<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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>
<CAPTION>
DELAWARE 58-2113290
<S> <C> <C>
(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 MAY 10, 1999
---------------------------
Common Stock at $.01 par value 30,711,601
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 30,571 $ 167,743
Trade receivables, net ....................................................... 2,900 3,278
Deferred income taxes ........................................................ 5,135 3,421
Prepaids and other current assets ............................................ 1,871 758
--------- ---------
Total current assets ..................................................... 40,477 175,200
--------- ---------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment .................................... 59,584 35,580
Assets under capital lease ................................................... 9,546 9,546
Other ........................................................................ 6,064 4,821
--------- ---------
75,194 49,947
Less: accumulated depreciation ............................................... (17,601) (14,106)
--------- ---------
Total property and equipment, net ........................................ 57,593 35,841
--------- ---------
OTHER ASSETS:
Acquired customer base, net .................................................. 258,026 34,742
Deferred debt costs .......................................................... 1,936 --
Deferred income taxes ........................................................ 4,251 1,123
Other ........................................................................ 715 693
--------- ---------
Total other assets ....................................................... 264,928 36,558
--------- ---------
$ 362,998 $ 247,599
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable....................................................... $ 7,011 $ 4,990
Current portion of capital lease liability ................................... 2,666 2,695
Deferred Revenue ............................................................. 11,743 7,443
Other accrued expenses ....................................................... 25,771 22,966
--------- ---------
Total current liabilities ................................................ 47,191 38,094
--------- ---------
LONG-TERM LIABILITIES:
Line of Credit ............................................................... 80,000 --
Capital lease obligations .................................................... 1,752 2,424
--------- ---------
Total long-term liabilities .............................................. 81,752 2,424
--------- ---------
Total liabilities ........................................................ 128,943 40,518
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 60,000 authorized
and 28,922 and 28,284 issued and outstanding at
March 31, 1999 and December 31, 1998, respectively ......................... 289 283
Additional paid-in-capital ................................................... 240,255 209,983
Accumulated deficit .......................................................... (6,489) (3,185)
--------- ---------
Total stockholders' equity ................................................. 234,055 207,081
--------- ---------
$ 362,998 $ 247,599
========= =========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these balance sheets.
<PAGE> 3
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
REVENUES:
Access .......................................................................... $ 52,424 $ 18,211
Business services ............................................................... 9,204 3,173
--------- ---------
Total revenues ................................................................ 61,628 21,384
--------- ---------
COSTS AND EXPENSES:
Costs of revenues ............................................................... 21,398 6,607
General and administrative ...................................................... 19,431 7,799
Selling ......................................................................... 9,771 3,053
Depreciation .................................................................... 3,523 1,719
Customer base amortization ...................................................... 13,323 1,153
--------- ---------
Total operating expenses ...................................................... 67,446 20,331
--------- ---------
OPERATING (LOSS) INCOME ........................................................... (5,818) 1,053
INTEREST INCOME (EXPENSE), NET .................................................... 304 (163)
--------- ---------
(LOSS) INCOME BEFORE TAXES ........................................................ $ (5,514) $ 890
INCOME TAX BENEFIT (EXPENSE) ...................................................... 2,210 (30)
--------- ---------
NET (LOSS) INCOME ................................................................. $ (3,304) $ 860
========= =========
NET (LOSS) INCOME PER SHARE:
Basic ......................................................................... $ (0.12) $ 0.04
========= =========
Diluted ....................................................................... $ (0.12) $ 0.04
========= =========
SHARES USED FOR COMPUTING NET (LOSS) INCOME PER SHARE
Basic ......................................................................... 28,601 22,635
========= =========
Diluted ....................................................................... 28,601 24,132
========= =========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements
<PAGE> 4
Financial Statements - Continued
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ..................................... $ (3,304) $ 860
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Deferred income taxes ................................. (4,842) --
Depreciation and amortization ......................... 16,846 2,872
Changes in operating assets and liabilities:
Trade receivables ................................. 2,608 (349)
Other current assets .............................. (1,113) 480
Trade accounts payable ............................ 2,021 96
Other accrued expenses ............................ 6,141 1,059
Deferred revenue .................................. 1,145 589
--------- -------
Total adjustments ............................... 22,806 4,747
--------- -------
Net Cash Provided by Operating Activities ......... 19,502 5,607
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (12,051) (4,129)
Cash paid in conjunction with acquisitions ............ (222,215) (950)
Other ................................................. (49) (161)
--------- -------
Net Cash Used in Investing Activities ............. (234,315) (5,240)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable ............................. -- (396)
Cash provided by credit line .......................... 78,064 --
Payments of capital lease obligations ................. (701) (603)
Issuance of common stock .............................. 278 112
--------- -------
Net Cash Provided by (Used in) Financing Activities 77,641 (887)
--------- -------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ........................................... (137,172) (520)
CASH AND CASH EQUIVALENTS, beginning of period ............. 167,743 9,386
--------- -------
CASH AND CASH EQUIVALENTS, end of period ................... $ 30,571 $ 8,866
========= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ................................ $ 878 $ 270
========= =======
Cash paid for income taxes ............................ $ 4,434 $ --
========= =======
SUPPLEMENTAL NONCASH DISCLOSURES:
Stock issued in conjunction with acquisition .......... $ 30,000 $ 0
========= =======
</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
MARCH 31, 1999 AND 1998
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, 1998 (File No. 0-27890).
2. Basic (loss) earnings per common share ("EPS") was computed by dividing
net (loss) income 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 months ended March 31,
1998. For the three months ended March 31, 1999, the effect of the
options is excluded, as it is anti-dilutive. The following table
summarizes the shares used in the calculations:
<TABLE>
<CAPTION>
----------------------------
THREE MONTHS ENDED
----------------------------
MARCH 31,
----------------------------
(in thousands except per share data) 1999 1998
-------- -------
<S> <C> <C>
Weighted average shares 28,601 22,635
Outstanding-basic
Effect of dilutive stock options -- 1,497
-------- -------
Shares used for diluted earnings per share 28,601 24,132
======== =======
Net (loss) income $ (3,304) $ 860
-------- -------
Basic (loss) earnings per share
$ (0.12) $ 0.04
-------- -------
Diluted (loss) earnings per share $ (0.12) $ 0.04
-------- -------
</TABLE>
3. On February 17, 1999 the Company completed its acquisition of certain
assets used in connection with the United States Internet access and Web
hosting business operated by NETCOM On-Line Communications, Inc., which
subsequently changed its name to ICG PST, Inc. and is a wholly owned
subsidiary of ICG Communications, Inc. In this transaction, the Company
acquired NETCOM's subscriber base of approximately 371,000 individual
Internet access accounts, 22,000 Web hosting accounts, and 3,000
dedicated Internet access accounts in the United States. The Company paid
NETCOM approximately $245 million, consisting of $215 million in cash and
$30 million in MindSpring common stock (376,116 shares, at a price per
share of $79.76). The Company also incurred expenses of approximately
$3.3 million in connection with this acquisition. In addition to the
NETCOM subscriber base, MindSpring also acquired various assets used in
serving those subscribers, including leased operations facilities in San
Jose, California, and Dallas, Texas and all of NETCOM's rights to the
"NETCOM" name (except in Canada, Brazil, and the United Kingdom).
The following table summarizes the net assets purchased in connection
with the acquisition and the amount attributable to intangibles (in
thousands):
<TABLE>
<S> <C>
-------------------------------------------
Working Capital $ (1,395)
Property and Equipment 13,200
Acquired subscriber base 236,495
-------------------------------------------
</TABLE>
The preliminary estimate of net assets acquired represents management's
best estimate based on currently available information; however, such
estimate may be revised up to one year from the acquisition date.
<PAGE> 6
ICG PST has retained the network assets used to serve the subscribers
acquired by MindSpring. The Company purchases access to ICG PST's
network under a network services agreement with ICG PST at rates that
are generally comparable to the full costs of using MindSpring POP's.
This network agreement has a term of one year with an option for a
second year on potentially different terms to be agreed upon by the
parties. During the first year under this network agreement, the
Company is obligated to pay at least $27 million for network services,
as long as the services provided meet specified performance levels.
4. In March 1999 the Company made a final payment of approximately $7
million to America Online, Inc. in connection with the Company's
acquisition in October 1998 of the customer base and certain related
assets of Spry, Inc.
5. On February 17, 1999, the Company entered into a credit agreement with
First Union National Bank ("First Union") and several other lenders.
The credit agreement provides for a $100 million revolving credit
facility that may be increased at the Company's option to $200 million
with the approval of First Union and other lenders under the credit
agreement. The credit facility will mature on February 17, 2002. The
credit facility is to be used to fund working capital and for general
corporate purposes, including permitted acquisitions. On February 17,
1999, the Company borrowed approximately $80 million under the credit
facility to finance the NETCOM acquisition. Obligations under the
credit facility are secured by substantially all of MindSpring's
assets. For a more detailed description of our secured credit facility,
see the Company's Current Report on form 8-K filed with the Securities
and Exchange Commission on February 25, 1999. The Company repaid all
amounts outstanding under the credit facility with a portion of the net
proceeds from its recently completed offering of 2,760,000 shares of
common stock and amended the credit facility to permit the issuance of
notes, the payment of interest thereon, and certain redemptions
thereof.
SUBSEQUENT EVENTS
In March 1999 the Company filed a universal shelf registration statement with
the Securities and Exchange Commission for the public offering from time to time
of up to $800 million of debt and equity securities. In April 1999, the Company
completed two public offerings of securities under this shelf registration
statement. The Company sold 2,760,000 shares of common stock, raising net
proceeds of approximately $263.8 million, out of which the Company repaid all
amounts outstanding under the secured credit facility. The Company also sold
$179,975,000 aggregate principal amount of 5% Convertible Subordinated Notes due
2006, raising net proceeds of approximately $174.3 million.
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ITEM 2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. All statements regarding our expected financial position and operating
results, our business strategy and our financing plans are forward-looking
statements. These statements can sometimes be identified by our use of
forward-looking words such as "may," "will," "anticipate," "estimate," "expect,"
or "intend." Known and unknown risks, uncertainties and other factors could
cause our actual results to differ materially from those contemplated by these
statements. Such risks and uncertainties include our ability to retain and grow
our subscriber base, our ability to successfully integrate new subscribers
and/or assets obtained through acquisitions, the highly competitive markets in
which we operate and our ability to respond to technological developments
affecting the Internet. The Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, filed with the Securities and Exchange Commission
on March 30, 1999, discusses some additional important factors that could cause
the Company's actual results to differ materially from those in such
forward-looking statements.
All common stock numbers and per share amounts in this report give
effect to a 3-for-1 stock split effected by MindSpring in July 1998.
OVERVIEW
MindSpring is a leading national Internet service provider, or ISP. We
focus on serving individuals and small businesses. Our subscribers use their
MindSpring accounts to, among other things, communicate, retrieve information,
and publish information on the Internet. Our primary service offerings are
dial-up Internet access and business services which we offer in various price
and usage plans designed to meet the needs of our subscribers. Our business
services include Web hosting, which entails maintaining a customer's Web site;
high-speed, dedicated Internet access; Web page design; domain name registration
and customer Web server co-location. Web hosting, our principal business
service, complements our Internet access business and is one of the fastest
growing segments of the Internet marketplace.
We offer our subscribers:
- user-friendly and easy to install software, containing 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;
- highly responsive customer service, and technical support which is
available 24 hours a day, seven days a week; and
- a reliable nationwide network that enables subscribers in the 48
contiguous United States and the District of Columbia to access
the Internet via a local telephone call.
Our nationwide network consists of MindSpring-owned points of presence,
or "POPs," and POPs that are owned by other companies with which we have service
agreements. Through these service agreements, we have the flexibility to offer
Internet access in a particular market through a MindSpring-owned POP, a
third party network provider's POP or a combination of the two. As part of our
efforts to control quality and cost, we typically seek to increase the number of
MindSpring-owned POPs in markets where we have higher numbers of subscribers.
MindSpring has grown rapidly by:
- providing superior customer service and technical support;
- expanding marketing and distribution activities;
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<PAGE> 8
- making strategic acquisitions; and
- creating additional revenue streams by offering value-added
services such as Web hosting that build on our basic operating
capabilities and services.
We have increased our subscriber base from approximately 12,000
subscribers at December 31, 1995 to approximately 1,157,000 subscribers at March
31, 1999, including approximately 47,000 Web hosting subscribers.
In addition, we have rapidly increased revenues. We believe that
providing superior service and support to our subscribers has contributed to our
achieving significant market penetration in a number of our target markets. We
also believe that high geographic concentrations of satisfied subscribers in a
particular market reduces the costs of adding new subscribers in that market
relative to revenues. This tends to result in higher margins and greater
profitability in these markets.
From our inception in February 1994 through 1997, we experienced annual
net operating losses, as a result of efforts to build our network infrastructure
and internal staffing, develop our systems, and expand into new markets. During
1997, we generated positive cash flows from operations, with EBITDA of
approximately $5 million. We had our first year of profitability in 1998, with
net income of approximately $8.8 million, excluding a one-time tax benefit of
approximately $1.7 million. Including the one-time tax benefit, our net income
for 1998 was approximately $10.5 million. For the three months ended March 31,
1999, we had revenues of approximately $62 million, EBITDA of approximately $11
million, and a net loss of approximately $3.3 million. Excluding tax-effected
amortization expense related to our acquisitions of subscriber bases and other
related assets, net income for the three months ended March 31, 1999 was
approximately $4.7 million. Net loss per share for the three months ended March
31, 1999 was $(0.12). Excluding the tax-effected amortization expense, net
income per share ("EPS+A") for this period was $0.16 per diluted share.
We expect to continue to focus on increasing our subscriber base.
Increases in our subscriber base will cause our revenues to increase but will
also cause our costs of revenue, selling, general and administrative expenses,
capital expenditures, and depreciation and amortization to increase. Our
purchases of subscriber bases such as the Spry and NETCOM acquisitions,
described below, cause an immediate increase in our amortization expense. We
generally amortize subscriber acquisitions over a three-year period in
approximately equal amounts each year. As more fully described below, we
anticipate that, while we will continue to generate positive cash flows from
operations and EBITDA during 1999 and 2000, we expect to incur net losses into
2000, principally as a result of amortization expenses related to the Spry and
NETCOM acquisitions. We expect that annual amortization expense attributable to
these transactions will be between approximately $85 and $90 million per year
for the next three years. If our assumptions are incorrect, our business plans
change and/or we undertake additional acquisitions of subscriber bases in the
near future, we could continue to incur net losses for a longer period of time.
We do not currently have any agreements to do additional acquisitions. There can
be no assurance that we will be able to sustain growth in our subscriber base,
revenues, cash flows or EBITDA. Also, there can be no assurance that we will be
able to achieve or sustain net income in the future.
Spry Acquisition. On October 15, 1998, we completed the Spry
acquisition and made an initial cash payment to America Online, Inc,. or AOL, of
$25 million. In that transaction, we acquired Spry's subscriber base of
approximately 130,000 individual Internet access customers in the United States
and Canada as well as various assets used in serving those customers. In March
1999, we made an additional and final payment to AOL of approximately $7
million. The total purchase price of approximately $32 million for the Spry
subscribers and assets was primarily a function of the number of acquired
subscribers who remained active with MindSpring as continuing users in good
standing after two billing cycles, measured as of December 31, 1998
NETCOM Acquisition. On February 17, 1999, we completed an acquisition
of certain assets used in connection with the United States Internet access and
web hosting business operated by NETCOM On-Line Communications Services, Inc.,
which subsequently changed its name to ICG PST, Inc, and is a wholly owned
subsidiary of ICG Communications, Inc. In this transaction, we acquired NETCOM's
subscriber base of approximately 371,000 individual Internet access accounts,
22,000 Web hosting accounts, and 3,000 dedicated Internet access accounts in the
United States. The acquisition closed on February 17, 1999. We paid NETCOM
approximately $245 million, consisting of $215 million in cash and $30 million
in MindSpring common stock (376,116 shares, at a price per share of $79.76). In
addition to the NETCOM subscriber base, MindSpring also acquired various assets
used in serving those subscribers, including leased operations facilities in San
Jose, California and Dallas, Texas and all of NETCOM's rights to the "NETCOM"
name (except in Canada, the United Kingdom
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<PAGE> 9
and Brazil). ICG PST has retained the network assets used to serve those
subscribers. We purchase access to that network under a network services
agreement with ICG PST at rates that are generally comparable to the full costs
of using MindSpring POPs. This network services agreement has a term of one year
with an option for a second year on potentially different terms to be agreed
upon by the parties. During the first year under this network services
agreement, we are obligated to pay at least $27 million for network services, as
long as the services provided meet specified performance levels.
Credit Facility. On February 17, 1999, we entered into a credit
agreement with First Union National Bank ("First Union") and several other
lenders. The credit agreement provides for a $100 million revolving credit
facility that may be increased at our option to $200 million with the approval
of First Union and the other lenders under the credit agreement. The credit
facility will mature on February 17, 2002. The credit facility is to be used to
fund working capital and for general corporate purposes, including permitted
acquisitions. Our obligations under the credit facility are secured by
substantially all of MindSpring's assets. On February 17, 1999, we borrowed
approximately $80 million under the credit facility to finance the NETCOM
acquisition. We repaid all amounts outstanding under the credit facility with a
portion of the net proceeds from our recently completed offering of 2,760,000
shares of common stock and we amended the credit facility to permit the issuance
of notes, the payment of interest thereon, and certain redemptions thereof. For
a more detailed description of our secured credit facility, see our Current
Report in form 8-K filed with the Securities and Commission on February 25,
1999.
Anticipated Effects of the Spry and NETCOM Acquisitions. The Spry and
NETCOM acquisitions, which closed on October 15, 1998 and February 17, 1999,
respectively, represent significant growth opportunities and challenges for
MindSpring. Both acquisitions were of large customer bases and related assets
which, as previously operated stand-alone entities, were historically
unprofitable. We expect to incur net losses into 2000, primarily as a result of
the amortization expense associated with the Spry and NETCOM acquisitions. We
expect that annual amortization expense attributable to these transactions will
be between approximately $85 million and $90 million per year for the next three
years. In addition, we face the significant challenge of integrating the
acquired customers and assets into MindSpring's operations. The integration
process is most time and resource intensive during the sixty- to ninety-day
period immediately after completion of an acquisition, and involves, among other
things:
- communication with and increased technical and customer support to
acquired subscribers;
- network supervision, provisioning and maintenance, including
third party networks;
- increased management time and resources related to hiring and
integration of new employees to support acquired subscribers;
- integration of acquired subscribers into MindSpring's billing systems;
and
- attempting to bring the cost structures associated with the acquired
subscribers and assets into alignment with MindSpring's historical cost
structure.
Principally as a result of the amortization expense associated with
the NETCOM acquisition, we expect that we will incur net losses into 2000. Even
though we expect to incur net losses, we expect to continue to generate
increased revenues and EBITDA as we continue to increase our subscriber base. We
believe that reducing the historical costs associated with the acquired NETCOM
subscribers to levels that approximate MindSpring's historical costs of
providing Internet access to its subscribers will contribute to our ability to
reduce net losses in the future. We expect that these cost reductions will be
achieved in part as a function of:
- the ICG PST network agreement, through which MindSpring expects
initially to provide service to the majority of the acquired NETCOM
subscribers and which MindSpring expects will be at a lower cost than
that incurred by NETCOM; and
- economies of scale in selling, general and administrative costs,
particularly in the areas of numbers of employees and salaries,
operating leases, and marketing expenses.
By "economies of scale" we mean that, as the number of subscribers we
serve increases, the costs and expenses per subscriber decrease. There can be no
assurance that we will achieve these anticipated cost reductions in a timely
manner or at all. If the cost reductions are lower than anticipated, other costs
increase, and/or revenues decline, our EBITDA and net
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<PAGE> 10
income would also decline, which would have a material adverse effect on our
business, results of operations and financial condition, including our liquidity
and capital resources.
Revenues. MindSpring derives revenue primarily by providing individuals
with dial-up access to the Internet. Monthly subscription fees vary by billing
plan. Under MindSpring'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). MindSpring 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 March
31, 1999, the average monthly recurring revenue per dial-up subscriber was
approximately $20. Average monthly recurring revenue is calculated by dividing
monthly recurring revenue plus usage charges for non "flat rate" subscribers by
the total number of subscribers.
In addition, MindSpring earns revenue by providing Web hosting,
full-time dedicated access connections to the Internet, and other value-added
services such as Web page design, domain registration, and Web server
co-location. MindSpring'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. MindSpring currently offers three price
plans for Web hosting subscribers ranging from $19.95 to $99.95 per month.
MindSpring had approximately 47,000 Web hosting subscribers as of March 31,
1999. Through our domain registration services, MindSpring offers 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 MindSpring's statements of operations and in the "Results
of Operations" table shown below.
Costs. MindSpring's costs include (1) costs of revenue that are
primarily related to the number of subscribers; (2) selling, general and
administrative expenses that are associated more generally with operations; and
(3) depreciation and amortization, which are related to the number of
MindSpring-owned POPs and servers, and the deferred costs associated with
acquired customer bases.
Costs of revenue that are primarily related to the number of
subscribers consist primarily of the costs of telecommunications facilities
necessary to provide service to subscribers. Telecommunications facilities costs
include (1) the costs of providing local telephone lines into each
MindSpring-owned POP; (2) costs related to the use of third party networks; and
(3) costs associated with leased lines connecting each MindSpring-owned POP and
third party network to MindSpring's hub and connecting MindSpring's hub to the
Internet backbone.
Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer service and technical support, network operations
and maintenance, engineering, accounting and administration. Selling, general
and administrative costs will increase over time as MindSpring's scope of
operations increases. We may determine to significantly increase the level of
marketing activity to increase the rate of subscriber growth. A significant
increase in marketing activity would have a short term negative impact on net
income. We believe that these increased costs would be more than offset by
anticipated increases in revenue attributable to overall subscriber growth.
However, there can be no assurance that we will be able to build, increase or
maintain our subscriber base in a given market to the extent necessary to
generate sufficient revenues to offset these marketing expenses. MindSpring does
not defer any sales or marketing expenses.
As MindSpring expands into new markets, both costs of revenue and
selling, general and administrative expenses will increase. To the extent
MindSpring opens MindSpring POPs in new markets, these costs and expenses may
also increase as a percentage of revenue in the short term for the period
immediately after a new MindSpring POP is opened. Many of the fixed costs of
providing service in a new market through a new MindSpring POP are incurred
before significant revenue can be expected from that market. However, to the
extent that we expand into new markets by using third party POPs instead of
opening our own POPs, MindSpring's incremental monthly recurring costs will
consist primarily of the fees to be paid to third parties under network services
agreements. In general, the margins on those subscribers will initially be
higher than if we had opened our own POP in new markets. When a market matures,
if the market is served through purchased, third party network services rather
than MindSpring-owned POPs, costs of revenue as a percentage of revenue will
tend to be higher, and therefore, margins on subscribers will tend to be lower.
This is because the full costs of using third party networks is included in
costs of revenue, as compared to the costs of using MindSpring-owned POPs, a
portion of which is included in depreciation and amortization. In addition, in
more mature markets, where we have greater concentrations of subscribers, we
generally can provide services at a lower cost per subscriber through
MindSpring-owned
6
<PAGE> 11
POPs after the initial period when related expenses are higher. This depends in
part on how much we must pay for local area telecommunications charges.
For the first year of the network agreement with ICG PST, we will pay
for use of ICG PST's POPs at rates that are generally comparable to the full
costs of using MindSpring POPs. We have an option to extend this agreement for a
second year, but on potentially different terms to be negotiated and agreed upon
by both parties. The ICG PST network agreement should also contribute to our
ability to reduce future net losses. However, the cost advantages of providing
services to MindSpring subscribers through the ICG PST network agreement may be
offset if there are operating inefficiencies, network reliability issues or
technical support difficulties due to the fact that ICG PST is just beginning to
offer network services as a third party provider for companies such as
MindSpring.
We have added, and may in the future continue to add, MindSpring
subscribers by purchasing customer bases from other ISPs. MindSpring amortizes
such purchased customer bases using the straight-line method over a period of
three years, commencing when the purchase is completed. This amortization has a
negative effect on net income. Therefore, to the extent we continue to expand
our subscriber base through acquisitions such as the Spry and NETCOM
acquisitions, we will continue to experience increased amortization expense.
7
<PAGE> 12
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
The following table shows unaudited financial data for the three months
ended March 31, 1999 and 1998. 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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
% OF % OF
STATEMENTS OF OPERATIONS DATA: (000'S) REVENUE (000'S) REVENUE
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES
Access $ 52,424 85 $ 18,211 85
Business services 9,204 15 3,173 15
-------- ------- -------- -----
Total revenues 61,628 100 21,384 100
COST AND EXPENSES
Cost of revenues 21,398 35 6,607 31
-------- ------- -------- -----
Gross margin 40,230 65 14,777 69
General and administrative 19,431 31 7,799 36
Selling 9,771 16 3,053 14
-------- ------- -------- -----
EBITDA (1) 11,028 18 3,925 18
Depreciation 3,523 5 1,719 8
Acquired customer base amortization 13,323 22 1,153 5
-------- ------- -------- -----
OPERATING (LOSS) INCOME (5,818) (9) 1,053 5
INTEREST INCOME (EXPENSE), NET 304 0 (163) (1)
-------- ------- -------- -----
(LOSS) INCOME BEFORE TAXES (5,514) (9) 890 4
Income tax benefit (expense) 2,210 4 (30) (0)
-------- ------- -------- -----
NET(LOSS) INCOME $ (3,304) (5) $ 860 4
======== ========
NET (LOSS) INCOME PER SHARE
Basic $ (0.12) $0.04
Diluted $ (0.12) $0.04
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic 28,601 2,635
Diluted 28,601 24,132
</TABLE>
8
<PAGE> 13
OTHER OPERATING DATA:
<TABLE>
<S> <C> <C>
Approx. number of subscribers at End of period 1,157,000 341,000
Number of employees at end of period 1,790 602
</TABLE>
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance.
REVENUE. Revenues for the three months ended March 31, 1999 totaled
approximately $61,628,000 as compared to approximately $21,384,000 for the three
months ended March 31, 1998. This approximately 188% increase in period revenues
resulted primarily from a 239% increase in subscribers. The increase in
subscribers is due to the acquisition of the NETCOM subscribers in February,
1999, the acquisition of Spry subscribers in October 1998, and organic growth.
Revenues from dial-up access to the Internet, which include start-up fees,
represented approximately 85% of total revenue for both the three months ended
March 31, 1999 and 1998. Business services revenue, consisting primarily of
Web hosting and dedicated Internet access, remained constant at 15% of total
revenue for the three months ended March 31, 1999 and 1998.
COSTS OF REVENUES. For the three months ended March 31, 1999, cost of
revenues increased to approximately 35% of total revenue, compared to
approximately 31% of total revenue for the three months ended March 31, 1998.
This increase is attributable to several factors including approximately
$600,000 in discounts in the first quarter of 1998 pursuant to our network
services agreement with PSINet, Inc. Exclusive of these discounts, cost of
revenues would have been 34% of total revenue in the three months ended March
31, 1998. The discounts earned under the network services agreement with PSINet
ended in October 1998. In addition, cost of revenues increased as a percentage
of total revenues as a result of a greater percentage of our subscribers being
served through the use of third party networks rather than MindSpring POPs due
to the Spry and NETCOM acquisitions.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses were approximately 47% of revenue for the three months
ended March 31, 1999, compared to approximately 50% of revenue for the three
months ended March 31, 1998. This decrease was primarily due to general and
administrative costs declining from 36% of revenue for the three months ended
March 31, 1998 to 31% for the three months ended March 31, 1999, offset by
selling expenses increasing from 14% to 16% for the three months ended March 31,
1998 and 1999, respectively. General and administrative costs declined due to
efficiencies gained primarily through economies of scale. Selling costs
increased due primarily to increased advertising costs.
EBITDA MARGIN. EBITDA margin refers to EBITDA as a percentage of
revenues. EBITDA margin represented 18% of revenues for both the three months
ended March 31, 1999 and 1998.
DEPRECIATION AND AMORTIZATION. Customer base amortization expense
increased significantly from 5% of revenues for the three months ended March 31,
1998 to 22% for the three months ended March 31, 1999 due to the acquisitions of
the Spry and NETCOM customer bases, which are being amortized over three years.
Depreciation expense decreased from 8% of revenues in 1998 to 5% of revenues in
1999.
INTEREST INCOME (EXPENSE),NET. Interest income (expense), net was
approximately $304,000 for the three months ended March 31, 1999 compared to
approximately ($163,000) for the three months ended March 31, 1998. This
increase in interest income (expense), net for the three months ended March 31,
1999 compared to the three months ended March 31, 1998 was primarily due to
interest income increasing as a result of the increase in cash available for
investment purposes, primarily derived from cash flows from operations as well
as an equity offering completed in December of 1998.
INCOME TAX BENEFIT ( PROVISION.) For the three months ended March 31,
1999, the Company recorded an income tax benefit of $2,210,000, for an effective
tax rate of 40%, compared to an income tax provision of $30,000, for an
effective tax rate of 3%, for the three months ended March 31, 1998. The Company
expects its effective tax rate to approximate the March 31, 1999 quarter rate in
future periods.
9
<PAGE> 14
NET (LOSS) INCOME AND (LOSS) INCOME PER SHARE. As a result of the
factors discussed above, and primarily as a result of the increase in acquired
customer base amortization, the Company had a net loss for the three months
ended March 31, 1999 of ($3,304,000) or $(0.12) per basic and diluted share. The
Company's net income for the three months ended March 31, 1998 was $860,000, or
$0.04 per diluted share. Excluding tax-effected customer based amortization
expense, the Company recorded earnings of $4,690,000 or $0.16 per diluted share
("EPS+A") for the three months ended March 31, 1999 and earnings of $2,043,000
or $0.08 per diluted share for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, MindSpring generated net
cash from operations of approximately $19.5 million, compared to $5.6 million
for the three months ended March 31, 1998, an increase of approximately 248%. In
March of 1999, we made a final payment to AOL of approximately $7 million to
conclude our payments related to the Spry acquisition. During the first quarter
of 1999, we spent a total of approximately $12.1 million related to purchases of
telecommunications equipment necessary for the provision of service to
subscribers. We did not enter into any capital lease agreements in the first
quarter of 1999. On February 17, 1999, we paid $215 million in cash to ICG in
connection with the closing of the NETCOM acquisition, approximately $80 million
of which we borrowed under our $100 million secured revolving credit facility
and the remainder from our available cash.
As of March 31, 1999, we had approximately $30.6 million of cash. In
March 1999, we filed a universal shelf registration statement with the
Securities and Exchange Commission for the public offering from time to time of
up to $800 million of debt and equity securities. In April 1999, we completed
two public offerings of securities under this shelf registration statement. We
sold 2,760,000 shares of our common stock raising net proceeds of approximately
$263.8 million, from which we repaid $80 million of principal and interest
outstanding under our secured credit facility. We also sold $179,975,000
aggregate principal amount of our 5% Convertible Subordinated Notes due 2006,
raising net proceeds of approximately $174.3 million. Net of expenses and
repayment of debt, the Company raised an aggregate of approximately $358 million
in these offerings.
MindSpring's future capital requirements depend on various factors
including, without limitation:
- our ability to integrate successfully the subscribers and
assets acquired from Spry and NETCOM, which requires us to
reduce the costs previously associated with those subscribers
and assets to approximate MindSpring's historical cost
structure;
- the rate of market acceptance of MindSpring's services;
- our ability to maintain and expand our subscriber base;
- the rate of expansion of MindSpring's network infrastructure;
- the resources required to expand our marketing and sales
efforts; and
- the availability of hardware and software provided by
third party vendors.
We currently estimate that our cash and financing needs for 1999,
assuming reasonable internal growth, can be met by cash on hand, amounts
available under our credit facility, additional capital financing arrangements,
and cash flow from operations. If our credit facility is unavailable or if our
expectations change regarding our capital needs due to market conditions,
strategic opportunities or otherwise, then our capital requirements may vary
materially from those currently anticipated. We do not currently have any
commitments for any additional financing, and there can be no assurance that if
and when we need additional capital it will be available on terms that are
acceptable to us, if at all. If additional capital financing arrangements,
including public or private sales of debt or equity securities, or additional
borrowings from commercial banks are insufficient or unavailable, or if we
experience shortfalls in anticipated revenues or increases in anticipated
expenses, we will be required to modify our growth and operating plans to match
available funding. Any additional equity financing may be on terms that are
dilutive or potentially dilutive to MindSpring's stockholders. Debt financing,
if available, may involve restrictive covenants with respect to dividends,
raising future capital and other financial and operational matters and incurring
additional debt may further limit MindSpring's ability to raise additional
capital. In addition, our credit facility contains restrictions on our ability
to incur additional debt and to issue some types of convertible or redeemable
capital stock.
10
<PAGE> 15
MindSpring frequently engages in discussions involving potential
business acquisitions. Depending on the circumstances, MindSpring may not
disclose material acquisitions until completion of a definitive agreement.
MindSpring 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 MindSpring's growth rate could materially affect
MindSpring's operating and financial expectations and results, liquidity and
capital resources.
YEAR 2000
Introduction. The term "Year 2000 issue" is a general term used to
describe the various problems that may result from 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 distinguish 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.
State of Readiness. We have 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. Our Year 2000 program
office has developed and is currently implementing a comprehensive Year 2000
program for us to become Year 2000 ready. The Year 2000 program consists of six
phases: (1) project planning and inventory of our assets, (2) assessment of
remediation requirements, (3) remediation (whether by upgrade or replacement),
(4) testing and validation of selected critical assets, (5) implementation and
(6) creation of contingency plans in the event of year 2000 failures.
The Year 2000 program covers the following: (1) internally developed
software products which we provide to our customers, (2) our information
technology systems, (3) our network elements, (4) our operational support
systems, and (5) certain non-information technology systems, including embedded
technology. In addition, the program calls for us to identify and assess the
systems and services of our third party suppliers, such as major vendors, third
party network service providers and other material service providers, and take
appropriate remedial actions and develop contingency plans where appropriate in
connection with such third party suppliers.
We have recently completed our acquisitions of Spry and NETCOM. We have
identified certain software products, information technology systems, network
elements, operational support systems and non-information technology systems
acquired in the Spry and NETCOM acquisitions which will be supported by us going
forward, and we have revised our Year 2000 program to include these elements.
We provide our customers with a software package which, among other
things, allows our customers to access our services. The software package
consists of internally developed software (e.g., the MindSpring Internet Desktop
interface) which is bundled with third party software. We have conducted
operational testing and believe that the current shipping version of the
MindSpring Internet Desktop is Year 2000 ready. In addition, we believe that,
with the possible exception of one shareware product, the third party software
included in the current shipping version of the MindSpring software package is
also Year 2000 ready.
As of April 30, 1999, we have completed the inventory phase of the Year
2000 program, have completed a substantial majority of the assessment phase of
the Year 2000 program, and are well into the remediation phase of the Year 2000
program. Due to the expansion of the Year 2000 program to include the Spry and
NETCOM elements, we have revised the schedule of the Year 2000 program, and
expect to complete all six phases by the end of August, 1999.
We have performed a technical review of many of the more critical third
party systems and have surveyed the publicly available statements issued by the
vendors of those systems, in an effort to assess their Year 2000 readiness
status. Additionally, we have contacted our significant providers of third party
systems requesting information regarding their vulnerability to Year 2000 issues
and whether the products and services purchased from those entities are Year
2000 ready. We are evaluating these responses for their accuracy and adequacy,
and intend to develop appropriate contingency plans for any material supplier
that does not provide an adequate response.
11
<PAGE> 16
We have not deferred any specific information technology project due to
the Year 2000 program. We have engaged a consulting firm to assist us in
completing the inventory, assessment and testing phases of our Year 2000
program, and to assist us in our Year 2000 program management.
Costs. As of April 30, 1999, we have incurred expenses of approximately
$170,000 in connection with the implementation of the Year 2000 Program Office
and Year 2000 program. We estimate that an additional $500,000 in expenses will
be incurred through the remainder of the Year 2000 program. These costs will be
expensed as incurred. The costs and estimates provided include our estimate of
the cost of internal resources directly attributable to the Year 2000 program.
We have funded, and anticipate that we 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. We currently believe these costs
will not have a material effect on our financial condition, liquidity or results
of operations.
Risks. Our failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, normal business activities or
operations. Presently, however, we perceive that our most reasonably likely
worst case scenario related to the Year 2000 is associated with potential
concerns with third party services or products.
Specifically, we are heavily dependent on a significant number of third
party vendors to provide both network services and equipment. A significant Year
2000-related disruption of the network services or equipment provided to us 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 our results of
operations, liquidity and financial condition. We are not presently aware of any
vendor related Year 2000 issue that is likely to result in this type of
disruption.
Furthermore, our business depends on the continued operation of, and
widespread access to, the Internet. To the extent that the normal operation of
the Internet is disrupted by the Year 2000 issue, our results of operations,
liquidity and financial condition could be materially and adversely affected.
Although there is inherent uncertainty in the Year 2000 issue, we
expect that as we progress in our Year 2000 program the level of uncertainty
about the impact of the Year 2000 issue will be reduced significantly, and we
should be better positioned to identify the nature and extent of material risk
to us 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. We have established a Contingency Plan
Committee to monitor and address the development of contingency plans. Due to
the current phase of the Year 2000 program in which we are in, we are currently
unable at this time to fully assess our risks and determine what contingency
plans, if any, need to be implemented. As we progress in our Year 2000 program
and identify specific risk areas, we intend to timely implement appropriate
remedial actions and contingency plans.
The estimates and conclusions included in this discussion contain
forward-looking statements and are based on management's best estimates of
future events. Our expectations about risks, future costs and the timely
completion of its Year 2000 modifications may turn out to be incorrect and any
variance from these expectations could cause actual results to 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 our
success in identifying and correcting potential Year 2000 issues and the ability
of third parties to appropriately address their Year 2000 issues. The foregoing
Year 2000 discussion and the information contained herein is provided as a "Year
2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October
19, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No 133, Accounting for Derivative Instruments and
Hedging Activities, which must be adopted by the year 2000. This statement
establishes accounting and reporting standards for derivative instruments-
including certain derivative instruments embedded in other contracts - and for
hedging activities. Adoption of this statement is not expected to have a
material impact on the Company's financial statements.
12
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We believe our exposure to market rate fluctuations on our investments is
nominal due to the short-term nature of those investments. We have no material
future earnings or cash flow exposures with respect to our outstanding capital
leases, which are all at fixed rates. To the extent MindSpring has borrowings
outstanding under the credit facility, we would have market risk relating to
those amounts because the interest rates under the credit facility are variable.
At present, we have no plans to enter into any hedging arrangements with respect
to potential future borrowings.
13
<PAGE> 18
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On February 17, 1999, MindSpring issued 376,116 shares of its common stock,
par value $.01 per share, to NETCOM On-Line Communication Services, Inc. in
connection with MindSpring's acquisition of certain tangible and intangible
assets and rights used in connection with the Internet services business
operated in the United States by NETCOM. MindSpring purchased these assets for
an aggregate purchase price of $245 million, including $215 million in cash and
$30 million in common stock of MindSpring (376,116 shares, at a per share price
of $79.76). The issuance of these securities was made pursuant to Section 4(2)
of the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On January 8, 1999, MindSpring filed a Current Report on Form 8-K reporting
that, on January 5, 1999, MindSpring entered into an Asset Purchase Agreement
with NETCOM On-Line Communication Services, Inc., a Delaware corporation and an
indirect wholly-owned subsidiary of ICG Communications, Inc., pursuant to which
MindSpring agreed to acquire certain assets used in connection with the Internet
services business operated in the United States by NETCOM (the "NETCOM
Acquisition").
On February 25, 1999, MindSpring filed a Current Report on Form 8-K reporting
that, on February 17, 1999, MindSpring completed the NETCOM Acquisition. The
Form 8-K contained, pursuant to Item 7 to Form 8-K, certain financial
information concerning the NETCOM Acquisition.
On February 25, 1999, MindSpring filed a Current Report on Form 8-K that
contained certain exhibits with respect to its business and financial condition,
including its Management's Discussion and Analysis of Financial Condition and
Results of Operations and audited financial statements of MindSpring
Enterprises, Inc. as of December 31, 1998 and 1997.
14
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINDSPRING ENTERPRISES, INC.
----------------------------
(Registrant)
Date: May 15, 1999 By: /s/ Michael S. McQuary
----------------------
Michael S. McQuary
President and Chief Operating Officer
Date: May 15, 1999 By: /s/ Juliet M. Reising
---------------------
Juliet M. Reising
Executive Vice President and Chief Financial
Officer
15
<PAGE> 20
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Numbered
- ------- --------
Number Exhibit Description Page
- ------ ----
<S> <C> <C>
27. Financial Data Schedule (for SEC use only)
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF MINDSPRING ENTERPRISES, INC. FOR THE THREE MONTHS ENDED
MARCH 21, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,571
<SECURITIES> 0
<RECEIVABLES> 7,392
<ALLOWANCES> 4,492
<INVENTORY> 123
<CURRENT-ASSETS> 40,477
<PP&E> 75,194
<DEPRECIATION> 17,601
<TOTAL-ASSETS> 362,998
<CURRENT-LIABILITIES> 47,191
<BONDS> 0
0
0
<COMMON> 289
<OTHER-SE> 233,766
<TOTAL-LIABILITY-AND-EQUITY> 362,998
<SALES> 0
<TOTAL-REVENUES> 61,628
<CGS> 21,398
<TOTAL-COSTS> 67,446
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> (5,514)
<INCOME-TAX> (2,210)
<INCOME-CONTINUING> (3,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,304)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
