<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 September 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
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MINDSPRING ENTERPRISES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 58-2113290
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1430 West Peachtree St. NW, Suite 400, Atlanta, GA 30309
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (404) 815-0770
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at November 11, 1997
--------------------------------
Common Stock at $.01 par value 7,530,731 Shares
<PAGE> 2
Part I - Financial Information
Item 1 - Financial Statements
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30,1997 DECEMBER 31, 1996
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 7,317,440 $ 9,653,234
Trade receivables, net ...................................................... 2,052,007 1,996,613
Prepaids and other current assets ........................................... 798,408 853,122
Inventory ................................................................... 81,499 116,545
------------ ------------
Total current assets .................................................... 10,249,354 12,619,514
------------ ------------
PROPERTY AND EQUIPMENT;
Computer and telecommunications equipment ................................... 14,737,413 11,509,165
Assets under capital lease .................................................. 7,589,060 1,472,885
Other ....................................................................... 1,750,714 565,503
------------ ------------
24,077,187 13,547,553
Less:accumulated depreciation ............................................... (4,973,327) (1,964,231)
------------ ------------
Property and equipment, net ............................................. 19,103,860 11,583,322
------------ ------------
OTHER ASSETS:
Acquired customer base, net ................................................. 8,234,698 10,727,268
Other ....................................................................... 231,548 302,273
------------ ------------
Total other assets ...................................................... 8,466,246 11,029,541
------------ ------------
$ 37,819,460 $ 35,232,377
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable....................................................... $ 2,568,487 $ 4,119,302
Other accrued expenses ...................................................... 4,262,459 1,284,626
Current portion of capital lease obligations ................................ 1,900,823 656,252
Current portion of notes payable ............................................ 1,687,970 623,922
Deferred revenue ............................................................ 1,609,972 415,881
------------ ------------
Current liabilities ..................................................... 12,029,711 7,099,983
------------ ------------
LONG-TERM LIABILITIES:
Notes payable ............................................................... 592,841 2,042,742
Capital lease obligations ................................................... 4,292,727 682,571
------------ ------------
Total long-term liabilities ............................................. 4,885,568 2,725,313
------------ ------------
Total liabilities ....................................................... 16,915,279 9,825,296
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares authorized
and 7,530,531 and 7,477,084 issued and outstanding at
September 30, 1997 and December 31, 1996, respectively .................... 75,305 74,771
Additional paid-in-capital .................................................. 35,055,880 34,978,225
Accumulated deficit ......................................................... (14,227,004) (9,645,915)
------------ ------------
Total stockholders' equity ................................................ 20,904,181 25,407,081
------------ ------------
$ 37,819,460 $ 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 NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Access .......................... $ 10,857,739 $ 3,911,055 $ 27,266,968 $ 6,700,655
Subscriber start-up fees ........ 1,024,888 734,948 2,831,811 1,580,716
Business services ............... 2,084,655 655,357 5,248,880 1,326,512
------------ ----------- ------------ ------------
Total revenue ................. 13,967,282 5,301,360 35,347,659 9,607,883
------------ ----------- ------------ ------------
COSTS AND EXPENSES
Costs of revenue-recurring ...... $ 3,948,466 $ 1,905,802 $ 10,642,041 $ 3,202,005
Costs of subscriber start-up fees 440,058 941,376 1,100,037 1,557,496
General and administrative ...... 5,621,178 2,920,303 15,867,217 5,690,845
Selling ......................... 2,150,222 1,122,686 5,968,692 2,693,097
Depreciation and amortization ... 2,272,722 1,011,563 6,160,843 1,607,906
------------ ----------- ------------ ------------
Total cost and expenses ....... 14,432,646 7,901,730 39,738,830 14,751,349
OPERATING LOSS ..................... $ (465,364) $(2,600,370) $ (4,391,171) $ (5,143,466)
INTEREST EXPENSE, NET .............. (161,160) (101,330) (189,918) (57,447)
------------ ----------- ------------ ------------
NET LOSS ........................... $ (626,524) $(2,701,700) $ (4,581,089) $ (5,200,913)
------------ ----------- ------------ ------------
NET LOSS PER SHARE ................. $ (0.08) $ (0.53) $ (0.61) $ (1.13)
------------ ----------- ------------ ------------
WEIGHTED AVERAGE
COMMON
SHARES OUTSTANDING ................ 7,528,102 5,138,836 7,508,200 4,588,202
------------ ----------- ------------ ------------
</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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $(4,581,089) $ (5,200,913)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 6,160,843 1,607,906
Changes in operating assets and liabilities:
Trade receivables ........................................... (55,394) (2,485,297)
Other current assets ........................................ 89,760 (1,285,164)
Trade accounts payable ...................................... (1,550,815) 1,246,190
Other accrued expenses ...................................... 2,977,832 1,870,301
Deferred revenue ............................................ 1,194,091 1,497,964
----------- ------------
Total adjustments ......................................... 2,655,474 843,994
----------- ------------
Net Cash Provided by (Used in) Operating Activities ....... 4,235,228 (2,749,013)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................. (4,415,030) (7,366,647)
Purchase of customer base ....................................... (620,249) (12,473,998)
Other ........................................................... 33,369 (139,638)
----------- ------------
Net Cash Used in Investing Activities........................ (5,001,910) (19,980,283)
----------- ------------
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 ....................................... - 12,029,000
Payments of notes payable ....................................... (385,853) -
Payments of capital lease obligations ........................... (1,261,448) -
Issuance of common stock ........................................ 78,189 14,149,689
----------- ------------
Net Cash (Used in) Provided by Financing Activities ......... (1,569,112) 23,678,689
----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ..................................................... (2,335,794) 949,393
CASH AND CASH EQUIVALENTS, beginning of period ....................... 9,653,234 424,834
----------- ------------
CASH AND CASH EQUIVALENTS, end of period............................. $ 7,317,440 $ 1,374,227
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.......................................... $ 493,809 $ 136,127
=========== ============
Cash paid for income taxes...................................... $ - $ -
=========== ============
SUPPLEMENTAL NON-CASH DISCLOSURES:
Assets acquired under capital leases............................ $ 6,116,175 $ -
=========== ============
</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
SEPTEMBER 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 nine
months ended September 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 reincorporated in Delaware in December
1995. At September 30, 1997, the Company served a total of approximately 224,000
subscribers.
The Company offers local Internet access to subscribers in
most major metropolitan areas of the United States, either through Company owned
points of presence ("POPs") or through access to third party POPs in accordance
with network services agreements between the Company and third party network
providers. Currently, the Company has agreements with, and provides services
through the network POPs of PSINet, Inc. ("PSINet") and GridNet International,
L.L.C. ("GridNet"). Pursuant to the network 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 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 September 30, 1997 and September 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 start up 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. 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 and URLs (Uniform Resource Locators). The
services described in this paragraph have been classified as business services
in the statements of operations 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
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
6
<PAGE> 7
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 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. Beginning October 1, 1997 the Company began
providing services through new Company owned POPs in California and New York
City, markets that were previously served through PSINet 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 SEPTEMBER 30, 1997 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1996
The following table sets forth certain unaudited financial
data for the quarters ended September 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
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
(000'S) % OF (000'S) % OF
REVENUE REVENUE
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue
Dial-up access to the Internet $ 10,858 78 $ 3,911 74
Start-up fees 1,025 7 735 14
Business services 2,084 15 655 12
---------- --------- ---------- ---------
Total revenue 13,967 100 5,301 100
Costs and expenses:
Costs of revenue- recurring 3,949 28 1,906 36
Costs of revenue- start-up fees 440 3 941 18
Selling, general and administrative 7,771 55 4,043 76
Depreciation 1,213 9 508 10
Amortization of acquired customer bases 1,060 8 504 9
---------- --------- ---------- ---------
Total costs and expenses 14,433 103 7,902 149
---------- --------- ---------- ---------
Operating loss (466) (3) (2,601) (49)
Interest expense, net (161) (1) (101) (2)
---------- --------- ---------- ---------
Net loss (627) (4) (2,702) (51)
========== ==========
PER SHARE DATA:
Net loss per share $ (0.08) $ (0.53)
Weighted average common shares outstanding 7,528,102 5,138,836
OPERATING DATA:
Approximate number of subscribers at end of period 223,800 117,360
Number of Company employees at end of period
465 319
</TABLE>
Revenue: Revenue for the quarter ended September 30, 1997
totaled approximately $13,967,000, compared to approximately $5,301,000 for the
quarter ended September 30, 1996. The approximately 163% increase in period
revenue resulted primarily from an increase in subscribers. Revenues from
dial-up access to the Internet for the quarter ended September 30, 1997
represented approximately 78% of revenue, compared to approximately 74% of
revenue for the same quarter in the prior year. Subscriber start-up fees
accounted for approximately 7% of revenue for the quarter ended September 30,
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1997, compared to approximately 14% for the quarter ended September 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 for the quarter ended September 30, 1997
increased to approximately 15% of total revenue, compared to approximately 12%
of total revenue for the quarter ended September 30, 1996. This increase is
primarily attributable to the increase in the number of the Company's web
hosting customers.
Costs of revenue-recurring: For the quarter ended September
30, 1997, costs of revenue-recurring decreased to approximately 28% of total
revenue, compared to approximately 36% of total revenue for the quarter ended
September 30, 1996. Costs of revenue-recurring also decreased as a percentage of
dial-up access revenue from approximately 49% in the third quarter of 1996 to
approximately 36% in the third quarter of 1997. Exclusive of $550,000 in
discounts received in the third quarter of 1997 pursuant to the PSINet Services
Agreement, costs of revenue-recurring would have been approximately 41% of total
dial-up revenue for the period, compared to approximately 49% for the quarter
ended September 30, 1996. This decrease of costs of revenue-recurring as a
percentage of total revenue and 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 fees: For the quarter ended
September 30, 1997, subscriber start-up expenses decreased to approximately 3%
of total revenue, compared to approximately 18% of total revenue for the quarter
ended September 30, 1996, and decreased to approximately 43% of start-up fee
revenue for the quarter ended September 30, 1997 compared to approximately 128%
of start-up fee revenue for the quarter ended September 30, 1996. The Company
had abnormally high customer start-up costs in the third quarter of 1996 due to
expenditures for license fees and starter kits related to the acquisition of
certain individual subscriber accounts of PSINet. However, 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. 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.
Selling, general and administrative expenses: Selling, general
and administrative expenses were approximately 55% of revenue for the quarter
ended September 30, 1997, compared to approximately 76% of revenue for the
quarter ended September 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 direct proportion to increases in revenue and to cost control efforts
implemented by management.
Depreciation and amortization: Depreciation and amortization
expenses decreased to approximately 17% of revenue for the quarter ended
September 30, 1997, compared to approximately 19% of revenue for the same period
in the prior year. Amortization expense for the quarter ended September 30, 1997
was approximately 8% of revenue compared to approximately 9% of revenue for the
quarter ended September 30, 1996. Amortization expense resulted solely from
acquired customer bases which are being amortized over three years. Depreciation
expense was approximately 9% of total revenue for the quarter ended September
30, 1997, compared to approximately 10% for the comparable period in the prior
year. The decrease in depreciation expense as a percentage of total revenue
resulted from efficiencies within the Company's owned POPs resulting from
reductions in cost of new equipment and improved utilization within the
Company's network and the addition of capacity through increased utilization of
purchased network services as opposed to increasing capacity by the construction
of additional Company-owned POPs.
Interest expense: Interest expense for the quarter ended
September 30, 1997 consisted of approximately $258,000 related to capital leases
of equipment and imputed interest related to a note payable issued to PSINet,
offset by approximately $97,000 of interest income. For the quarter ended
September 30, 1996, the Company had interest expense related to notes payable
9
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issued to PSINet of approximately $155,000 and interest income of approximately
$54,000.
10
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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS SEPTEMBER 30, 1996
The following table sets forth certain unaudited financial
data for the nine months ended September 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>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
(000'S) % OF (000'S) % OF
REVENUE REVENUE
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue
Dial-up access to the Internet $ 27,267 77 $ 6,700 69
Start-up fees 2,832 8 1,581 17
Business services 5,249 15 1,327 14
----------- ---- ----------- ----
Total revenue 35,348 100 9,608 100
Costs and expenses:
Costs of revenue- recurring 10,642 30 3,202 34
Costs of revenue- start-up fees 1,100 3 1,558 16
Selling, general and administrative 21,836 62 8,384 87
Depreciation 3,048 8 1,104 12
Amortization of acquired customer bases 3,113 9 504 5
----------- ---- ----------- ----
Total costs and expenses 39,739 112 14,752 154
----------- ---- ----------- ----
Operating loss (4,391) (12) (5,144) (54)
Interest expense, net (190) (1) (57) 0
----------- ---- ----------- ----
Net loss (4,581) (13) (5,201) (54)
=========== ===========
PER SHARE DATA:
Net loss per share $ (0.61) $ (1.13)
Weighted average common shares outstanding 7,508,200 4,588,202
OPERATING DATA:
Approximate number of subscribers at end of period 223,800 117,360
Number of Company employees at end of period 465 319
</TABLE>
Revenue: Revenue for the nine months ended September 30, 1997
totaled approximately $35,348,000, compared to approximately $9,608,000 for the
nine months ended September 30, 1996. The approximately 268% increase in period
revenue resulted primarily from an increase in subscribers. Revenue from dial-up
access to the Internet for the nine month period ended September 30, 1997
represented approximately 77% of revenue, compared to approximately 69% of
revenue for the same period in the prior year. Subscriber start-up fees
accounted for approximately 8% of revenue for the nine months ended September
30, 1997, compared to approximately 17% for the nine months ended September 30,
1996. The Company anticipates that as its customer base
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<PAGE> 12
continues to expand, subscriber start-up fees will progressively represent a
smaller percentage of revenue. Business services revenue increased slightly as a
percentage of total revenue representing approximately 15% of revenue for the
nine months ended September 30, 1997, compared to approximately 14% for the nine
months ended September 30, 1996.
Costs of revenue-recurring: For the nine months ended
September 30, 1997, costs of revenue-recurring decreased to approximately 30% of
total revenue as compared to approximately 34% of total revenue for the nine
months ended September 30, 1996. Costs of revenue-recurring also decreased as a
percentage of dial-up access revenue from approximately 48% in the first nine
months of 1996 to approximately 39% in the first nine months of 1997. Exclusive
of $1,450,000 in discounts received in the first nine months of 1997 pursuant to
the PSINet Services Agreement, costs of revenue-recurring would have been
approximately 44% of total dial-up revenue for the period, compared to
approximately 48% for the nine months ended September 30, 1996. This decrease of
the cost of revenue-recurring as a percentage of total revenue and as a
percentage of dial-up access revenue resulted primarily from increased
efficiency and reduced Actwork costs in the Company's own Actwork.
Costs of revenue-start-up fees: For the nine months ended
September 30, 1997, subscriber start-up expenses decreased to approximately 3%
of total revenue, compared to approximately 16% of total revenue for the nine
months ended September 30, 1996, and decreased to approximately 39% of start-up
fee revenue for the nine months ended September 30, 1997, compared to
approximately 99% of start-up fee revenue for the nine months ended September
30, 1996. The company had abnormally high customer start-up costs in the third
quarter of 1996 due to the expenditures for license fees and starter kits
related to the acquisition of certain individual subscriber accounts of PSINet.
However, 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. 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.
Selling, general and administrative expenses: Selling, general
and administrative expenses were approximately 62% of revenue for the nine
months ended September 30, 1997, compared to approximately 87% of revenue for
the nine months ended September 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 direct proportion to increases in revenue and to cost control efforts
implemented by management.
Depreciation and amortization: Amortization expense increased
for the nine months ended September 30, 1997 to approximately 9% of revenue from
approximately 5% of revenue for the nine months ended September 30, 1996. This
increase resulted from the large number of subscribers added in the third
quarter of 1996 in connection with the acquisition of certain individual
subscriber accounts of PSINet. Amortization expense resulted solely from
acquired customer bases which are being amortized over three years. Depreciation
expense was approximately 8% of total revenue for the nine months ended
September 30, 1997, compared to approximately 12% for the comparable period in
the prior year. The decrease in depreciation expense as a percentage of total
revenue resulted from efficiencies within the Company's owned POPs resulting
from reductions in cost of new equipment and improved utilization within the
Company's network and the addition of capacity through increased utilization of
purchased network services as opposed to increasing capacity by the construction
of additional Company-owned POPs.
Interest expense: Interest expense for the nine months ended
September 30, 1997 consisted of approximately $494,000 related to capital leases
of equipment and imputed interest related to a note payable issued to PSINet,
offset by $304,000 of interest income. For the nine months ended September 30,
1996, the Company had interest expense of approximately $247,000
12
<PAGE> 13
which primarily related to a credit facility that was repaid in March 1996 and a
note payable issued to PSINet, offset by approximately $190,000 of interest
income.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operations in the amount of
$4,235,000 for the nine months ending September 30, 1997 versus using cash of
approximately $2,749,000 to support operating activities during the nine months
ended September 30, 1996. The operating cash flow has been used in the current
period primarily to cover the Company's investing activities of approximately
$5,002,000 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 $6,116,000 of equipment
under capital lease agreements in the first nine months ended September 30,
1997. There were no capital lease agreements for the nine months ended
September 30, 1996. The Company also used approximately $620,000 for
customer bases acquired during the nine months ended September 30, 1997. The
Company's primary financing activities of approximately $1,569,000 for the nine
months ended September 30, 1997 consisted of cash paid for capital lease
obligations and cash paid to PSINet in connection with a transaction between
the Company and PSINet in 1996 in which the Company purchased certain
individual subscriber accounts of PSINet and related assets (the "PSINet
Transaction"). Total cash provided from financing activities for the nine
months ended September 30, 1996 was approximately $23,679,000, consisting
primarily of the net proceeds of the Company's initial public offering in March
1996.
On October 14, 1996, the Company and Monorail Inc.
("Monorail"), an Internet-ready computer manufacturer, entered into an agreement
pursuant to which the Company's software is to be included on the personal
computers manufactured by Monorail. The Company provided a $500,000 prepayment
to Monorail for potential subscribers to be acquired by the Company pursuant to
this agreement (the "Monorail Prepayment"). As of September 30, 1997, Monorail
had earned approximately $65,000 of the Monorail Prepayment. Monorail may
continue to offset the Monorail Prepayment by referring subscribers to the
Company, or may repay all or part of the balance of the Monorail Prepayment at
any time. The Company has agreed to accept warrants to purchase Monorail stock
in lieu of interest on the balance of the Monorail Prepayment outstanding.
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.
As of September 30, 1997, the Company had cash on hand of
approximately $7,317,000. The Company's significant capital commitments for the
remainder of 1997 and to the end of 1998 include approximately $2,281,000 in
principal under a non-interest bearing note issued to PSINet in connection with
the PSINet Transaction. The Company anticipates that it will continue to
generate cash flows from operations for the remainder of 1997 and into 1998. The
Company estimates that its cash and financing needs into 1998 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
13
<PAGE> 14
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement Re: Computation of loss per common share
27. Financial Data Schedule
15
<PAGE> 16
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: November 11, 1997 By: /s/ Michael S. McQuary
------------------------------
Michael S. McQuary
President and Chief
Operating Officer
Date: November 11, 1997 By: /s/ Michael G. Misikoff
------------------------------
Michael G. Misikoff
Vice President, and Chief Financial
Officer
16
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Exhibit Description Sequentially
- ------- ------------------- ------------
Number Numbered Page
- ------ -------------
<S> <C> <C>
11. Statement Re: Computation of loss per common
share
27. Financial Data Schedule
</TABLE>
17
<PAGE> 1
EXHIBIT 11
- --------------------------------------------------------------------------------
EARNINGS PER SHARE CALCULATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Weighted Average Shares 7,528,102 5,138,836 7,508,200 4,588,202
Outstanding
Net Loss $ (626,524) $(2,701,700) $(4,581,089) $(5,200,913)
---------- ----------- ----------- -----------
Primary Loss Per Share $ (0.08) $ (0.53) $ (0.61) $ (1.13)
---------- ----------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MINDSPRING ENTERPRISES FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,317,440
<SECURITIES> 0
<RECEIVABLES> 2,495,202
<ALLOWANCES> 443,195
<INVENTORY> 81,499
<CURRENT-ASSETS> 10,249,354
<PP&E> 24,077,187
<DEPRECIATION> 4,973,327
<TOTAL-ASSETS> 37,819,460
<CURRENT-LIABILITIES> 12,029,711
<BONDS> 0
0
0
<COMMON> 75,305
<OTHER-SE> 20,828,876
<TOTAL-LIABILITY-AND-EQUITY> 37,819,460
<SALES> 0
<TOTAL-REVENUES> 35,347,659
<CGS> 11,742,078
<TOTAL-COSTS> 39,738,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,026,385
<INTEREST-EXPENSE> 189,918
<INCOME-PRETAX> (4,581,089)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,581,089)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,581,089)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
