<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
----- -----
Commission file number 0-27890
---------------
MINDSPRING ENTERPRISES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2113290
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1430 West Peachtree St. NW, Suite 400, Atlanta, GA 30309
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 815-0770
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Outstanding at August 11, 1997
------------------------------
<S> <C>
Common Stock at $.01 par value 7,527,949 Shares
</TABLE>
<PAGE> 2
Part I - Financial Information
Item 1 - Financial Statements
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF JUNE 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
JUNE 30,1997 DECEMBER 31, 1996
------------ -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 6,410,550 $ 9,653,234
Trade receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . 1,988,423 1,996,613
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . 959,444 853,122
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,307 116,545
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 9,445,724 12,619,514
------------ ------------
PROPERTY AND EQUIPMENT;
Computer and telecommunications equipment . . . . . . . . . . . . . . . 13,903,345 11,509,165
Assets under capital lease . . . . . . . . . . . . . . . . . . . . . . . 5,265,454 1,472,885
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,610,413 565,503
------------ ------------
20,779,212 13,547,553
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . (3,773,595) (1,964,231)
------------ ------------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . 17,005,617 11,583,322
------------ ------------
OTHER ASSETS:
Acquired customer base, net . . . . . . . . . . . . . . . . . . . . . . 9,025,030 10,727,268
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,778 302,273
------------ ------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 9,175,808 11,029,541
------------ ------------
35,627,149 35,232,377
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,981,324 $ 4,119,302
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 3,630,133 1,284,626
Current portion of capital lease obligations . . . . . . . . . . . . . . 1,729,743 656,252
Current portion of notes payable . . . . . . . . . . . . . . . . . . . . 1,273,295 623,922
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,245,194 415,881
------------ ------------
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9,859,689 7,099,983
------------ ------------
LONG TERM LIABILITIES:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,239,014 2,042,742
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . 3,005,345 682,571
------------ ------------
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . 4,244,359 2,725,313
------------ ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 14,104,048 9,825,296
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares authorized
and 7,525,625 and 7,477,084 issued and outstanding at
June 30, 1997 and December 31, 1996, respectively . . . . . . . . . . 75,256 74,771
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . 35,048,325 34,978,225
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (13,600,480) (9,645,915)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 21,523,101 25,407,081
------------ ------------
$ 35,627,149 $ 35,232,377
============ ============
</TABLE>
The accompanying Condensed Notes to Financial Statements are an integral part
of these balance sheets.
2
<PAGE> 3
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
REVENUES
Access $ 9,053,043 $ 1,619,287 $16,409,229 $ 2,789,600
Subscriber start-up fees 806,640 478,672 1,806,923 845,768
Business services 1,740,678 396,850 3,164,225 671,155
----------- ------------ ----------- -------------
Total revenues 11,600,361 2,494,809 21,380,377 4,306,523
----------- ------------ ----------- -------------
COST AND EXPENSES
Cost of revenues--recurring $ 3,524,777 $ 754,569 $ 6,693,575 $ 1,296,203
Cost of subscriber start-up fees 294,905 351,783 659,979 616,120
General and administrative 5,233,577 1,611,503 10,246,039 2,770,542
Selling 1,908,037 991,487 3,818,470 1,570,411
Depreciation and amortization 2,059,631 362,435 3,888,121 596,343
----------- ------------ ----------- -------------
Total cost and expenses 13,020,927 4,071,777 25,306,184 6,849,619
OPERATING LOSS $(1,420,566) $ (1,576,968) $(3,925,807) $ (2,543,096)
INTEREST (EXPENSE) INCOME,
NET (8,946) 117,015 (28,758) 43,883
----------- ------------ ----------- -------------
NET LOSS $(1,429,512) $ (1,459,953) $(3,954,565) $ (2,499,213)
----------- ------------ ----------- -------------
NET LOSS PER SHARE $ (0.19) $ (0.29) $ (0.53) $ (0.58)
----------- ------------ ----------- -------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 7,517,069 5,111,782 7,497,798 4,309,859
----------- ------------ ----------- -------------
</TABLE>
The accompanying Condensed Notes to Financial Statements
are an integral part of these statements.
3
<PAGE> 4
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,954,565) $ (2,499,213)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 3,888,121 596,343
Changes in operating assets and liabilities:
Trade receivables . . . . . . . . . . . . . . . . . . 8,190 (640,087)
Other current assets . . . . . . . . . . . . . . . . . (77,084) (57,242)
Trade accounts payable . . . . . . . . . . . . . . . . (2,137,978) 686,746
Other accrued expenses . . . . . . . . . . . . . . . . 2,345,507 176,532
Deferred revenue . . . . . . . . . . . . . . . . . . . 829,313 356,305
------------- ---------------
Total adjustments . . . . . . . . . . . . . . . . . 4,856,069 1,118,597
------------- ---------------
Net Cash Provided by (Used in) Operating Activities 901,504 (1,380,616)
------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . (3,440,662) (3,922,432)
Purchase of customer base . . . . . . . . . . . . . . . . (351,181) (3,000,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 127,729 (77,864)
------------- ---------------
Net Cash Used in Investing Activities . . . . . . . . (3,664,114) (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 of notes payable . . . . . . . . . . . . . . . . - 2,000,000
Payments of notes payable . . . . . . . . . . . . . . . . (154,355) -
Payments of capital lease obligations . . . . . . . . . . (396,304) -
Issuance of common stock . . . . . . . . . . . . . . . . . 70,585 14,149,689
------------- ---------------
Net Cash (Used in) Provided by Financing Activities . (480,074) 13,649,689
-------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . (3,242,684) 5,268,777
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . 9,653,234 424,834
------------- ---------------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . $ 6,410,550 $ 5,693,611
============= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . $ 235,608 $ 136,127
============= ===============
Cash paid for income taxes . . . . . . . . . . . . . . . . $ - $ -
============= ===============
SUPPLEMENTAL NON-CASH DISCLOSURES:
Assets acquired under capital leases . . . . . . . . . . . $ 3,792,569 $ -
============= ===============
</TABLE>
The accompanying Condensed Notes to Financial Statements
are an integral part of these statements.
4
<PAGE> 5
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1996
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 the Company's financial position and
results for the interim periods presented. All such adjustments are of
a normal and recurring nature. It is suggested that these condensed
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (File No. 0-27890).
2. Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
3. Net loss per share is computed using the weighted average number of
shares of common stock and dilutive common stock equivalent shares
from stock options (using the treasury stock method). For the periods
presented, options to purchase shares of the company's common stock
are excluded from the calculation as their effect is antidilutive.
4. There was no provision for or cash payment of income taxes for the six
months ended June 30, 1997 and 1996, respectively, as the Company had
net taxable loss for these periods and anticipates a net taxable loss
for the year ended December 31, 1997.
5
<PAGE> 6
ITEM 2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MindSpring Enterprises, Inc. (the "Company") is a national
provider of Internet access. The Company was incorporated in Georgia on
February 24, 1994, and began marketing its services in June 1994. The Company
reincorporated in Delaware in December 1995. At June 30, 1997, the Company
served a total of approximately 183,000 subscribers.
The Company offers nationwide Internet access through an
aggregate of over 250 Company-owned points of presence ("POPs") and third party
POPs to which the Company has access pursuant to network services agreements
with such parties. The Company provides access to subscribers through 38
Company-owned POPs and access to the network of over 200 POPs owned by PSINet
Inc. ("PSINet") and the network of over 130 POPs owned by GridNet
International, L.L.C. ("GridNet"). As of June 30, 1997 the Company and PSINet
maintained approximately 18 POPs in the same service area. Of the 130 GridNet
POPs to which the Company has access, approximately 105 POPs are in the same
service area as an existing Company-owned POP or PSINet POP. Pursuant to each
of the services agreements between the Company and each of PSINet and GridNet
(the "PSINet Services Agreement" and "GridNet Services Agreement,"
respectively), the Company has the flexibility to offer Internet access in such
overlapping POP locations through a MindSpring POP, a PSINet or GridNet POP or
a combination of all three.
The Company derives revenue primarily from monthly
subscriptions and start-up fees from individuals for dial-up access to the
Internet. Monthly subscription fees vary by billing plan. Under the Company's
current pricing plans, customers have a choice of two "flat rate" plans (The
Works and Unlimited Access) and two "usage-sensitive" plans (Standard and
Light). For the quarters ended June 30, 1997 and June 30, 1996, the average
monthly recurring revenue per dial-up subscriber was approximately $20 (monthly
recurring revenue plus usage charges for non-"flat rate" subscribers, divided
by total subscribers). Start-up fees for new subscribers vary depending upon
the promotional method by which the subscriber is acquired, ranging up to a
maximum of $25. Aggregate subscriber fees are sufficient to cover the
aggregate costs of direct materials, mailing expenses, and licensing fees
associated with new subscribers. Most of the Company's individual subscribers
pay their MindSpring fees automatically by preauthorized monthly charges to the
subscriber's credit card.
In addition, the Company earns revenue 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. Through its domain registration
services, the Company provides subscribers the ability to personalize
electronic mail addresses. These services have been classified as business
services in the condensed statements of income and the "Results of Operations"
table set forth below.
The Company's costs include (1) costs of revenue that are
primarily related to the number of subscribers, (2) selling, general and
administrative expenses that are associated more generally with operations, and
(3) depreciation and amortization, which are related to the size of the
Company's network and the deferred costs associated with acquired customer
bases.
Costs of revenue that are primarily related to the number of
subscribers include both recurring costs and subscriber start-up expenses.
Recurring costs of revenue consist primarily of the costs of telecommunications
facilities necessary to provide service to subscribers and certain monthly
6
<PAGE> 7
licensing fees per subscriber for the right to receive and make available
certain proprietary on-line services. Telecommunications facilities costs
include the costs of providing local telephone lines into each Company-owned
POP, costs related to the use of third party networks pursuant to services
agreements and costs associated with leased lines connecting each Company-owned
POP and third party network to the Company's hub and connecting the Company's
hub to the Internet backbone. 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.
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 Company's scope of
operations increases. However, the Company expects that such costs will be
more than offset by anticipated increases in revenue attributable to overall
subscriber growth. 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 revenue to
offset such marketing expenses. The Company does not defer any start-up
expenses 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.
Prior to the PSINet Services Agreement and the GridNet
Services Agreement, as the demand for the Company's services in a particular
POP had grown, the Company had been required to invest in additional
telecommunications equipment and provide additional local telephone lines for
that POP. The third party network services agreements provide the Company the
option to evaluate on a POP-by-POP basis whether to continue to develop
MindSpring POPs using the Company's capital resources or to conserve capital
through utilization of third party POPs for a specified fee. As the Company
expands into new markets, both costs of revenue and selling, general and
administrative expenses will increase. To the extent the Company opens
MindSpring POPs in new markets, such expenses may also increase as a percentage
of revenue 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 revenue can be expected from that market. However, to the extent
that the Company expands into new markets by using third party POPs instead of
opening its own POPs, the Company's incremental monthly recurring costs will
consist primarily of the fees to be paid to third parties based on revenue per
subscriber served, as provided in the PSINet Services Agreement and the GridNet
Services Agreement. The margins on such subscribers will initially be higher
than if the Company had developed its own POP in new markets. Once a new
market matures, costs of revenue as a percentage of revenue will tend to be
higher in markets served through utilization of purchased network services
rather than Company-owned POPs since the full costs of utilizing such network
services is included in costs of revenue while a portion of the costs of
utilizing Company-owned POPs is included in depreciation and amortization. The
Company has announced plans to build its own POPs to serve New York City and
most of California, markets which are currently served by the Company through
PSINet POPs, by October 1, 1997. Besides the New York City and California
POPs, the Company does not currently plan to open a significant number of
additional MindSpring POPs during the remainder of 1997. Management will,
however, evaluate on a POP-by-POP basis the closing or expansion of existing
MindSpring POPs or the opening of new MindSpring POPs based on subscriber
demand and strategic considerations.
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 has, however, begun to generate cash flows from operations. The Company
expects to continue to focus on increasing its subscriber base which will
result in higher expenses, but believes that the development of its operations
will provide certain economies of scale which will decrease its cost of
start-up fees, selling expenses, and general and administrative expenses as a
percentage of revenue in the future.
7
<PAGE> 8
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996
The following table sets forth certain unaudited financial
data for the quarters ended June 30, 1997 and 1996. Operating results for any
period are not necessarily indicative of results for any future period. Dollar
amounts (except per share data) are shown in thousands.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
JUNE 30, 1997 JUNE 30, 1996
(000'S) % OF (000'S) % OF
REVENUES REVENUES
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
Dial-up access to Internet $ 9,053 78 $ 1,619 65
Start-up fees 807 7 479 19
Business services 1,740 15 397 16
----------- --------- ---------- ---------
Total revenues 11,600 100 2,495 100
Costs and expenses:
Selling, general and administrative 7,142 61 2,603 104
Costs of revenues- recurring 3,525 30 755 30
Costs of revenues- start-up fees 295 3 352 14
Depreciation 1,027 9 362 15
Amortization of acquired customer bases 1,032 9 0 0
----------- --------- ---------- ---------
Total costs and expenses 13,021 112 4,072 163
----------- --------- ---------- ---------
Operating loss (1,421) (12) (1,577) (63)
Interest (expense) income, net (9) (0) 117 5
----------- --------- ---------- ---------
Net loss (1,430) (12) (1,460) (58)
=========== ==========
PER SHARE DATA:
Net loss per share $ (0.19) $ (0.29)
Weighted average common shares outstanding 7,517,069 5,111,782
OPERATING DATA:
Approximate number of subscribers at end of period 183,388 34,460
Number of Company employees at end of period 398 177
</TABLE>
Revenue: Revenue for the quarter ended June 30, 1997 totaled
approximately $11,600,000, compared to approximately $2,495,000 for the quarter
ended June 30, 1996. The 365% increase in period revenue resulted primarily
from a 432% increase in subscribers. Dial-up Access to the Internet revenue
for the quarter ended June 30, 1997 represented 78% of revenue, compared to 65%
of revenue for the same quarter in the prior year. Subscriber start-up fees
accounted for 7% of revenue for the quarter ended June 30, 1997, compared to
19% for the quarter ended June 30, 1996. The Company anticipates that as its
customer base continues to expand, subscriber start-up fees will
8
<PAGE> 9
progressively represent a smaller percentage of revenue. Business services
revenue remained relatively constant as a percentage of total revenue.
Costs of revenue-recurring: For the quarters ended June 30,
1997 and 1996, recurring costs of revenue represented approximately 30% of
total revenue. However, the cost decreased as a percentage of dial-up access
revenue from 47% in the second quarter of 1996 to 39% in the second quarter of
1997. Exclusive of $450,000 in discounts received in the second quarter of
1997 pursuant to the PSINet Services Agreement, recurring costs of revenue
would have been 44% of total dial-up revenue for the period, compared to 47%
for the quarter ended June 30, 1996. This decrease as a percentage of dial-up
access revenue resulted primarily from increased efficiency and reduced network
costs in the Company's own network.
Costs of revenue-start-up expenses: For the quarter ended June
30, 1997, subscriber start-up expenses decreased to approximately 3% of total
revenue, compared to approximately 14% of total revenue for the quarter ended
June 30, 1996, and decreased to 37% of start-up fee revenue for the quarter
ended June 30, 1997 compared to 73% of start-up fee revenue for the quarter
ended June 30, 1996. The decrease in start-up expenses as a percentage of total
revenue was primarily a result of the number of new subscribers decreasing as a
percentage of the entire subscriber base as the subscriber base expands. The
decrease in start-up expenses as a percentage of start-up fees resulted from
reduced expenditures per new subscriber for licenses and kit materials. The
Company anticipates that start-up expenses will continue to decrease as a
percentage of total revenue to the extent that the number of new subscribers
decreases as a percentage of the entire subscriber base.
Selling, general and administrative expenses: Selling, general
and administrative expenses were approximately 61% of revenue for the quarter
ended June 30, 1997, compared to approximately 104% of revenue for the quarter
ended June 30, 1996. The decrease in selling, general and administrative
expenses as a percentage of revenue resulted from economies of scale with
respect to such costs as employee compensation that do not increase in
direction proportion to increases in revenue and to cost control efforts
implemented by management.
Depreciation and amortization: Depreciation and amortization
expenses increased to approximately 18% of revenue for the quarter ended June
30, 1997, compared to approximately 15% of revenue for the same period in the
prior year. The increase was primarily attributable to the amortization of
acquired customer bases. The Company is amortizing the costs of acquired
customer bases over a three-year period. Amortization expense related to
acquired customer bases for the quarter ended June 30, 1997 was approximately
$1,032,000, or 9% of revenue. Depreciation expense was 9% of total revenue for
the quarter ended June 30, 1997, compared with 15% for the comparable period in
the prior year. The decrease in depreciation expense as a percentage of total
revenue resulted from the addition of capacity through increased utilization of
purchased network services as opposed to increasing capacity by the
construction of additional Company-owned POPs and from efficiencies within the
Company's owned POPs resulting from reductions in cost of new equipment and
improved utilization within the Company's network.
Interest expenses: Interest expense for the quarter ended
June 30, 1997 consisted of approximately $109,000 related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet,
offset by approximately $100,000 of interest income. For the quarter ended
June 30, 1996, the Company had no interest expense and $117,000 of interest
income. The Company recorded a $2,000,000 note payable to PSINet on June 30,
1996, and recorded no interest for the period ending June 30, 1996. No other
credit facilities existed during the second quarter of 1996.
9
<PAGE> 10
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
The following table sets forth certain unaudited financial
data for the six months ended June 30, 1997 and 1996. Operating results for
any period are not necessarily indicative of results for any future period.
Dollar amounts (except per share data) are shown in thousands.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1996
(000'S) % OF (000'S) % OF
REVENUES REVENUES
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues
Dial-up access to Internet $ 16,409 77 $ 2,790 65
Start-up fees 1,807 8 846 20
Business services 3,164 15 671 15
-------- ------- -------- ------
Total revenues 21,380 100 4,307 100
Costs and expenses:
Selling, general and administrative 14,064 66 4,341 101
Costs of revenues- recurring 6,694 31 1,296 30
Costs of revenues- start-up fees 660 3 616 14
Depreciation 1,835 8 597 14
Amortization of acquired customer bases 2,053 10 0 0
--------- ------- --------- ------
Total costs and expenses 25,306 118 6,850 159
--------- ------- --------- ------
Operating loss (3,926) (18) (2,543) (59)
Interest (expense) income, net (29) (0) 44 1
--------- ------- --------- ------
Net loss (3,955) (18) (2,499) (58)
========= =========
PER SHARE DATA:
Net loss per share $ (0.53) $ (0.58)
Weighted average common shares outstanding 7,497,798 4,309,859
OPERATING DATA:
Approximate number of subscribers at end of period 183,388 34,460
Number of Company employees at end of period 398 177
</TABLE>
Revenue: Revenue for the six months ended June 30, 1997
totaled approximately $21,380,000, compared to approximately $4,307,000 for the
six months ended June 30, 1996. The 396% increase in period revenue resulted
primarily from a 432% increase in subscribers offset by a decrease in revenue
per subscriber resulting from price changes implemented in May 1996. Dial-up
Access to the Internet revenue for the six month period ended June 30, 1997
represented 77% of revenue, compared to 65% of revenue for the same period in
the prior year. Subscriber start-up fees accounted for 8% of revenue for the
six months ended June 30, 1997, compared to 20% for the six months ended June
30, 1996. The Company anticipates that as its customer base continues to
expand, subscriber start-up fees will progressively represent a smaller
percentage of revenue. Business services revenue remained constant as a
percentage of total revenue.
10
<PAGE> 11
Costs of revenue-recurring: For the six months ended June 30,
1997, recurring costs of revenue increased to approximately 31% of total
revenue as compared to approximately 30% of total revenue for the six months
ended June 30, 1996. However, the cost decreased as a percentage of dial-up
access revenue from 46% in the first six months of 1996 to 41% in the first six
months of 1997. Exclusive of $900,000 in discounts received in the first six
months of 1997 pursuant to the PSINet Services Agreement, recurring costs of
revenue would have been 46% of total dial-up revenue for the six months ended
June 30, 1997 and 1996.
Costs of revenue-start-up expenses: For the six months ended
June 30, 1997, subscriber start-up expenses decreased to approximately 3% of
total revenue, compared to approximately 14% of total revenue for the six
months ended June 30, 1996, and decreased to 37% of start-up fee revenue for
the six months ended June 30, 1997, compared to 73% of start-up fee revenue for
the six months ended June 30, 1996. The decrease in start-up expenses as a
percentage of total revenue was primarily a result of the number of new
subscribers decreasing as a percentage of the entire subscriber base as the
subscriber base expands. The decrease in start-up expenses as a percentage of
start-up fees resulted from reduced expenditures per new subscriber for
licenses and kit materials. The Company anticipates that start-up expenses
will continue to decrease as a percentage of total revenue to the extent that
the number of new subscribers decreases as a percentage of the entire
subscriber base.
Selling, general and administrative expenses: Selling, general
and administrative expenses were approximately 66% of revenue for the six
months ended June 30, 1997, compared to approximately 101% of revenue for the
six months ended June 30, 1996. The decrease in selling, general and
administrative expenses as a percentage of revenue resulted from economies of
scale with respect to such costs as employee compensation that do not increase
in direction proportion to increases in revenue and to cost control efforts
implemented by management.
Depreciation and amortization: Depreciation and amortization
expenses increased to approximately 18% of revenue for the six months ended
June 30, 1997, compared to approximately 14% of revenue for the same period in
the prior year. The increase was primarily attributable to the amortization of
acquired customer bases. The Company is amortizing the costs of acquired
customer bases over a three-year period. Amortization expense related to
acquired customer bases for the six months ended June 30, 1997 was
approximately $2,053,000, or 10% of revenue. Depreciation expense was 8% of
total revenue for the six months ended June 30, 1997, compared to 14% for the
comparable period in the prior year. The decrease in depreciation expense as a
percentage of total revenue resulted from the addition of capacity through
increased utilization of purchased network services as opposed to increasing
capacity by the construction of additional Company-owned POPs and from
efficiencies within the Company's owned POPs resulting from reductions in cost
of new equipment and improved utilization within the Company's network.
Interest expenses: Interest expense for the six months ended
June 30, 1997 consisted of approximately $236,000 related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet,
offset with $207,000 of interest income. For the six months ended June 30,
1996, the Company had interest expense of approximately $92,000 which primarily
related to a credit facility that was repaid in March 1996, offset with
approximately $136,000 of interest income.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operations in the amount
of $902,000 for the six months ending June 30, 1997. The Company has primarily
financed its operations to date through public and private sales of equity
securities, loans from third parties and capital leases of equipment. The
Company completed an initial public offering of its Common Stock in March 1996
(the "Initial Offering") and a second public offering in October 1996 (the
"October Offering"), issuing 2,025,000 shares at a price of $8.00 per share and
2,250,000 shares at a price of $9.125 per share, respectively. The proceeds
from the public offerings were approximately $32,500,000, net of underwriting
discounts and expenses. Upon completion of the Initial Offering, the Company
repaid all outstanding principal amounts loaned to the Company by ITC Holding
Company, Inc., totaling $3,500,000 of principal and approximately $97,000 in
interest. The Company used approximately $9,175,000 or 50% of the net proceeds
from the October Offering to pay PSINet in conjunction with a transaction
between the Company and PSINet in which the Company purchased certain
individual subscriber accounts of PSINet and related assets (the "PSINet
Transaction"). Total cash used in financing activities for the six months ended
June 30, 1997 was approximately $480,000, consisting primarily of cash paid for
capital lease obligations and cash paid to PSINet in connection with the PSINet
Transaction. Total cash provided from financing activities for the six months
ended June 30, 1996 was approximately $13,650,000, consisting primarily of the
net proceeds of the Initial Offering.
The Company used approximately $3,664,000 in cash for
investing activities during the six months ended June 30, 1997 and
approximately $7,000,000 during the six months ended June 30, 1996. This
investing activity primarily related to purchases of telecommunications
equipment necessary for the provision of service to subscribers. In addition
to the purchased equipment, the Company acquired approximately $3,793,000 of
equipment under capital lease agreements in the first six months ended June 30,
1997. There were no capital lease agreements in the first six months of 1996.
On October 14, 1996, the Company and Monorail Inc.
("Monorail"), an Internet-ready computer manufacturer, entered into an
agreement (the "Monorail Agreement"), pursuant to which the Company's software
is to be included on the personal computers manufactured by Monorail. The
Company paid $560,000 in cash to Monorail, which included a prepayment of
$500,000 for potential subscribers to be acquired by the Company pursuant to
this agreement (the "Monorail Prepayment"), and $60,000 for estimated expenses
incurred by Monorail to include the Company's software on its PCs. The software
preparation cost was expensed in 1996. As of June 30, 1997, Monorail had earned
$50,000 of the Monorail Prepayment. The Company has the right to require
Monorail to reimburse the Company for the remaining balance of the Monorail
Prepayment of $450,000. The Company is currently discussing various
arrangements in connection with such refund with Monorail and has not yet
exercised its right to require reimbursement at this time.
In June 1997, the Company entered into various agreements
with BellSouth (collectively, the "BellSouth Agreement"), pursuant to which the
Company has agreed to purchase certain telecommunications facilities from
BellSouth over a term of twenty-four months. The Company estimates the total
commitment under the BellSouth Agreement to be approximately $2,700,000 per
year. The BellSouth Agreement supercedes the Company's previously negotiated
purchase commitments with BellSouth.
As of June 30, 1997, the Company had cash on hand of
approximately $6,411,000. The Company's significant capital commitments for
the remainder of 1997 include approximately $470,000 in principal under a non-
interest bearing note issued to PSINet in connection with the
12
<PAGE> 13
PSINet Transaction and capital expenditures estimated to be approximately
$1,710,000. The Company anticipates that it will continue to generate cash
flows from operations for the remainder of 1997, in part due to certain
discounts available to the Company pursuant to the PSINet Services Agreement.
The Company estimates that its cash and financing needs
through 1997 will be met by cash on hand, additional capital financing
arrangements, and cash flow from operations. However, any increases in the
Company's growth rate, shortfalls in anticipated revenue, 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 third party network services agreements). 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.
In February 1997, the Financial Accounting Standards Board
issued Statement 128, "Earnings per Share" ("SFAS 128") which redefines how
entities compute earnings per share. Primary earnings per share will be
replaced by basic earnings per share which will be computed exclusively based
on the weighted average number of common shares outstanding. This statement is
effective for periods ending after December 15, 1997 and will require
restatement of all prior period earnings per share data presented. The
adoption of SFAS 128 is not expected to have a material impact on the Company's
earnings per share data.
In June 1997, the Financial Accounting Standards Board issued
Statement 130, "Reporting Comprehensive Income" ("SFAS 130") which establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general purpose financial statements. This
statement is effective for periods beginning after December 15, 1997. The
adoption of SFAS 130 is not expected to have an impact on the Company's
financial statements.
13
<PAGE> 14
P A R T II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders at the 1997
Annual Meeting of Stockholders held on May 28, 1997:
1. Election of two Class I Directors and two Class II Directors to the Board
of Directors of the Company. The following votes were cast in the election of
directors:
<TABLE>
<CAPTION>
CLASS I DIRECTORS FOR WITHHOLD AUTHORITY
--------------- ------------------
<S> <C> <C>
Michael G. Misikoff 5,918,998 17,473
O. Gene Gabbard 5,918,998 17,473
CLASS II DIRECTORS
Michael S. McQuary 5,918,998 17,473
William H. Scott, III 5,918,868 17,603
</TABLE>
The term of two Class III Directors, Charles M. Brewer and Campbell B. Lanier,
III, did not expire at this Annual Meeting and each of them continue to serve
as directors of the Company.
2. Proposed Amendment to 1995 Stock Option Plan described in the proxy
statement dated April 29, 1997. There were 5,756,017 votes cast for approval
of the amendment, 87,039 votes cast against approval of the amendment and
64,490 abstentions. There were 28,925 broker non-votes recorded.
3. Proposed ratification of the appointment of Arthur Andersen LLP as the
independent auditors of the Company for the fiscal year ending December 31,
1997. There were 5,914,444 votes cast for ratification, 9,177 votes cast
against ratification and 12,850 abstentions. There were no broker non-votes
recorded.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.1. Amendment dated June 6, 1997 to Master Services Agreement dated July 15, 1996 between
BellSouthTelecommunications, Inc. and MindSpring Enterprises, Inc.
* 10.2. Special Service Arrangement Agreement dated June 1997 between BellSouth Telecommunications, Inc. and
MindSpring Enterprises, Inc. (a substantially identical contract has been executed for each of Alabama,
Florida, Kentucky, North Carolina, South Carolina and Tennessee).
11. Statement Re: Computation of loss per common share
27. Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
None.
*Confidential treatment has been requested. The copy
filed as an exhibit omits the information subject to the confidential
treatment request.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINDSPRING ENTERPRISES, INC.
----------------------------
(Registrant)
Date: August 11, 1997 By: /s/ Michael S. McQuary
----------------------
Michael S. McQuary
President and Chief
Operating Officer
Date: August 11, 1997 By: /s/ Michael G. Misikoff
-----------------------
Michael G. Misikoff
Vice President, and Chief Financial
Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Exhibit Description Sequentially
Number ------------------- Numbered Page
------ -------------
<S> <C> <C>
10.1. Amendment dated June 6, 1997 to Master Services
Agreement dated July 15, 1996 between
BellSouth Telecommunications, Inc. and MindSpring
Enterprises, Inc.
*10.2. Special Service Arrangement Agreement dated June 1997
between BellSouth Telecommunications, Inc. and
MindSpring Enterprises, Inc. (a substantially
identical contract has been executed for each of
Alabama, Florida, Kentucky, North Carolina, South
Carolina and Tennessee).
11. Statement Re: Computation of loss per common share
27. Financial Data Schedule (for SEC use only).
</TABLE>
* Confidential treatment has been requested. The copy filed
as an exhibit omits the information subject to the
confidential treatment request.
16
<PAGE> 1
EXHIBIT 10.1.
July 12, 1996
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
<PAGE> 2
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.
- ---------------------------------------- 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
---------------------------------- ----------------------------------
<PAGE> 3
June 6, 1997
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 shell 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> 4
June 6, 1997
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 in 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 inwriting 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 calendar 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> 5
June 6, 1997
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 includes, 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 four hours, BellSouth shall provide MindSpring a credit
of $200 per hour after the initial four hours and for each additional hour or
part thereof that the outage occurs. BellSouth and MindSpring further agree
that a Cap of $1,000 shall be applied in the event the outage exceeds 8 hours.
Credits issued for outage shall be applied to the installation of, or
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
-3-
<PAGE> 6
June 6, 1997
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 downtown 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 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
-4-
<PAGE> 7
June 6, 1997
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 $2,000,000 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 conjunction 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.
By: /s/ Michael Misikoff By: /s/ J. Randall Cook
--------------------------- -----------------------------
(Authorized Signature) (Authorized Signature)
Name: Michael Misikoff Name: J. Randall Cook
------------------------- ---------------------------
(PRINT OR TYPE) (PRINT OR TYPE)
Title: CFO Title: Assistant Vice President-Sales
------------------------ --------------------------
Date: 6/6/97 Date: 6/6/97
------------------------- ---------------------------
-5-
<PAGE> 8
June 6, 1997
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 $2,000,000.
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 10.2
SPECIAL SERVICE
ARRANGEMENT AGREEMENT
This Special Service Arrangement Agreement ("Agreement"), is by and between
BellSouth Telecommunications, Inc., a Georgia corporation, d/b/a BellSouth,
("Company") and MINDSPRING ("Customer or Subscriber"), and is entered into
pursuant to Tariff Section A5 of the General Subscriber Services Tariff. This
agreement is based upon the following terms and conditions as well as any
Attachment(s) affixed and the appropriate lawfully filed and approved tariffs
which are by this reference incorporated herein.
1. Subscriber requests and Company agrees, subject to the terms and
conditions herein, to provide the service described in the Attachment(s) at the
monthly and nonrecurring rates, charges, and conditions as described in the
Attachment(s) ("Service"). The rates, charges and conditions described in the
Attachment(s) are binding upon Company and Subscriber for the duration of this
Agreement. For the purposes of the effectiveness of the terms and conditions
contained herein, this Agreement shall become effective upon execution by both
parties.
2. Subscriber agrees to subscribe to and Company agrees to provide any
additional tariffed services required for the installation of the Service.
Subscriber agrees to be responsible for all rates, charges, and conditions for
such tariffed services.
3. This agreement is subject to and controlled by the provisions of
Company's or any of its affiliated companies' lawfully filed and approved
tariffs, including but not limited to Section A2 of the General Subscriber
Services Tariff and No. 2 of the Federal Communications Commission Tariff and
shall include all changes to said tariffs as may be made from time to time. All
appropriate tariff rates and charges shall be included in the provision of this
service. The tariff shall supersede any conflicting provisions of this
Agreement, with the exception of the rates and charges herein, in the event any
part of this Agreement conflicts with terms and conditions of Company's or any
of its affiliated companies' lawfully filed and approved tariffs.
4. This Agreement may be subject to the appropriate regulatory approval
prior to commencement of installation. Should such regulatory approval be
denied, after a proper request by Company, this Agreement shall be null, void,
and of no effect.
5. If Subscriber cancels this Agreement prior to the completed
installation of the Service, but after the execution of this Agreement by
Subscriber and Company, Subscriber shall pay all reasonable costs incurred in
the implementation of this Agreement prior to receipt of written notice of
cancellation by Company. Notwithstanding the foregoing, such reasonable costs
shall not exceed all costs which would apply if the work in the implementation
of this Agreement had been completed by Company.
6. This Agreement shall be construed in accordance with the laws of
the State of South Carolina.
7. 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 United States mail,
postage prepaid, addressed to the appropriate party at the address set forth
below. Either party hereto may change the name and address to whom all notices
or other documents required under this Agreement must be sent at any time by
giving written notice to the other party.
<PAGE> 2
SPECIAL SERVICE
ARRANGEMENT AGREEMENT
Company
- -------
BellSouth Telecommunications, Inc.
Assistant Vice President
1800 CENTURY BLVD # 300
ATLANTA, GA 30345
Subscriber
- ----------
MINDSPRING
1439 PEACHTREE
ATLANTA, GA 30309
8. Subscriber may not assign its rights or obligations under this
Agreement without the express written consent of Company and only pursuant to
the conditions contained in the appropriate tariff.
9. 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. In the
event that any provision becomes invalid, the Agreement can remain in effect
only if invalidating that provision does not have the effect of increasing
pricing or commitment. If price or commitment increase as a result of paragraph
9, customer shall have the right to sixty (60) day notice prior to any change
taking effect, and the right to cancel,
<PAGE> 3
SPECIAL SERVICE Case Number SC97-3590-00
ARRANGEMENT AGREEMENT Option 1 of 1
SUBSCRIBER MINDSPRING ATTACHMENT 1 PAGE 1
ADDITIONAL TERMS AND CONDITIONS
BellSouth agrees that in the event it fails to install facilities on the
negotiated Service Due Date and fails to meet Service Due Date by more than five
(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 five (5) business days, BellSouth
shall provide MindSpring a credit equivalent to 50% (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 request for credits
associated with this provision must be submitted in writing within thirty (30)
calendar days to the BellSouth Business Account Team subsequent to each
occurrence.
BellSouth and MindSpring agree that the negotiated Service Due Date on all new
service shall be fourteen (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 twenty (20)
business days for sites where MindSpring has not ordered any services from
BellSouth and is not currently using BellSouth services.
MindSpring agrees to furnish BellSouth with an accurate ninety (90) calendar day
rolling forecast updated each thirty (30) day calendar 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 existing locations are not
forecasted within thirty (30) calendar days of order placement date, this
provision is not applicable to request 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.
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 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 (6) months and BellSouth reserves the right
to renegotiate this provision after six (6) months.
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 four hours, BellSouth shall provide MindSpring a credit of $200 per hour
after the initial four 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 customers 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,
<PAGE> 4
SPECIAL SERVICE CASE NUMBER SC97-3590-00
ARRANGEMENT AGREEMENT Option 1 of 1
SUBSCRIBER MINDSPRING ATTACHMENT 1 PAGE 2
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.
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 minimum service requirement of 225 PRI's 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
MindSpring's minimum service requirement to the extent of any shortfall
resulting from 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.
REGULATIONS
A. Termination liability charge is applicable if service is terminated prior
to expiration of the contract. The applicable charge will be equal to the number
of months remaining in the contract times the monthly rate provided under the
contract.
B. Customer agrees to order a minimum of two hundred twenty-five (225)
Primary Rate Interfaces (PRIs) with BellSouth installation completed by April
30, 1998. If customer does not maintain minimum service of two hundred
twenty-five (225) circuits, BellSouth will bill the customer for the minimum
service. Any shortage of circuits will bill the average of the rates from the
listed contracts. Rates and charges are valid only if a minimum of two hundred
twenty-five (225) PRIs are purchased from one or more of the following
contracts: AL97-3586-00, GA97-3609-00, GA96-1598-00, KY97-3587-00, NC97-3588-00,
SC97-3590-00, SF97-1895-02 and TN97-1890-02.
C. Customer can relocate Primary Rate Interfaces (PRI's) from one location to
another within BellSouth territory provided Customer maintains minimum of two
hundred twenty-five (225) circuits for the contract period.
D. Services installed during the term of this contract will have a contract
term coterminous with the original Agreement.
<PAGE> 5
SPECIAL SERVICE CASE NUMBER SC97-3590-00
ARRANGEMENT AGREEMENT OPTION 1 OF 1
THIS RATE VALID THROUGH: 6/30/97
ESTIMATED SERVICE INTERVAL FOLLOWING ACCEPTANCE DATE: 6 WEEKS.
SERVICE DESCRIPTION:
THIS CONTRACT SERVICE ARRANGEMENT (CSA) PROVIDES FOR BELLSOUTH(R) PRIMARY RATE
ISDN SERVICE- INWARD DATA OPTION.
THIS AGREEMENT IS FOR TWENTY-FOUR (24) MONTH PAYMENT PLAN.
(R) REGISTERED SERVICE MARK OF BELLSOUTH CORPORATION
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE CAUSED THIS AGREEMENT TO BE
EXECUTED BY THEIR DULY AUTHORIZED REPRESENTATIVES ON THE DATES SET FORTH BELOW.
ACCEPTED BY:
SUBSCRIBER: BELLSOUTH TELECOMMUNICATIONS, INC.
MINDSPRING
BY: MICHAEL MISIKOFF BY: J. RANDALL COOK
TITLE: CFO TITLE: ASSISTANT VICE PRESIDENT
DATE: 6/97 DATE: 6/18/97
<PAGE> 6
Portions of this exhibit for which confidential treatment has been requested
are marked by brackets [ ]. In addition, an asterisk (*) appears in the
right-hand margin in each place where confidential material has been bracketed.
SPECIAL SERVICE CASE NUMBER SC97-3590-00
ARRANGEMENT AGREEMENT OPTION 1 0F 1
RATES AND CHARGES
<TABLE>
<CAPTION>
Rate Element Non-Recurring Monthly Rate USOC
<S> <C> <C> <C>
1. BellSouth(R) Primary Rate ISDN service [$ ] [$ ] ILDIE *
Access line,
each
2. BellSouth(R) Primary Rate ISDN service [$ ] [$ ] PR7BD *
B-Channels, Inward Data Option, each
3. Contract Preparation Charge [$ ] [$ ] WGGVF *
</TABLE>
NOTES:
All applicable rates and regulations for BellSouth(R) Primary Rate ISDN
service as set forth in the General Subscriber Services Tariff are in
addition to the rates and regulations contained in this Contract Service
Arrangement.
Apply appropriate number of End User Common Line Charges for each Primary
Rate Interface.
(R) Registered Service Mark of BellSouth Corporation
END OF ARRANGEMENT AGREEMENT OPTION 1
<PAGE> 1
EXHIBIT 11
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 3O, JUNE 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES 7,517,069 5,111,782 7,497,798 4,309,859
OUTSTANDING
NET LOSS ($1,429,512) ($1,459,953) ($3,954,565) ($2,499,213)
----------- ----------- ----------- -----------
PRIMARY LOSS PER SHARE ($0.19) ($0.29) ($0.53) ($0.58)
----------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,410,550
<SECURITIES> 0
<RECEIVABLES> 2,201,466
<ALLOWANCES> 213,043
<INVENTORY> 87,307
<CURRENT-ASSETS> 9,445,724
<PP&E> 20,779,212
<DEPRECIATION> 3,773,595
<TOTAL-ASSETS> 35,627,149
<CURRENT-LIABILITIES> 9,859,689
<BONDS> 0
0
0
<COMMON> 75,256
<OTHER-SE> 21,447,845
<TOTAL-LIABILITY-AND-EQUITY> 35,627,149
<SALES> 0
<TOTAL-REVENUES> 21,380,377
<CGS> 7,353,554
<TOTAL-COSTS> 24,604,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 702,005
<INTEREST-EXPENSE> 28,758
<INCOME-PRETAX> (3,954,565)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,954,565)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,954,565)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
