<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 March 31, 1998
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)
<TABLE>
<S> <C>
Delaware 58-2113290
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
1430 West Peachtree St. NW, Suite 400, Atlanta, GA 30309
- -----------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
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 April 15, 1998
-----------------------------
<S> <C>
Common Stock at $.01 par value 7,562,329 Shares
</TABLE>
<PAGE> 2
Part I - Financial Information
Item 1 - Financial Statements
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
As of March 31, 1998 and December 31, 1997
(In 000's)
<TABLE>
<CAPTION>
March 31,1998 December 31, 1997
-------------- -----------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . $ 8,866 $ 9,386
Trade receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,351 2,002
Prepaids and other current assets . . . . . . . . . . . . . . . . . . . 563 1,043
-------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 11,780 12,431
-------------- ------------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment . . . . . . . . . . . . . . . 21,169 18,050
Assets under capital lease . . . . . . . . . . . . . . . . . . . . . . . 9,916 9,916
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,815 1,805
-------------- ------------
33,900 29,771
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . (7,809) (6,133)
-------------- -----------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . 26,091 23,638
-------------- ------------
OTHER ASSETS:
Acquired customer base, net . . . . . . . . . . . . . . . . . . . . . . 7,274 7,477
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 859 740
-------------- ------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . 8,133 8,217
-------------- ------------
$ 46,004 $ 44,286
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,821 $ 5,725
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 6,269 5,209
Current portion of capital lease obligations . . . . . . . . . . . . . . 2,666 2,608
Current portion of notes payable . . . . . . . . . . . . . . . . . . . . 1,647 2,043
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,787 2,198
-------------- ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 19,190 17,783
-------------- ------------
LONG-TERM LIABILITIES:
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . 4,429 5,090
-------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 23,619 22,873
-------------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 15,000,000 shares authorized
and 7,556,630 and 7,534,440 issued and outstanding at
March 31, 1998 and December 31, 1997, respectively . . . . . . . . . . 76 75
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . 35,178 35,067
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (12,869) (13,729)
-------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 22,385 21,413
-------------- ------------
$ 46,004 $ 44,286
============== ============
</TABLE>
The accompanying condensed notes to financial statements are an
integral part of these statements.
2
<PAGE> 3
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(In 000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---------------- ---------------
<S> <C> <C>
REVENUES:
Access..................................... $ 16,992 $ 7,356
Business services.......................... 3,173 1,424
Subscriber start-up fees................... 1,219 1,000
--------------- -----------
Total revenues........................... 21,384 9,780
--------------- -----------
COSTS AND EXPENSES:
Costs of revenue-recurring................. $ 5,990 $ 3,169
Costs of subscriber start-up fees.......... 617 365
General and administrative................. 7,799 5,013
Selling.................................... 3,053 1,910
Depreciation and amortization.............. 2,872 1,828
--------------- -----------
Total cost and expenses.................. 20,331 12,285
OPERATING INCOME (LOSS)....................... $ 1,053 $ (2,505)
INTEREST EXPENSE, NET......................... (163) (20)
--------------- -----------
INCOME (LOSS) BEFORE TAXES.................... $ 890 $ (2,525)
Provision for income taxes................. (30) 0
--------------- -----------
NET INCOME (LOSS)............................. $ 860 $ (2,525)
=============== ===========
NET INCOME (LOSS) PER SHARE:
Basic.................................... $ 0.11 $ (0.34)
=============== ===========
Diluted.................................. $ 0.11 $ (0.34)
=============== ===========
SHARES USED FOR COMPUTING
NET INCOME (LOSS) PER SHARE:
Basic.................................... 7,545 7,478
=============== ===========
Diluted.................................. 8,044 7,478
=============== ===========
</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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(In 000's)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 860 $ (2,525)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 2,872 1,828
Changes in operating assets and liabilities:
Trade receivables . . . . . . . . . . . . . . . . . . (349) (387)
Other current assets . . . . . . . . . . . . . . . . . 480 (169)
Trade accounts payable . . . . . . . . . . . . . . . . 96 (1,144)
Other accrued expenses . . . . . . . . . . . . . . . . 1,059 1,065
Deferred revenue . . . . . . . . . . . . . . . . . . . 589 534
------------- ------------
Total adjustments . . . . . . . . . . . . . . . . . 4,747 1,727
------------- ------------
Net Cash Provided by (Used in) Operating Activities 5,607 (798)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . (4,129) (2,371)
Purchase of customer base . . . . . . . . . . . . . . . . (950) (35)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (161) 37
------------- ------------
Net Cash Used in Investing Activities . . . . . . . (5,240) (2,369)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable . . . . . . . . . . . . . . . . (396) (77)
Payments of capital lease obligations . . . . . . . . . . (603) (210)
Issuance of common stock . . . . . . . . . . . . . . . . . 112 42
------------- ------------
Net Cash Used in Financing Activities . . . . . . . (887) (245)
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . (520) (3,412)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . 9,386 9,653
------------- ------------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . $ 8,866 $ 6,241
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . $ 270 $ 127
============= ============
Cash paid for income taxes . . . . . . . . . . . . . . . . $ - $ -
============= ============
SUPPLEMENTAL NON-CASH DISCLOSURES:
Assets acquired under capital leases . . . . . . . . . . . $ - $ 520
============= ============
</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
MARCH 31, 1998 AND 1997
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, 1997 (File No. 0-27890).
2. Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
3. The Company adopted SFAS No. 128, "Earnings per Share", effective
December 31, 1997. Basic earnings (loss) per common share ("EPS") was
computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the period then ended. The
effect of the Company's stock options (using the treasury stock method)
was included in the computation of diluted EPS for the quarter ended
March 31, 1998. For the period ended March 31, 1997, the effect of the
options is excluded as it is antidilutive. Accordingly, no prior
period restatement for previously reported quarters is required. The
following table summarizes the shares used in the calculations:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED MARCH 31,
(IN 000'S)
1998 1997
------------ -------------
<S> <C> <C>
Weighted average shares outstanding 7,545 7,478
Effect of dilutive stock options 499 -
------------ -------------
Shares used for diluted earnings per share 8,044 7,478
------------ -------------
</TABLE>
4. For the three months ended March 31, 1998, the Company recorded a
provision for income taxes equal to its liability in various states at
the enacted rates where it does not have any net operating loss
carryforwards available. The remaining portion of the current period
provision was offset by the reversal of previously recorded valuation
allowance amounts. For the three months ended March 31, 1997, no income
tax benefit was recognized as the Company had a net taxable loss for the
period and anticipated being in a net taxable loss position for the year
ended December 31, 1997. There were no cash payments for income taxes
for the quarters ended March 31, 1998 and 1997.
The Company is continually assessing its income tax situation to
determine when it is "more likely than not" that its deferred tax assets
will be realized. Based on the Company's short history of earnings and
the uncertainty of near term earnings because of various industry trends
which may have a significant negative impact on near term earnings,
management does not believe it is "more likely than not" that the
deferred tax assets will be realized. When management believes this
situation has changed, the Company will reverse its valuation allowance
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(approximately $4.9 million at March 31, 1998) through that period's tax
provision. Prior to that point, the Company will reverse the valuation
allowance against the current period's provision as realized.
6
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ITEM 2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a leading
national Internet access provider that focuses on serving individuals and small
businesses. The Company is also a leading provider of Web hosting services, a
complement to its Internet access business and one of the fastest growing
segments of the Internet marketplace. Through its network of Company-owned and
third-party POPs, the Company can offer its services in 45 U.S. states and the
District of Columbia via a local telephone call. As of March 31, 1998, the
Company served approximately 341,000 subscribers, including approximately 12,000
Web hosting subscribers.
The Company's services include dial-up Internet access, Web hosting and
other value-added services such as Web page design and Web-server co-location.
The Company's primary service offerings, dial-up Internet access and Web
hosting, are offered in various price and usage plans designed to meet the needs
of its customers. The Company offers local Internet access to subscribers
either through Company-owned POPs or through access to POPs owned and operated
by third parties with which the Company has network service agreements. Through
these service agreements, the Company has the flexibility to offer Internet
access through a Company-owned POP, a third-party network provider's POP or a
combination thereof.
STATEMENT OF OPERATIONS
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 three
months ended March 31, 1998, 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. A
majority of the Company's individual subscribers pay their MindSpring fees
automatically by pre-authorized monthly charges to the subscriber's credit card.
In addition, the Company earns revenue by providing Web-hosting, domain
registration and Web page design services, Web-server co-location and full-time
dedicated access connections to the Internet. The Company's Web-hosting services
allow a business or individual to post information on the World Wide Web so that
the information is available to anyone who has access to the Internet. The
Company currently offers three price plans for Web hosting subscribers ranging
from $19.95 to $99.95 per month. MindSpring had approximately 12,000 Web hosting
subscribers as of March 31, 1998. 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.
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The Company's costs include (i) costs of revenue that are primarily
related to the number of subscribers; (ii) selling, general and administrative
expenses that are associated more generally with operations; and (iii)
depreciation and amortization, which are related to the size of the Company's
network 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 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. For a discussion of the Company's network services agreement with
PSINet Inc. ("PSINet") (the "PSINet Services Agreement"), see Notes 3 and 7 of
Notes to Financial Statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. 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 may determine to significantly
increase the level of marketing activity in order to increase the rate of
subscription growth. Any such increase would have a short-term negative impact
on earnings. The Company does not defer any start-up expenses related to
entering new markets.
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
pursuant to network service agreements. 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 and because, subject to local area telecommunications charges, the
Company can provide services at a lower cost on its own POPs when certain
economies of scale are achieved.
The Company has added, and may in the future continue to add, MindSpring
subscribers by purchasing customer bases from other Internet service providers.
The Company amortizes such purchased customer bases using the straight-line
method over a period of three years, commencing when the purchase is completed.
Customer base purchases and related amortization for the quarter ended March
31, 1998 were not material to the Company's results of operations.
While the Company has experienced annual 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, it
generated positive cash flows from operations during 1997 and had
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<PAGE> 9
profitable quarters in the fourth quarter of 1997 and the first quarter of
1998. The Company expects to continue to focus on increasing its subscriber
base, which will cause its costs of revenue, selling, general and
administrative expenses and capital expenditures to increase in addition to its
revenues. There can be no assurance, however, that growth in the Company's
revenue or subscriber base will continue or that the Company will be able to
sustain profitability or positive cash flows.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
The following table sets forth certain unaudited financial data for the
three months ended March 31, 1998 and 1997. Operating results for any period
are not necessarily indicative of results for any future period. Dollar amounts
are shown in thousands (except per share data).
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------------- -------------------
(000'S) % OF (000'S) % OF
REVENUE REVENUE
<S> <C> <C> <C> <C>
Revenue:
Access $16,992 79% $ 7,356 75%
Business services 3,173 15% 1,424 15%
Subscriber start-up fees 1,219 6% 1,000 10%
--------------- --------- ---------- ---------
Total revenue 21,384 100% 9,780 100%
Costs and expenses:
Costs of revenue- recurring 5,990 28% 3,169 32%
Costs of revenue- start-up fees 617 3% 365 4%
Selling, general and administrative 10,852 51% 6,923 71%
Depreciation and amortization 2,872 13% 1,828 19%
--------------- --------- ---------- ---------
Total operating expenses 20,331 95% 12,285 126%
--------------- --------- ---------- ---------
Operating income (loss) 1,053 5% (2,505) (26)%
Interest income (expense), net (163) (1)% (20) 0
--------------- --------- ---------- ---------
Income (loss) before taxes 890 4% (2,525) (26)%
Income tax provision (30) 0% 0 0%
--------------- --------- ---------- ---------
Net income (loss) 860 4% (2,525) (26)%
=============== ========= ========== ==========
PER SHARE DATA:
Net income (loss) per share $ 0.11 $ (0.34)
Weighted average common shares outstanding 8,044 7,478
OPERATING DATA:
Approximate number of subscribers at end of
period 341,000 153,000
Number of Company employees at end of period 602 365
</TABLE>
Revenue: Revenue for the three months ended March 31, 1998 totaled
approximately $21,384,000, compared to approximately $9,780,000 for the three
months ended March 31, 1997. The approximately 119% increase in period revenue
resulted primarily from a 123% increase in subscribers. Revenues from dial-up
access to the Internet for the three months ended March 31, 1998 represented
approximately 79% of revenue, compared to approximately 75% of revenue for the
same three months in the prior year. Subscriber start-up fees accounted for
approximately 6% of revenue for the three months ended March 31, 1998, compared
to approximately 10% for the three months ended March 31, 1997. The Company
anticipates that as its customer base continues to expand, subscriber start-up
fees will progressively
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<PAGE> 10
represent a smaller percentage of revenue. Business services revenue remained
steady and represented approximately 15% of total revenue for the three months
ended March 31, 1998 and 1997.
Costs of revenue-recurring: For the three months ended March 31, 1998,
costs of revenue-recurring decreased to approximately 28% of total revenue,
compared to approximately 32% of total revenue for the three months ended March
31, 1997. Costs of revenue-recurring also decreased as a percentage of dial-up
access revenue from approximately 43% in the first quarter of 1997 to
approximately 35% in the first quarter of 1998. Exclusive of $600,000 in
discounts received in the first quarter of 1998 and $450,000 in discounts
received in the first quarter of 1997 pursuant to the PSINet Services
Agreement, costs of revenue-recurring would have been approximately 39% and 49%
of total dial-up revenue, respectively. 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 per subscriber in the Company's own network.
Costs of revenue-start-up fees: For the three months ended March 31,
1998, subscriber start-up expenses decreased to approximately 3% of total
revenue, compared to approximately 4% of total revenue for the three months
ended March 31, 1997. Costs of revenue-start-up fees increased as a percentage
of subscriber start-up revenue from approximately 36% for the three months ended
March 31, 1997 to approximately 51% in the three months ended March 31, 1998.
This increase of costs of revenue-start-up fees as a percentage of subscriber
start-up revenue resulted from the Company more aggressively waiving the
subscriber start-up fees during selected marketing campaigns in the first
quarter of 1998. 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 51% of revenue for the three months
ended March 31, 1998, compared to approximately 71% of revenue for the three
months ended March 31, 1997. The decrease in selling, general and
administrative expenses as a percentage of revenue resulted from economies of
scale with respect to certain costs, such 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 13% of revenue for the three months ended March 31,
1998, compared to approximately 19% of revenue for the same period in the prior
year. Amortization expense for the three months ended March 31, 1998 was
approximately 5% of revenue compared to approximately 10% of revenue for the
three months ended March 31, 1997. 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 three months
ended March 31, 1998, compared to approximately 9% 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 the cost of new equipment and improved utilization within the
Company's network and the utilization of purchased network services as opposed
to increasing capacity by the construction of additional Company-owned POPs.
Interest expense, net: Interest expense for the three months ended March
31, 1998 consisted of approximately $270,000 related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet,
offset by approximately $107,000 of interest income. For the three months ended
March 31, 1997, the Company had interest expense related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet of
approximately $127,000 and interest income of approximately $107,000.
Income tax provision: For the three months ended March 31, 1998, the
Company recorded a provision for income taxes equal to its liability in various
states at the enacted rates where it does
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<PAGE> 11
not have any net operating loss carryforwards available. The remaining portion
of the current period provision was offset by the reversal of previously
recorded valuation allowance amounts. For the three months ended March 31,
1997, no income tax benefit was recognized as the Company had a net taxable loss
for the period and anticipated being in a net taxable loss position for the year
ended December 31, 1997.
The Company is continually assessing its income tax situation to
determine when it is "more likely than not" that its deferred tax assets will be
realized. Based on the Company's short history of earnings and the uncertainty
of near term earnings due to various industry trends which may have a
significant negative impact on near term earnings, management does not believe
it is "more likely than not" that the deferred tax assets will be realized. When
management believes this situation has changed, the Company will reverse its
valuation allowance (approximately $4.9 million at March 31, 1998) through that
period's tax provision. Prior to that point, the Company will reverse the
valuation allowance against the current period's provision as realized.
Net income and income per share: As a result of the factors discussed
above, the Company's net income for the three months ended March 31, 1998 was
$860,000, or $0.11 basic and diluted income per share, compared to a net loss of
$2,525,000, or $0.34 basic and diluted loss per share, for the three months
ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operations in the amount of
$5,607,000 for the three months ended March 31, 1998 versus using cash of
approximately $798,000 to support operating activities during the three months
ended March 31, 1997. The operating cash flow was used in the current period
primarily to cover the Company's investing activities of approximately
$5,240,000 primarily related to purchases of telecommunications equipment
necessary for the provision of service to subscribers. The Company's primary
financing activities of approximately $887,000 for the three months ended March
31, 1998 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 used in financing
activities for the three months ended March 31, 1997 was approximately $245,000,
consisting of cash paid for capital lease obligations and to PSINet in
connection with the PSINet Transaction.
In June 1997, the Company entered into various agreements with BellSouth
(collectively, the "BellSouth Agreement"), pursuant to which the Company agreed
to purchase certain telecommunications facilities from BellSouth over a term of
24 months. The Company estimates the total commitment under the BellSouth
Agreement to be approximately $2,700,000 per year.
As of March 31, 1998, the Company had cash on hand of approximately
$8,866,000. The Company's significant capital commitments through 1998 include
approximately $1,647,000 in principal related to a non interest-bearing note
issued to PSINet in connection with the PSINet Transaction and $2,508,000 in
capital lease payments. The Company anticipates that it will continue to
generate cash flows from operations in 1998. The Company estimates that its
cash and financing needs in 1998, assuming reasonable internal growth, can be
met by cash on hand, additional capital financing arrangements, and cash flow
from operations. If such sources of financing are insufficient or unavailable,
or if the Company experiences shortfalls in anticipated revenue or increases in
anticipated expenses, the Company will be required to modify its growth and
operating plans in accordance with the extent of available funding. The Company
frequently engages in discussions involving potential business acquisitions.
Depending on the circumstances, the Company may not disclose material
acquisitions until completion of a definitive agreement. The Company may
determine to raise additional debt or equity capital to finance potential
acquisitions and/or to fund accelerated growth. Any significant acquisitions or
increases in the Company's growth rate could
11
<PAGE> 12
materially affect the Company's operating and financial expectations and
results, liquidity and capital resources.
The Company does not believe that the Year 2000 issue will have a
material effect on its programs and computer systems, but will continue to
assess the potential impact of the Year 2000 issue on its reporting and
operating systems. Due to the proprietary nature of many of the Company's
operating platforms, including its billing and accounts receivable systems, the
Company has limited reliance on external vendors that might be vulnerable to
Year 2000 problems. To the extent that the Company does rely on external
vendors with Year 2000 exposure, however, any failure by such vendors to
resolve any Year 2000 issues on a timely basis or in a manner that is
compatible with the Company's systems could have a material adverse effect on
the Company. The Company has begun to ask its third-party network providers
about their progress in identifying and addressing problems that their computer
systems may face in correctly processing data information related to the Year
2000. Preliminary indications are that the Company's third-party network
providers are, or will be, Year 2000 compliant, although the Company has not
undertaken an in-depth evaluation of such providers in relation to the Year
2000 issue. Any failure on the part of such third-party network providers to
become Year 2000 compliant on a timely basis or in a manner that is compatible
with the Company's systems could have a material adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective with the first quarter of 1998, the Company was subject to the
provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information". Neither statement had any impact on the Company's
financial statements as the Company does not have any "comprehensive income"
type earnings (losses) and its financial statements reflect how the "key
operating decision maker" views the business. The Company will continue to
review these statements over time, in particular, SFAS 131, to determine if any
additional disclosures are necessary based on evolving circumstances.
12
<PAGE> 13
P A R T II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Statement Re: Computation of earnings (loss) per common share
27. Financial Data Schedule
13
<PAGE> 14
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: May 1, 1998 By: /s/ Michael S. McQuary
----------------------
Michael S. McQuary
President and Chief
Operating Officer
Date: May 1, 1998 By: /s/ Michael G. Misikoff
-----------------------
Michael G. Misikoff
Vice President and Chief Financial
Officer
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Exhibit Description Sequentially
-------------- ------------------- -------------
Numbered Page
-------------
<S> <C>
11. Statement Re: Computation of earnings (loss) per
common share
27. Financial Data Schedule
</TABLE>
15
<PAGE> 1
EXHIBIT 11
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------ --------------
(in 000's )
<S> <C> <C>
Weighted average shares 7,545 7,478
outstanding-basic
Effect of options 499 -
------------ --------------
Shares outstanding-diluted 8,044 7,478
============ ==============
Net income (loss) $ 860 $ (2,525)
Basic earning (loss) per share $ 0.11 $ (0.34)
============ ==============
Diluted earning (loss) per share $ 0.11 $ (0.34)
============ ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 8,866
<SECURITIES> 0
<RECEIVABLES> 3,571
<ALLOWANCES> 1,220
<INVENTORY> 145
<CURRENT-ASSETS> 11,780
<PP&E> 33,900
<DEPRECIATION> 7,809
<TOTAL-ASSETS> 46,004
<CURRENT-LIABILITIES> 19,190
<BONDS> 0
0
0
<COMMON> 76
<OTHER-SE> 22,309
<TOTAL-LIABILITY-AND-EQUITY> 46,004
<SALES> 0
<TOTAL-REVENUES> 21,384
<CGS> 6,607
<TOTAL-COSTS> 20,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 508
<INTEREST-EXPENSE> 163
<INCOME-PRETAX> 890
<INCOME-TAX> 30
<INCOME-CONTINUING> 860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
