<PAGE> 1
PROSPECTUS
MAY 29, 1998
1,000,000 SHARES
[MINDSPRING LOGO]
COMMON STOCK
The 1,000,000 shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by MindSpring
Enterprises, Inc. ("MindSpring" or the "Company"). The Common Stock is traded on
The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under
the symbol "MSPG." On May 28, 1998, the last reported sale price of the Common
Stock on the Nasdaq National Market was $54.00 per share. See "Price Range of
Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.......................................... $53.00 $2.65 $50.35
Total(3)........................................... $53,000,000 $2,650,000 $50,350,000
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $450,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 150,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $60,950,000, the total
Underwriting Discount will be $3,047,500, and the total Proceeds to Company
will be $57,902,500. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain prior conditions including the right of the Underwriters to reject
orders in whole or in part. It is expected that delivery of such shares will be
made in New York, New York, on or about June 3, 1998.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.C. BRADFORD & CO.
FURMAN SELZ
WHEAT FIRST UNION
<PAGE> 2
[A COLOR MAP OF THE CONTINENTAL UNITED STATES APPEARS ON THE INSIDE FRONT
COVER, REPRESENTING MINDSPRING'S SERVICE AREA. MINDSPRING'S CORPORATE
HEADQUARTERS IS REPRESENTED BY A STAR; EACH MINDSPRING POP LOCATION IS
REPRESENTED BY A SOLID DOT; AND EACH THIRD-PARTY NETWORK PROVIDER POP IS
REPRESENTED BY A SOLID TRIANGLE. BELOW THE MAP IS A KEY TO THE AFOREMENTIONED
SYMBOLS.]
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. SEE "GLOSSARY OF TECHNICAL TERMS" FOR THE DEFINITION OF "POP" AS
USED HEREIN.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), omits certain of the information set forth in the
Registration Statement in accordance with the rules and regulations of the
Commission. Reference is hereby made to the Registration Statement and to the
exhibits thereto for further information with respect to the Company and the
securities offered hereby. Copies of the Registration Statement and the exhibits
thereto are on file at the offices of the Commission and may be obtained upon
payment of the prescribed fee or may be examined without charge at the public
reference facilities of the Commission described below.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company with the Commission may be inspected and copied at the public reference
facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and the following regional offices of
the Commission: New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
also may be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants such as the
Company which file electronically with the Commission. The Common Stock of the
Company is traded on the Nasdaq National Market under the symbol "MSPG," and
such reports, proxy statements and other information concerning the Company also
can be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been previously filed by the Company
with the Commission pursuant to the Exchange Act (File No. 0-27890), are
incorporated by reference in this Prospectus and shall be deemed to be a part
hereof:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(ii) Amendments No. 1 and No. 2 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997;
(iii) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998; and
(iv) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A filed under Section 12
of the Exchange Act, including any reports filed under the Exchange
Act for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the date of filing of
such documents (such documents, and the documents enumerated above, being
hereinafter referred to as the "Incorporated Documents"). Any statement
contained in an Incorporated Document shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed Incorporated Document modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, including any beneficial owner, upon the written or
oral request of such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the documents that this
Prospectus incorporates). Such requests should be directed to MindSpring
Enterprises, Inc., Attention: Investor Relations, 1430 West Peachtree Street,
Suite 400, Atlanta, Georgia 30309, telephone number: (404) 815-0770. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C., 20549. Copies of such materials can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal offices at 450 Fifth Street, N.W. Washington, D.C. 20549. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding the Company.
---------------------
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS, INCLUDING ANY DOCUMENTS THAT ARE INCORPORATED BY REFERENCE
HEREIN AS SET FORTH IN "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE,"
INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. ALL STATEMENTS REGARDING MINDSPRING'S EXPECTED FUTURE
FINANCIAL POSITION, BUSINESS STRATEGY, PROJECTED COSTS AND PLANS, AND OBJECTIVES
OF MANAGEMENT FOR FUTURE OPERATIONS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH
MINDSPRING BELIEVES THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, NO ASSURANCE CAN BE GIVEN THAT
SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS HEREIN INCLUDE, AMONG OTHERS, THE FACTORS SET FORTH
UNDER THE CAPTION "RISK FACTORS," GENERAL ECONOMIC AND BUSINESS AND MARKET
CONDITIONS, CHANGES IN FEDERAL LAWS AND INCREASED COMPETITIVE PRESSURE IN THE
COMPANY'S INDUSTRY.
---------------------
This Prospectus includes product names and trademarks of the Company and of
other organizations.
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PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective investors should carefully consider the factors set forth herein
under the caption "Risk Factors" and are urged to read this Prospectus in its
entirety. Unless otherwise indicated, the information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The "Glossary of Technical
Terms" appearing elsewhere in this Prospectus contains definitions of certain
technical terms used herein.
THE COMPANY
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a leading
national Internet access provider that focuses on serving individuals and small
businesses. The Company is also a leading provider of Web hosting services, a
complement to its Internet access business and one of the fastest growing
segments of the Internet marketplace. 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 points of presence
("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 Internet service providers
("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 demand for Internet access and value-added services is increasing
rapidly. According to International Data Corporation ("IDC"), total United
States ISP revenues are projected to grow from approximately $4.6 billion in
1997 to approximately $18.3 billion in 2000. In addition, 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 in
2000. Trends contributing to this growth in demand include heightened consumer
awareness of the Internet, the increasing number of people who have computers
with modems and the expanding diversity of information, entertainment and
commercial offerings available on the Internet and the World Wide Web. Despite
the Internet's rapid growth, use of the Internet by individuals and small
businesses remains low and is expected to grow substantially from its current
level of market penetration. In addition, small businesses are increasingly
reliant on full service ISPs to maintain and manage their Web presence. IDC
estimates that total United States Web hosting revenues will grow from
approximately $247 million in 1997 to approximately $3.6 billion by 2000.
Consequently, the Company believes that there is a growing and unsatisfied
demand for high-quality Internet access and Web hosting services for individuals
and small businesses.
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. MindSpring's subscribers use their accounts for, among other
things, communicating, retrieving
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information, and publishing information on the Internet. To facilitate this
usage, MindSpring offers a complete set of the most popular Internet
applications including electronic mail, World Wide Web access, Network News,
File Transfer Protocol and Internet Relay Chat.
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. Recently, the Company has increased the number of subscribers accessing
Company-owned POPs in an effort to control quality and cost.
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:
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 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.
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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.
THE OFFERING
Common Stock offered by the Company............. 1,000,000 shares
Common Stock to be outstanding after the
Offering (1).................................... 8,572,130 shares
Use of proceeds................................. The net proceeds from the
Offering will be used to fund
expansion of the Company's
business, for additional
working capital and general
corporate purposes and for
possible strategic
acquisitions of subscriber
accounts and complementary
businesses. See "Use of
Proceeds."
Nasdaq National Market Symbol................... MSPG
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(1) Based on the number of shares of Common Stock outstanding as of April 30,
1998. Does not include: (a) 683,429 shares of Common Stock issuable upon
exercise of stock options granted to directors, officers and employees of
the Company as of April 30, 1998 at prices ranging from $0.64 to $68.75 per
share; or (b) 150,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
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SUMMARY FINANCIAL AND OPERATING DATA
The summary historical financial and operating data set forth below should
be read in conjunction with "Use of Proceeds," "Selected Financial and Operating
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," the Company's financial statements and notes thereto and other
financial and operating data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- -------------------
INCEPTION
PERIOD (1) 1995 1996 1997 1997 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Access................................... $ 70 $ 1,455 $13,420 $40,925 $ 7,356 $16,992
Business services........................ -- 260 2,286 7,711 1,424 3,173
Subscribers start-up fees................ 33 512 2,426 3,920 1,000 1,219
------ ------- ------- ------- ------- -------
Total revenues...................... 103 2,227 18,132 52,556 9,780 21,384
Cost and expenses:
Cost of revenues -- recurring............ 37 627 6,332 15,203 3,169 5,990
Cost of subscriber start-up fees......... 15 339 1,876 1,619 365 617
Selling, general and administrative...... 121 2,230 14,161 30,784 6,923 10,852
Depreciation and amortization............ 5 265 3,285 8,695 1,828 2,872
------ ------- ------- ------- ------- -------
Total operating expenses............ 178 3,461 25,654 56,301 12,285 20,331
------ ------- ------- ------- ------- -------
Operating gain (loss)...................... (75) (1,234) (7,522) (3,745) (2,505) 1,053
Interest income (expense), net............. -- (725) (90) (338) (20) (163)
------ ------- ------- ------- ------- -------
Income before income taxes................. (75) (1,959) (7,612) (4,083) (2,525) 890
Income tax provision....................... -- -- -- -- -- (30)
------ ------- ------- ------- ------- -------
Net income (loss).......................... $ (75) $(1,959) $(7,612) $(4,083) $(2,525) $ 860
====== ======= ======= ======= ======= =======
Diluted earnings (loss) per share.......... $ (0.59) $ (1.45) $ (0.54) $ (0.34) $ 0.11
Pro forma diluted earnings per share (2)... 0.10
Diluted weighted average common shares
outstanding.............................. 3,310 5,253 7,514 7,478 8,044
OTHER OPERATING DATA:
Approximate number of subscribers at end of
period................................... 1,000 12,000 122,000 278,000 153,000 341,000
Approximate number of employees at end of
period................................... 8 95 321 502 365 602
EBITDA (3)................................. $ (70) $ (969) $(4,237) $ 4,950 $ (677) $ 3,925
EBITDA margin (3).......................... (68)% (44)% (23)% 9% (7)% 18%
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<CAPTION>
MARCH 31, 1998
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HISTORICAL AS ADJUSTED (2)
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BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 8,866 $58,766
Working capital........................................... (7,410) 42,490
Total assets.............................................. 46,004 95,904
Total debt, including current maturities.................. 8,742 8,742
Total stockholders' equity................................ 22,385 72,285
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(1) The Inception Period is the period from February 24, 1994 (inception) to
December 31, 1994.
(2) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company hereby at a price to the public of $53.00 per share. Assumes an
increase to cash and cash equivalents and working capital of $49.9 million
upon completion of the Offering, which amount equals the aggregate estimated
net proceeds of the Offering. See "Use of Proceeds" for a description of the
Company's specific plans for application of the net proceeds from the
Offering.
(3) EBITDA represents operating gain (loss) plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for
operating income, net income or cash flows from operating activities for
purposes of analyzing the Company's operating performance, financial
position and cash flows. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
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RISK FACTORS
Prospective investors should consider carefully the following risk factors,
together with the information contained in this Prospectus, in evaluating an
investment in the Common Stock offered hereby. The following factors and other
information set forth in this Prospectus contain certain forward-looking
statements involving risks and uncertainties. Actual results may differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors set forth in this section and elsewhere in this
Prospectus.
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company was incorporated on February 24, 1994 and began offering
Internet access in June 1994. The Company has experienced annual operating
losses since its inception, although 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 has had net losses of approximately
$1,959,000, $7,612,000, and $4,083,000 for the years ended December 31, 1995,
1996, and 1997, respectively. As of March 31, 1998, the Company had an
accumulated deficit of approximately $12,869,000. The Company's ability to
maintain profitability and positive cash flow is dependent upon a number of
factors, including the Company's ability to increase revenue while maintaining
or reducing per subscriber costs by achieving economies of scale. There can be
no assurance that the Company will be successful in increasing or maintaining
revenue or achieving or sustaining economies of scale and positive cash flow in
the future, and any such failure could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"-- Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results," and "Business -- Competition."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's future success depends on a number of factors, many of which
are beyond the Company's control. These factors include, among others, the rates
of and costs associated with new subscriber acquisitions, subscriber retention,
capital expenditures, and other costs relating to the expansion of operations;
the timing of new product and service announcements; changes in the Company's
pricing policies and those of its competitors; market acceptance of new and
enhanced versions of the Company's products and services; changes in operating
expenses; changes in the Company's strategy; personnel changes; the introduction
of alternative technologies; the viability of the Company's arrangements with
third-party network providers under their services agreements; and the effect of
potential acquisitions, increased competition in the Company's markets, and
other general economic factors.
The Company's operating results, cash flows, and liquidity may fluctuate
significantly in the future. The Company's revenue depends on its ability to
attract and retain subscribers who purchase access or other services on a
month-to-month basis. MindSpring generally offers its new subscribers a 30-day
money-back satisfaction guarantee, and subscribers have the option of
discontinuing their service at the end of any given month for any reason. The
Company's expense levels are based, in part, on its expectations as to future
revenue. To the extent that revenue is below expectations, the Company may be
unable or unwilling to reduce expenses proportionately, and operating results,
cash flows, and liquidity are likely to be adversely affected. Due to all of the
foregoing factors, it is likely that in some future quarter, the Company's
operating results and/or growth rate will be below the expectations of public
market analysts and investors. In such event, the market price of the Common
Stock will likely be materially adversely affected.
MANAGEMENT AND RISKS OF GROWTH
The rapid execution necessary for the Company to fully exploit the market
for its products and services requires an effective planning and management
process. MindSpring's rapid growth has in the past placed, and may in the future
place, a significant strain on the Company's managerial, operational, and
financial resources. In order to effectively manage its operations, the Company
will be required to continue to implement and improve its operational,
financial, and management information systems and to identify, attract, train,
integrate, and retain qualified personnel. These demands will require the
addition of new management personnel and the development of additional expertise
by existing management. In particular, the successful
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integration of newly acquired assets and the implementation of a nationwide
strategy and network will require close monitoring of service quality
(particularly through third-party POPs) and, to the extent management deems
necessary, identification and acquisition of physical sites, acquisition and
installation of necessary equipment and telecommunications facilities,
implementation of marketing efforts in new as well as existing markets,
employment of qualified personnel to provide technical and marketing support for
such sites, and continued expansion of the Company's managerial, operational,
and financial resources to support such development. The demands on the
Company's customer service and technical support resources have grown rapidly
due to the Company's rapidly expanding subscriber base. There can be no
assurance that the Company's customer service and technical support or other
resources will be sufficient to manage any future growth in the Company's
business or that the Company will be able to implement its expansion program in
whole or in part.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards, changes in subscriber needs, and
frequent new service and product introductions. The Company's future success
will depend, in part, on its ability to use leading technologies effectively, to
continue to develop its technical expertise, and to enhance its existing
services and develop new services to meet changing subscriber needs on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in using new technologies effectively, in developing new services, or
in enhancing existing services on a timely basis or that such new technologies
or enhancements will achieve market acceptance.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products and architectures offered by various vendors. Although the Company
intends to support emerging standards in the market for Internet access, there
can be no assurance that industry standards will be established or, if they
become established, that the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
In addition, there can be no assurance that services or technologies developed
by others will not render the Company's services or technology noncompetitive or
obsolete.
The Company is also at risk to fundamental changes in the way Internet
access is delivered. Currently, Internet services are accessed primarily by
computers connected by telephone lines. Several companies have developed cable
television modems. These cable television modems have the ability to transmit
data at substantially faster speeds than the modems the Company and its
subscribers currently use. As the Internet becomes accessible through these
cable television modems and by screen-based telephones, wireless products,
televisions, and other consumer electronic devices or as subscriber requirements
change the way Internet access is provided, the Company will have to develop new
technology or modify its existing technology to accommodate these developments.
The Company's pursuit of these technological advances may require substantial
time and expense, and there can be no assurance that the Company will succeed in
adapting its Internet access business to alternate access devices and conduits.
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
The Company must continue to enhance and develop its network in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. Despite the
availability of additional network capacity from third-party network providers,
the Company intends to maintain the flexibility to expand or open MindSpring
POPs or make other capital investments as and where subscriber demand or
strategic considerations may warrant. Opening new MindSpring POPs entails
significant capital equipment expenditures as well as initial commitments for
leased telecommunications facilities and advertising. In addition, the
nationwide expansion of the Company's subscriber base is likely to require
additional capital equipment expenditures to maintain the high speed and
reliability of the Company's Internet access services. In the event the net
proceeds from the Offering, cash on hand, and cash generated from operations are
not sufficient to meet these cash requirements the Company will need to seek
alternative sources of financing to carry out its growth and operating plans.
The Company may need to raise additional capital from public or private equity
or debt sources in order to: (i) fund growth, operating losses, increases in
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expenses or cash requirements; (ii) take advantage of unanticipated
opportunities, such as major strategic alliances or other special marketing
opportunities, acquisitions of complementary businesses or assets, or the
development of new products; or (iii) otherwise respond to unanticipated
developments or competitive pressures. There can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company or at all. Such financings may be upon terms that are dilutive or
potentially dilutive to the Company's stockholders. If alternative sources of
financing are required, but are insufficient or unavailable, the Company will be
required to modify its growth and operating plans in accordance with the extent
of available funding and attempt to attain profitability in its existing
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE ON NETWORK INFRASTRUCTURE; CAPACITY; DEPENDENCE ON THIRD PARTY
PROVIDERS; RISK OF SYSTEM FAILURE
The future success of the Company's business will depend on the capacity,
reliability, and security of its network infrastructure, including the
third-party POPs. The Company will have to expand and adapt its network
infrastructure as the number of subscribers and the amount and type of
information they wish to transfer increase. Such expansion and adaptation of the
Company's network infrastructure will require substantial financial,
operational, and management resources. There can be no assurance that the
Company will be able to expand or adapt its network infrastructure to meet
additional demand or changing subscriber requirements on a timely basis and at a
commercially reasonable cost, or at all.
Capacity constraints have occurred and may occur in the future, both at the
level of particular POPs (affecting only subscribers attempting to use the
particular POP) and in connection with systemwide services (such as e-mail and
news group services). From time to time, the Company has experienced delayed
delivery from suppliers of new telephone lines, modems, terminal servers, and
other equipment. If delays of this nature are severe, all incoming modem lines
may become full during peak times, resulting in busy signals for subscribers who
are trying to connect to MindSpring. Further, if the Company does not maintain
sufficient bandwidth capacity in its network connections, subscribers will
perceive a general slowdown of all services on the Internet. In order to protect
the service levels for current members, the Company will sometimes temporarily
delay adding new subscribers in cities experiencing significant capacity
constraints until such capacity constraints can been alleviated. Similar
problems can occur if the Company is unable to expand the capacity of its
information servers (for e-mail, news, and the World Wide Web) fast enough to
keep up with demand from the Company's rapidly expanding subscriber base. If the
capacity of such servers is exceeded, subscribers will experience delays when
trying to use a particular service. While the Company's objective is to maintain
excess capacity, any failure of the Company to expand or enhance its network
infrastructure on a timely basis or to adapt it to an expanding subscriber base,
changing subscriber requirements, or evolving industry standards could
materially adversely affect the Company's business, financial condition, and
results of operations.
In addition, the Company provides Internet access exclusively through
third-party POPs in a significant number of markets. The inability or
unwillingness of any such third-party to provide POP access to MindSpring's
subscribers or the Company's inability to secure alternative POP arrangements
upon partial or complete termination of a third-party network provider agreement
or other loss of access to such POPs could significantly limit the Company's
ability to provide Internet access to its subscribers and could limit the
Company's ability to further expand nationally, which could, in turn, have a
material adverse effect on the Company's business, financial condition, and
results of operations. There can be no assurance that, if access to third-party
POPs is lost, any alternative arrangements will be available if and when the
Company requires them or, if available, that such arrangements will be on terms
acceptable to the Company. The Company does not currently have any plans or
commitments with respect to such alternative POP arrangements. Moreover, while
the third-party providers are contractually obligated to provide commercially
reliable service to MindSpring's subscribers with a significant assurance of
accessibility to the Internet, there can be no assurance that such services or
Internet access will meet the Company's requirements, which could materially
adversely affect the Company's business, financial condition, and results of
operations.
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The Company's operations and services are dependent on the extent to which
the computer equipment of the Company and its third-party network providers is
protected against damage from fire, earthquakes, power loss, telecommunications
failures, and similar events. A significant portion of the Company's computer
equipment, including critical equipment dedicated to its Internet access
services, is located at a single facility in Atlanta, Georgia. A significant
amount of critical equipment is also located at the Company's call center near
Harrisburg, Pennsylvania (the "Harrisburg Facility"). Despite precautions taken
by the Company and its third-party network providers (over which the Company has
no control), the occurrence of a natural disaster or other unanticipated
problems at the Company's headquarters, network hub, the Harrisburg Facility, or
a MindSpring or third-party network provider POP could cause interruptions in
the services provided by the Company. In the event of disruptions in such
third-party networks, the Company may have no means of replacing these services
on a timely basis or at all in the event of such disruption. Any accident,
incident, system failure, or discontinuance of operations involving a
third-party network that causes interruptions in the Company's operations could
have a material adverse effect on the Company's ability to provide Internet
services to its subscribers and, in turn, on the Company's business, financial
condition, and results of operations. In addition, failure of the Company's
telecommunications providers to provide the data communications capacity
required by the Company as a result of a natural disaster, operational
disruption or for any other reason could cause interruptions in the services
provided by the Company. See "Business -- Network Infrastructure." The Company
does not currently maintain fully redundant or back-up Internet services or
backbone facilities or other fully redundant computing and telecommunications
facilities. Any accident, incident, or system failure that causes interruptions
in the Company's operations could have a material adverse effect on the
Company's ability to provide Internet services to its subscribers and, in turn,
on the Company's business, financial condition, and results of operations. See
"-- Dependence on Telecommunications Carriers and Other Suppliers" and
"-- Security Risks."
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
The Company relies on local telephone companies and other companies to
provide data communications capacity via local telecommunications lines and
leased long-distance lines. The Company is subject to potential disruptions or
capacity constraints in these telecommunications services and may have no means
of replacing these services, on a timely basis or at all, in the event of such
disruption or capacity constraints. In addition, local phone service is
sometimes available only from the local monopoly telephone company in each of
the markets served by the Company. Management believes that the
Telecommunications Act of 1996 generally will lead to increased competition in
the provision of local telephone service, but the Company cannot predict the
timing or extent of any such developments or the effect thereof on pricing or
supply.
The Company is dependent on certain third-party suppliers of hardware
components. Certain components used by the Company in providing its networking
services are currently acquired from only one source, including modems and
terminal servers manufactured by 3Com, Inc. and high-performance routers
manufactured by Cisco Systems, Inc. Expansion of network infrastructure by the
Company and others is placing, and will continue to place, a significant demand
on the Company's suppliers, some of which have limited resources and production
capacity. Failure of the Company's suppliers to adjust to meet such increasing
demand may prevent them from continuing to supply components and products in the
quantities, at the quality levels and at the times required by the Company, or
at all. The Company's inability to develop alternative sources of supply, if
required, could result in delays and increased costs in expanding the Company's
network infrastructure.
The Company's suppliers and telecommunications carriers also sell or lease
products and services to the Company's competitors and may be, or in the future
may become, competitors of the Company themselves. There can be no assurance
that the Company's suppliers and telecommunications carriers will not enter into
exclusive arrangements with the Company's competitors or stop selling or leasing
their products or services to the Company at commercially reasonable prices or
at all.
SECURITY RISKS
The future success of the Company's business will depend on the security of
the Company's network and, in part, on the security of the network
infrastructures of its third-party providers (over which the Company has
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no control). Despite the implementation of security measures, both MindSpring's
and its third-party network providers' infrastructures are vulnerable to
computer viruses or similar disruptive problems caused by their subscribers or
other Internet users. Computer viruses or problems caused by third parties (such
as the sending of excessive volumes of unsolicited bulk e-mail) could lead to
interruptions, delays, or cessation in service to MindSpring's subscribers.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company or its subscribers, which could cause losses to the
Company or its subscribers or deter certain persons from subscribing to the
Company's services. Such inappropriate use of the Internet would include
attempting to gain unauthorized access to information or systems, commonly known
as "cracking" or "hacking." Although the Company intends to continue to
implement security measures, such measures have been circumvented in the past,
and there can be no assurance that measures implemented by the Company or its
third-party network providers will not be circumvented in the future.
Alleviating problems caused by computer viruses or other inappropriate uses or
security breaches may require interruptions, delays, or cessation in service to
the Company's subscribers, which could have a material adverse effect on the
Company's business, financial condition, and results of operations. In addition,
the Company expects that its subscribers will increasingly use the Internet for
commercial transactions in the future. Any network malfunction or security
breach could cause these transactions to be delayed, not completed at all, or
completed with compromised security. There can be no assurance that subscribers
or others will not assert claims of liability against the Company as a result of
any such failure. Further, until more comprehensive security technologies are
developed, the security and privacy concerns of existing and potential
subscribers may inhibit the growth of the Internet service industry in general
and MindSpring's subscriber base and revenue in particular.
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 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 Corporation, 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
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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.
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 faster access rates than existing modem speeds. Such companies may
include Internet access or Web hosting in their basic bundle of services or may
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.
PROPRIETARY RIGHTS; INFRINGEMENT CLAIMS
The Company's success depends in part upon its software and related
documentation. The Company principally relies upon copyright, trade secret, and
contract laws to protect its proprietary technology. 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. See "Business -- Proprietary Rights."
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 subscribers. Although the Company does not believe that the
software or the trademarks it uses infringe on the proprietary rights of any
third parties, there can be no assurance that third parties will not assert such
claims against the Company in the future or that such claims will not be
successful. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights, which could materially adversely affect the Company's
business, financial condition, and results of operations. Parties making such
claims could secure a judgment awarding substantial damages as well as
injunctive or other equitable relief that could effectively block the Company's
ability to license its products in the United States or abroad. Such a judgment
could have a material adverse effect on the Company's business, financial
condition, and results of operations. In the event a claim relating to
proprietary technology or information is asserted against the Company, the
Company may seek licenses to such intellectual property. There can be no
assurance, however, that licenses could be extended or obtained on commercially
reasonable terms, if at all, or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain the necessary licenses or other
rights could materially adversely affect the Company's business, financial
condition, and results of operations. See "Business -- Proprietary
Rights -- Licenses."
RISKS ASSOCIATED WITH ACQUISITIONS AND PURCHASES OF SUBSCRIBER ACCOUNTS
As part of its business strategy, the Company will continue to evaluate
strategic acquisitions of businesses and subscriber accounts principally
relating to its current operations. Such transactions commonly involve certain
risks, including, among others, the difficulty of assimilating the acquired
operations and personnel; the potential disruption of the Company's ongoing
business; the possible inability of management to maximize the financial and
strategic position of the Company by the successful incorporation of acquired
technology and rights into the Company's service offerings and to maintain
uniform standards, controls, procedures, and
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policies; the risks of entering markets in which the Company has little or no
direct prior experience; and the potential impairment of relationships with
employees and subscribers as a result of changes in management. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered in connection with future transactions. In addition,
any such transactions could materially adversely affect the Company's operating
results due to dilutive issuances of equity securities, the incurrence of
additional debt, and the amortization of expenses related to goodwill and other
intangible assets, if any.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon the continued efforts of its senior
management team and its technical, marketing, and sales personnel. Such
employees may voluntarily terminate their employment with the Company at any
time. The Company's success also depends on its ability to attract and retain
additional highly qualified management, technical, marketing, and sales
personnel. The process of hiring employees with the combination of skills and
attributes required to carry out the Company's strategy can be extremely
competitive and time-consuming. There can be no assurance that the Company will
be able to retain or integrate existing personnel or identify and hire
additional personnel. The loss of the services of key personnel or the inability
to attract additional qualified personnel could materially adversely affect the
Company's business, financial condition, and results of operations.
CONTROL OF COMPANY
As of April 30, 1998, ITC Holding Company, Inc. ("ITC Holding"), through an
indirect wholly owned subsidiary, beneficially owned approximately 30.0% and the
Company's executive officers and directors beneficially owned an aggregate of
approximately 14.6% of the outstanding voting stock of the Company. Upon
completion of the Offering, based on beneficial ownership as of April 30, 1998,
ITC Holding and the Company's executive officers and directors would
beneficially own approximately 26.5% and 12.9% of the outstanding voting stock
of the Company (26.1% and 12.7%, respectively, assuming the Underwriters' over-
allotment option is exercised in full). As a result, these stockholders, acting
together, are able to exercise significant control over most matters requiring
approval by the stockholders of the Company, including the election of a
majority of the directors and the approval of significant corporate matters,
such as certain change-of-control transactions. ITC Holding, through its
indirect wholly owned subsidiary, has pledged all of its stock in the Company to
certain lenders in connection with a credit facility. In the event of a default
by ITC Holding's wholly owned subsidiaries under such credit facility, the
lenders or another third-party may obtain ownership of all of ITC Holding's
stock in the Company. In addition, the Company's Amended and Restated
Certificate of Incorporation (the "Restated Certificate") authorizes the Board
of Directors of the Company (the "Board of Directors") to provide for the
issuance of shares of preferred stock of the Company, in one or more series,
which the Board of Directors could issue without further stockholder approval
and upon such terms and conditions and having such rights, privileges, and
preferences as the Board of Directors may determine. The Company has no current
plans to issue any such preferred stock. These factors could have the effect of
delaying, deferring, dissuading, or preventing a change of control of the
Company.
POTENTIAL CONFLICTS OF INTEREST
ITC Holding, as a significant stockholder of the Company, and Campbell B.
Lanier, III, William H. Scott, III, and O. Gene Gabbard, who are directors,
stockholders, and officers of ITC Holding and directors of the Company, are in
positions involving the possibility of conflicts of interest with respect to
certain transactions concerning the Company. Certain decisions concerning the
operations or financial structure of the Company may present conflicts of
interest between the Company and ITC Holding and/or its affiliates. For example,
if the Company is required to raise additional capital from public or private
sources in order to finance its anticipated growth and contemplated capital
expenditures, the interests of the Company might conflict with those of ITC
Holding and/or its affiliates with respect to the particular type of financing
sought. In addition, the Company may have an interest in pursuing acquisitions,
divestitures, financings, or other transactions that, in the Company's judgment,
could be beneficial to the Company, even though such
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transactions might conflict with the interests of ITC Holding and/or its
affiliates. If such conflicts do occur, ITC Holding and its affiliates may
exercise their influence in their own best interests.
The Company currently engages and expects in the future to engage in
transactions with ITC Holding and/or its affiliates. In addition, the Company
provides Internet access to various companies controlled by ITC Holding,
although the revenue the Company derives from these sources is not substantial.
The Company has adopted a policy requiring that any material transaction between
the Company and persons or entities affiliated with officers, directors, or
principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in arm's-length transactions
with independent third parties. The Company believes that each current
transaction in which it is engaged with an affiliate complies with this policy.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Restated Certificate, the Company's Amended and
Restated Bylaws (the "Bylaws"), and the Delaware General Corporation Law (the
"Delaware Corporation Law") could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer, or proxy contest
involving the Company or could discourage a third-party from attempting to
acquire control of the Company, even if such events would be beneficial to the
interests of the stockholders. In particular, the classification of the Board of
Directors could have the effect of delaying a change in control of the Company.
In addition, the Restated Certificate authorizes the Board of Directors to
provide for the issuance of shares of preferred stock of the Company, in one or
more series, which the Board of Directors could issue without further
stockholder approval and upon such terms and conditions and having such rights,
privileges, and preferences as the Board of Directors may determine. The Company
has no current plans to issue any such preferred stock. The Company is also
subject to the provisions of Section 203 of the Delaware Corporation Law. In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless certain conditions are met.
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 Federal
Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally. In a report to Congress adopted
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 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
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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.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations, causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
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 services 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.
VOLATILITY OF STOCK PRICE
Since the Common Stock has been publicly traded, the market price of the
Common Stock has fluctuated over a wide range and may continue to do so in the
future. See "Price Range of Common Stock and Dividend Policy." The market price
of the Common Stock could be subject to significant fluctuations in response to
various factors and events, including, among other things, the depth and
liquidity of the trading
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market for the Common Stock, quarterly variations in actual or anticipated
operating results, growth rates, changes in estimates by analysts, market
conditions in the industry (including demand for Internet access), announcements
by competitors, regulatory actions, and general economic conditions. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations, which have particularly affected the market prices of
the stocks of high-technology companies and which may be unrelated to the
operating performance of particular companies. Furthermore, the Company's
operating results and prospects from time to time may be below the expectations
of public market analysts and investors. Any such event could result in a
material adverse effect on the price of the Common Stock.
ABSENCE OF CASH DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
See "Price Range of Common Stock and Dividend Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated to be approximately $49.9 million (approximately $57.5
million if the Underwriters' over-allotment option is exercised in full) after
deducting estimated underwriting discounts and commissions, and after deducting
other fees and expenses payable by the Company of approximately $450,000. The
Company intends to use the net proceeds from the Offering to fund expansion of
the Company's business, including for additional working capital and general
corporate purposes. In addition, the Company may apply a portion of the net
proceeds of the Offering to acquire complementary businesses, subscriber
accounts, products or technologies. As part of its ongoing corporate development
activities, the Company expects that it will continue to consider acquisition
opportunities. There can be no assurance, however, that suitable acquisition
candidates will be identified or that any acquisition will be consummated.
The Company currently intends to allocate substantial proceeds to each of
the foregoing categories. However, the precise allocation of funds among these
uses will depend on future technological, regulatory and other developments in
or affecting the Company's business, the competitive climate in which it
operates and the emergence of future opportunities. Pending such uses, the
Company intends to invest such proceeds in short-term, interest-bearing
securities.
19
<PAGE> 20
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company completed its initial public offering on March 14, 1996, at a
price per share of Common Stock of $8.00. Since that date, the Common Stock has
traded on the Nasdaq National Market under the symbol "MSPG." The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
<S> <C> <C>
First Quarter (from March 14, 1996)......................... $ 8.88 $ 7.88
Second Quarter.............................................. 13.00 7.88
Third Quarter............................................... 12.75 8.38
Fourth Quarter.............................................. 11.75 5.25
1997 HIGH LOW
First Quarter............................................... $10.25 $ 5.75
Second Quarter.............................................. 11.38 6.63
Third Quarter............................................... 24.63 10.63
Fourth Quarter.............................................. 34.63 18.25
1998 HIGH LOW
First Quarter............................................... $69.00 $27.63
Second Quarter (through May 28, 1998)....................... 85.25 48.50
</TABLE>
On May 28, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $54.00 per share. At May 27, 1998, there were 253
holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. It is the current policy of the Board of Directors to retain
earnings to finance the expansion of the Company's operations. Future
declaration and payment of dividends, if any, will be determined in light of the
then-current conditions, including the Company's earnings, operations, capital
requirements, financial condition, restrictions in financing agreements, and
other factors deemed relevant by the Board of Directors.
20
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998: (i) on an actual basis; and (ii) as adjusted to reflect the sale
of shares of Common Stock offered hereby (at a price to the public of $53.00 per
share). This table should be read in conjunction with "Selected Financial and
Operating Data," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's financial
statements and notes thereto and other financial and operating data included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
HISTORICAL AS ADJUSTED
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 8,866 $ 58,766
======== ========
Indebtedness (1):
Capital leases......................................... 7,095 7,095
Long-term debt......................................... 1,647 1,647
-------- --------
Total indebtedness................................ 8,742 8,742
-------- --------
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized; 0 shares issued and outstanding (2)...... -- --
Common Stock, $.01 par value, 15,000,000 shares
authorized; 7,557,929 shares issued and outstanding;
8,557,929 shares issued and outstanding as adjusted
(3).................................................. 76 86
Additional paid-in capital (3)......................... 35,178 85,068
Accumulated deficit.................................... (12,869) (12,869)
-------- --------
Total stockholders' equity........................ 22,385 72,285
-------- --------
Total capitalization........................................ $ 31,127 $ 81,027
======== ========
</TABLE>
- ------------------------------
(1) Includes current portion of related indebtedness.
(2) Excludes shares of the Company's Class C Preferred Stock, none of which are
outstanding. On April 28, 1998, the Board of Directors adopted an amendment
to the Company's Restated Certificate of Incorporation to eliminate the
Company's Class C Preferred Stock, which proposal will be voted on at the
Company's 1998 Annual Meeting of Stockholders. See "Description of Capital
Stock."
(3) Excludes 643,739 shares of Common Stock reserved for issuance pursuant to
stock options granted as of March 31, 1998.
21
<PAGE> 22
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected financial and operating data for
the Company. The selected historical statements of operations data for the
period from February 24, 1994 (inception) to December 31, 1994 (the "Inception
Period") and the years ended December 31, 1995, 1996 and 1997 and the selected
historical balance sheet data as of December 31, 1997 have been derived from
financial statements of the Company, which have been audited by Arthur Andersen
LLP, independent public accountants, whose report with respect thereto is
included elsewhere in this Prospectus. The selected historical statement of
operations data for the three months ended March 31, 1997 and March 31, 1998 and
the selected historical balance sheet data as of March 31, 1998 have been
derived from the unaudited financial statements of the Company. In the opinion
of management, the unaudited financial statements include all material
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the information set forth herein. The results for the three months ended
March 31, 1998 are not necessarily indicative of the operating results for the
entire year.
The selected historical financial and operating data set forth below should
be read in conjunction with "Summary Financial and Operating Data," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company's financial statements and notes thereto and
other financial and operating data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -----------------
INCEPTION
PERIOD(1) 1995 1996 1997 1997 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Access.......................................... $ 70 $ 1,455 $13,420 $40,925 $ 7,356 $16,992
Business services............................... -- 260 2,286 7,711 1,424 3,173
Subscribers start-up fees....................... 33 512 2,426 3,920 1,000 1,219
---- ------- ------- ------- ------- -------
Total revenues.............................. 103 2,227 18,132 52,556 9,780 21,384
Cost and expenses:
Cost of revenues -- recurring................... 37 627 6,332 15,203 3,169 5,990
Cost of subscriber start-up fees................ 15 339 1,876 1,619 365 617
Selling, general and administrative............. 121 2,230 14,161 30,784 6,923 10,852
Depreciation and amortization................... 5 265 3,285 8,695 1,828 2,872
---- ------- ------- ------- ------- -------
Total operating expenses.................... 178 3,461 25,654 56,301 12,285 20,331
---- ------- ------- ------- ------- -------
Operating gain (loss)............................... (75) (1,234) (7,522) (3,745) (2,505) 1,053
Interest income (expense), net...................... -- (725) (90) (338) (20) (163)
---- ------- ------- ------- ------- -------
Income (loss) before taxes.......................... (75) (1,959) (7,612) (4,083) (2,525) 890
Income tax provision................................ -- -- -- -- -- (30)
---- ------- ------- ------- ------- -------
Net income (loss)................................... $(75) $(1,959) $(7,612) $(4,083) $(2,525) $ 860
==== ======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings (loss) per share..................... $ (0.68) $ (1.45) $ (0.54) $ (0.34) $ 0.11
Diluted earnings (loss) per share................... $ (0.59) $ (1.45) $ (0.54) $ (0.34) $ 0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic............................................... 2,888 5,253 7,514 7,478 7,545
Diluted............................................. 3,310 5,253 7,514 7,478 8,044
OTHER OPERATING DATA:
Approximate number of subscribers at end of
period............................................ 1,000 12,000 122,000 278,000 153,000 341,000
Approximate number of employees at end of period.... 8 95 321 502 365 602
EBITDA (2).......................................... $(70) $ (969) $(4,237) $ 4,950 $ (677) $ 3,925
EBITDA margin (2)................................... (68)% (44)% (23)% 9% (7)% 18%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- MARCH 31,
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $585 $ 425 $ 9,653 $ 9,386 $ 8,866
Working capital......................................... 547 (3,100) 5,027 (5,352) (7,410)
Total assets............................................ 722 4,845 35,232 44,286 46,004
Total debt, including current maturities................ -- 2,500 4,005 9,740 8,742
Total stockholders' equity.............................. 670 482 25,407 21,413 22,385
</TABLE>
- ------------------------------
(1) The Inception Period is the period from February 24, 1994 (inception) to
December 31, 1994.
(2) EBITDA represents operating gain (loss) plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for
operating income, net income or cash flows from operating activities for
purposes of analyzing the Company's operating performance, financial
position and cash flows. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
22
<PAGE> 23
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.
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
23
<PAGE> 24
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 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.
24
<PAGE> 25
RESULTS OF OPERATIONS
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 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
25
<PAGE> 26
subscriber start-up revenue from approximately 36% for the three months ended
March 31, 1997 to approximately 51% in the three months ended March 31, 1998.
This increase of costs of revenue-start-up fees as a percentage of subscriber
start-up revenue resulted from the Company more aggressively waiving the
subscriber start-up fees during selected marketing campaigns in the first
quarter of 1998. The Company anticipates that start-up expenses will continue to
decrease as a percentage of total revenue to the extent that the number of new
subscribers decreases as a percentage of the entire subscriber base.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately 51% of revenue for the three months
ended March 31, 1998, compared to approximately 71% of revenue for the three
months ended March 31, 1997. The decrease in selling, general and administrative
expenses as a percentage of revenue resulted from economies of scale with
respect to certain costs, such as employee compensation, that do not increase in
direct proportion to increases in revenue and to cost control efforts
implemented by management.
Depreciation and Amortization. Depreciation and amortization expenses
decreased to approximately 13% of revenue for the three months ended March 31,
1998, compared to approximately 19% of revenue for the same period in the prior
year. Amortization expense for the three months ended March 31, 1998 was
approximately 5% of revenue compared to approximately 10% of revenue for the
three months ended March 31, 1997. Amortization expense resulted solely from
acquired customer bases which are being amortized over three years. Depreciation
expense was approximately 8% of total revenue for the three months ended March
31, 1998, compared to approximately 9% for the comparable period in the prior
year. The decrease in depreciation expense as a percentage of total revenue
resulted from efficiencies within the Company's owned POPs resulting from
reductions in the cost of new equipment and improved utilization within the
Company's network and the utilization of purchased network services as opposed
to increasing capacity by the construction of additional Company-owned POPs.
Interest Expense, Net. Interest expense for the three months ended March
31, 1998 consisted of approximately $270,000 related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet,
offset by approximately $107,000 of interest income. For the three months ended
March 31, 1997, the Company had interest expense related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet of
approximately $127,000 and interest income of approximately $107,000.
Income Tax Provision. For the three months ended March 31, 1998, the
Company recorded a provision for income taxes equal to its liability in various
states at the enacted rates where it does 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
26
<PAGE> 27
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 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 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
27
<PAGE> 28
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 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 $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.
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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, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Revenues:
Access..................... $ 1,170 $ 1,619 $ 3,911 $ 6,720 $ 7,356 $ 9,053 $10,858 $13,658 $16,992
Business services.......... 303 397 655 931 1,424 1,741 2,084 2,462 3,173
Subscriber start-up fees... 339 479 735 873 1,000 806 1,025 1,089 1,219
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Revenues......... 1,812 2,495 5,301 8,524 9,780 11,600 13,967 17,209 21,384
------- ------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of
revenue -- recurring..... 542 755 1,906 3,129 3,169 3,525 3,948 4,561 5,990
Cost of revenue -- start-up
fees..................... 264 352 941 319 365 295 440 519 617
Selling, general, and
administrative........... 1,738 2,603 4,043 5,777 6,923 7,142 7,771 8,948 10,852
Depreciation and
amortization............. 234 362 1,012 1,677 1,828 2,059 2,273 2,535 2,872
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 2,778 4,072 7,902 10,902 12,285 13,021 14,432 16,563 20,331
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating gain (loss)...... (966) (1,577) (2,601) (2,378) (2,505) (1,421) (465) 646 1,053
Interest income (expense),
net...................... (73) 117 (101) (33) (20) (9) (161) (148) (163)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes.................... (1,039) (1,460) (2,702) (2,411) (2,525) (1,430) (626) 498 890
Income tax provision....... 0 0 0 0 0 0 0 0 (30)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).......... $(1,039) $(1,460) $(2,702) $(2,411) $(2,525) $(1,430) $ (626) $ 498 $ 860
======= ======= ======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF TOTAL REVENUES
Revenues:
Access...................... 65% 65% 74% 79% 75% 78% 78% 80% 79%
Business services........... 17% 16% 12% 11% 15% 15% 15% 14% 15%
Subscriber start-up fees.... 18% 19% 14% 10% 10% 7% 7% 6% 6%
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Revenues.......... 100% 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Cost of
revenue -- recurring...... 30% 30% 36% 37% 32% 30% 28% 27% 28%
Cost of revenue -- start-up
fees...................... 15% 14% 18% 4% 4% 3% 3% 3% 3%
Selling, general, and
administrative............ 95% 104% 76% 67% 71% 61% 56% 51% 51%
Depreciation and
amortization.............. 13% 15% 19% 20% 19% 18% 16% 15% 13%
------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses.............. 153% 163% 149% 128% 126% 112% 103% 96% 95%
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating gain (loss)....... (53%) (63%) (49%) (28%) (26%) (12%) (3%) 4% 5%
Interest income (expense),
net....................... (4%) 4% (2%) 0% 0% 0% (1%) (1%) (1%)
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
taxes..................... (57%) (59%) (51%) (28%) (26%) (12%) (4%) 3% 4%
Income tax provision........ 0% 0% 0% 0% 0% 0% 0% 0% 0%
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)........... (57%) (59%) (51%) (28%) (26%) (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
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purchased certain individual subscriber accounts of PSINet and related assets
(the "PSINet Transaction"). Total cash used in financing activities for the
three months ended March 31, 1997 was approximately $245,000, consisting of cash
paid for capital lease obligations and to PSINet in connection with the PSINet
Transaction.
In June 1997, the Company entered into various agreements with BellSouth
(collectively, the "BellSouth Agreement"), pursuant to which the Company agreed
to purchase certain telecommunications facilities from BellSouth over a term of
24 months. The Company estimates the total commitment under the BellSouth
Agreement to be approximately $2,700,000 per year.
As of March 31, 1998, the Company had cash on hand of approximately
$8,866,000. The Company's significant capital commitments through 1998 include
approximately $1,647,000 in principal related to a non interest-bearing note
issued to PSINet in connection with the PSINet Transaction and $2,508,000 in
capital lease payments. The Company anticipates that it will continue to
generate cash flows from operations in 1998. The Company estimates that its cash
and financing needs in 1998, assuming reasonable internal growth, can be met by
cash on hand, additional capital financing arrangements (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.
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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.
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
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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:
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 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
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<PAGE> 33
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.
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.
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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 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 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
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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 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
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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
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.
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.).
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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
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 invoices to commercial accounts with multiple users. Billing
calculations and payment transactions are managed on the Company's automated
billing system. The
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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 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
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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.
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 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,
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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
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors of the Company are elected at the annual meeting of stockholders.
Officers of the Company are appointed at the first meeting of the Board of
Directors after each annual meeting of stockholders. Directors and executive
officers of the Company are elected to serve until they resign or are removed,
or are otherwise disqualified to serve, or until their successors are elected
and qualified. The ages of the persons set forth below are as of March 31, 1998.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH COMPANY EXPIRES
<S> <C> <C> <C>
Charles M. Brewer................... 39 Chairman, Chief Executive Officer and Director 1998
Michael S. McQuary.................. 38 President, Chief Operating Officer and Director 2000
Michael G. Misikoff................. 45 Vice President, Chief Financial Officer, 1999
Secretary, Treasurer and Director
James T. Markle..................... 38 Executive Vice President of Network Operations --
Robert D. Sanders................... 24 Vice President and Chief Technical Officer --
Gregory J. Stromberg................ 45 Executive Vice President of Call Centers --
Lance Weatherby(1).................. 38 Executive Vice President of Sales and Marketing --
O. Gene Gabbard(2)(3)............... 57 Director 1999
Campbell B. Lanier, III(2)(3)....... 47 Director 1998
William H. Scott, III (2)(3)........ 50 Director 2000
</TABLE>
- ------------------------------
(1) Mr. Weatherby became an executive officer on April 28, 1998.
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Charles M. Brewer founded the Company and has served as Chief Executive
Officer and Director of the Company since its inception in February 1994 and as
Chairman since March 1996. He also served as the President of the Company from
its inception until March 1996 and as the Secretary and Treasurer of the Company
from its inception until January 1995. From May 1993 to January 1994, Mr. Brewer
developed the concept for the Company and evaluated its prospects. Prior to
starting the Company, he served as Chief Executive Officer of AudioFax, Inc.
("AudioFax"), a software company providing fax server software, from May 1992 to
April 1993 and was the Chief Financial Officer of AudioFax from May 1989 to
April 1992. Mr. Brewer received a BA in Economics from, and was a Phi Beta Kappa
graduate of, Amherst College and received a Masters in Business Administration
from Stanford University.
Michael S. McQuary has been the President of the Company since March 1996,
the Chief Operating Officer of the Company since September 1995, and a Director
of the Company since December 1995. He also served as the Company's Executive
Vice President from October 1995 to March 1996 and the Company's Executive Vice
President of Sales and Marketing from July 1995 to September 1995. Prior to
joining the Company, Mr. McQuary served in a variety of management positions
with Mobil Chemical Co. ("Mobil"), a petrochemical company, from August 1984 to
June 1995, including Regional Sales Manager from April 1991 to February 1994 and
Manager of Operations (Reengineering) from February 1994 to June 1995. Mr.
McQuary received a BA in Psychology from the University of Virginia and a
Masters in Business Administration from Pepperdine University.
Michael G. Misikoff has served as Vice President, Chief Financial Officer,
Secretary, Treasurer and a Director of the Company since January 1995. From
January 1992 to December 1994, Mr. Misikoff was the Acting Chief Financial
Officer and a Director of InterCall Corporation, a subsidiary of ITC Holding
that
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provides conference call services. From March 1991 to January 1992, Mr. Misikoff
worked as an independent financial consultant. Mr. Misikoff served as Chief
Financial Officer of Async Corporation ("Async"), a provider of voice messaging
services, from its startup in February 1985 until March 1991. He received a BBA
in Accounting from Georgia State University.
James T. Markle has served as the Company's Executive Vice President of
Network Operations since March 1998 and served as Vice President of Network
Operations from April 1995 to February 1998. Prior to joining the Company, Mr.
Markle served as the Director of Technical Support for Concert Communications,
Co., a telecommunications company, from April 1994 until April 1995. From August
1990 to April 1994, Mr. Markle served as Senior Manager of Network Operations
for MCI Communications Corporation ("MCI"), a telecommunications company. Mr.
Markle attended Maryville College.
Robert D. Sanders has been the Company's Vice President since September
1996 and its Chief Technical Officer since January 1995. Mr. Sanders served as
the Company's Vice President of Network Engineering from December 1995 to
September 1996 and the Company's Senior Engineer from June 1994 to January 1995.
Prior to joining the Company, Mr. Sanders worked as the Software Engineer and
System Administrator of Harry's Farmers Market, Inc. from March 1994 to May
1994. Mr. Sanders attended the Georgia Institute of Technology.
Gregory J. Stromberg has served as the Company's Executive Vice President
of Call Centers since March 1998 and as Vice President of Customer Service from
October 1995 when he joined the Company to February 1998. From June 1993 to
September 1994, he served as a Regional Manager for Digital Financial Services,
a computer leasing company. Mr. Stromberg worked for Digital Equipment
Corporation, a computer manufacturer, and served as Senior Sales representative
from June 1983 to May 1987, Program Manager from May 1987 to May 1990, and
District Operations Manager from May 1990 to June 1993. Mr. Stromberg received a
B.S. degree in Business Management and a Masters in Business Administration
degree from the University of Utah.
Lance Weatherby has served as the Company's Executive Vice President of
Sales and Marketing since April 1998. Mr. Weatherby served as the Company's Vice
President of Business Development from September 1996 to April 1998, the
Company's Acting Vice President of Business Development from August 1996 to
September 1996, and a Market Development Manager from September 1995 to August
1996. Mr. Weatherby held a variety of sales, sales management and marketing
positions with Mobil from October 1990 to September 1995, including District
Sales Manager from December 1992 to September 1995. Mr. Weatherby received a BBA
in Marketing from Eastern Kentucky University and an MBA from Indiana
University.
O. Gene Gabbard has been a Director of the Company since December 1995. He
has worked independently as an entrepreneur and consultant since February 1993.
Mr. Gabbard currently serves as a director of ITC Holding and several of its
subsidiaries, as well as ITC(+)DeltaCom, Inc. ("ITC(+)DeltaCom") (a carriers'
carrier and retail telecommunications company), Powertel, Inc. ("Powertel") (a
wireless telecommunications company) (formerly known as InterCel, Inc.), KNOLOGY
Holdings, Inc. ("KNOLOGY") (a broadband telecommunications services company)
(formerly known as CyberNet Holding, Inc.) and two telecommunications technology
companies, Dynatech Corporation and Adtran, Inc. From August 1990 through
January 1993, he served as Executive Vice President and Chief Financial Officer
of MCI. He served in various senior executive capacities, including Chairman of
the Board, President and Chief Executive Officer of Telecom*USA, Inc.
("Telecom") from December 1988 until Telecom's merger with MCI in August 1990.
From July 1984 to December 1988, he was Chairman and/or President of
SouthernNet, Inc. ("SouthernNet"), a long distance telecommunications company
which was the predecessor to Telecom. Mr. Gabbard has served as a Managing
Director of South Atlantic Private Equity Fund IV, Limited Partnership since
1997.
Campbell B. Lanier, III has served as a Director of the Company since
November 1994. Mr. Lanier has served as Chairman of the Board and Chief
Executive Officer of ITC Holding (or its predecessors) since its inception in
1985. In addition, Mr. Lanier is an officer and director of several ITC Holding
subsidiaries. He is also the Chairman of ITC(+)DeltaCom and is a director of
ITC(+)DeltaCom, KNOLOGY, National Vision Associates, Ltd. (a full service
optical retailer), K&G Men's Centers (a discount retailer of men's clothing),
Vice Chairman of the Board of AvData Systems, Inc. ("AvData") (a provider of
data communications
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networks) and Chairman of the Board of Powertel. He served as Chairman of the
Board of AvData from 1998 to 1990. From 1984 to 1989, Mr. Lanier served as
Chairman of the Board of Async. Mr. Lanier also served as Vice
President -- Industry Relations of Telecom from 1984 to 1988 and as Senior Vice
President -- Industry Relations from January 1989 until Telecom's merger with
MCI in August 1990. From 1984 to 1985, he served as Chief Executive Officer of
SouthernNet, and from 1985 to 1986 he was Vice Chairman of the Board of
SouthernNet. Mr. Lanier has served as a Managing Director of South Atlantic
Private Equity Fund IV, Limited Partnership since 1997.
William H. Scott, III has been a Director of the Company since November
1994. Mr. Scott has served as President of ITC Holding (or its predecessors)
since December 1991 and has been a director of ITC Holding (or its predecessors)
since May 1989. In addition, Mr. Scott is an officer and director of several ITC
Holding subsidiaries. Mr. Scott is a director of ITC(+)DeltaCom, KNOLOGY,
Powertel and AvData. From 1989 to 1991, he served as Executive Vice President of
ITC Holding's predecessor. From 1985 to 1989, Mr. Scott was an officer and
director of Async. Between 1984 and 1988, Mr. Scott held several offices with
SouthernNet, including Chief Operating Officer, Chief Financial Officer, and
Vice President -- Administration. He was a director of that company from 1984 to
1987.
BOARD OF DIRECTORS
The Restated Certificate provides for a classified Board of Directors
consisting of three classes of directors with each class required to be as
nearly equal in number as possible. The number of directors is determined from
time to time by the Board of Directors and is currently fixed at six. A single
class of directors is elected each year at the Company's annual meeting of
stockholders. Subject to transition provisions, each director elected at each
such meeting will serve for a term ending on the date of the third annual
meeting of stockholders after his election and until his successor has been
elected and qualified. Messrs. Brewer and Lanier are serving for terms expiring
in 1998, Messrs. Gabbard and Misikoff are serving for terms expiring in 1999 and
Messrs. McQuary and Scott are serving for terms expiring in 2000. Officers of
the Company are appointed annually by the Board of Directors and serve at its
discretion.
The Board of Directors currently has two committees, the Audit Committee
and the Compensation Committee. The Audit Committee, among other things,
recommends the firm to be appointed as independent accountants to audit the
Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Gabbard,
Lanier, and Scott.
The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's 1995
Stock Option Plan, as amended (the "Stock Option Plan"). The members of the
Compensation Committee for the year ended December 31, 1997 were Messrs.
Gabbard, Lanier, and Scott.
DIRECTOR COMPENSATION
Since the Company's inception, members of the Board of Directors have not
received any compensation for their service on the Board of Directors except
pursuant to the Company's Directors Stock Option Plan (the "Directors Plan").
Under the Directors Plan, 70,000 shares of Common Stock are authorized for
issuance to non-employee directors (in the form of grants of 10,000 options per
director) upon their initial election or appointment to the Board, or, in the
case of Messrs. Lanier, Scott and Gabbard, who joined the Board prior to the
creation of the Directors Plan, upon the adoption of the Directors Plan by the
Board. Options are exercisable at the fair market value of the Common Stock (as
determined by the Board) on the date of grant. The Directors Plan was amended in
March 1998, subject to stockholder approval at the Company's 1998 Annual
Meeting, to provide for discretionary option grants. Upon adoption of this
amendment, each of Messrs. Lanier, Scott and Gabbard received a grant of 5,000
options, which grants are also subject to stockholder approval of the amendment.
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PRINCIPAL STOCKHOLDERS
The following table provides information as of April 30, 1998 concerning
beneficial ownership of Common Stock by: (i) each person or entity known by the
Company to beneficially own more than 5% of the outstanding Common Stock; (ii)
each director of the Company; (iii) the four most highly compensated executive
officers of the Company during the fiscal year ended December 31, 1997; and (iv)
all directors and executive officers of the Company as a group. The information
as to beneficial ownership has been furnished by the respective stockholders,
directors and executive officers of the Company, and, unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING (1) AFTER OFFERING (1)
--------------------- ---------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
<S> <C> <C> <C> <C>
ITC Holding Company, Inc. (2)(3)....................... 2,274,689 30.0% 2,274,689 26.5%
Charles M. Brewer (4).................................. 840,001 11.1 840,001 9.8
O. Gene Gabbard (5)(6)................................. 10,000 * 10,000 *
Campbell B. Lanier, III (6)(7)......................... 10,000 * 10,000 *
James T. Markle (8).................................... 19,427 * 19,427 *
Michael S. McQuary (9)................................. 98,396 1.3 98,396 1.1
Michael G. Misikoff (10)............................... 94,707 1.3 94,707 1.1
William H. Scott, III (6)(11).......................... 11,500 * 11,500 *
All executive officers and directors as a group (11
persons) (12)........................................ 1,120,510 14.6% 1,120,510 12.9%
</TABLE>
- ------------------------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
be the beneficial owner, for purposes of this table, of any shares of
Common Stock if such person has or shares voting power or investment power
with respect to such security, or has the right to acquire beneficial
ownership at any time within 60 days from April 30, 1998. As used herein,
"voting power" is the power to vote or direct the voting of shares and
"investment power" is the power to dispose or direct the disposition of
shares.
(2) ITC Holding Company, Inc. indirectly owns these shares through its
indirect, wholly owned subsidiary, ITC Service Company. The address of both
ITC Holding Company, Inc. and ITC Service Company is 1239 O.G. Skinner
Drive, West Point, Georgia 31833.
(3) ITC Holding Company, Inc. has pledged all of its stock in the Company to
certain lenders in connection with a credit agreement dated October 20,
1997.
(4) The address for Charles M. Brewer is MindSpring Enterprises, Inc., 1430
West Peachtree Street, Suite 400, Atlanta, Georgia 30309.
(5) Includes 5,000 shares of Common Stock that Mr. Gabbard has the right to
purchase within 60 days from April 30, 1998 pursuant to options.
(6) Mr. Lanier is Chairman of the Board, Chief Executive Officer and a
beneficial owner of approximately 21.4% of the common stock of ITC Holding
(as of October 20, 1997). Mr. Scott is the President and a director of ITC
Holding and is a beneficial owner of 2.0% of its common stock (as of
October 20, 1997). Mr. Scott's beneficial ownership includes 500 shares of
the Company's Common Stock held by his wife and 1,000 shares of the
Company's Common Stock held in trust for Mr. Scott's minor daughter, of
which Mr. Scott's wife is trustee. Mr. Gabbard is a director of ITC Holding
and a beneficial owner of less than 1% of its common stock (as of October
20, 1997). Each of Messrs. Lanier, Scott and Gabbard disclaims beneficial
ownership of the shares of the Company's Common Stock held by ITC Holding.
(7) Includes 5,000 shares of Common Stock that Mr. Lanier has the right to
purchase within 60 days from April 30, 1998 pursuant to options.
(8) Includes 19,367 shares of Common Stock that Mr. Markle has the right to
purchase within 60 days from April 30, 1998 pursuant to options.
(9) Includes 46,476 shares of Common Stock that Mr. McQuary has the right to
purchase within 60 days from April 30, 1998 pursuant to options.
(10) Includes 12,912 shares of Common Stock that Mr. Misikoff has the right to
purchase within 60 days from April 30, 1998 pursuant to options.
(11) Includes 5,000 shares of Common Stock that Mr. Scott has the right to
purchase within 60 days from April 30, 1998 pursuant to options.
(12) Includes 125,534 shares of Common Stock that such persons have the right to
purchase within 60 days from April 30, 1998 pursuant to options.
44
<PAGE> 45
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Restated
Certificate and Bylaws, which are included as exhibits to the Registration
Statement of which this Prospectus forms a part and by the provisions of
applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Restated Certificate, the Company has authority to issue
15,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000
shares of Class C Preferred, par value $0.01 per share. On April 28, 1998, the
Board of Directors adopted an amendment to the Restated Certificate to increase
the number of authorized shares of Common Stock to 60,000,000 shares and to
eliminate the Class C Preferred. The Board of Directors believes that the
proposed increase in the authorized shares of Common Stock is desirable to
enhance the Company's flexibility in connection with possible future actions,
such as stock splits, stock dividends, acquisitions, financing transactions,
employee benefit plan issuances, and such other corporate purposes as may arise.
The Company's stockholders will vote on this proposal at the Annual Meeting. The
Board of Directors expects the stockholders to approve this proposal. In
addition, under the Restated Certificate, the Board of Directors of the Company
has authority (without action by the stockholders) to issue 1,000,000 shares of
preferred stock, par value $0.01 per share, in one or more classes or series
and, within certain limitations, to determine the voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and in liquidation, and conversion and other rights of each such series. The
Company has no current plans to issue any additional shares of preferred stock.
The rights of the holders of Common Stock discussed below are subject to
such rights as the Board of Directors may hereafter confer on the holders of
preferred stock; accordingly, rights conferred on holders of preferred stock
that may be issued in the future under the Restated Certificate may adversely
affect the rights of holders of Common Stock.
COMMON STOCK
Voting Rights. Each holder of shares of Common Stock shall be entitled to
attend all special and annual meetings of the stockholders of the Company and,
share-for-share and without regard to class, together with the holders of all
other classes of stock entitled to attend such meetings and to vote (except any
class or series of stock having special voting rights), to cast one vote for
each outstanding share of Common Stock so held upon any matter or thing
(including, without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders.
Liquidation Rights. In the event of any dissolution, liquidation, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Common Stock and holders of any class or series of stock entitled to participate
therewith, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Company remaining after
the Company shall have paid, or provided for payment of, all debts and
liabilities of the Company and after the Company shall have paid, or set aside
for payment, to the holders of any class of stock having preference over the
Common Stock in the event of dissolution, liquidation or winding up the full
preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith as to dividends but only when
and as declared by the Board of Directors.
PREFERRED STOCK
The Restated Certificate authorizes the Board of Directors, from time to
time and without further stockholder action, to provide for the issuance of up
to 1,000,000 shares of preferred stock, par value $.01 per share, in one or more
series, and to fix the relative rights and preferences of the shares, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the Board of Directors has not
provided for the issuance of any series of such preferred stock, and there are
no agreements or understandings for the issuance of any such preferred stock.
Because of its broad discretion with respect to the
45
<PAGE> 46
creation and issuance of preferred stock without stockholder approval, the Board
of Directors could adversely affect the voting power of the holders of Common
Stock and, by issuing shares of preferred stock with certain voting, conversion
and/or redemption rights, could discourage any attempt to obtain control of the
Company.
CERTAIN CHARTER AND STATUTORY PROVISIONS
The Restated Certificate provides for the division of the Board of
Directors into three classes of directors, serving staggered three year terms.
The Restated Certificate further provides that the approval of the holders of at
least two-thirds of the shares entitled to vote thereon and the approval of a
majority of the entire Board of Directors are necessary for the alteration,
amendment or repeal of certain sections of the Restated Certificate relating to
the election and classification of the Board of Directors, indemnification and
the vote requirements for such amendments to the Restated Certificate. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
The Company is subject to the provisions of Section 203 of the Delaware
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to such
date, the board approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in such person becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain employee stock plans),
or (iii) on or after the date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and authorized by
the affirmative vote (and not by written consent) of at least two-thirds of the
outstanding voting stock excluding that stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation), together with
affiliates and associates, owns (or, as an affiliate or associate, within three
years prior, did own) 15% or more of the corporation's outstanding voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
46
<PAGE> 47
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated May
28, 1998 (the "Underwriting Agreement"), the Underwriters named below, who are
represented by Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), J.C.
Bradford & Co., Furman Selz LLC and Wheat First Union, a division of Wheat First
Securities, Inc. (the "Representatives"), have severally agreed to purchase from
the Company the respective number of shares of Common Stock set forth opposite
their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......... 300,001
J.C. Bradford & Co.......................................... 233,333
Furman Selz LLC............................................. 233,333
Wheat First Securities, Inc................................. 233,333
---------
Total............................................. 1,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $1.59 per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $0.10 per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase, from time to time, in
whole or in part, up to an aggregate of 150,000 additional shares of Common
Stock at the initial public offering price less underwriting discounts and
commissions. The Underwriters may exercise such option solely to cover
overallotments, if any, made in connection with the Offering. To the extent that
the Underwriters exercise such option, each Underwriter will become obligated,
subject to certain conditions, to purchase its pro rata portion of such
additional shares based on such Underwriter's percentage underwriting commitment
as indicated in the preceding table.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
Each of the Company, its executive officers and directors and certain
stockholders of the Company has agreed, subject to certain exceptions, not to
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 90 days
after the date of this Prospectus without the prior written consent of DLJ. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers and
directors and certain stockholders of the Company has agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without DLJ's prior written consent.
47
<PAGE> 48
Other than in the United States, no action has been taken by the Company or
the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering of the Common Stock and the distribution of this
Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. These activities may stabilize or
maintain the market price of the Common Stock above independent market levels.
The Underwriters are not required to engage in these activities, and may end any
of these activities at any time.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
are being passed upon for the Company by Hogan & Hartson L.L.P., Washington,
D.C., counsel for the Company. Hogan & Hartson L.L.P. also provides legal
services to ITC Holding, its affiliated companies and Campbell B. Lanier, III,
Chairman and Chief Executive Officer of ITC Holding. In particular, Hogan &
Hartson L.L.P. (with the consent of the Company) has represented ITC Holding in
certain transactions with the Company. Anthony S. Harrington, a partner of the
firm, beneficially owns 34,800 shares of ITC Holding common stock and 5,000
shares of MindSpring Common Stock. Certain legal matters are being passed upon
for the Underwriters by Alston & Bird LLP, Atlanta, Georgia. Alston & Bird LLP
also provides legal services to ITC Holding and certain of its affiliated
companies other than the Company.
EXPERTS
The financial statements and financial statement schedules of the Company
as of December 31, 1996 and 1997 and for the periods ended December 31, 1995,
1996 and 1997 included in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent certified public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
48
<PAGE> 49
GLOSSARY OF TECHNICAL TERMS
<TABLE>
<S> <C>
BACKBONE.................................. A high-speed network that connects smaller, independent
networks.
BANDWIDTH................................. The number of bits of information that can move over a
communications medium in a given amount of time.
BROADBAND................................. A transmission facility that has a bandwith greater than
a voice grade line of 3 kHz and which may carry numerous
voice, video and data channels simultaneously.
ELECTRONIC MAIL OR E-MAIL................. An application that allows a user to send or receive
messages to or from any other user with an Internet
address, commonly termed an e-mail address.
FRAME RELAY............................... A communications standard that is optimized for
efficient switching of variable-length data packets.
FTP....................................... File Transfer Protocol. A protocol that allows file
transfer between a host and a remote computer.
GRAPHICAL USER INTERFACE.................. A means of communicating with a computer by manipulating
icons and windows rather than using text commands.
INTERNET.................................. An open global network of interconnected commercial,
educational and governmental computer networks that
utilize a common communications protocol, TCP/IP.
INTERNET BACKBONE......................... The Internet backbone consists of high-speed networks
that link the smaller, independent networks of the
Internet.
ISDN...................................... Integrated Services Digital Network. A digital network
that combines voice and digital network services through
a single medium, making it possible to offer subscribers
digital data services as well as voice connections.
MODEM..................................... A piece of equipment that connects a computer to a data
transmission line (typically a telephone line).
ON-LINE SERVICES.......................... Commercial information services that offer a computer
user access through a modem to specific menus of
information, entertainment and communications data.
These services are generally closed systems and many
offer limited, if any, Internet access.
POP....................................... Point of Presence. The Company defines a POP as a local
geographic point of presence where subscribers can
access the Company's services via a local telephone
call. To the Company's knowledge, there is no
industry-wide definition of an Internet access POP, and
other companies may define a POP differently. For
purposes of this Prospectus, the Company has determined
all POP numbers using the Company's definition.
PPP....................................... Point to Point Protocol. A communications protocol that
allows direct dial-up access to the Internet over phone
lines. Unlike SLIP, PPP can automatically retransmit
information packets if they become corrupted.
PROTOCOL.................................. A formal description of message formats and the rules
two or more machines must follow in order to exchange
such messages.
ROUTER.................................... A device that receives and transmits data packets
between segments in a network or different networks.
</TABLE>
G-1
<PAGE> 50
<TABLE>
<S> <C>
SERVER.................................... Software that allows a computer to offer a service to
another computer. Other computers contact the server
program by means of matching client software. In
addition, such term means the computer on which server
software runs.
SLIP...................................... Serial Line Interface Protocol. A communications
protocol that allows direct, dial-up access to the
Internet over phone lines.
T-1....................................... A data communications line capable of transmission
speeds of 1.54 Mbps.
TCP/IP.................................... Transmission Control Protocol/Internet Protocol. A
compilation of network-level and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
TERMINAL SERVER........................... A specialized computer that supports multiple
communications connections.
WINDOWS................................... A computer operating system developed by Microsoft
Corporation that provides a graphical user interface and
multitasking capabilities.
WORLD WIDE WEB............................ A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication of
graphics, video and sound.
</TABLE>
G-2
<PAGE> 51
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1996 and 1997 and March
31, 1998 (unaudited)...................................... F-3
Statements of Operations for the years ended December 31,
1995, 1996 and 1997 and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-4
Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997.......................... F-5
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and for the three months ended March
31, 1997 and 1998 (unaudited)............................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
MindSpring Enterprises, Inc.:
We have audited the accompanying balance sheets of MINDSPRING ENTERPRISES,
INC. (a Delaware corporation) as of December 31, 1996 and 1997 and the related
statements of operations, stockholders' equity, and cash flows for the three
years ended December 31, 1995, 1996 and 1997. These financial statements are the
responsibility of the Company'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 MindSpring Enterprises, Inc.
as of December 31, 1996 and 1997 and the results of its operations and its cash
flows for each of the three years ended December 31, 1995, 1996, and 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 13, 1998
F-2
<PAGE> 53
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 9,653 $ 9,386 $ 8,866
Trade receivables, net of allowance for doubtful
accounts of $386, $751, and $1,220 at December 31,
1996 and 1997 and March 31, 1998, respectively........ 1,997 2,002 2,351
Prepaids and other current assets (Note 2).............. 361 906 418
Inventory............................................... 116 137 145
------- -------- --------
Total current assets............................... 12,127 12,431 11,780
------- -------- --------
Property and equipment:
Computer and telecommunications equipment............... 11,509 18,050 21,169
Assets under capital lease.............................. 1,473 9,916 9,916
Other................................................... 566 1,805 2,815
------- -------- --------
13,548 29,771 33,900
Less: accumulated depreciation.......................... (1,964) (6,133) (7,809)
------- -------- --------
Property and equipment, net............................. 11,584 23,638 26,091
------- -------- --------
Other assets:
Acquired customer base, net (Notes 2 and 3)............. 10,727 7,477 7,274
Other................................................... 794 740 859
------- -------- --------
Total other assets................................. 11,521 8,217 8,133
------- -------- --------
$35,232 $ 44,286 $ 46,004
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................. $ 1,954 $ 4,307 $ 4,993
Current portion of capital lease liability (Note 8)..... 656 2,607 2,666
Telecommunications costs payable........................ 901 2,233 1,900
Deferred revenue........................................ 416 2,198 2,787
Current portion of notes payable (Note 7)............... 624 2,043 1,647
Other accrued expenses.................................. 609 1,776 2,026
Accrued compensation expense............................ 635 1,404 1,308
Network services payable (Note 3)....................... 1,305 1,215 1,863
------- -------- --------
Total current liabilities.......................... 7,100 17,783 19,190
------- -------- --------
Long-term liabilities:
Notes payable (Note 7).................................. 2,042 -- --
Capital lease liability (Note 8)........................ 683 5,090 4,429
------- -------- --------
Total long-term liabilities........................ 2,725 5,090 4,429
------- -------- --------
Total liabilities.................................. 9,825 22,873 23,619
------- -------- --------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 4):
Preferred stock, $.01 par value; 1,000,000 shares
authorized and 0 shares issued and outstanding at
December 31, 1996 and December 31, 1997,
respectively.......................................... -- -- --
Common stock, $.01 par value; 15,000,000 shares
authorized and 7,477,084, 7,534,440 and 7,557,929 and
issued and outstanding at December 31, 1996 and 1997
and March 31, 1998, respectively...................... 75 75 76
Additional paid-in capital.............................. 34,978 35,067 35,178
Accumulated deficit..................................... (9,646) (13,729) (12,869)
------- -------- --------
Total stockholders' equity......................... 25,407 21,413 22,385
------- -------- --------
$35,232 $ 44,286 $ 46,004
======= ======== ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-3
<PAGE> 54
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Access.................................. $ 1,455 $13,420 $40,925 $ 7,356 $16,992
Business services....................... 260 2,286 7,711 1,424 3,173
Subscriber start-up fees................ 512 2,426 3,920 1,000 1,219
------- ------- ------- ------- -------
Total revenues...................... 2,227 18,132 52,556 9,780 21,384
------- ------- ------- ------- -------
Cost and expenses:
Cost of revenues -- recurring........... 627 6,332 15,203 3,169 5,990
Cost of subscriber start-up fees........ 339 1,876 1,619 365 617
General and administrative.............. 1,651 10,072 22,265 5,013 7,799
Selling................................. 579 4,089 8,519 1,910 3,053
Depreciation and amortization........... 265 3,285 8,695 1,828 2,872
------- ------- ------- ------- -------
Total operating expenses............ 3,461 25,654 56,301 12,285 20,331
------- ------- ------- ------- -------
Operating income (loss)..................... (1,234) (7,522) (3,745) (2,505) 1,053
Interest expense, net....................... (725) (90) (338) (20) (163)
------- ------- ------- ------- -------
Income (loss) before taxes.................. (1,959) (7,612) (4,083) (2,525) 890
Provision for Income Taxes.............. -- -- -- -- (30)
------- ------- ------- ------- -------
Net income (loss)........................... $(1,959) $(7,612) $(4,083) $(2,525) $ 860
======= ======= ======= ======= =======
Net loss per share:
Basic................................... $ (0.68) $ (1.45) $ (0.54) $ (0.34) $ 0.11
======= ======= ======= ======= =======
Diluted................................. $ (0.59) $ (1.45) $ (0.54) $ (0.34) $ 0.11
======= ======= ======= ======= =======
Shares used for computing net loss per
share:
Basic................................... 2,888 5,253 7,514 7,478 7,545
======= ======= ======= ======= =======
Diluted................................. 3,310 5,253 7,514 7,478 8,044
======= ======= ======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-4
<PAGE> 55
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK TOTAL
--------------- --------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT APIC SHARES AMOUNT EQUITY DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............. 1,136 $11 $ (11) 1,188 $ 745 $ (75) $ 670
Issuance of additional common
stock............................ 131 2 131 -- -- -- 133
Issuance of Class B convertible
preferred stock.................. -- -- -- 646 1,000 -- 1,000
Issuance of Class C convertible
preferred stock, warrant......... -- -- -- 100 638 -- 638
Net loss....................... -- -- -- -- -- (1,959) (1,959)
----- --- ------- ------ ------ -------- -------
Balance, December 31, 1995............. 1,267 $13 $ 120 1,934 $2,383 $ (2,034) $ 482
Conversion of Class A preferred
stock to common.................. 1,188 12 733 (1,188) (745) -- --
Conversion of Class B preferred
stock to common.................. 646 6 994 (646) (1,000) -- --
Issuance of additional common
stock, net of related offering
expenses......................... 2,025 20 14,129 -- -- -- 14,149
Conversion of Class C preferred
stock to common.................. 100 1 637 (100) (638) -- --
Issuance of additional common
stock, net of related offering
expenses......................... 2,250 23 18,364 -- -- -- 18,387
Issuance of common stock pursuant
to exercise of options........... 1 -- 1 -- -- -- 1
Net loss....................... -- -- -- -- -- (7,612) (7,612)
----- --- ------- ------ ------ -------- -------
Balance, December 31, 1996............. 7,477 $75 $34,978 -- $ -- $ (9,646) $25,407
Issuance of common stock pursuant
to exercise of options........... 57 -- 89 -- -- -- 89
Net loss....................... -- -- -- -- -- (4,083) (4,083)
----- --- ------- ------ ------ -------- -------
Balance, December 31, 1997............. 7,534 $75 $35,067 -- $ -- $(13,729) $21,413
===== === ======= ====== ====== ======== =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-5
<PAGE> 56
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income (Loss)...................... $ (1,959) $ (7,612) $(4,083) $(2,525) $ 860
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization........ 265 3,285 8,695 1,828 2,872
Noncash charge for warrant
issuance........................... 637 -- -- -- --
Changes in operating assets and
liabilities:
Trade receivables.................. (505) (1,477) (6) (387) (349)
Other current assets............... (319) (158) (565) (169) 480
Trade accounts payable............. 817 1,106 2,353 (300) 686
Telecommunications cost payable.... 201 700 1,332 387 (333)
Deferred revenue................... 333 80 1,782 534 589
Other accrued expenses............. 354 246 1,166 300 250
Accrued compensation expense....... 106 520 769 (25) (96)
Network services payable........... -- 1,305 (89) (441) 648
-------- -------- ------- ------- -------
Total adjustments.............. 1,889 5,607 15,437 1,727 4,747
-------- -------- ------- ------- -------
Net Cash Provided By (Used In)
Operating Activities......... (70) (2,005) 11,354 (798) 5,607
-------- -------- ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment.... (3,692) (8,298) (8,043) (2,371) (4,129)
Purchase of customer base.............. -- (12,249) (960) (35) (950)
Other.................................. (31) (789) 1 37 (161)
-------- -------- ------- ------- -------
Net Cash Used In Investing
Activities....................... (3,723) (21,336) (9,002) (2,369) (5,240)
-------- -------- ------- ------- -------
Cash flows from financing activities:
Proceeds of loan from preferred
stockholder.......................... 2,500 1,000 -- -- --
Payments of loan from preferred
stockholder.......................... -- (3,500) -- -- --
Proceeds from notes payable............ -- 11,488 -- -- --
Payments of notes payable.............. -- (8,822) (624) (77) (396)
Payments of capital lease
obligations.......................... -- (134) (2,084) (210) (603)
Issuance of common stock............... 133 32,537 89 42 112
Issuance of preferred stock............ 1,000 -- -- -- --
-------- -------- ------- ------- -------
Net Cash (Used In) Provided By
Financing Activities............. 3,633 32,569 (2,619) (245) (887)
-------- -------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents.............................. (160) 9,228 (267) (3,412) (520)
Cash and cash equivalents, beginning of
period................................... 585 425 9,653 9,653 9,386
-------- -------- ------- ------- -------
Cash and cash equivalents, end of period... $ 425 $ 9,653 $ 9,386 $ 6,241 $ 8,866
======== ======== ======= ======= =======
Supplemental disclosure for cash flow
information:
Interest paid.......................... $ -- $ 402 $ 749 $ 127 $ 270
======== ======== ======= ======= =======
Income taxes paid...................... $ -- $ -- $ -- $ -- $ --
======== ======== ======= ======= =======
Supplemental noncash disclosures:
Assets acquired under capital lease.... $ -- $ 1,473 $ 8,443 $ 520 $ --
======== ======== ======= ======= =======
Noncash charge for warrant issuance.... $ 637 $ -- $ -- $ -- $ --
======== ======== ======= ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-6
<PAGE> 57
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996, 1997 AND MARCH 31, 1998
1. ORGANIZATION AND NATURE OF BUSINESS
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a national
provider of Internet access. The Company was incorporated in Georgia on February
24, 1994 and began marketing its services in June 1994. The Company
reincorporated in Delaware and effected a recapitalization in December 1995, in
which shares of capital stock of the Company's predecessor Georgia corporation
were converted into shares of the Company's capital stock on the basis of
1.936199 for 1. All share information has been restated to reflect the effect of
the recapitalization.
While the Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure and internal staffing,
develop its systems, and expand into new markets, it generated positive cash
flows from operations during 1997 and had its first profitable quarter in the
fourth quarter of 1997. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES AND ASSUMPTIONS
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 revenue and expenses during the period.
Actual results could differ from those estimates.
PRESENTATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
SOURCES OF SUPPLIES
The Company relies on third-party networks, local telephone companies and
other companies to provide data communications capacity. 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.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards, and the ability to terminate
access on delinquent accounts. In addition, the concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
F-7
<PAGE> 58
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORY
Inventory consists of starter kits and purchased goods for resale and is
stated at the lower of cost or market using a specific identification method.
Starter kits consist of diskettes, manuals, and other printed material.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful lives
of the assets, commencing when assets are installed or placed in service. The
estimated useful life for all assets is five years or, for leasehold
improvements, the life of the lease, if shorter.
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communication and other equipment
under lease agreements accounted for as capital. The assets and liabilities
under capital leases are recorded at the lesser of the present value of
aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Assets under capital lease
are depreciated over their estimated useful lives of five years, which are
longer than the terms of the leases.
ACQUIRED CUSTOMER BASE
The Company capitalizes specific costs incurred for the purchase of
customer bases from other Internet Service Providers ("ISPs"). The customer
acquisition costs include the actual fee paid to the selling ISP as well as
legal expenses specifically related to the transactions. The account balance at
December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
PSINet (Note 3)............................................ $11,613,000 $11,613,000
Nando.Net (Note 3)......................................... 519,000 519,000
Other...................................................... 116,000 1,077,000
----------- -----------
12,248,000 13,209,000
Less: Accumulated amortization............................. (1,521,000) (5,731,000)
----------- -----------
$10,727,000 $ 7,478,000
=========== ===========
</TABLE>
Amortization is provided using the straight-line method over three years
commencing when the customer base is received.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and customer acquisition costs, to determine
whether any impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
INCOME TAXES
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.
F-8
<PAGE> 59
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Effective in 1995, the Company adopted the disclosure option of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this statement
shall disclose the pro forma effects on earnings and earnings per share as if
SFAS No. 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123.
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. Advance billings and collections relating
to future access services are recorded as deferred revenue and recognized as
revenue when earned.
BARTER TRANSACTIONS
The Company engages in certain exchanges of services for advertising and
promotional services. The Company records these transactions at the market value
of the services provided. Such transactions are not material for the periods
presented.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share," effective December
31, 1997. Basic loss per common share ("EPS") was computed by dividing net loss
by the weighted average number of shares of common stock outstanding for the
year ended. The effect of the Company's stock options (using the treasury stock
method) was not included in the computation of diluted EPS as their effect was
dilutive for both 1997 and 1996.
Additionally, in February, 1998, the Securities and Exchange Commission
issued Staff Accounting Bulletin ("SAB") No. 98 which superseded SAB No. 83,
pursuant to which the Company has calculated its 1995 EPS. SAB No. 98 requires
basic EPS to be presented assuming all stock options are outstanding for all
periods prior to the effective date of an initial public offering. Previously,
SAB No. 83 required the effect of all stock options be calculated using the
treasury stock method. Accordingly, previously reported EPS for 1995 of $.62 has
been restated to conform with this new guidance and differs because of the
exclusion of options (basic) and not employing the treasury stock method
(diluted).
The effect of the Company's stock options (using the treasury stock method)
was included in the computation of diluted EPS for the quarter ended March 31,
1998. For the period ended March 31, 1997, the effect of options is excluded as
it is antidilutive. Accordingly, no prior period restatement for previously
reported quarters is required.
QUARTERLY INFORMATION
In the opinion of management, all adjustments necessary to achieve a fair
statement of the Company's financial position and results for the interim
periods presented are reflected and are of a normal and recurring nature.
F-9
<PAGE> 60
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CUSTOMER BASE ACQUISITIONS
On June 28, 1996, the Company entered into a purchase agreement (as
amended, the "Purchase Agreement") with PSINet Inc. ("PSINet"), pursuant to
which the Company agreed to acquire certain of the tangible and intangible
assets and rights related to the consumer dial-up Internet access services
provided by PSINet in the United States, including (i) certain of PSINet's
individual subscriber accounts and (ii) the lease for a customer support call
center near Harrisburg, Pennsylvania, (the "Harrisburg Facility") and all
related telephone switches and other equipment (the "Assets").
On October 21, 1996, the Company paid PSINet approximately $9,175,000,
which consisted of $8,951,000 in principal and $224,000 in interest, in
repayment of promissory notes issued in connection with the PSINet transaction.
Effective as of January 24, 1997, the Company and PSINet further amended the
Purchase Agreement to, among other things, fix an aggregate purchase price for
the Assets in an amount equal to $12,929,000 (excluding accrued interest and
increases in principal amount under the First and Second PSINet Notes previously
paid by the Company) (the "Purchase Price"). In connection with fixing the
aggregate amount of the Purchase Price, the Company and PSINet amended the
Second PSINet Note to, among other things, reduce the principal amount owed
thereunder to $3,078,000, an amount equal to the remaining balance of the
Purchase Price as of January 24, 1997. As amended, the Second PSINet Note no
longer accrues interest, is payable over a two-year period, and has been
discounted for financial statement purposes using the same rate of interest
(Prime + 3%) as the prior PSINet Notes. The Company accretes the difference
between the principal and total payable amount of $3,078,000 over the two years
of the note.
In connection with the PSINet Transaction, the parties also entered into a
network services agreement (as amended, the "Services Agreement") which enables
MindSpring to offer nationwide Internet access through PSINet's network of over
200 points of presence ("POPs"). Pursuant to the Services Agreement, PSINet has
agreed, among other things, to provide to the Company (i) Internet connection
services which meet reasonable commercial standards, including with respect to
access and reliability, and (ii) access to PSINet's network monitoring systems
and subscriber log-in and accounting information. The term of the Services
Agreement is 5 years commencing on June 28, 1996 and is automatically renewable
annually thereafter unless either party notifies the other in writing not less
than 12 months prior to the end of such 5-year period or any 12-month extension
thereof. Subject to certain exceptions, PSINet may not terminate the Services
Agreement prior to October 31, 1998, and the Company may terminate the Services
Agreement at any time upon 60 days' written notice to PSINet without penalty.
The Company and PSINet amended the Services Agreement effective January 1,
1997 to provide for certain discounts to the monthly service fees which
otherwise would have been payable by the Company to PSINet. The Company earned
the maximum amount of credits ($2,050,000) during 1997, and the discounts are
reflected as reductions of cost of revenue. The Company can earn up to $200,000
per month in 1998 through September and can earn up to $300,000 in October.
4. STOCKHOLDERS' EQUITY
The Company has authorized 15,000,000 shares of $.01 par value common stock
and 1,000,000 shares of $.01 par value preferred stock.
COMMON STOCK
In March 1996, the Company completed an initial public offering of its
common stock (the "Initial Offering"). The Company issued 1,950,000 shares at an
initial public offering price of $8 per share. The total proceeds of the
offering, net of underwriting discounts and offering expenses, were
approximately $13,672,000. In April 1996, the Company's underwriters exercised a
portion of the over-allotment option granted in
F-10
<PAGE> 61
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
connection with the Company's Initial Offering, electing to purchase 75,000
additional shares of common stock. The net proceeds to the Company were
approximately $478,000.
In October 1996, the Company completed another public offering of its
common stock. The Company issued 2,250,000 shares at a public offering price of
$9.13 per share. The total proceeds of the offering, net of underwriting
discounts and offering expenses, were approximately $18,387,000.
PREFERRED STOCK
1,188,000 shares of Class A convertible preferred stock and 646,000 shares
of Class B convertible stock automatically converted into shares of common stock
on a one-for-one basis at the Initial Offering by the Company.
On December 22, 1995, the board of directors authorized the issuance of
5,000,000 shares of Class C convertible preferred stock. On December 27, 1995,
the Company issued 100,000 shares of Class C convertible preferred stock to ITC
Holding for total consideration of $1,000. The Company recorded a charge to
interest expense in 1995 for the difference between the fair market value of the
Class C convertible preferred stock and the consideration paid of $637,000. Each
share of Class C convertible preferred stock was automatically converted into
one share of common stock at the 190th day after the Initial Offering (September
18, 1996).
5. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan (the "Stock Option Plan"), as
adopted on February 21, 1995, amended by the board of directors on April 5, 1995
and December 19, 1995 and approved by the stockholders on December 27, 1995, and
subsequently amended by the board of directors on March 26, 1997 and approved by
the stockholders on May 28, 1997, 900,000 shares of common stock are reserved
and authorized for issuance upon the exercise of options. All employees of the
Company are eligible to receive options under the Stock Option Plan. The
compensation committee of the board of directors administers the Stock Option
Plan. Options granted under the Stock Option Plan are intended to qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended. Options generally become exercisable as follows: (i) 50% of the
options become exercisable two years after the date of grant or, in certain
cases, the commencement date of the holder's employment; (ii) an additional 25%
of the options become exercisable three years after the date of grant or, in
certain cases, the commencement date of the holder's employment; and (iii) the
remaining 25% of the options become exercisable four years after the date of
grant or, in certain cases, the commencement date of the holder's employment.
All options were granted at an exercise price equal to the estimated fair value
of the common stock at the dates of grant as determined by the board of
directors based on equity transactions and other analyses. The options expire
ten years from the date of grant or, in certain circumstances, the commencement
date of the option holder's employment.
DIRECTORS' STOCK OPTION PLAN
Under the Company's Directors' Stock Option Plan (the "Directors' Plan"),
adopted in December 1995, 70,000 shares of common stock are authorized for
issuance to nonemployee directors (in the form of 10,000 options per director)
upon their initial election or appointment to the board or, in the case of
directors who joined the board prior to the creation of the Directors' Plan,
upon the adoption of the Directors' Plan by the board of directors. The
Directors' Plan does not provide for discretionary option grants. Options become
exercisable as follows: (i) 50% of the options become exercisable two years
after the date of grant, (ii) an additional 25% of the options become
exercisable three years after the date of grant, and (iii) the remaining 25% of
the options become exercisable four years after the date of grant. All options
were granted at an
F-11
<PAGE> 62
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
exercise price equal to the estimated fair value of the common stock at the
dates of grant as determined by the board of directors based upon equity
transactions and other analyses. The options expire ten years from the date of
grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which defines a fair value-based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by APB No. 25. Entities
electing to remain with the accounting in APB No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if the fair
value-based method of accounting defined in this statement had been applied.
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 1995, 1996, and 1997 using the
Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Risk-free interest rate................................. 7.0% 6.4% 6.4%
Expected dividend yield................................. 0% 0% 0%
Expected lives.......................................... 3 years 3.5 years 3.5 years
Expected volatility..................................... 84.5% 69.3% 58.4%
</TABLE>
The total value of options granted during 1995, 1996, and 1997 was computed
as approximately $409,000, $601,000, and $3,735,000, respectively, which would
be amortized on a pro forma basis over the four-year vesting period of the
options. If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's net loss and pro forma net loss per share for the years
ended December 31, 1997, 1996, and 1995 would have been as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
<S> <C> <C>
1995
Net loss................................................... $(1,959,000) $(2,010,000)
Pro forma net loss per share............................... $ (0.85) $ (0.90)
1996
Net loss................................................... $(7,612,000) $(7,836,000)
Net loss per share......................................... $ (1.45) $ (1.49)
1997
Net loss................................................... $(4,083,000) $(5,402,000)
Net loss per share......................................... $ (0.54) $ (0.72)
</TABLE>
F-12
<PAGE> 63
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's two stock options plans at
December 31, 1995, 1996, and 1997 and changes during the years then ended are
presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
<S> <C> <C>
December 31, 1994........................................... -- $0.00
Grants...................................................... 375,000 1.82
Forfeitures................................................. (18,000) 1.00
--------
December 31, 1995........................................... 357,000 1.86
Grants...................................................... 252,000 8.60
Exercised................................................... (1,000) 0.64
Forfeitures................................................. (30,000) 6.04
--------
December 31, 1996........................................... 578,000 4.58
Grants...................................................... 151,000 12.63
Exercised................................................... (57,000) 0.87
Forfeitures................................................. (58,000) 9.36
--------
December 31, 1997........................................... 614,000 6.46
========
Weighted average fair value of options granted in 1997...... $ 24.72
========
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by year of
grant:
<TABLE>
<CAPTION>
WEIGHTED
YEAR NUMBER EXERCISE WEIGHTED AVERAGE
OF OF PRICE AVERAGE REMAINING
GRANT SHARES RANGE PRICE CONTRACTUAL LIFE
<S> <C> <C> <C> <C>
1995 285,000 0.64 -- 6.38 2.02 7.5
1996 192,000 6.38 -- 12.38 8.48 8.6
1997 137,000 $7.00 -- 29.13 $12.87 9.4 years
</TABLE>
The following table summarizes the options exercisable as of December 31,
1997, 1996, and 1995:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER WEIGHTED AVERAGE
OF AVERAGE REMAINING
AS OF SHARES PRICE CONTRACTUAL LIFE
<S> <C> <C> <C>
December 31, 1995................................... -- -- --
December 31, 1996................................... 70,000 $0.64 8.1 years
December 31, 1997................................... 122,000 $2.19 7.5 years
</TABLE>
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 matching
contributions to the Savings Plan.
F-13
<PAGE> 64
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED-PARTY TRANSACTIONS
The Company has entered into certain business relationships with several
subsidiaries and affiliates of ITC Holding. Except as noted below, none of these
transactions were material for the periods presented.
The Company purchases long-distance telephone services and wide area
network transport service from ITC DeltaCom, Inc. ("ITC DeltaCom"), formerly
DeltaCom, Inc., a related party through relationships with ITC Holding.
Long-distance charges from ITC DeltaCom totaled approximately $677,000 and
$1,942,000 for the years ended December 31, 1996 and 1997, respectively. ITC
DeltaCom provided no long-distance services to the Company in 1995.
See Note 4 for a discussion of a preferred stock transaction with ITC Holding.
7. DEBT
The Company's only debt obligation for the periods presented is a
promissory note issued in connection with the PSINet Transaction.
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
PSINet Note, due October, 1998.............................. $2,667,000 $ 2,043,000
Less: current maturities.................................... (624,000) (2,043,000)
---------- -----------
Long-term obligations....................................... $2,043,000 $ --
========== ===========
</TABLE>
The carrying value of the PSINet Note approximates market value as of
December 31, 1997.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under agreements which are classified
as capital leases. These leases have original terms of three years or less and
contain bargain purchase options at the end of the original lease terms. The
Company also has operating leases which relate to the lease of office and
equipment space. Rental expense attributable to these operating leases was
approximately $65,000, $519,000, and $1,420,000, for the year ended December 31,
1995, 1996, and 1997, respectively.
At December 31, 1997, the Company's capital lease obligations and minimum
rental commitments under noncancelable operating leases with initial or
remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
1998........................................................ $ 3,351,000 $1,112,000
1999........................................................ 3,103,000 901,000
2000........................................................ 2,601,000 575,000
2001........................................................ -- 604,000
2002 and thereafter......................................... -- 158,000
----------- ----------
Total minimum lease payments........................... 9,055,000 $3,350,000
==========
Amounts representing interest............................... (1,358,000)
-----------
Present value of net minimum payments....................... 7,697,000
Current portion............................................. (2,607,000)
-----------
Long-term capitalized lease obligations..................... $ 5,090,000
===========
</TABLE>
F-14
<PAGE> 65
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BELLSOUTH PURCHASE COMMITMENT
In June 1997, the Company entered into various agreements with BellSouth
(collectively, the "BellSouth Agreement"), pursuant to which the Company has
agreed to purchase certain telecommunications facilities from BellSouth over a
term of 24 months. The Company estimates the total commitment under the
BellSouth Agreement to be approximately $2,700,000 per year.
MONORAIL AGREEMENT
On October 14, 1996, the Company and Monorail Inc. ("Monorail"), an
Internet-ready computer manufacturer, entered into an agreement pursuant to
which the Company's software is to be included on the personal computers
manufactured by Monorail. The Company provided a $500,000 prepayment to Monorail
for potential subscribers to be acquired by the Company pursuant to this
agreement (the "Monorail Prepayment"). As of December 31, 1997, Monorail had
earned approximately $69,000 of the Monorail Prepayment. Monorail may continue
to offset the Monorail Prepayment by referring subscribers to the Company or may
repay all or part of the balance of the Monorail Prepayment at any time. The
Company has agreed to accept warrants to purchase Monorail stock in lieu of
interest on the balance of the Monorail Prepayment outstanding.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. As of December 31, 1997, management is not aware of
any asserted or pending litigation or claims against the Company that would have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
9. INCOME TAXES
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 December
31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 3,348,000 $ 3,866,000
Acquired customer base................................ 465,000 1,742,000
Deferred revenue...................................... 158,000 835,000
Allowance for doubtful accounts....................... 147,000 285,000
Other accrued liabilities............................. 188,000 126,000
----------- -----------
Total deferred tax assets........................ 4,306,000 6,854,000
----------- -----------
Deferred tax liabilities:
Depreciation.......................................... (619,000) (1,608,000)
Other................................................. (36,000) (48,000)
----------- -----------
Total deferred tax liabilities................... (655,000) (1,656,000)
----------- -----------
Net deferred tax asset..................................... 3,651,000 5,198,000
Valuation allowance for deferred tax assets................ (3,651,000) (5,198,000)
----------- -----------
Net deferred taxes......................................... $ -- $ --
=========== ===========
</TABLE>
F-15
<PAGE> 66
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's net operating loss carryforwards will expire between 2009 and
2012 unless utilized. Due to the fact that the Company has incurred losses since
inception, the Company has not recognized the income tax benefit of the net
operating loss carryforwards. 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 by more than 50%, as
defined.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the year ended December 31, 1995, 1996,
and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Income tax benefit at statutory rate........................ 34% 34% 34%
State income taxes, net of federal benefit.................. 4 4 4
Deferred tax asset valuation allowance...................... (38) (38) (38)
---- ---- ----
Total income tax provision........................ 0% 0% 0%
==== ==== ====
</TABLE>
For the three months ended March 31, 1998, the Company recorded a provision
for income taxes equal to its liability in various states at the enacted rates
where it does not have any net operating loss carryforwards available. The
remaining portion of the current period provision was offset by the reversal of
previously recorded valuation allowance amounts. For the three months ended
March 31, 1997, no income tax benefit was recognized as the Company had a net
taxable loss for the period and anticipated being in a net taxable loss position
for the year ended December 31, 1997. There were no cash payments for income
taxes for the quarters ended March 31, 1997 and 1998.
The Company is continually assessing its income tax situation to determine
when it is "more likely than not" that its deferred tax assets will be realized.
Based on the Company's short history of earnings and the uncertainty of near
term earnings because of various industry trends which may have a significant
negative impact on near term earnings, management does not believe it is "more
likely than not" that the deferred tax assets will be realized. When management
believes this situation has changed, the Company will reverse its valuation
allowance (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.
F-16
<PAGE> 67
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results for 1995,
1996, and 1997:
<TABLE>
<CAPTION>
NET INCOME
(LOSS) PER
SHARE
OPERATING NET ---------------
QUARTER ENDED REVENUE INCOME (LOSS) INCOME (LOSS) BASIC DILUTED
<S> <C> <C> <C> <C> <C>
December 31, 1995................. $ 1,125,000 $ (582,000) $(1,308,000) $(.41) $(.36)
September 30, 1995................ 590,000 (388,000) (389,000) (.12) (.11)
June 30, 1995..................... 340,000 (170,000) (169,000) (.07) (.06)
March 31, 1995.................... 172,000 (94,000) (93,000) (.04) (.03)
December 31, 1996................. $ 8,524,000 $(2,378,000) $(2,411,000) $(.33) $(.33)
September 30, 1996................ 5,301,000 (2,601,000) (2,702,000) (.53) (.53)
June 30, 1996..................... 2,495,000 (1,577,000) (1,460,000) (.29) (.29)
March 31, 1996.................... 1,812,000 (966,000) (1,039,000) (.30) (.30)
December 31, 1997................. $17,209,000 $ 646,000 $ 498,000 $ .07 $ .06
September 30, 1997................ 13,967,000 (465,000) (626,000) (.08) (.08)
June 30, 1997..................... 11,600,000 (1,421,000) (1,430,000) (.19) (.19)
March 31, 1997.................... 9,780,000 (2,505,000) (2,525,000) (.34) (.34)
</TABLE>
See Note 2 for a discussion of earnings per share.
F-17
<PAGE> 68
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information................ 3
Incorporation of Certain Documents by
Reference.......................... 4
Prospectus Summary................... 5
Risk Factors......................... 9
Use of Proceeds...................... 19
Price Range of Common Stock and
Dividend Policy.................... 20
Capitalization....................... 21
Selected Financial and Operating
Data............................... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................. 31
Management........................... 41
Principal Stockholders............... 44
Description of Capital Stock......... 45
Underwriting......................... 47
Legal Matters........................ 48
Experts.............................. 48
Glossary of Technical Terms.......... G-1
Financial Statements................. F-1
</TABLE>
======================================================
======================================================
1,000,000 SHARES
[MINDSPRING LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.C. BRADFORD & CO.
FURMAN SELZ
WHEAT FIRST UNION
MAY 29, 1998
======================================================
