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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 7, 1998
MINDSPRING ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-27890 58-2113290
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
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1430 WEST PEACHTREE ST., SUITE 400, ATLANTA, GA 30309
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(Address of principal executive offices)
Registrant's telephone number, including area code: (404) 815-0770
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ITEM 5. OTHER EVENTS.
On October 15, 1998, MindSpring Enterprises, Inc. (the "Company")
acquired certain assets used in connection with the consumer dial-up Internet
access business operated in the United States by Spry, Inc. ("Spry").
A description of this acquisition was set forth in the Company's Current Report
on Form 8-K filed with the Commission on September 15, 1998. The Company is
hereby filing under Item 7 certain updated, unaudited pro forma financial
information concerning this acquisition.
The Company is also filing hereby certain other information with
respect to its business and financial condition that was contained in the
Company's prospectus dated May 29, 1998 which formed a part of the Company's
Registration Statement on Form S-3 (SEC File No. 333-51615) and that the
Company deems of importance to its stockholders. Such information is set
forth below.
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BUSINESS
MindSpring 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. MindSpring offers
subscribers complete Internet access and Web hosting solutions which include
user-friendly software, a reliable network and highly responsive customer
service and technical support. 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. The Company has rapidly
increased its subscriber base and revenues by (i) providing superior customer
service and technical support, (ii) expanding marketing and distribution
activities, and (iii) leveraging its operating capabilities to create additional
revenue streams from value-added services such as Web hosting. As a result, the
Company's subscriber base has grown rapidly, from approximately 12,000
subscribers at December 31, 1995 to approximately 341,000 subscribers, including
approximately 12,000 Web hosting subscribers, at March 31, 1998. Management
believes that high geographic concentrations of satisfied subscribers improve
network economics and reduce subscriber acquisition costs, thereby resulting in
higher margins. By providing its subscribers superior service and support and
achieving significant market penetration in a number of the Company's target
markets, MindSpring has achieved profitability ahead of other national ISPs. In
the first quarter of 1998, the Company had revenues, EBITDA and net income of
$21.4 million, $3.9 million and $860,000, respectively, representing an EBITDA
margin of 18% and earnings per share of $0.11.
The Company was incorporated in Georgia in February 1994 and was
reincorporated in Delaware in December 1995. The Company's executive offices are
located at 1430 West Peachtree St., Suite 400, Atlanta, Georgia 30309. The
Company's telephone number is (404) 815-0770.
INDUSTRY OVERVIEW
Internet access and enhanced Internet services represent two of the fastest
growing segments of the telecommunications services marketplace. According to
industry estimates, the number of Internet users in the United States who access
the World Wide Web reached approximately 29.2 million in 1997 and is forecasted
to grow to approximately 72.1 million by the year 2000. In addition, total ISP
revenues in the U.S. are projected to grow from $4.6 billion in 1997 to $18.3
billion in 2000. The availability of Internet connectivity, advancements in
technologies required to navigate the Internet and the proliferation of content
and applications available over the Internet have attracted a rapidly growing
number of users.
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Internet access services represent the means by which ISPs interconnect
either businesses or individual consumers to the Internet's resources or to
corporate intranets and extranets. Access services include dial-up access for
individuals and small businesses and high-speed dedicated access used primarily
by mid-sized and larger organizations. In addition to Internet access services,
an increasing number of Internet users are taking advantage of value-added
services such as Web hosting and security services. According to industry
estimates, these value-added services represent the fastest growing segment of
the ISP market. Value-added services revenues are projected to increase in the
United States at a compounded annual growth rate of approximately 171% from $352
million in 1997 to $7 billion in 2000. In particular, Web hosting revenues are
projected to grow in the United States approximately 144% annually from $247
million in 1997 to $3.6 billion in 2000.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry of over 4,000 national and local ISPs in the U.S. Access
providers vary widely in geographic coverage, customer focus and levels of
Internet access provided to subscribers. For example, access providers may
concentrate on certain types of subscribers (such as businesses or individuals)
that differ substantially in the type of service and support required. Providers
may also differ according to whether they provide direct or indirect access to
the Internet.
The Company focuses on the individual and small business segments of the
Internet marketplace. According to industry estimates, only 20% of U.S.
households have Internet service. The Company believes that this market will
grow substantially from its current level of market penetration. In addition to
trends driving the overall growth of the Internet market, the individual and
small business markets are being driven by lower prices in the PC market and
increased availability of Web browsers which make the Internet experience more
user-friendly. The Web hosting market represents another rapidly growing and
underpenetrated area of the Internet marketplace. Web hosting growth for
individuals and small businesses is being driven by the increasing desire of
individuals and small businesses for World Wide Web sites without the
responsibility and expense of maintaining a Web server or high speed Internet
connection. The Company believes that the individual and small business markets
represent an enormous area for continued growth as many of the major national
ISPs are focused on medium and large businesses.
MINDSPRING STRATEGY
MindSpring's objective is to strengthen its position as a leading national
provider of high quality Internet access, Web hosting and other value-added
services to individuals and small businesses. Key elements to the Company's
business strategy include:
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Continue to Provide Superior Customer Service and Technical Support.
Because the Internet is an evolving and growing medium, the number of potential
problems subscribers may face is enormous. The Company believes that even
sophisticated subscribers periodically encounter problems as applications
designed for the Internet proliferate. Consequently, the Company focuses on
providing high levels of customer service and technical support in an effort to
achieve maximum levels of customer satisfaction. As a result, the Company has
low churn rates and experiences significant subscriber growth from customer
referrals. In addition, the Company has received numerous customer service
awards, including being named ISP with the best customer support by PC World
magazine in December 1997. To ensure a high level of customer service and
technical support, one of the Company's priorities is to maintain a sufficient
number of qualified service and support personnel. In this regard, over half of
the Company's employees are engaged in this capacity. The Company's technical
support staff is highly trained in the use of MindSpring's starter-kit software
and the Internet and is available 24 hours a day, seven days a week.
Efficiently Expand National Network. The Company intends to continue to
efficiently increase the capacity and geographic reach of its network in order
to support subscriber growth, enter new markets and accommodate increased
customer usage. The Company pursues a hybrid network strategy of owning POPs in
mature markets where the Company can cost-effectively deliver high quality
access services and leasing POPs and capacity from third-party network service
providers in new or developing markets. The Company continuously evaluates the
economic and strategic benefits of building Company-owned POPs versus leasing
third-party POPs in each of its respective markets. This strategy allows
MindSpring the flexibility to modify its network cost structure on a
market-by-market basis. As of March 31, 1998, approximately 77% of the Company's
subscribers accessed the Company's network through a Company-owned POP.
Expand Targeted Marketing and Distribution Activities. The Company plans to
expand its targeted marketing and distribution efforts in markets where there is
the opportunity for substantial market penetration. The Company believes that
high geographic concentrations of subscribers improve network economics and
reduce subscriber acquisition costs, thereby resulting in higher margins. While
continuing to encourage referrals from existing subscribers, the Company plans
to increase its print publication, radio and direct mail advertising in certain
targeted metropolitan areas throughout the U.S. In addition, the Company will
continue to pursue nationwide strategic alliances and retail opportunities to
broaden its distribution. The Company currently has such relationships with,
among others, Microsoft Corporation, The 3Com Corporation and Ziff-Davis, Inc.
Increase Revenues from Value-Added Services. The Company intends to
continue to leverage its current sales, marketing and network capabilities to
create
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additional revenue opportunities from value-added services such as Web hosting,
Web page design and co-location services. Value-added services include the
fastest growing segments of the Internet marketplace and are projected to grow
in the United States from approximately $352.0 million in 1997 to approximately
$7.0 billion by the year 2000. The Company, which began offering Web hosting in
1995, had approximately 12,000 Web hosting customers as of March 31, 1998.
Business Services revenues, which consist predominantly of Web hosting,
represent approximately 15% of the Company's revenues. The Company will continue
to aggressively market value-added services in order to increase its
participation in these higher end and faster growing segments of the Internet
marketplace.
Engage in Selected Acquisitions. Since early 1996, the Company has
supplemented its expansion efforts through selected acquisitions of businesses
and subscriber accounts. As the Company continues to expand, it may in the
future acquire additional subscriber accounts and complementary businesses.
According to industry sources, the ISP market is undergoing consolidation as
performance, reliability, and support expectations prevent smaller ISPs from
scaling up to remain competitive on a national or regional basis. As a result,
the Company intends to evaluate acquisition opportunities as they become
available.
MINDSPRING SERVICES
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 continuously evaluates the need to add additional
product offerings based upon market demands.
DIAL-UP INTERNET ACCESS
MindSpring's primary service offering is dial-up Internet access. The basic
equipment requirements for an individual dial-up subscriber are a Windows 3.x or
later operating system or Macintosh computer with at least 8MB of RAM and a
modem of 14.4 Kbps speed or faster. The subscriber's MindSpring connection is a
direct PPP connection, enabling the subscriber to use any standard Internet
capable software that will run on the subscriber's computer.
The Company currently offers the following five price plans for dial-up
subscribers in order to accommodate both heavy and light Internet users. Each
plan requires a start-up fee of up to $25 (except for the Commercial plan, which
has a start-up fee of $50), depending upon the promotional method by which the
subscriber is acquired.
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The Works. For $26.95 per month, individual subscribers receive unlimited
use (not intended to be a full-time connection) as well as 10MB of Web space, a
personal Web page editor that lets subscribers create and upload their own Web
pages, and two additional mailboxes.
Unlimited Access. Individual subscribers pay $19.95 per month for unlimited
use, with the restriction that the subscriber must disconnect when not actively
accessing the Internet. The subscriber is not permitted, for example, to
maintain a full-time computer connection as a World Wide Web server.
Standard. Subscribers pay $14.95 per month for 20 hours of use and $1 per
hour for each additional hour. Subscribers also receive 5MB of Web space.
Light. Subscribers pay $6.95 per month for 5 hours of use and $2 per hour
for each additional hour. Subscribers also receive 5MB of Web space.
Commercial. Designed for small businesses, subscribers pay a $50 start-up
fee and $99 per month thereafter in exchange for 160 hours of use and $.75 for
each additional hour. Subscribers receive 10 mailboxes and are not charged for
simultaneous usage which allows several employees to be online at once without
paying additional fees.
Subscribers to each plan can also purchase additional features such as
extra mailboxes for specified fees.
Substantially all of the Company's subscribers are on month-to-month
subscriptions. The Company offers a 30-day money-back satisfaction guarantee for
new subscribers. Billing is made to the majority of subscribers by automatic
charges to subscribers' credit cards each month in advance, although some
subscribers are invoiced (for an extra charge). Subscribers, as well as the
Company, may cancel an account at any time, with the cancellation taking effect
as of the first day of the following month.
A subscriber who is within local dialing range of one of the MindSpring
POPs or a third-party provider POP can access the Internet with a local
telephone call. The Company also offers access to its services through an "800"
number for an additional charge. All dial-up subscribers can connect to the
MindSpring network (including the third-party provider POPs) via modem at speeds
up to 36.6 Kbps and over 90% of the Company's subscribers can connect at speeds
up to 56 Kbps. In a majority of the cities that the Company serves, individual
subscribers, except subscribers to the Unlimited Access and Commercial plans,
can also choose to connect via ISDN at 64 Kbps or 128 Kbps. There is a one-time
extra start-up fee of $25 for ISDN users who subscribe to the Standard and
Light plans; otherwise, ISDN pricing is the same as for modem subscribers. All
dial-up subscribers, except
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subscribers to the Unlimited Access plan, also have the option of using
MindSpring servers to publish information on the Internet through the World
Wide Web or FTP. MindSpring subscribers may use the space made available on
MindSpring's servers to make World Wide Web pages or computer files available
to the Internet.
WEB HOSTING
MindSpring offers Web hosting accounts for companies and other
organizations that wish to create their own World Wide Web sites without
maintaining their own Web servers and high-speed Internet connections. Web
hosting subscribers can use their own domain names in their World Wide Web
addresses. This type of Web hosting is sometimes called "virtual hosting." Web
hosting subscribers are responsible for building their Web sites themselves and
then uploading the pages to a MindSpring Web server. The Company's Web hosting
service features state-of-the-art Web servers for high speed and reliability, a
high-quality connection to the Internet, specialized customer support, advanced
services features, such as secure transactions and VRML (Virtual Reality Markup
Language, a feature used to make Web pages seem three-dimensional), and
reporting on site usage. 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.
OTHER SERVICES
MindSpring offers other Internet-related services to its subscribers,
including Web page design and Web-server co-location services. In the fourth
quarter of 1997, the Company began to offer Web page design services to its
subscribers by offering four standard design packages from which a subscriber
can choose. The subscriber provides the text for the Web site, and custom design
work is available from the Company, including logo design, additional HTML
pages, and database integration. The Company also offers Web-server co-location
services at its headquarters in Atlanta for subscribers who want to maintain
their own Web servers in MindSpring's state-of-the-art telephony environment and
receive a high-speed, full-time connection to the Internet. MindSpring's
co-location services include 24-hour security monitoring, an uninterrupted power
supply (UPS), climate control, remote access for the subscriber, tape swap, and
secure tape storage. The Company also offers domain registration services and,
in certain markets, dedicated access connections to the Internet.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
MindSpring believes that excellent customer support is critical to its
success in retaining and in attracting new subscribers. MindSpring currently
provides customer service and technical support at call centers located at its
headquarters
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and at the Harrisburg Facility. The Company's customer service staff handles all
questions regarding a subscriber's account and are available from 9 a.m. to 9
p.m. eastern time seven days a week (excluding major holidays). As of March 31,
1998, the Company had 50 customer service employees. The Company's technical
support staff handles questions related to the provision of the Company's
services such as questions regarding installation of the Company's service,
connection to the Company's network and use of various software applications.
The Company's technical support staff is available 24 hours a day, seven days a
week (excluding major holidays). As of March 31, 1998, the Company had 313
technical support employees.
Subscribers can call the Company's headquarters and the Harrisburg Facility
through a local Atlanta telephone number or a toll-free "800" number.
Subscribers can also e-mail their questions directly to a customer service and
technical support address at the Company. In addition, the Company maintains
MindSpring-specific newsgroups on the Internet where subscribers can post
requests for help and other subscribers, as well as MindSpring support
personnel, can respond.
SALES AND MARKETING
The Company believes that the market for individual Internet access is
heavily influenced by person-to-person referrals. Accordingly, the Company's
marketing efforts have been geared, among other things, toward generating
positive referrals and stimulating subscriber growth and retention by providing
exceptionally high-quality service to its existing subscribers. The Company also
offers a $10 credit to existing subscribers each time a new subscriber names the
existing subscriber as the referral source. A significant number of the
Company's new subscribers indicate that an existing subscriber referred them.
The Company also engages in targeted marketing and distribution efforts in
markets where there is the opportunity for substantial market penetration. The
Company believes that high geographic concentrations of subscribers improve
network economics and reduce subscriber acquisition costs, thereby resulting in
higher margins. While continuing to encourage referrals from existing
subscribers, the Company plans to increase its print publication, radio and
direct mail advertising in certain targeted major metropolitan areas throughout
the United States in order to achieve greater density in its subscriber base.
In addition to encouraging referrals from existing subscribers and engaging
in targeted marketing efforts, the Company has attempted to establish a
nationwide presence and nationwide name recognition through moderate amounts of
print publication, radio, and direct mail advertising and by pursuing nationwide
strategic alliances available to the Company as a result of the Company's
nationwide access and reputation for reliability and high quality. Such
nationwide marketing opportunities may include, among others, entering into
large-scale bundling
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arrangements with complementary products, such as computers, software products,
multimedia books, and CD-ROM merchandise, and seeking strategic alliances
available with complementary businesses operating in its service areas, such as
Internet-oriented training organizations and consulting firms, World Wide Web
content developers, computer networking firms, media companies,
telecommunications companies, local area network and World Wide Web consulting
companies, and other Internet access companies that specialize in providing
dedicated connections. Such alliances are of varying natures and terms.
The Company also intends to continue to expand its marketing and
distribution efforts. The Company will continue to closely monitor the results
of its marketing techniques as part of an ongoing effort to increase the
cost-effectiveness of its marketing efforts.
The Company has attempted to maintain a high degree of personal contact
with the communities that it serves, and the Company has a staff of regional
managers who are responsible for generating interest in MindSpring in these
communities. MindSpring marketing personnel spend considerable time meeting with
and making presentations to groups representing potential subscribers, such as
computer user associations, high-technology business associations, and
educational institutions. The Company plans to continue these efforts in the
southeastern United States, New York and California and to selectively expand
them to include key metropolitan areas in other regions of the country.
Sales are consummated by the Company's telephone sales force, which
responds to incoming subscription inquiries, as well as through an on-line
sign-up procedure. The on-line registration module, which is available in the
Company's retail software package, through the Company's Web site and through
various Original Equipment Manufacturer ("OEM") arrangements, enables a user to
become a MindSpring subscriber by selecting service plans and billing methods
on-line, without the need to speak to a MindSpring employee.
NETWORK INFRASTRUCTURE
Geographic Coverage. 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. Approximately 77% of MindSpring's
subscribers dial into MindSpring owned and operated POPs. The Company has access
to additional POPs through agreements with PSINet, Gridnet International,
L.L.C., and GTE Internetworking Incorporated (formerly BBN Planet Corporation).
The Company believes that the combination of Company-owned POPs and
arrangements with third-party network providers enables MindSpring to provide
Internet access services on a nationwide basis while managing the timing and
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magnitude of its capital expenditures. The Company employs a strategy of leasing
POPs through third-party providers in locations where it is more economical to
do so. These are typically geographic areas where the Company has less
significant market penetration than areas served by MindSpring POPs. The Company
periodically reevaluates the economics of the POP leasing strategy and, if
warranted, installs a MindSpring POP to replace or overlap with a leased POP.
MindSpring is less dependent today on third-party providers than it has been in
the past.
MindSpring POPs. Each MindSpring POP typically consists of data
communications equipment such as 3COM Total Control modem chassis', 3COM or Bay
switches and Cisco routers, the majority of which are currently co-located with
a local telecommunications or media company.
The 3COM modem chassis' employed by the Company support both ISDN and
analog terminations. The Company is currently in the process of upgrading all
modem chassis' to support the new international 56Kb modem standard, V.90. Each
MindSpring POP is connected either to the Company's Atlanta Network Hub or to
one of the Company's "Super-POPs." These connections consist of either a private
line point-to-point Internet Protocol ("IP") connection or a frame relay
connection. By routing Internet connections to the Super-POPs instead of the
Company's Atlanta Network Hub, MindSpring is able to more efficiently manage
Internet traffic.
A Super-POP is a POP where MindSpring co-locates its equipment with a
competitive local exchange carrier ("CLEC"). By co-locating with a CLEC, the
Company is able to aggregate disparate Internet traffic from multiple local
calling areas into a single modem pool via local telephone numbers. This
creates, in effect, a "Super-POP," enabling the Company to offer local dial-up
access out of a single POP to areas that would otherwise require co-location
sites in each local dial-up area (i.e., multiple POPs) to accomplish the same
task. As part of its strategy, the Company intends to open additional Super-POPs
where demand and other economic factors warrant.
Atlanta Network Hub. The Company's Atlanta Network Hub is connected, as are
the Company's Super-POPs, to Internet backbone providers such as GTE
Internetworking via leased DS-3 telecommunications lines. The Company's Atlanta
Network Hub is supported by dual SONET rings provided by BellSouth and MediaOne.
The Hub has a back-up generator for emergency use in the event of a prolonged
loss of electric power. In addition to dial-up subscribers, most of the
Company's Web hosting and Web-server co-location customers are served from this
location.
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Network Operations Center. The Company maintains a Network Operations
Center at its Atlanta headquarters through which the Company's technical staff
monitors network traffic, service quality, and security, as well as equipment at
individual POPs, to ensure reliable Internet access. The Network Operations
Center is staffed 24 hours a day, 7 days a week. In addition, the Company is
continuing to invest in improved network monitoring software and hardware
systems.
MINDSPRING SOFTWARE
An important component of the Company's offering for dial-up subscribers is
the MindSpring starter kit. The starter kit includes the MindSpring installation
program, front-end software and documentation, an on- line registration module
(retail version only), network software that enables a subscriber to connect to
the Internet, and application programs. See "-- Subscriber Applications."
The Company's objectives in developing and providing this starter kit are
to:
Simplify Installation. The MindSpring software package automatically
configures all the individual Internet access programs after one-time entry
by the user of a few required fields of information (name, user name,
password, etc.).
Provide a Convenient and Intuitive Starting Place for Subscribers. The
MindSpring front-end software allows subscribers to connect and disconnect,
see any current messages from MindSpring, check their monthly usage, see if
they have any E-mail, and launch any of their Internet application
programs, all from one screen. "Help" files and the accompanying
documentation contain information on troubleshooting and things to do on
the Internet.
Enhance Efficiency of the Company's Support Services. High-quality
software with which the Company's technical support representatives are
familiar makes it easier for the Company to provide fast and efficient
customer service and technical support. Software that is reliable and easy
to install and use also tends to reduce subscriber need for extensive
customer service and technical support services.
Provide State-of-the-Art Applications. The Company uses existing
applications in its software package. MindSpring believes that this
approach will enable it to include state-of-the-art software in its package
and to keep pace with technology developments by replacing applications
with newer or better programs as they become available without diverting
resources by attempting to develop new applications programs.
SUBSCRIBER APPLICATIONS
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MindSpring subscribers use their accounts for, among other things,
communicating, retrieving information, and publishing information on the
Internet. In Company surveys of its subscribers, a substantial number of the
Company's individual subscribers report that they use their MindSpring accounts
for personal as well as business purposes. The subscriber's MindSpring
connection is a direct PPP connection, enabling subscribers to use any standard
Internet-capable software that will run on their computers. A complete set of
the most popular Internet applications are part of the MindSpring starter kit
software package, including:
Electronic Mail. E-mail allows subscribers to exchange electronic messages
with anyone else who has an Internet e-mail address. These messages are usually
text only but can also include other kinds of computer files (such as images,
computer programs, or word processing documents), which are sent as attachments.
The Company's software package includes the Eudora Light E-mail application.
The World Wide Web. The World Wide Web allows a multimedia presentation of
material (i.e., text, graphic, sound, and video). Users can move from one World
Wide Web site to another by clicking on hypertext links and can interact with
the World Wide Web information providers through typed input. The software
programs that allow users to explore the World Wide Web are known as "browsers."
The browser applications currently included in the Company's software package
are Microsoft's Internet Explorer and Netscape Navigator.
Network News. Network News provides Internet-wide, subject-specific forums
on thousands of different subjects, where users can post information and review
posted information from other users.
FTP. File transfer protocol, or FTP, is a standard Internet tool that
allows users to send and retrieve computer files. FTP is often used for
retrieving software from various archive sites on the Internet.
Internet Relay Chat. Internet Relay Chat allows users to participate in
chat sessions, in which typed comments from all participants appear on the
screen, allowing simultaneous multiperson real-time conversations.
The Company has obtained permission and, in certain cases, licenses from
each manufacturer of the software that the Company bundles in its front-end
software product for Windows and Macintosh subscribers. See "Proprietary
Rights."
BILLING AND MANAGEMENT INFORMATION SYSTEMS
A majority of the Company's individual subscribers pay their MindSpring
fees automatically by credit card each month. The Company generally sends
monthly
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invoices to commercial accounts with multiple users. Billing calculations and
payment transactions are managed on the Company's automated billing system. The
Company expects to continue to modify and upgrade its billing system as needed
in order to maintain its ability to bill and collect amounts due and to be
responsive to changes in the market.
PROPRIETARY RIGHTS
General. Although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights, the Company's success
and ability to compete are dependent in part upon its technology. The Company
relies on a combination of copyright, trademark and trade secret laws, and
contractual restrictions to establish and protect its technology. It is the
Company's policy to require employees and consultants and, when possible,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with the Company. These agreements provide that confidential
information developed or made known during the course of a relationship with the
Company must be kept confidential and not disclosed to third parties except in
specific circumstances. There can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
Licenses. The Company has obtained authorization to use the products of
each manufacturer of software that the Company bundles in its front-end software
product for Windows and Macintosh subscribers. The particular applications
included in the MindSpring starter-kit have, in some cases, been licensed. The
Company currently intends to maintain or negotiate renewals of, as the case may
be, all existing software licenses and authorizations as necessary. The Company
may also want or need to license other applications in the future. License fees
charged to the Company upon enrollment of additional subscribers are included in
the cost of subscriber start-up fees. Other applications included in the
MindSpring starter kit are shareware that the Company has obtained permission to
distribute or that are from the public domain and are freely distributable.
MindSpring developed the front-end software programs in MindSpring's starter kit
for Windows, Win95, and Macintosh.
COMPETITION
The markets for the provision of Internet access and Web hosting services
to individuals and small businesses is extremely competitive and highly
fragmented. There are no substantial barriers to entry, and the Company expects
that competition will continue to intensify. The Company believes that the
primary competitive factors determining success in these markets are a
reputation for
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reliability and service, effective customer support, pricing, easy-to-use
software, and geographic coverage. Other important factors include the timing of
introductions of new products and services and industry and general economic
trends. There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially adversely affect its business,
financial condition, and results of operations.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. In addition, every
local market the Company has entered or intends to enter is served by multiple
local Internet access providers. The Company currently competes or expects to
compete with the following types of companies: (i) national commercial Internet
access providers, such as EarthLink Network, Inc., (ii) established on-line
commercial information service providers, such as America Online, Inc., (iii)
numerous regional and local commercial Internet access providers which vary
widely in quality, service offerings, and pricing, (iv) national and regional
Web hosting companies that focus primarily on providing Web hosting services,
(v) cable operators, (vi) national long-distance carriers, such as AT&T Corp.
and MCI Communications Corporation, (vii) regional telephone companies, (viii)
computer hardware and software and other technology companies, such as
International Business Machines Corporation and Microsoft Corp, and (ix)
nonprofit or educational Internet access providers.
The Company believes that new competitors, including large computer
hardware and software, media, and telecommunications companies, will continue to
enter the Internet access and Web hosting markets. In addition, as consumer
awareness of the Internet grows, existing competitors are likely to further
increase their emphasis on their Internet access and Web hosting services,
resulting in even greater competition for the Company. In addition,
telecommunications companies may be able to offer customers reduced
communications costs in connection with such services, reducing the overall cost
of their Internet access and Web hosting solutions and significantly increasing
pricing pressures on the Company. The ability of the Company's competitors to
enter into strategic alliances or joint ventures or to bundle services and
products with Internet access or Web hosting could also put the Company at a
significant competitive disadvantage. Competition could result in increased
selling and marketing expenses, related subscriber acquisition costs, and
increased subscriber attrition, all of which could adversely affect the
Company's business, financial condition, and results of operations. There can be
no assurance that the Company will be able to offset the effects of any such
increased costs through an increase in the number of its subscribers or higher
revenue from enhanced services or that the Company will have the resources to
continue to compete successfully.
<PAGE> 16
Moreover, the Company faces competition from companies that provide
broadband connections to consumers' homes, including local and long-distance
telephone companies, cable television companies, electric utility companies, and
wireless communications companies. For example, technologies have been developed
that enable cable television operators to offer high-speed Internet access
through their cable facilities. These broadband technologies promise
significantly higher access rates than existing modem speeds. Such companies
could include Internet access or Web hosting in their basic bundle of services
or could offer such access for a nominal additional charge and could prevent the
Company from delivering Internet access through the wire and cable connections
that such companies own. Any such developments could materially adversely affect
the Company's business, financial condition, and results of operations.
The Company does not currently compete internationally. To the extent that
the ability to provide Internet access internationally becomes a competitive
advantage in the Internet access industry, the Company may be at a competitive
disadvantage relative to other competitors.
GOVERNMENT REGULATION
The Company provides Internet access, in part, through transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. The Company, as an Internet
access provider, is not currently subject to direct regulation by the FCC or any
other agency, other than regulations applicable to businesses generally. In a
report to Congress issued on April 10, 1998, the FCC reaffirmed that Internet
access providers should be classified as unregulated "information service
providers" rather than regulated "telecommunications providers" under the terms
of the Telecommunications Act of 1996.
The consequence of this finding is that the Company is not subject to
regulations applicable to telephone companies and similar carriers. The Company
also is not required to contribute a percentage of its gross revenues to support
"universal service" subsidies for local telephone services and other public
policy objectives, such as enhanced communications systems for schools,
libraries, and certain health care providers. The FCC action is also likely to
discourage states from regulating Internet access providers as
telecommunications carriers or imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that the Company could be exposed to regulation in
the future. For example, in the same report to Congress the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. The FCC is also considering whether such
Internet-based telephone services should
<PAGE> 17
be subject to the universal service support obligations discussed above, or pay
carrier access charges on the same basis as traditional telecommunications
companies. Access charges are assessed by local telephone companies to long
distance companies for the use of the local telephone network to originate and
terminate long distance calls, generally on a per-minute basis. Access charges
have been a matter of continuing dispute, with long distance companies
complaining that the rates are substantially in excess of cost and local
telephone companies arguing that access rates are justified to subsidize lower
local rates for end users and other purposes. Both local and long distance
companies, however, contend that Internet-based telephony should be subject to
these charges. The Company has no current plans to install gateway equipment and
offer telephony, and so does not believe it would be directly affected by these
developments. However, it cannot predict whether these debates will cause the
FCC to reconsider its current policy of not regulating Internet access
providers.
The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. Although no claims seeking to impose such liability have
been asserted against the Company to date, there can be no assurance that such
claims will not be asserted in the future or, if asserted, will not be
successful. As the law in this area develops, the potential imposition of
liability upon the Company for information carried on and disseminated through
its network could require the Company to implement measures to reduce its
exposure to such liability, which may require the expenditure of substantial
resources or the discontinuation of certain products or service offerings. Any
costs that are incurred as a result of contesting any such asserted claims or
the consequent imposition of liability could materially adversely affect the
Company's business, financial condition, and results of operations.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, pricing, encryption
standards, consumer protection, electronic commerce, taxation, copyright
infringement and other intellectual property issues. The Company cannot predict
the impact, if any, that any future regulatory changes or development may have
on its business, financial condition, and results of operations. Changes in the
regulatory environment relating to the Internet access industry, including
regulatory changes that directly or indirectly affect telecommunication costs or
increase the likelihood or scope of competition from regional telephone
companies or others, could have a material adverse effect on the Company's
business, financial condition, and results of operations.
EMPLOYEES
As of March 31, 1998, the Company had 602 employees. The Company
anticipates that the development of its business will require the hiring of a
<PAGE> 18
substantial number of new employees. None of the Company's current employees is
represented by a labor organization, and the Company's management considers its
employee relations to be good.
PROPERTIES
The Company maintains its corporate headquarters in Atlanta, Georgia. The
lease for this space expires March 31, 1999. The Company has the option to
extend this lease for an additional two years. The Company has arranged for
expansion space within the building that houses its current headquarters. The
Company also leases additional office space in the vicinity of its Atlanta
headquarters in order to meet the Company's existing and anticipated space
requirements. The lease for this additional office space expires on March 31,
2002. The Company believes that these facilities will provide sufficient
capacity for the Company's operations for the foreseeable future. Equipment for
POPs other than the Atlanta POP site is generally co-located with and in space
leased from other companies operating in the area of the particular POP.
The Company also maintains the Harrisburg Facility, which it primarily uses
to augment its current sales, customer service and technical support operations.
The lease for the Harrisburg Facility expires on December 14, 1999. The Company
has the option to extend this lease for one additional year. In December 1997,
in connection with its acquisition of Internet Direct, Inc., MindSpring acquired
a facility in Phoenix, Arizona where it continues to operate the former Web
hosting and development businesses of Internet Direct.
LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
are likely to have a material impact on the Company.
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MindSpring 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 three "usage-sensitive" plans (Standard, Light and Commercial). For
the years ended December 31, 1996 and 1997 and 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 on 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.
<PAGE> 20
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" tables set forth below.
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 primarily 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. 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
<PAGE> 21
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 year ended December 31,
1997 and the three months 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 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
<PAGE> 22
The following table sets forth, for the periods indicated, certain items
from the Company's Statement of Operations as a percentage of revenue. Operating
results for any period are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
REVENUES:
Access 65% 74% 78% 75% 79%
Business services 12% 13% 15% 15% 15%
Subscriber start-up fees................. 23% 13% 7% 10% 6%
--- --- --- --- ---
Total revenues...................... 100% 100% 100% 100% 100%
--- --- --- --- ---
COST AND EXPENSES:
Cost of revenue-recurring................ 28% 35% 29% 32% 28%
Cost of revenue start-up fees............ 15% 10% 3% 4% 3%
Selling, general and administrative...... 100% 78% 59% 71% 51%
Depreciation and amortization............ 12% 18% 16% 19% 13%
--- --- --- --- ---
Total operating expenses............ 155% 141% 107% 126% 95%
--- --- --- --- ---
Operating gain (loss)......................... (55%) (41%) (7%) (26%) 5%
Interest income (expense), net................ (33%) (1%) (1%) -- (1%)
--- --- --- --- ---
Income (loss) before taxes.................... (88%) (42%) (8%) (26%) 4%
Income tax provision.......................... -- -- -- -- --
--- --- --- --- ---
Net income (loss)................... (88%) (42%) (8%) (26%) 4%
=== === === === ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
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 quarter 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 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 Company's network services
agreement with PSINet, Inc. ("PSINet") (the "PSINet Services Agreement"), costs
of revenue-recurring would have been
<PAGE> 23
approximately 39% and 49% of total dial-up revenue, respectively. For a
discussion of the PSINet Services Agreement, see Notes 3 and 7 of Notes to
Financial Statements. 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.
<PAGE> 24
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 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue for the year ended December 31, 1997 totaled approximately
$52,556,000, as compared to approximately $18,132,000 for the year ended
December 31, 1996. The approximately 190% increase in period revenue resulted
primarily from an approximately 129% increase in subscribers. Revenues increased
in a greater proportion than subscribers because the subscribers acquired in the
PSINet Transaction (as described herein) were added in the later portion of
1996. See "-- Liquidity and Capital Resources". Revenues from dial-up access to
the Internet for the year ended December 31, 1997 represented approximately 78%
of
<PAGE> 25
revenue, compared to approximately 74% for the year ended December 31, 1996.
Business services revenue increased slightly to approximately 15% of revenue for
the year ended December 31, 1997, compared to approximately 13% for the year
ended December 31, 1996. This increase is primarily attributable to the increase
in the number of the Company's Web hosting customers. Subscriber start-up fees
accounted for 7% of revenue for the year ended December 31, 1997, as compared to
approximately 13% for the year ended December 31, 1996. The Company anticipates
that as its customer base continues to expand, subscriber start-up fees will
progressively represent a smaller percentage of revenue.
Costs of Revenue-Recurring. For the year ended December 31, 1997, costs of
revenue-recurring decreased to approximately 29% of total revenue, compared to
approximately 35% of total revenue for the year ended December 31, 1996. Costs
of revenue-recurring also decreased as a percentage of dial-up access revenue
from approximately 47% for the year ended December 31, 1996 to approximately 37%
for the year ended December 31, 1997. Exclusive of $2,050,000 in discounts
received in 1997 pursuant to the PSINet Services Agreement, costs of
revenue-recurring would have been approximately 42% of total dial-up revenue for
the year ended December 31, 1997, compared to approximately 47% for the year
ended December 31, 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 per
subscriber in the Company's own network.
Costs of Revenue-Start-Up Fees. For the year ended December 31, 1997,
subscriber start-up expenses decreased to approximately 3% of total revenue,
compared to approximately 10% of total revenue for the year ended December 31,
1996, and decreased to approximately 41% of start-up fee revenue for the year
ended December 31, 1997, compared to approximately 77% of start-up fee revenue
for the year ended December 31, 1996. The Company had significant customer
start-up costs in 1996 due to expenditures for license fees and starter kits
related to the acquisition of certain individual subscriber accounts of PSINet.
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 start-up kit materials.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately 59% of revenue for the year ended
December 31, 1997, compared to approximately 78% of revenue for the year ended
December 31, 1996. The decrease in selling, general and administrative expenses
as a percentage of revenue resulted from the Company's benefiting from economies
of scale with respect to certain costs, such as employee compensation, that do
not
<PAGE> 26
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 16% of revenue for the year ended December 31, 1997,
compared to approximately 18% of revenue for the year ended December 31, 1996.
Amortization expense remained steady at approximately 8% of revenue for both the
years ended December 31, 1997 and December 31, 1996. Amortization expense
resulted primarily from acquired customer bases which are being amortized over
three years. Depreciation expense was approximately 8% of total revenue for the
year ended December 31, 1997, compared to approximately 10% for the year ended
December 31, 1996. The decrease in depreciation expense as a percentage of total
revenue resulted from efficiencies within Company-owned POPs resulting from
reductions in cost of new equipment and improved utilization within the
Company's network and the addition of capacity through 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 year ended December 31,
1997 consisted of approximately $749,000 related to capital leases of equipment
and imputed interest related to a note payable issued to PSINet, offset by
approximately $411,000 of interest income. For the year ended December 31, 1996,
the Company had interest expense related to capital leases of equipment and
imputed interest related to a note payable issued to PSINet of approximately
$415,000 and interest income of approximately $325,000.
Net Loss and Loss Per Share. As a result of the factors discussed above,
the Company's net loss for the year ended December 31, 1997 was $4,083,000, or
$0.54 basic and diluted loss per share, compared to a net loss of $7,612,000, or
$1.45 basic and diluted loss per share, for the year ended December 31, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue for the year ended December 31, 1996 totaled approximately
$18,132,000, as compared to approximately $2,227,000 for the year ended December
31, 1995. The 714% increase in period revenue resulted primarily from an 881%
increase in subscribers offset by a decrease in revenue per subscriber resulting
from price changes implemented in May 1996. Revenues from dial-up access to the
Internet for the year ended December 31, 1996 represented approximately 74% of
the revenue, compared to approximately 65% for the year ended December 31, 1995.
Subscriber start-up fees accounted for 13% of revenue for the year ended
December 31, 1996, as compared to 23% for the year ended December 31, 1995.
Business services revenue increased slightly to 13% of revenue for the year
ended December
<PAGE> 27
31, 1996, compared to 12% for the year ended December 31, 1995. This increase
was primarily attributable to the increase in the number of the Company's Web
hosting customers.
Costs of Revenue-Recurring. For the year ended December 31, 1996, costs of
revenue-recurring increased to approximately 35% of total revenue, compared to
approximately 28% of total revenue for the year ended December 31, 1995. Costs
of revenue-recurring also increased as a percentage of dial-up access revenue
from approximately 43% for the year ended December 31, 1995 to approximately 47%
for the year ended December 31, 1996. This increase was primarily associated
with expanding the Company's network into 40 markets at the end of 1996 compared
to seven markets at the end of 1995.
Costs of Revenue-Start-Up Fees. For the year ended December 31, 1996,
subscriber start-up expenses decreased to approximately 10% of total revenue,
compared to approximately 15% of total revenue for the year ended December 31,
1995, and increased to approximately 77% of start-up fee revenue for the year
ended December 31, 1996, compared to approximately 66% of start-up fee revenue
for the year ended December 31, 1995. This increase was attributable to the
additional expenditures such as license fees and starter kits related to the
purchase of certain individual subscriber accounts of PSINet in the third
quarter of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses represented approximately 78% of revenue for the year
ended December 31, 1996, compared to approximately 100% of revenue for the year
ended December 31, 1995. The decrease in selling, general and administrative
expenses as a percentage of revenue resulted from the Company's benefiting from
economies of scale with respect to such costs as employee compensation that do
not increase in direct proportion to increases in revenue and cost control
efforts implemented by management.
Depreciation and Amortization. Depreciation and amortization expenses
increased to approximately 18% of revenue for the year ended December 31, 1996,
compared to approximately 12% of revenue for the year ended December 31, 1995.
The increase is attributable to the 227% increase in property, plant and
equipment and 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 the acquired customer bases for the year ended
December 31, 1996 was approximately $1,521,000.
Interest Expense, Net. Interest expense for the year ended December 31,
1996 consisted of approximately $415,000 related to capital leases of equipment
and imputed interest related to a note payable issued to PSINet, offset by
approximately
<PAGE> 28
$325,000 of interest income. For the year ended December 31, 1995, the Company
had interest expense of approximately $725,000.
Net Loss and Loss Per Share. As a result of the factors discussed above,
the Company's net loss for the year ended December 31, 1996 was $7,612,000, or
$1.45 diluted loss per share, compared to a net loss of $1,959,000, or $0.59
diluted loss per share, for the year ended December 31, 1995.
QUARTERLY COMPARISONS
The following table sets forth certain quarterly financial information of
the Company for each quarter of fiscal 1996 and fiscal 1997 and for the first
quarter of fiscal 1998. The information has been derived from the quarterly
financial statements of the Company which are unaudited but which, in the
opinion of management, have been prepared on the same basis as the audited
financial statements included herein and include all adjustments (consisting
only of normal recurring items) necessary for a fair presentation of the
financial results for such periods. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and the
other financial information appearing elsewhere in this Prospectus. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
--------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Revenues:
Access $ 1,170 $ 1,619 $ 3,911 $ 6,720 $ 7,356
Business services............... 303 397 655 931 1,424
Subscriber start-up fees........ 339 479 735 873 1,000
---------- ---------- ---------- ----------- -----------
Total Revenues.............. 1,812 2,495 5,301 8,524 9,780
---------- ---------- ---------- ----------- -----------
Costs and expenses:
Cost of revenue -- recurring 542 755 1,906 3,129 3,169
Cost of revenue -- start-up
fees 264 352 941 319 365
Selling, general, and
administrative 1,738 2,603 4,043 5,777 6,923
Depreciation and
amortization 234 362 1,012 1,677 1,828
---------- ---------- ---------- ----------- -----------
Total operating
expenses 2,778 4,072 7,902 10,902 12,285
---------- ---------- ---------- ----------- -----------
Operating gain (loss)........... (966) (1,577) (2,601) (2,378) (2,505)
Interest income (expense),
net (73) 117 (101) (33) (20)
---------- ---------- ---------- ----------- -----------
Income (loss) before
taxes (1,039) (1,460) (2,702) (2,411) (2,525)
Income tax provision............ 0 0 0 0 0
---------- ---------- ---------- ----------- -----------
Net income (loss)............... (1,039) $ (1,460) $ (2,702) $ (2,411) $ (2,525)
========== ========== ========== =========== ===========
PERCENTAGE OF TOTAL
REVENUES
Revenues:
<CAPTION>
THREE MONTHS ENDED,
----------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Revenues:
Access $ 9,053 $ 10,858 $ 13,658 $ 16,992
Business services............... 1,741 2,084 2,462 3,173
Subscriber start-up fees........ 806 1,025 1,089 1,219
----------- ----------- ----------- -----------
Total Revenues.............. 11,600 13,967 17,209 21,384
----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenue -- recurring 3,525 3,948 4,561 5,990
Cost of revenue -- start-up
fees 295 440 519 617
Selling, general, and
administrative 7,142 7,771 8,948 10,852
Depreciation and
amortization 2,059 2,273 2,535 2,872
----------- ----------- ----------- -----------
Total operating
expenses 13,021 14,432 16,563 20,331
----------- ----------- ----------- -----------
Operating gain (loss)........... (1,421) (465) 646 1,053
Interest income (expense),
net (9) (161) (148) (163)
----------- ----------- ----------- -----------
Income (loss) before
taxes (1,430) (626) 498 890
Income tax provision............ 0 0 0 (30)
----------- ----------- ----------- -----------
Net income (loss)............... $ (1,430) $ (626) $ 498 $ 860
=========== =========== =========== ===========
PERCENTAGE OF TOTAL
REVENUES
Revenues:
</TABLE>
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C> <C>
Access 65% 65% 74% 79% 75%
Business services............... 17% 16% 12% 11% 15%
Subscriber start-up fees........ 18% 19% 14% 10% 10%
--------- --------- --------- ---------- ----------
Total Revenues.............. 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenue -- recurring 30% 30% 36% 37% 32%
Cost of revenue -- start-up
fees 15% 14% 18% 4% 4%
Selling, general, and
administrative 95% 104% 76% 67% 71%
Depreciation and
amortization 13% 15% 19% 20% 19%
--------- --------- --------- ---------- ----------
Total costs and
expenses 153% 163% 149% 128% 126%
--------- --------- --------- ---------- ----------
Operating gain (loss)........... (53%) (63%) (49%) (28%) (26%)
Interest income (expense),
net (4%) 4% (2%) 0% 0%
--------- --------- --------- ---------- ----------
Income (loss) before
taxes (57%) (59%) (51%) (28%) (26%)
Income tax provision............ 0% 0% 0% 0% 0%
--------- --------- --------- ---------- ----------
Net income (loss) (57%) (59%) (51%) (28%) (26%)
========= ========= ========= ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Access 78% 78% 80% 79%
Business services............... 15% 15% 14% 15%
Subscriber start-up fees........ 7% 7% 6% 6%
---------- ---------- ---------- ----------
Total Revenue............... 100% 100% 100% 100%
Costs and expenses:
Cost of revenue -- recurring 30% 28% 27% 28%
Cost of revenue -- start-up
fees 3% 3% 3% 3%
Selling, general, and
administrative 61% 56% 51% 51%
Depreciation and
amortization 18% 16% 15% 13%
---------- ---------- ---------- ----------
Total costs and
expenses 112% 103% 96% 95%
---------- ---------- ---------- ----------
Operating gain (loss)........... (12%) (3%) 4% 5%
Interest income (expense),
net 0% (1%) (1%) (1%)
---------- ---------- ---------- ----------
Income (loss) before
taxes (12%) (4%) 3% 4%
Income tax provision............ 0% 0% 0% 0%
---------- ---------- ---------- ----------
Net income (loss) (12%) (4%) 3% 4%
========== ========== ========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operations in the amount of $11,354,000
and $5,607,000 for the year ended December 31, 1997 and for the three months
ended March 31, 1998, respectively, versus using cash of approximately
$2,005,000 and $798,000 to support operating activities during the year ended
December 31, 1996 and the three months ended March 31, 1997, respectively. The
operating cash flow was used during the three months ended March 31, 1998
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
<PAGE> 30
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 (including the Offering), 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 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.
<PAGE> 31
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(b) Pro Forma Financial Information.
<PAGE> 32
INDEX TO FINANCIAL STATEMENTS
MINDSPRING ENTERPRISES, INC.
Unaudited Pro Forma Financial Data....................................... F-2
Unaudited Pro Forma Balance Sheet as of September 30, 1998............... F-3
Unaudited Pro Forma Statement of Operations for the nine months ended
September 30, 1998 and the twelve months ended December 31, 1997.. F-5
F-1
<PAGE> 33
UNAUDITED PRO FORMA FINANCIAL DATA
The following pro forma balance sheet reflects the acquisition of Spry,
Inc. ("Spry") as if it had occurred on September 30, 1998. The following pro
forma statements of operations for the year ended December 31, 1997 and the nine
months ended September 30, 1998 reflect the acquisition of Spry as if it had
occurred on January 1, 1997. The pro forma financial information does not
purport to represent what the Company's consolidated results of operations would
have been if the acquisition had in fact occurred on these dates, nor does it
purport to indicate the future consolidated financial position or future
consolidated results of operations of the Company. The pro forma adjustments are
based on currently available information and certain assumptions that management
believes are reasonable.
F-2
<PAGE> 34
UNAUDITED PRO FORMA
BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total Assets: MindSpring Spry Subtotal Adjustments Pro Forma
---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 62,498 $ - $ 62,498 $ (25,000) (a) $ 37,498
Accounts receivable, net 2,370 3,241 5,611 (3,241) (a) 2,370
Due to parent - 2,002 2,002 (2,002) (a) -
Other 602 161 763 (161) (a) 602
--------- --------- --------- ----------- ---------
Total current assets 65,470 5,404 70,874 (30,404) 40,470
--------- --------- --------- ----------- ---------
Property and equipment, net 28,375 1,740 30,115 (1,130) (a) 28,985
--------- --------- --------- ----------- ---------
Intangibles, net 5,280 34,883 40,163 (10,493) (a) 29,670
--------- --------- --------- ----------- ---------
Other assets 890 143 1,033 (143) (a) 890
--------- --------- --------- ----------- ---------
Total assets $ 100,015 $ 42,170 $ 142,185 $ (42,170) $ 100,015
========= ========= ========= =========== =========
Liabilities and Stockholders' equity:
Accounts payable $ 2,036 $ 935 $ 2,971 $ (935) (a) $ 2,036
Accrued expenses 8,270 9,254 17,524 (9,254) (a) 8,270
Deferred revenue 4,961 - 4,961 - 4,961
Current portion of debt 593 - 593 - 593
Current portion of capital leases 2,715 - 2,715 - 2,715
--------- --------- --------- ----------- ---------
Total current liabilities 18,575 10,189 28,764 (10,189) 18,575
--------- --------- --------- ----------- ---------
Capital leases--non-current 3,077 - 3,077 - 3,077
--------- --------- --------- ----------- ---------
Total Liabilities 21,652 10,189 31,841 (10,189) 21,652
--------- --------- --------- ----------- ---------
Stockholders' equity:
Preferred stock - - - - -
Common stock 259 - 259 - 259
Additional paid-in-capital 84,967 37,500 122,467 (37,500) (a) 84,967
Accumulated deficit (6,863) (5,519) (12,382) 5,519 (a) (6,863)
--------- --------- --------- ----------- ---------
Total stockholders' equity 78,363 31,981 110,344 (31,981) 78,363
--------- --------- --------- ----------- ---------
Total Liabilities and Stockholders' equity $ 100,015 $ 42,170 $ 142,185 $ (42,170) $ 100,015
========= ========= ========= =========== =========
</TABLE>
(a) Reflects the preliminary purchase price allocation based on $25 million
paid at initial closing. Such estimate will be revised upon final closing
during the first quarter of 1999 when the final subscribers are
determined under the terms of the agreement. Management's best estimate
based on currently available information is that the final purchase price
will be between $35-45 million (such increase will be entirely reflected
as an
F-3
<PAGE> 35
increase in intangibles). In addition to the customer subscriber base,
the Company is acquiring certain fixed assets of Spry, which have also
been included in this allocation based on management's estimate of their
fair market value of $610 thousand. All other assets and liabilities are
not being acquired. Accordingly, they have been eliminated in the
accompanying pro forma balance sheet.
F-4
<PAGE> 36
UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MindSpring Spry Subtotal Adjustments (a) Pro Forma
---------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 75,139 $ 34,754 $ 109,893 $ - $ 109,893
--------- --------- --------- --------- ---------
Costs and expenses:
Selling, general and administrative 37,240 16,444 53,684 - 53,684
Cost of revenue 22,167 20,792 42,959 - 42,959
Depreciation and amortization 9,244 3,656 12,900 1,484 (b) 13,982
(402) (c)
--------- --------- --------- --------- ---------
68,651 40,892 109,543 1,082 110,625
--------- --------- --------- --------- ---------
Operating income (loss) 6,488 (6,138) 350 (1,082) (732)
--------- --------- --------- --------- ---------
Interest income (expense), net 590 (70) 520 - 520
--------- --------- --------- --------- ---------
Income before income tax expense 7,078 (6,208) 870 (1,082) (212)
Income tax expense (212) - (212) - (212)
--------- --------- --------- --------- ---------
Net income $ 6,866 $ (6,208) $ 658 $ (1,082) $ (424)
========= ========= ========= ========= =========
Shares:
Primary 24,043 1,644 (d) 25,687
Diluted 25,446 241 (d) 25,687
Earnings per share:
Primary $ 0.29 $ (0.02)
========= =========
Diluted $ 0.27 $ (0.02)
========= =========
</TABLE>
UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
12 MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MindSpring Spry Subtotal Adjustments (a) Pro Forma
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $ 52,557 $ 50,190 $ 102,747 $ - $ 102,747
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Selling, general and administrative 30,784 29,279 60,063 - 60,063
Cost of revenue 16,823 29,689 46,512 - 46,512
Depreciation and amortization 8,695 4,191 12,886 6,897 (b) 17,930
(1,853) (c)
---------- ---------- ---------- ---------- ----------
56,302 63,159 119,461 5,044 124,504
---------- ---------- ---------- ---------- ----------
</TABLE>
F-5
<PAGE> 37
<TABLE>
<S> <C> <C> <C> <C> <C>
---------- ---------- ---------- ---------- ----------
Operating income (loss) (3,745) (12,969) (16,714) (5,044) (21,757)
---------- ---------- ---------- ---------- ----------
Interest income (expense), net (338) (8) (346) 0 (346)
---------- ---------- ---------- ---------- ----------
Net income $ (4,083) $ (12,977) $ (17,060) $ (5,044) $ (22,103)
========== ========== ========== ========== ==========
Shares:
Primary 22,542 3,000 (d) 25,542
Diluted 22,542 3,000 (d) 25,542
Earnings per share:
Primary $ (0.18) $ (0.87)
========== ==========
Diluted $ (0.18) $ (0.87)
========== ==========
</TABLE>
(a) Adjustments have not been made to cost of revenue and selling, general
and administrative costs since the amounts expected to be incurred by
MindSpring are not readily determinable. However, such cost recorded by
Spry include allocations from its Parent Corporations and other
third-party vendors which may not be indicative of the costs that would
have been incurred on a stand alone basis. Accordingly, cost of revenue
and selling, general and administrative costs incurred by MindSpring in
future periods may be materially different from the amounts reflected in
MindSpring's historical statements.
(b) Represents additional amortization based on preliminary purchase price
allocation (as noted in footnote (a) to the pro forma balance sheet)
using a three-year amortization period. Management currently estimates
that the final purchase price will increase between $10-20 million, which
would result in $3.3-6.6 million in additional amortization expense per
annum.
(c) Represents the adjustment to conform the accounting policy of the
acquired company to those of the Company with respect to depreciable
lives.
(d) Reflects the 3 million shares of common stock issued on May 29, 1998 as
if they were outstanding since January 1, 1997. Also, the nine months
ended September 30, 1998 excludes the effect of stock options for
purposes of the diluted calculation since the effect for pro forma
purposes is antidilutive.
F-6
<PAGE> 38
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 hereunto duly authorized.
MINDSPRING ENTERPRISES, INC.
/s/ Michael G. Misikoff
------------------------------------------
Michael G. Misikoff
Vice President and Chief Financial Officer
Date: December 7, 1998
