes Payable 2,000,000 0
Trade accounts payable 1,680,910 994,164
Accrued expenses 708,938 532,406
Deferred revenue 692,332 336,027
----------- -----------
Total current liabilities 5,082,180 4,362,597
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares authorized
and 0 shares issued and outstanding at June 30, 1996 and
December 31, 1995, respectively 0 0
Class A convertible preferred stock, $.64 par value; 1,187,895
shares authorized, and 0 and 1,187,895 issued and
outstanding at June 30, 1996 and December 31, 1995, 0 744,575
respectively.
Class B convertible preferred stock, $1.55 par value; 645,596
shares authorized and 0 and 645,594 shares issued and
outstanding at June 30, 1996 and December 31, 1995,
respectively 0 1,000,000
Class C convertible preferred stock, $.01 par value; 5,000,000
shares authorized and 100,000 issued and outstanding at
June 30, 1996 and December 31, 1995, respectively 638,000 638,000
Common stock, $.01 par value; 15,000,000 shares authorized
and 5,125,793 and 1,267,304 issued and outstanding at
June 30, 1996 and December 31, 1995, respectively 51,258 12,673
Additional paid-in capital 15,976,226 120,547
Accumulated deficit (4,532,805) (2,033,592)
----------- ----------
Total stockholders' equity 12,132,679 482,203
----------- -----------
$17,214,859 $ 4,844,800
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying condensed notes to financial statements
are an integral part of these statements.
-3-
<PAGE> 4
FINANCIAL STATEMENTS-Continued
MINDSPRING ENTERPRISES, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Access $ 1,506,315 $ 235,633 $ 2,671,634 $ 347,363
Subscriber start-up fees 478,672 91,242 845,768 146,642
Business services 396,850 24,905 671,155 31,530
Other 112,972 (12,359) 117,966 (14,228)
------------- ------------- ------------ ------------
Total revenues 2,494,809 339,421 4,306,523 511,307
------------- ------------- ------------ ------------
COST AND EXPENSES
Cost of revenues -- recurring $ 754,569 $ 98,084 $ 1,296,203 $ 160,479
Cost of subscriber start-up fees 351,783 41,192 616,120 62,833
Selling 991,487 56,512 1,570,411 84,972
General and administrative 1,611,503 280,249 2,770,542 419,197
Depreciation and amortization 362,435 33,625 596,343 48,125
------------- ------------- ------------ ------------
Total operating expenses 4,071,777 509,662 6,849,619 775,606
------------- ------------- ------------ ------------
OPERATING LOSS $ (1,576,968) $ (170,241) $ (2,543,096) $ (264,299)
INTEREST (EXPENSE) INCOME, NET 117,015 1,166 43,883 2,364
------------- ------------- ------------ ------------
NET LOSS $ (1,459,953) $ (169,075) $ (2,499,213) $ (261,935)
============= ============= ============ ============
NET LOSS PER SHARE $ (0.29) $ (0.06) $ (0.58) $ (0.09)
============= ============= ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 5,111,782 2,871,229 4,309,859 2,857,119
============= ============= ============ ============
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
- 4 -
<PAGE> 5
FINANCIAL STATEMENTS - CONTINUED
MINDSPRING ENTERPRISES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOW USED IN OPERATING ACTIVITIES:
Net loss $(2,499,213) $ (261,935)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 596,343 48,125
Changes in operating assets and liabilities:
Trade receivables (640,087) (166,285)
Other current assets (57,242) (1,650)
Trade accounts payable 686,746 151,439
Accrued expenses 176,532 45,919
Deferred revenue 356,305 109,575
----------- ----------
Net cash used in operating activities (1,380,616) (74,812)
----------- ----------
CASH FLOW USED IN INVESTING ACTIVITIES
Purchases of property and equipment (3,922,432) (710,514)
Purchase of customer base (3,000,000) -
Product development costs (77,989) (74,964)
Other 125 (1,012)
----------- ----------
Net Cash Used For Investing Activities (7,000,296) (786,490)
----------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds of loan from preferred stockholder 1,000,000 -
Payments of loan from preferred stockholder (3,500,000) -
Proceeds from Note Payable 2,000,000 -
Issuance of common stock 14,149,689 50,000
Issuance of preferred stock - 1,000,000
----------- ----------
Net Cash Provided By Financing Activities 13,649,689 1,050,000
----------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,268,777 188,698
CASH AND CASH EQUIVALENTS, beginning of period 424,834 584,798
----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 5,693,611 $ 773,496
=========== ==========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
Interest paid $ 136,127 $ 0
----------- ----------
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
-5-
<PAGE> 6
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities and Exchange
Commission. The accompanying unaudited condensed financial statements
reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of financial position and results for the
interim periods presented. All such adjustments are of a normal and
recurring nature. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and
notes thereto included in the Company's Registration Statement on Form
S-1 relating to the Company's initial public offering, which was
declared effective by the Securities and Exchange Commission on March
13, 1996.
2. On June 28, 1996, the Company entered into an Asset Purchase Agreement
(the "Purchase Agreement") with PSINet Inc., a New York corporation
("PSINet"), pursuant to which the Company agreed to acquire certain of
the tangible and intangible assets and rights in connection with the
consumer dial-up Internet access services currently operated by PSINet
in the United States ("Consumer Services"), including approximately
100,000 subscriber contracts, and the lease, all telephone switches
and other equipment for a customer service facility (the "Harrisburg
Facility"), and approximately 75 employees who are expected to
continue to operate that facility (the "Acquisition").
The Purchase Agreement specifies a maximum aggregate purchase
price for the Acquisition of approximately $21,400,000 (including
approximately $1,400,000 representing the net book value of the
Harrisburg Facility) to be paid at two closings, the first of which
occurred on June 28, 1996 (the "First Closing"). At the First
Closing, the Company paid PSINet $1,000,000 in cash (from cash on
hand), and issued a promissory note in the amount of $2,000,000 (the
"First PSINet Note") in return for 15,000 subscriber accounts. The
second closing is to occur on a date to be mutually determined by the
Company and PSINet, and is currently anticipated to occur in September
1996 (the "Second Closing"). At the Second Closing, the Company
anticipates issuing a second promissory note in the amount of
$10,200,000 (the "Second PSINet Note") in exchange for additional
subscriber accounts and the Harrisburg Facility. In addition to the
consideration delivered at the First Closing and the Second Closing,
the Company has agreed to issue additional promissory notes for the
balance of the purchase price for the assets (which will depend
primarily upon the number of acquired subscribers who remain
subscribers of the Company as of certain specified dates). The
promissory notes are convertible into Common Stock of the Company if
such notes are not redeemed in full by the first anniversary of the
issuance of such notes. See "--Liquidity and Capital Resources."
In connection with the Purchase Agreement, the parties also entered
into a Network Services Agreement (the "Services Agreement"), pursuant
to which PSINet has agreed generally to provide Internet connection
services to the Company and its subscribers through PSINet's
nationwide network of over 220 points-of-presence ("POPs"). Pursuant
to the Services Agreement, the Company has agreed to pay specified
monthly fees for each subscriber that the Company has assigned to a
primary dial-in POP that is a PSINet POP. The term of the Services
Agreement is five years, commencing on June 28, 1996, and is
automatically renewable annually thereafter unless either party
notifies the other in writing not less than 12 months prior to the end
of such five-year period or any 12-month extension thereof. Either
party may terminate the Services Agreement upon 365 days written
notice to the other party. The Company may terminate the Services
Agreement in whole or in part without advance notice to PSINet under
certain circumstances if there is a significant failure of PSINet's
network. The Company may also terminate the Services Agreement on a
per POP basis upon payment to PSINet of an amount equal to the
aggregate amount of the fees paid or payable by the Company for the
last two months' service provided through the PSINet POP or POPs
being terminated.
- 6 -
<PAGE> 7
See "Part I, Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Part II, Item 6(b).
Reports on Form 8-K."
3. Certain amounts in the prior year financial statements have been
reclassified to confirm to the current year presentation.
4. In March 1996, the Company completed an initial public offering of its
Common Stock. The Company issued 1,950,000 shares at an initial
public offering price of $8.00 per share. The total proceeds of the
offering, net of underwriting discounts and offering expenses, were
approximately $13,672,000. In April 1996, the Company's underwriters
exercised a portion of the over-allotment option granted in connection
with the Company's initial public offering, electing to purchase
75,000 additional shares of Common Stock. The net proceeds to the
Company were approximately $478,000.
5. The Company used a portion of the proceeds from the initial public
offering to repay outstanding principal amounts of $3,500,000 loaned
to the Company by ITC Holding Company, Inc. ("ITC Holding") plus
accrued interest (at the rate of 14% per annum) of approximately
$97,000.
6. The net loss per share is computed using the weighted average number
of shares of common stock and dilutive common stock equivalent shares
from convertible preferred stock (using the if-converted method) and
from stock options (using the treasury stock method). For the quarter
and six months ended June 30, 1996, the Class C Preferred Stock and
stock options are excluded from the calculation as their effect is
antidilutive. Pursuant to the Securities and Exchange Commission Staff
Accounting Bulletins, common stock and common stock equivalent shares
issued by the Company at prices below the public offering price during
the twelve month period prior to the Company's initial public offering
have been included in the calculation as if they were outstanding for
all periods prior to the offering, regardless of whether they are
dilutive (using the treasury stock method and an initial public
offering price of $8.00 per share). Accordingly, all stock options
granted and the Class C Preferred are included in the earnings per
share calculations for all periods presented prior to the effective
date of the initial public offering (March 13, 1996), even though the
effect on net loss is antidilutive. The Class A Preferred Stock and
Class B Preferred Stock have been included for the respective weighted
average periods for which such shares were outstanding, even though
their effect is antidilutive. Concurrently with the completion of the
initial public offering, all outstanding shares of Class A Preferred
Stock and Class B Preferred Stock converted into shares of Common
Stock, on the basis of one for one.
7. There was no provision for or cash payment of income taxes for
the three months and six months ended June 30, 1996 and 1995,
respectively, as the Company had a net taxable loss for these periods
and anticipates a net taxable loss for the year ended December 31,
1996.
- 7 -
<PAGE> 8
8. Pro Forma Condensed Statements of Income
The following unaudited pro forma condensed financial statements have
been prepared to give effect to the Acquisition (as defined in Note 2,
above). The accompanying pro forma condensed statements of operations
of the Company for the six-month period ended June 30, 1996 and the
year ended December 31, 1995 give effect to the Acquisition as if it
had occurred at the beginning of the respective periods. The
accompanying pro forma condensed consolidated balance sheet as of June
30, 1996 has been prepared as if the Acquisition had been consummated
as of that date. The pro forma adjustments are based upon available
information and certain assumptions that the Company believes are
reasonable under the circumstances. Final purchase adjustments may
differ from the pro forma adjustments herein.
The pro forma condensed consolidated financial statements set forth
below should be read in conjunction with "Part II, Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's consolidated financial
statements and notes thereto and other financial information and
operating information included elsewhere in this report. The pro
forma condensed consolidated financial statements and notes thereto
are provided for informational purposes only and do not purport to be
indicative of actual results had the Acquisition been completed on the
dates indicated or of future results.
- 8 -
<PAGE> 9
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Historical PSINet
Historical Consumer Transaction MindSpring
MindSpring (a) Services (a) Adjustments Pro Forma
-------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents . . . . . . . . . 5,693,611 527,247 (527,247)(e) 5,693,611
Trade receivables . . . . . . . . . . . . 1,159,367 363,304 (363,304)(e) 1,159,367
Inventory . . . . . . . . . . . . . . . 36,478 0 0 36,478
Prepaids and other. . . . . . . . . . . . 347,129 36,512 (36,512)(e) 347,129
------------ ------------ ------------ ------------
Total current assets . . . . . . . 7,236,585 927,063 (927,063) 7,236,585
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Property 7,716,928 1,795,396 1,515,000 (b) 10,632,660
(394,664) (e)
Less: accumulated depreciation and
amortization. . . . . . . . . . . . . . (843,055) (394,664) 394,664 (e) (843,055)
------------ ------------ ------------ ------------
Property and equipment, net . . . . . . . 6,873,873 1,400,732 1,515,000 9,789,605
------------ ------------ ------------ ------------
Product development costs . . . . . . . . . . 95,920 0 0 95,920
Intangibles, net . . . . . . . . . . . . . . 3,000,000 5,097,294 17,700,000 (c) 20,700,000
(5,097,294)(e)
Other assets . . . . . . . . . . . . . . . . 8,481 43,000 (43,000)(e) 8,481
------------ ------------ ------------ ------------
Total assets. . . . . . . . . . . . . . 17,214,859 7,468,089 13,147,643 37,830,591
============ ============ ============ ===========
CURRENT LIABILITIES:
Notes payable to PSINet . . . . . . . . . 2,000,000 0 18,400,732 (d) 20,400,732
Current amount of capital lease
obligations . . . . . . . . . . . . . . 0 398,170 (398,170)(e) 0
Current portions of long term debt 0 54,648 (54,648)(e) 0
Due to parent . . . . . . . . . . . . . . 0 28,684,996 (28,684,996)(e) 0
Trade accounts payable . . . . . . . . . 1,680,910 703,211 (703,211)(e) 1,680,910
Accrued expenses . . . . . . . . . . . . 708,938 77,430 (77,430)(e) 2,923,938
1,515,000 (b)
700,000 (f)
Deferred revenue . . . . . . . . . . . . 692,332 899,774 (899,774)(e) 692,332
------------ ------------ ------------ ------------
Total current liabilities 5,082,180 30,818,229 (10,202,497) 25,697,912
------------ ------------ ------------ ------------
LONG TERM LIABILITIES:
Long term capital lease
obligations . . . . . . . . . . . . . . 0 601,353 (601,353)(e) 0
Long term notes payable . . . . . . . . . 0 67,315 (67,315)(e) 0
------------ ------------ ------------ ------------
Total long term liabilities . . . 0 668,669 (668,668) 0
------------ ------------ ------------ ------------
Total liabilities . . . . . . . . 5,082,180 31,486,897 (10,871,165) 25,697,912
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Class C preferred stock . . . . . . . . . 638,000 0 0 638,000
Common stock . . . . . . . . . . . . . . 51,258 0 0 51,258
Additional paid-in capital . . . . . . . 15,976,226 0 0 15,976,226
Accumulated deficit . . . . . . . . . . . (4,532,805) (24,018,808) 24,018,808 (4,532,805)
------------ ------------ ------------ ------------
Total equity . . . . . . . . . . . 12,132,679 (24,018,808) 24,018,808 12,132,679
------------ ------------ ------------ ------------
Total liabilities & stockholders'
equity . . . . . . . . . . . . . . 17,214,859 7,468,089 13,147,643 37,830,591
============ ============ ============ ============
</TABLE>
- -------------------
(a) Derived from the financial statements of the Company and the PSINet
Consumer Services.
(b) Additional capital expenditures recorded by the Company to support the
PSINet subscribers being acquired.
(c) Reflects the allocation of the purchase price to tangible and intangible
assets based on the estimated fair value of such assets and to
identifiable liabilities. The intangible asset resulting from the
acquisition has been determined to relate primarily to the acquired
customer base, and will be amortized over a three-year period.
(d) The First PSINet Note ($2,000,000 principal amount) is reflected on the
balance sheet as of June 30, 1996. Assumes that the Company is required
to pay for the maximum 100,000 PSINet subscriber accounts specified in
the Purchase Agreement and acquires the Harrisburg Facility at the Second
Closing for its net book value of approximately $1,400,000, resulting in
a principal amount outstanding under the PSINet Notes of approximately
$18,400,000.
- 9 -
<PAGE> 10
The pro forma intangible assets have been adjusted to reflect this
assumption. Under the terms of the Purchase Agreement, the number of
subscribers that the Company must pay for is not to exceed 100,000, but
could be less depending primarily upon the number of acquired subscribers
who remain subscribers of the Company as of certain specified measurement
dates. If, for example, only 75,000 subscribers were acquired, then the
net cash proceeds would be increased by $5,175,000 million and the
intangible assets reduced by the same amount.
(e) Reflects the removal of assets and liabilities of the PSINet Consumer
Services that are not being acquired and/or assumed by MindSpring as part
of the Acquisition.
(f) Reflects the cost of certain contractual obligations of the Company
related to converting subscriber accounts acquired from PSINet to
MindSpring's operating system.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-----------------------------------------------------------------
Historical PSINet
Historical Consumer Transaction MindSpring
MindSpring(a) Services (a) Adjustments Pro Forma
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . $ 2,226,844 $ 6,488,291 $ 0 $ 8,715,135
Costs and expenses
Selling, general and 2,230,102
administrative expenses. . . . . . 11,321,248 (4,847,939)(c) 8,703,411
Cost of revenues . . . . . . . . . 965,773 4,873,604 (1,629,458)(f) 4,209,919
Depreciation . . . . . . . . . . . 264,683 213,105 303,000 (d) 780,788
Amortization 0 3,160,158 (3,160,159)(g) 6,900,000
6,900,000 (e)
------------ ------------ ------------ -------------
Total costs and expenses . . . . . . . 3,460,558 16,407,957 (2,434,555) 20,594,118
------------ ------------ ------------ -------------
Income (loss) from operations . . . . . (1,233,714) (9,919,666) 2,434,555 (11,878,982)
Interest (income) expense . . . . . . . 724,817 32,253 0 757,070
------------ ------------ ------------ -------------
Net income (loss) . . . . . . . . . . . $ (1,958,531) $ (9,951,919 $ 2,434,555 $ (12,636,052)
============ ============ ============ =============
Weighted average common shares
outstanding. . . . . . . . . . . . 3,175,376 3,175,376
Offering Shares . . . . . . . . . . 2,025,000 2,025,000
------------ -------------
Total pro forma common
shares outstanding . . . . . . 5,200,376 5,200,376
Historical net loss per share (b) . $ (0.62) $ (3.98)
============ ==============
Pro Forma net loss per share (b) . . $ (0.38) $ (2.43)
============ ==============
</TABLE>
(Table continued on following page.)
- 10 -
<PAGE> 11
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 1996
--------------------------------------------------------------------
HISTORICAL PSINET
HISTORICAL CONSUMER TRANSACTION MINDSPRING
MINDSPRING (A) SERVICES (A) ADJUSTMENTS PRO FORMA
-------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $ 4,306,523 $ 7,955,466 $ 0 $ 12,261,989
Costs and expenses
Selling, general and
administrative expenses . . . . 4,340,953 12,017,951 (3,997,270)(c) 12,361,634
Cost of revenues. . . . . . . . . 1,912,323 4,678,893 (701,162)(f) 5,890,056
Depreciation . . . . . . . . . . 596,343 181,560 151,500 (d) 929,403
Amortization . . . . . . . . . . 0 1,569,643 (1,569,642)(g) 3,450,000
3,450,000 (e)
----------- ----------- ---------- -------------
Total costs and expenses . . . . . 6,849,619 16,878,406 (2,666,575) 22,631,093
----------- ----------- ---------- -------------
Income (loss) from operations . . . (2,543,096) (8,922,940) 2,666,575 (10,369,104)
Interest (income) expense . . . . . (43,883) 62,395 0 (18,752)
----------- ----------- ---------- -------------
Net income (loss) . . . . . . . . . $(2,499,213) $(8,985,575) $(2,666,575) $ (10,387,856)
=========== =========== =========== =============
Weighted average common
shares outstanding . . . . . . . 4,309,859 4,309,859
Net loss per share (h). . . . . . $ (0.58) $ (2.41)
=========== =============
</TABLE>
- ------------------
(a) Derived from the financial statements of the Company or the PSINet Consumer
Services, as applicable.
(b) Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive Common Stock equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). Common Stock and Common Stock
equivalent shares issued at prices below the initial public offering price
during the twelve-month period prior to the Company's initial public
offering have been included in the calculation as if they were outstanding
for all periods prior to the initial public offering, regardless of whether
they are dilutive. Accordingly, all stock options granted and the Class C
Preferred Stock are included in the earnings per share calculations for all
periods presented, even though the effect on net loss is antidilutive. The
Class A Preferred Stock and the Class B Preferred Stock have been included
for the respective weighted average periods for which such shares were
outstanding, even though their effect is antidilutive. Concurrently with
the completion of the initial public offering all outstanding shares of
Class A Preferred Stock and Class B Preferred Stock converted on a
one-for-one basis into shares of Common Stock. The shares of Common Stock
issued in the initial public offering have been included in the pro forma
calculations as if they were outstanding for the entire period.
(c) Reflects reduction of PSINet's historical selling, general, and
administrative expenses relating to the Consumer Services to the historical
relationship of such expenses experienced by the Company as a percentage of
revenues. A majority of PSINet's historical selling, general, and
administrative expenses result from functions not being acquired by the
Company, including certain allocations to the Consumer Services of PSINet's
historical corporate level expenses. The impact of expected economies of
scale to reduce selling, general, and administrative expenses relating to
the Consumer Services below the Company's historical relationship of such
expenses to revenue have not been reflected, as the amount is not
determinable on a pro-forma historical basis.
(d) Reflects additional depreciation expense associated with capital
expenditures recorded by the Company to support the PSINet subscribers
being acquired.
(e) Reflects the amortization of the excess of the purchase price over the
estimated fair value of the tangible and intangible assets to be acquired
in the Acquisition. The assigned lives of the acquired tangible and
intangible assets is three years. The above is based on the assumption
that the Company pays for 100,000 subscribers. If only 75,000 PSINet
subscribers are paid for, this amount would be reduced to $5,175,000 and
$2,875,000 for the year ended December 31, 1995 and the six months ended
June 30, 1996, respectively.
(f) Reflects the difference between the Company's historical costs and the
costs that would have been incurred pursuant to the Services Agreement.
See "Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this report.
(g) Reflects the elimination of PSINet's historical amortization associated
with PSINet's acquisition in February 1995 of The Pipeline Network, Inc.
(h) Loss per share is computed using the weighted average number of shares of
Common Stock adjusted for the dilutive effect of Common Stock equivalents
(Class C Preferred Stock and stock options). Such Common Stock equivalents
are excluded from this calculation as their effect is antidilutive. Common
Stock equivalents are calculated using the treasury stock method.
- 11 -
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MindSpring is a provider of Internet access. The Company was
incorporated in Georgia on February 24, 1994 and began marketing its services
in June 1994. The Company reincorporated in Delaware and effected a
recapitalization in December 1995, in which shares of capital stock of the
Company's predecessor Georgia corporation were converted into shares of the
Company's capital stock on the basis of 1.936199 for one. All share
information has been restated to reflect the effect of the recapitalization.
On June 28, 1996, the Company entered into an Asset Purchase Agreement
with PSINet, Inc. (the "Purchase Agreement"), a New York corporation
("PSINet"), pursuant to which the Company agreed to acquire the subscriber
accounts and certain other assets in connection with the consumer dial-up
Internet access services currently operated by PSINet in the United States (the
"Consumer Services"), including approximately 100,000 subscriber accounts, and
the lease, all telephone switches and other equipment for a customer service
facility located in New Cumberland, Pennsylvania (the "Harrisburg Facility")
and approximately 75 employees who are expected to continue to operate that
facility (the "Acquisition").
The Purchase Agreement specifies a maximum aggregate purchase price
for the Acquisition of approximately $21,400,000 (including $1,400,000
representing the net book value of the Harrisburg Facility) to be paid at two
closings, the first of which occurred on June 28, 1996 (the "First Closing").
At the First Closing, the Company paid PSINet $1,000,000 in cash (from cash on
hand), and issued a promissory note in the amount of $2,000,000 (the "First
PSINet Note") in return for 15,000 subscriber accounts. The second closing is
to occur on a date to be mutually determined by the Company and PSINet, and is
currently anticipated to occur in September 1996 (the "Second Closing"). At
the Second Closing, the Company anticipates issuing a second promissory note in
the amount of $10,200,000 (the "Second PSINet Note") in exchange for additional
subscriber accounts and the Harrisburg Facility. In addition to the
consideration delivered at the First Closing and the Second Closing, the
Company has agreed to issue additional promissory notes for the balance of the
purchase price for the assets (which will depend primarily upon the number of
acquired subscribers who remain subscribers of the Company as of certain
specified dates). Each of the promissory notes to be issued by the Company for
the Acquisition (collectively, the "PSINet Notes") is convertible into Common
Stock of the Company if such note is not redeemed in full by the first
anniversary of the issuance of such note. See "--Liquidity and Capital
Resources."
In connection with the Purchase Agreement, the parties also entered
into a Network Services Agreement (the "Services Agreement"), pursuant to which
PSINet has agreed generally to provide Internet connection services to the
Company and its subscribers through PSINet's nationwide network of over 220
points-of-presence ("POPs"). Pursuant to the Services Agreement, the Company
has agreed to pay specified monthly fees for each subscriber that the Company
has assigned to a primary dial-in POP that is a PSINet POP. The term of the
Services Agreement is five years, commencing on June 28, 1996, and is
automatically renewable annually thereafter unless either party notifies the
other in writing not less than 12 months prior to the end of such five-year
period or any 12-month extension thereof. Either party may terminate the
Services Agreement upon 365 days written notice to the other party. The
Company may terminate the Services Agreement in whole or in part without
advance notice to PSINet under certain circumstances if there is a significant
failure of PSINet's network. The Company may also terminate the Services
Agreement on a per-POP basis upon payment to PSINet of an amount equal to the
aggregate amount of the fees paid or payable by the Company for the last two
months' service provided through the PSINet POP or POPs being terminated.
- 12 -
<PAGE> 13
The Company believes that, primarily as a consequence of the
Acquisition, the Company's future financial results will not be comparable to
its historical financial results. This report contains certain forward-looking
statements, which reflect management's current intentions and expectations.
Such forward-looking statements are subject to risks and uncertainties which
could cause actual future results to differ materially from those currently
anticipated. Such risks and uncertainties include factors such as, but not
limited to, the ability of the Company to successfully integrate the assets
acquired from PSINet into the Company's operations and implement the Services
Agreement, as well as the availability of financing to fund the Company's
growth and business plans, including the Acquisition. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof.
The Company derives revenues primarily from monthly subscriptions and
start-up fees from individuals for dial-up access to the Internet. Monthly
subscription fees vary by billing plan. In May 1996, in response to a changing
competitive environment, the Company introduced five different pricing plans
for dial-up access, compared to the two prior plan offerings, the Standard Plan
($15 per month for up to 20 hours plus $1 per hour over 20 hours) or the Flat
Rate Plan ($29.95 per month for unlimited access). With the new pricing plans,
new and existing subscribers have a choice of two "flat rate" plans (The Works
and Unlimited Access) and three "usage-sensitive" plans (Standard, Beat the
Clock and Light). These plan changes generally represent a reduction from the
previous rates. The Company anticipates that additional price changes may be
necessary in the future due to the dynamic nature of the Internet access
industry. Management believes that the reduction in revenues per subscriber
due to the recently effected price changes will be offset in the near term by
continuing increases in subscriber growth. However, there can be no assurance
that growth in the Company's revenues or subscriber base will continue or that
the Company will be able to achieve or sustain profitability or positive cash
flow.
For the quarter ended June 30, 1996, the average monthly recurring
revenue per dial-up subscriber was approximately $20 (monthly recurring revenue
plus usage charges for non- "flat rate" subscribers, divided by total
subscribers), compared to $23 per dial-up subscriber for the quarter ended June
30, 1995. Start-up fees for new subscribers typically range from $25 to $35
per user, which covers the costs of the direct materials, mailing, and
licensing fees associated with each new subscriber. Most of the Company's
individual subscribers pay their MindSpring fees automatically by
pre-authorized monthly charges to the subscriber's credit card.
In addition, the Company earns revenues by providing Web-hosting
services, full-time dedicated access connections to the Internet and domain
registration primarily to businesses and some individual subscribers. The
Company's Web-hosting services allow a business or individual to post
information on the World Wide Web, so that the information is available to
anyone who has access to the Internet. The Company provides the subscriber the
ability to personalize an electronic mail address through its domain
registration services. These services have been classified as business
services in the condensed statements of income and the table below.
- 13 -
<PAGE> 14
The table below shows historical revenues and cost of revenues by
category and the percentage of the total revenues attributable to each
category. Dollar amounts are shown in thousands.
<TABLE>
<CAPTION>
SECOND SIX SECOND SIX
QUARTER ENDED MONTHS ENDED QUARTER ENDED MONTHS ENDED
JUNE 30, 1995 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1996
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Dial-up access to Internet $ 236 70% $ 347 68% $ 1,506 60% $2,672 62%
Start-up fees 91 27 147 29 479 19 846 19
Business services 25 7 31 6 397 16 671 16
Other revenues, net (1) (13) (4) (14) (3) 113 5 118 3
------- --- ----- --- ------- --- ------ ---
Total $ 339 100% $ 511 100% $ 2,495 100% $4,307 100%
======= === ===== === ======= === ====== ===
COST OF REVENUES:
Cost of revenues --recurring $ 98 29% $ 160 32% $ 755 30% $1,297 30%
Cost of subscriber start-up fees 41 12 63 12 352 14 616 14
------- --- ----- --- ------- --- ------ ---
Total cost of revenues $ 139 41% $ 223 44% $ 1,107 44% $1,913 44%
======= === ===== === ======= === ====== ===
</TABLE>
- --------------------------------------------
(1) "Other revenues, net" include billing adjustments and miscellaneous
(primarily non-recurring) additional items.
The Company's costs include (1) costs of revenues that are primarily
related to the number of subscribers, (2) selling, general and
administrative expenses that are associated more generally with operations, and
(3) depreciation and amortization, which are related to the size of the
Company's network. Costs of revenues consist primarily of the start-up
expenses for each subscriber, certain monthly licensing fees, and the costs of
telecommunications facilities necessary to provide service to subscribers.
Start-up expenses for each subscriber include one-time license fees paid to
third parties for the right to bundle other capabilities into the Company's
software, cost of diskettes and other product media, manuals, and packaging and
delivery costs associated with the materials provided to new subscribers. The
Company does not defer any such subscriber start-up expenses. Costs of
revenues also include monthly license fees per subscriber for the right to
receive and make available certain news services. Telecommunications costs
include the costs of providing local telephone lines into each POP and costs
associated with leased lines connecting each POP to the Company's Atlanta hub
and connecting the hub to the Internet backbone.
As the above table indicates, subscriber start-up fees have decreased
generally as a percentage of revenues as the cumulative subscriber base has
increased. Because operating margins on start-up fees are lower than margins
earned for providing monthly access services, a continuing trend of decreasing
start-up fee revenues would, by itself, tend to increase the overall margins
for the Company. However, the impact of this trend has been offset
historically by the increased costs and expenses associated with opening new
POPs. As a result of the Acquisition, the Company generally anticipates
opening fewer POPs.
Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Selling, general and
administrative costs will increase over time as the scope of the Company's
operations increases, primarily as a result of the Acquisition and the related
nationwide expansion of the Company's marketing and advertising activities.
However, the Company expects such costs will be more than offset by anticipated
increases in revenues attributable to the subscriber accounts acquired as part
of the Acquisition. In addition, significant levels of marketing activity may
be necessary in order for the Company to build or increase its subscriber base
in a given market to a size large
- 14 -
<PAGE> 15
enough to generate sufficient revenues to offset such marketing expenses. The
Company does not defer any start-up expenses or subscriber acquisition costs
related to entering new markets. The costs associated with the development and
registration of the Company's trademarks have been expensed as incurred. Such
costs have not been material.
Historically, the Company has achieved growth of subscriber revenues
by providing service in new Company-owned POPs. For each new POP opened to
date, the Company has initially invested approximately $35,000 in capital
expenditures for telecommunications equipment, primarily modems and terminal
servers. The Company also incurs approximately $5,000 of installation costs
for local telephone lines and for the leased telephone lines used in
transporting data from the POP to the Company's Atlanta hub. The Company
estimates that approximately 250 subscribers can be served by the capacity
provided by its initial investment (which typically includes 24 telephone
lines) in each POP, based on current rates of usage.
Prior to the transactions with PSINet, as the demand for the Company's
services in a particular POP has grown, the Company has had to invest in
additional telecommunications equipment and provide additional local telephone
lines for that POP. The Services Agreement provides the Company the option to
evaluate on a POP-by-POP basis whether to continue to develop POPs using the
Company's resources or to conserve capital through utilization of the PSINet
POPs for a specified fee. As the Company expands into new markets, both cost
of revenues and selling, general and administrative expenses will increase. To
the extent the Company opens its own POPs, such expenses may also increase as a
percentage of revenues in the short term after a new POP is opened because many
of the fixed costs of providing service in a new market are incurred before
significant revenues can be expected from that market. However, to the extent
that the Company expands into new markets by using the PSINet POPs instead of
opening its own POPs, the Company's incremental monthly recurring costs will
consist primarily of the fees to be paid to PSINet per subscriber served, as
provided in the Services Agreement.
The Company estimates that as of June 30, 1996, the Company's 40 POPs,
which were serving approximately 34,460 subscribers as of such date, had
sufficient capacity to serve in excess of approximately 38,900 subscribers. As
of June 30, 1996, the Company and PSINet maintained 20 POPs in the same
locations. Pursuant to the Services Agreement, the Company has the flexibility
to offer Internet access in such overlapping POP locations through its own POP,
through PSINet's POP or a combination of both. In certain of these locations,
it may be more cost-effective for the Company to close its own POP and offer
Internet access exclusively through PSINet's POP. The Company currently
estimates that it will be offering Internet access in over 200 POPs by the end
of 1996. Although the Company does not currently plan to open a significant
number of new POPs in 1996, the Company intends to maintain the flexibility to
close, expand or open new Company-owned POPs or make other capital investments
as and where subscriber demand or strategic considerations may warrant. The
closing or expansion of existing POPs or opening of new POPs will be evaluated
by management on a POP-by-POP basis.
The Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure and internal staffing,
develop its systems and expand into new markets. The Company expects to
continue to focus on increasing its subscriber base and geographic coverage.
Accordingly, the Company expects that its cost of revenues, selling expenses,
general and administrative expenses, and capital expenditures will continue to
increase, all of which may have a negative impact on short-term operating
results.
- 15 -
<PAGE> 16
RESULTS OF OPERATIONS
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995
The following table sets forth certain financial data for each of the
quarters ended June 30, 1996 and June 30, 1995. The quarterly information is
unaudited, has been prepared on the same basis as the annual financial
statements and, in the opinion of the Company's management, reflects all
adjustments (consisting only of normal and recurring adjustments) necessary for
a fair presentation of the information for the periods presented. Operating
results for any quarter are not necessarily indicative of results for any
future period. Dollar amounts (except per share data) are shown in thousands.
<TABLE>
<CAPTION>
QUARTERS ENDED JUNE 30,
1995 1996
------------------------ ---------------------------
% of % of
REVENUES REVENUES
-------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 339 100% $ 2,495 100%
---------- -------- ----------- --------
Selling, general and administrative expenses 336 99% 2,603 104%
Cost of revenues 139 41% 1,107 44%
Depreciation and amortization 34 10% 362 15%
---------- -------- ----------- --------
Total costs and expenses 509 150% $ 4,072 163%
========== ======== =========== ========
Operating loss (170) $ (1,577)
Interest income 1 117
---------- -------- ----------- --------
Net Loss $ (169) 50% $ (1,460) 59%
PER SHARE DATA:
Net loss per share (1) $ (.06) $ (.29)
Weighted average common shares outstanding 2,871,229 5,111,782
OTHER OPERATING DATA: (2)
Approximate subscribers at end of period 4,370 34,460
POPs at end of period 2 40
Employees at end of period 29 177
Access lines at end of period 464 3,479
</TABLE>
- -------------------------
(1) Net loss per share is computed using the weighted average number of shares
of Common Stock and dilutive common stock equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). Common Stock and Common Stock
equivalent shares issued at prices below $8.00, the initial public offering
price per share, during the twelve-month period prior to the initial public
offering have been included in the calculation as if they were outstanding
for all periods prior to the initial public offering, regardless of whether
they are dilutive. Accordingly, all stock options granted and the Class C
Preferred Stock are included in the earnings per share calculations for all
periods presented prior to March 13, 1996, the effective date of the
initial public offering even though the effect on net loss is antidilutive.
(2) Excludes the effects of the Acquisition.
Revenues. Revenues for the quarter ended June 30, 1996 totaled
approximately $2,495,000, compared to approximately $339,000 for the same
period in the prior year. Subscriber start-up fees accounted for 19% of
revenue in the quarter ended June 30, 1996, compared to 27% for the quarter
ended June 30, 1995. The Company anticipates that as its subscriber base
continues to expand, subscriber start-up fees will progressively represent a
smaller percentage of revenue. The 636% increase in quarterly revenues
resulted primarily from an increase of 689% in subscribers to approximately
34,460 as of June 30, 1996, compared to approximately 4,370 subscribers as of
June
- 16 -
<PAGE> 17
30, 1995. In addition, business services revenues for the quarter ended June
30, 1996 increased to approximately $397,000, compared to approximately $25,000
for the same period in the prior year due to substantial increases in Web-
hosting, domain and dedicated accounts.
Cost of revenues. For the quarter ended June 30, 1996, cost of
revenues increased to approximately $1,107,000 or 44% of revenues, compared to
approximately $139,000 or 41% of revenues for the quarter ended June 30, 1995.
Cost of revenues increased significantly in the quarter ended June 30, 1996 as
a result of the significant increase in subscribers. Cost of revenues
increased as a percentage of revenues primarily as a result of the capital
expenditures and other costs associated with the opening of new Company-owned
POPs and the significant increase in subscribers.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $2,603,000 or 104% of
revenues for the quarter ended June 30, 1996, compared to approximately
$336,000 or 99% of revenues for the quarter ended June 30, 1995. The increase
as a percentage of revenues resulted from the substantial increase in
advertising and marketing expenses for developing business in new and existing
POPs. The Company was operating 40 POPs as of June 30, 1996, compared to two
POPs as of June 30, 1995. Also, the Company increased the number of employees
to 177 as of June 30, 1996, compared to 29 as of June 30, 1995, an increase of
510%.
Depreciation and amortization. During the second quarter 1995, the
Company had a relatively small asset base, which expanded dramatically during
the second half of 1995 and the first half of 1996. Consequently, depreciation
and amortization expenses increased to approximately $362,000 or 15% of
revenues for the quarter ended June 30, 1996, compared to approximately $34,000
or 10% of revenues for the same period in the prior year.
- 17 -
<PAGE> 18
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
The following table sets forth certain financial data for each of the
six-month periods ended June 30, 1996 and June 30, 1995. The period
information is unaudited, has been prepared on the same basis as the annual
financial statements and, in the opinion of the Company's management, reflects
all adjustments (consisting only of normal and recurring adjustments) necessary
for a fair presentation of the information for the periods presented.
Operating results for any period are not necessarily indicative of results for
any future period. Dollar amounts (except per share data) are shown in
thousands.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1995 1996
------------------------- -----------------------------
% of % of
REVENUES REVENUES
-------- --------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 511 100% $ 4,307 100%
---------- -------- ------------ --------
Selling, general and administrative expenses 504 99% 4,341 101%
Cost of revenues 223 44% 1,913 44%
Depreciation and amortization 48 9% 596 14%
---------- -------- ------------ --------
Total costs and expenses 775 152% $ 6,850 159%
========== ======== ============ ========
Operating loss (264) $ (2,543)
Interest expense 0 (92)
Interest income 2 136
---------- -------- ------------ --------
Net Loss $ (262) 54% $ (2,499) 58%
PER SHARE DATA:
Net loss per share (1) $ (.09) $ (.58)
Weighted average common shares outstanding 2,857,119 4,309,859
</TABLE>
- ------------------------------
(1) Net loss per share is computed using the weighted average number of shares
of Common Stock and dilutive common stock equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). Common Stock and Common Stock
equivalent shares issued at prices below $8.00, the initial public offering
price per share, during the twelve-month period prior to the initial public
offering have been included in the calculation as if they were outstanding
for all periods prior to the initial public offering, regardless of whether
they are dilutive. Accordingly, all stock options granted and the Class C
Preferred Stock are included in the earnings per share calculations for all
periods presented prior to March 13, 1996, the effective date of the
initial public offering even though the effect on net loss is antidilutive.
Revenues. Revenues for the six months ended June 30, 1996 totaled
approximately $4,307,000, as compared to approximately $511,000 for the same
period in the prior year. Subscriber start-up fees accounted for 19% of
revenues for the six months ended June 30, 1996, as compared to 29% for the six
months ended June 30, 1995. The 743% increase in period revenues resulted
primarily from an increase of 689% in subscribers to approximately 34,460 as of
June 30, 1996, compared to approximately 4,370 subscribers as of June 30, 1995.
In addition, the business services revenues in the period ended June 30, 1996
increased to approximately $671,000 or 16% of revenues, as compared to
approximately $31,000 or 6% of revenues, for the same period in the prior year,
primarily due to substantial increases in Web-hosting accounts.
- 18 -
<PAGE> 19
Cost of revenues. For the six months ended June 30, 1996, cost of
revenues increased to approximately $1,913,000 or 44% of revenues, compared to
approximately $223,000 or 44% of revenues for the six months ended June 30,
1995. Cost of revenues increased significantly for the six-month period ended
June 30, 1996 as a result of the capital expenditures and other costs
associated with the opening of new Company-owned POPs and the significant
increase in subscribers.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $4,341,000 or 101% of
revenues for the six months ended June 30, 1996, compared to approximately
$504,000 or 99% of revenues for the six months ended June 30, 1995. The
increase as a percentage of revenues resulted primarily from increased
advertising expenses incurred to attract new subscribers, whereas in the past
the Company relied primarily on personal referrals. The overall increase in
expenses was primarily attributable to the expansion of the Company's
operations in terms of POPs, subscribers and employees between the periods.
The Company was operating 40 POPs and had 177 employees as of June 30, 1996,
compared to two POPs and 29 employees as of June 30, 1995.
Depreciation and amortization. Depreciation and amortization expenses
increased substantially to approximately $596,000 or 14% of revenues for the
six months ended June 30, 1996, compared to approximately $48,000 or 9% of
revenues for the same period in the prior year, reflecting a dramatic expansion
in the Company's asset base.
Interest Expense. At the beginning of the first quarter of 1996, the
Company had $2,500,000 outstanding under a loan agreement with ITC Holding. In
March 1996, the outstanding amount of $3,500,000 was paid in full, plus accrued
interest of $97,000, with a portion of the proceeds from the initial public
offering. The interest expense of approximately $92,000 recorded during the
first six months of 1996 represents interest on this loan, which accrued at the
rate of 14% per annum. No such credit facilities existed during the first six
months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily financed its operations to date through
public and private sales of equity securities and loans from its principal
stockholders. During the first quarter of 1996, the Company completed an
initial public offering of Common Stock, issuing 1,950,000 shares at a price of
$8.00 per share. The proceeds of the initial public offering were
approximately $13,672,000, net of underwriting discounts and expenses. Upon
completion of the initial public offering, the Company repaid all outstanding
principal amounts outstanding under a loan to the Company from ITC Holding
Company, Inc. totaling $3,500,000 and approximately $97,000 in accrued but
unpaid interest.
In April 1996, the Company's underwriters for the initial public
offering exercised a portion of the over-allotment option granted by the
Company, electing to purchase 75,000 additional shares of Common Stock. The
net proceeds to the Company from the exercise of the over-allotment option
equaled approximately $478,000, resulting in total cash from financing
activities of approximately $13,650,000 for the six months ended June 30, 1996,
a $12,600,000 increase compared to the same period in 1995. Cash from
financing activities for the second quarter ended June 30, 1996 equaled
approximately $2,478,000 (including $2,000,000 in proceeds from the First
PSINet Note), a $1,328,000 increase compared to the same period in
1995.
Cash used in investing activities (approximately $7,000,000 for the
six months ended June 30, 1996 (of which approximately $5,706,000 was used
during the second quarter ended June 30, 1996) and approximately $786,000
during the six months ended June 30, 1995 (of which approximately $472,000 was
used during the second quarter ended June 30, 1995)) consisted primarily of
purchases of telecommunications equipment necessary for the provision of
service to
- 19 -
<PAGE> 20
subscribers. In addition, on June 28, 1996, in connection with the First
Closing of the Acquisition, the Company paid PSINet $1,000,000 in cash and
issued a one-year promissory note in the amount of $2,000,000.
At the Second Closing of the Acquisition, which is currently expected
to occur in September 1996, the Company will receive the rest of the assets
related to the Consumer Services in exchange for issuing the Second PSINet Note
in the amount of $10,200,000. The Company has agreed to issue to PSINet two
additional promissory notes in payment of the balance of the Purchase Price (up
to an aggregate of $8,200,000), depending primarily upon the number of
subscribers who remain subscribers of the Company as of certain specified
dates, the last of which is to be no later than January 17, 1997.
The First PSINet Note is, and each of the other PSINet Notes will be,
due and payable in full (including accrued interest) on the first anniversary
of the date of such PSINet Note and will bear interest at the interest rate
published as the "prime rate" in the "Money Rates" section of The Wall Street
Journal plus 3.0%. In addition, in the event that any PSINet Note is not paid
in full within 90 days after the date of such PSINet Note, the principal amount
thereof will increase by 5.0% of the principal then outstanding, compounding at
the rate of 5.0% each 90 days thereafter until such PSINet Note is redeemed in
full. Therefore, pursuant to the Purchase Agreement, the maximum consideration
(excluding interest payable on the PSINet Notes) could increase to
approximately $24,800,000 if all of the PSINet Notes are issued and
outstanding, and no amounts payable thereunder are paid until due. There are
no prepayment penalties under the PSINet Notes.
In the event that any PSINet Note is not paid in full by the first
anniversary of the date of such PSINet Note, the registered owner of such
PSINet Note will have the right to convert all, but not less than all, of the
amount due under such PSINet Note into fully paid and non-assessable shares of
Common Stock, at a conversion price per share equal to the closing price of the
Common Stock reported on The Nasdaq Stock Market as of the end of the trading
day on the Second Closing Date or, if the Second Closing Date has not occurred,
then as of the end of the trading day on the First Closing Date.
The Company does not anticipate making any payments on any PSINet Note
before the fourth quarter of 1996, when the Company anticipates raising
additional capital from public or private equity or debt sources. The
principal amount of the First PSINet Note will increase by 5.0% if not paid in
full on or before September 26, 1996. If issued in September 1996, the
principal amount of the Second PSINet Note will increase by 5.0% if not paid in
full on or before the ninetieth day after issuance during December 1996.
In connection with the Nando.net Transaction (as defined in
Item 5 of Part II of this report), the Company is required to pay $100,000 in
cash at the Closing, which is expected to occur on or about September 30, 1996.
The balance of the purchase price in the Nando.net Transaction may be paid in
the form of a secured promissory note. The aggregate purchase price is
currently expected to be approxiately $700,000. See Part II, Item 5.
On July 15, 1996, the Company and Bell South Telecommunications, Inc.
("BellSouth") entered into a two-year agreement (the "BellSouth Agreement"),
pursuant to which the Company agreed to purchase telecommunications services
from BellSouth for a minimum of $2,000,000 in the first year, and, in the
second year, a minimum of 90% of the amount billed to the Company during the
first year. The Company may renew the BellSouth Agreement pursuant to two
one-year renewal options. In the event the Company terminates the BellSouth
Agreement prior to its expiration, the Company is required to pay BellSouth a
termination fee equal to 50% of the amounts billed to the Company during the 12
months preceding such termination. The Company currently has no other material
commitments except for obligations related to the First PSINet Note and various
operating leases entered into in the ordinary course of the Company's business,
including the Company's office space lease (which expires on March 31, 1999).
Current anticipated capital expenditures through the end of 1996 and
for 1997 required due to the nationwide expansion of the Company's subscriber
base primarily as a result of the Acquisition, and in connection with the
expansion of existing Company-owned POPs or, if applicable, opening of selected
new Company POPs, are estimated to be $5,700,000 and $10,000,000, respectively.
At June 30, 1996, the Company's principal sources of liquidity were
approximately $5,694,000 in cash. The Company anticipates that cash
requirements for the rest of 1996 will
- 20 -
<PAGE> 21
include approximately $20,400,000 for repayment of currently anticipated
outstanding principal amounts (excluding accrued interest) under the PSINet
Notes (assuming that all of the PSINet Notes will be issued during 1996 and
that the Company pays the maximum aggregate purchase price payable under the
Purchase Agreement), approximately $5,700,000 for capital expenditures
(excluding approximately $1,400,000 in capital expenditures for
the Harrisburg Facility to be represented by a portion of the Second PSINet
Note) and approximately $2,400,000 to fund operating losses (including
approximately $2,000,000 for advertising and promotional expenses) before
depreciation.
The Company expects to refinance the Acquisition and obtain additional
working capital through a public offering of its Common Stock during the third
or fourth quarters of 1996. The public offering will be made only by means of
a prospectus. The Company's cash and financing needs for the remainder of
1996, for 1997 and beyond will be dependent on the Company's level of
subscriber growth and the related capital expenditures, advertising costs and
working capital needs necessary to support such growth. Other than the
anticipated public equity financing during the third or fourth quarters of
1996, the Company has not identified financing sources to fund such cash needs.
If alternative sources of financing are insufficient or unavailable, the
Company will be required to modify its growth and operating plans in accordance
with the extent of available funding and attempt to attain profitability in its
existing markets (including those accessible pursuant to the Services
Agreement). In addition, any increases in the Company's growth rate,
shortfalls in anticipated revenues, increases in expenses, or significant
acquisition opportunities could have a material adverse effect on the Company's
liquidity and capital resources and would require the Company to raise
additional capital from public or private equity or debt sources in order to
finance its anticipated growth and contemplated capital expenditures. In
addition, the Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, such as acquisitions of complementary
businesses or the development of new products, or otherwise respond to
unanticipated competitive pressures. There can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company or at all.
- 21 -
<PAGE> 22
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 6, 1996, the Company entered into a definitive agreement
with The News and Observer Publishing Company ("N&O"), pursuant to which the
Company agreed to acquire certain Internet access individual subscriber
accounts in North Carolina and related assets currently used by N&O in
connection with its Nando.net Internet access business (the "Nando.net
Transaction").
Consummation of the Nando.net Transaction is subject to the
fulfillment of customary closing conditions, and is currently expected to occur
on or about September 30, 1996 (the "Closing Date"). As payment for the
Nando.net Transaction, the Company is required to pay N&O (i) $100,000 on the
Closing Date, and (ii) an additional amount based upon the number of acquired
Internet customer and subscriber accounts which continue to be accounts of the
Company on December 1, 1996 (the "Additional Payment"). The Additional Payment
may be in the form of a promissory note (the "Promissory Note") payable in
two installments due on March 31, 1997 and September 30, 1997 (unless
prepayment is required due to the occurrence of one of several specified
conditions). The Promissory Note is to be secured by a lien on and a security
interest in certain Internet customer contracts, equipment, inventory and
accounts owned by the Company. The Company currently anticipates that the
aggregate purchase price for the Nando.net Transaction will be approximately
$700,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------ -------------------
<S> <C>
11 Statement regarding Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K.
On July 15, 1996, the Company filed a Current Report on Form 8-K which
reported that the Company had entered into an Asset Purchase Agreement dated
June 28, 1996 with PSINet Inc., pursuant to which the Company agreed to acquire
certain tangible and intangible assets and rights in connection with the
consumer dial-up Internet access services operated by PSINet Inc. in the United
States (the "Consumer Services"), including approximately 100,000 subscriber
contracts and the lease for a customer service facility. See "Part I -
Financial Information."
- 22 -
<PAGE> 23
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.
MINDSPRING ENTERPRISES, INC.
----------------------------
(Registrant)
Date: August 14, 1996 By: /s/ Michael S. McQuary
---------------------------
Michael S. McQuary
President and Chief Operating Officer
Date: August 14, 1996 By: /s/ Michael G. Misikoff
----------------------------
Michael G. Misikoff
Vice President and Chief
Financial Officer
- 23 -
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- ------ ------------------- -------------
<S> <C>
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
- 24 -
<PAGE> 1
EXHIBIT 11
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
For the Quarter For the Six Months
Ended Ended
June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 1,267,304 5,111,782 1,267,304 4,309,859
Common Stock Equivalents:
Class A Convertible Preferred Stock 1,187,895 0 (A) 1,187,895 0 (A)
Class B Convertible Preferred Stock 28,378 0 (A) 14,267 0 (A)
Class C Convertible Preferred Stock 100,000 0 (B) 100,000 0 (B)
Stock Options: Employee and Director Plans 287,652 0 (B) 287,652 0 (B)
---------- ---------- ---------- ----------
Total Shares for Primary Loss Per Share 2,871,229 5,111,782 2,857,119 4,309,859
Net Loss (169,075) (1,459,953) (261,935) (2,449,213)
---------- ---------- ---------- -----------
Primary Loss Per Share ($0.06) ($0.29) ($0.09) ($0.58)
========== ========== ========== ===========
</TABLE>
(A) Converted as part of the IPO and included in weighted average shares
outstanding.
(B) Excluded from calculation as antidilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,693,611
<SECURITIES> 0
<RECEIVABLES> 1,287,835
<ALLOWANCES> 128,468
<INVENTORY> 36,478
<CURRENT-ASSETS> 7,236,585
<PP&E> 7,716,928
<DEPRECIATION> 843,055
<TOTAL-ASSETS> 17,214,859
<CURRENT-LIABILITIES> 5,082,180
<BONDS> 0
0
638,000
<COMMON> 51,258
<OTHER-SE> 11,393,421
<TOTAL-LIABILITY-AND-EQUITY> 17,214,859
<SALES> 0
<TOTAL-REVENUES> 4,306,523
<CGS> 1,912,323
<TOTAL-COSTS> 6,849,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,883
<INCOME-PRETAX> (2,499,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,499,213)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,299,213)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> 0
</TABLE>