<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 23, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MINDSPRING ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7389 58-2113290
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
1430 WEST PEACHTREE, SUITE 400
ATLANTA, GA 30309
(404) 815-0770
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
CHARLES M. BREWER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MINDSPRING ENTERPRISES, INC.
1430 WEST PEACHTREE, SUITE 400
ATLANTA, GA 30309
(404) 815-0770
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID B.H. MARTIN, JR., ESQ. GLENN W. STURM, ESQ.
NANCY J. KELLNER, ESQ. JAMES WALKER IV, ESQ.
HOGAN & HARTSON L.L.P. NELSON MULLINS
555 THIRTEENTH STREET, N.W. RILEY & SCARBOROUGH, L.L.P.
WASHINGTON, D.C. 20004 400 COLONY SQUARE, SUITE 2200
(202) 637-5600 1201 PEACHTREE STREET, N.E.
ATLANTA, GA 30361
(404) 817-6000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
---------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /
---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================
PROPOSED
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE MAXIMUM OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.......... 4,025,000(1) $10.25(2) $41,256,250(2) $14,227
=============================================================================================================
</TABLE>
(1) Includes 525,000 shares subject to an over-allotment option granted by the
Company to the Underwriters. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED AUGUST , 1996
PROSPECTUS
3,500,000 SHARES
[MINDSPRING LOGO]
COMMON STOCK
The 3,500,000 shares of Common Stock offered hereby (the "Offering") are
being sold by MindSpring Enterprises, Inc. ("MindSpring" or the "Company"). The
Common Stock is traded on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "MSPG." On August 19, 1996, the last reported
sale price of the Common Stock on the Nasdaq National Market was $10.25 per
share. See "Price Range of Common Stock and Dividend Policy."
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A SIGNIFICANT
DEGREE OF RISK. SEE "RISK FACTORS" APPEARING ON PAGES 6 THROUGH 17 OF THIS
PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 525,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ , and the total Proceeds to Company
will be $ . See "Underwriting."
---------------------
The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about , 1996.
---------------------
J.C. BRADFORD & CO.
WHEAT FIRST BUTCHER SINGER
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1996
<PAGE> 3
MINDSPRING SERVICE AREA
[A color map of the continental United States appears on the inside front
cover, representing MindSpring's service area. MindSpring's corporate
headquarters is represented by a star; each MindSpring POP location is
represented by a solid dot; each PSINet POP is represented by a solid triangle.
Below the map is a key to the aforementioned symbols.]
AS OF JUNE 30, 1996, THERE WERE 40 MINDSPRING POPS IN NINE STATES AND THE
DISTRICT OF COLUMBIA, AND OVER 200 PSINET POPS IN 46 STATES AND THE DISTRICT OF
COLUMBIA. SEE "GLOSSARY OF TECHNICAL TERMS" FOR THE DEFINITION OF "POP" AS USED
HEREIN. THE COMPANY HAS OBTAINED ACCESS TO THE PSINET POPS PURSUANT TO THE
SERVICES AGREEMENT, WHICH MAY BE TERMINATED UNDER SPECIFIED CIRCUMSTANCES. SEE
"RISK FACTORS -- DEPENDENCE ON PSINET" AND "RECENT TRANSACTIONS."
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
-------------------
This Prospectus includes product names and trademarks of the Company and of
other organizations.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective investors should carefully consider the factors set forth herein
under the caption "Risk Factors" and are urged to read this Prospectus in its
entirety. Unless otherwise indicated, the information in this Prospectus: (i)
assumes and gives effect to the Acquisition (as defined below), except for the
historical financial information; and (ii) assumes no exercise of the
Underwriters' over-allotment option. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this Prospectus. 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 Glossary of Technical Terms appearing
elsewhere in this Prospectus contains definitions of certain technical terms
used herein.
THE COMPANY
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is an Internet
access provider that focuses on serving individual subscribers, including
individuals with little or no prior on-line experience. MindSpring provides
easy-to-use Internet access by offering customized software, reliable network
facilities and responsive customer service. MindSpring believes that there is a
growing and unsatisfied demand for high quality Internet access for individuals.
Trends contributing to this growth in demand include the heightened consumer
awareness of the Internet, the increasing number of individuals who have
computers with modems and the expanding diversity of information, entertainment
and commercial offerings available on the Internet. Management believes that
few, if any, of its major competitors have developed a comparable level of
service quality and customer support for individual subscribers and that by
targeting individual subscribers, rather than attempting to serve all segments
of the Internet access market, MindSpring can continue to increase its
subscriber base rapidly while maintaining superior quality service.
In June 1996, the Company announced its plans to become a nationwide
Internet access provider through agreements with PSINet Inc. ("PSINet") to
purchase up to 100,000 consumer dial-up subscriber accounts, a customer service
facility and certain other related assets and to obtain access to PSINet's
national network of over 200 points of presence ("POPs") (the "PSINet
Transaction"). Prior to the PSINet Transaction, MindSpring was a regional
Internet access provider that offered its services through 40 POPs in the
southeastern United States and had grown to approximately 34,500 subscribers,
from approximately 12,400 subscribers as of December 31, 1995. On a pro forma
basis as of June 30, 1996, MindSpring would have had access to approximately 230
POPs (excluding PSINet POPs located in areas served by MindSpring POPs) and
would have had approximately 134,500 subscribers, assuming the acquisition of
100,000 subscriber accounts from PSINet.
MindSpring's objective is to become a leading national provider of high
quality Internet access to individuals by: (i) leveraging the opportunities
afforded by the PSINet Transaction and expanding its subscriber base; (ii)
maintaining superior service and customer support and providing easy-to-use
software and reliable Internet access; (iii) expanding marketing and
distribution activities and pursuing strategic alliances with complementary
businesses; (iv) focusing on individual subscribers; and (v) engaging in
selected acquisitions.
The Company believes that the PSINet Transaction will enhance the Company's
ability to achieve its strategic objectives on a cost-effective and accelerated
basis and to realize economies of scale. The Company believes that the PSINet
Transaction will establish the Company as a leading Internet access provider
with nationwide coverage, create opportunities for the Company to pursue
national marketing and strategic alliances and reduce the need for significant
up-front capital expenditures to establish Company-owned POPs. The Company
intends, however, to maintain the flexibility to expand, open or close its own
POPs or make other capital investments as and where subscriber demand or
strategic considerations warrant.
The Company was incorporated in Georgia in February 1994 and was
reincorporated in Delaware in December 1995. The Company's executive offices are
located at 1430 West Peachtree, Suite 400, Atlanta, Georgia 30309. The Company's
telephone number is (404) 815-0770.
3
<PAGE> 5
RECENT DEVELOPMENTS
On June 28, 1996, the Company entered into a Purchase Agreement with PSINet
(as amended, the "Purchase Agreement") pursuant to which the Company agreed to
acquire subscriber accounts and other assets from PSINet for a purchase price of
up to approximately $21,400,000 (the "Acquisition"). The actual purchase price
will depend on the number of acquired subscriber accounts that remain MindSpring
subscriber accounts for a specified period. Management currently expects that
fewer than 100,000 subscriber accounts will actually be purchased, due to
subscriber attrition over such period. The Company acquired 15,000 of these
subscriber accounts for $1,000,000 in cash and a $2,000,000 one-year promissory
note on June 28, 1996. The Company expects to acquire substantially all of the
remaining subscriber accounts and related assets in early September 1996, at
which time the Company will issue an additional one-year promissory note in the
amount of $10,200,000. The balance of the purchase price is expected to be paid
out of the net proceeds from the Offering at specified intervals during the
fourth quarter of 1996 and the first quarter of 1997. The completion of the
Acquisition is not contingent upon consummation of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems, and
subscriber log-in and accounting information.
On August 6, 1996, the Company and The News and Observer Publishing Company
("N&O") entered into a definitive agreement to purchase certain individual
subscriber accounts in North Carolina (currently expected to number between
4,000 and 6,000) in connection with N&O's Nando.net Internet access business
(the "Nando.net Transaction"). The Nando.net Transaction is expected to be
consummated on or about September 30, 1996, subject to the fulfillment of
certain customary closing conditions. See "Recent Transactions."
THE OFFERING
Common Stock offered by the
Company.................... 3,500,000 shares
Common Stock to be outstanding
after the Offering (1)..... 8,625,793 shares
Use of proceeds............... Payment of the balance of the purchase price in
connection with the Acquisition, the
Nando.net Transaction and other subscriber
purchases; capital expenditures through the
end of 1996; working capital and general
corporate purposes; funding of operating
deficits and possible additional strategic
acquisitions of subscriber accounts and
complementary businesses. See "Use of
Proceeds" and "Recent Transactions."
Nasdaq National Market
Symbol........................ MSPG
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1996. Does not include: (a) 100,000 shares of Common Stock issuable on
September 19, 1996 upon conversion of the Company's Class C Preferred Stock,
par value $0.01 per share ("Class C Preferred"); (b) 439,213 shares of
Common Stock issuable upon exercise of stock options granted to directors,
officers and employees of the Company at prices ranging from $0.64 to
$12.375 per share; or (c) 525,000 shares of Common Stock issuable upon
exercise of the Underwriters' over-allotment option.
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully a number of factors that could
affect the Company's business, financial condition and results of operations.
Such factors are discussed elsewhere in this Prospectus under the heading "Risk
Factors."
4
<PAGE> 6
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA)
The summary historical and pro forma financial and operating data set forth
below should be read in conjunction with "Use of Proceeds," "Selected Financial
and Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Company's financial statements and
notes thereto and other financial and operating data included elsewhere in this
Prospectus. The pro forma financial information does not purport to represent
what the Company's results of operations would have been if the PSINet
Transaction had in fact occurred on such dates, nor does it purport to indicate
the future financial position or results of future operations of the Company.
The pro forma adjustments are based on currently available information and
certain assumptions that management believes to be reasonable.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
---------------------- -----------------------------------
INCEPTION PRO FORMA PRO FORMA
PERIOD 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues...................................... $ 103 $ 2,227 $ 9,013 $ 511 $ 4,307 $ 12,262
Costs and expenses:
Selling, general and administrative....... 121 2,230 9,001 504 4,342 12,362
Cost of revenues.......................... 52 966 4,359 223 1,912 5,890
Depreciation.............................. 5 265 797 48 596 929
Amortization.............................. 0 0 6,953 0 0 3,477
--------- --------- --------- --------- --------- ----------
Total costs and expenses.............. 178 3,461 21,110 775 6,850 22,658
--------- --------- --------- --------- --------- ----------
Operating loss................................ (75) (1,234) (12,097) (264) (2,543) (10,396)
Interest income (expense), net................ 0 (725) (725) 2 44 44
--------- --------- --------- --------- --------- ---------
Net loss...................................... $ (75) $ (1,959) $ (12,822) $ (262) $ (2,499) $ (10,352)
======== ======== ========= ========= ========= =========
PER SHARE DATA:
Net loss per share(1)......................... $ (0.62) $ (1.92) $ (0.09) $ (0.58) $ (1.33)
Weighted average common shares
outstanding(1).............................. 3,175,376 6,675,376 2,857,119 4,309,859 7,809,859
OTHER OPERATING DATA:
Approximate number of subscribers at end of
period(2)................................... 1,000 12,410 112,410 4,370 34,460 134,460
Approximate number of POPs at end of
period(2)................................... 1 17 207 2 40 230
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------
AS ADJUSTED
ACTUAL FOR THE OFFERING(3) PRO FORMA(4)
------- ------------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................ $ 2,154 $32,951 $14,336
Property and equipment, net............................................ 6,874 6,874 9,790
Total assets........................................................... 17,215 48,172 48,172
Total liabilities...................................................... 5,082 3,082 3,082
Accumulated deficit.................................................... (4,533) (4,533) (4,533)
Total stockholders' equity............................................. 12,133 45,090 45,090
</TABLE>
- ---------------
(1) 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). For 1996, the Class C Preferred
and stock options are excluded from the calculations as their effect is
antidilutive. For 1995, Common Stock and Common Stock equivalent shares
issued at prices below the initial public offering price ($8.00 per share)
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 are included in the earnings per share calculations for all 1995
periods presented, even though the effect on net loss is antidilutive. For
1995, the Company's Class A Preferred Stock and Class B Preferred Stock
(which converted into shares of Common Stock on a one-for-one basis at the
time of the Company's initial public offering) have been included for the
respective weighted average periods for which such shares were outstanding,
even though their effect is antidilutive. For purposes of the "pro forma"
presentations, includes 3,500,000 shares of Common Stock offered hereby.
(2) Under the terms of the Purchase Agreement, the number of subscriber accounts
the Company may acquire could be less than 100,000 depending on various
factors described elsewhere herein. For example, if only 66,000 PSINet
subscriber accounts are acquired, June 30, 1996 pro forma subscribers would
be 100,460. The historical number of POPs and subscribers at end of period
for the six months ended June 30, 1996 excludes the effects of the PSINet
Transaction. The pro forma presentations assume the acquisition by the
Company of 100,000 subscriber accounts and access to 190 PSINet POPs that
are not located in areas served by a MindSpring POP.
(3) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $10.25 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of the First PSINet Note (including accrued
interest and increases in principal amount), estimated to be $2,160,000 upon
completion of the Offering. See "Use of Proceeds" for a description of the
Company's specific plans for application of the net proceeds from the
Offering.
(4) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $10.25 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of indebtedness to PSINet, which is assumed to
be $20,560,000 (including accrued interest and increases in principal
amount), based on an assumed acquisition of 100,000 subscriber accounts from
PSINet. Assumes that an additional $700,000 of net proceeds from the
Offering will be used to pay certain one-time license fees and starter kit
costs associated with the transfer of PSINet subscriber accounts to
MindSpring. If only 66,000 PSINet subscriber accounts are acquired,
indebtedness to PSINet would be $13,760,000 (including accrued interest and
increases in principal amount) and one-time license fees and starter kit
costs would be $462,000.
5
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing any of the Common Stock offered hereby.
LIMITED OPERATING HISTORY; OPERATING LOSSES. The Company was incorporated
on February 24, 1994 and commenced offering Internet access in June 1994. The
Company has had net losses in each quarter since it commenced operations and had
net losses of approximately $75,000, $1,959,000 and $2,499,000 for the years
ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively. As of June 30, 1996, the Company had an accumulated deficit of
approximately $4,533,000. The Company expects that it will continue to incur net
losses at least through the third quarter of 1997. Amortization charges in
connection with the Company's acquisition of assets related to PSINet's consumer
dial-up Internet access services will be first incurred in the third quarter of
1996 and are expected to adversely affect the Company's results of operations
through the second quarter of 1999. The Company's ability to achieve and
maintain profitability and positive cash flow is dependent upon a number of
factors, including the Company's ability to increase revenues while reducing per
subscriber costs by achieving economies of scale. There can be no assurance that
the Company will be successful in increasing or maintaining revenues or
achieving or sustaining economies of scale or positive cash flow in the future,
and any such failure could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Competition,"
"-- Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results" and "-- Need for Additional Capital to Finance Growth and Capital
Requirements."
PSINET TRANSACTION. The PSINet Transaction involves numerous risks. Such
risks include, among others: the difficulty of integrating the Company's network
and systems with PSINet's network; the potential disruption of the Company's
ongoing business; the potential inability of management to successfully
assimilate and retain subscriber accounts acquired from PSINet and convert such
subscriber accounts to the Company's billing system; potential problems that
transferring subscribers may experience with the process of converting to
MindSpring software and the potential dissatisfaction of subscribers who are
required to change their e-mail or domain address; the difficulty of
assimilating the operations and personnel of the customer service facility to be
acquired from PSINet (the "Harrisburg Facility"); the difficulty of
incorporating acquired technology and rights into the Company's service
offerings and maintaining uniform standards, controls, procedures and policies
in conjunction with a dramatically expanded subscriber base; the risks of
entering markets in which the Company has little or no direct prior experience;
and the possible impairment of relationships with former PSINet employees and
subscribers as a result of changes in management. There can be no assurance that
the Company will be successful in overcoming these risks or any other problems
encountered in connection with the PSINet Transaction. In addition, the Purchase
Agreement requires the Company to pay PSINet $200 for each acquired subscriber
account that remains a MindSpring subscriber account on certain measurement
dates, the first of which is expected to be November 15, 1996 and the last of
which is expected to be January 15, 1997. Such subscribers may cancel their
accounts at any time, with the cancellation taking effect as of the first day of
the following month. Consequently, if any such subscriber remains a MindSpring
subscriber past the applicable measurement date but cancels MindSpring service
thereafter, the Company could receive significantly less revenue from such
subscriber than the amount it pays to PSINet for the subscriber account. There
can be no assurance that the Company will retain the subscriber accounts
acquired from PSINet, or successfully integrate the assets or subscriber
accounts acquired from PSINet, and any failure to retain subscriber accounts, or
to successfully integrate the assets or subscriber accounts acquired from
PSINet, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Risks Associated With
Additional Acquisitions and Purchases of Subscriber Accounts," "-- Need for
Additional Capital to Finance Growth and Capital Requirements" and "Recent
Transactions."
DEPENDENCE ON PSINET. The Services Agreement with PSINet expires on June
28, 2001, and automatically renews for additional one-year terms, but may be
terminated earlier at any time by either party upon 365 days' prior written
notice. The Services Agreement does not require PSINet to continue to operate
any POP that is not serving as a primary dial-in POP for any MindSpring
subscriber. PSINet's inability or unwillingness to provide POP access to
MindSpring's subscribers, or the Company's inability to secure
6
<PAGE> 8
alternative POP arrangements upon partial or complete termination of the
Services Agreement or other loss of access to PSINet POPs, could significantly
limit the Company's ability to provide Internet access to its subscribers and
limit the Company's ability to expand nationally, which could, in turn, have a
material adverse effect on the Company's business, financial condition and
results of operations. Other than its intention to retain the flexibility to
open new MindSpring POPs on an as-needed basis, the Company does not currently
have any plans or commitments with respect to such alternative POP arrangements.
There can be no assurance that any such alternative arrangements will be
available if and when the Company requires them or, if available, that such
arrangements will be on terms acceptable to the Company.
Pursuant to the Services Agreement, the Company expects to rely
increasingly on PSINet to provide connectivity to MindSpring subscribers through
PSINet's nationwide network of over 200 POPs. The future success of the
Company's business will depend, in part, on the capacity, reliability and
security of PSINet's network infrastructure, over which the Company has no
control. In the event of disruptions in PSINet's network, the Company may have
no means of replacing these services on a timely basis or at all in the event of
such disruption. Any accident, incident, system failure or discontinuance of
operations involving PSINet's network that causes interruptions in the Company's
operations could have a material adverse effect on the Company's ability to
provide Internet services to its subscribers, and, in turn, on the Company's
business, financial condition and results of operations. See "-- Dependence on
Network Infrastructure; Capacity; Risk of System Failure," "-- Dependence on
Telecommunications Carriers and Other Suppliers" and "-- Security Risks."
COMPETITION. The market for the provision of Internet access to
individuals is extremely competitive and highly fragmented. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company believes that the primary competitive factors
determining success in this market are a reputation for reliability and service,
effective customer support, pricing, easy-to-use software, and geographic
coverage. Other important factors include the timing of introductions of new
products and services, and industry and general economic trends. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, financial condition and results of
operations.
As a result of increased competition in the industry, the Company has
encountered and expects to continue to encounter significant pricing pressure.
In May 1996, in response to a changing competitive environment, the Company
introduced five different pricing plans for dial-up access, compared to two
prior plan offerings. These plan changes generally represent a reduction from
the previous rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." Further reductions in rates
charged by the Company's competitors could require the Company to further reduce
prices charged to its subscribers, which could cause a decrease in total
revenues and revenue per subscriber and reduce the likelihood of the Company
achieving positive cash flow or profitability in the future. Any such reductions
in prices could materially adversely affect the Company's business, financial
condition and results of operations. In addition, telecommunications companies
may be able to offer customers reduced communications costs in connection with
their Internet access services, reducing the overall cost of their Internet
access services and significantly increasing price pressures on the Company.
Competition could also result in increased selling and marketing expenses,
related subscriber acquisition costs, and subscriber attrition, all of which
could materially adversely affect the Company's business, financial condition
and results of operations. There can be no assurance that the Company will be
able to offset the effects of any such increased costs or reductions in the
Company's prices through an increase in the number of its subscribers, higher
revenues from enhanced services, cost reductions or otherwise, or that the
Company will have the resources to continue to compete successfully.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. In addition, every
local market the Company has entered or intends to enter is served by multiple
local Internet access providers. The Company currently competes or expects to
compete with the following types of Internet access providers: (i) national
commercial Internet access providers, such as NETCOM On-Line Communications,
Inc. ("NETCOM"); (ii) numerous regional and local commercial Internet access
providers which
7
<PAGE> 9
vary widely in quality, service offerings and pricing; (iii) established on-line
commercial information service providers, such as America Online, Inc. ("America
Online") and CompuServe Incorporated ("CompuServe"); (iv) computer hardware and
software and other technology companies, such as International Business Machines
Corporation ("IBM") and Microsoft Corp. ("Microsoft"); (v) national long
distance carriers, such as AT&T Corp. ("AT&T"), MCI Communications Corporation
("MCI"), MFS Communications Company, Inc. ("MFS") and Sprint Corporation
("Sprint"); (vi) regional telephone companies; (vii) cable operators, such as
Comcast Corporation, Tele-Communications, Inc. and Time Warner, Inc.; and (viii)
nonprofit or educational Internet access providers.
Congress recently enacted, and President Clinton signed, the
Telecommunications Act of 1996, P.L. 104-104 (the "1996 Telecommunications
Act"), which contains certain provisions lifting, or establishing procedures for
lifting, restrictions on Bell Operating Companies and other companies which may
permit them to engage directly in the Internet access business. In addition, the
1996 Telecommunications Act makes it easier for national long distance carriers
such as AT&T to offer local telephone service. The Company cannot predict the
extent to which the 1996 Telecommunications Act, or strategic alliances or
consolidation among Internet access providers, may result in additional
competitive pressures on the Company or have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that new competitors, including large computer
hardware and software, media and telecommunications companies, will continue to
enter the Internet access market, resulting in even greater competition for the
Company. For example, Microsoft offers an Internet access solution, including
front-end software and an on-line service called "Microsoft Network." IBM's most
recent version of its OS/2 operating system software includes Internet
utilities, and IBM offers Internet access through its own private communications
network. MCI, AT&T and Sprint have also recently entered the Internet access
market. The ability of these competitors or others to enter into business
combinations, strategic alliances or joint ventures or to bundle services and
products with Internet access could put the Company at a significant competitive
disadvantage. For example, Microsoft recently announced strategic marketing
alliances for Internet access with MCI, AT&T and NETCOM. GTE Corp. ("GTE") and
UUNet Technologies Inc. ("UUNet") (which was recently acquired by MFS) have also
recently announced a strategic alliance whereby GTE's customers will obtain
access to the Internet through UUNet's communications network. The ability of
these competitors or others to enter into strategic alliances or joint ventures
or to bundle services and products with Internet access could put the Company at
a significant competitive disadvantage.
Moreover, the Company expects to face competition in the future from
companies that provide connections to consumers' homes, including local and long
distance telephone companies, cable companies, electric utility companies and
wireless communications companies. See "-- Risks of Technology Trends and
Evolving Industry Standards." Such companies could include Internet access in
their basic bundle of services or offer such access for a nominal additional
charge and could prevent the Company from delivering Internet access through the
wire and cable connections that such companies own. Any such developments could
materially adversely affect the Company's business, financial condition and
results of operations.
The Company does not currently compete internationally. To the extent that
the ability to provide Internet access internationally becomes a competitive
advantage in the Internet access industry, the Company may be at a competitive
disadvantage relative to other competitors. See "Business -- Competition."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. The Company's future success depends on a number of factors, many of
which are beyond the Company's control. These factors include the rates of and
costs associated with new subscriber acquisition, subscriber retention, capital
expenditures and other costs relating to the expansion of operations, the
ability of the Company to successfully assimilate the assets purchased in the
Acquisition (including, but not limited to, the Harrisburg Facility and
subscriber accounts), the timing of new product and service announcements,
changes in the Company's pricing policies and those of its competitors, market
acceptance of new and enhanced versions of the Company's products and services,
changes in operating expenses, changes in the Company's strategy, personnel
changes, the introduction of alternative technologies, the viability of the
Company's arrangement
8
<PAGE> 10
with PSINet under the Services Agreement, the effect of potential acquisitions,
increased competition in the Company's markets and other general economic
factors.
The Company's operating results, cash flows and liquidity may fluctuate
significantly in the future. The Company's revenues depend on its ability to
attract and retain subscribers who purchase access on a month-to-month basis.
MindSpring subscribers have the option of discontinuing their MindSpring service
at the end of any given month for any reason. The Company's expense levels are
based, in part, on its expectations as to future revenues. To the extent that
revenues are below expectations, the Company may be unable or unwilling to
reduce expenses proportionately, and operating results, cash flows and liquidity
are likely to be adversely affected. Due to all of the foregoing factors, it is
likely that in some future quarter the Company's operating results and/or growth
rate will be below the expectations of public market analysts and investors. In
such event, the price of the Common Stock will likely be materially adversely
affected.
RISKS ASSOCIATED WITH ADDITIONAL ACQUISITIONS AND PURCHASES OF SUBSCRIBER
ACCOUNTS. As part of its business strategy, the Company has undertaken the
PSINet Transaction and the Nando.net Transaction and will continue to evaluate
additional strategic acquisitions of businesses and subscriber accounts
principally relating to its current operations. Such transactions commonly
involve certain risks including, among others: the difficulty of assimilating
the acquired operations and personnel; the potential disruption of the Company's
ongoing business; the possible inability of management to maximize the financial
and strategic position of the Company by the successful incorporation of
acquired technology and rights into the Company's service offerings and the
maintenance of uniform standards, controls, procedures and policies; the risks
of entering markets in which the Company has little or no direct prior
experience; and the potential impairment of relationships with employees and
subscribers as a result of changes in management. There can be no assurance that
the Company will be successful in overcoming these risks or any other problems
encountered in connection with the PSINet Transaction, the Nando.net Transaction
or other future transactions. In addition, any such transactions could
materially adversely affect the Company's operating results due to dilutive
issuances of equity securities, the incurrence of additional debt, and the
amortization of expenses related to goodwill and other intangible assets, if
any. Except as described in this Prospectus, the Company is not currently
engaged in any negotiations with respect to specific additional significant
acquisitions, although from time to time it has had discussions with several
companies and is continuing to assess these and other acquisition opportunities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- MindSpring Strategy."
MANAGEMENT'S DISCRETION REGARDING USE OF PROCEEDS. The Company intends to
use approximately $21,300,000 of the estimated net proceeds from the Offering to
pay: (i) the balance of the purchase price in connection with the Acquisition,
including repayment of all amounts outstanding under the PSINet Notes (assuming
the Company pays the maximum aggregate purchase price pursuant to the Purchase
Agreement); (ii) the outstanding balance of the purchase price in the Nando.net
Transaction; and (iii) all amounts payable in connection with certain other
purchases of subscriber accounts. Pursuant to the terms of the Purchase
Agreement, the Company will purchase up to 100,000 subscriber accounts. To the
extent that fewer than 100,000 subscriber accounts are actually acquired, the
foregoing amount will be reduced by the product of $200 and the difference
between 100,000 and the number of subscriber accounts actually acquired, and the
amount of net proceeds allocated to working capital and general corporate
purposes will be increased by a like amount. As of August 15, 1996, the
outstanding aggregate principal amount under the First PSINet Note (as defined
under the heading "Recent Transactions") equaled $2,000,000 and accrued but
unpaid interest thereon was approximately $30,000. The Company does not
anticipate repaying any amounts due under the First PSINet Note prior to
completion of the Offering. Pursuant to the First PSINet Note, principal amounts
thereunder will increase by 5.0% if not paid in full on or before September 26,
1996. Principal and interest payable on the First PSINet Note are expected to be
approximately $2,100,000 and $60,000, respectively, upon completion of the
Offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Assuming that all of
the subscriber accounts purchased from Nando.net continue to be MindSpring
subscriber accounts on December 1, 1996, the outstanding balance of the purchase
price in the Nando.net Transaction is expected to be approximately $600,000
(excluding $100,000 expected to be paid at the closing of the Nando.net
Transaction) and the
9
<PAGE> 11
amount payable in connection with certain other purchases of subscriber accounts
is expected to be approximately $140,000. See "Recent Transactions -- Other
Recent Transactions."
After paying all such amounts payable in connection with the Acquisition,
the Nando.net Transaction and the purchase of certain other subscriber accounts,
through the end of 1996 the Company expects to use approximately $5,700,000
(excluding $1,400,000 payable for the Harrisburg Facility) of the remaining
estimated net proceeds from the Offering for capital expenditures related to the
continued development of the Company's network, and approximately $5,900,000 for
working capital and general corporate purposes, funding operating deficits and
possible strategic acquisitions of complementary assets and businesses such as,
but not limited to, subscriber accounts of other access providers, World Wide
Web page developers and access providers in other markets. The Company estimates
that its cash and financing needs through mid-1997 will be met by the net
proceeds of the Offering. Beginning in mid-1997, the Company anticipates that
cash flow from operations will be sufficient to support anticipated capital
expenditures and working capital and general corporate purposes requirements.
However, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in anticipated expenses, or significant acquisition
opportunities could have a material adverse effect on the Company's liquidity
and capital resources and could require the Company to raise additional capital
from public or private equity or debt sources. 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. Other than with respect to payment of the balance of the
purchase price for the Acquisition and the Nando.net Transaction, the Company is
not required to allocate the net proceeds of the Offering in the manner
described above and, in light of future developments and circumstances, may
allocate different amounts of the proceeds to the uses described above. See "Use
of Proceeds."
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS.
The Company must continue to enhance and develop its network in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. As a result of the
PSINet Transaction, the Company generally anticipates opening fewer POPs.
However, the Company intends to maintain the flexibility to expand or open
MindSpring POPs or make other capital investments as and where subscriber
demand or strategic considerations may warrant. Opening new MindSpring POPs
entails significant capital equipment expenditures as well as initial
commitments for leased telecommunications facilities and advertising. In
addition, the nationwide expansion of the Company's subscriber base is likely
to require additional capital equipment expenditures to maintain the high speed
and reliability of the Company's Internet access services. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview." The Company anticipates that cash requirements through the end of
1996 will include approximately $5,700,000 for capital expenditures (excluding
$1,400,000 payable for the Harrisburg Facility) and $2,800,000 to fund cash
used in operations. In the event the net proceeds from the Offering, after
payment of the expected outstanding balance of the purchase price in the
Acquisition, the Nando.net Transaction and the purchase of certain other
subscriber accounts, and funding of operating losses (before depreciation), are
not sufficient to meet these cash requirements, the Company will need to seek
alternative sources of financing to carry out its growth and operating plans.
The Company may need to raise additional capital from public or private equity
or debt sources in order to: (i) fund growth, operating losses, increases in
expenses or cash requirements; (ii) take advantage of unanticipated
opportunities, such as major strategic alliances or other special marketing
opportunities, acquisitions of complementary businesses or assets, or the
development of new products; or (iii) otherwise respond to unanticipated
developments or 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. Such financings may be upon terms that are dilutive or
potentially dilutive to the Company's stockholders. If alternative sources of
financing are required, but 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
MANAGEMENT AND RISKS OF GROWTH. The rapid execution necessary for the
Company to fully exploit the market for its products and services requires an
effective planning and management process. MindSpring's rapid growth, the PSINet
Transaction and the Nando.net Transaction are placing, and are expected to
continue to place, a significant strain on the Company's managerial, operational
and financial resources. The
10
<PAGE> 12
Company's ability to manage effectively will require it to continue to implement
and improve its operational, financial and management information systems and to
attract, identify, train, integrate and retain qualified personnel. These
demands will require the addition of new management personnel and the
development of additional expertise by existing management. Six of the Company's
nine officers have joined the Company since January 1995, including President
and Chief Operating Officer Michael S. McQuary and Vice President and Chief
Financial Officer Michael G. Misikoff. The Company's success depends to a
significant extent on the ability of its officers to operate effectively, both
independently and as a group.
In particular, the successful integration of newly-acquired assets and the
implementation of a nationwide strategy and network will require close
monitoring of service quality (particularly through PSINet POPs) and, to the
extent management deems necessary, identification and acquisition of physical
sites, acquisition and installation of necessary equipment and telecommunication
facilities, implementation of marketing efforts in new as well as existing
locations, employment of qualified personnel to provide technical and marketing
support for such sites, and continued expansion of the Company's managerial,
operational and financial resources to support such development. The demands on
the Company's customer support resources have grown rapidly due to the Company's
rapidly expanding subscriber base and are expected to continue to increase as a
result of the PSINet Transaction and the Nando.net Transaction. There can be no
assurance that the Company's customer support or other resources will be
sufficient to manage any future growth in the Company's business or that the
Company will be able to implement in whole or in part its expansion program.
DEPENDENCE ON NETWORK INFRASTRUCTURE; CAPACITY; RISK OF SYSTEM FAILURE.
The future success of the Company's business will depend on the capacity,
reliability and security of its network infrastructure, including the PSINet
POP sites to which the Company is granted access pursuant to the Services
Agreement. The Company will have to expand and adapt its network infrastructure
as the number of subscribers and the amount and type of information they wish
to transfer increases. Such expansion and adaptation of the Company's network
infrastructure will require substantial financial, operational and management
resources. There can be no assurance that the Company will be able to expand or
adapt its network infrastructure to meet additional demand or changing
subscriber requirements on a timely basis and at a commercially reasonable
cost, or at all.
Capacity constraints have occurred, and may occur in the future, both at
the level of particular POPs (affecting only subscribers attempting to use the
particular POP) and in connection with system-wide services (such as e-mail and
news group services). From time to time the Company has experienced delayed
delivery from suppliers of new telephone lines, modems, terminal servers, and
other equipment. If delays of this nature are severe, all incoming modem lines
may become full during peak times, resulting in busy signals for subscribers who
are trying to connect to MindSpring. Similar problems can occur if the Company
is unable to expand the capacity of its information servers (for e-mail, news,
and the World Wide Web) fast enough to keep up with demand from the Company's
rapidly expanding subscriber base. If the capacity of such servers is exceeded,
subscribers will experience delays when trying to use a particular service.
Further, if the Company does not maintain sufficient bandwidth capacity in its
network connections, subscribers will perceive a general slow-down of all
services on the Internet. On two occasions early in the Company's history,
management chose to suspend activation of new subscriber accounts for periods of
less than two weeks each until additional capacity could be brought on-line.
While the Company's objective is to maintain substantial excess capacity, any
failure of the Company to expand or enhance its network infrastructure on a
timely basis or to adapt it to an expanding subscriber base, changing subscriber
requirements or evolving industry standards could materially adversely affect
the Company's business, financial condition and results of operations. In
addition, while the Services Agreement requires PSINet to provide commercially
reliable service to MindSpring's subscribers with a significant assurance of
accessibility to the Internet, there can be no assurance that such services or
Internet access will meet the Company's requirements, which could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company's operations and services provided through PSINet POPs are
dependent on the extent to which the Company's and PSINet's computer equipment
is protected against damage from fire, earthquakes, power loss,
telecommunications failures and similar events. A significant portion of the
Company's computer equipment, including critical equipment dedicated to its
Internet access services, is located at a single facility
11
<PAGE> 13
in Atlanta, Georgia. A significant amount of critical equipment is also located
at the Harrisburg Facility, which the Company expects to acquire from PSINet in
early September 1996. Despite precautions taken by the Company and by PSINet
(over which the Company has no control), the occurrence of a natural disaster or
other unanticipated problems at the Company's headquarters, network hub, the
Harrisburg Facility or at MindSpring or PSINet POPs could cause interruptions in
the services provided by the Company. In addition, failure of the Company's
telecommunications providers to provide the data communications capacity
required by the Company as a result of a natural disaster, operational
disruption or for any other reason could cause interruptions in the services
provided by the Company. See "Business -- Network Infrastructure." The Company
does not currently maintain fully redundant or backup Internet services or
backbone facilities or other fully redundant computing and telecommunication
facilities. Any accident, incident or system failure that causes interruptions
in the Company's operations could have a material adverse effect on the
Company's ability to provide Internet services to its subscribers, and, in turn,
on the Company's business, financial condition and results of operations.
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS. The Company
relies on local telephone companies and other companies to provide data
communications capacity via local telecommunications lines and leased
long-distance lines. The Company will also rely on PSINet to provide
connectivity to MindSpring subscribers through PSINet's nationwide network of
POPs. The Company is subject to potential disruptions in these
telecommunications services and may have no means of replacing these services,
on a timely basis or at all, in the event of such disruption. In addition, local
phone service is currently available only from the local monopoly telephone
company in each of the markets served by the Company. Management believes that
the 1996 Telecommunications Act generally will lead to increased competition in
the provision of local telephone service, but the Company cannot predict the
timing or extent of any such developments or the effect thereof on pricing or
supply.
The Company is dependent on certain third-party suppliers of hardware
components. Certain components used by the Company in providing its networking
services are currently acquired from only one source, including modems
manufactured by U.S. Robotics, Inc., terminal servers manufactured by Livingston
Enterprises, Inc., and high-performance routers manufactured by Cisco Systems,
Inc. Expansion of network infrastructure by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. Failure of the
Company's suppliers to adjust to meet such increasing demand may prevent them
from continuing to supply components and products in the quantities, at the
quality levels and at the times required by the Company, or at all. The
Company's inability to develop alternative sources of supply if required could
result in delays and increased costs in expanding the Company's network
infrastructure.
The Company's suppliers and telecommunications carriers also sell or lease
products and services to the Company's competitors and may be, or in the future
may become, competitors of the Company themselves. There can be no assurance
that the Company's suppliers and telecommunications carriers will not enter into
exclusive arrangements with the Company's competitors or stop selling or leasing
their products or services to the Company at commercially reasonable prices or
at all.
SECURITY RISKS. Despite the implementation of security measures, both
MindSpring's and PSINet's network infrastructures are vulnerable to computer
viruses or similar disruptive problems caused by their subscribers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to MindSpring's subscribers.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company or its subscribers, which may cause losses to the Company
or its subscribers or deter certain persons from subscribing to the Company's
services. Such inappropriate use of the Internet would include attempting to
gain unauthorized access to information or systems -- commonly known as
"cracking" or "hacking." Although the Company intends to continue to implement
security measures, and PSINet has publicly stated that it intends to do the
same, such measures have been circumvented in the past, and there can be no
assurance that measures implemented by the Company or PSINet will not be
circumvented in the future. Alleviating problems caused by computer viruses or
other inappropriate uses or security breaches may require interruptions, delays
or cessation in service to the Company's subscribers, which could have a
material
12
<PAGE> 14
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company expects that its subscribers will
increasingly use the Internet for commercial transactions in the future. Any
network malfunction or security breach could cause these transactions to be
delayed, not completed at all, or completed with compromised security. There can
be no assurance that subscribers or others will not assert claims of liability
against the Company as a result of any such failure. Further, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential subscribers may inhibit the growth of the
Internet service industry in general and MindSpring's subscriber base and
revenues in particular.
NEW AND UNCERTAIN MARKET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM
OF COMMERCE AND COMMUNICATION. The market for Internet access and related
products is in an early stage of growth. The Company's success will depend upon
the continuing development and expansion of the Internet and the market for
Internet access. Critical issues concerning commercial and personal use of the
Internet (including security, reliability, cost, ease of use, access and quality
of service) remain unresolved and may affect the growth of Internet use. The
acceptance of the Internet for commerce and communications, particularly by
those individuals and enterprises that have historically relied upon alternative
means of commerce and communication, generally requires that such subscribers
accept a new way of conducting business and exchanging information, that
industry participants continue to provide new and compelling content and
applications, and that the Internet provide a reliable and secure computer
platform. It is difficult to predict with any assurance the rate at which the
market will grow or at which new or increased competition will result in market
saturation. The novelty of the market for Internet access may also adversely
affect the Company's ability to retain new subscribers, as subscribers
unfamiliar with the Internet may be more likely to discontinue the Company's
services after an initial trial period than other subscribers. If demand for
Internet services fails to continue to grow, grows more slowly than anticipated,
or becomes saturated with competitors, the Company's business, operating results
and financial condition will be materially adversely affected.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS. The market for
Internet access is characterized by rapidly changing technology, evolving
industry standards, changes in subscriber needs, and frequent new service and
product introductions. The Company's future success will depend, in part, on its
ability to use leading technologies effectively, to continue to develop its
technical expertise, and to enhance its existing services and develop new
services to meet changing subscriber needs on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in using new
technologies effectively, developing new services or enhancing existing services
on a timely basis or that such new technologies or enhancements will achieve
market acceptance.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products and architectures offered by various vendors. Although the Company
intends to support emerging standards in the market for Internet access, there
can be no assurance that industry standards will be established or, if they
become established, that the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
In addition, there can be no assurance that services or technologies developed
by others will not render the Company's services or technology uncompetitive or
obsolete.
The Company is also at risk to fundamental changes in the way Internet
access is delivered. Currently, Internet services are accessed primarily by
computers connected by telephone lines. Recently, several companies have
developed cable television modems which they may offer for sale in the near
future. These cable television modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. As the Internet becomes accessible through these cable television
modems and by screen-based telephones, wireless products, televisions and other
consumer electronic devices, or as subscriber requirements change the way
Internet access is provided, the Company will have to develop new technology or
modify its existing technology to accommodate these developments. The Company's
pursuit of these technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
its Internet access business to alternate access devices and conduits.
13
<PAGE> 15
PROPRIETARY RIGHTS; INFRINGEMENT CLAIMS. The Company's success depends in
part upon its software and related documentation. The Company principally relies
upon copyright, trade secret and contract law to protect its proprietary
technology. There can be no assurance that the steps taken by the Company will
be adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. See "Business -- Proprietary
Rights."
The Company has obtained permission and, in certain cases, licenses from
each manufacturer of the software that the Company bundles in its front-end
software product for subscribers. Although the Company does not believe that its
products infringe the proprietary rights of any third parties, there can be no
assurance that third parties will not assert such claims against the Company in
the future or that such claims will not be successful. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any claims relating to proprietary rights, which could materially
adversely affect the Company's business, financial condition and results of
operations. Parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that could
effectively block the Company's ability to license its products in the United
States or abroad. Such a judgment could have a material adverse effect on the
Company's business, financial condition and results of operations. In the event
a claim relating to proprietary technology or information is asserted against
the Company, the Company may seek licenses to such intellectual property. There
can be no assurance, however, that licenses could be extended or obtained on
commercially reasonable terms, if at all, or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain the necessary
licenses or other rights could materially adversely affect the Company's
business, financial condition and results of operations. See "Business --
Proprietary Rights -- Licenses."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends upon the
continued efforts of its senior management team and its technical, marketing and
sales personnel. Such employees may voluntarily terminate their employment with
the Company at any time. The Company's success also depends on its ability to
attract and retain additional highly qualified management, technical, marketing
and sales personnel and will depend on the Company's ability to successfully
integrate former PSINet personnel hired in connection with the Acquisition who
will continue to operate the Harrisburg Facility. The process of hiring
employees with the combination of skills and attributes required to carry out
the Company's strategy can be extremely competitive and time-consuming. There
can be no assurance that the Company will be able to retain or integrate
existing personnel or identify and hire additional personnel. The loss of the
services of key personnel, or the inability to attract additional qualified
personnel, could materially adversely affect the Company's business, financial
condition and results of operations. See "Management" and
"Business -- Employees."
GOVERNMENT REGULATION. The Company provides Internet access, in part,
through transmissions over public telephone lines. These transmissions are
governed by regulatory policies establishing charges and terms for
communications. The Company is at present considered an enhanced services
provider and, therefore, is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally. However, the Company could
become subject in the future to regulations by the FCC and/or other regulatory
commissions as a provider of basic telecommunications services. For example, a
number of long distance telephone carriers recently filed a petition with the
FCC seeking a declaration that Internet telephone service is a
"telecommunications service" subject to common carrier regulation. Such a
declaration, if enacted, would create substantial barriers to the Company's
entry into the Internet telephone market. See "Business -- Government
Regulation."
The 1996 Telecommunications Act contains certain provisions lifting, or
establishing procedures for lifting, restrictions on Bell Operating Companies
and other companies that may permit them to engage directly in the Internet
access business and allows the Bell Operating Companies to provide electronic
publishing of information and databases. Competition from these companies could
have an adverse effect on the Company's business, financial condition and
results of operations. See "-- Competition." Further, the 1996
Telecommunications Act imposes fines on any entity that knowingly uses any
interactive computer service to send obscene or indecent material to minors or
makes indecent material available to minors. The standard for determining
whether an entity acted knowingly has not yet been established. See
"-- Potential Liability."
14
<PAGE> 16
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, user privacy, pricing, and copyright
infringement. Changes in the regulatory environment relating to the Internet
access industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have an adverse effect on the
Company's business. Shortly after AT&T announced its plans to offer Internet
access, several Bell Operating Companies reportedly complained that AT&T should
no longer receive the benefit of a data transmission exemption to a 1983 FCC
"access charge" plan, which exemption applies to all Internet service providers.
In response to a petition or on its own motion, the FCC could eliminate this
exemption. The Company cannot predict the impact, if any, that the elimination
of this exemption or any other future regulatory changes or developments may
have on its business, financial condition and results of operations. In
addition, Tacoma, Washington has recently imposed a tax on companies that
connect people to the Internet, and other localities may impose similar taxes.
See "Business -- Government Regulation."
POTENTIAL LIABILITY. The law relating to the liability of Internet access
providers and on-line services companies for information carried on or
disseminated through their networks is unsettled. Several private lawsuits
seeking to impose such liability upon Internet access providers and on-line
services companies are currently pending. Although no such claims have been
asserted against the Company to date, there can be no assurance that such claims
will not be asserted in the future, or if asserted, will not be successful.
Furthermore, although the Company has attempted to limit its liability by the
terms of its standard service agreement, there can be no assurance that the
Company's liability would be so limited in the event of any litigation or other
claim against the Company. In addition, the Communications Decency Act of 1996,
which is Title V of the 1996 Telecommunications Act, imposes fines on any entity
that: (i) by means of a telecommunications device, knowingly sends indecent or
obscene material to a minor; (ii) by means of an interactive computer service
sends or displays indecent material to a minor; or (iii) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. The standard for determining whether an entity acted
knowingly has not yet been established. The following defenses to liability
under the statute exist: (i) any entity that solely provides access or
connection to or from a facility, system, or network not under that entity's
control; and (ii) the use of reasonable, effective and appropriate screening
efforts to restrict or prevent access by minors. These defenses are unavailable
to an entity that is found to have conspired with another entity involved in the
creation or knowing distribution of indecent material through an interactive
computer service or telecommunications device or that knowingly advertises the
availability of such material. These defenses are also unavailable to entities
that solely provide access or connection, but that also own or control a
facility, system, or network engaged in the prohibited activities. The 1996
Telecommunications Act creates the right to challenge the law before a
three-judge district court, and a right of direct appeal to the U.S. Supreme
Court. Litigation was filed in federal court challenging the constitutionality
of the on-line provisions of the 1996 Telecommunications Act. On June 12, 1996,
a three-judge panel of the U.S. District Court for the Eastern District of
Pennsylvania unanimously enjoined enforcement of these provisions. The court has
since clarified that its injunction applies only to indecency issues and not to
the display or transmission of obscene material or child pornography. The U.S.
Department of Justice has announced that it will ask the U.S. Supreme Court to
review the lower court's decision.
As the law in this area develops, the potential imposition of liability
upon the Company for information carried on and disseminated through its network
could require the Company to implement measures to reduce its exposure to such
liability, which may require the expenditure of substantial resources or the
discontinuation of certain products or service offerings. Any costs that are
incurred as a result of contesting any such asserted claims or the consequent
imposition of liability could materially adversely affect the Company's
business, financial condition and results of operation.
CONTROL OF COMPANY. As of June 30, 1996, ITC Holding Company, Inc. ("ITC
Holding") owned approximately 36% and the Company's officers and directors owned
approximately 24% of the outstanding voting stock of the Company. Upon
completion of the Offering, based on beneficial ownership as of June 30, 1996,
ITC Holding and the Company's officers and directors would beneficially own
approximately 22% and 14% of the outstanding voting stock, respectively (21% and
13%, respectively, assuming that the Underwriters' over-allotment option is
exercised in full). As a result, these stockholders, acting together, will
continue to be
15
<PAGE> 17
able to exercise significant control over most matters requiring approval by the
stockholders of the Company, including the election of a majority of the
directors and the approval of significant corporate matters, including certain
change-of-control transactions. ITC Holding has pledged all of its stock in the
Company to certain lenders in connection with a credit facility. In the event of
a default by ITC Holding under such credit facility, the lenders or another
third party may obtain ownership of all of ITC Holding's stock in the Company.
In addition, the Company's Amended and Restated Certificate of Incorporation
(the "Restated Certificate") authorizes the Board of Directors of the Company
(the "Board of Directors") to provide for the issuance of shares of preferred
stock of the Company, in one or more series, which the Board of Directors could
issue without further stockholder approval and upon such terms and conditions,
and having such rights, privileges and preferences, as the Board of Directors
may determine. The Company has no current plans to issue any such preferred
stock. These factors could have the effect of delaying, deferring, dissuading or
preventing a change of control of the Company. See "Principal Stockholders" and
"Description of Capital Stock."
In the event that any PSINet Note issued in connection with the Acquisition
is not repaid in full by the first anniversary of the date of such PSINet Note,
PSINet or the registered owner of such PSINet Note shall 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. If such conversions
would result in the aggregate issuance under all PSINet Notes of greater than
19.9% of the issued and outstanding Common Stock as of June 28, 1996 (an "Excess
Issuance"), and approval by the Company's stockholders of such Excess Issuance
has not been obtained, a PSINet Note may be converted in part to the extent that
such conversion would not result in an Excess Issuance. The Company has agreed
to seek such stockholder approval if conversion of the PSINet Note would result
in an Excess Issuance as of the date that notices must be mailed for the
Company's next annual meeting of stockholders. If a PSINet Note is converted in
part, as described above, PSINet will be required to convert the remaining
balance of such PSINet Note upon receipt by MindSpring of stockholder approval.
If all five PSINet Notes were issued and outstanding and the Company were to
default on all amounts due thereunder, the number of shares of Common Stock into
which such PSINet Notes could be converted (assuming a Conversion Price (as
defined under the heading "Recent Transactions") of $10.25 per share) would
represent approximately 37% of the voting stock of the Company outstanding as of
June 30, 1996. See "Recent Transactions -- Acquisition of PSINet Assets."
POTENTIAL CONFLICTS OF INTEREST. ITC Holding, as a significant stockholder
of the Company, and Campbell B. Lanier, III, William H. Scott, III and O. Gene
Gabbard, who are directors, stockholders, and officers of ITC Holding and
directors of the Company, are in positions involving the possibility of
conflicts of interest with respect to certain transactions concerning the
Company. Certain decisions concerning the operations or financial structure of
the Company may present conflicts of interest between the Company and ITC
Holding and/or its affiliates. For example, if the Company is required to raise
additional capital from public or private sources in order to finance its
anticipated growth and contemplated capital expenditures, the interests of the
Company might conflict with those of ITC Holding and/or its affiliates with
respect to the particular type of financing sought. In addition, the Company may
have an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in the Company's judgment, could be beneficial to the
Company, even though such transactions might conflict with the interests of ITC
Holding and/or its affiliates. For example, Viper Computer Systems, Inc., an
indirect wholly owned subsidiary of ITC Holding, provides Web-hosting and
Internet access services primarily to companies and other organizations. If such
conflicts do occur, ITC Holding and its affiliates may exercise their influence
in their own best interests.
The Company currently engages and expects in the future to engage in
transactions with ITC Holding and/or its affiliates. The Company has purchased
leased line connections, local telephone service, and on-site technical
assistance for some of its POPs in western Georgia and Alabama from companies
controlled by ITC Holding. Any significant interruption in these services would
materially adversely affect the operation of the Company's network (as would the
interruption of service from any of the Company's telecommunications vendors).
The Company provides Internet access to various companies controlled by ITC
Holding, but the revenues the Company derives from these sources are not
substantial. The Company has adopted a policy requiring that any material
transaction between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arms'
length transactions with independent third parties. The
16
<PAGE> 18
Company believes that each current transaction in which it is engaged with an
affiliate complies with this policy. See "Management -- Board of
Directors -- Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Restated Certificate
and the Company's Amended and Restated Bylaws (the "Bylaws") and the Delaware
General Corporation Law (the "Delaware Corporation Law") could delay or impede
the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving the Company, or could discourage a third
party from attempting to acquire control of the Company, even if such events
would be beneficial to the interests of the stockholders. In particular, the
classification of the Board of Directors could have the effect of delaying a
change in control of the Company. In addition, the Restated Certificate
authorizes the Board of Directors to provide for the issuance of shares of
preferred stock of the Company, in one or more series, which the Board of
Directors could issue without further stockholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as the Board
of Directors may determine. The Company has no current plans to issue any such
preferred stock. The Company is also subject to the provisions of Section 203 of
the Delaware Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless certain
conditions are met. See "Principal Stockholders" and "Description of Capital
Stock -- Certain Charter and Statutory Provisions."
VOLATILITY OF STOCK PRICE. Since the Common Stock has been publicly
traded, the market price of the Common Stock has fluctuated over a wide range
and may continue to do so in the future. See "Price Range of Common Stock and
Dividend Policy." The market price of the Common Stock could be subject to
significant fluctuations in response to various factors and events, including,
among other things, the depth and liquidity of the trading market of the Common
Stock, quarterly variations in actual or anticipated operating results, growth
rates, changes in estimates by analysts, market conditions in the industry
(including demand for Internet access), announcements by competitors, regulatory
actions and general economic conditions. In addition, the stock market has from
time to time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of high technology
companies, and which may be unrelated to the operating performance of particular
companies. As a result of the foregoing, the Company's operating results and
prospects from time to time may be below the expectations of public market
analysts and investors. Any such event would likely result in a material adverse
effect on the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial amounts of
the Common Stock could adversely affect the market price of the Common Stock.
Several of the Company's principal stockholders hold a significant portion of
the Company's outstanding Common Stock, and a decision by one or more of these
stockholders to sell their shares could adversely affect the market price of the
Common Stock. The shares of Common Stock offered hereby (plus any shares issued
upon exercise of the Underwriters' over-allotment option) will be freely
tradable without restriction. Certain significant stockholders of the Company
and the Company's directors and executive officers have agreed to enter into
contractual agreements with the Underwriters (the "Lock-up Agreements")
generally providing that they will not offer, sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock, any securities exercisable
for or convertible into Common Stock or any options to acquire Common Stock
owned by them for a period of 120 days from the completion of the Offering
without the prior written consent of the Representatives (as defined under the
heading "Underwriting"). As a result, notwithstanding possible earlier
eligibility for sale under the provisions of Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), shares subject to the Lock-up
Agreements generally will not be eligible for sale until the Lock-up Agreements
expire or their terms are waived by the Representatives. Assuming the
Representatives do not release the stockholders from the Lock-up Agreements, the
following shares of Common Stock will be eligible for sale in the public market
at the following times: upon completion of the Offering, approximately 5,628,000
shares (of which 103,296 shares are eligible to be sold in accordance with Rule
144) will be immediately available for sale in the public market; and 120 days
after the completion of the Offering, approximately 56,800 shares will be
eligible for sale pursuant to Rule 701 under the Securities Act and
approximately 2,220,846 shares (all of which are held by affiliates of the
Company) will be eligible for sale pursuant to Rule 144. See "Shares Eligible
for Future Sale"
17
<PAGE> 19
and "Underwriting." In addition, the Company intends to register the shares of
Common Stock reserved for issuance under the Company's stock option plans as
soon as practicable.
ABSENCE OF CASH DIVIDENDS. The Company has never declared or paid any cash
dividends on its capital stock and does not anticipate paying cash dividends in
the foreseeable future. See "Price Range of Common Stock and Dividend Policy."
18
<PAGE> 20
RECENT TRANSACTIONS
ACQUISITION OF PSINET ASSETS
On June 28, 1996, the Company and PSINet entered into: (i) the Purchase
Agreement, pursuant to which the Company agreed to acquire the tangible and
intangible assets and rights relating to the consumer dial-up Internet access
services provided by PSINet in the United States (the "PSINet Consumer
Services"); and (ii) the Services Agreement, pursuant to which the Company's
individual subscribers will be able to access the Internet through local dial-in
POPs connected to PSINet's nationwide network. The Company believes that the
PSINet Transaction effectively expands the geographic scope of the MindSpring
network throughout the United States without the need for significant up-front
capital expenditures.
PSINet has publicly stated that the PSINet Transaction is part of its new
strategy to serve the consumer Internet market by providing wholesale services
to consumer-oriented Internet access providers in the United States, such as
MindSpring, and to focus its internal marketing, sales and customer support
efforts on the corporate sector. The Company believes that it is especially
well-suited to the challenge of providing service to individual PSINet
subscribers who become MindSpring subscribers as a result of the Acquisition,
although there can be no assurance that the subscriber accounts acquired from
PSINet will remain MindSpring subscriber accounts. See "Risk Factors -- PSINet
Transaction" and "Risk Factors -- Dependence on PSINet."
The Purchase Agreement. Under the terms of the Purchase Agreement, the
Company agreed to purchase certain assets (collectively, the "Assets"),
including: (i) up to 100,000 of PSINet's subscriber accounts relating to the
PSINet Consumer Services, excluding subscribers with five or more users on a
single billing account; (ii) the lease for the Harrisburg Facility, and all
related telephone switches and other equipment; (iii) the benefits of all
preexisting marketing programs relating to the PSINet Consumer Services; (iv)
all ownership rights to the software related to PSINet's Pipeline service in the
United States, including the components that allow Pipeline subscribers to
access the Internet (the "Pipeline Software"); (v) rights to the local content
published by that portion of the PSINet Consumer Services dedicated to servicing
subscribers using Pipeline Software; and (vi) a fully-paid non-exclusive license
to use and modify (but not sublicense) certain PSINet proprietary software. The
Company has also agreed to hire approximately 75 employees who are expected to
continue to operate the Harrisburg Facility. The Company agreed to purchase the
Assets for an aggregate purchase price (the "Purchase Price") of up to
approximately $21,400,000 in five installments, the first $3,000,000 of which
was paid on June 28, 1996 (the "First Closing").
The Purchase Price will be equal to the sum of: (i) the product of (a) $200
and (b) the number of subscribers obtained from PSINet after the Second Closing
(as defined below) and before October 1, 1996 who remain MindSpring subscribers
and current in their payments for services on November 15, 1996 (the "First
Measurement Date"), plus those PSINet subscribers obtained by MindSpring from
October 1 through October 31, 1996 who remain MindSpring subscribers and current
in their payments for services on December 15, 1996 (the "Second Measurement
Date"), plus those PSINet subscribers obtained by MindSpring from November 1,
1996 through November 30, 1996 who remain current in their payments for services
on January 15, 1997 (the "Third Measurement Date"), up to a maximum of 100,000
subscribers; and (ii) the net book value of the Harrisburg Facility, which has
been determined to be approximately $1,400,000.
At the First Closing, the Company paid PSINet $1,000,000 in cash (the "Cash
Payment"), issued a $2,000,000 promissory note to PSINet (the "First PSINet
Note") for 15,000 subscriber accounts, primarily located within the geographic
areas currently served by MindSpring POPs. At a second closing, which is
currently expected to occur in early September 1996 (the "Second Closing"),
subject to certain conditions, including the absence of any material adverse
change since March 31, 1996 in the Assets and other customary closing
conditions, the Company will receive substantially all of the remaining Assets
and will issue a second promissory note in the amount of $10,200,000 (the
"Second PSINet Note"). The Company agreed to pay the balance of the Purchase
Price (up to an aggregate of $8,200,000) in the form of three additional
promissory notes (the "Third PSINet Note," the "Fourth PSINet Note" and the
"Fifth PSINet Note") on the First Measurement Date, the Second Measurement Date
and the Third Measurement Date, respectively (the First
19
<PAGE> 21
PSINet Note, Second PSINet Note, Third PSINet Note, Fourth PSINet Note and Fifth
PSINet Note are collectively referred to as the "PSINet Notes," and each
individually as a "PSINet Note"). The Purchase Agreement requires the Company to
pay all or a portion of the balance of the Purchase Price in cash, depending on
the net proceeds from the Offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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 (the "Conversion Price") equal to the
closing price of the Common Stock reported on the Nasdaq National Market as of
the end of the trading day on the date of the Second Closing or, if the Second
Closing has not occurred, then as of the end of the trading day on the date of
the First Closing. If such conversions would result in the aggregate issuance
under all PSINet Notes of greater than 19.9% of the issued and outstanding
Common Stock as of June 28, 1996 (an "Excess Issuance"), and approval by the
Company's stockholders of such Excess Issuance has not been obtained, a PSINet
Note may be converted in part to the extent that such conversion would not
result in an Excess Issuance. The Company has agreed to seek such stockholder
approval if conversion of the PSINet Note would result in an Excess Issuance as
of the date that notices must be mailed for the Company's next annual meeting of
stockholders. If a PSINet Note is converted in part, as described above, PSINet
will be required to convert the remaining balance of such PSINet Note upon
receipt by MindSpring of stockholder approval. Both ITC Holding and Charles M.
Brewer have agreed to vote all shares of Common Stock and other capital stock of
the Company held by them in favor of such conversion. See "Risk
Factors -- Control of Company."
The Purchase Agreement may be terminated by mutual written consent of the
parties, or by one of the parties if the Second Closing has not occurred on or
before September 15, 1996, provided that such failure to close is not a result
of a breach of the Purchase Agreement by the party or parties seeking to
terminate the Purchase Agreement. Upon termination of the Purchase Agreement,
the parties would be released from all further obligations thereunder except for
the obligations of the Company and PSINet relating to brokers, expenses,
confidentiality and possible future conveyances of additional subscribers.
Network Services Agreement. Under the Services Agreement, PSINet has
agreed, for specified fees, to provide Internet connection services to the
Company through PSINet POPs in the United States or in the territories served
with such services by PSINet or any PSINet wholly owned subsidiary. There are
currently over 200 PSINet POPs, located in 46 states and the District of
Columbia. The Company has agreed to pay, during the term of the Services
Agreement, specified fees for each MindSpring subscriber assigned by the Company
in writing to a primary dial-in POP that is a PSINet POP. The Company also has
agreed to provide PSINet forecasts of the number of MindSpring subscribers per
price/usage plan served by each PSINet POP, and PSINet has agreed to index such
forecasts with respect to usage in order to obtain guaranteed uninterrupted
service and for the purposes of determining applicable fees.
Also pursuant to the Services Agreement, PSINet has agreed, for specified
fees, (i) to make ISDN 64 Kbps and 128 Kbps Internet connection services
available to MindSpring dial-up subscribers; (ii) to allow the Company to
co-locate equipment to provide to MindSpring subscribers being served through
PSINet's network e-mail, chat, news, World Wide Web, and/or domain name services
in a limited number of PSINet POP sites; and (iii) to provide the Company
network status reports, access to PSINet's network monitoring systems and
subscriber log-in and accounting information, which will enable the Company to
evaluate the service provided to its subscribers through the PSINet POPs. PSINet
has agreed to provide to the Company, for its subscribers, Internet connection
services which meet reasonable commercial standards, including, without
limitation, with respect to access, latency, packet loss and throughput.
The term of the Services Agreement is five years, commencing on June 28,
1996, with automatic annual renewals 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 at any time during the term of the Services Agreement, upon
365 days' written notice. The Company may terminate the Services Agreement in
whole or in part without advance notice to PSINet if PSINet's network
20
<PAGE> 22
is consistently inaccessible to a significant portion of MindSpring's
subscribers, under the circumstances specified in the Services Agreement. The
Company may also terminate the Services Agreement on a per-POP basis upon 365
days' written notice or 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. See
"Risk Factors -- Dependence on PSINet."
OTHER RECENT TRANSACTIONS
On August 6, 1996, the Company entered into a definitive agreement with N&O
to acquire certain individual subscriber accounts for subscribers located in
North Carolina in connection with its Nando.net Internet access business.
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
subscriber accounts which continue to be MindSpring subscriber accounts on
December 1, 1996. The additional payment will be payable in the form of a
promissory note (the "Promissory Note") payable in two equal installments on
March 31, 1997 and September 30, 1997 (unless prepayment is required due to the
occurrence of one of several specified conditions). There are no prepayment
penalties under the Promissory Note. The Promissory Note will 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, assuming that all of the acquired subscriber accounts
continue to be MindSpring subscriber accounts on December 1, 1996.
Since January 1, 1996, the Company has purchased approximately 1,700
subscriber accounts for subscribers located in Florida, Kentucky and Georgia
from various Internet access providers for an aggregate cash consideration of up
to approximately $200,000 (depending upon the number of subscribers who remain
MindSpring subscribers as of certain specified measurement dates), of which the
Company had paid approximately $61,000 as of June 30, 1996. The balance of
amounts payable in connection with these purchases is due on various dates
through November 1, 1996. See "Use of Proceeds." As of June 30, 1996,
approximately 1,100 of such subscribers were using the Company's services. See
"Risk Factors -- Risks Associated With Additional Acquisitions and Purchases of
Subscriber Accounts."
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated to be approximately $32,957,000 (approximately $38,036,000
if the Underwriters' over-allotment option is exercised in full) after deducting
estimated underwriting discounts and commissions and other fees and expenses
payable by the Company.
The Company intends to use approximately $21,300,000 of the estimated net
proceeds from the Offering to pay: (i) the balance of the Purchase Price in
connection with the Acquisition, including repayment of all amounts outstanding
under the PSINet Notes (assuming the Company pays the maximum aggregate Purchase
Price pursuant to the Purchase Agreement); (ii) the outstanding balance of the
purchase price in the Nando.net Transaction (currently anticipated to be
approximately $600,000, excluding $100,000 expected to be paid on the Closing
Date); and (iii) all amounts payable (currently anticipated to be approximately
$140,000) in connection with certain other purchases of subscriber accounts.
Pursuant to the terms of the Purchase Agreement, the Company will purchase up to
100,000 subscriber accounts. To the extent that fewer than 100,000 subscriber
accounts are actually acquired, the foregoing amount will be reduced by the
product of $200 and the difference between 100,000 and the number of subscriber
accounts actually acquired, and the amount of proceeds allocated to working
capital and general corporate purposes will be increased by a like amount. As of
August 15, 1996, the outstanding aggregate principal amount under the First
PSINet Note equaled $2,000,000 and accrued but unpaid interest thereon was
approximately $30,000. The Company does not anticipate repaying any amounts due
under the First PSINet Note prior to completion of the Offering. Pursuant to the
First PSINet Note, principal amounts thereunder will increase by 5.0% if not
paid in full on or before September 26, 1996 and, therefore, principal and
interest payable on the First PSINet Note are expected to be approximately
$2,100,000 and $60,000, respectively, upon completion of the Offering. The
21
<PAGE> 23
Company currently expects to issue the Second PSINet Note in early September
1996 and to pay the balance of the Purchase Price in connection with the
Acquisition out of the net proceeds from the Offering during the fourth quarter
of 1996 and the first quarter of 1997. Each PSINet Note is due and payable in
full (including accrued interest) on the first anniversary of the date of such
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%.
After paying all such amounts payable in connection with the Acquisition,
the Nando.net Transaction and the purchase of certain other subscriber accounts,
the Company expects to use approximately $5,700,000 (excluding $1,400,000
payable for the Harrisburg Facility) of the remaining net proceeds for capital
expenditures through the end of 1996, most of which are expected to be
associated with the continued development of the Company's network, including
capacity expansion of existing POPs; and approximately $5,957,000 for working
capital and general corporate purposes, funding operating deficits and possible
strategic acquisitions of complementary assets and businesses such as, but not
limited to, subscriber accounts of other access providers, World Wide Web page
developers and access providers in other markets. The Company intends to
continue to evaluate potential strategic acquisitions. The Company estimates
that its cash and financing needs through mid-1997 will be met by the net
proceeds of the Offering. Beginning in mid-1997, the Company anticipates that
cash flow from operations will be sufficient to support anticipated capital
expenditures and working capital and general corporate purposes requirements.
However, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in anticipated 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 operating
losses, anticipated growth and contemplated capital expenditures. 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.
Except for the payment of the balance of the purchase price for the
Acquisition and for the Nando.net Transaction, the Company is not required to
allocate the net proceeds of the Offering in the manner described above and, in
light of future developments and circumstances, may allocate different amounts
of the proceeds to the uses described above. See "Risk Factors -- Management's
Discretion Regarding Use of Proceeds," "Risk Factors -- Need for Additional
Capital to Finance Growth and Capital Requirements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Pending such uses, the Company intends to invest such
proceeds in short-term, interest-bearing securities.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company completed its initial public offering on March 14, 1996, at a
price per share of Common Stock of $8.00. Since that date, the Common Stock has
traded on the Nasdaq National Market under the symbol "MSPG." The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
-------------------------------------------------------------------- ------ ------
<S> <C> <C>
First Quarter (from March 14, 1996)................................. $ 8.88 $ 7.88
Second Quarter...................................................... 13.00 7.88
Third Quarter (through August 19, 1996)............................. 11.50 9.63
</TABLE>
On August 19, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $10.25 per share. At August 20, 1996, there were 94
holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. It is the current policy of the Board of Directors to retain
earnings to finance the expansion of the Company's operations. Future
declaration and payment of dividends, if any, will be determined in light of the
then-current conditions, including the Company's earnings, operations, capital
requirements, financial condition, restrictions in financing agreements, and
other factors deemed relevant by the Board of Directors.
22
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, (i) on an actual basis, (ii) as adjusted to reflect the sale of shares
of Common Stock offered hereby (at an assumed offering price of $10.25 per
share) and the increase in cash equal to the aggregate estimated net proceeds of
the Offering less repayment of the First PSINet Note and (iii) on a pro forma
basis giving effect to the Acquisition. This table should be read in conjunction
with "Selected Financial and Operating Data," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
AS ADJUSTED
ACTUAL FOR THE OFFERING PRO FORMA
------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash(1).................................................... $ 5,694 $ 36,491 $15,875
======= =========== ========
Indebtedness to PSINet(1).................................. 2,000 0 0
Stockholders' equity:
Class C preferred stock, $0.01 par value, 5,000,000
shares authorized; 100,000 shares issued and
outstanding; 100,000 shares issued and outstanding as
adjusted and pro forma(2)............................. 638 638 638
Common stock, $0.01 par value, 15,000,000 shares
authorized; 5,125,793 shares issued and outstanding;
8,625,793 issued and outstanding as adjusted and pro
forma(3).............................................. 51 86 86
Additional paid-in capital(3)............................ 15,977 48,899 48,899
Accumulated deficit...................................... (4,533) (4,533) (4,533)
------- ------------ --------
Total stockholders' equity............................ 12,133 45,090 45,090
------- ------------ ---------
Total capitalization............................. $14,133 $ 45,090 $45,090
======= =========== ========
</TABLE>
- ---------------
(1) Assumes, for purposes of the Pro Forma presentation, that the Company has
acquired 100,000 subscriber accounts from PSINet and that the resulting
aggregate indebtedness to PSINet of $20,560,000 (including expected accrued
interest and increases in principal amount under the First PSINet Note) has
been repaid in full with a portion of the net proceeds from the Offering as
well as certain one-time license fees and starter kit costs of approximately
$700,000. See unaudited pro forma financial statements elsewhere in this
Prospectus. Assumes, for purposes of the As Adjusted presentation, that the
Company's indebtedness to PSINet under the First PSINet Note, estimated to
be approximately $2,160,000 (including accrued interest and increases in
principal amount) as of the completion of the Offering, has been repaid in
full with a portion of the net proceeds from the Offering. Under the terms
of the Purchase Agreement, the number of subscriber accounts that the
Company must purchase will not exceed 100,000, and could be less depending
on various factors described elsewhere herein. For example, if 66,000
subscriber accounts were acquired, then the pro forma cash balance would be
increased by $7,038,000.
(2) The 100,000 shares of Class C Preferred were issued to ITC Holding in
December 1995 as part of the consideration for the Second Loan (as defined
under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year Ended December 31, 1995 Compared
to Inception Period") provided to the Company by ITC Holding. See
"Management -- Board of Directors -- Compensation Committee Interlocks and
Insider Participation." By their terms, these shares will automatically
convert on a one-for-one basis into shares of Common Stock on September 19,
1996. When these shares convert, there will be no Class C Preferred shares
outstanding, 100,000 additional shares of Common Stock outstanding and an
additional $637,000 of additional paid-in capital.
(3) Does not include 439,213 shares of Common Stock reserved for issuance
pursuant to stock options granted as of June 30, 1996.
23
<PAGE> 25
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected financial and operating data for
the Company. The selected historical statements of operations data for the
period from February 24, 1994 (inception) to December 31, 1994 (the "Inception
Period") and the year ended December 31, 1995 and the selected historical
balance sheet data as of December 31, 1995 have been derived from financial
statements of the Company, which have been audited by Arthur Andersen LLP,
independent public accountants, whose report with respect thereto is included
elsewhere in this Prospectus. The selected historical statement of operations
data for the six months ended June 30, 1995 and June 30, 1996 and the selected
historical balance sheet data as of June 30, 1996 have been derived from the
unaudited financial statements of the Company. In the opinion of management, the
unaudited financial statements include all material adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. The results for the six months ended June 30, 1996 are not
necessarily indicative of the operating results for the entire year.
The pro forma statement of operations data give effect to the PSINet
Transaction and the Offering as if each had occurred at the beginning of the
periods presented, and the pro forma balance sheet data give effect to the
Acquisition and the Offering as if each had occurred at June 30, 1996. The pro
forma financial information does not purport to represent what the Company's
results of operations would have been if the Acquisition and the Offering had in
fact occurred on such dates, nor does it purport to indicate the future
financial position or results of future operations of the Company. The pro forma
adjustments are based on currently available information and certain assumptions
that management believes to be reasonable. The selected historical and pro forma
financial and operating data set forth below should be read in conjunction with
"Summary Financial and Operating Data," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto and other financial
information and operating information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
---------------------- -----------------------------------
INCEPTION PRO FORMA PRO FORMA
PERIOD 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.............................. $ 103 $ 2,227 $ 9,013 $ 511 $ 4,307 $ 12,262
Costs and expenses:
Selling, general and
administrative.................. 121 2,230 9,001 504 4,342 12,362
Cost of revenues.................. 52 966 4,359 223 1,912 5,890
Depreciation...................... 5 265 797 48 596 929
Amortization...................... 0 0 6,953 0 0 3,477
------- --------- --------- --------- --------- ---------
Total costs and expenses..... 178 3,461 21,110 775 6,850 22,658
------- --------- --------- --------- --------- ---------
Operating loss........................ (75) (1,234) (12,097) (264) (2,543) (10,396)
Interest income (expense), net........ 0 (725) (725) 2 44 44
------- --------- --------- --------- --------- ---------
Net loss.............................. $ (75) $ (1,959) $ (12,822) $ (262) $ (2,499) $ (10,352)
======= ========= ========= ========= ========= =========
PER SHARE DATA:
Net loss per share(1)................. $ (0.62) $ (1.92) $ (0.09) $ (0.58) $ (1.33)
Weighted average common shares
outstanding(1)...................... 3,175,376 6,675,376 2,857,119 4,309,859 7,809,859
Pro forma supplementary net loss(2)... $ (0.55)
OTHER OPERATING DATA:
Approximate number of subscribers at
end of period(3).................... 1,000 12,410 112,410 4,370 34,460 134,460
Approximate number of POPs at end of
period(3)........................... 1 17 207 2 40 230
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------------
DECEMBER 31, AS ADJUSTED
1995 ACTUAL FOR THE OFFERING(4) PRO FORMA(5)
------------ ------- -------------------- ----------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ (3,099) $ 2,154 $ 32,951 $ 14,336
Property and equipment, net............... 3,539 6,874 6,874 9,790
Total assets.............................. 4,845 17,215 48,172 48,172
Total liabilities......................... 4,363 5,082 3,082 3,082
Accumulated deficit....................... (2,034) (4,533) (4,533) (4,533)
Total stockholders' equity................ 482 12,133 45,090 45,090
</TABLE>
- ---------------
(1) 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). For 1996, the Class C Preferred
and stock options have been excluded from the calculations as their effect
is antidilutive. For 1995, Common Stock and Common Stock equivalent shares
issued at prices below the initial public offering price ($8.00 per share)
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 are included in the earnings per share calculations for all 1995
periods presented, even though the effect on net loss is antidilutive. For
1995, the Company's Class A Preferred Stock and the Class B Preferred Stock
(which converted to shares of Common Stock on a one-for-one basis at the
time of the Company's initial public offering) have been included for the
respective weighted average periods for which such shares were outstanding,
even though their effect is antidilutive. For purposes of the pro forma
presentations, includes 3,500,000 shares of Common Stock offered hereby.
(2) Assumes that the indebtedness under the First PSINet Note as of June 30,
1996 has been repaid with the net proceeds from the sale of 212,398 shares
of the 3,500,000 shares of Common Stock expected to be sold in the Offering.
Does not include the remaining 3,287,602 shares expected to be sold in the
Offering, because the proceeds from such sale are expected to be used for
other purposes. See "Use of Proceeds."
(3) Under the terms of the Purchase Agreement, the number of subscriber accounts
the Company may acquire could be less than 100,000 depending on various
factors described elsewhere herein. For example, if only 66,000 PSINet
subscriber accounts are acquired, June 30, 1996 pro forma subscribers would
be 100,460. The historical number of POPs and subscribers at end of period
for the six months ended June 30, 1996 excludes the effects of the PSINet
Transaction. The June 30, 1996 pro forma presentations assume the
acquisition by the Company of 100,000 subscriber accounts and access to 190
PSINet POPs that are not located in areas served by a MindSpring POP.
(4) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $10.25 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of the First PSINet Note (including accrued
interest and increases in principal amount), estimated to be $2,160,000 upon
completion of the Offering. See "Use of Proceeds" for a description of the
Company's specific plans for application of the net proceeds from the
Offering.
(5) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $10.25 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of indebtedness to PSINet, which is assumed to
be $20,560,000 (including accrued interest and increases in principal
amount), based on an assumed acquisition of 100,000 subscriber accounts from
PSINet. Assumes that an additional $700,000 of net proceeds from the
Offering will be used to pay certain one-time license fees and starter kit
costs associated with the transfer of PSINet subscriber accounts to
MindSpring. If only 66,000 PSINet subscriber accounts are acquired,
indebtedness to PSINet would be $13,760,000 (including accrued interest and
increases in principal amount) and one-time license fees and starter kit
costs would be $462,000.
25
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On June 28, 1996, the Company agreed to acquire up to 100,000 subscriber
accounts, the Harrisburg Facility and certain other assets related to the PSINet
Consumer Services, including the Harrisburg Facility and other related assets,
and agreed to hire approximately 75 employees who are expected to continue to
operate the Harrisburg Facility. The maximum aggregate purchase price for the
Acquisition is $21,400,000 (excluding accrued interest and increases in
principal amount under the PSINet Notes). In connection with the Acquisition,
the parties also entered into 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 200 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. See "Recent Transactions -- Acquisition of PSINet Assets."
Management believes that, primarily as a consequence of the PSINet Transaction,
the Company's future financial results will not be comparable to its historical
financial results.
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. 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. See "Business -- MindSpring Service Plans." 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. See "Risk Factors -- Competition."
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
e-mail address through its domain registration services. These services have
been classified as business services in the following table.
26
<PAGE> 28
The table below shows historical revenues, cost of revenues and expenses by
category and the percentage of total revenues attributable to each category.
Dollar amounts are shown in thousands.
<TABLE>
<CAPTION>
THIRD
QUARTER
ENDED FOURTH QUARTER FIRST SECOND
SEPTEMBER ENDED QUARTER ENDED QUARTER ENDED
30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Dial-up access to Internet............. $ 403 68% $ 680 60% $ 1,165 65% $ 1,506 60%
Start-up fees.......................... 137 34 229 20 367 20 479 19
Business services...................... 62 11 166 15 274 15 397 16
Other revenues, net(1)................. (12) (2) 51 5 6 0 113 5
----- --- ------- ---- ------- --- ------- ---
Total revenues................ 590 100% 1,126 100% 1,812 100% 2,495 100%
Cost of revenues:
Cost of revenues -- recurring.......... 178 31% 288 25% 542 30% 755 30%
Cost of subscriber start-up fees....... 91 15 186 17 264 14 352 14
----- --- ------- ---- ------- --- ------- ---
Total cost of revenues........ 269 46% 474 42% 806 44% 1,107 44%
----- --- ------- ---- ------- --- ------- ---
Costs and expenses:
Selling, general and administrative.... 644 109% 1,082 96% 1,738 96% 2,603 104%
Depreciation........................... 65 11 152 13 234 13 362 15
----- --- ------- ---- ------- --- ------- ---
Total costs and expenses...... 978 166% 1,708 151% 2,778 153% 4,072 163%
----- --- ------- ---- ------- --- ------- ---
Operating loss......................... (388) (66)% (582) (51)% (966) (53)% (1,577) (63)%
----- --- ------- ---- ------- --- ------- ---
Interest expense....................... (1) -- (730) (65) (92) (5) -- --
Interest income........................ -- -- 4 -- 19 1 117 5
----- --- ------- ---- ------- --- ------- ---
Net loss............................... $(389) (66)% $(1,308) (116)% $(1,039) (57)% $(1,460) (59)%
===== === ======= ==== ======= === ======= ===
Approximate subscribers at end of
period............................... 7,430 12,410 21,540 34,460
Approximate POPs at end of period...... 7 17 29 40
</TABLE>
- ---------------
(1) "Other revenues, net" include billing adjustments and miscellaneous
(primarily non-recurring) additional items.
The Company's costs include (i) cost of revenues that are primarily related
to the number of subscribers, (ii) selling, general and administrative expenses
that are associated more generally with operations, and (iii) depreciation and
amortization, which are related to the size of the Company's network. Cost of
revenues consists primarily of the startup 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. Cost of revenues also includes 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, historically, the impact of this trend has been offset by
increased costs and expenses associated with opening new POPs. See "-- Results
of Operations -- Year Ended December 31, 1995 Compared to Inception Period." As
a result of the PSINet Transaction, the Company generally anticipates opening
fewer MindSpring 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 PSINet Transaction and the related
nationwide expansion of the Company's marketing and
27
<PAGE> 29
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 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 MindSpring 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 PSINet Transaction, 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 MindSpring POPs or to conserve
capital through utilization of 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
MindSpring POPs, such expenses may also increase as a percentage of revenues in
the short term after a new MindSpring 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 PSINet POPs instead of opening
MindSpring POPs, the Company's incremental monthly recurring costs will consist
primarily of the fees to be paid per subscriber served, as provided in the
Services Agreement.
The Company estimates that as of June 30, 1996, the 40 MindSpring POPs,
which were serving approximately 34,500 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 had an aggregate of 20 POPs located in
the same service areas. Pursuant to the Services Agreement, the Company has the
flexibility to offer Internet access in such overlapping POP locations through a
MindSpring POP, through a PSINet POP or a combination of both. In certain of
these locations, it may be more cost-effective for the Company to close the
MindSpring POP and offer Internet access exclusively through the PSINet POP. The
Company currently estimates that it will be offering Internet access in over 230
POPs by the end of 1996. Although the Company does not currently plan to open a
significant number of new MindSpring POPs in 1996, the Company intends to
maintain the flexibility to close, expand or open new MindSpring POPs or make
other capital investments as and where subscriber demand or strategic
considerations may warrant. Management will evaluate the closing or expansion of
existing MindSpring POPs or opening of new MindSpring POPs 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.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
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
28
<PAGE> 30
for 20% 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 $32,000 or 6% of revenues, for the same period in the
prior year, primarily due to substantial increases in Web-hosting accounts.
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 months ended June 30,
1996 as a result of the capital expenditures and other costs associated with the
opening of new MindSpring 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 the Second 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
Company's initial public offering. The interest expense of approximately $92,000
recorded during the first six months of 1996 represents interest on the Second
Loan, which accrued at the rate of 14% per annum. No such credit facilities
existed during the first six months of 1995.
Year Ended December 31, 1995 Compared to Inception Period
Revenues. Revenues for the year ended December 31, 1995 were approximately
$2,227,000, as compared to approximately $103,000 for the Inception Period. The
Inception Period reflects sales activity from June through December 31, 1994.
During the months of April and May 1994, the Company offered services to a
limited number of subscribers on a "test" basis. The quarter ended September 30,
1994 was the first full quarter in which the Company made its services available
to the general public. The increase in revenues in 1995 as compared to the
Inception Period was primarily attributable to the Company being operational for
the full 1995 period and the substantial increase in the number of subscribers
in 1995.
Revenues for both periods were comprised of start-up fees and monthly
service fees from subscribers. Subscriber start-up fees accounted for 26% of
total revenues in 1995, as compared to 33% in 1994. At December 31, 1994 the
Company had approximately 990 dial-up subscribers, fewer than ten dedicated
access subscribers and fewer than ten Web-hosting service subscribers. At
December 31, 1995, the Company had approximately 11,830 dial-up customers,
approximately 80 dedicated access subscribers and approximately 490 Web-hosting
service subscribers.
Cost of revenues. For the year ended 1995, cost of revenues increased to
approximately $966,000 or 43% of revenues, compared to approximately $52,000 or
51% of revenues for the Inception Period. Cost of revenues increased
significantly in the year ended December 31, 1995 as a result of the significant
increase in subscribers. Cost of revenues decreased as a percentage of revenues
as a result of higher utilization of telecommunications facilities. In addition,
cost of subscriber start-up fees, which have lower associated
29
<PAGE> 31
margins than recurring costs, were approximately 15% of revenues for the year
ended December 31, 1995, as compared to 14% of revenues for the Inception
Period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $2,230,000 or 100% of
revenues for the year ended December 31, 1995, compared to approximately
$121,000 or 117% of revenues during the Inception Period. The decrease as a
percentage of revenues resulted from the substantial increase in subscriber
revenues. The increase in expenses was primarily attributable to the expansion
of the Company's operations in terms of POPs and subscribers between the
periods. The Company was operating in 17 POPs as of December 31, 1995 compared
to one POP during the Inception Period.
Depreciation and amortization. During the Inception Period, the Company
had a very small asset base, which expanded dramatically during 1995.
Consequently, depreciation and amortization expenses increased substantially, to
approximately $265,000 or 12% of revenues for the year ended December 31, 1995,
compared to approximately $5,000 or 5% of revenues for the Inception Period.
Interest expense. In August 1995, ITC Holding agreed to lend to the
Company up to $2,000,000 in aggregate principal amount for working capital,
general corporate purposes, and to fund capital expenditures (the "First Loan").
At December 15, 1995, the Company had not repaid any amounts outstanding under
the First Loan. In consideration of ITC Holding's agreement not to exercise its
rights and remedies upon such default under the First Loan, the Company agreed
to pay ITC Holding a $50,000 processing fee, which the Company recorded as a
charge to interest expense in the fourth quarter of 1995. In addition, the
Company issued to ITC Holding an immediately exercisable warrant to purchase
100,000 shares of Class C Preferred at an exercise price of $0.01 per share. The
Company recorded the difference between the fair market value of the warrants,
$6.38 per share, and the exercise price, $0.01 per share, of $637,000 as
interest expense in the fourth quarter. In December 1995, ITC Holding agreed to
lend to the Company up to $4,000,000 for working capital and to fund capital
expenditures (the "Second Loan"). The remaining $44,000 of interest expense
recorded during the fourth quarter of 1995 represents interest on the two loans.
No such credit facilities existed during the Inception Period. The First Loan
accrued interest at 11% per annum and the Second Loan accrues interest at 14%
per annum. See "Management -- Board of Directors -- Compensation Committee
Interlocks and Insider Participation."
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations for any period
presented. 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 six months of 1996, the Company completed an
initial public offering of Common Stock, issuing 2,025,000 shares at a price of
$8.00 per share. Total cash from financing activities for the six months ended
June 30, 1996 (consisting of the proceeds ($14,150,000) from the initial public
offering, net of underwriting discounts and expenses) were approximately
$13,650,000, a $12,600,000 increase compared to the same period in 1995.
Cash used in investing activities was 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. Cash used in investing activities
consisted primarily of purchases of telecommunications equipment necessary for
the provision of service to 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. See "Recent Transactions -- Acquisition of PSINet Assets."
At the Second Closing of the Acquisition, which is currently expected to
occur in early September 1996, the Company will receive substantially all of the
remaining Assets in exchange for issuing the Second PSINet Note in the amount of
$10,200,000. The Company has agreed to pay the balance of the Purchase Price (up
to an aggregate of $8,200,000) as follows: (i) within 10 days after the First
Measurement Date, the Company will deliver the Third PSINet Note, in an original
principal amount equal to the Purchase Price (as
30
<PAGE> 32
determined as of the First Measurement Date) minus $13,200,000 (the sum of the
Cash Payment and the original principal amounts of the First and Second PSINet
Notes), (ii) within 10 days after the Second Measurement Date, the Company will
deliver the Fourth PSINet Note, in an original principal amount equal to the
Purchase Price (as determined as of the Second Measurement Date) minus the sum
of $13,200,000 and the original principal amount of the Third PSINet Note and
(iii) within 10 days after the Third Measurement Date, the Company will deliver
the Fifth PSINet Note, in an original principal amount equal to the Purchase
Price (as determined as of the Third Measurement Date) minus the sum of
$13,200,000 and the original principal amounts of the Third PSINet Note and the
Fourth PSINet Note. The Purchase Agreement requires the Company to pay all or a
portion of the Purchase Price in cash, depending on the net proceeds from the
Offering. The Company expects to apply such proceeds to the payment of all
outstanding amounts payable to PSINet under the Purchase Agreement, and
therefore expects to pay cash in lieu of issuing the Third PSINet Note, the
Fourth PSINet Note and the Fifth PSINet Note. There are no prepayment penalties
under the PSINet Notes.
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.
The principal amount of the First PSINet Note will increase by 5.0% if not
paid in full on or before September 26, 1996. The Company does not anticipate
making any payments on any PSINet Note prior to the completion of the Offering,
and therefore, principal and interest payable on the First PSINet Note is
expected to be approximately $2,100,000 and $60,000, respectively, upon
completion of the Offering (assuming the Offering is completed in September
1996). As required by the Purchase Agreement, the Company expects to pay all
amounts due under the First PSINet Note and the Second PSINet Note with a
portion of the net proceeds of the Offering promptly following the Offering.
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. If such conversions would result in the aggregate issuance under all
PSINet Notes of greater than 19.9% of the issued and outstanding Common Stock as
of June 28, 1996 (an "Excess Issuance"), and approval by the Company's
stockholders of such Excess Issuance has not been obtained, a PSINet Note may be
converted in part to the extent that such conversion would not result in an
Excess Issuance. The Company has agreed to seek such stockholder approval if
conversion of the PSINet Note would result in an Excess Issuance as of the date
that notices must be mailed for the Company's next annual meeting of
stockholders. If a PSINet Note is converted in part, as described above, PSINet
will be required to convert the remaining balance of such PSINet Note upon
receipt by MindSpring of stockholder approval. See "Risk Factors -- Control of
Company" and "Recent Transactions."
In connection with the Nando.net Transaction, the Company is required to
pay $100,000 in cash on the Closing Date, 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 cash or a secured promissory note. The
aggregate purchase price is currently expected to be a maximum of approximately
$700,000. See "Recent Transactions."
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
31
<PAGE> 33
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 MindSpring's subscriber base
primarily as a result of the Acquisition, and in connection with the expansion
of existing MindSpring POPs or, if applicable, opening of selected new
MindSpring POPs, are estimated to be $5,700,000 and $10,000,000, respectively.
At June 30, 1996, the Company's principal source of liquidity was
approximately $5,694,000 in cash. The Company anticipates that cash requirements
for the rest of 1996 will include 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 $2,800,000 to fund cash used in operations. As discussed
above, the Company estimates that cash requirements through the first quarter of
1997 will also include approximately $20,560,000 for payment of the balance of
the Purchase Price for the Acquisition (including accrued interest and increases
in principal amounts under the PSINet Notes, assuming that the Company pays the
maximum Purchase Price payable under the Purchase Agreement with the proceeds of
the Offering).
The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds of the Offering. However, any increases in the
Company's growth rate, shortfalls in anticipated revenues, increases in
anticipated 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 operating losses, anticipated growth
and contemplated capital expenditures. If such 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). 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. See "Risk Factors -- Need for Additional
Capital to Finance Growth and Capital Requirements."
32
<PAGE> 34
BUSINESS
MindSpring is an Internet access provider that focuses on serving
individual subscribers, including individuals with little or no prior on-line
experience. MindSpring provides easy-to-use Internet access by offering
customized software, reliable network facilities and responsive customer
service. MindSpring believes that there is a growing and unsatisfied demand for
high quality Internet access for individuals. Trends contributing to this growth
in demand include the heightened consumer awareness of the Internet generally,
the increasing number of individuals who have computers with modems and the
expanding diversity of information, entertainment and commercial offerings
available on the Internet. Management believes that few, if any, of its major
competitors have developed a comparable level of service quality and customer
support for individual subscribers and that by targeting individual subscribers,
rather than attempting to serve all segments of the Internet access market,
MindSpring can continue to increase its subscriber base rapidly while
maintaining superior quality service.
In June 1996, the Company announced its plans to become a nationwide
Internet access provider through agreements with PSINet to purchase up to
100,000 consumer dial-up subscriber accounts, a customer service facility and
certain other related assets and to obtain access to PSINet's national network
of over 200 POPs. Prior to the PSINet Transaction, MindSpring was a regional
Internet access provider that offered its services through 40 POPs in the
southeastern United States and had grown to approximately 34,500 subscribers,
from approximately 12,400 subscribers as of December 31, 1995. On a pro forma
basis as of June 30, 1996, MindSpring would have had access to approximately 230
POPs (excluding PSINet POPs located in areas served by MindSpring POPs) and
would have had approximately 134,500 subscribers, assuming the acquisition of
100,000 subscriber accounts from PSINet.
The Company believes that the PSINet Transaction will enhance the Company's
ability to achieve its strategic objectives on a cost-effective and accelerated
basis and to realize economies of scale. The Company believes that the PSINet
Transaction will establish the Company as a leading Internet access provider
with nationwide coverage, create opportunities for the Company to pursue
national marketing and strategic alliances and reduce the need for significant
up-front capital expenditures to establish Company-owned POPs. The Company
intends, however, to maintain the flexibility to expand, open or close its own
POPs or make other capital investments as and where subscriber demand or
strategic considerations warrant.
Starting in early September 1996, the Company expects to send to each
PSINet subscriber transitioning to the Company's network a copy of MindSpring's
customized software package. Those subscribers who receive new e-mail addresses
in the conversion will have any e-mail sent to their old address forwarded to
their MindSpring e-mail address for approximately twelve months from the date of
switch-over. Once they have been successfully converted to the MindSpring
system, these subscribers will generally continue to have access to all of the
applications that they could access as PSINet subscribers.
MindSpring POPs are connected to the Internet primarily through
MindSpring's network hub in Atlanta, Georgia. Leased data communication lines
from three different suppliers connect the network hub to the Internet's
backbone. The Company will connect its network hub to PSINet's nationwide
network of over 200 POPs at the PSINet POP located in Austel, Georgia. The
Company may also connect its network to PSINet's network at various other PSINet
POP sites.
Management believes that as a result of the PSINet Transaction and the
Company's reputation for reliability and high quality, MindSpring will become
recognized as a leading national provider of high quality Internet access
services to individual subscribers. PSINet has agreed, among other things, to
provide to the Company: (i) Internet connection services which meet reasonable
commercial standards, including with respect to access and reliability; and (ii)
access to PSINet's network monitoring systems and subscriber log-in and
accounting information. In addition, by using PSINet POPs, MindSpring has
reduced the need for significant up-front capital expenditures to establish
MindSpring POPs to support the Company's growth, although the Company intends to
maintain the flexibility to expand, open or close MindSpring POPs or make other
capital investments as and where subscriber demand or strategic considerations
warrant.
The Company's largest stockholder is ITC Holding, which currently owns
approximately 36% of the Company's outstanding capital stock. See "Principal
Stockholders." ITC Holding is a diversified telecommunications company based in
West Point, Georgia, with substantial holdings in telecommunications companies
33
<PAGE> 35
operating throughout the southeastern United States. ITC Holding's affiliates
provide, among other things, local exchange telephone service, audio and video
teleconferencing, long distance telecommunications service, Web hosting and
Internet access services, wireless communications, and cable television, fiber
optic network and telemarketing services. MindSpring anticipates that ITC
Holding's experience and contacts in the telecommunications industry will
enhance ITC Holding's contributions to MindSpring's development. Campbell B.
Lanier, III, Chairman and Chief Executive Officer of ITC Holding, William H.
Scott, III, President and Chief Operating Officer of ITC Holding, and O. Gene
Gabbard, a director of ITC Holding, are members of the Board of Directors of
MindSpring. See "Risk Factors -- Control of Company," "Risk Factors -- Potential
Conflicts of Interest," and "Management."
The Company was incorporated in February 1994 and began offering services
in June 1994.
MINDSPRING STRATEGY
MindSpring's objective is to become a leading national provider of high
quality Internet access services to individual subscribers. The Company intends
to achieve this objective by:
Leveraging the opportunities afforded by the PSINet Transaction and
expanding its subscriber base. The Company intends to exploit the
opportunities presented by the PSINet Transaction to attract subscribers
nationwide and establish the Company as a national Internet access
provider. Management believes that the substantial increase in subscribers
and nationwide POP access resulting from the PSINet Transaction will enable
it to implement its strategy on a cost-effective and accelerated basis and
to realize economies of scale while providing the Company with
opportunities to further increase its subscriber base. Management believes
that providing exceptionally high quality service to its existing
subscribers, including subscribers who become MindSpring subscribers as a
result of acquisitions, is the most important factor in determining both
the retention of existing subscribers and the addition of new subscribers.
Historically, the Company has obtained many of its new subscribers as a
result of referrals from existing subscribers. During 1995 and the first
six months of 1996, approximately half of the Company's new subscribers
(not including the 15,000 subscribers obtained from PSINet in June 1996 or
the subscribers obtained through other purchases) indicated that they were
direct referrals from existing subscribers. The Company expects to obtain
additional subscribers through referrals from subscribers added as a result
of the PSINet Transaction and other acquisitions.
Maintaining superior service and customer support and providing
easy-to-use software and reliable Internet access. Providing superior
service and customer support is a fundamental component of the Company's
strategy. Consequently, the Company strives to maintain adequate numbers of
qualified customer support representatives to be able to provide responsive
customer support services. The Company's customer support representatives,
who are familiar with the Company's software and are experienced with
Internet issues, are generally available seven days a week to provide
technical support to subscribers. By year-end 1996, the Company expects to
have over 190 technical support staff employees (compared to approximately
74 full-time and four part-time employees as of June 30, 1996). In
addition, MindSpring has developed starter kits that are intended to make
Internet access as easy as possible for individual users. The Company
believes that its starter kits, which include front-end software and
documentation for both Windows and Macintosh users, and reliable network
infrastructure significantly enhance its ability to provide a positive
experience to a wide variety of potential users, including those who have
little or no on-line experience.
Expanding marketing and distribution activities and pursuing strategic
alliances. The Company intends to expand and strengthen its marketing and
distribution efforts in order to establish a national presence and
nationwide name recognition. As a result of the Company's nationwide access
and reputation for reliability and high quality, the Company believes that
opportunities for nationwide strategic alliances with complementary
businesses and retail distribution and bundling arrangements will become
available to the Company. In addition, the Company plans to integrate into
its marketing plan certain PSINet marketing programs to which it will
receive the rights and benefits under the Purchase Agreement. The Company
also intends to continue to emphasize personal contacts with influential
34
<PAGE> 36
members of the communities it serves. These contacts include
representatives of the media, schools, universities, computer user groups,
and high technology business associations.
Focusing on individual subscribers. The Company believes that the
Internet access services market for individual subscribers is likely to
continue to grow rapidly. Trends contributing to the continued growth of
this market segment include: the increasing use of computers by individuals
in their homes for, among other things, e-mail, file transfer, remote
login, file sharing and information services; the dramatic increases in
cost-effective processing power and data storage capabilities in personal
computers; the widespread availability of multimedia, fax/modem and
networking capabilities to the home computing market; the growing awareness
of the Internet generally; and the increasing diversity of information,
entertainment and commercial offerings available on the Internet. The
Company further believes that there is a growing and unsatisfied demand for
high-quality Internet access for individuals, based on reports of start-up
problems, busy signals, poor network performance, insufficient customer
support and billing problems with other Internet access providers. The
Company believes that serving individual Internet access subscribers
requires a very different form of expertise than does serving dedicated
access subscribers. MindSpring believes that its strategy of focusing on
individual subscribers, rather than dividing its efforts between the two
types of subscribers, will make it easier to provide superior quality
service while expanding rapidly.
Engaging in selected acquisitions. Since early 1996, the Company has
accelerated its expansion efforts through selected acquisitions of
businesses and subscriber accounts, including the PSINet Transaction and
the Nando.net Transaction described herein. As the Company continues to
expand, it may in the future seek to acquire additional subscriber accounts
and complementary businesses. The Company further believes that its
operational focus on serving individual subscribers provides the Company
with significant acquisition opportunities given the Company's belief that
a number of Internet access providers will discontinue serving individual
subscribers in order to focus on some other segment of the market, such as
dedicated access for institutional customers. The Company expects to
continue to benefit from the significant experience of its largest
stockholder, ITC Holding, in achieving growth through acquisitions in the
telecommunications industry.
CUSTOMER SUPPORT
MindSpring believes that excellent customer support is critical to its
success in retaining existing subscribers and in attracting new subscribers.
MindSpring currently provides customer support through a call center located at
its headquarters, which is open for service from 9:00 a.m. until 9:00 p.m.
eastern time seven days a week (excluding holidays). The Company will also
provide customer support through the Harrisburg Facility, which will be acquired
as part of the Acquisition and will be open for service 24 hours a day, seven
days a week. Subscribers can call these centers through a local Atlanta
telephone number or a toll-free "800" number. Subscribers can also e-mail their
questions directly to a customer support address at the Company. In addition,
the Company maintains MindSpring specific newsgroups on the Internet, where
subscribers can post requests for help, and other subscribers, as well as
MindSpring support personnel, can respond. By year-end 1996, the Company expects
to have a staff of over 190 technical support employees (compared to
approximately 74 full-time and four part-time employees as of June 30, 1996).
SALES AND MARKETING
MindSpring believes that the market for individual Internet access is
heavily influenced by person-to-person referrals. Accordingly, the Company's
marketing efforts have been geared, among other things, toward generating
positive referrals and stimulating subscriber growth and retention by providing
an exceptionally high quality service to its existing subscribers. MindSpring
also offers a $10 credit to existing subscribers each time a new subscriber
names the existing subscriber as the referral source. During 1995 and the first
six
35
<PAGE> 37
months of 1996, approximately half of the Company's new subscribers (not
including the 15,000 subscriber accounts obtained at the First Closing or the
subscriber accounts obtained through other purchases) indicated that they were
referred by an existing subscriber.
In addition to encouraging referrals from existing subscribers, the Company
intends to establish a nationwide presence and nationwide name recognition
through moderate amounts of print publication, radio and direct mail
advertising, and by pursuing nationwide strategic alliances and retail
opportunities available to the Company as a result of the Company's nationwide
access and reputation for reliability and high quality. Such nationwide
marketing opportunities may include, among others: entering into large-scale
bundling arrangements with complementary products such as computers, software
products, multimedia books, and CD-ROM merchandise; entering into retail
distribution agreements for its software package with national distributors; and
seeking strategic alliances with complementary businesses operating in its
service areas, such as Internet-oriented training organizations and consulting
firms, World Wide Web content developers, computer networking firms, media
companies, telecommunications companies, local area network and World Wide Web
consulting companies, and other Internet access companies that specialize in
providing dedicated connections. The Company expects that any such alliances
would be of varying natures and terms, and could involve, among other things,
commission arrangements, "wholesale" purchases of Company services for resale,
private branding of Company services, or the exchange of the Company's services
for promotional services or other services. The Company will also continue to
pursue strategic alliances with complementary businesses operating in its
service areas. The Company seeks to forge these alliances through:
Trade arrangements with media companies. The Company establishes
trade arrangements with a variety of media companies, including newspapers,
radio and television stations, cable television stations, and
telecommunications companies in the POPs in which the Company provides
service. These arrangements may involve, among other things, commission
arrangements, "wholesale" purchases of Company services for resale, private
branding of Company services, or an exchange of MindSpring Internet
services for advertising or other promotional services.
Sales agent programs. MindSpring has relationships with a number of
sales agents, who typically are involved in offering products or services
that are related to the Internet. The basic sales agent agreement offers a
finder's fee for each new subscriber that names the sales agent as the
referral source. MindSpring sales agents include Internet-oriented training
organizations and consulting firms, World Wide Web content developers,
computer networking firms, local area network and World Wide Web consulting
companies and computer stores. The Company anticipates expanding this
program as it expands into new POP locations as a result of the PSINet
Transaction. Pursuant to the Purchase Agreement, MindSpring will pay PSINet
a fee for each new subscriber obtained as a result of PSINet's sales
efforts.
Speaking appearances and presentations. MindSpring marketing
personnel spend considerable time meeting with and making presentations to
groups representing potential subscribers, such as computer user
associations, high technology business associations and educational
institutions.
Pursuant to the Purchase Agreement, MindSpring will acquire the rights to
and benefits of all of PSINet's preexisting marketing programs that are targeted
at individual subscribers. These programs include: (i) marketing relationships
with publishers, equipment manufacturers and organizations representing
potential subscribers; (ii) relationships with individuals and organizations
that receive a commission for successfully recruiting subscribers; and (iii)
certain arrangements with retail outlets to distribute, sell or promote Internet
access services. The Company intends to integrate certain of these programs into
its marketing plan. For example, as part of the Acquisition, the Company
acquired the right to assume certain of PSINet's distribution relationships with
book and hardware vendors, pursuant to which the vendor would include the
MindSpring front-end software as part of a CD-ROM which might include other
programs or as a stand-alone CD-ROM. Pursuant to these distribution
arrangements, PSINet was required to make a one-time payment per subscriber of
usually less than $10 for each new subscriber resulting from the arrangement,
and the Company will have the same obligation for each arrangement it continues.
MindSpring has contacted every
36
<PAGE> 38
such PSINet vendor, and most have indicated their intention to continue the
distribution relationship with MindSpring.
The Company intends to continue to expand its marketing and distribution
efforts by exploiting these newly available marketing opportunities as well as
traditional advertising media in order to develop the Company's evolving
nationwide service area. The Company anticipates that the expansion of its
geographic coverage and subscriber base will require it to continue to expand
and adapt its marketing and distribution efforts. MindSpring will continue to
closely monitor the results of its marketing techniques as part of an ongoing
effort to increase the cost-effectiveness of its marketing efforts.
MindSpring has attempted to maintain a high degree of personal contact with
the communities that it serves, and the Company has a staff of regional managers
who are responsible for generating interest in MindSpring in these communities.
The Company plans to continue these efforts in the southeastern United States
and selectively expand them to include key metropolitan areas in other regions
of the country following the Acquisition.
Sales are consummated by the Company's telephone sales force, which
responds to incoming subscription inquiries, as well as through an on-line
sign-up procedure. The on-line registration module, which is included in the
Company's retail software package, enables a user to become a MindSpring
subscriber by selecting service plans and billing methods on-line, without the
need to speak to a MindSpring employee. As of June 30, 1996, the Company's
retail software package was available in 117 computer stores and other outlets
located in the southeastern United States. The Company intends to expand the
availability of the retail software package in connection with the Company's
evolving nationwide service area.
MINDSPRING SERVICE PLANS
MindSpring's primary subscribers are individuals within local dialing range
of one of its POPs and Web-hosting service subscribers. The Company's objective
is to offer its service in a way that enables subscribers to have a positive
experience with MindSpring and the Internet, even if they are not expert
computer users or have no on-line experience. Accordingly, the Company provides
intensive customer support services, helpful and easily understood
documentation, and a software starter kit that is designed to be easy to
install, easy to use and supports both Windows and Macintosh users. In addition,
MindSpring also provides service to dedicated access subscribers.
Dial-up Internet Access. MindSpring's primary service offering is dial-up
Internet access. The basic equipment requirements for an individual dial-up
subscriber are a Windows 3.x or later or Macintosh computer with at least 8MB of
RAM and a working modem of 14.4 Kbps speed or faster. The subscriber's
MindSpring connection is a direct PPP connection, enabling the subscriber to use
any standard Internet-capable software that will run on the subscriber's
computer.
The Company currently offers the following five price plans for dial-up
subscribers in order to accommodate both heavy and light Internet users. Each
plan requires a $35 start-up fee and includes a complete starter kit (purchasers
of the retail software package are charged only a $25 start-up fee). PSINet
subscribers who become MindSpring subscribers as a result of the Acquisition
will receive the starter kit at no charge.
The Works. For $26.95 per month, individual subscribers receive
unlimited use (not intended to be a fulltime connection) as well as 10MB of
Web space, access to the Clarinet premium news service and two extra
mailboxes.
Unlimited Access. Individual subscribers pay $19.95 per month for
unlimited use, with the restriction that the subscriber must disconnect
when not actively accessing the Internet. The subscriber is not permitted,
for example, to maintain a full-time computer connection as a World Wide
Web server.
Standard. Subscribers pay $14.95 per month for 20 hours of use and $1
per hour for each additional hour. Subscribers also receive 5MB of Web
space and access to the Clarinet premium news service.
37
<PAGE> 39
Beat the Clock. Subscribers pay $12.95 per month for unlimited use
(not intended to be a full-time connection) between the hours of 1:00 a.m.
and 5:00 p.m. and $2 per hour for each hour outside that time period.
Subscribers also receive 5MB of Web space and access to the Clarinet
premium news service.
Light. Subscribers pay $6.95 per month for five hours of use and $2
per hour for each additional hour. Subscribers also receive 5MB of Web
space.
The Company has also established a discount program for organizations that
open a group of at least ten individual accounts. The Company expects that the
typical user of this program will be a corporation or other organization that
wishes to purchase Internet access for its employees.
Substantially all of the Company's subscribers are on month-to-month
subscriptions. The Company offers a 30-day money-back satisfaction guarantee for
new subscribers. Billing is made to the majority of subscribers by automatic
charges to subscribers' credit cards each month in advance, though some
subscribers are invoiced (for an extra charge). Subscribers, as well as the
Company, may cancel an account at any time, with the cancellation taking effect
as of the first day of the following month. The Company's liability in
connection with a subscriber's use of the Company's services may be limited by
certain provisions in the Company's standard form of service agreement. See
"Risk Factors -- Potential Liability."
Users located within local dialing range of one of the Company's POPs or,
except for Beat the Clock users, any of the PSINet POPs can access the Internet
with a local telephone call. The Company also offers access to its services
through an "800" number for an additional charge. All dial-up subscribers can
connect to the MindSpring network (including the PSINet POPs) via modem at
speeds up to 28.8 Kbps. In some cities that the Company serves, individual
subscribers can also choose to connect via ISDN at 64 Kbps or 128 Kbps. There is
a one-time extra startup fee of $35 for ISDN users; otherwise, pricing is the
same as for modem subscribers. All dial-up subscribers, except subscribers to
the Unlimited Access plan, also have the option of using MindSpring servers to
publish information on the Internet through the World Wide Web or FTP.
MindSpring subscribers may use the space made available on MindSpring's servers
for each subscriber to make World Wide Web pages or computer files available to
the Internet.
Web Hosting. MindSpring also offers Web-hosting accounts for companies and
other organizations that wish to create their own World Wide Web sites without
maintaining their own Web server and high speed Internet connection. Webhosting
subscribers can use their own domain name in their World Wide Web address. This
type of Web hosting is sometimes called "virtual hosting." Web-hosting
subscribers are responsible for building their Web sites themselves, and then
uploading the pages to a MindSpring Web server. The Company's Web-hosting
service features state-of-the-art Web servers for high speed and reliability, a
high quality connection to the Internet, specialized customer support, advanced
services features such as secure transactions and VRML (Virtual Reality Markup
Language, a feature which allows Web-site visitors to navigate through a three
dimensional "virtual" world) and detailed statistical reporting on hits to the
site. Average monthly fees for Web-hosting accounts are approximately $55.
MindSpring had approximately 1,590 Web-hosting subscribers as of June 30, 1996,
compared to 490 Web-hosting subscribers as of December 31, 1995.
"Dedicated" Connections. MindSpring offers "dedicated" (i.e., full-time)
connections at the following current prices:
<TABLE>
<S> <C>
Dedicated 28.8 Kbps modem connection................ $500 start-up fee, $120 per month
Dedicated 64 Kbps ISDN connection................... $250 start-up fee, $250 per month
Dedicated 128 Kbps ISDN connection.................. $250 start-up fee, $400 per month
</TABLE>
As a result of the Company's strategy of focusing on Internet access to
individual subscribers, the Company generally intends to limit its number of
dedicated access subscribers to those currently served. In addition, MindSpring
does not provide network consulting services. Subscribers intending to use a
dedicated MindSpring connection to their own networks need to be technically
self-sufficient.
38
<PAGE> 40
NETWORK INFRASTRUCTURE
Geographic Coverage. As of June 30, 1996, MindSpring offered Internet
access service through 40 MindSpring POPs in nine states and the District of
Columbia. In addition, as a result of the PSINet Transaction, the Company will
have access to PSINet's network of over 200 POPs located in 46 states and the
District of Columbia. See "Recent Transactions -- Acquisition of PSINet Assets."
The MindSpring Network. Users located within local dialing range of a
MindSpring POP connect to the POP through telephone lines provided by the local
telephone company. Each MindSpring POP generally connects to the Company's
Atlanta hub via a leased line T-1 connection. The equipment located in the
remote POPs consists primarily of a router, rackmounted terminal servers and
modems.
In order to continue to build its base of individual dial-up subscribers,
the Company intends to continue to evaluate the need to expand existing
MindSpring POPs, to open new MindSpring POPs and to locate servers in remote
locations to optimize network traffic. The number and location of additional
POPs that the Company may actually open depends on such factors as subscriber
demand, relative costs of telecommunications facilities, competitive
considerations, and other factors, including the ability to provide service
through access to PSINet POPs and possibly through POPs of other companies. The
Company has no current plans and is not involved in any negotiations with
respect to providing service through POPs of other companies.
MindSpring's network hub is currently connected to the Internet through
three separate leased data communications lines, one connecting to the Sprint
Communications Company, L.P. ("Sprint Communications") network, one to the Apex
Global Information Services, Inc. ("AGIS") network and one to the BBN Planet
Corporation ("BBN") network. Sprint Communications, AGIS and BBN are Internet
backbone providers that carry data traffic for MindSpring and other subscribers
and deliver it either to its end destination (if that destination is connected
directly to their network) or to the Internet gateway points where the traffic
is routed onward to its ultimate destination. As MindSpring grows, it will need
to increase the bandwidth over its connection to the rest of the Internet. This
may be done through increasing the bandwidth of the Company's connections
through these current providers, by adding new connections through these or
other providers, or by establishing leased line connections directly to the
Internet gateway points.
The Company maintains a Network Management Center at its Atlanta
headquarters through which the Company's technical staff monitors network
traffic, service quality and security, as well as equipment at individual POPs,
to ensure reliable Internet access. The Network Management Center is staffed 24
hours a day seven days a week. In addition, the Company is continuing to invest
in improved network monitoring software and hardware systems.
MindSpring Connection to PSINet POPs. In addition to its MindSpring POPs,
the Company intends to provide Internet access to its subscribers through a
nationwide network of over 200 PSINet POPs pursuant to the Services Agreement.
The Company believes that this arrangement will enable it to provide Internet
access services on a nationwide basis while minimizing capital expenditures.
However, the Company intends to maintain the flexibility to expand or open
MindSpring POPs or make other capital investments as and where subscriber demand
or strategic considerations may warrant. This approach provides MindSpring the
freedom to focus on superior customer service rather than on establishing new
POPs. See "Recent Transactions -- Network Services Agreement."
The Company will connect its network hub via a telecommunications circuit
provided by the Company to PSINet's network at the PSINet POP located in Austel,
Georgia. The Company may also co-locate equipment at various other PSINet POP
sites. The Company is responsible for all customer support, pricing, billing and
collection services that are associated with subscribers that access the
Company's network through a PSINet POP. In addition, the Company may, at its
option, enter into peering arrangements with PSINet whereby the Company would
establish connections between MindSpring's network and PSINet's network with
telecommunications circuits in order to more efficiently route traffic
originating within one party's network and destined for the other party's
network. See "Recent Transactions -- Network Services Agreement."
39
<PAGE> 41
MINDSPRING SOFTWARE
An important component of the Company's offering for dial-up subscribers is
the MindSpring starter kit. The starter kit includes the MindSpring installation
program, front-end software and documentation; an on-line registration module
(retail version only); network software that enables a subscriber to connect to
the Internet; and application programs. (The application programs are described
more fully below. See "-- Subscriber Applications.")
The Company's objectives in developing and providing this starter kit are
to:
Simplify installation. The MindSpring Windows software package
automatically configures all the individual Internet access programs after
one-time entry by the user of a few required fields of information (name,
username, password, etc.). The Macintosh installation program is similar but
requires subscribers to enter some additional information.
Provide a convenient and intuitive starting place for subscribers. The
MindSpring front-end software allows subscribers to connect and disconnect, see
any current messages from MindSpring, check their monthly usage, see if they
have any mail, and launch any of their Internet application programs, all from
one screen. "Help" files and the accompanying documentation contain information
on trouble-shooting and things to do on the Internet.
Enhance efficiency of the Company's support services. High-quality
software with which the Company is familiar makes it easier for the Company to
provide fast and efficient customer support. Software that is reliable and easy
to install and use also tends to reduce subscriber need for extensive support
services.
Provide state-of-the-art applications. The Company uses already-existing
applications in its software package. MindSpring believes that this approach
will enable it to include state-of-the-art software in its package and keep pace
with technology developments by replacing applications with newer or better
programs as they become available without diverting resources by attempting to
develop new applications programs.
Provide open standards and flexibility. MindSpring software is based on
open standards, and the Windows package is fully Winsock-compatible. Winsock is
an industry standard programming interface definition for Windows which
specifies how TCP/IP-based network applications should communicate with TCP/IP
protocol software. Winsock has been adopted by most vendors of network protocol
software and network applications software for Windows. Subscribers can run any
standard Windows or Macintosh Internet programs and are not limited to those
programs that are included in the starter kit but can experiment with new
Internet applications as they become available.
SUBSCRIBER APPLICATIONS
MindSpring subscribers use their accounts for communicating, retrieving
information and publishing information on the Internet. In Company surveys of
its subscribers, a substantial number of the Company's individual subscribers
report that they use their MindSpring accounts for business as well as for
personal purposes. The subscribers' MindSpring connection is a direct PPP
connection, enabling subscribers to use any standard Internet-capable software
that will run on their computers. A complete set of the most popular Internet
applications are included in the MindSpring starter kit software package,
including:
Electronic Mail. E-mail allows subscribers to exchange electronic
messages with anyone else who has an Internet e-mail address. These
messages are usually text only, but can also include other kinds of
computer files (such as images, computer programs, or word processing
documents), which are sent as attachments. The Company's software package
includes the Eudora(R) e-mail application.
The World Wide Web. The World Wide Web allows a multimedia
presentation of material (text, graphic, sound and video). Users can move
from one World Wide Web site to another by clicking on hypertext links and
can interact with the World Wide Web information providers through typed
input. The software programs that allow users to explore the World Wide Web
are known as "browsers." The browser application currently included in the
Company's software package is Netscape Navigator (a trademark of Netscape
Communications).
40
<PAGE> 42
Network News. Network News provides Internet-wide, subject-specific
forums on thousands of different subjects, where users can post information
and review posted information from other users.
FTP. File transfer protocol, or FTP, is a standard Internet tool that
allows users to send and retrieve computer files. FTP is often used for
retrieving software from various archive sites on the Internet.
Internet Relay Chat. Internet Relay Chat allows users to participate
in "chat" sessions, in which typed comments from all participants appear on
the screen, allowing simultaneous multi-person real-time conversations.
The Company has obtained permission and, in certain cases, licenses from
each manufacturer of the software that the Company bundles in its front-end
software product for Windows and Macintosh subscribers. See "-- Proprietary
Rights."
PROPRIETARY RIGHTS
General. Although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights, the Company's success
and ability to compete is dependent in part upon its technology. The Company
relies on a combination of copyright, trademark and trade secret laws and
contractual restrictions to establish and protect its technology. It is the
Company's policy to require employees and consultants and, when possible,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with the Company. These agreements provide that confidential
information developed or made known during the course of a relationship with the
Company must be kept confidential and not disclosed to third parties except in
specific circumstances. There can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. See "Risk
Factors -- Proprietary Rights; Infringement Claims."
Licenses. The Company has obtained authorization to use the product of
each manufacturer of software that the Company bundles in its front-end software
product for Windows and Macintosh subscribers. The particular applications
included in the MindSpring starter kit have in some cases been licensed. These
applications currently include the Netscape Navigator (a trademark of Netscape
Communications) from Netscape Communications Corporation (which license expires
on December 31, 1997), WS-FTP software from Ipswitch, Inc. (which license
expires on March 1, 1997), TCP/IP software from Network TeleSystems, Inc. (which
license expires on November 11, 1996 and is renewable for one-year terms), the
Eudora(R) e-mail program from Qualcomm, Inc. (which license expires on September
28, 1996), Lview Pro graphics viewer software from MMedia Research (which
license has an indefinite term), Internet Explorer from Microsoft (which license
expires on April 29, 1997), Anarchie from Peter N. Lewis (which license expires
on January 19, 1997), Newswatcher from Northeastern University (which license
expires on March 1, 1997), Mac TCP from Apple Computer Inc. (which license
expires on December 27, 1996), FreePPP from Steve Dagley (which license expires
on March 6, 1997), Fetch from Dartmouth University (which license expires on
June 3, 1997), Free Agent from Forte Advanced Management Software, Inc. (which
license expires on November 29, 1996) and MacPPP from Merit Network, Inc. (which
license expires on March 11, 1997). License fees charged to the Company upon
enrollment of additional subscribers are included in the cost of subscriber
start-up fees. In other cases such applications are shareware that the Company
has obtained permission to distribute, or are from the public domain and are
freely distributable. The only software programs in the MindSpring starter kit
that were developed by MindSpring are the front-end programs for Windows, Win95
and Macintosh. The Company currently intends to maintain or negotiate renewals
of, as the case may be, all existing software licenses and authorizations as
necessary. The Company may also want or need to license other applications in
the future.
Trademarks. In April 1996, the Company adopted a new MindSpring logo. The
Company currently has applications pending with respect to the registration in
the United States of the trademark "MindSpring" and the old and new MindSpring
logos.
41
<PAGE> 43
BILLING AND MANAGEMENT INFORMATION SYSTEMS
Most of the Company's individual subscribers pay their MindSpring fees
automatically by credit card each month. The Company generally sends monthly
invoices to commercial accounts with multiple users. Billing calculations and
payment transactions are managed on the Company's automated billing system,
which was implemented in May 1995. The Company is currently upgrading the
capacity of its billing system by purchasing additional hardware and modifying
its software to facilitate the addition of all of the PSINet subscribers who
become MindSpring subscribers following the Acquisition. The Company expects to
continue to modify and upgrade its billing system in order to maintain its
ability to bill and collect amounts due and to be responsive to changes in the
market.
COMPETITION
The market for the provision of Internet access to individuals is extremely
competitive and highly fragmented. There are no substantial barriers to entry,
and the Company expects that competition will continue to intensify. The Company
believes that the primary competitive factors determining success in this market
are a reputation for reliability and service, effective customer support,
pricing, easy-to-use software, and geographic coverage. Other important factors
include the timing of introductions of new products and services, and industry
and general economic trends. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
As a result of increased competition in the industry, the Company has
encountered and expects to continue to encounter significant pricing pressure.
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. These plan changes generally represent a reduction from
the previous rates. Further reductions in rates charged by the Company's
competitors could require the Company to further reduce prices charged to its
subscribers, which could cause a decrease in total revenues and revenue per
subscriber and reduce the likelihood of the Company achieving positive cash flow
or profitability in the future. Any such reductions in prices could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, telecommunications companies may be able to offer
customers reduced communications costs in connection with their Internet access
services, reducing the overall cost of their Internet access solution and
significantly increasing price pressures on the Company. Competition could also
result in increased selling and marketing expenses, related subscriber
acquisition costs, and increased subscriber attrition, all of which could
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to offset
the effects of any such increased costs or reductions in the Company's prices
through an increase in the number of its subscribers, higher revenue from
enhanced services, cost reductions or otherwise, or that the Company will have
the resources to continue to compete successfully. See "Risk
Factors -- Competition."
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. In addition, every
local market the Company has entered or intends to enter is served by multiple
local Internet access providers. The Company currently competes or expects to
compete with the following types of Internet access providers: (i) national
commercial Internet access providers, such as NETCOM; (ii) numerous regional and
local commercial Internet access providers which vary widely in quality, service
offerings and pricing; (iii) established on-line commercial information service
providers, such as America Online and CompuServe; (iv) computer hardware and
software and other technology companies, such as IBM and Microsoft; (v) national
long distance carriers, such as AT&T, MCI, MFS and Sprint; (vi) regional
telephone companies; (vii) cable operators; and (viii) nonprofit or educational
Internet access providers.
Congress recently enacted, and President Clinton signed, the 1996
Telecommunications Act, which contains certain provisions lifting, or
establishing procedures for lifting, restrictions on Bell Operating Companies
and other companies which may permit them to engage directly in the Internet
access business. In addition, the 1996 Telecommunications Act makes it easier
for national long distance carriers such as AT&T
42
<PAGE> 44
to offer local telephone service. The Company cannot predict the extent to which
the 1996 Telecommunications Act, or strategic alliances or consolidation among
Internet access providers may result in additional competitive pressures on the
Company or have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes that new competitors, including large computer
hardware and software, media and telecommunications companies, will continue to
enter the Internet access market, resulting in even greater competition for the
Company. For example, Microsoft has introduced an Internet access solution,
including front-end software and an on-line service called "Microsoft Network."
The application software for this on-line service is bundled with Microsoft's
Windows '95 operating system, which may give the service a significant advantage
over on-line and other Internet access providers, including the Company. In
connection with its plans to enter the Internet access market, Microsoft has
entered into a strategic alliance with UUNet (which was recently acquired by
MFS) (including the purchase of a minority investment in UUNet by Microsoft)
that will give Microsoft customers access to the Internet through UUNet's POPs.
Microsoft also recently announced strategic marketing alliances for Internet
access with MCI, AT&T and NETCOM. GTE also recently entered into a strategic
alliance with UUNet whereby GTE's customers will obtain access to the Internet
through UUNet's communications network. AT&T began offering Internet access to
its customers in April 1996. In addition, IBM's most recent version of its OS/2
operating system software includes Internet utilities, and IBM offers Internet
access through its own private communications network. The ability of these
competitors or others to enter into strategic alliances or joint ventures or to
bundle services and products with Internet access could put the Company at a
significant competitive disadvantage.
Moreover, the Company expects to face competition in the future from
companies that provide connections to consumers' homes, including local and long
distance telephone companies, cable television companies, electric utility
companies and wireless communications companies. For example, technologies have
been developed to enable cable television operators to offer high-speed Internet
access through their cable facilities. These broadband technologies promise
significantly higher access rates than existing modem speeds. Such companies
could include Internet access in their basic bundle of services or offer such
access for a nominal additional charge and could prevent the Company from
delivering Internet access through the wire and cable connections that such
companies own. Any such developments could materially adversely affect the
Company's business, financial condition and results of operations.
The Company does not currently compete internationally. To the extent that
the ability to provide Internet access internationally becomes a competitive
advantage in the Internet access industry, the Company may be at a competitive
disadvantage relative to other competitors.
INDUSTRY BACKGROUND
The Internet. The Internet is a global collection of thousands of
interconnected computer networks that enable commercial organizations,
educational institutions, governmental agencies and individuals to communicate
electronically, access and share information and conduct business. The Internet
originated with the ARPAnet, a restricted network started in 1969 by the United
States Department of Defense Advanced Research Project Agency to provide
efficient and reliable long-distance data communications among the disparate
computer systems used by government-funded researchers and organizations. Unlike
other public and private telecommunications networks that are managed by
businesses, governmental agencies and other entities, the Internet is a
cooperative interconnection of many such public and private networks. The
networks that comprise the Internet are connected in a variety of ways,
including by the public-switched telephone network and by dedicated high speed
leased lines. Open communications on the Internet are enabled by TCP/IP, the
common Internet communications protocol, which enables communication across the
Internet regardless of the hardware and software used.
Internet Growth. Recent technological advances, including the development
of easy-to-use graphical user interfaces (which provide a means of communicating
with computers by manipulating icons and "windows," in addition to text),
combined with cultural and business changes, have led to the Internet being
integrated into the activities of individuals and the operations and strategies
of commercial organizations.
43
<PAGE> 45
Individuals increasingly are using computers in their homes for electronic mail,
file transfer, remote login, file sharing and information services. This trend
has been facilitated by dramatic increases in cost-effective processing power
and data storage capabilities in personal computers, as well as widespread
availability of multimedia, fax/modem, and networking capabilities to the home
computing market. Much of the recent growth in Internet use by businesses and
individuals has been driven by the emergence of a network of servers and
information available on the Internet called the World Wide Web. The World Wide
Web, which is based on a client/server model and a set of standards for
information access and navigation, can be accessed using software that allows
non-technical users to exploit the capabilities of the Internet. The World Wide
Web enables users to find, retrieve and link information on the Internet easily
and consistently. The development of World Wide Web technology and associated
easy-to-use software has made the Internet easier to navigate and more
accessible to a larger number of users and for a broader range of applications.
Internet Services and Software Providers. Until recently, individuals
could access the Internet only through their employer or another organization
with a direct Internet connection or through traditional on-line services
employing closed, proprietary networks that allowed access only to limited
Internet resources. With the growth and increasing commercialization of the
Internet, a number of companies have emerged to provide Internet software and
direct access targeted to individuals. Traditional on-line services have also
begun to increase the scope and capacity of their access to the Internet.
Access providers vary widely in the geographic coverage, customer focus and
levels of Internet access provided to subscribers. For example, access providers
may concentrate on certain types of subscribers (such as businesses or
individuals) that differ substantially in the type of service and support
required. Providers may also differ according to whether they provide direct or
non-direct access to the Internet. Direct access through Internet protocols such
as SLIP or PPP enable users to establish direct connections to other computers
on the Internet, including World Wide Web sites or computers operated by other
users, and thereby have access to the full range of Internet resources. The
Company offers direct Internet access, as do most regional and national access
providers other than on-line service providers. To compete with these direct
Internet access providers, consumer on-line services (including America Online
and CompuServe) have introduced Internet access gateways.
GOVERNMENT REGULATION
The Company provides Internet access, in part, through transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. The Company is at present
considered an enhanced services provider and, therefore, is not currently
subject to direct regulation by the FCC or any other agency, other than
regulations applicable to businesses generally. However, the Company could
become subject in the future to regulations by the FCC and/or other regulatory
commissions as a provider of basic telecommunications services. For example, a
number of long distance telephone carriers recently filed a petition with the
FCC seeking a declaration that Internet telephone service is a
"telecommunications service" subject to common carrier regulation. Such a
declaration, if enacted, would create substantial barriers to the Company's
entry into the Internet telephone market.
The 1996 Telecommunications Act contains certain provisions lifting, or
establishing procedures for lifting, restrictions on Bell Operating Companies
and other companies that may permit them to engage directly in the Internet
access business and allows the Bell Operating Companies to provide electronic
publishing of information and databases. Competition from these companies could
have an adverse effect on the Company's business, financial condition and
results of operations. See "-- Competition." Further, the 1996
Telecommunications Act imposes fines on any entity that knowingly uses any
interactive computer service to send obscene or indecent material to minors or
makes indecent material available to minors. The standard for determining
whether an entity acted knowingly has not yet been established.
The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. Several private lawsuits seeking to impose such liability
upon Internet access providers and on-line services companies are currently
pending. Although no such claims have been asserted against the Company to date,
there can be no assurance that such
44
<PAGE> 46
claims will not be asserted in the future, or if asserted, will not be
successful. Furthermore, although the Company has attempted to limit its
liability by the terms of its standard service agreement, there can be no
assurance that the Company's liability would be so limited in the event of any
litigation or other claim against the Company. In addition, the Communications
Decency Act of 1996, which is Title V of the 1996 Telecommunications Act,
imposes fines on any entity that: (i) by means of a telecommunications device,
knowingly sends indecent or obscene material to a minor; (ii) by means of an
interactive computer service sends or displays indecent material to a minor; or
(iii) permits any telecommunications facility under such entity's control to be
used for the purposes detailed above. The standard for determining whether an
entity acted knowingly has not yet been established. The following defenses to
liability under the statute exist: (i) any entity that solely provides access or
connection to or from a facility, system, or network not under that entity's
control; and (ii) the use of reasonable, effective and appropriate screening
efforts to restrict or prevent access by minors. These defenses are unavailable
to an entity that is found to have conspired with another entity involved in the
creation or knowing distribution of obscene or indecent material through an
interactive computer service or telecommunications device or that knowingly
advertises the availability of such material. These defenses are also
unavailable to entities that solely provide access or connection, but that also
own or control a facility, system, or network engaged in the prohibited
activities. The 1996 Telecommunications Act creates the right to challenge the
law before a three-judge district court, and a right of direct appeal to the
U.S. Supreme Court. Litigation was filed in federal court challenging the
constitutionality of the on-line provisions of the 1996 Telecommunications Act.
On June 12, 1996, a three-judge panel of the U.S. District Court for the Eastern
District of Pennsylvania unanimously enjoined enforcement of these provisions.
The court has since clarified that its injunction applies only to indecency
issues and not to the display or transmission of obscene material or child
pornography. The U.S. Department of Justice has announced that it will ask the
U.S. Supreme Court to review the lower court's decision.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, user privacy, pricing, and copyright
infringement. Changes in the regulatory environment relating to the Internet
access industry, including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have an adverse effect on the
Company's business. Shortly after AT&T announced its plans to offer Internet
access, several Bell Operating Companies reportedly complained that AT&T should
no longer receive the benefit of a data transmission exemption to a 1983 FCC
"access charge" plan, which exemption applies to all Internet service providers.
In response to a petition or on its own motion, the FCC could eliminate this
exemption. The Company cannot predict the impact, if any, that the elimination
of this exemption or any other future regulatory changes or developments may
have on its business, financial condition and results of operations. In
addition, Tacoma, Washington has recently imposed a tax on companies that
connect people to the Internet, and other localities may impose similar taxes.
As the law in this area develops, the potential imposition of liability
upon the Company for information carried on and disseminated through its network
could require the Company to implement measures to reduce its exposure to such
liability, which may require the expenditure of substantial resources or the
discontinuation of certain products or service offerings. Any costs that are
incurred as a result of contesting any such asserted claims or the consequent
imposition of liability could materially adversely affect the Company's
business, financial condition and results of operation.
EMPLOYEES
As of June 30, 1996, the Company had 177 employees, including approximately
21 part-time employees. In connection with the Purchase Agreement, the Company
expects concurrently with the Second Closing to hire approximately 75 former
PSINet employees who will continue to operate the Harrisburg Facility. The
Company anticipates that the development of its business will require the hiring
of a substantial number of new employees. None of the Company's current
employees or the employees of the Harrisburg Facility are represented by a labor
organization, and the Company's management considers its employee relations to
be good.
45
<PAGE> 47
The Company anticipates that in connection with the development of its
network infrastructure and its expansion into new markets as a result of the
Acquisition, the Company will be required to hire a substantial number of new
employees during 1996 and 1997. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Overview."
PROPERTIES
The Company maintains its corporate headquarters in Atlanta, Georgia. The
lease for this space expires March 31, 1999. The Company has the option to
extend this lease for an additional two years. The Company has arranged for
expansion space within the building that houses its current headquarters, and
believes that its facilities there, as expanded, will be adequate through 1996.
The Company is currently negotiating to arrange additional office space in the
vicinity of its Atlanta headquarters in order to meet the Company's anticipated
additional space requirements. The Company has also arranged for expansion space
for its POP site in Atlanta, which it believes will provide sufficient room for
growth over the expected term of its lease for such site, which expires on
December 31, 1996, but which will renew automatically for successive six-month
terms thereafter, subject to termination by either party upon 180 days written
notice. Equipment for POPs other than the Atlanta POP site is generally
co-located with, and in space leased from, other companies operating in the area
of the particular POP. MindSpring employees in remote offices are expected to
continue to work from their homes until the scope of the Company's operations in
the related market warrants multiple employees there.
In addition, as part of the Acquisition, the Company will be assigned the
rights and obligations under the lease for the Harrisburg Facility, which is
located in New Cumberland, Pennsylvania. The lease for the Harrisburg Facility
expires on April 14, 1997. The Company intends to use the Harrisburg Facility
primarily to augment its current sales and customer support operations.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party.
46
<PAGE> 48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors of the Company are elected at the annual meeting of stockholders.
Officers of the Company are appointed at the first meeting of the Board of
Directors after each annual meeting of stockholders. Directors and executive
officers of the Company are elected to serve until they resign or are removed,
or are otherwise disqualified to serve, or until their successors are elected
and qualified. The ages of the persons set forth below are as of July 31, 1996.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH COMPANY EXPIRES
- ------------------------- --- -------------------------------------------------- --------
<S> <C> <C> <C>
Charles M. Brewer........ 37 Chairman, Chief Executive Officer and Director 1998
Michael S. McQuary....... 36 President, Chief Operating Officer and Director 1997
Michael G. Misikoff...... 43 Vice President, Chief Financial Officer, 1996
Secretary, Treasurer and Director
James T. Markle.......... 37 Vice President of Network Operations --
Susan F. Nicholson....... 35 Vice President of Marketing --
J. Fredrick Nixon........ 40 Vice President of Engineering --
Robert D. Sanders........ 22 Vice President of Network Engineering and Chief --
Technical Officer
Gregory J. Stromberg..... 43 Vice President of Customer Service --
Alan J. Taetle........... 32 Vice President of Business Development --
O. Gene Gabbard.......... 56 Director 1996
Campbell B. Lanier, III.. 45 Director 1998
William H. Scott, III.... 49 Director 1997
</TABLE>
CHARLES M. BREWER founded the Company and has served as Chief Executive
Officer and Director of the Company since its inception in February 1994 and as
Chairman since March 1996. He also served as the President of the Company from
its inception until March 1996 and as the Secretary and Treasurer of the Company
from its inception until January 1995. From May 1993 to January 1994, Mr. Brewer
developed the concept for the Company and evaluated its prospects. Prior to
starting the Company, he served as Chief Executive Officer of AudioFax, Inc.
("AudioFax"), a software company providing fax server software, from May 1992 to
April 1993 and was the Chief Financial Officer of AudioFax from May 1989 to
April 1992. From March 1988 to April 1989, Mr. Brewer explored potential
business opportunities. Mr. Brewer was Vice President of Sanders & Company, a
venture capital firm, from September 1987 to February 1988. From November 1984
to August 1987, Mr. Brewer primarily worked toward his MBA, managed a retail
store and traveled. From November 1981 to October 1984, he was employed by
Wertheim & Company, an investment banking firm, and worked in institutional
sales. Mr. Brewer received a BA in Economics from, and was a Phi Beta Kappa
graduate of, Amherst College and received an MBA from Stanford University.
MICHAEL S. MCQUARY has been the President of the Company since March 1996,
the Chief Operating Officer of the Company since September 1995, and a Director
of the Company since December 1995. He also served as the Company's Executive
Vice President from October 1995 to March 1996 and the Company's Executive Vice
President of Sales and Marketing from July 1995 to September 1995. Prior to
joining the Company, Mr. McQuary served in a variety of management positions
with Mobil Chemical Co., a petrochemical company, from August 1984 to June 1995,
including Regional Sales Manager from April 1991 to February 1994 and Manager of
Operations (Reengineering) from February 1994 to June 1995. From September 1981
to July 1984, Mr. McQuary served as a Sales Representative, Territory Manager
and then Product Sales Manager for Lily Tulip, Inc., a food service packaging
company. Mr. McQuary received a BA in Psychology from the University of Virginia
and an MBA from Pepperdine University.
MICHAEL G. MISIKOFF has served as Vice President, Chief Financial Officer,
Secretary, Treasurer and a Director of the Company since January 1995. From
January 1992 to December 1994, Mr. Misikoff was the Acting Chief Financial
Officer and a Director of InterCall Corporation, a subsidiary of ITC Holding
that
47
<PAGE> 49
provides conference call services. From March 1991 to January 1992, Mr. Misikoff
worked as an independent financial consultant. Mr. Misikoff served as Chief
Financial Officer of Async Corporation ("Async"), a provider of voice messaging
services, from its startup in February 1985 until March 1991. From March 1979 to
February 1985, Mr. Misikoff served as the Chief Financial Officer for
TransDesigns, Inc., a multi-level marketing company. Mr. Misikoff was a
Certified Public Accountant with the firm of Arthur Young & Co. from July 1975
until March 1979. He received a BBA in Accounting from Georgia State University.
JAMES T. MARKLE joined the Company as Vice President of Network Operations
in April 1995. Prior to joining the Company, Mr. Markle served as the Director
of Technical Support for Concert Communications, Co., a telecommunications
company, from April 1994 until April 1995. From August 1990 to April 1994, Mr.
Markle served as Senior Manager of Network Operations for MCI. Mr. Markle served
in various operation positions at Telecom*USA, Inc. ("Telecom") and its
predecessor SouthernNet, Inc. ("SouthernNet"), including Director of Operations
for a multi-state region, from July 1985 until July 1990. Mr. Markle attended
Maryville College.
SUSAN F. NICHOLSON has served as the Company's Vice President of Marketing
from July 1995 to the present and served as Director of Marketing of the Company
from September 1994 until July 1995. Prior to joining the Company, Ms. Nicholson
worked for AudioFax from March 1990 to September 1994, first as a technical
writer, then as Director of Marketing Communications and then as Director of
Product Management. In addition, Ms. Nicholson worked as an independent
technical writer from August 1987 to March 1990 and founded and sold Babes in
Highland, a retail store in Atlanta, Georgia between June 1986 and May 1987. She
served as a Technical Sales representative for Hewlett-Packard Company, a
computer manufacturing company, from December 1982 to June 1986. Ms. Nicholson
received a BS in Electrical Engineering from Georgia Institute of Technology.
J. FREDRICK NIXON joined the Company as Vice President of Engineering in
August 1995. From August 1994 to July 1995, Mr. Nixon served as a consultant for
the Tennessee Valley Authority and Federal Express, Inc. He served from
September 1990 to August 1994 as an Assistant Professor of Computer Science at
the University of Tennessee at Chattanooga. From September 1989 to September
1990, Mr. Nixon served as a senior member of the Technical Staff of General
Electric Advanced Technology Labs, an operating systems research company. He was
a Senior Scientist at General Electric Research Corporation, a database systems
development company, from March 1987 to September 1989. Mr. Nixon also served as
the Principal Engineer for Token Link Corporation, a computer design and
manufacturing company, from September 1986 to March 1987. From December 1978 to
September 1982, Mr. Nixon served as a Programmer/Analyst for General Electric
Information Services Company, a general research company. Mr. Nixon received a
BA in Physics and Math and a Ph.D. in Computer Science from Vanderbilt
University.
ROBERT D. SANDERS has been the Company's Vice President of Network
Engineering since December 1995 and its Chief Technical Officer since January
1995. Mr. Sanders served as the Company's Senior Engineer from June 1994 to
January 1995. Prior to joining the Company, Mr. Sanders worked as the Software
Engineer and System Administrator of Harry's Farmers Market, Inc. from March
1994 to May 1994. He served as Co-op Engineer in the Line Card Development Group
of Bell Northern Research, Inc., a research subsidiary of Northern Telecom,
Inc., from March 1992 to December 1993. Mr. Sanders attended the Georgia
Institute of Technology.
GREGORY J. STROMBERG joined the Company as Vice President of Customer
Service in October 1995. From June 1993 to September 1994, he served as a
Regional Manager for Digital Financial Services, a computer leasing company,
after which he traveled. Mr. Stromberg worked for Digital Equipment Corporation,
a computer manufacturer, and served as a Senior Sales representative from June
1983 to May 1987, Program Manager from May 1987 to May 1990, and District
Operations Manager from May 1990 to June 1993. In addition, Mr. Stromberg served
as a Large Account Sales representative and Product Manager for Burroughs Corp.,
a computer hardware company, from June 1978 to June 1983. Mr. Stromberg received
a BS in Business Management and an MBA from the University of Utah.
ALAN J. TAETLE joined the Company as its Vice President of Business
Development in March 1995. Prior to joining the Company, Mr. Taetle served as
the Director of Operations and Product Management at
48
<PAGE> 50
CogniTech Corporation, makers of a retail series of Contact Management software
products, from November 1992 to March 1995. Mr. Taetle was the Director of MIS
of a subsidiary of Itochu International ("Itochu"), a Japanese trading company,
from September 1989 until November 1991, and served as the Assistant to the
Executive Vice President of Itochu from November 1991 to November 1992. From
July 1985 to August 1987, Mr. Taetle served as Systems Engineer with Electronic
Data Systems, a systems integration consulting company. Mr. Taetle received a BA
in Economics from the University of Michigan and an MBA from Harvard Business
School.
O. GENE GABBARD has been a Director of the Company since December 1995. He
has worked independently as an entrepreneur and consultant since February 1993.
Mr. Gabbard currently serves as a director of ITC Holding and several of its
subsidiaries, InterCel, Inc. ("InterCel") (a wireless telecommunications
company), Masada Security, Inc. (a security monitoring services company),
Adtran, Inc. (a telecommunications equipment manufacturing company), and two
telecommunications technology companies, Dynatech Corporation and Telogy
Network, Inc. From August 1990 through January 1993, he served as Executive Vice
President and Chief Financial Officer of MCI. He served in various senior
executive capacities, including Chairman of the Board, President and Chief
Executive Officer of Telecom from December 1988 until Telcom's merger with MCI
in August 1990. From July 1984 to December 1988, he was Chairman and/or
President of SouthernNet, a long distance telecommunications company which was
the predecessor to Telecom.
CAMPBELL B. LANIER, III has served as a Director of the Company since
November 1994. Mr. Lanier serves as Chairman of the Board and Chief Executive
Officer of ITC Holding and has served as a director of ITC Holding since its
inception in 1985 through a predecessor company. In addition, Mr. Lanier is an
officer and director of several ITC Holding subsidiaries. He is a director of
National Vision Associates, Ltd. (a full service optical retailer), K&G Men's
Centers (a discount retailer of men's clothing) Vice Chairman of the Board of
AvData Systems, Inc. ("AvData") (a company providing data communications
networks) and Chairman of the Board of InterCel. He served as Chairman of the
Board of AvData from 1988 to 1990. From 1984 to 1989, Mr. Lanier served as
Chairman of the Board of Async. Mr. Lanier also served as Vice
President -- Industry Relations of Telecom from 1984 to 1988 and as Senior Vice
President -- Industry Relations from January 1989 until Telecom's merger with
MCI in August 1990. From 1984 to 1985, he served as Chief Executive Officer of
SouthernNet, and from 1985 to 1986 he was Vice Chairman of the Board of
SouthernNet.
WILLIAM H. SCOTT, III has been a Director of the Company since November
1994. Mr. Scott has served as President of ITC Holding since December 1991 and
has been a director of ITC Holding since May 1989. Mr. Scott is a director and
Secretary of InterCel. Mr. Scott is also currently a director of AvData. From
1985 to 1989, Mr. Scott was an officer and director of Async. Between 1984 and
1988, Mr. Scott held several offices with SouthernNet, including Chief Operating
Officer, Chief Financial Officer and Vice President -- Administration. He was a
director of SouthernNet from 1984 to 1987.
BOARD OF DIRECTORS
The Restated Certificate provides for a classified Board of Directors
consisting of three classes of directors with each class required to be as
nearly equal in number as possible. The number of directors is determined from
time to time by the Board of Directors and is currently fixed at six. A single
class of directors is elected each year at the Company's annual meeting of
stockholders. Subject to transition provisions, each director elected at each
such meeting will serve for a term ending on the date of the third annual
meeting of stockholders after his election and until his successor has been
elected and qualified. Messrs. Gabbard and Misikoff are serving for terms
expiring in 1996, Messrs. McQuary and Scott are serving for terms expiring in
1997, and Messrs. Brewer and Lanier are serving for terms expiring in 1998.
Officers of the Company are appointed annually by the Board of Directors and
serve at its discretion.
Compensation Committee Interlocks and Insider Participation. The Board of
Directors currently has two committees, the Audit Committee and the Compensation
Committee. The Audit Committee, among other things, recommends the firm to be
appointed as independent accountants to audit the Company's financial
statements, discusses the scope and results of the audit with the independent
accountants, reviews
49
<PAGE> 51
with management and the independent accountants the Company's interim and
year-end operating results, considers the adequacy of the internal accounting
controls and audit procedures of the Company and reviews the non-audit services
to be performed by the independent accountants. The current members of the Audit
Committee are Messrs. Brewer, Lanier and Scott.
The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's 1995
Stock Option Plan. The current members of the Compensation Committee are Messrs.
Lanier, Scott and Gabbard. Prior to December 1995, compensation decisions were
made by the Board of Directors, including Messrs. Brewer and Misikoff.
As of June 30, 1996, ITC Holding owned approximately 36% of the outstanding
capital stock of the Company. Both Messrs. Lanier and Scott serve as executive
officers and directors of ITC Holding. Mr. Gabbard also is a director of ITC
Holding. As of June 30, 1996, Messrs. Lanier, Scott and Gabbard beneficially
owned approximately 28%, less than 3% and less than 1%, respectively, of the
common stock of ITC Holding. As of June 30, 1996, Messrs. Brewer and Misikoff
each owned less than 1% of the common stock of ITC Holding.
In August 1995, ITC Holding agreed to extend a loan to the Company (the
"First Loan") of up to $2,000,000 in aggregate principal amount at an annual
interest rate of 11%, to be used for capital expenditures and for general and
working capital purposes. All amounts outstanding under the First Loan were due
and payable in full on or before December 15, 1995. At December 15, 1995, the
outstanding aggregate principal amount of all advances under the First Loan was
$2,000,000.
At December 15, 1995, the Company had not repaid any amounts outstanding
under the First Loan. In consideration of ITC Holding's agreement not to
exercise its rights and remedies upon such default under the First Loan, on
December 27, 1995 the Company agreed to pay ITC Holding a processing fee of
$50,000 and issued to ITC Holding an immediately exercisable warrant to purchase
100,000 shares of Class C Preferred at a price of $.01 per share. Accordingly,
the Company recorded a charge of approximately $637,000 in December 1995
representing the fair market value of the warrant issued. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Year Ended December 31, 1995 Compared to
Inception Period -- Interest Expense." By December 31, 1995, ITC Holding had
exercised such warrant in full. All principal amounts due and owing under the
First Loan were paid in full by December 31, 1995 with proceeds from a second
loan made to the Company by ITC Holding (the "Second Loan"). Accrued interest on
the First Loan of approximately $39,100 and the $50,000 processing fee were paid
in full in January 1996.
In December 1995, the Company executed a promissory note in favor of, and
entered into a loan agreement and a security agreement with, ITC Holding
relating to the Second Loan, pursuant to such loan agreement the Company was
entitled to borrow, from time to time, up to $4,000,000 (in aggregate
outstanding principal amount). The unpaid principal amount of the Second Loan
was due and payable in a single payment on July 15, 1996, together with interest
on the unpaid principal amount from the date of each advance, until paid in
full, at an annual rate of 14%. All of the unpaid principal amount of the Second
Loan, together with all accrued and unpaid interest thereon, in an amount equal
to approximately $3,597,000, was paid in full by the Company on March 18, 1996
with a portion of the proceeds from the Company's initial public offering.
In 1995, the Company loaned excess cash totaling approximately $300,000 to
ITC Holding. This transaction was approved by the Board of Directors. The loan
amount, plus interest thereon equal to approximately $3,000, was repaid by ITC
Holding during 1995.
The Company has also entered into certain business relationships with
several subsidiaries of ITC Holding. The Company currently leases telephone
lines from, and has contracts for maintenance and installations with, Interstate
Telephone Company, Inc. ("Interstate Telephone"), a wholly owned subsidiary of
ITC Holding. The Company pays Interstate Telephone approximately $3,000 per
month for these leased telephone lines. Charges from Interstate Telephone for
telephone lines and installation charges totaled approximately $41,000 for the
year ended December 31, 1995 and approximately $38,000 for the six months ended
June 30, 1996, of which the Company had paid approximately $34,000 as of June
30, 1996.
50
<PAGE> 52
The Company also leases a T-1 line for data transport for some of its POPs
from Interstate FiberNet Company ("Interstate FiberNet"), a wholly owned
subsidiary of ITC Holding. The Company pays Interstate FiberNet approximately
$7,500 per month for these services. The Company had no charges from Interstate
FiberNet for the year ended December 31, 1995 and approximately $15,000 in
charges for the six months ended June 30, 1996 of which the Company had paid
approximately $9,000 as of June 30, 1996.
The Company also purchases long distance telephone services and wide area
network transport service from DeltaCom, Inc. ("DeltaCom"), a wholly owned
subsidiary of ITC Holding. The Company pays DeltaCom approximately $25,000 per
month for such services. Unpaid charges from DeltaCom totaled approximately
$50,000 for the six months ended June 30, 1996.
As of January 1, 1995, the Company entered into an agreement with AvData
providing for the rental by the Company of floor space from AvData for the
placement of the Company's equipment for its network hub and for AvData
personnel to service and maintain such equipment for a payment by the Company of
$3,000 per month. AvData may increase this monthly payment if the amount of
technical support services required by the Company exceeds ten hours per month.
The lease runs from January 1, 1995, through December 31, 1996, but either party
may terminate the lease earlier, without cause, upon 180 days prior written
notice. Unless either party gives notice to terminate, this lease will renew
automatically for successive six-month terms. As of December 31, 1995, ITC
Holding owned approximately 25.5% of the capital stock of AvData.
In February 1994, in connection with the initial capitalization of the
Company, the Company issued a total of 1,032,951 shares of Common Stock to
Charles M. Brewer for an aggregate purchase price of $200.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal years 1994 and 1995 earned by or awarded to
the Company's Chief Executive Officer. No executive officers of the Company
received a combined salary and bonus in excess of $100,000 during the fiscal
year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS
----------------------------------------------------------- ---- ------- -------
<S> <C> <C> <C>
Charles M. Brewer.......................................... 1995 $60,000 $10,000
President and Chief Executive Officer.................... 1994 0 0
</TABLE>
OPTION GRANTS DURING 1995
As of December 31, 1995, no options had been granted to the Chief Executive
Officer of the Company, and no executive officer of the Company received a
combined salary and bonus in excess of $100,000 during the fiscal year ended
December 31, 1995.
OPTION PLANS
Employee Stock Option Plan. Under the Company's 1995 Stock Option Plan
(the "Stock Option Plan"), as adopted on February 21, 1995, and as amended by
the Board of Directors on April 5, 1995 and December 19, 1995, and approved by
the stockholders, effective December 27, 1995, 616,668 shares of Common Stock
are reserved and authorized for issuance upon the exercise of options. All
employees of the Company and its subsidiaries are eligible to receive options
under the Stock Option Plan. The Stock Option Plan is administered by the
Compensation Committee of the Board of Directors. The purpose of the Stock
Option Plan is to further the growth and success of the Company by enabling
selected employees of the Company to acquire shares of Common Stock of the
Company, thereby increasing their personal interest in such growth and success
and to provide a means of rewarding outstanding performance by such persons.
Options granted under the Stock Option Plan are intended to qualify as
"incentive stock options" under
51
<PAGE> 53
Section 422 of the Internal Revenue Code of 1986, as amended. Options will
become exercisable as follows: (i) 50% of the options will become exercisable on
the second anniversary of the date of grant, or in certain cases, the
commencement date of the holder's employment; (ii) an additional 25% of the
options will become exercisable on the third anniversary of the date of grant,
or in certain cases, the commencement date of the holder's employment; and (iii)
the remaining 25% of the options will become exercisable on the fourth
anniversary of the date of grant, or in certain cases, the commencement date of
the holder's employment. See Note 4 to the December 31, 1994 and 1995 financial
statements included elsewhere in this Prospectus. As of June 30, 1996, 439,213
options have been granted at exercise prices ranging from $0.64 to $12.375, all
of which will be outstanding and unexercised as of the consummation of the
Offering. Options expire ten years after the date of grant, or in certain cases,
the commencement date of the option holder's employment. An increase in the
number of shares of Common Stock that may become available for sale in the
public market, or the perception that such sales may occur, could adversely
affect the market price prevailing from time to time of the Common Stock in the
public market and could impair the Company's ability to raise additional capital
through the sale of its equity securities. See "Shares Eligible for Future
Sale."
Directors Stock Option Plan. Under the Company's Directors Stock Option
Plan (the "Directors Plan"), adopted in December 1995, 70,000 shares of Common
Stock are authorized for issuance to nonemployee directors (in the form of
grants of 10,000 options per director) upon their initial election or
appointment to the Board of Directors, or, in the case of Messrs. Lanier and
Scott, who joined the Board of Directors prior to the creation of the Directors
Plan, upon the adoption of the Directors Plan by the Board of Directors. Options
are exercisable at the fair market value of the Common Stock (as determined by
the Board of Directors) on the date of grant. The Directors Plan does not
provide for discretionary option grants. Options generally become exercisable as
to 50% two years after the date of grant, as to an additional 25% three years
after the date of grant, and as to the remaining 25% four years after the date
of grant. As of June 30, 1996, 30,000 options had been granted at an exercise
price of $6.38 pursuant to the Directors Plan, all of which will be outstanding
and unexercised as of the Effective Date. Options expire ten years after the
date of grant. An increase in the number of shares of Common Stock that may
become available for sale in the public market, or the perception that such
sales may occur, could adversely affect the market price prevailing from time to
time of the Common Stock in the public market and could impair the Company's
ability to raise additional capital through the sale of its equity securities.
See "Shares Eligible for Future Sale."
DIRECTOR COMPENSATION
Since the Company's inception, members of the Board of Directors have not
received any compensation for their service on the Board of Directors except as
provided under the Directors Plan. See "-- Option Plans -- Directors Stock
Option Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate contains provisions that provide that no director
of the Company shall be liable for breach of fiduciary duty as a director except
for: (i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) liability under
Section 174 of the Delaware Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. The Restated Certificate
contains provisions that further provide for the indemnification of the
Company's directors and officers to the fullest extent permitted by the Delaware
Corporation Law. The Company also has entered into indemnity agreements with
each of its directors pursuant to which the Company has agreed to indemnify the
directors as permitted by the Delaware Corporation Law.
52
<PAGE> 54
CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material transactions
between the Company and persons or entities affiliated with officers, directors
or principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in arms' length transactions
with independent third parties.
For a summary of certain transactions and relationships among the Company
and its associated entities, and among the directors, executive officers and
stockholders of the Company and its associated entities, see
"Management -- Board of Directors -- Compensation Committee Interlocks and
Insider Participation."
53
<PAGE> 55
PRINCIPAL STOCKHOLDERS
The following table provides information, as of June 30, 1996, concerning
beneficial ownership of Common Stock by: (i) each person or entity known by the
Company to beneficially own more than 5% of the outstanding Common Stock; (ii)
each director of the Company; (iii) the Chief Executive Officer; and (iv) all
directors and executive officers of the Company as a group. The information as
to beneficial ownership has been furnished by the respective stockholders,
directors and executive officers of the Company, and, unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON AMOUNT AND NATURE OF PERCENT OF COMMON
BENEFICIAL OWNERSHIP STOCK OUTSTANDING BENEFICIAL OWNERSHIP STOCK OUTSTANDING
NAME OF BENEFICIAL OWNER BEFORE OFFERING(1) BEFORE OFFERING AFTER OFFERING AFTER OFFERING(2)
- -------------------------- -------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
ITC Holding(3)(4)......... 1,933,489 37.0% 1,933,489 22.2%
Charles M. Brewer(5)...... 1,032,951 20.2 1,032,951 12.0
O. Gene Gabbard(4)........ 5,000 * 5,000 *
Campbell B. Lanier,
III(4).................. 7,400 * 7,400 *
Michael S. McQuary........ 63,920 1.2 63,920 *
Michael G. Misikoff....... 77,972 1.5 77,972 *
William H. Scott,
III(4).................. 5,500 * 5,500 *
All executive officers and
directors as a group (12
persons)(6)............. 1,217,450 23.7% 1,217,450 14.1%
</TABLE>
- ---------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a person is deemed to be the beneficial owner,
for purposes of this table, of any shares of Common Stock if such person has
or shares voting power or investment power with respect to such security, or
has the right to acquire beneficial ownership at any time within 60 days
from June 30, 1996. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to dispose
or direct the disposition of shares.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The address of ITC Holding is 1239 O.G. Skinner Drive, West Point, Georgia
31833. Beneficial ownership presented for ITC Holding assumes conversion on
September 19, 1996 of the 100,000 shares of Class C Preferred owned by ITC
Holding into shares of Common Stock on a one-for-one basis. On January 29,
1996, ITC Holding pledged all of its stock in the Company to certain lenders
in connection with a credit facility.
(4) Mr. Lanier is Chairman of the Board, Chief Executive Officer and a
beneficial owner of approximately 28% of the common stock of ITC Holding.
Mr. Lanier's beneficial ownership of MindSpring includes 1,200 shares of
Common Stock held in trust for his son and 1,200 shares of Common Stock held
by his wife. Mr. Scott is the President and a director of ITC Holding and is
a beneficial owner of less than 3% of its common stock. Mr. Scott's
beneficial ownership of MindSpring includes 500 shares of Common Stock held
by his wife. Mr. Gabbard is a director of ITC Holding and a beneficial owner
of less than 1% of its common stock. Each of Messrs. Lanier, Scott and
Gabbard disclaims beneficial ownership of the shares of the Company's Common
Stock held by ITC Holding.
(5) The address for Charles M. Brewer is MindSpring Enterprises, Inc., 1430 West
Peachtree, Suite 400, Atlanta, Georgia 30309.
(6) Includes 12,912 shares of Common Stock that such persons have the right to
purchase within 60 days from June 30, 1996 pursuant to options.
54
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Restated
Certificate and Bylaws, which are included as exhibits to the Registration
Statement of which this Prospectus forms a part and by the provisions of
applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Restated Certificate, the Company has authority to issue
15,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000
shares of Class C Preferred, par value $0.01 per share, each having the terms
described below. In addition, under the Restated Certificate, the Board of
Directors of the Company has authority (without action by the stockholders) to
issue 1,000,000 shares of preferred stock, par value $0.01 per share in one or
more classes or series and, within certain limitations, to determine the voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and in liquidation, and conversion and other rights
of each such series. The Company has no current plans to issue any additional
shares of preferred stock.
The rights of the holders of Common Stock discussed below are subject to
the rights of the Class C Preferred holders and to such rights as the Board of
Directors may hereafter confer on the holders of preferred stock; accordingly,
rights conferred on holders of preferred stock that may be issued in the future
under the Restated Certificate may adversely affect the rights of holders of
Common Stock.
COMMON STOCK
Voting Rights. Each holder of shares of Common Stock shall be entitled to
attend all special and annual meetings of the stockholders of the Company and,
share-for-share and without regard to class, together with the holders of all
other classes of stock entitled to attend such meetings and to vote (except any
class or series of stock having special voting rights), to cast one vote for
each outstanding share of Common Stock so held upon any matter or thing
(including, without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders.
Liquidation Rights. In the event of any dissolution, liquidation, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Common Stock and holders of any class or series of stock entitled to participate
therewith, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Company remaining after
the Company shall have paid, or provided for payment of, all debts and
liabilities of the Company and after the Company shall have paid, or set aside
for payment, to the holders of any class of stock having preference over the
Common Stock in the event of dissolution, liquidation or winding up the full
preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith as to dividends but only when
and as declared by the Board of Directors.
CLASS C PREFERRED STOCK
Voting Rights. Except as otherwise required by law, the holders of shares
of Class C Preferred are entitled, together with the holders of all other
classes of stock entitled to a vote (except any class or series of stock having
special voting rights), to cast one vote for each share registered in the name
of such holder on matters that are voted on by stockholders generally, including
the election of directors.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up the Company, whether voluntary or involuntary, the holders of shares
of Class C Preferred are entitled to receive out of assets of the Company
legally available for distribution to stockholders, before any payment or
distribution is made on the Common Stock cash in the amount of $6.38 per share
(the "Class C Preferred Liquidation Distribution"). After the Class C Preferred
Liquidation Distribution has been made and after the holders of any other class
or series having preference over the Common Stock in the event of dissolution,
liquidation or winding up have received the full preferential amounts to which
they are entitled, the holders of the shares of Common Stock and any other class
or series of stock entitled to participate with the Common Stock in the event of
dissolution,
55
<PAGE> 57
liquidation or winding up are entitled to receive out of the assets of the
Company legally available for distribution to stockholders cash in an aggregate
amount equal to the amount of the Class C Preferred Liquidation Distribution.
Thereafter, the holders of shares of Class C Preferred participate equally with
the holders of the shares of Common Stock and any other class or series of stock
entitled to participate with the Common Stock in the event of dissolution,
liquidation or winding up in the distribution of any remaining assets of the
Corporation. If the assets distributable upon such dissolution, liquidation or
winding up are insufficient to pay cash in an amount equal to the Class C
Preferred Liquidation Distribution to the holders of the shares of Class C
Preferred, then such assets or the proceeds thereof are distributed among the
holders of the Class C Preferred ratably in proportion to the respective amounts
of the Class C Preferred Liquidation Distribution to which they would otherwise
be entitled.
Dividends. The Class C Preferred ranks, as to dividends, senior and prior
to the Common Stock and to all other classes or series of stock issued by the
Company.
Conversion into Common Stock. By their terms, the shares of Class C
Preferred automatically convert into fully paid and nonassessable shares of
Common Stock of the Company at the rate of one share of Common Stock for each
share of Class C Preferred (as adjusted for any stock split or reclassification)
on September 19, 1996.
OTHER AUTHORIZED PREFERRED STOCK
The Restated Certificate authorizes the Board of Directors, from time to
time and without further stockholder action, to provide for the issuance of up
to 1,000,000 shares of preferred stock, par value $.01 per share, in one or more
series, and to fix the relative rights and preferences of the shares, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the Board of Directors has not
provided for the issuance of any series of such preferred stock, and there are
no agreements or understandings for the issuance of any such preferred stock.
Because of its broad discretion with respect to the creation and issuance of
preferred stock without stockholder approval, the Board of Directors could
adversely affect the voting power of the holders of Common Stock and, by issuing
shares of preferred stock with certain voting, conversion and/or redemption
rights, could discourage any attempt to obtain control of the Company.
CERTAIN CHARTER AND STATUTORY PROVISIONS
The Restated Certificate provides for the division of the Board of
Directors into three classes of directors, serving staggered three year terms.
The Restated Certificate further provides that the approval of the holders of at
least two-thirds of the shares entitled to vote thereon and the approval of a
majority of the entire Board of Directors are necessary for the alteration,
amendment or repeal of certain sections of the Restated Certificate to the
election and classification of the Board of Directors, indemnification and the
vote requirements for such amendments to the Restated Certificate. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
The Company is subject to the provisions of Section 203 of the Delaware
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to such
date, the board approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in such person becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain employee stock plans),
or (iii) on or after the date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and authorized by
the affirmative vote (and not by written consent) of at least two-thirds of the
outstanding voting stock excluding that stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested
56
<PAGE> 58
stockholder" is a person who (other than the corporation and any direct or
indirect majority-owned subsidiary of the corporation), together with affiliates
and associates, owns (or, as an affiliate or associate, within three years
prior, did own) 15% or more of the corporation's outstanding voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
57
<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. An increase in the number of shares of Common
Stock that may become available for sale in the public market after the
expiration of the restrictions described below could adversely affect the market
price prevailing from time to time of the Common Stock in the public market and
could impair the Company's ability to raise additional capital through the sale
of its equity securities in the future.
The Company's directors, executive officers and certain significant
stockholders have agreed to enter into Lock-up Agreements with the Underwriters,
providing that, subject to certain exceptions, they will not offer, sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock, any
securities convertible into or exercisable or exchangeable for Common Stock or
any options to acquire Common Stock for a period of 120 days from the completion
of the Offering, without the prior written consent of the Representatives. See
"Principal Stockholders" and "Underwriting."
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of "restricted securities"
from the Company or any "affiliate" of the Company, as those terms are defined
under the Securities Act, the holder is entitled to sell within any three-month
period a number of shares of Common Stock that does not exceed the greater of 1%
of the then-outstanding shares of Common Stock (approximately 86,258 shares
immediately after the Offering or approximately 91,508 shares if the
Underwriters' over-allotment option is exercised in full), or the average weekly
trading volume of shares of Common Stock on all exchanges and reported through
the automated quotation system of a registered securities association during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are also subject to certain restrictions on the manner of sales, notice
requirements and the availability of current public information about the
Company. If three years have elapsed since the date of acquisition of restricted
shares from the Company or from any "affiliate" of the Company, and the holder
thereof is deemed not to have been an "affiliate" of the Company at any time
during the 90 days preceding a sale, such person would be entitled to sell such
Common Stock in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements described above. A proposal currently pending before the
Commission would reduce the two-and three-year holding periods described above
to one-and two-years, respectively.
As of June 30, 1996, the Company had granted pursuant to the Stock Option
Plan and the Directors Plan and there remains outstanding options to purchase
439,213 shares of Common Stock out of a maximum of 686,668 shares of Common
Stock reserved for those purposes. See "Management -- Option Plans."
58
<PAGE> 60
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co., Wheat, First Securities, Inc. and The Robinson-Humphrey Company, Inc., as
representatives of the several underwriters (the "Representatives"), have
agreed, severally, to purchase from the Company the number of shares of Common
Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
J.C. Bradford & Co........................................................
Wheat, First Securities, Inc..............................................
The Robinson-Humphrey Company, Inc........................................
---------
Total................................................................
========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all shares of Common Stock
offered hereby if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the public offering price and such concessions may be changed by the
Underwriter.
The offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to an aggregate of
525,000 additional shares of Common Stock to cover over-allotments, if any. To
the extent the Underwriters exercise the option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
table above bears to the total number of shares in such table, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered hereby.
If purchased, the Underwriters will sell these additional shares on the same
terms as those on which the 3,500,000 shares are being offered.
The Company, its executive officers and directors and certain of its
significant stockholders, owning an aggregate of approximately 3,050,939 shares
of Common Stock, have agreed that they will not offer, sell or otherwise dispose
of any shares of Common Stock, any securities exercisable for or convertible
into the Common Stock or any options to acquire Common Stock owned by them prior
to the expiration of 120 days from the date of this Prospectus, without the
prior written consent of the Representatives, except with respect to the grant
and exercise of stock options granted or to be granted under the Company's stock
option plans. See "Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil liabilities,
including liabilities under the Securities Act, or will
59
<PAGE> 61
contribute to payments that the Underwriters or any such controlling persons may
be required to make in respect thereof.
In connection with this Offering, certain Underwriters and selling group
members (if any) who in the past have acted as market makers in the Common Stock
may engage in passive market making activities in the Common Stock on the Nasdaq
National Market in accordance with Rule 10b-6A under the Exchange Act.
Underwriters and other participants in the distribution of the Common Stock
generally are prohibited during a specified time period (the "qualifying
period"), determined in light of the timing of the distribution, from bidding
for or purchasing the Common Stock or a related security except to the extent
permitted under applicable rules, primarily Rules 10b-6 and 10b-6A. Rule 10b-6A
allows, among other things, an Underwriter or member of the selling group (if
any) for the Common Stock to effect "passive market making" transactions on the
Nasdaq National Market in the Common Stock during the qualifying period at a
price that does not exceed the highest independent bid for that security at the
time of the transaction. Such a passive market maker must not display a bid for
the subject security at a price in excess of the highest independent bid, and
generally must lower its bid if all independent bids are lowered. Moreover, the
passive market maker's net purchases of such security on each day of the
qualifying period shall not exceed 30% of its average daily trading volume
during a reference period preceding the distribution.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
are being passed upon for the Company by Hogan & Hartson L.L.P., Washington,
D.C. counsel for the Company. Hogan & Hartson L.L.P. also provides legal
services to ITC Holding, its affiliated companies and Campbell B. Lanier, III,
Chairman and Chief Executive Officer of ITC Holding. In particular, Hogan &
Hartson L.L.P. (with the consent of the Company) has represented ITC Holding in
certain transactions with the Company, including the First Loan and the Second
Loan. Anthony S. Harrington, a partner of the firm, beneficially owns 34,800
shares of ITC Holding common stock and 5,000 shares of MindSpring Common Stock.
Certain legal matters are being passed upon for the Underwriters by Nelson
Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The financial statements and financial statement schedules of the Company
and PSINet Inc. Consumer Internet Services in the United States as of December
31, 1994 and 1995 and included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements for PSINet Pipeline New York, Inc. (formerly The
Pipeline Network Inc.) as of December 31, 1994 and for the year then ended
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, upon payment of prescribed rates or in
certain cases by accessing the Commission's World Wide Web site at
http://www.sec.gov. The Common Stock of the Company is traded on the Nasdaq
Stock Market under the
60
<PAGE> 62
symbol "MSPG", and such reports, proxy statements and other information
concerning the Company also can be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information set forth in the Registration Statement. For
further information about the Company and the Common Stock, reference is made to
the Registration Statement and to the financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission or, in
the case of certain such documents, by accessing the Commission's World Wide Web
site at http://www.sec.gov.
61
<PAGE> 63
GLOSSARY OF TECHNICAL TERMS
BACKBONE................... A high-speed network that connects smaller,
independent networks.
BANDWIDTH.................. The number of bits of information that can move
over a communications medium in a given amount of
time.
ELECTRONIC MAIL OR
E-MAIL..................... An application that allows a user to send or
receive messages to or from any other user with an
Internet address, commonly termed an e-mail
address.
FTP........................ File Transfer Protocol. A protocol that allows file
transfer between a host and a remote computer.
GRAPHICAL USER INTERFACE... A means of communicating with a computer by
manipulating icons and windows rather than using
text commands.
INTERNET................... An open global network of interconnected
commercial, educational and governmental computer
networks that utilize a common communications
protocol, TCP/IP.
INTERNET BACKBONE.......... The Internet backbone consists of high-speed
networks that link the smaller, independent
networks of the Internet.
ISDN....................... Integrated Services Digital Network. A digital
network that combines voice and digital network
services through a single medium, making it
possible to offer subscribers digital data services
as well as voice connections.
MODEM...................... A piece of equipment that connects a computer to a
data transmission line (typically a telephone
line).
ON-LINE SERVICES........... Commercial information services that offer a
computer user access through a modem to specific
menus of information, entertainment and
communications data. These services are generally
closed systems and many offer limited, if any,
Internet access.
POP........................ Point of Presence. The Company defines a POP as a
local geographic point of presence where
subscribers can access the Company's services via a
local telephone call. To the Company's knowledge,
there is no industry-wide definition of an Internet
access POP, and other companies may define a POP
differently. For purposes of this Prospectus, the
Company has determined all POP numbers using the
Company's definition.
PPP........................ Point to Point Protocol. A communications protocol
that allows direct dial-up access to the Internet
over phone lines. Unlike SLIP, PPP can
automatically retransmit information packets if
they become corrupted.
PROTOCOL................... A formal description of message formats and the
rules two or more machines must follow in order to
exchange such messages.
ROUTER..................... A device that receives and transmits data packets
between segments in a network or different
networks.
SERVER..................... Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. In addition, such term means the computer
on which server software runs.
G-1
<PAGE> 64
SLIP....................... Serial Line Interface Protocol. A communications
protocol that allows direct, dial-up access to the
Internet over phone lines.
T-1........................ A data communications line capable of transmission
speeds of 1.54 Mbps.
TCP/IP..................... Transmission Control Protocol/Internet Protocol. A
compilation of network-level and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
TERMINAL SERVER............ A specialized computer that supports multiple
communications connections.
UNIX....................... A computer operating system frequently found on
workstations and PCs and noted for its portability
and communications functionality.
WINDOWS.................... A computer operating system developed by Microsoft
Corp. that provides a graphical user interface and
multitasking capabilities.
WINSOCK.................... An industry standard programming interface
definition for Windows which specifies how
TCP/IP-based network applications should
communicate with TCP/IP protocol software. Winsock
has been adopted by most vendors of network
protocol software and network applications software
for Windows.
WORLD WIDE WEB............. A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
G-2
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MINDSPRING ENTERPRISES, INC.
Financial Statements as of December 31, 1994 and December 31, 1995
Report of Independent Public Accountants................................... F-2
Balance Sheets as of December 31, 1994 and 1995............................ F-3
Statements of Operations for the Period from Inception (February 24, 1994)
to December 31, 1994 and for the Year Ended December 31, 1995............ F-4
Statements of Stockholders' Equity for the Period from Inception (February
24, 1994) to December 31, 1994 and for the Year Ended December 31, 1995.... F-5
Statements of Cash Flows for the Period from Inception (February 24, 1994)
to December 31, 1994 and for the Year Ended December 31, 1995............ F-6
Notes to Financial Statements.............................................. F-7
Condensed Financial Statements as of June 30, 1996 (Unaudited)
Condensed Balance Sheets as of December 31, 1995 and June 30, 1996
(Unaudited).............................................................. F-18
Condensed Statements of Operations for the Three-Month Periods Ended June
30, 1995 and 1996 and the Six-Month Periods Ended June 30, 1995 and 1996
(Unaudited).............................................................. F-19
Condensed Statement of Cash Flows for the Six-Month Periods Ended June 30,
1995 and 1996 (Unaudited)................................................ F-20
Notes to Condensed Financial Statements.................................... F-21
PSINET INC. -- CONSUMER INTERNET ACCESS SERVICES IN THE UNITED STATES
Financial Statements as of December 31, 1994 and 1995, and June 30, 1996
(Unaudited)
Report of Independent Public Accountants................................... F-23
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.......... F-24
Statements of Operations for the Period from Inception (July 1, 1994) to
December 31, 1994, the year ended December 31, 1995, and the Six Months
Ended June 30, 1995 and 1996 (Unaudited)................................. F-25
Statements of Accumulated Deficit for the Period from Inception (July 1,
1994) to December 31, 1994, the Year Ended December 31, 1995, and the Six
Months Ended June 30, 1996 (Unaudited)................................... F-26
Statement of Cash Flows for the Period from Inception (July 1, 1994) to
December 31, 1994, the Year Ended December 31, 1995, and the Six Months
Ended June 30, 1996 (Unaudited).......................................... F-27
Notes to Financial Statements.............................................. F-28
PSINET PIPELINE NEW YORK, INC.
Financial Statements as of December 31, 1994
Report of Independent Accountants.......................................... F-35
Balance Sheet as of December 31, 1994...................................... F-36
Statement of Operations for the Year Ended December 31, 1994............... F-37
Statement of Changes in Shareholders' Equity for the Year Ended December
31, 1994................................................................... F-38
Statement of Cash Flows for the Year Ended December 31, 1994............... F-39
Notes to Financial Statements.............................................. F-40
PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Information....................................... F-44
Pro Forma Combined Balance Sheet as of June 30, 1996 (Unaudited)........... F-45
Pro Forma Combined Statements of Income for the Year Ended December 31,
1995 and the Six-Month Period Ended June 30, 1996 (Unaudited)............ F-47
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
MindSpring Enterprises, Inc.:
We have audited the accompanying balance sheets of MINDSPRING ENTERPRISES,
INC. (a Delaware corporation) as of December 31, 1994 and 1995 and the related
statements of operations, stockholders' equity, and cash flows for the period
from inception (February 24, 1994) to December 31, 1994 and for the year ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MindSpring Enterprises, Inc.
as of December 31, 1994 and 1995 and the results of its operations and its cash
flows for the period from inception (February 24, 1994) to December 31, 1994 and
for the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 16, 1996 (except with
respect to Note 10 as to
which the date is
August 20, 1996)
F-2
<PAGE> 67
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31,
1994 1995 1995
-------- ----------- ------------
(NOTE 9)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $584,798 $ 424,834
Trade receivables, net of allowance for doubtful accounts of $15,000 and
$45,563 at December 31, 1994 and 1995, respectively........................ 14,610 519,280
Inventory.................................................................... 0 45,415
Prepaids and other current assets (Note 2)................................... 0 273,658
-------- -----------
Total current assets................................................... 599,408 1,263,187
-------- -----------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.................................... 102,492 3,594,528
Purchased software systems................................................... 0 103,078
Other........................................................................ 0 96,890
-------- -----------
102,492 3,794,496
Less accumulated depreciation and amortization............................... (1,138) (255,560)
-------- -----------
Property and equipment, net............................................ 101,354 3,538,936
-------- -----------
PRODUCT DEVELOPMENT COSTS, net of accumulated amortization of $4,027 and
$14,288 at December 31, 1994 and 1995, respectively.......................... 15,974 34,071
-------- -----------
OTHER ASSETS................................................................... 4,830 8,606
-------- -----------
$721,566 $ 4,844,800
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan from preferred stockholder (Note 6)..................................... $ 0 $ 2,500,000
Trade accounts payable....................................................... 31,120 994,164
Accrued expenses............................................................. 17,731 532,406
Deferred revenue............................................................. 2,981 336,027
-------- -----------
Total current liabilities.............................................. 51,832 4,362,597
-------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized and 0 shares
issued and outstanding at December 31, 1994 and 1995....................... 0 0 $ 0
Class A convertible preferred stock, $0.64 par value; 1,187,895 shares
authorized, issued, and outstanding at December 31, 1994 and 1995,
respectively............................................................... 744,575 744,575 0
Class B convertible preferred stock, $1.55 par value; 645,596 shares
authorized and 0 and 645,594 shares issued and outstanding at December 31,
1994 and 1995, respectively................................................ 0 1,000,000 0
Class C convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized and 0 and 100,000 shares issued and outstanding at December 31,
1994 and 1995, respectively................................................ 0 638,000 638,000
Common stock, $0.01 par value; 15,000,000 shares authorized and 1,136,247 and
1,267,304 issued and outstanding at December 31, 1994 and 1995,
respectively............................................................... 11,362 12,673 30,119
Additional paid-in-(deficit) capital......................................... (11,142) 120,547 1,847,676
Accumulated deficit.......................................................... (75,061) (2,033,592) (2,033,592)
-------- ----------- ------------
Total stockholders' equity............................................. 669,734 482,203 $ 482,203
-------- ----------- ------------
$721,566 $ 4,844,800
======== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 68
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 1994) TO DECEMBER 31, 1994
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
-------- -----------
<S> <C> <C>
REVENUES:
Access.............................................................. $ 65,423 $ 1,506,695
Subscriber start-up fees............................................ 33,662 594,231
Other............................................................... 4,321 125,918
-------- -----------
Total revenues.............................................. 103,406 2,226,844
COSTS AND EXPENSES:
Selling, general, and administrative................................ 121,376 2,230,102
Cost of revenues -- recurring....................................... 37,329 626,404
Cost of subscriber start-up fees.................................... 14,517 339,369
Depreciation and amortization....................................... 5,245 264,683
-------- -----------
Total costs and expenses.................................... 178,467 3,460,558
-------- -----------
OPERATING LOSS........................................................ (75,061) (1,233,714)
INTEREST EXPENSE, NET................................................. 0 (724,817)
-------- -----------
NET LOSS.............................................................. $(75,061) $(1,958,531)
======== ===========
PRO FORMA NET LOSS PER SHARE (NOTE 2):
Weighted average shares outstanding -- 3,175,376 at December 31,
1995............................................................. $ (0.62)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 69
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 1994) TO DECEMBER 31, 1994
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN- PREFERRED STOCK TOTAL
------------------- (DEFICIT) ---------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
--------- ------- ---------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 24, 1994
(inception)............... 0 $ 0 $ 0 0 $ 0 $ 0 $ 0
Initial issuance of common
stock (Note 3)......... 1,032,951 10,330 (10,130) 0 0 0 200
Issuance of additional
common stock (Note
3)..................... 103,296 1,032 (1,012) 0 0 0 20
Issuance of Class A
convertible preferred
stock, net of related
offering expenses...... 0 0 0 1,187,895 744,575 0 744,575
Net loss.................. 0 0 0 0 0 (75,061) (75,061)
--------- ------- ---------- --------- ---------- ----------- ------------
BALANCE, December 31,
1994...................... 1,136,247 $11,362 $ (11,142) 1,187,895 $ 744,575 $ (75,061) $ 669,734
Issuance of additional
common stock........... 131,057 1,311 131,689 0 0 0 133,000
Issuance of Class B
convertible preferred
stock.................. 0 0 0 645,594 1,000,000 0 1,000,000
Issuance of Class C
convertible preferred
stock warrant.......... 0 0 0 100,000 638,000 0 638,000
Net loss.................. 0 0 0 0 0 (1,958,531) (1,958,531)
--------- ------- ---------- --------- ---------- ----------- ------------
BALANCE, December 31,
1995...................... 1,267,304 $12,673 $ 120,547 1,933,489 $2,382,575 $(2,033,592) $ 482,203
========= ======= ========= ========= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 70
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 1994) TO DECEMBER 31, 1994
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss......................................................... $ (75,061) $(1,958,531)
--------- -----------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 5,245 264,683
Provision for doubtful accounts............................... 15,000 40,624
Noncash charge for warrant issuance (Note 6).................. 0 637,000
Changes in operating assets and liabilities:
Trade receivables........................................... (29,610) (545,294)
Inventory................................................... 0 (45,415)
Prepaids and other current assets........................... 0 (273,658)
Trade accounts payable...................................... 31,120 963,044
Accrued expenses............................................ 17,731 514,675
Deferred revenue............................................ 2,981 333,046
--------- -----------
Total adjustments........................................ 42,467 1,888,705
--------- -----------
Net cash used in operating activities.................... (32,594) (69,826)
--------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (102,492) (3,692,004)
Product development costs........................................ (20,001) (28,358)
Other............................................................ (4,910) (3,776)
--------- -----------
Net cash used in investing activities.................... (127,403) (3,724,138)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of loan from preferred stockholder...................... 0 2,500,000
Issuance of common stock......................................... 220 133,000
Issuance of preferred stock...................................... 744,575 1,001,000
--------- -----------
Net cash provided by financing activities................ 744,795 3,634,000
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 584,798 (159,964)
CASH AND CASH EQUIVALENTS, beginning of period..................... 0 584,798
--------- -----------
CASH AND CASH EQUIVALENTS, end of period........................... $ 584,798 $ 424,834
========= ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest........................................... $ 0 $ 0
========= ==========
Cash paid for taxes.............................................. $ 0 $ 0
========= ==========
Noncash charge for warrant issuance (Note 6)..................... $ 0 $ 637,000
========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 71
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND NATURE OF BUSINESS
MindSpring Enterprises, Inc. (the "Company") was incorporated in Georgia in
February 1994. The Company is a provider of Internet access, serving primarily
individual subscribers. The Company offers subscribers Internet access comprised
of software and documentation, integrated with local dial-up and dedicated line
access and seven-day customer support.
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 its cost of revenues, selling, general, and
administrative expenses and capital expenditures will continue to increase
significantly, all of which will have a negative impact on short-term operating
results. In addition, the Company may change its pricing policies to respond to
a changing competitive environment. There can be no assurance that growth in the
Company's revenue or subscriber base will continue or that the Company will be
able to achieve or sustain profitability or positive cash flow.
Effective December 27, 1995, the Company reincorporated from Georgia to
Delaware.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues when services are provided. Services are
generally billed one month in advance. Advance billings and collections relating
to future access services are recorded as deferred revenue and recognized as
revenue when earned.
The Company recognizes revenue on sales of starter kits to retail stores
when the product is shipped, net of a reserve for anticipated returns.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards, and the ability to terminate
access on delinquent accounts. The concentration of credit risk is mitigated by
the large number of customers comprising the customer base. The carrying amount
of the Company's receivables approximates their fair value.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
F-7
<PAGE> 72
PREPAIDS AND OTHER CURRENT ASSETS
This account consists of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred initial public offering fees (Note 9)................. $ 0 $199,830
Prepaid maintenance contract................................... 0 58,045
Other.......................................................... 0 15,783
-------- --------
$ 0 $273,658
======== ========
</TABLE>
INVENTORY
Inventory consists of starter kits and purchased equipment for resale and
is stated at the lower of cost or market using a specific identification method.
Starter kits consist of diskettes, manuals, and other printed material.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful lives
of the assets, commencing when assets are installed or placed in service. The
estimated useful life for all assets is five years or, for leasehold
improvements, the life of the lease, if shorter.
PRODUCT DEVELOPMENT COSTS
The Company capitalizes costs incurred for the production of computer
software used in the sale of its services, including direct labor and related
overhead. All costs in the software development process that are classified as
research and development are expensed as incurred until technological
feasibility has been established. Once technological feasibility has been
established, such costs are capitalized until the software is commercially
available. Amortization is provided using the greater of the straight-line
method over three years or the ratio that current gross revenues bear to the
total of current and anticipated future gross revenues, commencing in the month
of product release. It is reasonably possible that the estimates of anticipated
future revenues, the remaining estimated economic life of the product, or both
will be reduced significantly in the near term due to competitive pressures.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and product development costs to determine if any
impairments are other than temporary. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1995, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which
do not choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings and earnings per
share as if SFAS 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
BARTER TRANSACTIONS
The Company engages in certain exchanges of services for advertising and
promotional services. The Company records these transactions at the market value
of the services provided.
F-8
<PAGE> 73
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
INCOME TAXES
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of shares of common stock and dilutive common stock equivalent shares ("CSEs")
from convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common stock and CSEs issued at
prices below the expected public offering price during the 12-month period prior
to the Company's expected initial public offering (Note 9) have been included in
the calculation as if they were outstanding for all periods prior to the
offering presented, regardless of whether they are dilutive. Accordingly, all
stock options granted and the Class C convertible 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 and Class B convertible
preferred stock have been included for the respective weighted periods for which
such shares were outstanding, even though their effect is antidilutive.
SOURCES OF SUPPLIES
The Company relies on local telephone companies and other companies to
provide data communications capacity. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain multiple vendors for each
required product, its modems, terminal servers, and high-performance routers,
which are important components of its network, are each currently acquired from
only one source. In addition, some of the Company's suppliers have limited
resources and production capacity. If the suppliers are unable to meet the
Company's needs as it builds out its network infrastructure, then delays and
increased costs in the expansion of the Company's network infrastructure could
result, which would affect operating results adversely.
3. STOCKHOLDERS' EQUITY
RECAPITALIZATION
Effective December 27, 1995, the Company recapitalized on the basis of
1.936199 shares of the capital stock of the Georgia corporation for one share of
the Delaware corporation. All amounts in the accompanying financial statements
have been restated to reflect the effect of this recapitalization. As a result
of this recapitalization, the issuances of common stock of the Georgia
corporation in 1994, which were issued at the then par value of $0.0001 per
share for total proceeds of $220, have been restated in the accompanying
financial statements as if issued below the $0.01 par value of the Delaware
corporation common stock.
COMMON STOCK
The Company has authorized 15,000,000 shares of $0.01 par value common
stock. On February 24, 1994, the Company issued 1,032,951 shares of common stock
to the founder of the Company for total proceeds of $200, which represented the
estimated fair value of the stock at the time of issuance. On March 3, 1994, the
Company issued 103,296 shares of its common stock to a third party for total
proceeds of $20. In management's opinion, the estimated fair value of the stock
at the time of the March 1994 issuance was equal to the value per share of the
February 1994 stock issuance.
F-9
<PAGE> 74
During 1995, the Company issued shares of $0.01 par value common stock to
three officers of the Company at amounts equal to the estimated fair value of
the common stock on the date of sale. The following table summarizes these
transactions:
<TABLE>
<CAPTION>
NUMBER PRICE TOTAL
OF PER CONSIDERATION
SHARES SHARE PAID
------- ----- -------------
<S> <C> <C> <C>
January 18............................................... 77,472 $0.64 $ 50,000
July 27.................................................. 48,420 1.55 75,000
August 29................................................ 5,165 1.55 8,000
------- -------------
Total.......................................... 131,057 $ 133,000
======= ==========
</TABLE>
PREFERRED STOCK
On November 15, 1994, the Company issued 1,187,895 shares of its $0.64 par
value Class A convertible preferred stock to ITC Holding Company, Inc. (the
"Preferred Stockholder") in exchange for total consideration of $765,000.
Expenses of $20,425 incurred in connection with the issuance have been deducted
from the total proceeds in the accompanying financial statements. The Preferred
Stockholder is entitled to the same voting rights and powers of the common
stockholders. Accordingly, the Preferred Stockholder held a 51% voting interest
in the Company. Each share of Class A convertible preferred stock is
automatically convertible into one share of common stock at the earlier of
either a public offering of common stock by the Company or on November 15, 1999.
In the event of liquidation of the Company, whether voluntary or involuntary,
the holders of Class A convertible preferred stock are entitled to receive
preferential distributions of $0.64 per share before any distributions to common
stockholders.
In April 1995, the board of directors approved an agreement to issue
645,594 shares of $1.55 par value Class B convertible preferred stock to the
Preferred Stockholder at $1.55 per share in exchange for total consideration of
$1,000,000, which represented the estimated fair value of the Class B
convertible preferred stock as of such date. In June 1995, the Company issued
the Class B convertible preferred stock. This increased the stockholder's
ownership percentage, net of other transactions in 1995, to 59.1%. Each share of
Class B convertible preferred stock is automatically convertible into one share
of common stock at the earlier of either a public offering of common stock by
the Company or on June 30, 2000. In the event of liquidation of the Company,
whether voluntary or involuntary, the holders of convertible preferred stock are
entitled to receive preferential distributions of $1.55 per share after any
distribution to the Class A preferred stockholders but before any distributions
to common stockholders.
On December 22, 1995, the board of directors authorized the issuance of
5,000,000 shares of Class C convertible preferred stock. See Note 6 for issuance
of 100,000 shares of Class C convertible preferred stock to the Preferred
Stockholder, increasing its ownership percentage to approximately 60%. Each
share of Class C convertible preferred stock is automatically convertible into
one share of common stock at the earliest of:
- If the Security and Exchange Commission issues in calendar year 1996 an
order of effectiveness (or evidence thereof satisfactory to the Company)
(an "Effectiveness Order") as to any registration statement for the sale
of any shares of common stock of the Company under the Securities Act of
1933 (or any successor law, other than an order relating to an offering
made primarily or exclusively to employees), the 190th day after issuance;
- The date of issuance after December 31, 1996 of an Effectiveness Order;
or
- December 10, 2000.
In the event of liquidation of the Company, whether voluntary or
involuntary, the holders of Class C convertible preferred stock are entitled to
receive preferential distributions of $6.38 per share after any distribution to
the Class A and B preferred stockholders but before any distributions to common
stockholders.
F-10
<PAGE> 75
STOCKHOLDERS' AGREEMENT
The Company entered into a stockholders' agreement ("Stockholders'
Agreement") with all of the stockholders of the Company. Pursuant to the
Stockholders' Agreement, for so long as the Preferred Stockholder owns any share
of any class or series of capital stock of the Company or any right or option to
acquire any capital stock of the Company ("Equity Securities") with a combined
voting power equal to at least 50.1% of the aggregate voting power of all
outstanding Equity Securities, all of the stockholders have entered into voting
agreements relating to the Company's board of directors. These voting agreements
regard such matters as quorum and voting requirements for the board of
directors, the election to the board of directors of directors designated by the
Preferred Stockholder as shall constitute at least a majority of the directors
serving on the board of directors and the removal and replacement of directors.
None of the parties to the Stockholders' Agreement may transfer any Equity
Securities held by such party to third parties (subject to limited exceptions)
without the consent of the Company and each of the parties to the Stockholders'
Agreement and without having offered rights of first refusal to purchase such
securities to the Company and the other parties to the Stockholders' Agreement.
The Stockholders' Agreement will irrevocably terminate upon the consummation of
an initial public offering.
4. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan (the "Stock Option Plan"), as
adopted on February 21, 1995, amended by the board of directors on April 5, 1995
and December 19, 1995, and approved by the stockholders on December 27, 1995,
616,668 shares of common stock are reserved and authorized for issuance upon the
exercise of options. All employees of the Company are eligible to receive
options under the Stock Option Plan. The Stock Option Plan is administered by
the Compensation Committee of the board of directors. Options granted under the
Stock Option Plan are intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended. Options generally
become exercisable as to 50% two years after the date of grant, or in certain
cases, the commencement date of the holder's employment; as to an additional 25%
three years after the date of grant, or in certain cases, the commencement date
of the holder's employment; and as to the remaining 25% four years after the
date of grant, or in certain cases, the commencement date of the holder's
employment. All options were granted at an exercise price equal to the estimated
fair value of the common stock at the dates of grant as determined by the board
of directors based on equity transactions and other analyses. The options expire
ten years from the date of grant.
DIRECTORS' STOCK OPTION PLAN
Under the Company's Directors' Stock Option Plan (the "Directors' Plan"),
adopted in December 1995, 70,000 shares of Common Stock are authorized for
issuance (in the form of 10,000 options per director) to nonemployee directors
upon their initial election or appointment to the board or the date of adoption
of the plan in the case of directors on the board of directors at such adoption
date. The Directors' Plan does not provide for discretionary option grants.
Options generally become exercisable as to 50% two years after the date of
grant, as to an additional 25% three years after the date of grant, and as to
the remaining 25% four years after the grant date. All options were granted at
an exercise price equal to the estimated fair value of the common stock at the
dates of grant as determined by the board of directors based upon equity
transactions and other analyses. The options expire ten years from the date of
grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied.
F-11
<PAGE> 76
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 using the Black-Scholes
option-pricing model as prescribed by SFAS 123 using the following weighted
average assumptions used for grants in 1995:
<TABLE>
<S> <C>
Risk-free interest rate.......................................... 7%
Expected dividend yield.......................................... 0%
Expected lives................................................... 3 years
Expected volatility.............................................. 84.5%
</TABLE>
The total value of options granted during 1995 was computed as
approximately $409,000, which would be amortized on a pro forma basis over the
four-year vesting period of the options. If the Company had accounted for these
plans in accordance with SFAS 123, the Company's net loss and pro forma net loss
per share for the year ended December 31, 1995 would have increased by the
following pro forma amounts:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss.................................................. $(1,958,531) $(2,010,357)
Pro forma net loss per share.............................. $ (0.85) $ (0.90)
</TABLE>
A summary of the status of the Company's two stock options plans at
December 31, 1995 and changes during the year then ended are presented in the
following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
------- ---------
<S> <C> <C>
Grants............................................................. 375,237 $1.82
Forfeitures........................................................ (17,558) 1.00
-------
Outstanding.............................................. 357,679 1.86
=======
Weighted average fair value of options granted..................... $ 1.12
=======
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE NUMBER WEIGHTED AVERAGE
PRICE OF AVERAGE CONTRACTUAL
RANGE SHARES PRICE LIFE
--------- ------- -------- -----------
<C> <C> <C> <S>
$0.64 182,310 $ 0.64 9.1 years
1.55 81,598 1.55 9.5
2.85-6.38 93,771 4.50 9.9
</TABLE>
No options were exercisable at December 31, 1995.
5. RELATED-PARTY TRANSACTIONS
During the period from inception to December 31, 1994, the Company received
cash advances totaling approximately $83,000 from the founder of the Company to
fund operating expenses. These advances were repaid prior to December 31, 1994.
No interest was paid in connection with these advances.
During 1995, the Company loaned excess cash totaling approximately $300,000
to the Preferred Stockholder. This transaction was approved by the board of
directors. The loan was paid back during 1995 at an interest rate of 6.25%.
The Company currently leases telephone lines from and has contracts for
maintenance and installations with a wholly owned subsidiary of the Preferred
Stockholder. The total charges for these services were approximately $41,000 for
the year ended December 31, 1995 and are reflected in cost of revenues --
recurring in the accompanying statements of operations.
F-12
<PAGE> 77
As of January 1, 1995, the Company entered into an agreement with an
affiliate of the Preferred Stockholder providing for the rental of floor space
for the placement of the Company's equipment for its network hub and for the
affiliate's personnel to service and maintain such equipment for a payment of
$3,000 per month. The affiliate may increase this monthly payment if the amount
of technical support services exceeds ten hours per month. The lease runs from
January 1, 1995 through December 31, 1996, but either party may terminate the
lease earlier, without cause, upon 180 days' prior written notice. Unless either
party gives notice to terminate, the lease will renew automatically for
successive six-month terms.
The three external members of the Company's board of directors are also
directors of the Preferred Stockholder, and two of these board members are
executive officers of the Preferred Stockholder.
On January 29, 1995, the Preferred Stockholder pledged all of its stock in
the Company to certain lenders in connection with a credit facility.
See Note 6 for a discussion of the loan facilities with the Preferred
Stockholder.
6. DEBT
In August 1995, the Preferred Stockholder agreed to extend the First Loan
to the Company, of up to $2,000,000 in aggregate principal amount at an annual
interest rate of 11% (the "First Loan") to be used for capital expenditures and
working capital purposes. All amounts outstanding under the First Loan were due
and payable in full on or before December 15, 1995. At December 15, 1995, the
outstanding aggregate principal amount of all advances under the First Loan was
$2,000,000.
At December 15, 1995, the Company had not repaid any amounts outstanding
under the First Loan. In consideration of the Preferred Stockholder's agreement
not to exercise its rights and remedies upon such default under the First Loan,
on December 27, 1995, the Company agreed to pay the Preferred Stockholder a
processing fee of $50,000 and issued to the Preferred Stockholder an immediately
exercisable warrant to purchase 100,000 shares of Class C convertible preferred
stock at a price of $0.01 per share. Accordingly, the Company recorded a charge
of approximately $637,000 in December 1995, representing the fair market value
of the warrant issued, as determined by the Black-Scholes option-pricing model.
By December 31, 1995, the Preferred Stockholder had exercised such warrant in
full. All principal amounts due and owing under the First Loan were paid in full
by December 31, 1995 with proceeds from the Second Loan (as defined below).
Accrued interest on the First Loan of approximately $39,100 and the $50,000
processing fee were paid in full in January 1996.
In December 1995, the Company executed a promissory note in favor of and
entered into the Second Loan Agreement and a security agreement with the
Preferred Stockholder, relating to the Second Loan, pursuant to which agreement
the Company may borrow from time to time up to $4,000,000 (in aggregate
outstanding principal amount) (the "Second Loan"). The unpaid principal amount
of the Second Loan is due and payable in a single payment on July 15, 1996,
together with interest on the unpaid principal amount from the date of each
advance, until paid in full, at an annual rate of 14%. The Second Loan is
secured by substantially all of the assets of the Company. As of February 15,
1996, the outstanding aggregate principal amount of all advances under the
Second Loan was $3,250,000 and accrued but unpaid interest was approximately
$54,700.
According to its terms, advances made pursuant to the Second Loan are to be
used to pay off the entire principal amount (and all accrued and unpaid
interest, as well as any other amounts due thereon) of the First Loan, pay all
costs incurred by all parties in connection with the making and documenting of
the Second Loan, and provide funds for working capital and capital expenditures
for the Company. So long as the Second Loan is outstanding, the Company may not,
without the written consent of the Preferred Stockholder, declare or pay any
dividend of any kind (other than stock dividends payable to all holders of any
class of capital stock), in cash or in property, on any class of the capital
stock of the Company, or purchase, redeem, retire or otherwise acquire for value
any shares of such stock, nor make any distribution of any kind in cash or
property in respect thereof, nor make any return of capital to stockholders, nor
make any payments in cash or property in respect of any stock options, stock
bonus or similar plan, nor grant any preemptive rights with respect to the
capital stock of the Company. In addition, the Company may not incur any other
indebtedness, except indebtedness incurred in the ordinary course of business
which individually does not exceed $25,000.
F-13
<PAGE> 78
In addition to other remedies that the Preferred Stockholder is entitled to
upon an event of default, the Preferred Stockholder has the right (the
"Conversion Privilege"), upon an event of default, to convert $2,000,000
(whether principal, interest, premium, penalty, or otherwise) of the outstanding
balance of the Second Loan into that number of fully paid and nonassessable
shares of the Class C convertible preferred stock that would give the Preferred
Stockholder, as of the date of such conversion, an aggregate equity interest in
the Company equal to 80% of all capital stock of the Company outstanding as of
such date on a fully diluted basis, except for any shares of such capital stock
sold in a registered public offering prior to such date. In the event that the
Preferred Stockholder exercises such Conversion Privilege, upon the issuance of
such Class C convertible preferred stock, the unpaid balance of the Second Loan
automatically shall be reduced by the amount of the balance of the Second Loan
that is converted into Class C convertible preferred stock, deemed to be the
restated principal of the Second Loan, and converted into a two-year term loan
(the "Term Loan"), with an annual rate of 14%. The principal amount of the Term
Loan shall be due and payable in a single payment on the second anniversary
after the date of conversion into the Term Loan.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Lease expense relates to the lease of office and equipment space. Rental
expense was approximately $65,000 and $1,250 for the year ended December 31,
1995 and the period from inception (February 24, 1994) to December 31, 1994,
respectively.
At December 31, 1995, the Company's minimum rental commitments under
noncancelable operating leases with initial or remaining terms of more than one
year were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
---------------------------------------------------------------
<S> <C>
1996.................................................... $103,948
1997.................................................... 113,784
1998.................................................... 118,786
1999.................................................... 30,009
--------
Total........................................... $366,527
========
</TABLE>
PURCHASE COMMITMENTS
The Company has entered into an agreement with a software licensing firm to
purchase a minimum of $150,000 of connection software by November 1996.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. There are no pending legal proceedings to which the
Company is a party.
F-14
<PAGE> 79
8. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 29,500 $ 527,800
Deferred debt costs........................................... 0 242,100
Allowance for doubtful accounts............................... 5,700 17,300
Accrued vacation.............................................. 0 4,750
Other......................................................... 1,100 0
-------- ---------
Total deferred tax assets............................. 36,300 791,950
Deferred tax liabilities:
Depreciation.................................................. (6,800) (16,300)
Other......................................................... 0 (4,825)
-------- ---------
Total deferred tax liabilities........................ (6,800) (21,125)
Net deferred tax asset.......................................... 29,500 770,825
Valuation allowance for deferred tax assets..................... (29,500) (770,825)
-------- ---------
Net deferred taxes.............................................. $ 0 $ 0
======== =========
</TABLE>
The Company's net operating loss carryforwards will expire between 2009 and
2010, unless utilized. Due to the fact that the Company has incurred losses
since inception, the Company has not recognized the income tax benefit of the
net operating loss carryforwards. Management has provided a 100% valuation
reserve against its net deferred tax asset, consisting primarily of net
operating loss carryforwards. In addition, the Company's ability to recognize
the benefit from the net operating loss carryforwards could be limited under
Section 382 of the Internal Revenue Code if ownership of the Company changes by
more than 50%, as defined.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the year ended December 31, 1995 and for
the period from inception (February 24, 1994) to December 31, 1994, is as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
--------- -------
<S> <C> <C>
1995:
Income tax benefit at statutory rate.................................... $ 665,900 34%
State income taxes, net of federal benefit.............................. 78,340 4
Other................................................................... (2,915) 0
Deferred tax asset valuation allowance.................................. (741,325) (38)
--------- -------
$ 0 0%
========= =====
1994:
Income tax benefit at statutory rate.................................... $ 25,500 34%
State income taxes, net of federal benefit.............................. 3,000 4
Other................................................................... 1,000 1
Deferred tax asset valuation allowance.................................. (29,500) (39)
--------- -------
$ 0 0%
========= =====
</TABLE>
F-15
<PAGE> 80
9. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
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.
DEBT
The Company borrowed an additional $750,000 under the Second Loan
subsequent to year-end. The Company repaid the Second Loan in full with a
portion of the net proceeds of the Company's initial public offering.
PRO FORMA STOCKHOLDERS' EQUITY
The Pro Forma Stockholders' Equity at December 31, 1995 gives effect to the
conversion of 1,187,895 shares of Class A convertible preferred stock and
645,594 shares of Class B convertible preferred stock into common stock upon the
close of the Company's initial public offering. This conversion would result in
3,100,793 shares of common stock issued and outstanding at the effective date of
the initial public offering.
STOCK OPTIONS GRANTED SUBSEQUENT TO YEAR-END
Subsequent to year-end, the Company granted an additional 64,382 options at
$6.38 per share. These shares are reflected in the pro forma net loss per share
calculations for all periods as prescribed by Security and Exchange Commission
Staff Accounting Bulletins as discussed in Note 2.
Pursuant to SFAS 123 as discussed in Note 4, the total value of these
options was computed as approximately $240,000, which would be amortized on a
pro forma basis over the four-year vesting period of the options.
10. ACQUISITIONS AND POTENTIAL STOCK OFFERING
On June 28, 1996, the Company entered into a Purchase Agreement with PSINet
(as amended, the "Purchase Agreement") pursuant to which the Company agreed to
acquire subscriber accounts and other assets from PSINet for a purchase price of
up to approximately $21,400,000 (the "Acquisition"). The actual purchase price
will depend on the number of acquired subscriber accounts that remain MindSpring
subscriber accounts for a specified period. Management currently expects that
fewer than 100,000 subscriber accounts will actually be purchased, due to
subscriber attrition over such period. The Company acquired 15,000 of these
subscriber accounts for $1,000,000 in cash and a $2,000,000 one-year promissory
note on June 28, 1996. The Company expects to acquire substantially all of the
remaining subscriber accounts and related assets in early September 1996, at
which time the Company will issue an additional one-year promissory note in the
amount of $10,200,000. The balance of the purchase price is expected to be paid
out of the net proceeds of the Offering at specified intervals during the fourth
quarter of 1996 and the first quarter of 1997. The completion of the Acquisition
is not contingent upon consummation of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems, and
subscriber log-in and accounting information.
On August 6, 1996, the Company and The News and Observer Publishing Company
("N&O") entered into a definitive agreement to purchase certain individual
subscriber accounts in North Carolina (currently
F-16
<PAGE> 81
expected to number between 4,000 and 6,000) in connection with N&O's Nando.net
Internet access business (the "Nando.net Transaction"). The Nando.net
Transaction is expected to be consummated on or about September 30, 1996,
subject to the fulfillment of certain customary closing conditions.
In the third quarter of 1996, the Company is planning an offering of its
common stock to finance the above acquisitions and meet general expansion and
working capital requirements (the "Offering"). The Company plans to issue
3,500,000 shares in the Offering. There can, however, be no assurance that the
Offering can be completed. There are significant potential risks associated with
this offering as well as the Company's ability to compete profitably in this
industry. See the "Risk Factors" section (pages 6 to 17) in the foregoing
prospectus related to the proposed offering for a discussion of these risks.
The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds of the Offering. However, any increases in the
Company's growth rate, shortfalls in anticipated revenues, increases in
anticipated 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 operating losses, anticipated growth
and contemplated capital expenditures. If such 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). 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.
F-17
<PAGE> 82
MINDSPRING ENTERPRISES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995 JUNE 30, 1996
------------ -------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 424,834 $ 5,693,611
Trade receivables, net................................................. 519,280 1,159,367
Prepaids and other current assets...................................... 273,658 347,129
Inventory.............................................................. 45,415 36,478
------------ -------------
Total current assets.............................................. 1,263,187 7,236,585
------------ -------------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.............................. 3,594,528 7,321,409
Purchased software systems............................................. 103,078 134,996
Other.................................................................. 96,890 260,523
------------ -------------
3,794,496 7,716,928
Less: accumulated depreciation......................................... (255,560) (843,055)
------------ -------------
Property and equipment, net....................................... 3,538,936 6,873,873
------------ -------------
PRODUCT DEVELOPMENT COSTS, NET............................................. 34,071 95,920
------------ -------------
OTHER ASSETS:
Acquired customer base................................................. 0 3,000,000
Other.................................................................. 8,606 8,481
------------ -------------
Total other assets................................................ 8,606 3,008,481
------------ -------------
$ 4,844,800 $17,214,859
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan from preferred stockholder........................................ $ 2,500,000 $ 0
Notes Payable.......................................................... 0 2,000,000
Trade accounts payable................................................. 994,164 1,680,910
Accrued expenses....................................................... 532,406 708,938
Deferred revenue....................................................... 336,027 692,332
------------ -------------
Total current liabilities......................................... 4,362,597 5,082,180
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized and 0
shares issued and outstanding at December 31, 1995 and June 30, 1996,
respectively.......................................................... 0 0
Class A convertible preferred stock, $0.64 par value; 1,187,895 shares
authorized, and 1,187,895 and 0 issued and outstanding at December 31,
1995 and June 30, 1996, respectively.................................. 744,575 0
Class B convertible preferred stock, $1.55 par value; 645,596 shares
authorized and 645,594 and 0 shares issued and outstanding at December
31, 1995 and June 30, 1996, respectively.............................. 1,000,000 0
Class C convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized and 100,000 issued and outstanding at December 31, 1995 and
June 30, 1996, respectively........................................... 638,000 638,000
Common stock, $0.01 par value; 15,000,000 shares authorized and
1,267,304 and 5,125,793 issued and outstanding at December 31, 1995
and June 30, 1996, respectively....................................... 12,673 51,258
Additional paid-in capital............................................. 120,547 15,976,226
Accumulated deficit.................................................... (2,033,592) (4,532,805)
------------ -------------
Total stockholders' equity........................................ 482,203 12,132,679
------------ -------------
$ 4,844,800 $17,214,859
============ ============
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-18
<PAGE> 83
MINDSPRING ENTERPRISES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1995 1996 1995 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Access................................. $ 235,633 $ 1,506,315 $ 347,363 $ 2,671,634
Subscriber start-up fees............... 91,242 478,672 146,642 845,768
Business services...................... 24,905 396,850 31,530 671,155
Other.................................. (12,359) 112,972 (14,228) 117,966
---------- ----------- ---------- -----------
Total revenues.................... 339,421 2,494,809 511,307 4,306,523
COSTS AND EXPENSES:
Cost of revenues -- recurring.......... 98,084 754,569 160,479 1,296,203
Cost of subscriber start-up fees....... 41,192 351,783 62,833 616,120
Selling................................ 56,512 991,487 84,972 1,570,411
General and administrative............. 280,249 1,611,503 419,197 2,770,542
Depreciation and amortization.......... 33,625 362,435 48,125 596,343
---------- ----------- ---------- -----------
Total operating expenses.......... 509,662 4,071,777 775,606 6,849,619
---------- ----------- ---------- -----------
OPERATING LOSS.............................. $ (170,241) $(1,576,968) $ (264,299) $(2,543,096)
INTEREST (EXPENSE) INCOME, NET.............. 1,166 117,015 2,364 43,883
---------- ----------- ---------- -----------
NET LOSS.................................... $ (169,075) $(1,459,953) $ (261,935) $(2,499,213)
========= ========== ========= ==========
NET LOSS PER SHARE.......................... $ (0.06) $ (0.29) $ (0.09) $ (0.58)
========= ========== ========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 2,871,229 5,111,782 2,857,119 4,309,859
========= ========== ========= ==========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-19
<PAGE> 84
MINDSPRING ENTERPRISES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1995 1996
---------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss.......................................................... $ (261,935) $(2,499,213)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization.................................. 48,125 596,343
Changes in operating assets and liabilities:
Trade receivables............................................ (166,285) (640,087)
Other current assets......................................... (1,650) (57,242)
Trade accounts payable....................................... 151,439 686,746
Accrued expenses............................................. 45,919 176,532
Deferred revenue............................................. 109,575 356,305
---------- -----------
Net cash used in operating activities..................... (74,812) (1,380,616)
---------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment............................... (710,514) (3,922,432)
Purchase of customer base......................................... -- (3,000,000)
Product development costs......................................... (74,964) (77,989)
Other............................................................. (1,012) 125
---------- -----------
Net cash used in investing activities..................... (786,490) (7,000,296)
---------- -----------
CASH FLOWS 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.......................................... 50,000 14,149,689
Issuance of preferred stock....................................... 1,000,000 --
---------- -----------
Net cash provided by financing activities................. 1,050,000 13,649,689
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 188,698 5,268,777
CASH AND CASH EQUIVALENTS, beginning of period...................... 584,798 424,834
---------- -----------
CASH AND CASH EQUIVALENTS, end of period............................ $ 773,496 $ 5,693,611
========= ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid..................................................... $ 0 $ 136,127
========= ==========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-20
<PAGE> 85
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 annual financial statements of the Company and
the notes thereto.
2. On June 28, 1996, the Company entered into a Purchase Agreement with
PSINet (as amended, the "Purchase Agreement") pursuant to which the Company
agreed to acquire subscriber accounts and other assets from PSINet for a
purchase price of up to approximately $21,400,000 (the "Acquisition"). The
actual purchase price will depend on the number of acquired subscriber accounts
that remain MindSpring subscriber accounts for a specified period. Management
currently expects that fewer than 100,000 subscriber accounts will actually be
purchased, due to subscriber attrition over such period. The Company acquired
15,000 of these subscriber accounts for $1,000,000 in cash and a $2,000,000
one-year promissory note on June 28, 1996. The Company expects to acquire
substantially all of the remaining subscriber accounts and related assets in
early September 1996, at which time the Company will issue an additional
one-year promissory note in the amount of $10,200,000. The balance of the
purchase price is expected to be paid out of the net proceeds from the Offering
at specified intervals during the fourth quarter of 1996 and the first quarter
of 1997. The completion of the Acquisition is not contingent upon consummation
of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems, and
subscriber log-in and accounting information.
On August 6, 1996, the Company and The News and Observer Publishing Company
("N&O") entered into a definitive agreement to purchase certain individual
subscriber accounts in North Carolina (currently expected to number between
4,000 and 6,000) in connection with N&O's Nando.net Internet access business
(the "Nando.net Transaction"). The Nando.net Transaction is expected to be
consummated on or about September 30, 1996, subject to the fulfillment of
certain customary closing conditions.
In the third quarter of 1996, the Company is planning an offering of its
common stock to finance the above acquisitions and meet general expansion and
working capital requirements (the "Offering"). The Company plans to issue
3,500,000 shares in the Offering. There can, however, be no assurance that the
Offering can be completed. There are significant potential risks associated with
this offering as well as the Company's ability to compete profitably in this
industry. See the "Risk Factors" section (pages 6 to 17) in the foregoing
prospectus related to the proposed offering for a discussion of these risks.
The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds of the Offering. However, any increases in the
Company's growth rate, shortfalls in anticipated revenues, increases in
anticipated 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 operating losses, anticipated growth
and contemplated capital expenditures. If such 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). 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.
F-21
<PAGE> 86
3. 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.
4. 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.
5. 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.
6. 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.
F-22
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
PSINet Inc.:
We have audited the accompanying balance sheets of PSINET INC. CONSUMER
INTERNET ACCESS SERVICES IN THE UNITED STATES as of December 31, 1994 and 1995
and the related statements of operations, accumulated deficit, and cash flows
for the period from inception (July 1, 1994) to December 31, 1994 and for the
year ended December 31, 1995. These financial statements are the responsibility
of the Consumer Access Business's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Consumer Access Business
as of December 31, 1994 and 1995 and the results of its operations and its cash
flows for the period from inception (July 1, 1994) to December 31, 1994 and for
the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 30, 1996
F-23
<PAGE> 88
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, -------------
-------------------------
1994 1995 (UNAUDITED)
--------- ------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 0 $ 1,014,029 $ 527,247
Accounts receivable, net of allowance for doubtful accounts
of $0, $328,656, and $20,340, at December 31, 1994 and
1995, and June 30, 1996 respectively....................... 3,408 422,478 363,304
Prepaid expenses and other assets............................ 0 10,566 36,512
--------- ------------ -------------
Total current assets.................................. 3,408 1,447,073 927,063
--------- ------------ -------------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.................... 0 1,233,234 1,614,730
Less accumulated amortization and depreciation............... 0 (132,158) (274,872)
--------- ------------ -------------
Property and equipment, net........................... 0 1,101,076 1,339,858
--------- ------------ -------------
OTHER ASSETS:
Software development costs, net of accumulated amortization
of $0, $80,946, and $119,792, at December 31, 1994 and 1995
and June 30, 1996, respectively............................ 31,624 99,720 60,874
Goodwill and other intangibles, net of accumulated
amortization of $0, $3,160,159, and $4,729,802, at December
31, 1994 and 1995 and June 30, 1996, respectively.......... 0 6,666,937 5,097,294
Other........................................................ 0 43,000 43,000
--------- ------------ -------------
Total other assets.................................... 31,624 6,809,657 5,201,168
--------- ------------ -------------
Total assets.......................................... $ 35,032 $ 9,357,806 $ 7,468,089
========== ============= =============
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current maturities of capital lease obligations.............. $ 0 $ 280,351 $ 398,170
Current portion of long-term debt............................ 0 51,607 54,648
Trade accounts payable....................................... 0 207,692 703,211
Accrued expenses............................................. 0 147,241 77,430
Deferred revenue............................................. 201,498 542,588 899,774
Due to parent company........................................ 185,047 20,926,686 28,684,996
--------- ------------ -------------
Total current liabilities............................. 386,545 22,156,165 30,818,229
--------- ------------ -------------
Long-term capital lease obligations.......................... 0 569,792 601,353
Long-term debt............................................... 0 95,439 67,315
--------- ------------ -------------
0 665,231 668,668
--------- ------------ -------------
Total liabilities..................................... 386,545 22,821,396 31,486,897
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, and 8)
ACCUMULATED DEFICIT............................................ (351,513) (13,463,590) (24,018,808)
--------- ------------ -------------
Total liabilities and accumulated deficit............. $ 35,032 $ 9,357,806 $ 7,468,089
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE> 89
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1995 JUNE 30, 1996
1994 1995 ------------- -------------
--------- ------------ (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Membership revenue...................... $ 408,578 $ 5,701,749 $ 1,793,030 $ 7,793,705
Start-up revenue........................ 90,794 786,542 462,110 161,761
--------- ------------ ------------- -------------
Total revenues.................. 499,372 6,488,291 2,255,140 7,955,466
--------- ------------ ------------- -------------
COSTS AND EXPENSES:
Selling, general, and administrative.... 599,104 11,321,248 3,302,353 12,017,951
Cost of revenue......................... 251,781 4,873,604 1,525,882 4,678,895
Depreciation and amortization........... 0 3,373,263 1,511,142 1,751,203
--------- ------------ ------------- -------------
850,885 19,568,115 6,339,377 18,448,049
--------- ------------ ------------- -------------
OPERATING LOSS............................ (351,513) (13,079,824) (4,084,237) (10,492,583)
INTEREST EXPENSE.......................... 0 32,253 1,443 62,635
--------- ------------ ------------- -------------
NET LOSS.................................. $(351,513) $(13,112,077) $ (4,085,680) $ (10,555,218)
========= =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 90
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
------------
<S> <C>
BALANCE, July 1, 1994 (inception)............................................. $ 0
Net loss.................................................................... (351,513)
------------
BALANCE, December 31, 1994.................................................... (351,513)
Net loss.................................................................... (13,112,077)
------------
BALANCE, December 31, 1995.................................................... (13,463,590)
Net loss.................................................................... (10,555,218)
------------
BALANCE, June 30, 1996 (unaudited)............................................ $(24,018,808)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 91
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1994 1995 1995 1996
--------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(351,513) $(13,112,077) $(4,085,680) $(10,555,218)
--------- ------------ ----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 0 3,373,263 1,511,142 1,751,203
Changes in current assets and
liabilities:
Accounts receivables, net.............. (3,408) (215,670) 53,616 59,174
Other current assets................... 0 (3,366) (21,864) (25,946)
Trade accounts payable................. 0 207,692 293,968 495,519
Accrued expenses....................... 0 147,241 72,006 (69,811)
Deferred revenue....................... 201,498 341,090 (4,814) 357,187
--------- ------------ ----------- ------------
Total adjustments.................... 198,090 3,850,250 1,904,054 2,567,326
--------- ------------ ----------- ------------
Net cash used in operating
activities......................... (153,423) (9,261,827) (2,181,626) (7,987,892)
--------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and
software development costs................ (31,624) (425,491) (259,941) (20,378)
Other....................................... 0 (43,000) (43,000) 0
--------- ------------ ----------- ------------
Net cash used in investing
activities......................... (31,624) (468,491) (302,941) (20,378)
--------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent company, net........... 185,047 10,665,637 2,893,521 7,758,310
Proceeds from the issuance of long-term
debt...................................... 0 190,055 59,770 0
Principal payments on notes payable......... 0 (43,009) (14,393) (25,083)
Principal payments on capital leases........ 0 (68,336) (2,364) (211,739)
--------- ------------ ----------- ------------
Net cash provided by financing
activities......................... 185,047 10,744,347 2,936,534 7,521,488
--------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 0 1,014,029 451,967 (486,782)
CASH AND CASH EQUIVALENTS, beginning of
period...................................... $ 0 $ 0 $ 0 $ 1,014,029
--------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period...... $ 0 $ 1,014,029 $ 451,967 $ 527,247
========== ============= ============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest...................... $ 0 $ 32,253 $ 1,443 $ 62,635
========== ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 92
PSINET INC. CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
PSINet Inc. (formerly Performance Systems International, Inc.) ("PSINet")
was organized in October 1988 and is engaged in providing Internet access,
services, and software. The financial statements and related footnotes contained
herein reflect the operations of PSINet's customer base of consumer Internet
access subscribers in the United States, which includes subscribers to PSINet's
"Pipeline New York," "Pipeline U.S.A.," and "InterRamp" services. InterRamp
service began in July 1994; PSINet Pipeline New York, Inc. (formerly the
Pipeline Network Inc., "Pipeline"), was acquired February 7, 1995 by PSINet
Inc.; and Pipeline U.S.A. service began in June 1995. The accompanying financial
statements present the financial position and results of operations of the
PSINet Inc. Consumer Internet Access Services in the United States by PSINet
Inc. (the "Consumer Access Business"). The Consumer Access Business, including
the Harrisburg customer service facility, is being acquired in a transaction
accounted for as a purchase by MindSpring Enterprises, Inc. ("MindSpring") (Note
8).
The Consumer Access Business has experienced operating losses since its
inception as a result of costs related to acquisitions, efforts to build its
network infrastructure, development of its systems, and expansion into new
markets. The Consumer Access Business expects to continue to focus on increasing
its subscriber base and geographic coverage. Accordingly, the Consumer Access
Business expects that its cost of revenues; selling, general, and administrative
expenses; and capital expenditures will continue to increase significantly, all
of which will have a negative impact on short-term operating results. In
addition, the Consumer Access Business may change its pricing policies to
respond to a changing competitive environment. There can be no assurance that
growth in the Consumer Access Business' revenue or subscriber base will continue
after the acquisition by MindSpring or that the Consumer Access Business will be
able to achieve or sustain profitability or positive cash flow.
See "Risk Factors" located elsewhere in this prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The Consumer Access Business is not a separate subsidiary of PSINet nor has
it been operated as a separate division of PSINet. The financial statements of
the Consumer Access Business have been derived from the consolidated financial
statements of PSINet and have been prepared to present its financial position,
results of operations, and cash flows on a stand-alone basis. Accordingly, the
accompanying financial statements include certain costs and expenses which have
been allocated to the Consumer Access Business from PSINet (Note 6). These costs
have been allocated on a pro rata basis based primarily on revenues. Such
allocated expenses may not be indicative of what such expenses would have been
had the Consumer Access Business been operated as a separate entity.
The interim financial data is unaudited. However, in the opinion of
management, the interim financial data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the interim periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and
F-28
<PAGE> 93
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Consumer Access Business
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. The cash and cash equivalents reflected
in the accompanying balance sheets represent specific accounts associated with
the Consumer Access Business. Certain other cash accounts are commingled with
PSINet funds and the PSINet portion is reflected in "Due to parent company" in
the accompanying balance sheets.
REVENUE RECOGNITION
The Consumer Access Business recognizes revenues when services are
provided. Advance billings are reflected as deferred revenue in the accompanying
financial statements.
During 1994, InterRamp offered a program whereby subscribers could prepay
for several months of service. This revenue was deferred until the services were
provided. This program was discontinued as of January 1, 1995. Accordingly,
there is no deferred revenue from this program at December 31, 1995 or June 30,
1996.
CREDIT RISK
The Consumer Access Business' accounts receivable potentially subject it to
credit risk, as collateral is generally not required. The Consumer Access
Business' risk of loss is limited due to advance billings to customers for
services, the use of preapproved charges to customer credit cards, and the
ability to terminate access on delinquent accounts. The concentration of credit
risk is mitigated by the large number of customers comprising the customer base.
The carrying amount of the Consumer Access Business' receivables approximates
their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over an estimated useful life of five years. The Consumer
Access Business' portion of the assets acquired as part of the Pipeline
acquisition were recorded at the estimated fair value at the acquisition date
and depreciated over the estimated remaining useful lives of the assets.
EQUIPMENT UNDER CAPITAL LEASE
The Consumer Access Business leases certain of its data communications
equipment under capital lease agreements. The assets and liabilities under
capital leases are recorded at the lesser of the present value of aggregate
future minimum lease payments, including estimated bargain purchase options, or
the fair value of the assets under lease. These leases are initially recorded as
noncash transactions in the Consumer Access Business' statements of cash flows.
Assets under these capital leases are depreciated over their estimated useful
lives of five years, which are generally longer than the terms of the leases.
The following is a detail of assets under capital lease as of December 31,
1995 and June 30, 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Cost................................................ $ 956,785 $1,317,903
Accumulated Amortization............................ (103,687) (217,510)
--------- ----------
$ 853,098 $1,100,393
========= ==========
</TABLE>
F-29
<PAGE> 94
SOFTWARE DEVELOPMENT COSTS
The Consumer Access Business capitalizes costs incurred for the production
of computer software used in the sale of its services, including direct labor
and related overhead. All costs in the software development process that are
classified as research and development are expensed as incurred until
technological feasibility has been established. Once technological feasibility
has been established, such costs are capitalized until the software is
commercially available. Amortization is provided using the greater of the
straight-line method over three years or the ratio that current gross revenues
bear to the total of current and anticipated future gross revenues, commencing
in the month of product release. It is reasonably possible that the estimates of
anticipated future revenues, the remaining estimated economic life of the
product, or both will be reduced significantly in the near term due to
competitive pressures.
GOODWILL AND OTHER INTANGIBLES
Goodwill is being amortized over three years, and other intangibles
including subscriber lists, trademarks, and non-compete agreements are being
amortized over two to three years. The Consumer Access Business' portion of the
goodwill and other intangibles were acquired in connection with PSINet's
acquisition of Pipeline on February 7, 1995.
LONG-LIVED ASSETS
The Consumer Access Business periodically reviews the values assigned to
long-lived assets such as property and equipment, software development costs,
and goodwill and other intangibles to determine whether any impairments are
other than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
DUE TO PARENT COMPANY
PSINet either advances funds to or borrows funds from the Consumer Access
Business. Funds advanced to the Consumer Access Business are used to cover fixed
asset expansion, acquisitions, and working capital requirements. The advances
and borrowings are netted and are reflected in Due to parent company in the
accompanying balance sheets (Note 6).
ACCUMULATED DEFICIT
The Consumer Access Business' accumulated deficit represents an amount
equivalent to the net assets of the Consumer Access Business at inception (July
1, 1994), decreased by the net loss in each period.
ADVERTISING COSTS
The Consumer Access Business expenses all advertising costs as incurred.
INCOME TAXES
The income tax returns of PSINet include the operations of the Consumer
Access Business. For purposes of these financial statements, income taxes
related to the Consumer Access Business have been computed and recorded on a
separate return basis based on the statutory rates in effect (Note 5).
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
SOURCES OF SUPPLIES
The Consumer Access Business has few long-term contracts with its
suppliers. The Consumer Access Business is dependent on third party suppliers
for its leased line connections, or bandwidth. Certain of these suppliers are or
may become competitors of the Consumer Access Business, and such suppliers are
not subject
F-30
<PAGE> 95
to any restrictions upon their ability to compete with the Consumer Access
Business. To the extent that these suppliers change their pricing structures,
the Consumer Access Business may be adversely affected. Regulatory proposals are
pending that may affect the prices charged by certain suppliers to the Consumer
Access Business. Although management feels alternative telecommunications
facilities could be found in a timely manner, any disruption of these services
could have an adverse effect on operating results.
The Consumer Access Business is also dependent on certain third-party
suppliers of hardware components. Although the Consumer Access Business attempts
to maintain a minimum of two vendors for each required product, certain
components used by the Consumer Access Business in providing its networking
services are currently acquired or available from only one source. A failure by
a supplier to deliver quality products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could materially adversely affect the Consumer Access Business. As the Consumer
Access Business's suppliers revise and upgrade their equipment technology, the
Consumer Access Business may encounter difficulties in integrating the new
technology into its network.
3. LONG-TERM DEBT
PSINet has entered into a borrowing facility with a bank for the
acquisition of equipment. While the Consumer Access Business does not
specifically enter into debt arrangements, the debt reflected in the
accompanying table relates to borrowings associated with equipment retained at
the Harrisburg customer service facility at December 31, 1995:
<TABLE>
<S> <C>
Allocation of PSINet's borrowing facility with a bank, interest at prime
plus 2.5%; monthly principal installments of $4,729 plus interest....... $147,046
Less current portion...................................................... 51,607
--------
Long-term portion......................................................... $ 95,439
========
</TABLE>
Borrowings under this facility are repayable in 36 monthly installments
from the dates of equipment purchases and are secured by a lien on the
equipment. Interest is payable monthly at a rate of prime plus 2.5%; the
interest rate was 11% at December 31, 1995.
The fair value of long-term debt, including current maturities, at December
31, 1995 is estimated to be approximately $151,808, based on a valuation
technique that considers cash flows discounted at current rates.
Maturities of long-term debt relating to the equipment retained at the
Harrisburg customer service facility outstanding at June 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996 (six months ended December 31)....................................... $ 22,731
1997...................................................................... 59,289
1998...................................................................... 39,101
1999...................................................................... 842
--------
Total maturities of long-term debt at June 30, 1996............. $121,963
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LEASES
PSINet leases certain equipment under agreements which are classified as
capital leases. These leases have original terms of three years and contain
bargain purchase options at the end of the original lease terms. While the
Consumer Access Business does not specifically enter into capital lease
arrangements, the capital leases reflected in the accompanying table relate
specifically to leases associated with equipment retained at the Harrisburg
customer service facility.
F-31
<PAGE> 96
Future minimum payments, by year and in the aggregate, under noncancelable
capital leases and operating leases with initial or remaining terms of one year
or more consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- --------
<S> <C> <C>
1996 (six months ended December 31)............................ $ 243,207 $129,000
1997........................................................... 523,275 79,800
1998........................................................... 400,731
1999........................................................... 22,510
--------- --------
Total minimum lease payments......................... 1,189,723 $208,800
========
Amounts representing interest.................................. 190,200
---------
Present value of net minimum payments.......................... 999,523
---------
Current portion................................................ 398,170
---------
Long-term capitalized lease obligations........................ $ 601,353
========
</TABLE>
The Consumer Access Business' rental expense for operating leases relates
to the lease of office and equipment space. Rental expense was approximately $0,
$183,000, $54,000 and $132,000 for the period from inception (July 1, 1994) to
December 31, 1994, the year ended December 31, 1995, and the six months ended
June 30, 1995 and 1996, respectively.
LEGAL PROCEEDINGS
PSINet and the Consumer Access Business are subject to legal proceedings
and claims which arise in the ordinary course of business.
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Consumer Access
Business is included in the consolidated return of PSINet. No tax-sharing
arrangement exists between PSINet and the Consumer Access Business, as the
Individual Internet Access Business is not a separate legal entity. The
significant components of the Consumer Access Business' allocated deferred tax
assets and liabilities as of December 31, 1994 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995
---- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $102 $ 3,730
Other.......................................................... 7 168
---- -------
Total deferred tax assets................................. 109 3,898
---- -------
Deferred tax liabilities:
Acquired intangibles........................................... 0 (670)
Depreciation/amortization...................................... (12) (101)
---- -------
Total deferred tax liabilities............................ (12) (771)
---- -------
Net deferred tax asset.............................................. 97 3,127
Valuation allowance................................................. (97) (3,127)
---- -------
Net deferred taxes.................................................. $ 0 $ 0
==== =======
</TABLE>
The Consumer Access Business' portion of PSINet's net operating loss
carryforwards will expire between 2009 and 2010 unless utilized. Due to the fact
that the Consumer Access Business has incurred losses since inception, the
Consumer Access Business has not recognized the income tax benefit of the net
operating loss
F-32
<PAGE> 97
carryforwards. Management has provided a 100% valuation reserve against its net
deferred tax asset, consisting primarily of net operating loss carryforwards.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the period from inception (July 1, 1994)
to December 31, 1994 and for the year ended December 31, 1995, is as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Income tax benefit at statutory rate.................................... 34% 34%
State income taxes, net of federal benefit.............................. 4 4
Nondeductible goodwill.................................................. 0 (10)
Deferred tax asset valuation allowance.................................. (38) (28)
---- ----
0% 0%
==== ====
</TABLE>
The Consumer Access Business paid no taxes in the periods presented herein.
6. RELATED-PARTY TRANSACTIONS
Transactions of the Consumer Access Business are performed and certain
management and administrative services are executed by PSINet. Services provided
to the Consumer Access Business include support in major functional areas such
as accounting, finance, human resources, legal, risk management, network
management, engineering, payroll, and taxes. Costs attributable to these support
functions are included in selling, general, and administrative expenses. These
costs are allocated to the Consumer Access Business based on various factors,
primarily revenue streams, as management feels this best represents relative
cost streams. The costs allocated to the Consumer Access Business were
approximately $633,000, $6,475,000, $1,851,000, and $7,797,000 for the period
from inception (July 1, 1994) to December 31, 1994, the year ended December 31,
1995, and the six months ended June 30, 1995 and 1996, respectively.
Certain costs, such as payroll for the Harrisburg customer service
facility, advertisements for the Consumer Access Business, and depreciation and
amortization, have been specifically identified, are reflected in the
accompanying statements of operations and are excluded from the cost allocation
model described previously.
Revenues reflected in the accompanying statements of operations represent
specifically identified revenues and that there have been no allocations of
revenues from PSINet.
7. ACQUISITION
On February 7, 1995, PSINet issued an aggregate of approximately 2,690,218
shares of its common stock to shareholders of Pipeline, a New York-based
Internet service provider, in exchange for all of the outstanding common stock
and preferred stock of Pipeline. The Pipeline shareholders were also granted
certain registration rights in respect of PSINet's common stock issued to them.
In addition, in exchange for their options to purchase Pipeline common stock,
certain employees of Pipeline were issued approximately 98,255 shares of
PSINet's common stock and options to purchase approximately 133,627 shares of
PSINet's common stock at an exercise price of $4.15 per share.
The acquisition was accounted for using the purchase method of accounting.
At February 7, 1995, the fair value of the 2,788,473 shares of PSINet's common
stock exchanged was based on $4.15 per share, or $11,572,000. Based on the ratio
of corporate revenue to individual subscriber revenue at the time of the
acquisition, $10,415,000 of this amount related to the Consumer Access Business
and is reflected on the
F-33
<PAGE> 98
accompanying balance sheets. The following table summarizes the net assets
allocated to the Consumer Access Business in connection with the acquisition and
the amount allocated to goodwill (in thousands):
<TABLE>
<S> <C>
Purchase price............................................................. $10,415
Assets..................................................................... (1,000)
Liabilities................................................................ 412
Identifiable intangibles................................................... (2,847)
-------
Goodwill................................................................... $ 6,980
=======
</TABLE>
The acquisition of these assets has been accounted for as a non-cash
transaction for purposes of the cash flow statements.
The following presents the Consumer Access Business' unaudited pro forma
condensed consolidated income statement data for the period from inception (July
1, 1994) to December 31, 1994 and for the year ended December 31, 1995 as if the
acquisition had occurred at the beginning of the periods presented. The revenue
and net loss below are not intended to reflect the results of operations that
would actually have been obtained if the acquisition had occurred at the
beginning of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Revenue.............................................. $ 1,115 $ 7,205
Net loss............................................. (704) (11,302)
</TABLE>
8. SUBSEQUENT EVENT
On June 28, 1996, MindSpring (the "Company") entered into a Purchase
Agreement with PSINet (as amended, the "Purchase Agreement") pursuant to which
the Company agreed to acquire subscriber accounts and other assets from PSINet
for a purchase price of up to approximately $21,400,000 (the "Acquisition"). The
actual purchase price will depend on the number of acquired subscriber accounts
that remain MindSpring subscriber accounts for a specified period. Management
currently expects that fewer than 100,000 subscriber accounts will actually be
purchased, due to subscriber attrition over such period. The Company acquired
15,000 of these subscriber accounts for $1,000,000 in cash and a $2,000,000
one-year promissory note on June 28, 1996. The Company expects to acquire
substantially all of the remaining subscriber accounts and related assets in
early September 1996, at which time the Company will issue an additional
one-year promissory note in the amount of $10,200,000. The balance of the
purchase price is expected to be paid out of the net proceeds from the Offering
at specified intervals during the fourth quarter of 1996 and the first quarter
of 1997. The completion of the Acquisition is not contingent upon consummation
of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems, and
subscriber log-in and accounting information.
F-34
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of PSINet Pipeline New York, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of PSINet Pipeline New
York, Inc. (formerly The Pipeline Network Inc.) at December 31, 1994, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Washington, D.C.
February 24, 1995
F-35
<PAGE> 100
PSINET PIPELINE NEW YORK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 322
Accounts and other receivables, net of allowance for doubtful accounts of
$80,000................................................................... 226
Prepaid expenses............................................................. 8
------
Total current assets................................................. 556
Property and equipment, net.................................................... 555
Capitalized software costs, net of accumulated amortization of $24,000......... 155
Other assets and deferred charges.............................................. 26
------
$1,292
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................ $ 288
Deferred revenue............................................................. 49
------
Total current liabilities............................................ 337
Accrued stock compensation................................................... 383
------
Total liabilities.................................................... 720
------
Commitments (Note 6)
Shareholders' equity:
Convertible preferred stock, $0.01 par value, 129 shares authorized, issued
and outstanding........................................................... 0
Common stock, $0.01 par value, 3,000 shares authorized, 1,240 issued and
outstanding............................................................... 0
Capital in excess of par value............................................... 1,064
Retained deficit............................................................. (492)
------
Total shareholders' equity........................................... 572
------
$1,292
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 101
PSINET PIPELINE NEW YORK, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Revenue:
Service.................................................................... $ 940
Licensing.................................................................. 180
Royalty.................................................................... 40
------
Total revenue...................................................... 1,160
------
Operating costs and expenses:
Data communications and operations......................................... 729
Sales and marketing........................................................ 238
General and administrative................................................. 557
Depreciation and amortization.............................................. 95
------
Total operating costs and expenses................................. 1,619
------
Loss from operations......................................................... (459)
Interest income.............................................................. 11
------
Loss before income taxes..................................................... (448)
Income taxes................................................................. --
------
Net Loss..................................................................... $ (448)
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 102
PSINET PIPELINE NEW YORK, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL
IN TOTAL
PREFERRED PAR COMMON PAR EXCESS OF RETAINED SHAREHOLDERS'
STOCK VALUE STOCK VALUE PAR VALUE DEFICIT EQUITY
--------- ----- ------ ----- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993......... 0 $ 0 1,000 $ 0 $ 95 $ (44) $ 51
Issuance of common stock pursuant
to exercise of options........ 240 0 0 0
Issuance of convertible preferred
stock......................... 129 0 969 969
Net loss......................... (448) (448)
--- ---- ------ ---- ------- ------ -----
Balance, December 31, 1994......... 129 $ 0 1,240 $ 0 $ 1,064 $ (492) $ 572
=== ==== ====== ==== ======= ====== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 103
PSINET PIPELINE NEW YORK, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (448)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 95
Provision for doubtful accounts........................................... 80
Increase in accounts receivable........................................... (294)
Increase in prepaid expenses.............................................. (7)
Increase in other assets and deferred charges............................. (16)
Increase in accounts payable and accrued expenses......................... 263
Increase in deferred revenue.............................................. 40
Increase in accrued stock compensation.................................... 383
-----
Net cash provided by operating activities............................ 96
-----
Cash flows from investing activities:
Purchase of property and equipment, net...................................... (553)
Capitalized software costs................................................... (178)
-----
Net cash used in investing activities................................ (731)
-----
Cash flows from financing activities:
Proceeds from loan from shareholder.......................................... 200
Repayments of loan from shareholder.......................................... (250)
Proceeds from issuance of Series A convertible preferred stock............... 969
Proceeds from exercise of common stock options............................... 0
-----
Net cash provided by financing activities............................ 919
-----
Net increase in cash........................................................... 284
Cash, beginning of year........................................................ 38
-----
Cash, end of year.............................................................. $ 322
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 104
PSINET PIPELINE NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PSINet Pipeline New York Inc. (formerly The Pipeline Network Inc.) (the
Company) was incorporated in the state of New York in June 1993. The Company
provides Internet access services, principally in New York City.
Revenue Recognition
Service revenue is recognized over the period services are provided.
Licensing revenue is recognized when the software is installed at the licensee's
site. Royalty revenue is recognized in the month earned. Cash received in
advance of revenues earned is recorded as deferred revenue.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over an estimated useful life of five years.
Software Development Costs
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86. Significant development
costs incurred beyond the point of demonstrated technological feasibility are
capitalized until the product or service is available for general release to
customers. Amortization is computed on an individual product basis and is the
greater of: (a) the ratio of current gross revenues for a product to the total
current and anticipated future gross revenues for the product or (b) the
straight-line method over the estimated economic life of the product. Currently,
the Company is using an economic life of three years for all capitalized
software costs.
The Company capitalized software development costs of $178,000 in 1994.
Amortization of these costs was $24,000 in 1994.
Income Taxes
The Company was an S Corporation from its inception through August 22,
1994. Because the individual shareholders and not the entity are subject to
income taxes on S Corporation taxable income, no provision for federal income
taxes has been recorded through August 22, 1994. On August 22, 1994, the
Company's S Corporation status was terminated. Accordingly, during the period
form August 23, 1994 through December 31, 1994, the Company was taxed as a C
corporation for federal and state purposes.
Income taxes are provided using the asset and liability approach. Under
this approach, deferred taxes represent the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of the assets
and liabilities.
F-40
<PAGE> 105
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Data communications equipment and software..................... $488
Office and other equipment..................................... 144
----
632
Less accumulated depreciation and amortization................. (77)
----
Property and equipment, net.................................... $555
====
</TABLE>
Total depreciation expense during 1994 was $70,000.
NOTE 3 -- CONVERTIBLE PREFERRED STOCK
On August 22, 1994, the Company entered into a securities purchase
agreement with investors. Pursuant to this agreement, the investors purchased
129 shares of Series A convertible participating preferred stock (Series A) for
a purchase price of $7,752 per share. Each share of Series A is convertible into
one share of common stock at any time (subject to adjustment under certain
conditions). Holders of Series A are entitled to vote as a class on all actions
to be taken by the shareholders of the Company. Stock issuance costs of $31,000
have been charged to capital in excess of par.
Liquidation Privileges -- In the event of liquidation, consolidation,
merger or winding up of the Company prior to conversion, all holders of
preferred stock are entitled to receive, in preference to the holders of the
common stock, an equal amount to their liquidation amount or a pro rata share of
the remaining assets based on their ownership of the Company.
Automatic Conversion -- Each share of the preferred stock automatically
converts to one share of common stock (subject to adjustment under certain
conditions) at the earlier of (i) August 18, 1995 or (ii) the closing of the
sale of shares of common stock by the Company pursuant to a firm commitment
underwritten public offering.
NOTE 4 -- STOCK OPTIONS
In 1994, the Company established the 1994 Stock Incentive Plan under which
it is authorized to grant up to 120 of either incentive stock options or
non-qualified stock options. Options become exercisable over one to three years
following the date of grant and all options expire ten years after the date of
grant. The Company did not grant any stock appreciation rights or restricted
stock during 1994 as allowed under the Plan. At December 31, 1994, there were
120 shares reserved for issuance under this Plan, of which 62 shares were
subject to options outstanding and 58 shares were available for future grants of
options. Compensation expense of $383,000 was recorded for certain options
granted in 1994. At December 31, 1994, no options were exercisable.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF OPTION PRICE
COMMON STOCK PER SHARE
------------ --------------
<S> <C> <C>
Balance, December 31, 1993........................... 240 $0.10
Granted............................................ 62 100.00-7,752
Exercised.......................................... (240) 0.10
Forfeited.......................................... --
------
Balance, December 31, 1994........................... 62 $100.00-$7,752
======
</TABLE>
F-41
<PAGE> 106
NOTE 5 -- INCOME TAXES
At its inception, the Company elected to be treated as an S Corporation as
permitted under the Internal Revenue Code. Accordingly, in lieu of corporate
income taxes, the shareholders were taxed on their share of the Company's
distributive share of the Company's income or loss. On August 22, 1994, the
Company changed from S Corporation status to C Corporation status. Accordingly,
during 1994, the Company was treated as an S Corporation from January 1, 1994
through August 22, 1994 and a C Corporation from August 23, 1994 through
December 31, 1994.
Deferred tax liabilities (assets) were comprised of the following at
December 31, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Depreciation......................................................... $ 22
Software development................................................. 61
-------
Gross deferred tax liabilities....................................... 83
-------
Other................................................................ (19)
Expense on options................................................... (149)
Loss carryforwards................................................... (32)
-------
Gross deferred tax assets............................................ (200)
-------
Net deferred tax asset............................................... (117)
Valuation allowance.................................................. 117
-------
Deferred tax asset after valuation allowance......................... $ 0
=======
</TABLE>
A full valuation allowance has been placed on the net deferred tax asset
since realization of these benefits cannot be reasonably assured. Accordingly,
the net change in the valuation allowance for deferred tax assets was an
increase of $117,000.
At December 31, 1994, the Company had net operating loss carryforwards of
approximately $81,000 for income tax purposes.
Pro forma income taxes for the periods the Company operated as an S
Corporation would not differ materially from the C Corporation income taxes
because of the operating losses experienced by the Company.
NOTE 6 -- COMMITMENTS
The Company leases its facilities under non-cancellable operating leases
expiring in various years through 2000. Total rent expense for all operating
leases amounted to $27,000 in 1994.
Future minimum lease payments under non-cancellable operating leases as of
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
----------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1995................................................. $ 76
1996................................................. 76
1997................................................. 76
1998................................................. 68
1999................................................. 57
Thereafter........................................... 14
------
$367
======
</TABLE>
F-42
<PAGE> 107
NOTE 7 -- SUBSEQUENT EVENTS
Sale of the Company to PSINet Inc. (formerly Performance Systems
International, Inc.)
On February 7, 1995, the Company and its shareholders completed an
agreement whereby all of the Company's outstanding shares of common stock and
preferred stock were exchanged for shares of common stock of PSINet Inc.
F-43
<PAGE> 108
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements have been prepared to give effect to the Acquisition. 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 occurred
as of that date. The pro forma adjustments are based upon available information
and certain assumptions that management believes to be reasonable. 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 "Use of Proceeds," "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 Prospectus. 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.
The Company is currently acquiring certain other subscriber accounts.
Including the balance of the purchase price to be paid in connection with the
Nando.net Transaction, the Company currently estimates that it will need to use
approximately $740,000 (excluding $100,000 expected to be paid at the closing of
the Nando.net Transaction) of the net proceeds from the Offering if such
transactions, as currently contemplated, are consummated.
F-44
<PAGE> 109
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 $ 11,696,299 (f) $15,874,910
(527,247)(e)
(1,515,000)(b)
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 9,254,236 17,417,884
------------ --------------- ------------ -----------
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 17,860,000 (c) 20,860,000
(5,097,294)(e)
Other assets............................. 8,481 43,000 (43,000)(e) 8,481
------------ --------------- ------------ -----------
Total assets.................... $17,214,859 $ 7,468,089 $ 23,488,942 $48,171,890
============ =============== ============ ===========
CURRENT LIABILITIES:
Notes payable to PSINet.............. $ 2,000,000 $ 0 $ (2,000,000)(g) $ 0
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) 708,938
Deferred revenue..................... 692,332 899,774 (899,774)(e) 692,332
------------ --------------- ----------- -----------
Total current liabilities....... 5,082,180 30,818,229 (32,818,229) 3,082,180
------------ --------------- ----------- -----------
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..... 0 668,668 (668,668) 0
------------ --------------- ----------- -----------
Total liabilities............... 5,082,180 31,486,897 (33,486,897) 3,082,180
------------ --------------- ----------- -----------
STOCKHOLDERS' EQUITY:
Class C preferred stock.............. 638,000 0 638,000
Common stock......................... 51,258 0 21,835 (d) 86,528
1,609 (b)
11,556 (f)
Additional paid-in capital........... 15,976,226 0 20,538,897 (d) 48,898,257
1,513,391 (b)
10,869,743 (f)
Accumulated deficit.................. (4,532,805) (24,018,808) 24,018,808 (e) (4,532,805)
------------ --------------- ------------ -----------
Total equity.................... 12,132,679 (24,018,808) 56,975,839 45,089,710
------------ --------------- ------------ -----------
Total liabilities &
stockholders' equity.......... $17,214,859 $ 7,468,089 $ 23,488,942 $48,171,890
============ =============== ============ ===========
</TABLE>
- ---------------
(a) Derived from the financial statements of the Company and the PSINet Consumer
Services appearing elsewhere in this Prospectus.
(b) Additional capital expenditures recorded by the Company to support the
PSINet subscribers being acquired to be financed by a portion of the
3,500,000 shares of Common Stock offered hereby.
F-45
<PAGE> 110
(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) Reflects the portion of the 3,500,000 shares of Common Stock offered hereby
utilized for the acquisition of PSINet. The Company's indebtedness to PSINet
under the First PSINet Note is estimated to be approximately $2,160,000
(including accrued interest and increases in principal amount) as of the
completion of the Offering. Assumes that the Company acquires 100,000 PSINet
subscriber accounts and the Harrisburg Facility at the Second Closing,
resulting in a principal amount outstanding under the remaining PSINet Notes
of approximately $18,400,000. The pro forma intangible assets have been
adjusted to reflect this assumption. It is the Company's intention to repay
the PSINet Notes in full with the net proceeds from the Offering. Under the
terms of the Purchase Agreement, the number of subscribers that PSINet must
pay for is not to exceed 100,000, but could be less depending on various
factors described elsewhere herein. For example, if 66,000 subscriber
accounts were acquired, then the net cash proceeds would be increased by
$7,038,000 and the intangible assets reduced by the same amount. Cost of the
acquisition also includes the cost of certain contractual obligations of the
Company entered into in connection with the acquisition to convert PSINet
subscribers to MindSpring's operating system.
(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 net proceeds of the Offering hereby after repayment of debt and
capital expenditures discussed in (d) and (b) that are available for general
corporate purposes (see "Use of Proceeds").
(g) Reflects repayment of debt with net proceeds of Offering hereby as discussed
in (d).
F-46
<PAGE> 111
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 $ 6,786,291 $ 0 $ 9,013,135
Costs and expenses
Selling, general and administrative
expenses........................... 2,230,102 11,397,248 (4,626,340)(c) 9,001,010
Cost of revenues..................... 965,773 5,039,604 (1,646,458)(g) 4,358,919
Depreciation......................... 264,683 229,105 303,000 (e) 796,788
Amortization......................... 0 3,160,158 (3,160,158)(h) 6,953,333
6,953,333 (f)
------------- ----------------- ----------- ------------
Total costs and expenses................. 3,460,558 19,826,115 (2,176,623) 21,110,050
------------- ----------------- ----------- ------------
Income (loss) from operations............ (1,233,714) (13,039,824) 2,176,623 (12,096,915)
Interest income (expense)................ (724,817) (29,523) 29,253 (d) (724,817)
------------- ----------------- ----------- ------------
Net income (loss)........................ $(1,958,531) $ (13,069,077) $ 2,205,876 $(12,821,732)
============== ================ ============ =============
Weighted average common shares
outstanding........................ 3,175,376 3,175,376
Offering Shares...................... 3,500,000 3,500,000
------------
Total pro forma common shares
outstanding........................ 3,175,376 6,675,376
Historical net loss per share(b)..... $ (0.62)
==============
Pro Forma net loss per share(b)...... $ (1.92)
=============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 1996
-----------------------------------------------------------------
HISTORICAL PSINET
HISTORICAL CONSUMER TRANSACTION MINDSPRING
MINDSPRING 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 4,678,895 (701,162)(g) 5,890,056
Depreciation......................... 596,343 181,560 151,500 (e) 929,403
Amortization......................... 0 1,569,643 (1,569,643)(h) 3,476,666
3,476,666 (f)
------------- ----------------- ----------- ------------
Total costs and expenses................. 6,849,619 18,448,049 (2,639,909) 22,657,759
------------- ----------------- ----------- ------------
Income (loss) from operations............ (2,543,096) (10,492,583) 2,639,909 (10,395,770)
Interest income (expense)................ 43,883 (62,635) 62,635 (d) 43,883
------------- ----------------- ----------- ------------
Net income (loss)........................ $(2,499,213) $ (10,555,218) $(2,702,544) $(10,351,887)
============== ================ ============ =============
Weighted average common shares
outstanding........................ 4,309,859 4,309,859
Offering Shares...................... 3,500,000 3,500,000
------------
Total pro forma common shares
outstanding(i)..................... 4,309,859 7,809,859
Historical net loss per share(i)..... $ (0.58)
==============
Pro Forma net loss per share(i)...... $ (1.33)
=============
</TABLE>
- ---------------
(a) Derived from the financial statements of the Company and the PSINet Consumer
Services appearing elsewhere in this Prospectus. The 1995 PSINet Consumer
Services amounts include the results of operations of PSI Pipeline New York
Inc. for the period (January 1 through February 6, 1995) prior to its
acquisition by PSINet Consumer Services.
F-47
<PAGE> 112
(b) Historical 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 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 and the Class B Preferred have been included for the
respective weighted average periods for which such shares were outstanding,
even though their effect is antidilutive. The shares of Common Stock offered
hereby have been included in the pro forma calculations as if they were
outstanding for the entire period.
(c) Reflects reduction of PSINet historical selling, general, and administrative
expenses to the historical relationship of such expenses experienced by
MindSpring as a percentage of revenues. A majority of PSINet's historical
selling, general, and administrative expenses result from functions not
being acquired by MindSpring, including certain allocations of PSINet
corporate level expenses (see historical PSINet financial statements
elsewhere in this Prospectus). The impact of expected economies of scale to
reduce selling, general, and administrative expenses below MindSpring'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 the reversal of interest expense since the fixed assets to be
acquired by the Company as a result of the Acquisition will be free of any
encumbrances pursuant to the Purchase Agreement and the Company will not be
financing asset purchases with debt.
(e) Reflects additional depreciation expense associated with capital
expenditures detailed in Note (b) to the Unaudited Pro Forma Balance Sheet
appearing elsewhere in this Prospectus.
(f) 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 100,000
subscriber accounts are acquired. If only 66,000 PSINet subscriber accounts
are acquired, this amount would be reduced by $2,346,000 and $1,173,000 for
the year ended December 31, 1995 and the six months ended June 30, 1996,
respectively.
(g) Reflects the difference between the Company's historical costs and the costs
that would have been incurred under the terms of the Services Agreement. See
"Recent Transactions -- Acquisition of PSINet Assets" elsewhere in the
Prospectus for a discussion of the Services Agreement.
(h) Reflects the elimination of PSINet historical amortization associated with
the Pipeline NY acquisition.
(i) Historical 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 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. The shares of Common Stock offered hereby have been included
in the pro forma calculation as if they were outstanding for all of the
period.
F-48
<PAGE> 113
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Recent Transactions................... 19
Use of Proceeds....................... 21
Price Range of Common Stock and
Dividend Policy..................... 22
Capitalization........................ 23
Selected Financial and Operating
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 33
Management............................ 47
Certain Transactions.................. 53
Principal Stockholders................ 54
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 58
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Available Information................. 60
Glossary of Technical Terms........... G-1
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,500,000 SHARES
[MINDSPRING LOGO]
COMMON STOCK
------------------------------
P R O S P E C T U S
------------------------------
J.C. BRADFORD & CO.
WHEAT FIRST BUTCHER SINGER
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts except the SEC Registration
Fee and the NASD Filing Fee are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $14,227
NASD Filing Fee.................................................... 4,626
Nasdaq Stock Market Listing Fee.................................... *
Blue Sky Fees and Expenses......................................... *
Accounting Fees and Expenses....................................... *
Legal Fees and Expenses............................................ *
Printing and Engraving Expenses.................................... *
Registrar and Transfer Agent Fees.................................. *
Miscellaneous...................................................... *
-------
Total.................................................... $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware Corporation Law, a corporation may
indemnify its directors, officers, employees and agents and its former
directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The Delaware
Corporation Law provides, however, that such person must have acted in good
faith and in a manner such person reasonably believed to be in (or not opposed
to) the best interests of the corporation and, in the case of a criminal action,
such person must have had no reasonable cause to believe his or her conduct was
unlawful. In addition, the Delaware Corporation Law does not permit
indemnification in an action or suit by or in the right of the corporation,
where such person has been adjudged liable to the corporation, unless, and only
to the extent that, a court determines that such person fairly and reasonably is
entitled to indemnity for costs the court deems proper in light of liability
adjudication. Indemnity is mandatory to the extent a claim, issue or matter has
been successfully defended.
The Restated Certificate contains provisions that provide that no director
of the Company shall be liable for breach of fiduciary duty as a director except
for: (i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) liability under
Section 174 of the Delaware Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. The Restated Certificate
contains provisions that further provide for the indemnification of directors
and officers to the fullest extent permitted by the Delaware Corporation Law.
Under the Bylaws, the Company is required to advance expenses incurred by an
officer or director in defending any such action if the director or officer
undertakes to repay such amount if it is determined that the director or officer
is not entitled to indemnification. In addition, the Company has entered into
indemnity agreements with each of its directors pursuant to which the Company
has agreed to indemnify the directors as permitted by the Delaware Corporation
Law and has obtained directors and officers liability insurance.
II-1
<PAGE> 115
The Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act, under
certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From the Company's inception on February 24, 1994, through June 30, 1996,
the Company has issued and sold the securities described below in the following
unregistered transactions:
(1) In February 1994, the Company issued 1,032,951 shares of Common
Stock to its founder, Charles M. Brewer. The price per share was $0.0002,
for an aggregate consideration of $200.
(2) In March 1994, the Company issued 103,296 shares of Common Stock
to Technologic, Inc. The price per share was $0.0002, for an aggregate
consideration of $20.
(3) In November 1994, the Company issued 1,187,895 shares of the
Company's Class A Preferred Stock to ITC Holding. The price per share was
$0.64, for an aggregate consideration of $765,000.
(4) In February 1995, the Company granted to ten of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 157,519 shares of Common Stock at an exercise price of $0.64
per share. As of June 30, 1996, 12,912 of these stock options was
exercisable.
(5) In April 1995, the Company issued 77,472 shares of Common Stock
to Michael G. Misikoff. The price per share was $0.64, for an aggregate
consideration of $50,000.
(6) In April 1995, the Company granted to two of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 37,702 shares of Common Stock at an exercise price of $0.64
per share. As of June 30, 1996, none of these stock options was
exercisable.
(7) In June 1995, the Company issued 645,594 shares of the Company's
Class B Preferred Stock to ITC Holding. The price per share was $1.55, for
an aggregate consideration of $1,000,000.
(8) In June 1995, the Company issued 48,420 shares of Common Stock to
Michael S. McQuary. The price per share was $1.55, for an aggregate
consideration of approximately $75,000.
(9) In June 1995, the Company granted to six of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 62,490 shares of Common Stock at an exercise price of $1.55
per share. As of June 30, 1996, none of these stock options was
exercisable.
(10) In August 1995, the Company issued 5,165 shares of Common Stock
to J. Fredrick Nixon. The price per share was $1.55, for an aggregate
consideration of $8,000.
(11) In August 1995, the Company granted to five of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 22,206 shares of Common Stock at an exercise price of $1.55
per share. As of June 30, 1996, none of these stock options was
exercisable.
(12) In October 1995, the Company granted to five of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 9,811 shares of Common Stock at an exercise price of $2.85 per
share. As of June 30, 1996, none of these stock options was exercisable.
(13) In November 1995, the Company granted to fourteen of its
employees, pursuant to the Company's Stock Option Plan, stock options to
purchase an aggregate of 52,155 shares of Common Stock at an exercise price
of $3.56 per share. As of June 30, 1996, none of these stock options was
exercisable.
(14) In December 1995, the Company granted to five of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 3,354 shares of Common Stock at an exercise price of $6.38 per
share. As of June 30, 1996, none of these stock options was exercisable.
(15) In December 1995, the Company granted to three of its
non-employee directors, pursuant to the Company's Director Stock Option
Plan, stock options to purchase an aggregate of 30,000 shares of
II-2
<PAGE> 116
Common Stock at an exercise price of $6.38 per share, of which 10,000 were
granted to O. Gene Gabbard, 10,000 were granted to Campbell B. Lanier, III,
and 10,000 were granted to William H. Scott, III. As of June 30, 1996, none
of these stock options was exercisable.
(16) On December 27, 1995, the Company issued to ITC Holding a warrant
to purchase 100,000 shares of Class C Preferred, at an exercise price of
$.01 per share in consideration of ITC Holding's agreement not to exercise
its rights and remedies upon default by the Company on an outstanding
$2,000,000 loan from ITC Holding. By December 31, 1995, ITC Holding had
exercised such warrant, for an aggregate consideration of $1,000.
(17) In January 1996, pursuant to the Company's Stock Option Plan, the
Company granted to 19 of its employees stock options to purchase an
aggregate of 26,632 shares of Common Stock at an exercise price of $6.38
per share. As of June 30, 1996, none of these stock options was
exercisable.
(18) In February 1996, pursuant to the Company's Stock Option Plan,
the Company granted to 53 of its employees stock options to purchase an
aggregate of 37,750 shares of Common Stock at an exercise price of $6.38
per share. As of June 30, 1996, none of these stock options was
exercisable.
(19) In March 1996, pursuant to the Company's Stock Option Plan, the
Company granted to one of its employees stock options to purchase an
aggregate of 500 shares of Common Stock at an exercise price of $6.38 per
share. As of June 30, 1996, none of these stock options was exercisable.
(20) In March 1996, pursuant to the Company's Stock Option Plan, the
Company granted to two of its employees stock options to purchase an
aggregate of 1,000 shares of Common Stock at an exercise price of $8.00 per
share. As of June 30, 1996, none of these stock options was exercisable.
(21) In April 1996, pursuant to the Company's Stock Option Plan, the
Company granted to ten of its employees stock options to purchase an
aggregate of 6,000 shares of Common Stock at an exercise price of $7.875
per share. As of June 30, 1996, none of these stock options was
exercisable.
(22) In May 1996, pursuant to the Company's Stock Option Plan, the
Company granted to 12 of its employees stock options to purchase an
aggregate of 10,000 shares of Common Stock at an exercise price of $12.375
per share. As of June 30, 1996, none of these stock options was
exercisable.
(23) In June 1996, pursuant to the Company's Stock Option Plan, the
Company granted to ten of its employees stock options to purchase an
aggregate of 10,000 shares of Common Stock at an exercise price of $10.625
per share. As of June 30, 1996, none of these stock options was
exercisable.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
II-3
<PAGE> 117
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------------------------------------------------------------------
<S> <C>
*1 -- Form of Underwriting Agreement by and among MindSpring Enterprises, Inc., J.C.
Bradford & Co., Wheat, First Securities, Inc., and The Robinson-Humphrey
Company, Inc.
2(a) -- Asset Purchase Agreement dated June 28, 1996 by and between MindSpring
Enterprises, Inc. and PSINet, Inc. (Filed as Exhibit 10.1 to Current Report on
Form 8-K dated June 28, 1996, File No. 0-27890, and incorporated herein by
reference.)
2(b) -- Amendment No. 1 to Asset Purchase Agreement and Network Services Agreement dated
August 23, 1996 by and between PSINet Inc. and MindSpring Enterprises, Inc.,
effective as of June 28, 1996. (Filed as Exhibit 10.3 to Current Report on Form
8-K/A dated August 23, 1996, File No. 0-27890, and incorporated herein by
reference.)
3(a) -- Amended and Restated Certificate of Incorporation of MindSpring Enterprises,
Inc. (Filed as Exhibit 3(a) to Quarterly Report on Form 10-Q dated May 3, 1996,
File No. 0-27890, and incorporated herein by reference.)
3(b) -- Amended and Restated Bylaws of MindSpring Enterprises, Inc. (Filed as Exhibit
3(c) to Registration Statement on Form S-1, File No. 333-00108 ("Initial Form
S-1"), and incorporated herein by reference.)
4(a) -- Form of Common Stock Certificate of the Company. (Filed as Exhibit 4 to Initial
Form S-1, and incorporated herein by reference.)
4(b) -- Convertible Note dated June 28, 1996, as amended on August 23, 1996, effective
as of June 28, 1996.(Filed as Exhibit 4 to Current Report on Form 8-K/A dated
August 23, 1996, File No. 0-27890, and incorporated herein by reference.)
*5 -- Opinion of Hogan & Hartson L.L.P.
10(a) -- Loan Agreement by and between MindSpring Enterprises, Inc. and ITC Holding
Company, Inc. dated as of December 21, 1995. (Filed as Exhibit 10(a) to Initial
Form S-1, and incorporated herein by reference.)
10(b) -- First Amendment to Loan Agreement by and between MindSpring Enterprises, Inc.
and ITC Holding Company, Inc. (Filed as Exhibit 10(a)(1) to Initial Form S-1,
and incorporated herein by reference.)
10(c) -- Security Agreement by and between MindSpring Enterprises, Inc. and ITC Holding
Company, Inc. dated as of December 27, 1995. (Filed as Exhibit 10(b) to Initial
Form S-1, and incorporated herein by reference.)
10(d) -- Promissory Note by MindSpring Enterprises, Inc. in favor of ITC Holding Company,
Inc. dated December 27, 1995. (Filed as Exhibit 10(c) to Initial Form S-1, and
incorporated herein by reference.)
*#10(e) -- Internet Service Provider Navigator Distribution Agreement dated June 21, 1995
between Netscape Communications Corporation and MindSpring Enterprises, Inc., as
amended by Amendment No. 1 dated September 29, 1995 and by Amendment No. 2 dated
March 28, 1996.
10(f) -- Eudora(R) Freeware Distribution Agreement dated as of September 28, 1995 between
MindSpring Enterprises, Inc. and Qualcomm Incorporated. (Filed as Exhibit 10(e)
to Initial Form S-1, and incorporated herein by reference.)
10(g) -- Agreement dated as of October 1, 1995 between Netsurfer, Inc. and MindSpring
Enterprises, Inc. (Filed as Exhibit 10(f) to Initial Form S-1, and incorporated
herein by reference.)
10(h) -- Lease and Service Agreement dated as of January 1, 1995 between AvData Systems,
Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(i) to Initial Form
S-1, and incorporated herein by reference.)
10(i) -- Lease Agreement commencing on November 1, 1995 between West Peachtree Point
Partners, L.P. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(j) to
Initial Form S-1, and incorporated herein by reference.)
</TABLE>
II-4
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------------------------------------------------------------------
<S> <C>
10(j) -- First Amendment dated February 6, 1996 to Lease Agreement dated November 1, 1995
between John Marshall Law School, Inc. (assignee of West Peachtree Point
Partners, L.P.) and MindSpring Enterprises, Inc. (Filed as Exhibit 10(cc) to
Initial Form S-1, and incorporated herein by reference.)
10(k) -- Agreement dated January 31, 1995 between Agis Net99 and MindSpring Enterprises,
Inc. (Filed as Exhibit 10(k) to Initial Form S-1, and incorporated herein by
reference.)
10(l) -- Data Communications Service Agreement dated July 23, 1995 between Sprint
Communications Company L.P. and MindSpring Enterprises, Inc. (Filed as Exhibit
10(l) to Initial Form S-1, and incorporated herein by reference.)
10(m) -- LVIEW Pro Software Distribution License Agreement dated November 22, 1995
between MMedia Research and MindSpring Enterprises, Inc. (Filed as Exhibit 10(m)
to Initial Form S-1, and incorporated herein by reference.)
10(n) -- Subscription Agreement dated as of April 27, 1995 between Michael G. Misikoff
and MindSpring Enterprises, Inc. (Filed as Exhibit 10(p) to Initial Form S-1,
and incorporated herein by reference.)
10(o) -- Subscription Agreement dated as of August 28, 1995 between Michael S. McQuary
and MindSpring Enterprises, Inc. (Filed as Exhibit 10(q) to Initial Form S-1,
and incorporated herein by reference.)
10(p) -- Subscription Agreement dated as of August 29, 1995 between J. Fredrick Nixon and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(r) to Initial Form S-1, and
incorporated herein by reference.)
10(q) -- Second Amended and Restated Stockholders' Agreement dated as of December 21,
1995 among MindSpring Enterprises, Inc. and Certain Stockholders. (Filed as
Exhibit 10(s) to Initial Form S-1, and incorporated herein by reference.)
10(r) -- Stock Purchase Agreement dated as of November 15, 1994 among ITC Holding
Company, Inc., MindSpring Enterprises, Inc., and Charles Brewer. (Filed as
Exhibit 10(t) to Initial Form S-1, and incorporated herein by reference.)
10(s) -- MindSpring Enterprises, Inc. 1995 Stock Option Plan. (Filed as Exhibit 10(u) to
Initial Form S-1, and incorporated herein by reference.)
10(t) -- Form of Stock Option Agreement. (Filed as Exhibit 10(v) to Initial Form S-1, and
incorporated herein by reference.)
10(u) -- MindSpring Enterprises, Inc. 1995 Directors Stock Option Plan. (Filed as Exhibit
10(w) to Initial Form S-1, and incorporated herein by reference.)
10(v) -- Form of Director Stock Option Agreement. (Filed as Exhibit 10(x) to Initial Form
S-1, and incorporated herein by reference.)
10(w) -- Form of MindSpring Service Agreement. (Filed as Exhibit 10(y) to Initial Form
S-1, and incorporated herein by reference.)
10(x) -- Service Provider Agreement dated December 13, 1995 between BBN Planet
Corporation and MindSpring Enterprises, Inc. (Filed as Exhibit 10(z) to Initial
Form S-1, and incorporated herein by reference.)
10(y) -- Software License Agreement dated September 1, 1995 between Ipswitch, Inc. and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(aa) to Initial Form S-1, and
incorporated herein by reference.)
10(z) -- Software License Agreement dated December 13, 1995 between Network TeleSystems,
Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(bb) to Initial Form
S-1, and incorporated herein by reference.)
10(aa) -- Form of MindSpring Director or Officer Indemnity Agreement. (Filed as Exhibit
10(dd) to Initial Form S-1, and incorporated herein by reference.)
10(bb) -- Network Services Agreement dated June 28, 1996 by and between MindSpring
Enterprises, Inc. and PSINet Inc. (Filed as Exhibit 10.2 to Current Report on
Form 8-K dated June 28, 1996, File No. 0-27890, and incorporated herein by
reference.)
10(cc) -- Master Services Agreement dated July 15, 1996 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc.
</TABLE>
II-5
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------------------------------------------------------------------
<S> <C>
10(dd) -- Software License Agreement dated as of March 29, 1996 between Clarify Inc. and
MindSpring Enterprises, Inc.
11 -- Statement regarding Computation of Per Share Earnings.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Price Waterhouse LLP.
*23(c) -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5)
24 -- Powers of Attorney for the following individuals: Charles M. Brewer, Michael S.
McQuary, Michael G. Misikoff, Campbell B. Lanier, III, William H. Scott, III and
O. Gene Gabbard (included on signature page).
27 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
# In connection with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, confidential treatment has been requested for this
exhibit. As of the date hereof, such request for confidential treatment
remains pending.
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are filed herewith:
Schedule II -- Valuation and Qualifying Accounts -- MindSpring
Enterprises, Inc.
Schedule II -- Valuation and Qualifying Accounts -- PSINet
Inc. -- Consumer Internet Access Services in the United States.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 120
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on this 23rd day of August, 1996.
MINDSPRING ENTERPRISES, INC.
By /s/ CHARLES M. BREWER
-------------------------------
CHARLES M. BREWER
Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Charles M. Brewer and Michael S. McQuary, jointly
and severally, each in his own capacity, his true and lawful attorneys-in-fact
and agents, with full power of substitution, for him and his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement or a Registration
Statement filed pursuant to Rule 462 under the Securities Act, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on this
23rd day of August, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ CHARLES M. BREWER Chairman, Chief Executive Officer and August 23, 1996
- ---------------------------------------- Director
CHARLES M. BREWER (Principal executive officer)
/s/ MICHAEL S. MCQUARY President, Chief Operating Officer and August 23, 1996
- ---------------------------------------- Director
MICHAEL S. MCQUARY
/s/ MICHAEL G. MISIKOFF Vice President, Chief Financial August 23, 1996
- ---------------------------------------- Officer, Secretary, Treasurer and
MICHAEL G. MISIKOFF Director
(Principal financial officer and
principal accounting officer)
/s/ CAMPBELL B. LANIER, III Director August 23, 1996
- ----------------------------------------
CAMPBELL B. LANIER, III
/s/ WILLIAM H. SCOTT, III Director August 23, 1996
- ----------------------------------------
WILLIAM H. SCOTT, III
/s/ O. GENE GABBARD Director August 23, 1996
- ----------------------------------------
O. GENE GABBARD
</TABLE>
II-7
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards,
the financial statements of MINDSPRING ENTERPRISES, INC. included in this
Registration Statement and have issued our report thereon dated February 16,
1996 (except with respect to Note 10, as to which the date is August 20, 1996).
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 16(b) is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 16, 1996
<PAGE> 122
SCHEDULE II
MINDSPRING ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(a) PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION IN THE BALANCE SHEET FROM THE
ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $ 15 $ 41 $ 0 $(10) $ 46
</TABLE>
- ---------------
(a) Represents collections of accounts previously written-off as considered to
be uncollectible.
MINDSPRING ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION IN THE BALANCE SHEET FROM THE
ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $0 $ 15 $ 0 $0 $ 15
</TABLE>
<PAGE> 123
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards,
the financial statements of PSINET INC. -- CONSUMER INTERNET ACCESS SERVICES IN
THE UNITED STATES included in this Registration Statement and have issued our
report thereon dated July 30, 1996. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 16(b) is the responsibility of the company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applies in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 30, 1996
<PAGE> 124
SCHEDULE II
PSINET INC. -- CONSUMER INTERNET ACCESS
SERVICES IN THE UNITED STATES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(a) PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION (INCREASE) IN THE BALANCE SHEET
FROM THE ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $ 0 $ 0 $ 0 $ (0) $ 0
</TABLE>
- ---------------
(a) Represents collections of accounts previously written-off as considered to
be uncollectible.
PSINET INC. -- CONSUMER INTERNET ACCESS
SERVICES IN THE UNITED STATES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION (INCREASE) IN THE BALANCE SHEET
FROM THE ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $0 $391 $ 0 $(62) $329
</TABLE>
- ---------------
(a) Represents collections of accounts previously written-off as considered to
be uncollectible.
<PAGE> 125
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<S> <C>
*1 -- Form of Underwriting Agreement by and among MindSpring Enterprises,
Inc., J.C. Bradford & Co., Wheat, First Securities, Inc., and The
Robinson-Humphrey Company, Inc. ......................................
2(a) -- Asset Purchase Agreement dated June 28, 1996 by and between MindSpring
Enterprises, Inc. and PSINet, Inc. (Filed as Exhibit 10.1 to Current
Report on Form 8-K dated June 28, 1996, File No. 0-27890, and
incorporated herein by reference.)....................................
2(b) -- Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement dated August 23, 1996 by and between PSINet Inc. and
MindSpring Enterprises, Inc., effective as of June 28, 1996. (Filed as
Exhibit 10.3 to Current Report on Form 8-K/A dated August 23, 1996,
File No. 0-27890, and incorporated herein by reference.)..............
3(a) -- Amended and Restated Certificate of Incorporation of MindSpring
Enterprises, Inc. (Filed as Exhibit 3(a) to Quarterly Report on Form
10-Q dated May 3, 1996, File No. 0-27890, and incorporated herein by
reference.) ..........................................................
3(b) -- Amended and Restated Bylaws of MindSpring Enterprises, Inc. (Filed as
Exhibit 3(c) to Registration Statement on Form S-1, File No. 333-00108
("Initial Form S-1"), and incorporated herein by reference.)..........
4(a) -- Form of Common Stock Certificate of the Company. (Filed as Exhibit 4
to Initial Form S-1, and incorporated herein by reference.)...........
4(b) -- Convertible Note dated June 28, 1996, as amended on August 23, 1996,
effective as of June 28, 1996. (Filed as Exhibit 4 to Current Report
on Form 8-K/A dated August 23, 1996, File No. 0-27890, and
incorporated herein by reference.)....................................
*5 -- Opinion of Hogan & Hartson L.L.P. ....................................
10(a) -- Loan Agreement by and between MindSpring Enterprises, Inc. and ITC
Holding Company, Inc. dated as of December 21, 1995. (Filed as Exhibit
10(a) to Initial Form S-1, and incorporated herein by reference.).....
10(b) -- First Amendment to Loan Agreement by and between MindSpring
Enterprises, Inc. and ITC Holding Company, Inc. (Filed as Exhibit
10(a)(1) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(c) -- Security Agreement by and between MindSpring Enterprises, Inc. and ITC
Holding Company, Inc. dated as of December 27, 1995. (Filed as Exhibit
10(b) to Initial Form S-1, and incorporated herein by reference.).....
10(d) -- Promissory Note by MindSpring Enterprises, Inc. in favor of ITC
Holding Company, Inc. dated December 27, 1995. (Filed as Exhibit 10(c)
to Initial Form S-1, and incorporated herein by reference.)...........
*#10(e) -- Internet Service Provider Navigator Distribution Agreement dated June
21, 1995 between Netscape Communications Corporation and MindSpring
Enterprises, Inc., as amended by Amendment No. 1 dated September 29,
1995 and by Amendment No. 2 dated March 28, 1996. ....................
10(f) -- Eudora(R) Freeware Distribution Agreement dated as of September 28,
1995 between MindSpring Enterprises, Inc. and Qualcomm Incorporated.
(Filed as Exhibit 10(e) to Initial Form S-1, and incorporated herein
by reference.)........................................................
10(g) -- Agreement dated as of October 1, 1995 between Netsurfer, Inc. and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(f) to Initial Form
S-1, and incorporated herein by reference.)...........................
10(h) -- Lease and Service Agreement dated as of January 1, 1995 between AvData
Systems, Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(i)
to Initial Form S-1, and incorporated herein by reference.)...........
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<S> <C>
10(i) -- Lease Agreement commencing on November 1, 1995 between West Peachtree
Point Partners, L.P. and MindSpring Enterprises, Inc. (Filed as
Exhibit 10(j) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(j) -- First Amendment dated February 6, 1996 to Lease Agreement dated
November 1, 1995 between John Marshall Law School, Inc. (assignee of
West Peachtree Point Partners, L.P.) and MindSpring Enterprises, Inc.
(Filed as Exhibit 10(cc) to Initial Form S-1, and incorporated herein
by reference.)........................................................
10(k) -- Agreement dated January 31, 1995 between Agis Net99 and MindSpring
Enterprises, Inc. (Filed as Exhibit 10(k) to Initial Form S-1, and
incorporated herein by reference.)....................................
10(l) -- Data Communications Service Agreement dated July 23, 1995 between
Sprint Communications Company L.P. and MindSpring Enterprises, Inc.
(Filed as Exhibit 10(l) to Initial Form S-1, and incorporated herein
by reference.)........................................................
10(m) -- LVIEW Pro Software Distribution License Agreement dated November 22,
1995 between MMedia Research and MindSpring Enterprises, Inc. (Filed
as Exhibit 10(m) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(n) -- Subscription Agreement dated as of April 27, 1995 between Michael G.
Misikoff and MindSpring Enterprises, Inc. (Filed as Exhibit 10(p) to
Initial Form S-1, and incorporated herein by reference.)..............
10(o) -- Subscription Agreement dated as of August 28, 1995 between Michael S.
McQuary and MindSpring Enterprises, Inc. (Filed as Exhibit 10(q) to
Initial Form S-1, and incorporated herein by reference.)..............
10(p) -- Subscription Agreement dated as of August 29, 1995 between J. Fredrick
Nixon and MindSpring Enterprises, Inc. (Filed as Exhibit 10(r) to
Initial Form S-1, and incorporated herein by reference.)..............
10(q) -- Second Amended and Restated Stockholders' Agreement dated as of
December 21, 1995 among MindSpring Enterprises, Inc. and Certain
Stockholders. (Filed as Exhibit 10(s) to Initial Form S-1, and
incorporated herein by reference.)....................................
10(r) -- Stock Purchase Agreement dated as of November 15, 1994 among ITC
Holding Company, Inc., MindSpring Enterprises, Inc., and Charles
Brewer. (Filed as Exhibit 10(t) to Initial Form S-1, and incorporated
herein by reference.).................................................
10(s) -- MindSpring Enterprises, Inc. 1995 Stock Option Plan. (Filed as Exhibit
10(u) to Initial Form S-1, and incorporated herein by reference.).....
10(t) -- Form of Stock Option Agreement. (Filed as Exhibit 10(v) to Initial
Form S-1, and incorporated herein by reference.)......................
10(u) -- MindSpring Enterprises, Inc. 1995 Directors Stock Option Plan. (Filed
as Exhibit 10(w) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(v) -- Form of Director Stock Option Agreement. (Filed as Exhibit 10(x) to
Initial Form S-1, and incorporated herein by reference.)..............
10(w) -- Form of MindSpring Service Agreement. (Filed as Exhibit 10(y) to
Initial Form S-1, and incorporated herein by reference.)..............
10(x) -- Service Provider Agreement dated December 13, 1995 between BBN Planet
Corporation and MindSpring Enterprises, Inc. (Filed as Exhibit 10(z)
to Initial Form S-1, and incorporated herein by reference.)...........
10(y) -- Software License Agreement dated September 1, 1995 between Ipswitch,
Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(aa) to
Initial Form S-1, and incorporated herein by reference.)..............
10(z) -- Software License Agreement dated December 13, 1995 between Network
TeleSystems, Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit
10(bb) to Initial Form S-1, and incorporated herein by reference.)....
</TABLE>
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<S> <C>
10(aa) -- Form of MindSpring Director or Officer Indemnity Agreement. (Filed as
Exhibit 10(dd) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(bb) -- Network Services Agreement dated June 28, 1996 by and between
MindSpring Enterprises, Inc. and PSINet Inc. (Filed as Exhibit 10.2 to
Current Report on Form 8-K dated June 28, 1996, File No. 0-27890, and
incorporated herein by reference.)....................................
10(cc) -- Master Services Agreement dated July 15, 1996 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc. ............
10(dd) -- Software License Agreement dated as of March 29, 1996 between Clarify
Inc. and MindSpring Enterprises, Inc. ................................
11 -- Statement regarding Computation of Per Share Earnings. ...............
23(a) -- Consent of Arthur Andersen LLP. ......................................
23(b) -- Consent of Price Waterhouse LLP. .....................................
*23(c) -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5).............
24 -- Powers of Attorney for the following individuals: Charles M. Brewer,
Michael S. McQuary, Michael G. Misikoff, Campbell B. Lanier, III,
William H. Scott, III and O. Gene Gabbard (included on signature
page). ...............................................................
27 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment
# In connection with the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, confidential treatment was requested for this exhibit.
As of the date hereof, such request for confidential treatment remains
pending.
<PAGE> 1
EXHIBIT 10(cc)
July 12, 1996 No. 0000001
MASTER SERVICES AGREEMEMT
This Master Services Agreement ("Agreement") is entered into by and between
BellSouth Telecommunications, Inc. ("BellSouth") and MindSpring Enterprises,
Inc. ("Customer"). BellSouth and Customer hereby agree to the following terms
and conditions:
I. Customer hereby orders the services described in the Master Services
Agreement-Order Attachment ("Order Attachment(s)") at the recurring and
non-recurring rates, charges in the Order Attachment, and in accordance with
terms and conditions as described in the applicable tariffs and Order
Attachment(s). Customer agrees to pay for the services included in the Order
Attachment(s) to this Agreement.
II. This Agreement is subject to and controlled by the provisions of
BellSouth's tariffs including but not limited to the General Subscriber
Services Tariff and the Private Line Tariff and all such revisions to said
tariffs as may be made from time to time. Except for the rates and charges in
the Order Attachment(s), the tariff shall supersede any conflicting provisions
of this Agreement. BellSouth agrees that any appropriate tariff decreases for
any rate element will be provided to the Customer.
III. If Customer cancels a service ordered pursuant to an Order Attachment
prior to the completed installation of the service but after the execution of
the Order Attachment, Customer shall pay all reasonable costs incurred in the
implementation of the service included in the Order Attachment. Such
reasonable costs shall not exceed all costs which could apply if the work in
the implementation of the Order Attachment had been completed.
IV. If Customer cancels a service ordered pursuant to an Order Attachment at
any time prior to the expiration of the service period set forth in the
appropriate Order Attachment(s), Customer shall be responsible for all
termination charges unless otherwise specified. Termination charges are
defined as all reasonable charges due or remaining as a result of the minimum
service period agreed to by BellSouth and Customer as set forth in the Order
Attachment(s).
V. This Agreement when used in conjunction with a Special Assembly or
Contract Services Arrangement may be subject to appropriate regulatory approval
prior to commencement of installation. In the event such regulatory approval
is denied, after a proper request by BellSouth, any Special Assembly and/or
Contract Service Arrangement shall be null and void and be of no effect.
VI. The service period shall be specified in the Order Attachment(s) to this
Agreement.
VII. For the determination of any service period, the service period shall
commence the date that the installation of service is completed.
VIII. At the expiration of the service period for any service that is available
pursuant to the tariff, the Customer may continue the service according to
renewal options provided under the tariff. If the Customer does not elect an
additional service period, or does not request discontinuance of service, the
service will be provided at the monthly rate currently in effect for
month-to-month rates. At the expiration of the service period for any Special
Assembly or Contract Service Arrangement, the customer may convert to an
available tariff offering for the specific service or may request a new Special
Assembly or Contract Service Arrangement.
IX. Customer may order additional existing services or new services by
submitting an appropriate Order Attachment properly authorized and submitted in
accordance with BellSouth's procedures. Rates for additional and/or new
services will be in accordance with the applicable tariff rates in effect at
the time the Order Attachment is accepted by BellSouth or as otherwise stated
in the appropriate Order Attachment.
X. This Agreement shall be governed by and construed in accordance with the
laws of each state where the service is provided unless otherwise provided.
XI. Except as otherwise provided in this Agreement, notices required to be
given pursuant to this Agreement shall be effective when received, and shall be
sufficient if given in writing, hand delivered or deposited in United States
mail, postage prepaid, addressed to the appropriate party at the address set
forth below:
------------------------------- BellSouth Telecommunications, Inc.
(NAME AND ADDRESS) (NAME AND ADDRESS)
(Attention: ) (Attention: )
------------------- -----------------
XII. Customer may not assign its rights or obligations under this Agreement
without the express prior written consent of BellSouth and only pursuant to the
conditions contained in the appropriate tariff.
XIII. In the event that one or more of the provisions contained in this
Agreement or incorporated within by reference shall be invalid, illegal or
unenforceable in any respect under any applicable statute, regulatory
requirement or rule of law, then such provisions shall be considered
inoperative to the extent of such invalidity, illegality or unenforceability
and the remainder of this Agreement shall continue in full force and effect.
XIV. This Agreement shall become effective upon execution by both parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the dates set forth below.
<TABLE>
<S> <C>
- -------------------------------------------- BELLSOUTH TELECOMMUNICATIONS, INC.
By: /s/ JAMES T. MARKLE By: /s/ J. D. SPRINGFIELD
----------------------------------------- -------------------------------------------------
(Authorized Signature) (Authorized Signature)
Name: James T. Markle Name: J. D. Springfield
--------------------------------------- ------------------------------------------------
(Print or Type) (Print or Type)
Title: Vice President Network Operations Title: Assistant Vice President
-------------------------------------- ------------------------------------------------------
Date: July 12, 1996 Date: July 15, 1996
-------------------------------------- ------------------------------------------------------
</TABLE>
<PAGE> 2
MindSpring Enterprises, Inc.
Additional Terms and Conditions
1. BellSouth and MindSpring recognize and agree that in the event that
the tariff pursuant to which BellSouth offers the services included in this
Agreement are declared null and void, this Agreement shall be deemed null and
void. BellSouth shall continue to work with MindSpring to pursue service
proposals that are consistent with the original intent of this Agreement and
comply with applicable legal and regulatory requirements.
2. The term of this Agreement shall be two years with two one year
renewal options.
2A. In the event MindSpring terminates this Agreement prior to the
expiration of the term of this Agreement, MindSpring shall be responsible for
termination charges. Termination charges shall equal fifty percent of the
billing for the previous 12 months billing for BellSouth services used by
MindSpring.
3. BellSouth shall present to MindSpring billing proposals that include
billing options on a service-by-service basis and on an aggregate service
basis.
4. In the event BellSouth inadvertently bills MindSpring in excess of
applicable tariffed rates, BellSouth shall refund to MindSpring any over
billing. Such refunds shall be in accordance with applicable legal and
regulatory requirements.
5. In the event that the tariff rates decrease for any services that
are included in this Agreement, appropriate tariff decreases for any rate
element shall be provided to MindSpring.
6. In the determination of MindSpring revenue commitment, BellSouth
shall aggregate all appropriate revenue from regulated local and intraLATA
services on a region wide basis.
7. There is nothing in this Agreement that prevents or should be
construed to prevent
- 1 -
<PAGE> 3
MindSpring from purchasing services from alternative service providers.
8. BellSouth has offered a proposal to MindSpring that is as favorable
as pricing proposals that have been made available to similarly situated
customers of BellSouth operating within the same industry as MindSpring.
Further, if BellSouth enters into an agreement with such a similarly situated
customer that contains more favorable pricing terms than the terms offered to
MindSpring during the term of this Agreement, BellSouth agrees to offer
MindSpring the opportunity to recast this Agreement at the more favorable
rates, terms, and conditions.
9. BellSouth agrees that in the event it fails to install facilities on
the negotiated Service Due Date and fails to meet the Service Due Date by more
than 5 business days, BellSouth shall provide MindSpring a credit equal to the
monthly recurring charges billed for the circuit. In the event BellSouth fails
to meet the Service Due Date by less than 5 business days, BellSouth shall
provide MindSpring a credit equivalent to fifty percent of the monthly
recurring charges for the circuit. Credits issued pursuant to this provision
will be applied to the installation of or billing for future BellSouth
services offered by MindSpring. MindSpring agrees that all requests for
credits associated with this provision must be submitted in writing within 30
calendar days to the BellSouth Business System Account Team subsequent to each
occurrence.
BellSouth and MindSpring agree that the negotiated Service Due Date on
all new services shall be 14 business days for sites where MindSpring is
currently using BellSouth services. BellSouth and MindSpring further agree
that the negotiated Service Due Date on all new services shall be 20 business
days for sites where MindSpring has not ordered any services from BellSouth
and is not currently using any BellSouth services.
MindSpring agrees to furnish BellSouth with an accurate 90 calender day
rolling forecast updated each 30 day calender period for new services to be
ordered at both new and existing MindSpring locations. MindSpring and
BellSouth agree that if the new services for both new and
- 2 -
<PAGE> 4
existing locations are not forecasted within 30 calender days of order
placement date, this provision is not applicable to requests or orders for
services submitted by MindSpring.
The failure to meet a Service Due Date that is caused by acts of God
(which include, but is not limited to, such acts as natural disasters,
hurricanes, floods, fires, etc.), political or civil unrest or other
causes beyond the reasonable control of BellSouth shall not constitute a
delay in performance for purposes of this provision. Further, BellSouth's
failure to meet the negotiated Service Due Date as a result of situations
created by or actions of third parties that are not within the control of
BellSouth that impact the availability of facilities, BellSouth's access
to facilities such as for example, access to conduit access to building
space operated by the building management shall also not constitute a
delay in performance for purposes of this provision. In addition, if a
MindSpring order for additional services causes an exhaust in BellSouth
Central Office capacity, credits under this provision will not apply. In
the event BellSouth fails to meet the Service Due Date because of acts
that are caused by or within the control of MindSpring, BellSouth shall
not be liable for installation credits for failure to meet the negotiated
Service Due Date. MindSpring and BellSouth agree that this provision
shall be implemented on a trial basis for six months and BellSouth
reserves the right to renegotiate this provision after six months.
10. BellSouth agrees that in the event MindSpring experience an
outage on circuits that generate 25 percent or more of MindSpring's
service, per location for more than three hours, BellSouth shall provide
MindSpring a credit of $200 per hour after the initial three hours and
for each additional hour or part thereof that the outage occurs. BellSouth
and MindSpring further agree that a Cap of $1000 shall be applied in the
event the outage exceeds 8 hours. Credits issued for outage shall be
applied to the installation of, or
- 3 -
<PAGE> 5
customary billing for future BellSouth services ordered by MindSpring.
MindSpring agrees that all credits associated with this provision must be
submitted in writing within 30 calendar days subsequent to each occurrence.
The calculation of the duration of the outage shall begin upon
BellSouth's receipt of notification to BellSouth Repair Center of the
service outage and a trouble ticket is opened. The service outage shall
cease at the time that MindSpring or BellSouth confirm that the service
outage has been corrected and the trouble ticket is closed.
An outage that is caused by acts of God (which includes, but is not
limited to, such acts as natural disasters, hurricanes, floods, fires,
etc.), political or civil unrest or other cause beyond the reasonable
control of BellSouth shall not constitute a failure in performance for
purposes of this provision. In the event MindSpring experiences or
prolongs an outage because of acts that are caused by or within the
control of MindSpring, BellSouth shall not be liable for outage credits.
MindSpring and BellSouth agree that this provision shall be implemented
on a trial basis for six months and BellSouth reserves the right to
renegotiate this provision after six months.
11. In the event of a divestiture of a significant part of
MindSpring's business, a business downturn beyond MindSpring's control,
or a network optimization using other BellSouth services, any of which
significantly reduces the volume of network services required by
MindSpring with the result that MindSpring is unable to meet its annual
revenue commitment under this Agreement (notwithstanding MindSpring's
best efforts to avoid such a shortfall), BellSouth and MindSpring will
cooperate in efforts to develop a mutually agreeable alternative that
will satisfy the concerns of both parties and comply with all applicable
legal and regulatory requirements. Such alternative may reduce the
MindSpring's Annual Revenue Commitment to the extent of any shortfall
resulting from
- 4 -
<PAGE> 6
the business downturn or network optimization. This provision shall not
apply to a change resulting from a decision by MindSpring: (i) to reduce
its overall use of telecommunications; or (ii) to transfer portions of
its traffic or projected growth to providers other than BellSouth.
MindSpring must provide BellSouth written notice of the conditions it
believes will require the application of this provision. This provision
does not constitute a waiver of any charges, including shortfall charges,
incurred by MindSpring prior to the time the parties mutually agree to
amend this Agreement.
12. MindSpring agrees to a Minimum Annual Revenue Commitment of
$2,000,000 in the first year and 90% of the actual first year contract
revenue for the second year.
13. BellSouth and MindSpring acknowledge and agree that if
MindSpring chooses to engage in the "Re-Sale" of BellSouth services, and
MindSpring becomes a Re-Seller (either directly or jointly in conjuction
with Interstate Holding Company or any of it's subsidiaries) all
obligations under this agreement may be terminated by MindSpring without
penalty at the effective date of the Re-Sale agreement.
14. BellSouth and MindSpring acknowledge and agree that the
aforementioned terms and conditions are preliminary and BellSouth agrees
to provide MindSpring a final offer and Agreement for execution by no
later than July 15, 1996.
<PAGE> 7
Attachment I
MindSpring Enterprises, Inc.
Incentive Schedule
1. MindSpring and BellSouth agree to establish the Minimum Annual
Revenue Commitment (MARC) at the current billing rate of $2,000,000 for the
first year. The MARC for the second year will be set at 90% of the first
year's contract billed revenue.
2. BellSouth agrees to apply a 3.5% initial discount on all services
other than services issued under special provisions including CSAs, Special
Assemblies and other packaged rates. BellSouth further agrees to apply the
following discounts in the event that MindSpring achieves the following levels
of billing.
Annual Billing Discount Rate
-------------- -------------
Current - 2,999,999 3.50%
$3,000,000 - 3,499,000 4.50%
$3,500,000 - 3,999.000 5.00%
$4,000,000 - 4,449,000 6.00%
$4,500,000 - 4,999,000 6.50%
$5,000,000 - 5,499,000 7.25%
$5,500,000 - 5,999,999 7.50%
$6,000,000 - 6,499,999 7.75%
$6,500,000 - 6,999,999 8.00%
$7,000,000 - 7,999,999 8.50%
BellSouth agrees to issue monthly credits of 3.5% initially, based upon
current annual billing at the inception of this agreement. BellSouth agrees to
issue additional credits should MindSpring's actual year end billing exceed
it's initial billing range. The "True Up" will be issued as follows:
(Percentage associated with actual annual billing, less 3.5%, times the actual
annual billing).
- 6 -
<PAGE> 1
EXHIBIT 10(dd)
SOFTWARE LICENSE AGREEMENT
Number MEI-022796
This AGREEMENT dated as of March 29, 1996, is between Clarify Inc., 2702
Orchard Parkway, San Jose, CA 95134 (hereinafter called "Clarify"), and
MindSpring Enterprises, Inc., 1430 West Peachtree Street, NW, Suite 400,
Atlanta, GA, 30309 (hereinafter called "CUSTOMER").
1.0 DEFINITIONS
1.1 "Agreement" means this License Agreement, any amendment
thereto, or any Schedule or Exhibit that exists as of the date of this
Agreement or may hereinafter be incorporated by reference.
1.2 "Concurrent User" means a Registered Client licensed to Use a
Licensed Program which has been designated by Clarify to be a concurrent
software application. A concurrent software application is a Licensed Program
which may be shared by any number of Registered Clients but, the maximum
simultaneous Use of the Licensed Program is limited to the number of Concurrent
User licenses purchased by CUSTOMER.
1.3 "License Fees" means amounts charged to CUSTOMER for the Use
of Licensed Programs.
1.4 "Licensed Programs" means those computer software programs
listed in the "Clarify Product Quotation", incorporated herein by reference as
Schedule A, (as well as any updates thereof furnished by Clarify pursuant to
the terms of this AGREEMENT) and in any written amendments thereto, in machine
readable, printed or other form, including but not limited to instructional and
operational manuals, flow charts, logic diagrams, file layouts and listings.
The term Licensed Programs does not include source code in any form, such
source code being the sole and exclusive property of Clarify, free from any
claim or retention of rights thereto on the part of CUSTOMER.
1.5 "Node Locked Software" means a Licensed Program which is
licensed for Use on a designated computer only.
1.6 "Proprietary Information" means the Licensed Programs in any
embodiment, and any other information relating to the Licensed Programs
received by CUSTOMER from Clarify which is also identified by Clarify as
proprietary or confidential.
1.7 "Registered Client" means any computer system authorized to
Use a Licensed Program and access data from or perform functions on a Server.
1.8 "Server" means a designated computer system situated at a
specific location and configured with Licensed Programs to support an
authorized number of Registered Clients and Concurrent Users.
1.9 "Use" means (i) transferring any portion of any Licensed
Program from storage units or media into the CUSTOMER's computer equipment for
processing; (ii) executing any portion of any Licensed Program as a Registered
Client or as a Concurrent User for any purpose; (iii) executing any portion of
any Node Locked Software for any purpose; (iv) accessing any Server for the
purpose of obtaining or preparing information or data created through the
execution of a Licensed Program; or (v) merging any Licensed Programs in
machine readable form into another program.
2.0 GRANT OF LICENSE
2.1 Clarify grants to CUSTOMER, on the terms and conditions set
forth herein, that number of non-exclusive, non-transferable, perpetual and
royalty-free licenses specified in Schedule A, and any amendments thereto, as
such licenses are required to support implementation of Customer's
configuration of Server, Registered Client, Concurrent User, and Node Locked
Software applications. The license granted does not authorize CUSTOMER to
change or modify the Licensed Programs.
2.2 Clarify reserves the right, upon prior notice to CUSTOMER to
audit usage and, if unauthorized Use is found, CUSTOMER agrees to cease such
usage immediately upon receipt of written notification, or to promptly purchase
additional Licensed Programs such that the total of all purchased licenses
reflects the actual number of licenses in Use.
3.0 CONDITIONS OF LICENSE
3.1 CUSTOMER may, in accordance with the section entitled "Trade
Secrets - Intellectual Property Rights" (Section 11.1) copy for backup purposes
only, License Programs which are provided in machine readable form. CUSTOMER
may copy, for internal use only, any portion of Licensed Programs which are
provided in printed form (i.e. instructional or operational manuals).
3.2 Immediately upon the termination of this Agreement, CUSTOMER
shall return to Clarify the original and all copies of the Licensed Programs
and shall certify in writing to Clarify that it has done so.
3.3 Except as permitted herein, CUSTOMER shall (a) not reproduce,
reverse engineer, decompile, transfer electronically or permit any other Use of
the Licensed Programs not expressly authorized by Section 2; and b) acknowledge
that any unpermitted act(s) or Use(s) is a breach of a material obligation of
this Agreement.
4.0 PRICE AND PAYMENT TERMS
4.1 Payment of License Fees shall entitle CUSTOMER to Use the
Licensed Programs subject to the terms of this Agreement. License Fees shall
be due and payable "Net 30 Days" from date of invoice. Applicable taxes,
including sales, use, personal property, excise, or other taxes and duties and,
specifically excluding any income or corporate franchise taxes, will be paid by
CUSTOMER. Interest will be charged on past due amounts at the lesser of one
and one-half percent (1 1/2%) per month, or at the maximum interest rate
allowed by law.
5.0 DELIVERY AND INSTALLATION
5.1 Delivery dates quoted by Clarify or its personnel represent
Clarify's best estimate only of the expected Delivery Date. Clarify will not
be liable for any damages or penalties arising from any delays in delivery or
for failure to give notice or any delivery
<PAGE> 2
delay. Risk of loss of Licensed Programs shall transfer to CUSTOMER upon
delivery.
5.2 It is the responsibility of the CUSTOMER to provide and
prepare, in the configuration and at the location specified in Schedule A, the
system environment upon which the Licensed Programs are to be installed.
Clarify will invoice CUSTOMER for the setup and installation of the Licensed
Programs as such service is provided.
6.0 CONSULTING, TRAINING AND MAINTENANCE SUPPORT
6.1 At CUSTOMER's election, and in accordance with the terms and
conditions of a mutually developed Consulting and Training Services Agreement
and/or Software Maintenance Agreement, Clarify will provide such support
services to CUSTOMER.
7.0 PATENT AND COPYRIGHT INFRINGEMENT
7.1 Clarify shall, at its own expense, defend or at its option,
settle any claim, suit or proceeding brought against CUSTOMER on the issue of
infringement of any patent, copyright or other proprietary rights, of any third
party, by virtue of CUSTOMER's usage of any of the Licensed Programs pursuant
to the terms of this Agreement. Clarify shall indemnify and hold CUSTOMER
harmless from and against any costs, expenses, settlements or damages, including
reasonable attorney fees, related to any claim for infringement provided that
CUSTOMER: (a) promptly notifies Clarify in writing of the action; (b) CUSTOMER
permits Clarify full authority to defend or settle the action; and (c) CUSTOMER
cooperates and provides all available information, assistance and authority to
defend or settle the action. Clarify shall not be liable for any costs,
expenses, damages or fees incurred by CUSTOMER in defending such action or
claim unless authorized in advance, in writing by Clarify.
7.2 If a Licensed Program is, or in the opinion of Clarify is
likely to become the subject of a claim, suit or proceeding of infringement,
Clarify may in its sole discretion: (a) procure, at no cost to CUSTOMER, the
right to continue using the Licensed Program, (b) replace or modify the
Licensed Program to render it non-infringing, provided there is no material
loss of functionality or (c) if, in Clarify's reasonable opinion, neither (a)
nor (b) above are commercially feasible, to terminate the license and refund
the amounts CUSTOMER paid for such Licensed Programs (as depreciated on a
straight line basis over a period of 60 months). The foregoing obligations of
Clarify do not apply with respect to Licensed Programs or portions or components
thereof (i) not supplied by Clarify; (ii) which are modified by CUSTOMER, if the
alleged infringement relates to such modifications; (iii) combined with other
products, processes or materials where the alleged infringement relates to such
combination, (iv) where CUSTOMER continues the allegedly infringing activity
after being notified thereof or after being informed and provided with
modifications that would have avoided the alleged infringement, or (v) where
CUSTOMER's use of the Licensed Programs is not strictly in accordance with the
purpose for which this license has been granted herein.
8.0 LIMITED WARRANTY
8.1 Clarify warrants that it has the right to enter into this
Agreement and that it has the right to grant the licenses hereunder. Clarify
warrants for a period of ninety (90) days from the date of delivery that the
Licensed Programs will be free from defects in media and shall substantially
conform to the specifications therefore set forth in the documentation, subject
to the condition that the Licensed Programs are installed on computer hardware
conforming to Clarify's published system requirements. In the event of any non
conformance of the Licensed Programs, CUSTOMER shall promptly notify Clarify in
writing, and provide Clarify with evidence and documentation which reproduces
the claimed error and resultant output from the execution of such programs or
data. Clarify's sole obligation under this warranty shall be limited to use of
its commercial best efforts to promptly correct such defects. Except as
provided under a valid Maintenance Agreement, Clarify will be under no
obligation to provide CUSTOMER with phone support or with any Licensed Programs
updates, releases or enhancements other than to remedy non conformance under
this warranty. Clarify's warranty obligations shall be void if the Licensed
Program(s) is/are used on other than computer hardware conforming to Clarify's
published system requirements or the computer hardware is modified without the
advance written consent of Clarify.
9.0 DISCLAIMER OF ALL OTHER WARRANTIES
9.1 EXCEPT AS SPECIFICALLY SET FORTH IN THE SECTION ENTITLED
"LIMITED WARRANTY" (SECTION 8.0), CLARIFY MAKES NO EXPRESS OR IMPLIED OR
STATUTORY WARRANTIES, INCLUDING, BUT NOT LIMITED TO THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, OR ARISING FROM A COURSE
OF DEALING, TRADE USAGE OR TRADE PRACTICE. THE SOLE AND EXCLUSIVE REMEDY FOR
ANY BREACH OF THE WARRANTIES AS SET FORTH IN THIS AGREEMENT SHALL BE REJECTION
AND REFUND OF ANY AMOUNTS ACTUALLY PAID BY CUSTOMER TO CLARIFY FOR LICENSED
PROGRAMS ONLY. THE PARTIES TO THIS AGREEMENT HEREBY ACKNOWLEDGE THE EXISTENCE
OF ERRORS IN THE LICENSED PROGRAMS AND CLARIFY OFFERS NO WARRANTY THAT ALL
ERRORS IN THE PROGRAMS WILL BE CORRECTED.
10.0 LIMITATION OF LIABILITY
10.1 EXCEPT AS PROVIDED FOR IN THE SECTION ENTITLED "PATENT AND
COPYRIGHT INFRINGEMENT (SECTION 7.0), NEITHER CLARIFY, NOR CLARIFY'S
SUPPLIERS, SHALL BE RESPONSIBLE OR LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREEMENT OR ANY ATTACHMENT, ADDENDUM, SCHEDULE OR TERMS AND CONDITIONS
RELATED THERETO UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER
THEORY: A) FOR LOSS OR INACCURACY OF ANY DATA OR
<PAGE> 3
COST OF PROCUREMENT OF SUBSTITUTE GOODS, SERVICES OR TECHNOLOGY; B) FOR
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO LOSS
OF REVENUES AND LOSS OF PROFITS; OR C) FOR ANY MATTER BEYOND ITS REASONABLE
CONTROL.
10.2 Except as provided for in Section Entitled "Patent and
Copyright Infringement" (Section 7.0) of this AGREEMENT, the total maximum
liability, if any, to CUSTOMER arising out of this Agreement as a result of any
action or inaction by Clarify or Clarify's suppliers, shall be limited to the
total license fees actually paid by CUSTOMER to Clarify. The existence of more
than one claim will not enlarge or extend this limit.
11.0 TRADE SECRETS - INTELLECTUAL PROPERTY RIGHTS
11.1 CUSTOMER acknowledges that the Licensed Programs and related
materials licensed hereunder are proprietary and protected by patent, copyright
and or trade secret law. All proprietary notices incorporated in, marked on or
fixed to Licensed Programs, or other confidential information by Clarify or its
suppliers, shall be duplicated by CUSTOMER on all copies of all or any part of
the Licensed Programs, and shall not be altered, removed, or obliterated. The
obligation to include such notices is a material obligation hereunder. A
copyright notice on Licensed Programs does not, by itself, constitute evidence
of publication or public notice.
11.2 Clarify and the CUSTOMER agree during the term of this
Agreement, and thereafter, to take all steps reasonably necessary to hold in
trust and confidence all proprietary or confidential information. "Confidential
Information" includes but is not limited to, technical and business information
relating to inventions or products, research and development, production,
manufacturing and engineering processes, costs, profit or margin information,
employee skills and salaries, finances, customers, marketing and production and
future business plans. Nothing received by the parties will be considered to
be the Confidential Information of the other party if (1) it has been published
or is otherwise readily available to the public other than by a breach of this
Agreement; (2) it has been rightfully received by the other party from a third
party without confidential limitations; (3) it has been independently developed
for the other party by personnel or agents having no access to the Confidential
Information of either party; (4) it was known to either party prior to its
first receipt from the other party; or (5) it has been disclosed by either
party to a third party without restriction on disclosure.
11.3 Unless otherwise agreed to in writing by Clarify, CUSTOMER
agrees to limit access to the Licensed Programs to those employees, contractors
or affiliates actively employed or engaged on behalf of Customer in the
installation or continued Use of the Licensed Programs.
12.0 TITLE
12.1 Subject to the licenses granted herein, all right, title and
interest in and to the Licensed Programs, Clarify Proprietary Information and
any other patents, patent applications, trademarks, copyrights or trade secrets
owned by or the rights in which are held by Clarify and its licensors shall
remain with Clarify and its licensors.
13.0 TERMINATION OF AGREEMENT
13.1 Either party may terminate this Agreement by written notice
(i) should the other party file a petition in bankruptcy, or have filed against
it an involuntary petition in bankruptcy not dismissed within sixty (60) days
after filing, or apply for or consent to the appointment of a receiver,
custodian, trustee or liquidator, or make a general assignment for the benefit
of its creditors; or (ii) upon failure of the other party to make a payment
hereunder within fifteen (15) days after written notice that such payment is
past due; (iii) upon any other breach of this Agreement by the other party,
which if remediable, has not been corrected within (60) days after written
notice; (iv) immediately in the event of a breach of Sections 3.1, 3.3, 11.0 or
12.0 of this Agreement.
13.2 On termination of this Agreement, all licenses granted by
Clarify to CUSTOMER hereunder shall terminate. CUSTOMER shall cease using the
Licensed Programs, whether or not modified or merged into other materials,
program installation instructions and user manuals, and CUSTOMER shall certify
in writing to Clarify all copies (in any form or media) of the Licensed
Programs, installation instructions and user manuals, whether or not modified or
incorporated into other materials, have been destroyed or returned to Clarify.
13.3 CUSTOMER's obligation to pay Clarify amounts due hereunder and
sections 3.3, 7.0, 8.0, 9.0, 10.0, 11.0, 12.0 and 14.0 shall survive any
expiration or termination of this Agreement.
14.0 GENERAL PROVISIONS
14.1 GOVERNING LAW: The validity, construction and performance of
this Agreement and the rights and obligations of the parties arising in
connection therewith, shall be governed in all respects and for all purposes by
and construed in accordance with the laws of the State of California, United
States of America. Such law shall apply to all claims arising out of or in
connection with the performance or breach of this Agreement whether such claims
are characterized as contractual, tortuous or otherwise. The parties hereto
expressly exclude from such applicable law the conflict of law rules of the
State of California and the U.N. Convention on Contracts for the International
Sale of Goods.
14.2 ENTIRE AGREEMENT: This Agreement sets forth the entire
understanding and Agreement between CUSTOMER and Clarify as to the subject
matter of their Agreement.
14.4 HEADINGS: Titles or headings to the sections of this
Agreement are not part of the terms of this Agreement and are inserted only for
convenience.
14.5 NOTICES: All notices, requests and other communications under
this Agreement must be
<PAGE> 4
made in writing and in the English language to the addresses as signed below.
14.6 LEGAL FEES: In the event that legal action is instituted by
either party to enforce the terms and conditions of this Agreement against the
other party, the party which is unsuccessful in the suit will pay all
reasonable legal fees incurred by the prevailing party.
14.7 FORCE MAJEURE: Clarify's performance hereunder is subject to
force majeure, including but not limited to wars, riots, strikes, labor
disturbances, acts of God, fires, floods, explosions, civil disturbances,
inability to obtain required material or transportation, and acts of
governmental authorities.
14.8 TIMELY CLAIMS: No action for breach of this Agreement or any
other action to enforce any claim arising out of or in connection with the
subject matter of this Agreement shall be brought by CUSTOMER against Clarify
more than one (1) year after the cause of action has accrued.
14.9 ACCESS BY Clarify: CUSTOMER agrees to provide Clarify with
full, free and timely access to CUSTOMER's computer equipment and Licensed
Programs at all reasonable times for the purpose of fulfilling its obligations
hereunder.
14.10 CUSTOMER ACKNOWLEDGEMENT: CUSTOMER acknowledges that, prior
to execution of this Agreement, it has had an opportunity to determine for
itself the characteristics and capabilities of the Licensed Programs and is
satisfied that the Licensed Programs fulfill CUSTOMER's requirements. Clarify
makes no representations of any kind beyond those contained in this Agreement
and no agent of Clarify has the authority to make any representations beyond
those contained in this Agreement.
Accepted By:
- ------------
MindSpring Enterprises, Inc.: Clarify:
- ----------------------------- --------
/s/ MICHAEL MISIKOFF /s/ RAY M. FRITZ
- ---------------------------------- -----------------------------------
Authorized Signature Authorized Signature
Michael Misikoff Ray Fritz
- ---------------------------------- -----------------------------------
Print Name Print Name
CFO C.F.O.
- ---------------------------------- -----------------------------------
Title Title
3/28/96 3/29/96
- ---------------------------------- -----------------------------------
Date Date
<PAGE> 5
SCHEDULE A
[CLARIFY LOGO] Clarify Inc.
117 Perimeter Center West
Suite N 113
Atlanta, GA 30338
Phone: (770) 395-7634
Fax: (770) 395-0518
MindSpring Enterprises, Inc.
1430 West Peachtree St. NW 25-Mar-96
Atlanta, GA 30309
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
1 ClearSupport Application $5,000 $5,000
- -----------------------------------------------------------------------------------------------------
14 ClearSupport User (Concurrent) $3,750 $52,500
- -----------------------------------------------------------------------------------------------------
5 Full Text Search User (Concurrent) $1,000 $5,000
- -----------------------------------------------------------------------------------------------------
3 ClearLogistics Field Operations User (Concurrent) $1,000 $3,000
- -----------------------------------------------------------------------------------------------------
1 ClearCustomize DD Editor User (Concurrent) $5,000 $5,000
- -----------------------------------------------------------------------------------------------------
1 ClearCustomize UI/Action Editor User (Concurrent) $5,000 $5,000
- -----------------------------------------------------------------------------------------------------
1 ClearExtensions Pager Interface $5,000 $5,000
- -----------------------------------------------------------------------------------------------------
5 ClearExpress Online User $500 $2,500
- -----------------------------------------------------------------------------------------------------
1 ClearExpress WebSupport Application $2,500 $2,500
- -----------------------------------------------------------------------------------------------------
3 ClearExpress WebSupport Users $500 $1,500
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
List price $87,000
- -----------------------------------------------------------------------------------------------------
Product volume discount 25% ($21,750)
- -----------------------------------------------------------------------------------------------------
Partnership Marketing Agreement 5% ($4,350)
- -----------------------------------------------------------------------------------------------------
Net product price $60,900
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
12 mo. Basic Support 15% $13,050
- -----------------------------------------------------------------------------------------------------
2 ClearSupport System Familiarization Training (3 days) $1,350 $2,700
- -----------------------------------------------------------------------------------------------------
1 ClearCustomize Training (2 days) $1,000 $1,000
- -----------------------------------------------------------------------------------------------------
1 Data Modeling (2 days) $1,000 $1,000
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
TBD Consulting (see Note) $1,600/day
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total Clarify Services $17,750
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
Total Clarify Product and Services Quotation $78,650
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Notes:
Terms: 30% due with order, 70% due upon software installation.
Orders must include Software License, Maintenance and Consulting agreements.
Page 1
<PAGE> 6
SCHEDULE B
CONSULTING AND TRAINING SERVICES AGREEMENT
This Consulting and Training Services Agreement ("CTSA") is an exhibit to the
Software License Agreement number MEI-022796 dated March 24, 1996 between
Clarify and CUSTOMER and constitutes a Master Services Agreement setting forth
the terms and conditions under which Clarify will provide consulting and
training services for the Licensed Program(s) licensed to CUSTOMER pursuant to
the License Agreement. All terms not otherwise defined herein shall have the
meaning given them in the License Agreement.
1.0 TERM
1.1 This CTSA shall continue in effect until terminated as
provided for herein.
2.0 RESPONSIBILITIES OF CLARIFY:
2.1 Clarify agrees that during the term of this CTSA, and under a
fee structure negotiated between the parties, that Clarify shall use its
commercial best efforts to provide those consulting and training services as
may be requested by CUSTOMER and mutually agreed upon between the parties.
3.0 RESPONSIBILITIES OF CUSTOMER As a condition of this CTSA, CUSTOMER
agrees to:
3.1 Provide reasonable access to CUSTOMER personnel.
3.2 Establish a requirements document for the Customer Service
Information Management System to be installed and, in conjunction with Clarify,
develop an implementation and roll out plan for the Licensed Program(s).
Changes to the project's scope, requirements document, schedule and/or cost
must be accepted by CUSTOMER and Clarify in writing and documented as an
Exhibit to this CTSA.
3.3 Establish, with Clarify's assistance, a training program that
meets the needs of CUSTOMER's user community. With regard to training, Clarify
reserves the right in consultation with the CUSTOMER to i) establish the dates
and times of any training course, (ii) specify the content of any training
course, (ii) specify the content of any training course, (iii) limit the number
of students attending any training course based on adequacy of computer
equipment provided by CUSTOMER for the training, and (iv) designate the
instructor for any training course.
3.4 Provide all equipment or software required for Clarify to
develop or test on behalf of CUSTOMER, platform specific features or
functionality unique to CUSTOMER's installation.
4.0 LIMITATIONS OF CTSA SERVICES:
Unless specific exceptions are approved in writing by Clarify, the following
limitations to CTSA service shall apply:
4.1 CTSA services will be provided to CUSTOMER solely for the Use
of Licensed Program(s) in the designated configuration specified in Schedule A
of the License Agreement, or any amendments thereto.
4.2 At the option of Clarify, Clarify may limit, suspend or
terminate its obligations under this CTSA if the Licensed Program(s) have been
modified in any way without Clarify's prior written approval.
4.3 If Clarify determines that the primary cause of any problem
arising during the performance of Clarify's obligations under this CTSA, result
from failure or malfunction of any tools, equipment, facilities or devices not
furnished by, or approved in writing for use in connection with the Licensed
Program(s) by Clarify, then Clarify at is option may immediately terminate this
CTSA.
5.0 CTSA SERVICE FEES
5.1 Clarify may, from time-to-time, provide CUSTOMER with an
assessment of the number of hours or days which Clarify believes will be
required to complete a particular assignment. CUSTOMER understands such
assessments are "estimates only" and agrees that the actual CTSA service fees
will be invoiced by Clarify at the end of each calendar month and paid by
CUSTOMER Net 30 Days from date of invoice. Clarify makes no representation
that the amount of service delivered or the actual hours charged will be equal
to, or will approximate, the estimate presented to CUSTOMER. Interest will be
charged on past due amounts at the lesser of one and one-half percent (1 1/2%)
per month, or at the maximum interest rate allowed by law.
5.2 CUSTOMER agrees to reimburse Clarify for all reasonable travel
and subsistence expenses including travel time expense computed at consulting
rates for non-local travel, airfare, meals, and other out-of-pocket expenses,
provided such expenses are first approved in writing by CUSTOMER.
5.3 CUSTOMER shall be responsible for applicable taxes, including
sales, use, personal property, excise, or other taxes and duties and,
specifically excluding any income or corporate franchise taxes, to be paid by
Clarify.
6.0 DISCLAIMER OF WARRANTIES
6.1 CLARIFY STIPULATES THAT IT HAS THE REQUIRED SKILLS TO PERFORM
THE SERVICES HEREUNDER AND THAT SUCH SERVICES SHALL BE PERFORMED IN A
PROFESSIONAL AND WORKMAN LIKE MANNER. CLARIFY OFFERS NO GUARANTEES THAT THE
INSTALLATION OR IMPLEMENTATION OF THE LICENSED PROGRAMS WILL BE SUCCESSFUL NOR
DOES CLARIFY IN CONNECTION WITH THIS CTSA, AND THE SERVICES RENDERED HEREUNDER,
MAKE ANY WARRANTY, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR OF MERCHANTABILITY OR
NON-INFRINGEMENT. CLARIFY'S SOLE OBLIGATION SHALL BE LIMITED TO CLARIFY'S USE
OF COMMERCIAL
<PAGE> 7
BEST EFFORTS TO PROVIDE THE AGREED UPON SERVICES.
7.0 LIMITATION OF LIABILITY
7.1 Clarify shall under no circumstances, be responsible directly
or indirectly, for any damage to the apparatus or adjacent property of
CUSTOMER, nor for any injuries to persons, unless such damage or injury is
directly attributable to the negligence of Clarify.
7.2 Clarify shall not be liable for the acts and workmanship of
the employees, contractors, subcontractors, or agents of CUSTOMER, including
but not limited to the failure to observe Clarify's instructions or
Documentation, or by failure or malfunctioning of any tools, equipment
facilities, or devices not furnished or approved by Clarify.
7.3 EXCEPT IN THE CASE OF DAMAGE TO TANGIBLE PHYSICAL PROPERTY,
NEITHER CLARIFY, NOR CLARIFY'S SUPPLIERS, SHALL BE RESPONSIBLE OR LIABLE WITH
RESPECT TO ANY SUBJECT MATTER OF THIS CTSA OR ANY ATTACHMENT, ADDENDUM,
SCHEDULE OR TERMS AND CONDITIONS RELATED THERETO UNDER ANY CONTRACT,
NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY FOR LOSS OR INACCURACY OF ANY DATA
OR COST OF PROCUREMENT OF SUBSTITUTE GOODS, SERVICES OR TECHNOLOGY; FOR
INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO
LOSS OF REVENUES AND LOSS OF PROFITS; OR FOR ANY MATTER BEYOND ITS REASONABLE
CONTROL. CLARIFY'S LIABILITY UNDER OR ARISING OUT OF THIS AGREEMENT, WHETHER
FOR BREACH OF CONTRACT, TORT, OR OTHERWISE, SHALL BE LIMITED TO CUSTOMER'S
TERMINATION OF THIS CTSA. CLARIFY'S LIABILITY FOR DAMAGE OR LOSS OF TANGIBLE
PHYSICAL PROPERTY SHALL NOT EXCEED $1 MILLION.
8.0 COPYRIGHTED WORKS
8.1 CUSTOMER acknowledges that it is the nature of Clarify's
services to produce ideas and concepts and other intellectual services that may
result in computer programs, notes, reports, presentations, documents, ideas, or
inventions relating or useful to CUSTOMER's business under this CTSA. Clarify
has the right to copyright or patent, or cause to be copyrighted or patented, or
produce products that are copyrighted or patented or considered proprietary,
related to the contributions by Clarify under this CTSA.
8.2 CUSTOMER agrees that the ideas, concepts, or other
intellectual products produced by Clarify under this CTSA shall also remain the
property of Clarify for past, concurrent, or future use in the pursuance of
Clarify's business. CUSTOMER shall have a non-exclusive, non-transferable
license to use such work product for its own internal purposes only. CUSTOMER
may not transfer or disclose such work product to any other person or party.
8.3 CUSTOMER agrees to assist Clarify, to the extent that it is
commercially reasonable, to obtain and enforce Clarify's benefit copyrights or
other property rights or damages. CUSTOMER agrees that the obligations of this
paragraph shall continue beyond the term of this CTSA. Such participation by
CUSTOMER must be explicitly requested by Clarify, and will be provided at the
reasonable convenience of CUSTOMER.
9.0 BREACH AND REMEDIES
9.1 Should CUSTOMER: (a) default in the payment of any sum of
money due beyond the fifteenth (15th) day after the same is due; or (b) default
in the performance of any other of its obligations under this CTSA or the
License Agreement and such default continues for a period of sixty (60) days
after receipt of written notice from Clarify; or (c) permit any person other
than a Clarify employee to alter or change any Licensed Program(s) without
Clarify's prior written consent; or (d) in the event that CUSTOMER is in breach
of Sections 3.0, 11.0 or 12.0, of the License Agreement, then in any such event
Clarify may, at its option proceed with the following: (i) suspend its CTSA
obligations immediately; (ii) immediately terminate this CTSA or (iii) adjust
any unpaid and future charges for any and all CTSA services rendered to
CUSTOMER. The rights afforded Clarify under this paragraph will not be deemed
to be exclusive, but shall be in addition to any rights or remedies provided by
law.
10.0 TERMINATION
10.1 Either party may terminate this CTSA at any time by providing
the other party with thirty (30) days written notice of their intent to
terminate. Upon termination or other expiration of this CTSA, each party shall
forthwith return to the other party all papers, materials and other properties
of the other held by each for purposes of execution of this CTSA, except that
CUSTOMER may retain any materials or documentation for which CUSTOMER has paid
Clarify a fee subject to the terms of this CTSA.
10.2 CUSTOMER's obligation to pay Clarify amounts due hereunder and
sections 6.0, 7.0, 8.0, and 12.0 shall survive any expiration or termination of
this CTSA.
11.0 ASSIGNMENT
11.1 Neither this CTSA nor any rights or obligations hereunder,
shall be transferred or assigned by CUSTOMER without the prior written consent
of Clarify, which consent shall not be unreasonably withheld.
11.2 Clarify reserves the right to assign the performance of this
CTSA to a qualified third party.
12.0 GENERAL
12.1 The General Provisions (Section 14.0), as well as the section
pertaining to Title (Section 12.0), each as stipulated in the License Agreement
are incorporated herein as an integral part of this CTSA.
<PAGE> 8
Accepted By:
- ------------
MindSpring Enterprises, Inc.: Clarify Inc.:
- ----------------------------- -------------
/s/ MICHAEL MISIKOFF /s/ RAY M. FRITZ
- ----------------------------------- -----------------------------------
Authorized Signature Authorized Signature
Michael Misikoff Ray Fritz
- ----------------------------------- -----------------------------------
Print Name Print Name
CFO C.F.O.
- ----------------------------------- -----------------------------------
Title Title
3/28/96 3/29/96
- ----------------------------------- -----------------------------------
Date Date
<PAGE> 9
SCHEDULE C
SOFTWARE MAINTENANCE AGREEMENT
This Software Maintenance Agreement ("SMA") is an exhibit to the Software
License Agreement number MEI-022796 dated 3/29, 1996 between Clarify and
CUSTOMER and constitutes a Master Maintenance Support Agreement setting forth
the the terms and conditions under which Clarify will provide maintenance
support ("Support") for the Licensed Program(s) licensed to CUSTOMER pursuant
to the License Agreement. All terms not otherwise defined herein shall have
the meaning given them in the License Agreement.
1.0 TERM
1.1 The effective maintenance period for each Licensed Program
covered by this Agreement shall be twelve (12) months unless either party
elects otherwise as provided herein.
2.0 RESPONSIBILITIES OF CLARIFY: Clarify agrees that during the term of
this Agreement with respect to each Licensed Program to be Supported hereunder,
Clarify shall use its commercial best efforts to:
2.1 Monitor CUSTOMER communication with Clarify; track CUSTOMER
inquires involving the Use of Licensed Program(s); evaluate problems involving
the Use of Licensed Program(s), and provide status reports on Licensed
Program(s) problem resolution and commitments.
2.2 Provide CUSTOMER, at no additional charge, with Updates to
Licensed Program(s). Clarify makes no representation as to what may be
included in and/or excluded from an Update and is under no obligation to
incorporate in an Update any newly developed functionality.
2.3 Provide Software Bulletins containing available information on
pending Updates, new product releases, application techniques, and workarounds
to problems at the time they are generally issued to all Clarify customers
covered under an SMA.
2.4 Provide the designated System Manager, with assistance in the
event of difficulty in the Use of Licensed Program(s) which emanate from
"bugs," code errors, documentation errors or problems of interpretation in
accordance with the terms and conditions of the Support Product purchased by
CUSTOMER.
2.5 Provide problem reporting procedures to CUSTOMER for reporting
Licensed Program(s) "bug," malfunctions, programming errors, and related
problems and for obtaining status thereof.
2.6 Provide replacements and/or workarounds for Licensed Program(s)
for the correction of" bugs, "malfunctions, programming errors and related
problems to correct the substantial inability of the Licensed Program(s) to
perform the tasks it is designed to perform as represented by the applicable
documentation.
2.7 Respond to and/or solve any problems in the current release
concerning the Use of the Licensed Program(s) which materially affect a
critical function or feature of the Licensed Program(s).
2.8 Make available to CUSTOMER the services of a qualified Clarify
Support Engineer to assist CUSTOMER in the Use of Licensed Program(s), to the
extent such services are covered under the terms and conditions of a Consulting
and Training Services Agreement.
3.0 RESPONSIBILITIES OF CUSTOMER
3.1 Appoint a System Manager and alternate, both trained and
qualified in accordance with Clarify then current training standards, who will
maintain the integrity of the Licensed Program(s) under the terms of the
License Agreement, who will act as CUSTOMER'S liaison for all technical
communications with Clarify and who will act as the point of contact for the
distribution of information and materials provided to CUSTOMER by Clarify
pursuant to this Agreement.
3.2 Promptly obtain training in the Licensed Program(s) including
any major updates, developed for the System Manager, their alternate, or any
other employee substituting or replacing the System Manager and/or alternate.
3.3 Properly maintain the Licensed Program(s) at the then current
version and release level. If any update release of the Licensed Program(s)
offered to CUSTOMER is deemed by CUSTOMER to be undesirable, CUSTOMER may, at
its option, continue to Use a prior release of the Licensed Program(s).
However, should CUSTOMER fail to accept, within 180 days of its offering, the
currently Supported version of the Licensed Program(s), or should CUSTOMER
modify the Licensed Program(s) in any manner except as authorized, in writing,
in advance, by Clarify, then Clarify shall have, at its option, no obligation
to fulfill the responsibilities set forth in Section 2.0. Clarify's obligations
as provided for in Section 2.0 shall only apply to the current release of the
Licensed Program(s).
3.4 Subject to CUSTOMER's security requirements, CUSTOMER shall
provide Clarify with access to and use of all information and system
facilities, including but not limited to a V32.bis modem connection to
CUSTOMER'S principal server running the Morningstar PPP software application,
which have been determined by the parties to the required in order that timely
Support may be provided pursuant to this Agreement.
3.5 Provide remedial corrective action, if necessary, with the
assistance of Clarify Support Personnel.
3.6 Notify Clarify of a "bug," programming error, malfunction
and/or other problem in accordance with the then-current problem reporting
procedures.
3.7 When Updates to Licensed Program(s) are received by CUSTOMER,
and immediately following installation of the Update, except for any archival
or back-up copies as authorized in Section 3.1 of the Software License
Agreement, CUSTOMER shall promptly destroy, or at Clarify's election return any
prior version.
4.0 LIMITATIONS OF SUPPORT: Unless specific exceptions are approved in
writing by Clarify, the following limitations of Support shall apply:
4.1 Support will be provided to CUSTOMER solely for the Use of
Licensed Programs(s)
<PAGE> 10
in the designated configuration specified in Schedule A of the License
Agreement, or any amendments thereto.
4.2 Pursuant to Section 3.3, Clarify may, at its option, limit or
discontinue its Support obligations if the Licensed Program(s) Updates have not
been installed as required or if the Licensed Program(s) has been modified in
any way without Clarify's prior written approval.
4.3 Clarify shall be under no obligation to provide Support to
CUSTOMER if Clarify determines that the primary cause of the problems
identified result from failure or malfunction of any tools, equipment,
facilities or devices not furnished by, or approved in writing for use in
connection with the Licensed Program(s) by Clarify.
5.0 ANNUAL SUPPORT FEES
5.1 Support fees hereunder shall be invoiced upon completion of
installation or in the case of a renewal, thirty (30) days in advance of
expiration, and are due and payable at the beginning of each effective period.
Net 30 Days from the date of invoice. Interest will be charged on past due
amounts at the lesser of one and one-half percent (1 1/2%) per month, or at the
maximum interest rate allowed by law. Support fees shall be pro-rated to begin
and end co-terminously. Support fees for any fraction of a month shall be
calculated (based on a thirty (30)-day month) from the effective date.
5.2 If this SMA should expire or be terminated at any time,
CUSTOMER may reinstate Support coverage, provided all client stations and
client servers are upgraded to the then current release of the Licensed
Program(s). The amount to be charged to CUSTOMER for Support reinstatement
shall be equal to the cumulative standard Support fees applicable for the
period during which Support had lapsed plus the Support fee for the current
period.
5.3 If CUSTOMER requests Support not provided for hereunder,
Clarify may at its sole discretion agree to provide such Support at the
then-current rates for such Support, including all time, travel and other
out-of-pocket expenses.
5.4 CUSTOMER shall be responsible for applicable taxes, including
sales, use, personal property, excise, or other taxes and duties and,
specifically excluding any income or corporate franchise taxes, to be paid by
Clarify.
6.0 DISCLAIMER OF WARRANTIES
6.1 IN CONNECTION WITH THIS SMA AND THE SUPPORT RENDERED HEREUNDER,
CLARIFY MAKES NO WARRANTY, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR OF
MERCHANTABILITY OR NON-INFRINGEMENT, CLARIFY'S SOLE OBLIGATION SHALL BE LIMITED
TO CLARIFY'S USE OF COMMERCIAL BEST EFFORTS TO SUPPORT THE LICENSED PROGRAM(S).
7.0 LIMITATION OF LIABILITY
7.1 In connection with the Support to be performed hereunder,
Clarify shall under no circumstances, be responsible directly or indirectly, for
any damage to the apparatus or adjacent property of CUSTOMER, nor for any
injuries to persons, unless such damage or injury is directly attributable to
the negligence of Clarify.
7.2 Clarify shall not be liable for the acts and workmanship of the
employees, contractors, subcontractors, or agents of CUSTOMER, including but
not limited to the failure to observe Clarify's instructions or documentation,
or by failure or malfunctioning of any tools, equipment facilities, or devices
not furnished or approved by Clarify.
7.3 EXCEPT IN THE CASE OF DAMAGE TO TANGIBLE PHYSICAL PROPERTY,
NEITHER CLARIFY, NOR CLARIFY'S SUPPLIERS, SHALL BE RESPONSIBLE OR LIABLE WITH
RESPECT TO ANY SUBJECT MATTER OF THIS SMA OR ANY ATTACHMENT, ADDENDUM SCHEDULE
OR TERMS AND CONDITIONS RELATED THERETO UNDER ANY CONTRACT, NEGLIGENCE, STRICT
LIABILITY OR OTHER THEORY FOR LOSS OR INACCURACY OF ANY DATA OR COST OF
PROCUREMENT OF SUBSTITUTE GOODS, SERVICES OR TECHNOLOGY; FOR INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO LOSS OF
REVENUES AND LOSS OF PROFITS; OR FOR ANY MATTER BEYOND ITS REASONABLE CONTROL.
CLARIFY'S LIABILITY UNDER OR ARISING OUT OF THIS AGREEMENT, WHETHER FOR BREACH
OF CONTRACT, TORT, OR OTHERWISE, SHALL BE LIMITED TO A REFUND OF THE UNUSED
SUPPORT FEES DETERMINED ON A PRO-RATA BASIS PAID FOR THE LICENSED PROGRAM(S)
INVOLVED IN THE CLAIM. CLARIFY'S LIABILITY FOR DAMAGE OR LOSS OF TANGIBLE
PHYSICAL PROPERTY SHALL NOT EXCEED $1 MILLION.
8.0 COPYRIGHTED WORKS
8.1 CUSTOMER acknowledges that it is the nature of Clarify's
services to produce ideas and concepts and other intellectual services that may
result in computer programs, notes, reports, presentations, documents, ideas,
or inventions relating or useful to CUSTOMER's business under this SMA.
Clarify has the right to copyright or patent, or cause to be copyrighted or
patented, or produce products that are copyrighted or patented or considered
proprietary, related to the contributions by Clarify under this SMA.
8.2 CUSTOMER agrees that the ideas, concepts, or other intellectual
products produced by Clarify under this SMA shall also remain the property of
Clarify for past, concurrent, or future use in the pursuant of Clarify's
business. CUSTOMER shall have a non-exclusive, non-transferable license to use
such work product for its own internal purposes only. CUSTOMER may not
transfer or disclose such work product to any other person or party.
8.3 CUSTOMER agrees to assist Clarify, to the extent that it is
commercially reasonable, to obtain and enforce Clarify's benefit copyrights or
other property rights or damages. CUSTOMER agrees that the obligations of this
paragraph shall continue beyond the term of this SMA. Such participation by
CUSTOMER must be explicitly requested by Clarify, and will be provided at the
reasonable convenience of CUSTOMER.
9.0 BREACH AND REMEDIES
<PAGE> 11
9.1 Should CUSTOMER: (a) default in the payment of any sum of money
due beyond the fifteenth (15th) day after the same is due; or (b) default in
the performance of any other of its obligations under this SMA or the Software
License Agreement and such default continues for a period of sixty (60) days
after receipt of written notice from Clarify; or (c) permit any person other
than a Clarify employee to alter or change any Licensed Program(s) without
Clarify's prior written consent; or (d) in the event that CUSTOMER is in breach
of Section 3.0, 11.0 or 12.0, of the License Agreement, then in any such event
Clarify may, at its option proceed with the following; (i) suspend its SMA
obligations immediately; (ii) terminate this SMA or (iii) adjust any unpaid and
future charges for any and all SMA services rendered to CUSTOMER. The rights
afforded Clarify under this paragraph will not be deemed to be exclusive, but
shall be in addition to any rights or remedies provided by law.
10.0 TERMINATION
10.1 CUSTOMER may terminate this SMA at any time by providing Clarify
with ninety (90) days written notice of CUSTOMER's intent to terminate. Upon
termination or other expiration of this SMA, each party shall forthwith return
to the other party all papers, materials and other properties of the other held
by each for purposes of execution of this SMA, except that CUSTOMER may retain
any materials or documentation for which CUSTOMER has paid Clarify a fee
subject to the terms of this SMA. As of the date of termination, Clarify shall
return any unused Support fees, as such may exit, and as determined on a
pro-rata basis.
10.2 CUSTOMER's obligation to pay Clarify amounts due hereunder and
sections 6.0, 7.0, 8.0, and 12.0 shall survive any expiration or termination of
this SMA.
11.0 ASSIGNMENT
11.1 Neither this SMA nor any rights or obligations hereunder, shall
be transferred or assigned by CUSTOMER without the prior written consent of
Clarify, which consent shall not be unreasonably withheld.
11.2 Clarify reserves the right to assign the performance of this SMA
to a qualified third party.
12.0 GENERAL
12.1 The General Provisions (Section 14.0), as well as the section
pertaining to Title (Section 12.0), each as stipulated in the License
Agreement, are incorporated herein as an integral part of this SMA.
Accepted By:
MindSpring Enterprises, Inc.:
/s/ MICHAEL MISIKOFF
- -------------------------------------------
Authorized Signature
Michael Misikoff
- -------------------------------------------
Print Name
CFO
- -------------------------------------------
Title
3/25/96
- -------------------------------------------
Date
Clarify:
/s/ RAY M. FRITZ
- -------------------------------------------
Authorized Signature
Ray Fritz
- -------------------------------------------
Print Name
C.F.O.
- -------------------------------------------
Title
3/29/96
- -------------------------------------------
Date
<PAGE> 12
[CLARIFY LOGO]
MindSpring Enterprises, Inc.
Special Considerations
1. The terms of this agreement are dependent on MindSpring completing a
Purchase Order and signed License Agreement before March 25, 1996.
2. Future software product purchases not covered by this agreement will be
discounted at 30% for three years from the date of License Agreement.
3. The ClearSupport Application Server will be priced as follows:
- $5,000 for the 1st through 30 ClearSupport concurrent user
- An additional $5,000 list for the 31st through 45th ClearSupport
concurrent user
- An additional $5,000 list for the 46th and up ClearSupport concurrent
user
Making it a total of $15,000 for unlimited ClearSupport concurrent
users.
4. The WEBSupport Application Server will be priced as follows:
- $2,500 for the 1st through 5th WEBSupport concurrent user
- An additional $2,500 list for the 6th through 10th WEBSupport
concurrent user
- An additional $2,500 list for the 11th and up WEBSupport concurrent
users.
Making it a total of $7,500 for unlimited WEBSupport concurrent users.
5. In January 1997 MindSpring will purchase an additional 14 ClearSupport
concurrent users at the lesser of a discounted price of $36,750 (list price
$52,500) or a discount of 30% of (January 1997) current list price.
6. January 1998 we jointly will reassess MindSpring's usage or the
ClearSupport concurrent users to determine the actual number of
concurrent users. If at that time MindSpring's actual usage exceed the 28
concurrent users count MindSpring will have the option to purchases the
additional concurrent users necessary to cover the actual usage or
discontinue the usage of the concurrent ClearSupport users in excess
of the 28 purchased. These additional concurrent users can be purchased at
the lesser of $2,100 dollars per concurrent user or at a 30% discount off
(January 1998) current list price. In 1998, for the propose of calculating
maintenance fees, the list price for ClearSupport concurrent users will be
$3000. dollars
7. In order for MindSpring to qualify for the 5% Public Relations the Clarify
Public Relations Addendum must be included as part of the Software License
Agreement.
8. December 1996 MindSpring will take delivery of the API Toolkit. Payment for
the toolkit will made in January 1997.
9. The ClearSupport Report Pack will be delivered for evaluation 3 months
after the License Agreement is signed.
10. Clarify will provide the Network Management Interface software for
evaluation, if Mind Spring should select to use one of the Clarify supported
Network Management systems.
<PAGE> 1
EXHIBIT 11
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
For the Year For the Quarter For the Six Months
Ended Ended Ended
December 31, 1995 June 30, 1995 June 30, 1996 June 30, 1995 June 30, 1996
----------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Weighted Average Shares Outstanding 1,267,304 1,267,304 5,111,782 1,267,304 4,309,859
Common Stock Equivalents:
Class A Convertible Preferred Stock 1,187,895 1,187,895 0 (A) 1,187,895 0 (A)
Class B Convertible Preferred Stock 332,525 28,378 0 (A) 14,267 0 (A)
Class C Convertible Preferred Stock 100,000 100,000 0 (B) 100,000 0 (B)
Stock Options: Employee and Director
Plans 287,652 287,652 0 (B) 287,652 0 (B)
----------- ---------- ----------- ---------- ----------
Total Shares for Primary Loss Per Share 3,175,376 2,871,229 5,111,782 2,857,119 4,309,859
Net Loss $(1,958,531) $ (169,075) $(1,459,953) $ (261,935) $(2,449,213)
----------- ---------- ----------- ---------- -----------
Primary Loss Per Share $ (0.62) $ ($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.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
Atlanta, Georgia
August 20 ,1996
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 24, 1995
relating to the financial statements of PSINet Pipeline New York, Inc.
(formerly The Pipeline Network Inc.), which appears in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
PRICE WATERHOUSE LLP
Washington, DC
August 21, 1996
<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>
