<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 15, 1998
MINDSPRING ENTERPRISES, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-27890 58-2113290
-------- ------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1430 WEST PEACHTREE ST., SUITE 400, ATLANTA, GA 30309
-----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (404) 815-0770
<PAGE> 2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statement of Business Acquired.
The financial statements of Spry required by this item are contained in
the financial statements and footnotes thereto listed in the Index on page F-1
herein and are incorporated by reference herein.
(b) Pro Forma Financial Information.
The pro forma financial information required by this item is contained
in the financial statements and footnotes thereto listed in the Index on page
F-1 and is incorporated by reference herein.
(c) Exhibits.
2.1. Asset Purchase Agreement, dated as of September 10, 1998, by
and among America Online, Inc., Spry, Inc., and MindSpring
Enterprises, Inc. (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated September 15, 1998 and
incorporated herein by reference).
99.1. Press release issued by the Company dated October 15, 1998.
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
SPRY, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................................... F-2
Balance Sheets as of April 30, 1997, January 31, 1998
and July 31, 1998 (unaudited)....................................................... F-3
Statement of Operations for the years ended April 30, 1996
and 1997, the nine months ended January 31, 1998
and the six months ended July 31, 1997 and 1998 (unaudited)......................... F-4
Statement of Shareholders' (Deficit) Equity for the years ended April 30, 1995,
1996 and 1997 and January 31, 1998.................................................. F-5
Statements of Cash Flows for the years ended April 30, 1996
and 1997, the nine months ended January 31, 1998
and the six months ended July 31, 1997 and 1998 (unaudited)......................... F-6
Notes to Financial Statements............................................................... F-7
MINDSPRING ENTERPRISES, INC.
Unaudited Pro Forma Financial Data.......................................................... F-18
Unaudited Pro Forma Balance Sheet as of June 30, 1998....................................... F-19
Unaudited Pro Forma Statement of Operations for the six months ended
June 30, 1998 and the twelve months ended December 31, 1997......................... F-21
</TABLE>
F-1
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spry, Inc.:
We have audited the accompanying balance sheets of SPRY, INC. (a Washington
corporation) as of April 30, 1997 and January 31, 1998 and the related
statements of operations, shareholders' (deficit) equity, and cash flows for the
years ended April 30, 1996 and 1997 and the nine months ended January 31, 1998.
These financial statements are the responsibility of Spry's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spry, Inc. as of April 30, 1997
and January 31, 1998 and the results of its operations and its cash flows for
the years ended April 30, 1996 and 1997 and the nine months ended January 31,
1998 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
November 6, 1998
F-2
<PAGE> 5
SPRY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31, JULY 31,
1997 1998 1998
--------- ----------- ----------
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 337 $ 110 $ 0
Accounts receivable, net of allowance for doubtful accounts of
$1,370, $2,047, and $1,115 at April 30, 1997, January 31,
1998, and July 31, 1998, respectively 2,545 3,802 3,345
Due from parent 0 0 2,102
Inventory 167 185 0
Prepaid expenses and other assets 137 74 272
--------- --------- --------
Total current assets 3,186 4,171 5,719
--------- --------- --------
PROPERTY AND EQUIPMENT, NET 3,353 2,302 1,896
--------- --------- --------
OTHER ASSETS
Goodwill, net of accumulated amortization of $2,774, $3,699, and
$1,868 at April 30, 1997, January 31, 1998, and July 31, 1998,
respectively 9,557 8,632 35,494
Other, net of accumulated amortization of $210, $313, and $63 at
April 30, 1997, January 31, 1998 and July 31, 1998,
respectively 180 190 156
--------- --------- --------
Total other assets 9,737 8,822 35,650
--------- --------- --------
Total assets $ 16,276 $ 15,295 $ 43,265
========= ========= ========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 716 $ 344 $ 740
Accrued expenses 3,707 6,181 9,161
Due to parent 30,454 35,328 0
--------- --------- --------
Total current liabilities 34,877 41,853 9,901
--------- --------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 4)
SHAREHOLDERS' (DEFICIT) EQUITY:
Non-voting delayed convertible preferred stock, no par value,
500,000 shares authorized, 403,864, 403,864, and 0 issued and
outstanding at April 30, 1997, January 31, 1998, and July 31,
1998, respectively 102,735 102,735 0
Common stock, no par value, 1,000 shares authorized, 100 shares
issued and outstanding at April 30, 1997, January 31, 1998, and
July 31, 1998, respectively 0 0 0
Additional paid-in capital 0 0 37,500
Accumulated deficit (121,336) (129,293) (4,136)
--------- --------- --------
Total shareholders' (deficit) equity (18,601) (26,558) 33,364
--------- --------- --------
Total liabilities and shareholders' (deficit) equity $ 16,276 $ 15,295 $ 43,265
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 6
SPRY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS SIX MONTHS SIX MONTHS
APRIL 30, APRIL 30, ENDED ENDED ENDED
1996 1997 JANUARY 31, 1998 JULY 31, 1997 JULY 31, 1998
---------- ---------- ---------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet service revenues $ 9,379 $ 32,575 $ 38,410 $ 23,559 $ 23,607
Software revenues 16,781 2,995 0 0 0
-------- -------- -------- -------- --------
Total revenues 26,160 35,570 38,410 23,559 23,607
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Costs of revenues 11,432 20,261 22,762 13,853 14,093
Selling, general, and administrative 39,473 33,122 20,407 17,743 11,139
Depreciation and amortization 2,807 3,866 3,163 2,056 2,449
-------- -------- -------- -------- --------
Total costs and expenses 53,712 57,249 46,332 33,652 27,681
-------- -------- -------- -------- --------
OPERATING LOSS (27,552) (21,679) (7,922) (10,093) (4,074)
OTHER INCOME (EXPENSE) 2,377 957 (35) 54 (62)
-------- -------- -------- -------- --------
NET LOSS BEFORE INCOME TAX BENEFIT (25,175) (20,722) (7,957) (10,039) (4,136)
INCOME TAX BENEFIT 7,693 0 0 0 0
-------- -------- -------- -------- --------
NET LOSS $(17,482) $(20,722) $ (7,957) $(10,039) $ (4,136)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 7
SPRY, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NON-VOTING
COMMON STOCK DELAYED
CONVERTIBLE STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ ------ ------ --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995 0 $ 0 404 $ 102,735 $ (83,132) $ 19,603
Net loss 0 0 0 0 (17,482) (17,482)
------- ---- ----- --------- ---------- ---------
BALANCE, APRIL 30, 1996 0 0 404 102,735 (100,614) 2,121
Net loss 0 0 0 0 (20,722) (20,722)
------- ---- ----- --------- ---------- ---------
BALANCE, APRIL 30, 1997 0 0 404 102,735 (121,336) (18,601)
Net loss 0 0 0 0 (7,957) (7,957)
------- ---- ----- --------- ---------- ---------
BALANCE, JANUARY 31, 1998 0 $ 0 404 $ 102,735 $ (129,293) $ (26,558)
======= ==== ===== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 8
SPRY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR YEAR NINE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED ENDED
APRIL 30, APRIL 30, JANUARY 31, JULY 31, JULY 31,
1996 1997 1998 1997 1998
--------- ---------- ----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,482) $(20,722) $(7,957) $(10,039) $(4,136)
-------- -------- ------- -------- -------
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization 2,807 3,866 3,163 2,056 2,449
Loss on disposal of equipment 97 121 72 33 62
Changes in operating assets and
liabilities:
Accounts receivable, net 5,884 (1,733) (1,257) 843 457
Other current assets (232) 515 45 111 (13)
Accounts payable 3,006 (3,893) (372) 385 396
Accrued expenses (1,155) 1,834 2,474 771 2,980
Other assets 619 788 (113) (16) (29)
-------- -------- ------- -------- -------
Total adjustments 11,026 1,498 4,012 4,183 6,302
-------- -------- ------- -------- -------
Net cash (used in) provided by
operating activities (6,456) (19,224) (3,945) (5,856) 2,166
-------- -------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of
retirements (5,024) (1,494) (1,156) (563) (174)
-------- -------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in due to/from parent 11,838 19,863 4,874 7,731 (2,102)
-------- -------- ------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 358 (855) (227) 1,312 (110)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 834 1,192 337 358 110
-------- -------- -------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,192 $ 337 $ 110 $ 1,670 $ 0
======== ======== ======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======= =======
Cash paid for taxes $ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 9
SPRY, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1996 AND 1997, JANUARY 31, 1998,
AND JULY 31, 1997 AND 1998 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND NATURE OF BUSINESS
Spry, Inc. ("Spry" or the "Company") was organized in February 1989 and
over the periods has been engaged in providing Internet access and
services and selling Internet software. On February 4, 1995, H&R Block,
Inc. ("H&R") issued an aggregate of approximately 404,000 shares of its
non-voting delayed convertible preferred stock, options for an additional
52,000 shares thereof, and $41,800 in cash to the shareholders of Spry in
exchange for all of the outstanding common stock, preferred stock, and
stock options of Spry. This acquisition was accounted for as a purchase.
On January 30, 1996, H&R dividended Spry to CompuServe Corporation. This
was accounted for as a transfer of assets under common control so
carryover basis was employed. On January 31, 1998, in transactions that
were consummated concurrently, H&R sold Compuserve Corporation, including
its wholly-owned subsidiary, Spry, to WorldCom, Inc. and America Online,
Inc. ("AOL") acquired from WorldCom Inc. the worldwide interactive
services division of CompuServe Corporation ("CompuServe"), including
Spry, in a transaction accounted for as a purchase (Note 10).
Collectively, H&R, CompuServe, and AOL are herein referred to as the
"Parent Corporation."
The Company initially sold prepackaged software to connect to the Internet
principally utilizing its "Internet in a Box" and "Mosaic in a Box"
products. As access to the Internet became increasingly prevalent, the
Company switched its focus to being a subscriber based Internet service
provider. Beginning in mid-1997, the Parent Corporation began an effort to
dispose of Spry, and advertising and marketing efforts were significantly
reduced. Accordingly, selling, general, and administrative costs decreased
while subscriber growth slowed and eventually began to decline.
The financial statements and related footnotes contained herein reflect
the operations of Spry's customer base of individual Internet access
subscribers, principally in the United States, which includes subscribers
to Spry's "Internet in a Box" family of products, and other service
revenue. A portion of Spry's assets including its subscriber base,
intellectual property and facilities are being acquired in a transaction
accounted for as a purchase by MindSpring Enterprises, Inc. ("MindSpring")
(Note 10).
F-7
<PAGE> 10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The financial statements of Spry have been derived from the consolidated
financial statements of its Parent Corporations and have been prepared to
present the Company's financial position, results of operations, and cash
flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to
Spry from its Parent Corporations (Note 8). These costs have been
allocated on a pro rata basis based on a variety of factors, including
revenues, and represent management's best estimates of what such expenses
would have been had Spry been operated as a separate entity.
QUARTERLY INFORMATION
The balance sheet as of July 31, 1998 and the statements of operations and
cash flows for the six months ended July 31, 1998 and 1997 are unaudited
and have been prepared by management of the Company in accordance with the
rules and regulations of the Securities and Exchange Commission. In the
opinion of management, the statements contain all adjustments (consisting
of only normal recurring items) necessary for the fair presentation of the
financial position and results of operations for the interim periods. The
results of operations for the six months ended July 31, 1998 are not
necessarily indicative of the results to be expected for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, Spry considers all highly
liquid investments with an original maturity of three months or less to be
cash equivalents. The cash and cash equivalents reflected in the
accompanying balance sheets represent specific accounts associated with
Spry.
Certain other cash accounts are commingled with Parent Corporation funds
and Spry's portion is reflected in Due to Parent in accordance with the
accompanying balance sheets.
REVENUE RECOGNITION
Spry recognizes revenues when Internet services are provided. Spry bills
in arrears so accounts receivable includes certain services that have not
yet been billed.
F-8
<PAGE> 11
Spry recognizes revenues on the sale of prepackaged software when products
are shipped, net of an allowance for potential returns based on historical
patterns.
CREDIT RISK
Spry's accounts receivable potentially subject it to credit risk, as
collateral is not generally required. Spry's risk of loss is limited due
to the use of preapproved charges to customer credit cards and the ability
to terminate access on delinquent accounts. The concentration of credit
risk is mitigated by the large number of customers comprising the customer
base. The carrying amount of Spry's receivables approximates their fair
value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of three to five
years.
In conjunction with the AOL acquisition, the carrying value of property
and equipment was adjusted to its fair market value which approximated
book value.
SOFTWARE DEVELOPMENT COSTS
Spry capitalizes costs incurred for the production of computer software
used in the sale of its services, including direct labor and related
overhead. All costs in the software development process that are
classified as research and development are expensed as incurred until
technological feasibility has been established. For all periods presented,
research and development costs were not material. Once technological
feasibility has been established, such costs are capitalized until the
software is commercially available. Amortization is provided over three
years. It is reasonably possible that the estimates of anticipated future
revenues, the remaining estimated economic life of the product, or both
will be reduced significantly in the near term due to competitive
pressures.
LONG-LIVED ASSETS
Spry periodically reviews the values assigned to long-lived assets, such
as property and equipment, software development costs, and goodwill and
other intangibles to determine whether any impairments are other than
temporary. Management believes that the long-lived assets in the
accompanying consolidated balance sheets are appropriately valued.
GOODWILL
Goodwill, which is being amortized over 10 years, relates to the pushdown
of the new accounting basis resulting from the acquisition of the Company
by H&R, and subsequently by AOL.
F-9
<PAGE> 12
DUE TO/FROM PARENT
Spry either advances funds to or borrows funds from its Parent
Corporations. Funds advanced to Spry are used to cover fixed asset
expansion, acquisitions, and working capital requirements. The advances
and borrowings are netted and are reflected in Due to/from Parent in the
accompanying balance sheets. The advances are not evidenced by any written
agreement, and are non-interest bearing.
ADVERTISING COSTS
Spry expenses all advertising costs as incurred.
INCOME TAXES
The income tax returns of its Parent Corporations have included the
operations of Spry. For purposes of these financial statements, income
taxes related to Spry have been computed and recorded on a separate return
basis based on the statutory rates in effect (Note 6).
Deferred income taxes are recorded using enacted tax laws and rates for
the years in which the taxes are expected to be paid. Deferred income
taxes are provided for items when there is a temporary difference in
recording such items for financial reporting and income tax reporting.
SOURCES OF SUPPLIES
Spry is dependent on related parties (Note 8) and third-party suppliers
for its Internet access. Certain of these suppliers are or may become
competitors of Spry, are or have been affiliates of Spry, and such
suppliers are not subject to any restrictions upon their ability to
compete with Spry. To the extent that these suppliers change their pricing
structures, Spry may be adversely affected. Regulatory proposals are
pending that may affect the prices charged by certain suppliers to Spry.
Although management feels alternative telecommunications facilities could
be found in a timely manner, any disruption of these services could have
an adverse effect on operating results.
Spry is also dependent on certain third-party suppliers of hardware
components. Although Spry attempts to maintain a minimum of two vendors
for each required product, certain components used by Spry in providing
its networking services are currently acquired or available from only one
source. A failure by a supplier to deliver quality products on a timely
basis, or the inability to develop alternative sources if and as required,
could result in delays which could materially adversely affect Spry. As
Spry's suppliers revise and upgrade their equipment technology, Spry may
encounter difficulties in integrating the new technology into its network.
F-10
<PAGE> 13
3. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on the
straight-line method over the estimated useful lives of the assets, which
range from three to five years, and consist of the following:
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
--------- -----------
<S> <C> <C>
Computer hardware $ 4,951 $ 5,819
Leasehold improvements 1,392 1,402
Furniture and fixtures 1,117 1,128
Office equipment 554 562
------- -------
8,014 8,911
Less accumulated depreciation (4,661) (6,609)
------- -------
Property and equipment, net $ 3,353 $ 2,302
======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LEASES
Spry leases office space and certain equipment under agreements which are
classified as operating leases. The following is a schedule by years of
future minimum rental payments under these operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as
of January 31, 1998:
<TABLE>
<S> <C>
1999* $1,741
2000* 1,706
2001* 1,596
------
Total minimum payments required $5,043
======
</TABLE>
*Minimum payments have not been reduced by minimum sublease rentals
which are due in future periods under noncancellable subleases.
Total rental expense net of sublease rentals for the years ended April 30,
1996 and 1997 and the nine months ended January 31, 1998 were $1,554,
$1,338, and $1,090, respectively.
LEGAL PROCEEDINGS
Spry is subject to legal proceedings and claims which arise in the
ordinary course of business. There are no pending legal proceedings to
which Spry is a party which management believes are material.
F-11
<PAGE> 14
5. STOCK OPTION PLANS
SPRY STOCK OPTION PLAN
Under the Company's 1995 stock option plan (the "Spry 1995 Plan"), as
adopted on February 13, 1995 and subsequently amended in April 1995 upon
H&R's purchase of Spry, selected employees, directors, officers, agents,
consultants, advisors, and independent contractors of the company were
eligible to receive options under the Spry 1995 Plan. The Company's board
of directors is responsible for administering the Spry 1995 Plan. The
options become exercisable at a rate of 20% per year from the grant date
of the options based upon the optionee's continuous relationship with the
Company. All options granted were at a price not less than the fair market
value per share of the common stock at the time the option was granted.
Upon acquisition by H&R, all options outstanding under the Spry 1995 Plan
were converted to options to purchase shares of H&R Block delayed
convertible preferred stock at a ratio of 2.09 for 1. All options granted
expire ten years from the original date they were granted.
H&R BLOCK INCENTIVE STOCK OPTION PLAN
Under H&R's 1995 Incentive Stock Option Plan (the "H&R Plan"), as adopted
on August 8, 1995, H&R authorized 100,000 options on H&R Block Common
Shares. Employees eligible were H&R's Internet division ("Internet
Division") employees employed prior to April 4, 1995, and were determined
at the discretion of the Internet Division executive management. The H&R
Plan options become exercisable in equal installments at the end of each
of the three years beginning on June 30, 1996.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during the year ended
April 30, 1996 using the Black-Scholes option-pricing model as prescribed
by SFAS No. 123 using the following weighted average assumptions:
Risk-free interest rate 5.89%
Expected dividend yield 0%
Expected lives Three years
Expected volatility 35.32%
There were no grants in the periods ended April 30, 1997 or January 31,
1998.
The total value of options granted during the year ended April 30, 1996
was computed as approximately $2,356, which would be amortized on a pro
forma basis over the vesting period of the options. Additionally, there
was approximately $678 remaining unamortized compensation on grants prior
to April 30, 1995. If the Company had accounted for these plans in
accordance with SFAS No. 123, the Company's net loss and pro forma net
loss for
F-12
<PAGE> 15
the years ended April 30, 1996 and 1997 and the nine months ended
January 31, 1998 would have been as follows:
<TABLE>
<CAPTION>
AS PRO
REPORTED FORMA
-------- -----
<S> <C> <C>
April 30, 1996 $(17,482) $(18,179)
April 30, 1997 (20,722) (21,025)
January 31, 1998 (7,957) (8,149)
</TABLE>
A summary of the status of the Company's stock options plans at April 30,
1996 and 1997 and January 31, 1998 and changes during the years then ended
are presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
-------- ---------
<S> <C> <C>
April 30, 1995 51,826 $34.11
Grants 122,700 44.13
Forfeitures (24,237) 42.75
-------- ------
April 30, 1996 150,289 40.90
Exercised (4,840) 33.63
Forfeitures (84,893) 42.87
-------- ------
April 30, 1997 60,556 38.71
Exercised (8,116) 34.59
Forfeitures (10,190) 43.62
-------- ------
January 31, 1998 42,250 $38.31
======== ======
</TABLE>
F-13
<PAGE> 16
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by plan
as of January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE WEIGHTED REMAINING
OF PRICE AVERAGE CONTRACTUAL
SHARES RANGE PRICE LIFE
------ --------- --------- ----------
<S> <C> <C> <C> <C>
1993 Grants 17,292 $ 35.66 $ 35.66 5.3 years
1994 Grants 8,244 32.65 32.65 6.3 years
H&R Plan 16,714 44.13 44.13 7.3 years
</TABLE>
The following table summarizes the options exercisable as of April 1996
and 1997 and January 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER WEIGHTED REMAINING
OF AVERAGE CONTRACTUAL
SHARES PRICE LIFE
------ --------- -----------
<S> <C> <C> <C>
As of:
April 30, 1996 24,338 $ 34.45 8.0 years
April 30, 1997 40,319 38.30 7.0 years
January 31, 1998 36,451 38.27 6.3 years
</TABLE>
6. INCOME TAXES
The income tax returns of its Parent Corporations have included the
operations of Spry. For purposes of these financial statements, income
taxes related to Spry have been computed and recorded on a separate return
basis based on the statutory rates in effect.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of the Company's deferred tax assets and
liabilities as of April 30, 1997 and January 31, 1998 are as follows:
F-14
<PAGE> 17
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 6,323 $ 8,465
Allowance for doubtful accounts 466 682
Other, net 22 45
-------- ---------
Net deferred tax assets 6,811 9,192
Valuation allowance for deferred tax assets (6,811) (9,192)
-------- ---------
Net deferred taxes $ 0 $ 0
======== =========
</TABLE>
The company's net operating loss carryforwards (approximately $24,896 as
of January 31, 1998) will expire between 2011 and 2013 unless utilized.
For the period ended April 30, 1996, the Company's federal income tax
benefit was utilized by its Parent Corporation through a tax sharing
arrangement. For all other periods, the Company has not recognized the
income tax benefit of the net operating loss carryforwards due to the fact
that its Parent Corporation was also in a net taxable loss position and
unable to utilize them. Accordingly, management has provided a 100%
valuation reserve against its net deferred tax asset, consisting primarily
of net operating loss carryforwards. In addition, the Company's ability to
recognize the benefit from the net operating loss carryforwards could be
limited under Section 382 of the Internal Revenue Code if ownership of the
Company changes more than 50%, as defined.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the years ended April 30, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
APRIL 30 JANUARY 31,
---------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at statutory rate (34)% (34)% (34)%
Nondeductible intangibles 2 2 4
Other, net 1 0 0
Deferred tax asset valuation allowance 1 32 30
--- --- ---
Total income tax provision (30)% 0 % 0 %
=== === ===
</TABLE>
7. EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue
Code. Under the Savings Plan, participating employees may defer a portion
of their pretax earnings, up to the Internal Revenue Service annual
contribution limit. Annually, the Company determines whether to make a
discretionary matching contribution equal to a percentage, determined by
the Company, of the employee's deferred compensation contribution. The
Company has not made any material matching contributions to the Savings
Plan for the related periods.
F-15
<PAGE> 18
8. RELATED-PARTY TRANSACTIONS
Transactions of Spry are performed and certain management and
administrative services are executed by its Parent Corporations for the
periods ending April 30, 1996 and 1997 and January 31, 1998 respectively.
Services provided to the Company include support in major functional areas
such as accounting, human resources, legal, risk management, payroll,
sales and marketing, and taxes. Costs attributable to these support
functions are included in selling, general, and administrative expenses.
These costs are allocated to Spry based on various factors which
management believes represent relative cost streams. The costs allocated
to Spry were approximately $375, $1,650, and $1,238 for the years ended
April 30, 1996 and 1997 and nine months ended January 31, 1998,
respectively.
Spry operates under the network agreements of its Parent Corporations and
the cost of revenues for Internet services in the accompanying statement
of operations represent management's best estimate of the amounts that
would have been allocated to Spry for such services if it were a
standalone entity.
As discussed in Note 6, the Company recognized an income tax benefit of
approximately $7,693 through a tax sharing arrangement with its Parent
Corporation. This amount is reflected as a reduction in Due to/from Parent
on the accompanying balance sheet.
9. SHAREHOLDERS' (DEFICIT) EQUITY
The Company has authorized 1,000 shares of no par value common shares, of
which 100 were outstanding for all periods.
Prior to the AOL acquisition, Spry had outstanding 403,864 shares of
non-voting delayed convertible preferred stock (no par value), which were
convertible into shares of common stock at a ratio of four shares of
common stock to one share of preferred stock. In conjunction with the AOL
acquisition (Note 10), all such shares were retired.
10. SUBSEQUENT EVENTS (UNAUDITED)
As discussed in Note 1, AOL acquired Spry as part of its acquisition of
CompuServe on January 31, 1998. The effect of the transaction has been
pushed down to the financial statements of the Company based upon AOL's
initial allocation of its purchase price of CompuServe and the Company.
The following table summarizes the net assets allocated to the acquisition
and the amount allocated to intangibles:
Purchase price $37,500
Tangible assets acquired (6,663)
Liabilities assumed 6,525
Intangibles 37,638
F-16
<PAGE> 19
This reflects a preliminary estimate of the purchase price allocations
based on management's best estimate given currently available information;
however, such information may be revised up to one year from the
acquisition date.
On September 10, 1998, MindSpring entered into an Asset Purchase Agreement
with Spry and AOL, pursuant to which, MindSpring agreed to acquire certain
of the tangible and intangible assets and rights in connection with the
consumer dial-up Internet access business currently operated by Spry as
well as the domestic and Canadian subscriber base.
The transaction was consummated on October 15, 1998 with MindSpring paying
$25 million in cash to AOL. The final purchase price is estimated to be
between $35 million and $45 million based on final subscriber totals on
various measurement dates.
The transaction will be completed in the first quarter of 1999, subject to
certain customary closing conditions.
F-17
<PAGE> 20
UNAUDITED PRO FORMA FINANCIAL DATA
The following pro forma balance sheet reflects the acquisition of Spry,
Inc. ("Spry") as if it had occurred on June 30, 1998. The following pro forma
statements of operations for the year ended December 31, 1997 and the six months
ended June 30, 1998 reflect the acquisition of Spry as if it had occurred on
January 1, 1997. The balance sheet information for Spry included herein is as of
July 31, 1998. The statements of operations for Spry included herein reflect the
results of operations for the year ended January 31, 1998 and the six months
ended July 31, 1998. 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-18
<PAGE> 21
UNAUDITED PRO FORMA
BALANCE SHEET
AS OF JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Total Assets: MindSpring Spry Subtotal Adjustments Pro Forma
- ------------- ---------- ---- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 60,257 $ -- $ 60,257 $(25,000)(a) $ 35,257
Accounts receivable, net 2,437 3,345 5,782 (3,345)(a) 2,437
Due to parent -- 2,102 2,102 (2,102)(a) --
Other 638 272 910 (272)(a) 638
-------- -------- --------- -------- --------
Total current assets 63,332 5,719 68,051 (30,719) 38,332
-------- -------- --------- -------- --------
Property and equipment, net 27,719 1,896 29,615 (1,286)(a) 28,329
-------- -------- --------- -------- --------
Intangibles, net 6,278 35,494 41,772 (11,104)(a) 30,668
-------- -------- --------- -------- --------
Other assets 801 156 957 (156)(a) 801
-------- -------- --------- -------- --------
Total assets $ 98,130 $ 43,265 $ 141,395 $(43,265) $ 98,130
======== ======== ========= ======== ========
Liabilities and Stockholders' equity:
Accounts payable $ 4,750 $ 740 $ 5,490 $ (740)(a) $ 4,750
Accrued expenses 8,114 9,161 17,275 (9,161)(a) 8,114
Deferred revenue 3,351 -- 3,351 -- 3,351
Current portion of debt 1,239 -- 1,239 -- 1,239
Current portion of capital leases 2,697 -- 2,697 -- 2,697
-------- -------- --------- -------- --------
Total current liabilities 20,151 9,901 30,052 (9,901) 20,151
-------- -------- --------- -------- --------
Capital leases--non-current 3,753 -- 3,753 -- 3,753
-------- -------- --------- -------- --------
Total Liabilities 23,904 9,901 33,805 (9,901) 23,904
-------- -------- --------- -------- --------
Stockholders' equity:
Preferred stock -- -- -- -- --
Common stock 258 -- 258 -- 258
Additional paid-in-capital 84,817 37,500 122,317 (37,500)(a) 84,817
Accumulated deficit (10,849) (4,136) (14,985) 4,136 (a) (10,849)
-------- -------- --------- -------- --------
Total stockholders' equity 74,226 33,364 107,590 (33,364) 74,226
-------- -------- --------- -------- --------
Total Liabilities and Stockholders' equity $ 98,130 $ 43,265 $ 141,395 $(43,265) $ 98,130
======== ======== ========= ======== ========
</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-19
<PAGE> 22
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-20
<PAGE> 23
UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
6 MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MindSpring Spry Subtotal Adjustments (a) Pro Forma
---------- ---- -------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues $ 46,444 $ 23,607 $ 70,051 $ -- $ 70,051
-------- -------- -------- -------- --------
Costs and expenses:
Selling, general and administrative 23,239 11,139 34,378 -- 34,378
Cost of revenue 14,192 14,093 28,285 -- 28,285
Depreciation and amortization 5,966 2,449 8,415 2,197 (b) 10,340
(272)(c)
-------- -------- -------- -------- --------
43,397 27,681 71,078 1,925 73,003
-------- -------- -------- -------- --------
Operating income (loss) 3,047 (4,074) (1,027) (1,925) (2,952)
-------- -------- -------- -------- --------
Interest income (expense), net (75) (62) (137) -- (137)
-------- -------- -------- -------- --------
Income before income tax expense 2,972 (4,136) (1,164) (1,925) (3,089)
Income tax expense (92) -- (92) -- (92)
-------- -------- -------- -------- --------
Net income $ 2,880 $ (4,136) $ (1,256) $ (1,925) $ (3,181)
======== ======== ======== ======== ========
Shares:
Primary 23,157 2,467 (d) 25,624
Diluted 24,588 1,036 (d) 25,624
Earnings per share:
Primary $ 0.12 $ (0.12)
========= =======
Diluted $ 0.12 $ (0.12)
========= =======
</TABLE>
F-21
<PAGE> 24
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
--------- --------- --------- --------- ---------
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 six months ended
June 30, 1998 excludes the effect of stock options for purposes of the
diluted calculation since the effect for pro forma purposes is
antidilutive.
F-22
<PAGE> 25
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 11, 1998
