<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _____
COMMISSION FILE NUMBER 0-27890
MINDSPRING ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2113290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1430 WEST PEACHTREE ST. NW, SUITE 400, ATLANTA, GA 30309
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (404) 815-0770
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
OUTSTANDING AT NOVEMBER 06, 1998
--------------------------------
Common Stock at $.01 par value 25,951,242 Shares
=================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN 000'S)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 62,498 $ 9,386
Trade receivables, net ............................................... 2,370 2,002
Prepaids and other current assets .................................... 602 1,043
-------- --------
Total current assets ............................................. 65,470 12,431
-------- --------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment ............................ 26,458 18,050
Assets under capital lease ........................................... 9,916 9,916
Other ................................................................ 3,679 1,805
-------- --------
40,053 29,771
Less: accumulated depreciation ....................................... (11,678) (6,133)
-------- --------
Total property and equipment, net ................................ 28,375 23,638
-------- --------
OTHER ASSETS:
Acquired customer base, net .......................................... 5,280 7,477
Other ................................................................ 890 740
-------- --------
Total other assets ............................................... 6,170 8,217
-------- --------
$100,015 $ 44,286
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ............................................... $ 2,036 $ 5,725
Other accrued expenses ............................................... 8,270 5,209
Current portion of capital lease obligations ......................... 2,715 2,608
Current portion of notes payable ..................................... 593 2,043
Deferred revenue ..................................................... 4,961 2,198
-------- --------
Total current liabilities ........................................ 18,575 17,783
-------- --------
LONG-TERM LIABILITIES:
Capital lease obligations ............................................ 3,077 5,090
-------- --------
Total liabilities ................................................ 21,652 22,873
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 60,000,000 shares authorized
and 25,852,993 and 22,603,320 issued and outstanding at
September 30, 1998 and December 31, 1997, respectively.............. 259 226
Additional paid-in-capital............................................ 84,967 34,916
Accumulated deficit................................................... (6,863) (13,729)
-------- --------
Total stockholders' equity.......................................... 78,363 21,413
-------- --------
$100,015 $ 44,286
======== ========
</TABLE>
The accompanying condensed notes to financial statements are an
integral part of these statements.
<PAGE> 3
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUE:
Access $ 23,898 $ 10,858 $ 61,516 $ 27,267
Subscriber start-up fees 1,019 1,025 3,279 2,832
Business services 3,778 2,084 10,344 5,249
-------- -------- -------- --------
Total revenue 28,695 13,967 75,139 35,348
-------- -------- -------- --------
COSTS AND EXPENSES:
Costs of revenue-recurring 7,358 3,949 20,333 10,642
Costs of revenue-start-up fees 618 440 1,834 1,100
General and administrative 9,195 5,621 25,505 15,867
Selling 4,806 2,150 11,735 5,969
Depreciation and amortization 3,278 2,273 9,244 6,161
-------- -------- -------- --------
Total cost and expenses 25,255 14,433 68,651 39,739
OPERATING INCOME (LOSS) 3,440 (466) 6,488 (4,391)
INTEREST INCOME (EXPENSE), NET 665 (161) 590 (190)
-------- -------- -------- --------
PRETAX INCOME (LOSS) $ 4,105 $ (627) $ 7,078 $ (4,581)
INCOME TAXES (120) 0 (212) 0
-------- -------- -------- --------
NET INCOME (LOSS) $ 3,985 $ (627) $ 6,866 $ (4,581)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic $ 0.15 $ (0.03) $ 0.29 $ (0.20)
======== ======== ======== ========
Diluted $ 0.15 $ (0.03) $ 0.27 $ (0.20)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 25,792 22,584 24,043 22,525
======== ======== ======== ========
Diluted 27,344 22,584 25,446 22,525
======== ======== ======== ========
</TABLE>
<PAGE> 4
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 6,866 $(4,581)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................... 9,244 6,161
Changes in operating assets and liabilities:
Trade receivables....................................... (368) (55)
Other current assets.................................... 441 89
Trade accounts payable.................................. (3,689) (1,551)
Other accrued expenses.................................. 3,061 2,978
Deferred revenue........................................ 2,763 1,194
-------- -------
Total adjustments..................................... 11,452 8,816
-------- -------
Net Cash Provided by Operating Activities............... 18,318 4,235
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (10,282) (4,415)
Purchase of customer base................................... (1,350) (620)
Other....................................................... (302) 33
-------- -------
Net Cash Used in Investing Activities................... (11,934) (5,002)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable................................... (1,450) (386)
Payments of capital lease obligations....................... (1,906) (1,261)
Issuance of common stock.................................... 50,084 78
-------- -------
Net Cash Provided by (Used in) Financing Activities..... 46,728 (1,569)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................. 53,112 (2,336)
CASH AND CASH EQUIVALENTS, beginning of period................... 9,386 9,653
-------- -------
CASH AND CASH EQUIVALENTS, end of period......................... $ 62,498 $ 7,317
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest...................................... $ 718 $ 494
======== =======
Cash paid for income taxes.................................. $ 226 $ --
======== =======
SUPPLEMENTAL NON-CASH DISCLOSURES:
Assets acquired under capital leases........................ $ -- $ 6,116
======== =======
</TABLE>
The accompanying condensed notes to financial
statements are an integral part of these
statements.
<PAGE> 5
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities and Exchange
Commission. The accompanying unaudited condensed financial statements
reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the Company's financial position and
results for the interim periods presented. All such adjustments are of
a normal and recurring nature. These condensed financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 0-27890).
On June 24, 1998, the Company declared a three-for-one stock split in
the form of a stock dividend which was paid on July 24, 1998 to
shareholders of record on July 9, 1998. Accordingly, the stock split
has been recognized in these financial statements by reclassifying
approximately $172,000, the par value of the additional shares issued
as a result of the split, from additional paid in capital to common
stock. For all periods presented, all shares outstanding and per share
amounts have been restated to reflect the stock split.
2. The Company adopted SFAS No. 128, "Earnings Per Share", effective
December 31, 1997. Basic earnings (loss) per common share ("EPS") was
computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding for the period then ended. The
effect of the Company's stock options (using the treasury stock
method) was included in the computation of diluted EPS for the three
and nine months ended September 30, 1998. For the 1997 periods, the
effect of the options is excluded, as it is antidilutive. Accordingly,
no prior period restatement for previously reported quarters is
required. The following table summarizes the shares used in the
calculations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
(in 000's except per share data)
Weighted average shares 25,792 22,584 24,043 22,525
Outstanding-basic
Effect of dilutive stock options 1,552 0 1,403
------- -------- ------- --------
Shares used for diluted earnings per share 27,344 22,584 25,446 22,525
======= ======== ======= ========
Net income (loss) $ 3,985 $ (627) $ 6,866 $ (4,581)
Basic earnings (loss) per share $ 0.15 $ (0.03) $ 0.29 $ (0.20)
======= ======== ======= ========
Diluted earnings (loss) per share $ 0.15 $ (0.03) $ 0.27 $ (0.20)
======= ======== ======= ========
</TABLE>
3. For the quarter ended September 30, 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 quarter ended September 30, 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 paid approximately
$115,000 in cash payments for estimated income taxes in the quarter
ended September 30, 1998. There were no cash payments for income taxes
for the nine months ended September 30, 1997.
The Company is continually assessing its income tax situation to
determine when it is "more likely than not" that its deferred tax
assets will be realized. Based on the Company's short history of
earnings and the uncertainty of near term earnings because of various
industry trends which may have a significant negative impact on near
term earnings, management does not believe it is "more likely than
not" that the deferred tax assets will be realized. When management
believes this situation has changed, the Company will reverse its
valuation allowance (approximately $2.7 million at September 30, 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.
<PAGE> 6
SUBSEQUENT EVENT
On September 10, 1998, MindSpring entered into an Asset
Purchase Agreement with America Online, Inc. ("AOL") and Spry, Inc., a
wholly-owned subsidiary of AOL ("Spry"), to purchase certain assets
used in connection with the consumer dial-up Internet access business
operated by Spry (the "SpryNet Agreement"). Pursuant to the SpryNet
Agreement, MindSpring acquired Spry's subscriber base of individual
Internet access customers in the United States and Canada as well as
various assets used in serving those customers, including a customer
support facility and a network operations facility in Seattle,
Washington. MindSpring also acquired all rights held by Spry to the
"SpryNet" name. The purchase price for these assets is based primarily
upon the number of acquired subscribers that remain MindSpring
subscribers for a specified period of time, but will not be less than
$25 million. The final purchase price is expected to be determined in
the first quarter of 1999. The Company expects the aggregate purchase
price to be between $35 million and $45 million. At the closing of
this acquisition on October 15, 1998, the Company paid approximately
$25 million of the purchase price to AOL. There was no financial
impact for the periods presented related to the SpryNet Agreement.
2
<PAGE> 7
ITEM 2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a
leading national Internet access provider that focuses on serving individuals
and small businesses. The Company is also a leading provider of Web hosting
services, a complement to its Internet access business and one of the fastest
growing segments of the Internet marketplace. Through its network of
Company-owned and third-party POPs, the Company can offer its services in 45
U.S. states and the District of Columbia via a local telephone call. As of
September 30, 1998, the Company served approximately 455,000 subscribers,
including approximately 18,000 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.
On September 10, 1998, MindSpring entered into an Asset Purchase
Agreement with America Online, Inc. ("AOL") and Spry, Inc., a wholly-owned
subsidiary of AOL ("Spry"), to purchase certain assets used in connection with
the consumer dial-up Internet access business operated by Spry (the "SpryNet
Agreement"). Pursuant to the SpryNet Agreement, MindSpring acquired Spry's
subscriber base of individual Internet access customers in the United States
and Canada as well as various assets used in serving those customers, including
a customer support facility and a network operations facility in Seattle,
Washington. MindSpring also acquired all rights held by Spry to the "SpryNet"
name. The purchase price for these assets is based primarily upon the number of
acquired subscribers that remain MindSpring subscribers for a specified period
of time, but will not be less than $25 million. The final purchase price is
expected to be determined in the first quarter of 1999. The Company expects the
aggregate purchase price to be between $35 million and $45 million. At the
closing of this acquisition on October 15, 1998, the Company paid approximately
$25 million of the purchase price to AOL.
STATEMENT OF OPERATIONS
The Company derives revenue primarily from monthly subscriptions and
start-up fees from individuals for dial-up access to the Internet. Monthly
subscription fees vary by billing plan. Under the Company's current pricing
plans, customers have a choice of two "flat rate" plans (The Works and
Unlimited Access) and two "usage-sensitive" plans (Standard and Light). The
Company also has a prepayment plan available to all dial-up subscribers which
allows subscribers to prepay their access fees for either one or two years at a
discounted rate. For the three months ended September 30, 1998 and 1997, the
average monthly recurring revenue per dial-up subscriber was approximately $20
(monthly recurring revenue plus usage charges for non-"flat rate" subscribers,
divided by total subscribers). Start-up fees for new subscribers vary depending
upon the promotional method by which the subscriber is acquired, ranging up to
a maximum of $25. Aggregate subscriber start-up fees are sufficient to cover
the aggregate costs of direct materials, mailing expenses, and licensing fees
associated with new subscribers. A majority of the Company's individual
subscribers pay their MindSpring fees automatically by pre-authorized monthly
charges to the subscriber's credit card.
In addition, the Company earns revenue by providing Web-hosting,
domain registration and Web page design services, Web-server co-location and
full-time dedicated access connections to the Internet. The Company's
Web-hosting services allow a business or individual to post information on the
World Wide Web so that the information is available to anyone who has access to
the Internet. The Company currently offers three price plans for Web hosting
subscribers ranging from $19.95 to $99.95 per month. MindSpring had
approximately 18,000 Web hosting subscribers as of September 30, 1998. Through
its domain registration services, the Company provides subscribers the ability
to personalize electronic mail addresses and URLs (Uniform Resource Locators).
The services described in this paragraph have been classified as business
services in the statements of operations and the "Results of Operations" table
set forth below.
The Company's costs include (i) costs of revenue that are primarily
related to the number of subscribers; (ii) selling, general and administrative
expenses that are associated more generally with operations; and (iii)
depreciation and amortization, which are related to the size of the Company's
network and the deferred costs associated with acquired customer bases.
Costs of revenue that are primarily related to the number of
subscribers include both recurring costs and subscriber start-up expenses.
Recurring costs of revenue consist primarily of the costs of telecommunications
facilities necessary to provide service to subscribers and certain monthly
licensing fees per subscriber for the right to receive and make available
certain proprietary on-line services. Telecommunications facilities costs
include the costs of providing local telephone lines into each Company-owned
POP, costs related to the use of third-party networks pursuant to services
agreements and costs
3
<PAGE> 8
associated with leased lines connecting each Company-owned POP and third-party
network to the Company's hub and connecting the Company's hub to the Internet
backbone. Start-up expenses for each subscriber include one-time license fees
paid to third parties for the right to bundle other capabilities into the
Company's software, cost of diskettes and other product media, manuals, and
packaging and delivery costs associated with the materials provided to new
subscribers. The Company does not defer any such subscriber start-up expenses.
Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Selling, general and administrative
costs will increase over time as the Company's scope of operations increases.
However, the Company expects that such costs will be more than offset by
anticipated increases in revenue attributable to overall subscriber growth. In
addition, significant levels of marketing activity may be necessary in order
for the Company to build or increase its subscriber base in a given market to a
size large enough to generate sufficient revenue to offset such marketing
expenses. The Company may determine to significantly increase the level of
marketing activity in order to increase the rate of subscription growth. Any
such increase would have a short-term negative impact on earnings. The Company
does not defer any start-up expenses related to entering new markets.
As the Company expands into new markets, both costs of revenue and
selling, general and administrative expenses will increase. To the extent the
Company opens MindSpring POPs in new markets, such expenses may also increase
as a percentage of revenue in the short-term after a new MindSpring POP is
opened because many of the fixed costs of providing service in a new market are
incurred before significant revenue can be expected from that market. However,
to the extent that the Company expands into new markets by using third-party
POPs instead of opening its own POPs, the Company's incremental monthly
recurring costs will consist primarily of the fees to be paid to third parties
pursuant to network service agreements. The margins on such subscribers will
initially be higher than if the Company had developed its own POP in new
markets. Once a new market matures, costs of revenue as a percentage of revenue
will tend to be higher in markets served through utilization of purchased
network services rather than Company-owned POPs, since the full costs of
utilizing such network services is included in costs of revenue while a portion
of the costs of utilizing Company-owned POPs is included in depreciation and
amortization and because, subject to local area telecommunications charges, the
Company can provide services at a lower cost on its own POPs when certain
economies of scale are achieved.
The Company has added, and may in the future continue to add,
MindSpring subscribers by purchasing customer bases from other Internet service
providers. The Company amortizes such purchased customer bases using the
straight-line method over a period of three years, commencing when the purchase
is completed. Customer base purchases and related amortization for the quarter
ended September 30, 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 has been
profitable in each quarter since 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.
4
<PAGE> 9
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
The following table sets forth certain unaudited financial data for
the three months ended September 30, 1998 and 1997. Operating results for any
period are not necessarily indicative of results for any future period.
Dollar amounts are shown in thousands (except per share data).
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
(000'S) % OF (000'S) % OF
REVENUE REVENUE
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Access $ 23,898 83% $ 10,858 78%
Subscriber start-up fees 1,019 4% 1,025 7%
Business services 3,778 13% 2,084 15%
-------- --- -------- ----
Total revenues 28,695 100% 13,967 100%
Costs and expenses:
Costs of revenue-recurring 7,358 26% 3,949 28%
Costs of revenue-start-up fees 618 2% 440 3%
Selling, general and administrative 14,001 49% 7,771 56%
Depreciation and amortization 3,278 11% 2,273 16%
-------- --- -------- ----
Total costs and expenses 25,255 88% 14,433 103%
-------- --- -------- ----
Operating income (loss) 3,440 12% (466) (3%)
Interest income (expense), net 665 2% (161) (1%)
-------- --- -------- ----
Income (loss) before taxes 4,105 14% (627) (4%)
Income tax provision (120) 0% 0 0%
-------- --- -------- ----
Net income (loss) 3,985 14% (627) (4%)
======== === ======== ====
NET INCOME (LOSS) PER SHARE:
Basic $ 0.15 $ (0.03)
Diluted $ 0.15 $ (0.03)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000'S):
Basic 25,792 22,584
Diluted 27,344 22,584
OPERATING DATA:
Approximate number of subscribers at end of period 455,000 224,000
Number of Company employees at end of period 732 465
</TABLE>
Revenue: Revenue for the three months ended September 30, 1998 totaled
approximately $28,695,000, compared to approximately $13,967,000 for the three
months ended September 30, 1997. The approximately 105% increase in period
revenue resulted primarily from a 103% increase in subscribers. Revenues from
dial-up access to the Internet for the three months ended September 30, 1998
represented approximately 83% of revenue, compared to approximately 78% of
revenue for the same three months in the prior year. Subscriber start-up fees
accounted for approximately 4% of revenue for the three months ended September
30, 1998, compared to approximately 7% for the three months ended September 30,
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, consisting primarily of Web Hosting services,
decreased to approximately 13% of total revenue for the three months ended
September 30, 1998 down from 15% of total revenue for the three months ended
September 30, 1997.
5
<PAGE> 10
Costs of revenue-recurring: For the three months ended September 30,
1998, costs of revenue-recurring decreased to approximately 26% of total
revenue, compared to approximately 28% of total revenue for the three months
ended September 30, 1997. Costs of revenue-recurring also decreased as a
percentage of dial-up access revenue to approximately 31% in the third quarter
of 1998 from approximately 36% in the third quarter of 1997. Exclusive of
approximately $596,000 in discounts received in the third quarter of 1998 and
$450,000 in discounts received in the third 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
33% and 41% of total dial-up access revenue, respectively. The discounts earned
under the PSINet Services Agreement will end in October 1998. 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 September
30, 1998, subscriber start-up expenses decreased to approximately 2% of total
revenue, compared to approximately 3% of total revenue for the three months
ended September 30, 1997. Costs of revenue-start-up fees increased as a
percentage of subscriber start-up revenue from approximately 43% for the three
months ended September 30, 1997 to approximately 61% in the three months ended
September 30, 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 third 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 49% of revenue for the three months
ended September 30, 1998, compared to approximately 56% of revenue for the
three months ended September 30, 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 11% of revenue for the three months ended September
30, 1998, compared to approximately 16% of revenue for the same period in the
prior year. Amortization expense for the three months ended September 30, 1998
was approximately 5% of revenue compared to approximately 7% of revenue for the
three months ended September 30, 1997. Amortization expense resulted solely
from acquired customer bases which are being amortized over three years.
Depreciation expense was approximately 6% of total revenue for the three months
ended September 30, 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. The Company anticipates amortization expense increasing in
the near future as a percentage of revenue as a result of the Sprynet
Agreement.
Interest income (expense), net: Interest income for the three months
ended September 30, 1998 consisted of approximately $873,000 of interest income
earned on the investment of excess cash balances offset by approximately
$208,000 related to capital leases of equipment and imputed interest related to
a note payable issued to PSINet. For the three months ended September 30, 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
$258,000 and interest income of approximately $97,000.
Income tax provision: For the three months ended September 30, 1998,
the Company recorded a provision for income taxes equal to its estimated
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 September 30, 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 $2.7 million at September 30,
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 September 30, 1998
was $3,985,000, or $0.15 basic and diluted income per share, compared to a net
loss of $627,000, or $0.03 basic and diluted loss per share, for the three
months ended September 30, 1997.
6
<PAGE> 11
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
The following table sets forth certain unaudited financial data for
the nine months ended September 30, 1998 and 1997. Operating results for any
period are not necessarily indicative of results for any future period.
Dollar amounts are shown in thousands (except per share data).
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
(000'S) % OF (000'S) % OF
REVENUE REVENUE
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Access $ 61,516 82% $ 27,267 77%
Subscriber start-up fees 3,279 4% 2,832 8%
Business services 10,344 14% 5,249 15%
-------- --- -------- ----
Total revenues 75,139 100% 35,348 100%
Costs and expenses:
Costs of revenue-recurring 20,333 27% 10,642 30%
Costs of revenue-start-up fees 1,834 2% 1,100 3%
Selling, general and administrative 37,240 50% 21,836 62%
Depreciation and amortization 9,244 12% 6,161 17%
-------- --- -------- ----
Total costs and expenses 68,651 91% 39,739 112%
-------- --- -------- ----
Operating income (loss) 6,488 9% (4,391) (12%)
Interest Income (expense), net 590 0% (190) (1%)
-------- --- -------- ----
Income (loss) before taxes 7,078 9% (4,581) (13%)
Income tax provision (212) 0% 0 0%
-------- --- -------- ----
Net income (loss) 6,866 9% (4,581) (13%)
======== === ======== ====
NET INCOME (LOSS) PER SHARE:
Basic $ 0.29 $ (0.20)
Diluted $ 0.27 $ (0.20)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000'S):
Basic 24,043 22,525
Diluted 25,446 22,525
OPERATING DATA:
Approximate number of subscribers at end of period 455,000 224,000
Number of Company employees at end of period 732 465
</TABLE>
Revenue: Revenue for the nine months ended September 30, 1998 totaled
approximately $75,139,000, compared to approximately $35,348,000 for the nine
months ended September 30, 1997. The approximately 113% increase in period
revenue resulted primarily from a 103% increase in subscribers. Revenues from
dial-up access to the Internet for the nine months ended September 30, 1998
represented approximately 82% of revenue, compared to approximately 77% of
revenue for the same nine months in the prior year. Subscriber start-up fees
accounted for approximately 4% of revenue for the nine months ended September
30, 1998, compared to approximately 8% for the nine months ended September 30,
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, consisting primarily of Web Hosting services,
remained relatively steady and represented approximately 14% and 15% of total
revenue for the nine months ended September 30, 1998 and 1997, respectively.
Costs of revenue-recurring: For the nine months ended September 30,
1998, costs of revenue-recurring decreased to approximately 27% of total
revenue, compared to approximately 30% of total revenue for the nine months
ended September 30, 1997. Costs of revenue-recurring also decreased as a
percentage of dial-up access revenue to approximately 33% in the first nine
months of 1998 from approximately 39% in the first nine months of 1997.
Exclusive of $1,796,000 in discounts received in the first nine months of 1998
and $1,450,000 in discounts received in the first nine months of 1997 pursuant
to the
7
<PAGE> 12
PSINet Services Agreement, costs of revenue-recurring would have been
approximately 36% and 44% of total dial-up revenue, respectively. The discounts
earned under the PSINet Services Agreement will end in October 1998. 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 nine months ended September
30, 1998, subscriber start-up expenses decreased to approximately 2% of total
revenue, compared to approximately 3% of total revenue for the nine months
ended September 30, 1997. Costs of revenue-start-up fees increased as a
percentage of subscriber start-up revenue from approximately 39% for the nine
months ended September 30, 1997 to approximately 56% in the nine months ended
September 30, 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 nine months 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 50% of revenue for the nine months
ended September 30, 1998, compared to approximately 62% of revenue for the nine
months ended September 30, 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 12% of revenue for the nine months ended September
30, 1998, compared to approximately 17% of revenue for the same period in the
prior year. Amortization expense for the nine months ended September 30, 1998
was approximately 5% of revenue compared to approximately 9% of revenue for the
nine months ended September 30, 1997. Amortization expense resulted solely from
acquired customer bases which are being amortized over three years.
Depreciation expense was approximately 7% of total revenue for the nine months
ended September 30, 1998, compared to approximately 8% 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. The Company anticipates amortization expense increasing in
the near future as a percentage of revenue as a result of the Sprynet
Agreement.
Interest Income (expense), net: Interest income for the nine months
ended September 30, 1998 consisted of approximately $1,308,000 offset by
approximately $718,000 of interest expense related to capital leases of
equipment and imputed interest related to a note payable issued to PSINet. For
the nine months ended September 30, 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 $494,000 and interest income of
approximately $304,000.
Income tax provision: For the nine months ended September 30, 1998,
the Company recorded a provision for income taxes equal to its estimated
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 nine months ended September 30, 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 $2.7 million at September 30,
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 nine months ended September 30, 1998
was $6,866,000, or $0.29 basic income per share or $0.27 diluted income per
share, compared to a net loss of $4,581,000, or $0.20 basic and diluted loss
per share, for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated net cash from operations in the amount of
$18,318,000 for the nine months ended September 30, 1998 versus approximately
$4,235,000 during the nine months ended September 30, 1997. The Company has
primarily financed its operations to date through cash flows generated from
operations, public and private sales of equity securities, loans from third
parties and capital leases of equipment. The company completed a secondary
public offering in June 1998 (the "June 1998 Offering"), issuing 3,000,000
shares at a price of $17.67 per share (offering information has been adjusted
to reflect the Company's three-for-one stock split which occurred on July 24,
1998). The proceeds of the public
8
<PAGE> 13
offering were approximately $49,747,000, net of underwriting discounts and
expenses. The Company's investing activities of approximately $11,934,000 for
the nine months ended September 30, 1998 primarily related to purchases of
telecommunications equipment necessary for the provision of service to
subscribers. In addition to the net proceeds of the June 1998 Offering, the
Company's primary financing activities for the nine months ended September 30,
1998 consisted of approximately $3,356,000 paid for capital lease obligations
and to PSINet in connection with a transaction between the Company and PSINet in
1996 in which the Company purchased certain individual subscriber accounts of
PSINet and related assets (the "PSINet Transaction"), offset by proceeds from
the exercise of employee incentive stock options of $337,000. Total cash used in
financing activities for the nine months ended September 30, 1997 was
approximately $1,569,000, consisting of cash paid for capital lease obligations
cash and paid to PSINet in connection with the PSINet Transaction.
In connection with its acquisition of certain assets of Spry,
MindSpring paid approximately $25 million to AOL on October 15, 1998. The final
installment of the purchase price for this acquisition is expected to be paid
in the first quarter of 1999. The Company expects to pay up to an additional
$20 million to AOL for these assets based upon the number of acquired
subscribers that remain MindSpring subscribers for the required period of time.
As of September 30, 1998, the Company had cash on hand of
approximately $62,498,000. The Company anticipates that it will continue to
generate cash flows from operations in 1998. The Company estimates that its
cash and financing needs for the next twelve months, assuming reasonable
internal growth and considering the Sprynet Agreement, can be met by cash on
hand and cash flow from operations. The Company's future capital requirements
depend on several factors, including the rate of market acceptance of the
Company's services, the Company's ability to maintain and expand its subscriber
base, the rate of expansion of the Company's network infrastructure, the level
of resources required to expand the Company's marketing and sales efforts, the
availability of hardware and software provided by third-party vendors and other
factors. If capital requirements vary materially from those currently planned,
the Company may require additional financing. The Company has no commitments
for any additional financing, and there can be no assurance that any such
commitments can be obtained on favorable terms, if at all. Any additional
equity financing may be dilutive to the Company's stockholders, and debt
financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and operational matters
and may otherwise limit the Company's ability to raise additional capital.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective with the first quarter of 1998, the Company was subject to
the provisions of Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income" and Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information". Neither statement had any impact on the Company's
financial statements as the Company does not have any "comprehensive income"
type earnings (losses) and its financial statements reflect how the "key
operating decision maker" views the business. The Company will continue to
review these statements over time, in particular, SFAS 131, to determine if any
additional disclosures are necessary based on evolving circumstances.
YEAR 2000
INTRODUCTION
The term "Year 2000 issue" is a general term used to describe the
various problems that may result form the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. These problems generally arise from the fact that
most of the world's computer hardware and software have historically used only
two digits to identify the year in a date, often meaning that the computer
will fail to distinghished dates in the "2000's" from dates in the "1900's."
These problems may also arise from other sources as well, such as the use of
special codes and conventions in software that make use of the date field.
9
<PAGE> 14
STATE OF READINESS
The Company recently established a Year 2000 Program Office to
coordinate appropriate activity and report to the Board of Directors on a
continuing basis with regard to the Year 2000 issue. The Company's Year 2000
Program Office has developed and is currently implementing a comprehensive plan
(the "Year 2000 Program") for the Company to become Year 2000 ready. The Year
2000 Program consists of six phases: (i) project planning and inventory of all
of the Company's assets, (ii) assessment, (iii) renovation (whether by upgrade
or replacement), (iv) testing and validation, (v) implementation and (vi)
creation of contingency plans in the event of year 2000 failures.
The Year 2000 Program covers: (i) software products which are supplied
by the Company to its customers, (ii) the Company's information technology and
operating systems ("IT Systems"), and (iii) the Company's non-information
technology systems, including embedded technology ("Non-IT Systems"). In
addition, the Program calls for the Company to identify and assess the systems
and services of the Company's major vendors, third party network service
providers and other material service providers ("Third Party Systems"), and
take appropriate remedial actions and develop contingency plans where
appropriate in connection with such Third Party Systems.
The Company supplies its customers with a software package that, among
other things, allows its customers to access the Company's services. The
software package consists of internally developed software (e.g., the
MindSpring Internet Desktop interface) which is bundled with third party
software (collectively, the "Access Product"). The Company believes that the
current shipping version of its software package (including the MindSpring
Internet Desktop) is Year 2000 ready. In addition, the Company believes that
substantially all of its customer base is presently using a version of the
Access Product that is Year 2000 ready.
The Company has substantially completed the inventory phase of the
Year 2000 Program for both its IT Systems and Non-IT Systems and has completed
a majority of the assessment phase of the Year 2000 Program for the IT Systems
and Non-IT Systems. The Company anticipates that it will complete the first two
phases for such systems during the first quarter of 1999. The Year 2000 Program
calls for the completion of all six phases for both IT and Non-IT Systems by
the end of the second quarter of 1999. The Company has performed a technical
review of many of the more critical Third Party Systems and has surveyed the
publicly available statements issued by the vendors of such systems.
Additionally, the Company has recently sent inquiry letters to its significant
providers of Third Party Systems requesting information regarding their
vulnerability to Year 2000 issues and whether the products and services
purchased from such entities are Year 2000 compliant. The Company intends to
pursue appropriate responses to such inquiries and will evaluate the responses
it receives.
The Company recently completed its acquisition of Spry, Inc. ("Spry").
The Company is developing plans to identify and address Year 2000 related
concerns with Spry as part of the natural integration of the Spry operation
into the Company. Management believes that the Spry operation will not present
any significant Year 2000 issues to the Company.
The Company has not deferred any specific IT project due to the Year
2000 Program. To date, the Company has primarily utilized internal resources to
develop and implement the Year 2000 Program. The Company will engage outside
resources to supplement its internal resources if management determines it is
necessary or desirable
10
<PAGE> 15
COSTS
The Company has incurred expenses of approximately $20,000 in
connection with the implementation of the Year 2000 Program Office and Year
2000 Program. The Company estimates that an additional $200,000 to $250,000 in
expenses will be incurred by the Company through the remainder of the Year 2000
Program. The costs and estimates provided include the Company's estimate of
the cost of internal resources directly attributable to the Company's Year 2000
Program. The Company has funded, and anticipates that it will continue funding,
the costs of the Year 2000 Program from cash flows. The estimates for the costs
of the Year 2000 Program are based upon management's best estimates and may be
updated or revised as additional information becomes available. The Company
believes such costs will not have a material effect on the Company's financial
condition, liquidity or results of operations.
RISKS
The failure by the Company to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain normal business
activities or operations. Presently, however, the Company perceives that its
most reasonably likely worst case scenario related to the Year 2000 is
associated with potential concerns with third party services or products.
Specifically, the Company is heavily dependent on a significant number of third
party vendors to provide both network services or equipment. A significant year
2000-related disruption of the network services or equipment provided to the
Company by third party vendors could cause customers to consider seeking
alternate providers or cause an unmanageable burden on customer service and
technical support, which in turn could materially and adversely affect the
Company's results of operations, liquidity and financial condition. The Company
is not presently aware of any vendor related Year 2000 issue that is likely to
result in such a disruption. Although there is inherent uncertainty in the year
2000 issue, the Company expects that as it progresses in its Year 2000 Program,
the level of uncertainty about the impact of the Year 2000 issue on the Company
will be reduced significantly and the Company should be better positioned to
identify the nature and extent of material risk to the Company as a result of
any Year 2000 disruptions.
CONTINGENCY PLANS
The Year 2000 Program calls for the development of contingency plans
for at-risk functions The Company has established a Contingency Plan Committee
to monitor and address the development of contingency plans. Due to the current
phase in which the Company is in of its Year 2000 Program, the Company is
currently unable at this time to fully assess its risks and determine what
contingency plans, if any, need to be implemented by the Company. As the
Company progresses in its Year 2000 Program and identifies specific risk areas,
the Company intends to timely implement appropriate remedial actions and
contingency plans.
The estimates and conclusions herein contain forward-looking
statements and are based on management's best estimates of future events. The
Company's expectations about risks, future costs, and the timely completion of
its Year 2000 modifications are subject to uncertainties that could cause
actual results of differ materially from what has been discussed above. Factors
that could influence risks, amount of future costs and the effective timing of
remediation efforts include the Company's success in identifying and
correcting potential Year 2000 issues and the ability of third parties to
appropriately address their Year 2000 issues.
11
<PAGE> 16
"SAFE HARBOR" STATEMENT
The following "Safe Harbor" Statement is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the Statements contained
in the body of this Report are forward-looking statements (rather than
historical facts) that are subject to risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. These risks include, without limitation, (1) that the Company will not
retain or grow its subscriber base, (2) that the Company will fail to be
competitive with existing and new competitors, (3) that the Company will not be
able to sustain its current growth, (4) that the Company will not adequately
respond to technological developments impacting the Internet, and (5) that
needed financing will not be available to the Company if and as needed. This
list is intended to identify certain of the principal factors that could cause
actual results to differ materially from those described in the forward-looking
statements included elsewhere herein. These factors are not intended to
represent a complete list of all risks and uncertainties inherent in the
Company's business, and should be read in conjunction with the more detailed
cautionary statements included in the Company's Report on Form 10-K, as
amended, for fiscal 1997 as well as the Company's other publicly filed reports
and documents.
12
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
On September 15, 1998, the Company filed a Current Report on Form 8-K
to report that, on September 10, 1998, the Company entered into an Asset
Purchase Agreement (the "SpryNet Asset Purchase Agreement") with Spry, Inc., a
Washington corporation ("Spry") and America Online, Inc., a Delaware
corporation ("AOL"), pursuant to which the Company agreed to acquire certain of
the tangible and intangible assets and rights in connection with the consumer
dial-up Internet access business operated by Spry in the United States (the
"SpryNet Acquisition").
On November 13, 1998, the Company filed a Current Report on Form 8-K
to report that, on October 15, 1998, the Company completed the SpryNet
Acquisition in accordance with the SpryNet Asset Purchase Agreement. The Current
Report on Form 8-K also included financial statements of Spry and pro forma
financial information for the Company reflecting the SpryNet Acquisition.
13
<PAGE> 18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
MINDSPRING ENTERPRISES, INC.
(Registrant)
Date: November 14, 1998 By: /s/ Michael S. McQuary
------------------------------------------------
Michael S. McQuary
President and Chief Operating Officer
Date: November 14, 1998 By: /s/ Michael G. Misikoff
------------------------------------------------
Michael G. Misikoff
Executive Vice President and Chief Financial Officer
</TABLE>
14
<PAGE> 19
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Sequentially
------------
Exhibit Numbered
- ------- --------
Number Exhibit Description Page
- ------ ----
<S> <C> <C>
27. Financial Data Schedule
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MINDSPRING ENTERPRISES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 62,498
<SECURITIES> 0
<RECEIVABLES> 2,970
<ALLOWANCES> 600
<INVENTORY> 109
<CURRENT-ASSETS> 65,470
<PP&E> 40,053
<DEPRECIATION> 11,678
<TOTAL-ASSETS> 100,015
<CURRENT-LIABILITIES> 18,575
<BONDS> 0
0
0
<COMMON> 259
<OTHER-SE> 78,104
<TOTAL-LIABILITY-AND-EQUITY> 100,015
<SALES> 0
<TOTAL-REVENUES> 75,139
<CGS> 22,167
<TOTAL-COSTS> 68,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (590)
<INCOME-PRETAX> 7,078
<INCOME-TAX> 212
<INCOME-CONTINUING> 6,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,866
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.27
</TABLE>
