<PAGE> 1
Prospectus Supplement to Prospectus Dated April 7, 1999.
$179,975,000
[Mindspring LOGO]
5% Convertible Subordinated Notes due 2006
----------------------
You may convert the notes into shares of common stock of MindSpring
Enterprises, Inc. at any time before their maturity or their redemption by
MindSpring. The notes will mature on April 15, 2006. The conversion rate is 8.00
shares per each $1,000 principal amount of notes, subject to adjustment in
certain circumstances. This is equivalent to a conversion price of $125 per
share. On April 7, 1999, the last reported sale price for the common stock on
the Nasdaq National Market was $102 per share. The common stock is listed under
the symbol "MSPG."
MindSpring will pay interest on the notes on April 15 and October 15 of each
year. The first interest payment will be made on October 15, 1999. The notes are
subordinated in right of payment to all senior debt of MindSpring. The notes
will be issued only in denominations of $1,000 and integral multiples of $1,000.
MindSpring may redeem the notes before April 15, 2002, in whole or in part,
at a redemption price equal to $1,000 per $1,000 note plus accrued and unpaid
interest, if any, to the redemption date, if the closing price for MindSpring's
common stock has exceeded 150% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending on the trading day
prior to the date of the mailing of the notice of redemption. MindSpring will
make an additional payment in cash with respect to the notes called for
redemption of $200 per $1,000 note, less the amount of interest actually paid on
such note prior to the call for redemption.
On or after April 15, 2002, MindSpring has the option to redeem all or a
portion of the notes which have not been previously converted, at the redemption
prices set forth in this prospectus supplement. You have the option, subject to
certain conditions, to require MindSpring to repurchase any notes held by you in
the event of a "Change in Control," as described in this prospectus supplement,
at a price equal to 100% of the principal amount of the notes, plus accrued
interest to the date of repurchase.
Concurrently with this notes offering, and by a separate prospectus
supplement, MindSpring is offering 2,400,000 shares of its common stock, plus up
to an additional 360,000 shares of common stock to cover over-allotments by the
underwriters for that offering. The completion of the notes offering and the
common stock offering are not dependent on one another.
See "Risk Factors" beginning on page S-15 of this prospectus supplement to
read about important factors you should consider before purchasing the notes.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Note Total
-------- ------------
<S> <C> <C>
Initial public offering price............................... 100% $179,975,000
Underwriting discount....................................... 3% $ 5,399,250
Proceeds, before expenses, to MindSpring.................... 97% $174,575,750
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from April 14, 1999 and must
be paid by the purchaser if the notes are purchased after April 14, 1999.
The underwriters have exercised their option to purchase an additional
$23,475,000 aggregate principal amount of notes from MindSpring at the initial
public offering price less the underwriting discount.
----------------------
The underwriters expect to deliver the notes in book-entry form only through
the facilities of The Depository Trust Company against payment in New York, New
York on April 14, 1999.
GOLDMAN, SACHS & CO.
ING BARING FURMAN SELZ LLC
J.C. BRADFORD & CO.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION CAPITAL MARKETS CORP.
JEFFERIES & COMPANY, INC.
----------------------
Prospectus Supplement dated April 7, 1999.
<PAGE> 2
There are restrictions on the offer and sale of the notes in the United
Kingdom. All applicable provisions of the Financial Services Act 1986 and the
Public Offers of Securities Regulations 1995 with respect to anything done by
any person in relation to the notes in, from or otherwise involving the United
Kingdom must be complied with. See "Underwriting."
------------------------
IN CONNECTION WITH THIS ISSUE GOLDMAN, SACHS & CO. AND ITS AFFILIATES MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE NOTES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKETS OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
THIS PROSPECTUS SUPPLEMENT INCLUDES PRODUCT NAMES AND TRADEMARKS OF
MINDSPRING ENTERPRISES, INC. AND OF OTHER ORGANIZATIONS.
S-2
<PAGE> 3
SUMMARY
This summary highlights more detailed information contained elsewhere in
this prospectus supplement. This summary is not complete and does not contain
all of the information that you should consider before investing in the notes.
You should read the entire prospectus supplement and the accompanying prospectus
carefully, especially the risks of investing in the notes discussed under "Risk
Factors." Unless otherwise stated, all of the information in this prospectus
supplement reflects the exercise by the underwriters of their over-allotment
option to purchase $23,475,000 aggregate principal amount of notes. All share
data in this prospectus supplement reflect a 3-for-1 stock split of our common
stock effected on July 24, 1998.
ABOUT MINDSPRING
OUR BUSINESS
MindSpring is a leading national Internet service provider, or ISP. We
focus on serving individuals and small businesses. 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
Internet 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 complete Internet access and Web hosting
solutions, emphasizing:
- 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 U.S. states and the District of Columbia to access the
Internet via a local telephone call.
OUR GROWTH HISTORY AND PROFITABILITY
Over the past three years, we have rapidly increased our subscriber base
and revenues by:
- providing superior customer service and technical support;
- expanding our marketing and distribution activities;
- 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.
S-3
<PAGE> 4
Our subscriber base has grown from approximately 12,000 subscribers at
December 31, 1995, to over 693,000 subscribers at December 31, 1998, including
over 21,000 Web hosting customers. In February 1999, we completed the NETCOM
acquisition, which increased our subscriber base to approximately 1.1 million
subscribers, including approximately 45,000 Web hosting subscribers. As a
result, MindSpring is currently the fourth largest ISP in the U.S. in terms of
the number of subscribers.
By providing superior service and support to our subscribers, making good
build-versus-buy network decisions and achieving significant market penetration
in a number of our target markets, we have achieved profitability ahead of many
other national ISPs. In the last quarter of 1998, we had revenues of $39.5
million, EBITDA of $7.3 million and net income of $3.7 million. At that time,
our EBITDA margin, meaning EBITDA as a percentage of revenues, was 18% and our
earnings per share were $0.13.
Our executive offices are located at 1430 West Peachtree St., Suite 400,
Atlanta, Georgia 30309 and our telephone number at that address is (404)
815-0770. We also maintain an Internet site on the World Wide Web at
www.mindspring.net. Information contained at our Web site is not, and should not
be deemed to be, a part of this prospectus supplement.
OUR TARGET SUBSCRIBER GROUP AND MARKET DEMAND
The demand for Internet access and business services by MindSpring's target
subscriber group of individuals and small businesses is increasing rapidly.
Trends contributing to this growth in demand include:
- heightened consumer awareness of the Internet;
- the increasing number of people who have computers with modems due in
part to lower prices; and
- the expanding diversity of information, entertainment and commercial
offerings available on the Internet and the World Wide Web.
According to International Data Corporation, total United States ISP
revenues are projected to grow from approximately $10.7 billion in 1997 to
approximately $37.4 billion in 2003. In addition, International Data Corporation
estimates that the number of users accessing the World Wide Web will increase
from approximately 97 million at the end of 1998 to approximately 320 million in
2002.
In addition to Internet access services, an increasing number of Internet
users are taking advantage of value-added services such as Web hosting and Web
page design. We believe that value-added services, such as those included in
MindSpring's business service offerings, are among the fastest growing segments
of the ISP marketplace. International Data Corporation estimates that revenues
attributable to value-added services are projected to increase in the United
States at a compounded annual growth rate of approximately 34%, from $3 billion
in 1998, to $12.9 billion in 2003. MindSpring believes that there is a growing
and unsatisfied demand among individuals and small businesses for high-quality
Internet access, Web hosting and other value-added Internet services such as Web
page design and e-commerce services.
S-4
<PAGE> 5
MINDSPRING STRATEGY
MindSpring's objective is to strengthen our position as a leading national
provider of high quality Internet access, Web hosting and other value-added
services to individuals and small businesses, as measured by customer
satisfaction, subscriber growth and financial performance. Key elements of our
business strategy include:
Continuing to Provide Superior Customer Service and Technical Support
MindSpring believes that, over time, individual consumers seeking broader
access to the Internet will face increasing and significant technological
challenges, in part because the Internet is an evolving and growing medium. In
addition, as new and more complex applications designed for the Internet
proliferate, we believe that even sophisticated users, including those that have
been MindSpring subscribers for years, will periodically encounter problems.
Consequently, we intend to continue to focus on providing high levels of
customer service and technical support in an effort to achieve maximum levels of
customer satisfaction. Historically, this strategic focus has resulted in low
churn rates, significant subscriber growth from customer referrals and industry
recognition. We have received numerous customer service awards, including PC
Computing's 1998 MVP Award for Best National ISP. Currently, over half of our
employees are engaged in a customer service or technical support function and
are available 24 hours a day, seven days a week, except for major holidays.
Efficiently Expanding Our National Network
MindSpring intends to continue to efficiently increase the capacity and
geographic reach of our network in order to support subscriber growth, enter new
markets and accommodate increased customer usage. We pursue a hybrid network
strategy of (1) owning POPs in mature markets where we can efficiently deliver
high quality access services and (2) leasing POPs and capacity from third-party
network service providers in new or developing markets. This strategy allows us
the flexibility to modify our network cost structure on a market-by-market
basis. As of December 31, 1998, approximately 61% of MindSpring's subscribers
accessed the Internet through a MindSpring-owned POP. As a result of the NETCOM
acquisition, this percentage has decreased significantly because most of the
approximately 400,000 subscribers we acquired from NETCOM access the Internet
using third-party POPs to which we have access under our network services
agreement with ICG PST, Inc., formerly known as NETCOM.
Expanding Our Targeted Marketing and Distribution Activities
We plan to expand our targeted marketing and distribution efforts in
markets where there is the opportunity for substantial market penetration. We
believe that high geographic concentrations of subscribers improve network
economics and reduce subscriber acquisition costs, thereby resulting in higher
margins. While continuing to encourage referrals from existing subscribers, we
plan to increase our print publication, radio, television and direct mail
advertising in certain targeted metropolitan areas throughout the U.S. In
addition, we will continue to pursue nationwide strategic alliances and retail
opportunities to broaden our distribution. We currently have such relationships
with, among others, Microsoft, 3Com(R) Corporation, Compaq and IBM.
S-5
<PAGE> 6
Increasing Our Revenues from Value-Added Services
We intend to continue to build on our current sales, marketing and network
capabilities to create additional revenue opportunities from value-added
services such as Web hosting, Web page design and co-location services. We
believe that value-added services are among the fastest growing segments of the
Internet marketplace. We began offering Web hosting services in 1995 and
currently have approximately 45,000 Web hosting subscribers, including
approximately 22,000 Web hosting accounts acquired from NETCOM in February 1999.
Web hosting represents approximately 13% of our revenues and is an area of
strategic growth for MindSpring.
Engaging in Selected Acquisitions
Since early 1996, we have supplemented our internal expansion efforts
through selected acquisitions of complementary businesses and subscriber
accounts. As MindSpring continues to expand, we may continue to pursue this
strategy. We believe that as the ISP market evolves, customers will place ever
greater emphasis on ISP performance, network coverage, reliability, and support.
As a result, smaller ISPs may be unable to remain competitive on a national or
regional basis, unless they significantly expand the scope of their operations.
These trends could lead to greater industry consolidation and, consequently,
acquisition opportunities. We intend to continue to evaluate acquisition
opportunities as they become available.
RECENT DEVELOPMENTS
- Acquisitions
We recently completed two substantial acquisitions:
Spry Acquisition. In October 1998, we purchased substantially all of
Spry, Inc.'s subscriber base of individual dial-up Internet access
customers in the United States and Canada, including approximately 130,000
individual access accounts. We also acquired various assets used in serving
those customers, including a leased customer support facility and a leased
network operations facility in Seattle, Washington and all rights to the
"Sprynet" name. Spry is a wholly owned subsidiary of America Online, Inc.
The purchase price for these assets was approximately $32 million.
NETCOM Acquisition. In February 1999, we purchased substantially all
of NETCOM On-Line Communication Services, Inc.'s subscriber accounts in the
U.S., including approximately 371,000 individual access accounts,
approximately 3,000 dedicated Internet access accounts and approximately
22,000 Web hosting accounts. NETCOM, now known as ICG PST, Inc., is a
wholly owned subsidiary of ICG Communications, Inc. MindSpring also
acquired assets used in serving those customers, including leased
operations facilities in San Jose, California and Dallas, Texas and ICG
PST's rights to the "NETCOM" name (except in Canada, the United Kingdom and
Brazil). ICG PST retained all of its assets used in connection with its
network operations. Under a separate network services agreement with ICG
PST, we purchase access to ICG PST's network. We paid $245 million for the
NETCOM assets, consisting of $215 million in cash and $30 million in
MindSpring common stock.
S-6
<PAGE> 7
- Credit Facility
On February 17, 1999, we entered into a credit agreement with First Union
National Bank and certain 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 National Bank 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. On February 17,
1999, we borrowed approximately $80 million under the credit facility to finance
the NETCOM acquisition, which we intend to repay in full with a portion of the
proceeds from the common stock offering that we are undertaking concurrently
with this offering. Our obligations under the credit facility are secured by
substantially all of our assets. See "Description of Secured Credit Facility"
and "Use of Proceeds."
S-7
<PAGE> 8
THE OFFERING
Securities offered............ $179,975,000 aggregate principal amount of 5%
convertible subordinated notes due 2006, which
includes $23,475,000 aggregate principal amount
of notes subject to the underwriters'
over-allotment option which has been exercised.
Offering price................ 100% of the principal amount plus accrued
interest, if any, from April 14, 1999.
Interest...................... Interest on the notes is payable semiannually
on April 15, and October 15, of each year,
commencing October 15, 1999.
Conversion.................... The notes will be convertible at the option of
the holder into shares of common stock at a
rate of 8.00 shares of common stock per $1,000
principal amount of notes, which is equivalent
to a conversion price of $125 per share,
subject to adjustment in certain events.
The notes will be convertible at any time after
the initial issuance of the notes and before
the close of business on the business day
immediately preceding the maturity date, unless
previously redeemed or repurchased, at the
conversion rate set forth above. Holders of
notes called for redemption or repurchase will
be entitled to convert the notes up to and
including, but not after, the business day
immediately preceding the date fixed for
redemption or repurchase, as the case may be.
See "Description of Notes -- Conversion
Rights."
Subordination................. The notes are subordinated to present and
future "senior debt," as that term is defined
in this prospectus supplement, of MindSpring.
If MindSpring establishes any subsidiaries, the
notes will also effectively be subordinated in
right of payment to all indebtedness and other
liabilities of our subsidiaries. As of February
28, 1999, the aggregate amount of outstanding
"senior debt" was approximately $84.8 million.
The indenture under which the notes will be
issued will not restrict the incurrence of
"senior debt" by MindSpring or any of our
subsidiaries. See "Description of Notes --
Subordination."
Global note; Book-entry
system...................... The notes offered hereby will be issued only in
fully registered form without coupons and in
minimum denominations of $1,000. The notes will
be evidenced by a global note, in fully
registered form and without coupons, deposited
with the trustee for the notes, as custodian
for DTC. Beneficial interests in the global
note will be shown on, and transfers thereof
will be effected
S-8
<PAGE> 9
only through, records maintained by DTC and its
participants and indirect participants. See
"Description of Notes -- Form, Denomination,
Transfer, Exchange and Book-Entry Procedures."
Provisional redemption by
MindSpring.................. The notes may be redeemed at the option of
MindSpring (the "Provisional Redemption"), in
whole or in part, at any time prior to
April 15, 2002, at a redemption price equal
to $1,000 per Note to be redeemed plus
accrued and unpaid interest, if any, to the
date of redemption (the "Provisional Redemption
Date") if the closing price of the Common Stock
shall have exceeded 150% of the conversion
price then in effect for at least 20 trading
days in any consecutive 30-trading day period
ending on the trading day prior to the date of
mailing of the notice of Provisional Redemption
(the "Notice Date"). Upon any Provisional
Redemption, MindSpring will make an additional
payment in cash (the "Make-Whole Payment") with
respect to the notes called for redemption in
an amount equal to $200 per $1,000 note, less
the amount of any interest actually paid on
such note prior to the call for redemption.
MINDSPRING WILL BE OBLIGATED TO MAKE THE
MAKE-WHOLE PAYMENT ON ALL NOTES CALLED FOR
PROVISIONAL REDEMPTION, INCLUDING ANY NOTES
CONVERTED AFTER THE NOTICE DATE AND PRIOR TO
THE PROVISIONAL REDEMPTION DATE. If the secured
credit facility is in effect at the time of any
such proposed redemption, MindSpring may be
required to obtain the prior consent of the
lenders under the secured credit facility or
terminate the credit facility to redeem the
notes. See "Description of Notes -- Provisional
Redemption by MindSpring."
Optional redemption by
MindSpring.................. The notes may be redeemed at the option of
MindSpring, in whole or in part, on or after
April 15, 2002, at the redemption prices set
forth herein plus accrued interest to the
redemption date. If the secured credit
facility is in effect at the time of any such
proposed redemption, MindSpring may be required
to obtain the prior consent of the lenders
under the secured credit facility or terminate
the credit facility to redeem the notes. See
"Description of Notes -- Optional Redemption."
Repurchase at option of
holders upon a change in
control..................... Upon a "change in control," as that term is
defined in the notes, you will have the right,
subject to certain conditions and restrictions,
to require MindSpring to repurchase your notes,
in whole or in part, at 100% of
S-9
<PAGE> 10
the principal amount thereof, plus accrued
interest to the repurchase date. The repurchase
price is payable in cash or, at the option of
MindSpring but subject to the satisfaction by
MindSpring of certain conditions, in shares of
common stock, valued at 95% of the average
closing sales prices of the common stock for
the five trading days preceding and including
the third trading day prior to the repurchase
date. A change in control would currently be an
event of default under the secured credit
facility, and may be an event of default under
any future bank credit facility or senior debt.
In such circumstances, the subordination
provisions of the applicable supplemental
indenture would likely restrict MindSpring's
ability to repurchase the notes prior to the
repayment in full of all amounts outstanding
under such credit facility or senior debt. See
"Description of Notes -- Repurchase at Option
of Holders Upon a Change in Control."
Use of proceeds............... For use in expansion of our business, as
additional working capital for general
corporate purposes and for possible strategic
acquisitions of subscriber accounts and
complementary businesses.
Events of default............. Events of default include:
(1) failure to pay principal of or premium, if
any, on any note when due, whether or not such
payment is prohibited by the subordination
provisions of the notes and the indenture;
(2) failure to pay any interest on any note
when due, continuing for 30 days, whether or
not such payment is prohibited by the
subordination provisions of the notes and the
indenture;
(3) default in MindSpring's obligation to
provide notice of a "change in control,"
whether or not prohibited by the subordination
provisions of the notes and the indenture;
(4) failure to perform any other covenant of
MindSpring in the indenture, continuing for 60
days, plus an additional 60 days in the case of
defaults subject to cure, provided MindSpring
commences such cure within the initial 60 days
and is diligently pursuing such cure, after
written notice as provided in the indenture;
(5) any indebtedness under any bonds,
debentures, notes or other evidences of
indebtedness for money borrowed by MindSpring
in an aggregate principal amount in excess of
$25,000,000 is not paid at final maturity
thereof, either at its stated maturity or upon
S-10
<PAGE> 11
acceleration thereof, and such indebtedness is
not discharged, or such acceleration is not
rescinded or annulled, within a period of 30
days after notice as provided in the notes
indenture; and
(6) certain events of bankruptcy, insolvency or
reorganization. See "Description of
Notes -- Events of Default."
Nasdaq National Market symbol
for MindSpring common
stock....................... MSPG
Listing....................... The notes will not be listed on any securities
exchange or quoted on the Nasdaq National
Market. The underwriters have advised
MindSpring that they intend to make a market in
the notes. The underwriters are not obligated,
however, to make a market in the notes, and any
such market making may be discontinued at any
time at the sole discretion of the underwriters
without notice. See "Underwriting."
Governing law................. The notes indenture and the notes are governed
by the laws of the State of New York.
RISK FACTORS.................. YOU SHOULD READ THE "RISK FACTORS" SECTION,
BEGINNING ON PAGE S-15 OF THIS PROSPECTUS
SUPPLEMENT, AS WELL AS THE OTHER CAUTIONARY
STATEMENTS THROUGHOUT THE ENTIRE PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS, SO THAT YOU
UNDERSTAND THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE NOTES.
CONCURRENT COMMON STOCK
OFFERING...................... CONCURRENTLY WITH THIS NOTES OFFERING AND BY
MEANS OF A SEPARATE PROSPECTUS SUPPLEMENT,
MINDSPRING IS OFFERING 2,400,000 SHARES OF
COMMON STOCK, PLUS AN ADDITIONAL 360,000 SHARES
TO COVER OVER-ALLOTMENTS BY THE UNDERWRITERS
FOR THAT OFFERING. THE COMPLETION OF THIS NOTES
OFFERING AND THE COMMON STOCK OFFERING ARE NOT
DEPENDENT ON ONE ANOTHER.
S-11
<PAGE> 12
SUMMARY FINANCIAL AND OPERATING DATA
You should read the following summary historical financial and operating
data along with the sections entitled "Use of Proceeds," "Selected Financial and
Operating Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and MindSpring's financial statements and notes
thereto and other financial and operating data included elsewhere in this
prospectus supplement and the accompanying prospectus or incorporated into this
prospectus supplement and the accompanying prospectus by reference.
The Inception Period referred to in the table below is the period from
February 24, 1994, MindSpring's inception, to December 31, 1994.
The balance sheet data presented below excludes the effects of the NETCOM
acquisition and borrowings under our secured credit facility, both of which
occurred on February 17, 1999. See note 10 to MindSpring's audited Financial
Statements for the fiscal year ended December 31, 1998 included in this
prospectus supplement at page F-18 for certain pro forma and other information
concerning these and other events. Also see our Current Report on Form 8-K filed
with the SEC on February 25, 1999 for more detailed pro forma information.
The adjusted balance sheet data contained in the following table gives
effect to the sale of the notes offered by MindSpring by this prospectus
supplement and the accompanying prospectus. This assumes an increase to cash and
cash equivalents and working capital of $174.3 million upon completion of this
offering, which amount equals the aggregate estimated net proceeds of the
offering. See the section entitled "Use of Proceeds" in this prospectus
supplement for a description of MindSpring's specific plans for the application
of the net proceeds from this offering.
The "as further adjusted" balance sheet data reflects the concurrent sale
by MindSpring of 2,400,000 shares of common stock offered by MindSpring by a
separate prospectus supplement and the accompanying prospectus at a price to the
public of $100 per share. This assumes an increase to cash and cash equivalents
and working capital of $229.3 million upon completion of this offering, which
amount equals the aggregate estimated net proceeds of the offering.
The total debt information included in the balance sheet data presented
below contains the current portion of related indebtedness and the stockholders'
equity information included in the balance sheet data presented below excludes
approximately 2,123,000 shares of common stock reserved for issuance upon
exercise of stock options granted as of December 31, 1998.
S-12
<PAGE> 13
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
INCEPTION ---------------------------------------
PERIOD 1995 1996 1997 1998
--------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Access................................ $ 70 $ 1,455 $ 13,420 $40,925 $ 95,852
Business services..................... -- 260 2,286 7,711 14,735
Subscribers start-up fees............. 33 512 2,426 3,920 4,086
----- ------- -------- ------- --------
Total revenues................... 103 2,227 18,132 52,556 114,673
Cost and expenses:
Cost of revenues -- recurring......... 37 627 6,332 15,203 31,724
Cost of subscriber start-up fees...... 15 339 1,876 1,619 2,612
Selling, general and administrative... 121 2,230 14,161 30,784 57,324
Depreciation and amortization......... 5 265 3,285 8,695 15,227
----- ------- -------- ------- --------
Total operating expenses......... 178 3,461 25,654 56,301 106,887
----- ------- -------- ------- --------
Operating gain (loss)................... (75) (1,234) (7,522) (3,745) 7,786
Interest income (expense), net.......... -- (725) (90) (338) 1,214
----- ------- -------- ------- --------
Income before income taxes.............. (75) (1,959) (7,612) (4,083) 9,000
Income tax provision.................... -- -- -- -- 1,544
----- ------- -------- ------- --------
Net income (loss)....................... $ (75) $(1,959) $ (7,612) $(4,083) $ 10,544
===== ======= ======== ======= ========
Diluted earnings (loss) per share....... $ (0.20) $ (0.48) $ (0.18) $ 0.41
Diluted weighted average common shares
outstanding........................... 9,930 15,758 22,542 25,431
OTHER OPERATING DATA:
Approximate number of subscribers at end
of period............................. 1,000 12,000 122,000 278,000 693,000
Approximate number of employees at end
of period............................. 8 95 321 502 977
EBITDA(1)............................... $ (70) $ (969) $ (4,237) $ 4,950 $ 23,013
EBITDA margin(1)........................ (68)% (44)% (23)% 9% 20%
CASH FLOW DATA:
Operations.............................. (33) (70) (2,005) 11,354 35,501
Investing............................... (127) (3,724) (21,336) (9,002) (47,647)
Financing............................... 745 3,634 32,569 (2,619) 170,503
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
AS
AS FURTHER
HISTORICAL ADJUSTED ADJUSTED
---------- -------- --------
<S> <C> <C> <C>
BALANCE SHEET DATA(2):
Cash and cash equivalents.................................. $167,743 $342,069 $571,369
Working capital............................................ 137,106 311,432 540,732
Total assets............................................... 247,599 427,574 656,874
Total debt, including current maturities................... 5,119 185,094 185,094
Total stockholders' equity................................. 207,081 207,081 436,381
</TABLE>
- -------------------------
(1) EBITDA represents operating gain (loss) plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of
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financial performance under generally accepted accounting principles and
should not be construed as a substitute for operating income, net income or
cash flows from operating activities for purposes of analyzing MindSpring's
operating performance, financial position and cash flows. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
(2) The balance sheet data presented excludes the effects of the NETCOM
acquisition and borrowings under our secured credit facility, both of which
occurred on February 17, 1999. These transactions would (1) reduce cash and
cash equivalents by $135 million, (2) increase total debt by $80 million and
(3) increase stockholders' equity by $30 million on a historical basis. On
an "adjusted basis," and on an "as further adjusted basis," cash and cash
equivalents would decrease by approximately $215 million and stockholders'
equity would increase by $30 million. See note 10 to MindSpring's audited
Financial Statements for the fiscal year ended December 31, 1998 included in
this prospectus supplement at page F-18 for certain pro forma and other
information concerning these and other events. Also see our Current Report
on Form 8-K filed with the SEC on February 25, 1999 for more detailed pro
forma information.
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<PAGE> 15
RISK FACTORS
In addition to the other information contained in this prospectus
supplement and the prospectus which it accompanies, you should carefully
consider the following risk factors relating to MindSpring before purchasing our
notes.
WE HAVE A LIMITED OPERATING HISTORY DURING WHICH WE HAVE INCURRED SIGNIFICANT
ANNUAL OPERATING LOSSES.
We started our business on February 24, 1994 and began offering Internet
access in June 1994. Our limited historical operating data and rapid growth may
make it more difficult for you to evaluate our performance. Before 1998, we had
incurred annual operating losses in each year since we started our business. Our
annual net losses since 1995 and our accumulated deficit as of December 31, 1998
are as follows:
<TABLE>
<CAPTION>
ACCUMULATED
ANNUAL DEFICIT AS OF
NET LOSS DECEMBER 31, 1998
---------- -----------------
<S> <C> <C>
1995..................................... $1,959,000
1996..................................... $7,612,000
1997..................................... $4,083,000
1998..................................... N/A $3,185,000
</TABLE>
Our ability to maintain profitability and positive cash flow depends upon a
number of factors, including our ability to increase revenue while maintaining
or reducing per subscriber costs. We may not succeed in increasing revenue while
maintaining or reducing per subscriber costs or achieving or sustaining positive
cash flow in the future, and our failure to do so could have a material adverse
effect on our business, financial condition and results of operations, including
our ability to repay the notes.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITIONS OF SUBSCRIBER ACCOUNTS,
INCLUDING THE SPRY AND NETCOM ACQUISITIONS.
As part of our business strategy, we have acquired subscriber accounts and
related assets from other companies. In October 1998, we acquired approximately
130,000 subscribers and related assets of Spry, Inc. from America Online, Inc.
In February 1999, we completed the acquisition of approximately 400,000
subscribers from NETCOM On-Line Communication Services, Inc., now known as ICG
PST, Inc., a wholly owned subsidiary of ICG Communications, Inc. We will
continue to evaluate strategic acquisitions of businesses and subscriber
accounts principally relating to our current operations. These transactions
commonly involve risks. These risks include, among others, that:
- we may experience difficulty in assimilating the acquired operations and
personnel;
- the acquisition may disrupt our ongoing business;
- the acquisition may divert management's attention from our ongoing
business;
- we may not be able to successfully incorporate acquired assets and
technology into our service offerings;
- we may not be able to maintain uniform standards, controls, procedures,
and policies;
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- we may lack the necessary experience to enter new markets and add new
services; and
- an acquisition may impair our relationships with employees and
subscribers as a result of changes in management.
We may not be successful in overcoming these risks or any other problems
encountered in connection with the Spry and NETCOM acquisitions or any future
transactions. In addition, these transactions and any future transaction could
require us to (1) issue additional equity securities, which would dilute our
stockholders, (2) incur additional debt, or (3) amortize acquisition or
debt-related expenses for goodwill and other intangible assets. We were required
to take each of these actions to complete the NETCOM acquisition. Any of these
actions could have a material adverse effect on our business, operating results
and financial condition, including our ability to repay the notes.
WE CANNOT ASSURE YOU THAT WE WILL EFFECTIVELY MANAGE OUR GROWTH.
We may not be successful in effectively managing our growth. Our rapid
growth has in the past placed, and may in the future place, a significant strain
on our business and financial resources. The rapid expansion of our subscriber
base, including through the Spry and NETCOM acquisitions, has placed increasing
demands on our customer service and technical support resources. Failure to
manage our recent and anticipated growth could have a material adverse effect on
our business, results of operations and financial condition.
For us to effectively (1) manage our rapidly growing operations, (2)
successfully integrate newly acquired assets, including those acquired in the
Spry and NETCOM acquisitions, and (3) continue to implement a nationwide
strategy and network, we must:
- continue to implement and improve our operational, financial, and
management information systems;
- closely monitor service quality, particularly through third-party
points-of-presence, or "POPs";
- integrate leased physical sites;
- acquire and install necessary equipment and telecommunications
facilities;
- implement marketing efforts in new and existing markets, which may
involve expanding our marketing strategy to include telemarketing and
other methods;
- add new services and provide related customer and technical support;
- employ qualified personnel to provide technical and marketing support for
new sites;
- identify, attract, train, integrate, and retain other qualified
personnel, including new management personnel;
- develop additional expertise; and
- continue to expand our operational and financial resources.
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WE HAVE SIGNIFICANT DEBT AND WE MAY BE UNABLE TO SERVICE THAT DEBT.
On February 17, 1999, we entered into a credit agreement with First Union
National Bank and other lenders establishing a $100 million secured revolving
credit facility. Also on February 17, 1999, we borrowed approximately $80
million under the credit facility to finance the NETCOM acquisition. At December
31, 1998, giving effect to the Spry acquisition, the NETCOM acquisition and the
borrowings under the credit facility as if they had occurred on January 1, 1998:
- we would have had $85.1 million of indebtedness;
- stockholders' equity would have been $237.1 million; and
- our earnings would have been insufficient to cover our fixed charges for
the year ended December 31, 1998 by $96.2 million.
Even if we repay all amounts outstanding under our credit facility, we will
have significant additional debt upon completion of the notes offering. We
cannot assure you that we will be able to improve our earnings before fixed
charges or that we will be able to meet our debt service obligations under our
credit facility or the notes. We will be in default under the terms of our
credit facility if (1) we are unable to generate sufficient cash flow or
otherwise obtain funds necessary to make required payments, or (2) we otherwise
fail to comply with the various covenants in our debt obligations. A default
would permit the holders of the indebtedness to accelerate its maturity. This,
in turn, would have a material adverse effect on our business, financial
condition and results of operations. In addition, we are required under the
terms of the credit facility to obtain, by May 19, 1999, landlord consents under
some of our operating leases. If we do not obtain these consents by the required
date, the lenders' commitment under the credit facility could be reduced to $20
million, which could have a material adverse effect on our business, financial
condition and results of operations, including our ability to repay the notes.
Even if we are able to meet our debt service obligations, the amount of
debt we have could adversely affect us in a number of ways, including by:
- limiting our ability to obtain any necessary financing in the future for
working capital, capital expenditures, debt service requirements or other
purposes;
- limiting our flexibility in planning for, or reacting to, changes in our
business;
- placing us at a competitive disadvantage to those of our competitors
having lower levels of debt;
- making us more vulnerable to a downturn in our business or the economy
generally; and
- requiring us to use a substantial portion of our cash flow from
operations to pay principal and interest on our debt, instead of
contributing those funds to other purposes, such as working capital and
capital expenditures.
To be able to meet our obligations under our credit facility, we must
successfully implement our business strategy, which includes:
- expanding our network;
- attracting or acquiring and retaining a significant number of
subscribers; and
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- achieving significant and sustained growth in our cash flow.
We cannot assure you that we will successfully implement our business
strategy or that we will be able to generate sufficient cash flow from operating
activities to meet our debt service obligations and working capital
requirements. Our ability to meet our obligations will be dependent upon our
future performance, which will in turn depend upon prevailing economic
conditions and financial, business and other factors.
If the implementation of our business strategy is delayed or unsuccessful,
or if we do not generate sufficient cash flow to meet our debt service and
working capital requirements, we may need to seek additional financing. If we
are unable to obtain necessary financing on terms that are acceptable to us, we
could be forced to dispose of assets to make up for any shortfall in the
payments due on our indebtedness under circumstances that might not be favorable
to realizing the highest price for those assets. A substantial portion of our
assets consist of intangible assets, the value of which will depend upon a
variety of factors, including the success of our business. As a result, we
cannot assure you that our assets could be sold quickly enough, or for amounts
sufficient, to meet our obligations.
VARIOUS FACTORS OUTSIDE OF OUR CONTROL MAY AFFECT OUR OPERATING RESULTS AND
CAUSE POTENTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS.
Our future success depends on a number of factors, many of which are beyond
our control. In particular, our revenue depends on our ability to attract and
keep subscribers. We normally offer our new subscribers a 30-day money-back
satisfaction guarantee. In addition, our subscribers, including the recently
acquired Spry and NETCOM subscribers, may discontinue their service at the end
of any month for any reason. We incur some expenses based on our expectations of
future revenue. If revenue is less than we expect, we may not be able to reduce
expenses proportionately. If we do not do so, our operating results, cash flows,
and liquidity will likely be adversely affected, including our ability to repay
the notes.
Our operating results, cash flows and liquidity may also fluctuate
significantly in the future due to other factors beyond our control which
include:
- how quickly we are able to acquire new subscribers;
- how expensive it will be to acquire new subscribers;
- the impact of increased depreciation and amortization from acquisitions;
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- how much money we have to spend to improve our business and expand our
operations;
- how quickly we are able to develop new products and services that our
subscribers require;
- how our prices compare to those of our competitors;
- whether customers accept our new and enhanced products and services;
- how much our operating expenses increase;
- the nature of changes in our strategy;
- whether we lose key employees;
- whether we experience business disruptions resulting from third parties
encountering "Year 2000" computer problems;
- whether and how quickly alternative technologies introduced by our
competitors gain market acceptance;
- whether our arrangements with third-party network providers under various
services agreements prove to be viable;
- changes in laws and regulations which affect our business;
- the extent to which we experience increased competition in our markets;
and
- other general economic factors.
Due to all of the foregoing factors, it is likely that in some future
periods, our operating results and/or our growth rate will be below what public
market analysts and investors expect. If that happens, the market price of our
common stock could decline materially.
Technology and industry standards relating to our business are constantly
evolving and our success depends on our ability to keep pace with these
developments.
The market for Internet access and Web hosting is characterized by rapidly
changing technology, evolving industry standards, changes in subscriber needs,
and frequent new service and product introductions. Our future success will
depend, in part, on our ability to use leading technologies effectively, to
continue to develop our technical expertise, and to enhance our existing
services and develop new services to meet changing subscriber needs on a timely
and cost-effective basis. We may not be successful in achieving these goals.
We believe that our ability to compete successfully will also depend upon
the continued compatibility and interoperability of our services with products
and architectures offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, industry standards may not
be established or, if they are established, we may not be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. In addition, others may develop services or technologies that will
render our services or technology noncompetitive or obsolete.
We are also at risk to fundamental changes in the way customers access the
Internet. Currently, customers access Internet services primarily through
computers connected by telephone lines. Several companies, however, have
developed cable television modems that
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transmit data at substantially faster speeds than the modems that we and most of
our subscribers currently use. As the Internet becomes accessible through these
cable television modems and by screen-based telephones, wireless products,
televisions, and other consumer electronic devices, or as subscriber
requirements change the way Internet access is provided, we must develop new
technology or modify our existing technology to accommodate these developments.
We will have to continue to modify and expand the means by which we deliver
our services. As discussed below, our ability to offer cable wire access to our
subscribers may depend on our ability to negotiate agreements with cable
companies and, therefore, may be very limited. Our pursuit of technological
advances, such as a new technology called Digital Subscriber Lines, or "DSL,"
that uses telephone lines for high-speed data transfers, may require substantial
time and expense. We may not succeed in adapting our Internet access business to
alternate access devices and conduits.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE OUR GROWTH AND CAPITAL REQUIREMENTS.
We must continue to enhance and develop our network to maintain our
competitive position and continue to meet the increasing demands for service
quality, availability, and competitive pricing. Despite the availability of
additional network capacity from third-party network providers, we intend to
maintain the flexibility to expand or open MindSpring POPs or make other capital
investments as dictated by subscriber demand or strategic considerations. To
open new MindSpring POPs, we must spend significant amounts of money for new
equipment as well as for leased telecommunications facilities and advertising.
In addition, to further expand our subscriber base nationwide, we will probably
have to spend significant amounts of money on additional equipment to maintain
the high speed and reliability of our Internet access services. We may also need
to spend significant amounts of cash to:
- fund growth, operating losses and increases in expenses;
- take advantage of unanticipated opportunities, such as major strategic
alliances or other special marketing opportunities, acquisitions of
complementary businesses or assets, or the development of new products;
or
- otherwise respond to unanticipated developments or competitive pressures.
If we do not have enough cash on hand, cash generated from our operations,
or cash available under our credit facility to meet these cash requirements, we
will need to seek alternative sources of financing to carry out our growth and
operating plans. We may not be able to raise needed cash on terms acceptable to
us or at all. Financings may be on terms that are dilutive or potentially
dilutive to our stockholders. If alternative sources of financing are required,
but are insufficient or unavailable, we will be required to modify our growth
and operating plans to the extent of available funding and attempt to attain
profitability in our existing operations.
OUR BUSINESS DEPENDS ON OUR NETWORK INFRASTRUCTURE, INCLUDING OUR ABILITY TO
OBTAIN SUFFICIENT NETWORK CAPACITY.
The future success of our business will depend on the capacity,
reliability, and security of our network infrastructure, including the
third-party POPs. We will need to use substantial financial, operational, and
management resources to expand and adapt our network
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infrastructure to meet the needs of an increasing number of subscribers and to
accommodate the expanding amount and type of information they wish to transfer.
We may not be able to expand or adapt our network infrastructure to meet
additional demand or changing subscriber requirements on a timely basis and at a
commercially reasonable cost, or at all.
In the past we have experienced shortages in bandwidth capacity, both at
the level of particular POPs, which affects only subscribers attempting to use
the particular POP, and in connection with system-wide services, such as e-mail
and news group services. If we do not maintain sufficient bandwidth capacity in
our network connections, subscribers will perceive a general slowdown of all
services on the Internet. We will sometimes temporarily delay adding new
subscribers in cities experiencing significant capacity constraints until the
capacity constraints can be alleviated. This is done to protect the service
levels for current subscribers. Similar problems can occur if we are unable to
expand the capacity of our information servers for e-mail, news, and the World
Wide Web fast enough to keep up with demand from our rapidly expanding
subscriber base. If the capacity of our servers is exceeded, subscribers will
experience delays when trying to use a particular service. While our objective
is to maintain excess capacity, our failure to expand or enhance our network
infrastructure on a timely basis or to adapt it to an expanding subscriber base,
changing subscriber requirements, or evolving industry standards could
materially adversely affect our business, financial condition, and results of
operations, including our ability to repay the notes.
WE ARE DEPENDENT ON THIRD-PARTY NETWORK PROVIDERS.
In a significant number of markets, we provide Internet access exclusively
through third-party POPs. Our ability to provide Internet access to our
subscribers will be limited if (1) third-parties are unable or unwilling to
provide POP access to our subscribers, (2) we are unable to secure alternative
POP arrangements upon partial or complete termination of third-party network
provider agreements or (3) there is a loss of access to third-party POPs for
other reasons. These events could also limit our ability to further expand
nationally, which could, in turn, have a material adverse effect on our
business. If we lose access to third-party POPs under our current arrangements,
we may not be able to make alternative arrangements on terms acceptable to us,
or at all. We do not currently have any plans or commitments with respect to
alternative POP arrangements, although there are some geographic overlaps among
our current arrangements. Moreover, while our contracts with the third-party
providers require them to provide commercially reliable service to MindSpring's
subscribers with a significant assurance of accessibility to the Internet, the
performance of third-party providers may not meet our requirements, which could
materially adversely affect our business, financial condition and results of
operations, including our ability to repay the notes.
In connection with the NETCOM acquisition, we entered into a network
services agreement with NETCOM, which has changed its name to ICG PST, Inc. We
expect to provide service to the majority of subscribers we acquired from NETCOM
under this agreement which, at least for the first year of the agreement, will
be at favorable rates. However, ICG PST is just beginning to offer network
services as a third-party provider for companies like MindSpring. We cannot be
sure that this network agreement will be adequate to provide the level of
service we require for our subscribers, and there may be operating
inefficiencies, network reliability issues or technical support difficulties
that are outside of our control.
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OUR OPERATIONS AND SERVICES ARE VULNERABLE TO NATURAL DISASTERS.
Our operations and services depend on the extent to which our computer
equipment and the computer equipment of our third-party network providers is
protected against damage from fire, earthquakes, power loss, telecommunications
failures, and similar events. A significant portion of our computer equipment,
including critical equipment dedicated to our Internet access services, is
located at a single facility in Atlanta, Georgia. Despite precautions taken by
us and our third-party network providers, over which we have no control, a
natural disaster or other unanticipated problems at our headquarters, network
hub, or a MindSpring or third-party network provider POP could cause
interruptions in the services that we provide. If disruptions occur, we may have
no means of replacing these network elements on a timely basis or at all. We do
not currently maintain fully redundant or back-up Internet services or backbone
facilities or other fully redundant computing and telecommunications facilities.
Any accident, incident, system failure, or discontinuance of operations
involving our network or a third-party network that causes interruptions in our
operations could have a material adverse effect on our ability to provide
Internet services to our subscribers and, in turn, on our business, financial
condition, and results of operations, including our ability to repay the notes.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS.
We rely on local telephone companies and other companies to provide data
communications capacity via local telecommunications lines and leased
long-distance lines. We may experience disruptions or capacity constraints in
these telecommunications services. If disruptions or capacity constraints occur,
we may have no means of replacing these services, on a timely basis or at all.
In addition, local phone service is sometimes available only from the local
monopoly telephone company in each of the markets we serve. We believe that the
federal Telecommunications Act of 1996 generally will lead to increased
competition in the provision of local telephone service, but we cannot predict
when or to what extent this will occur or the effect of increased competition on
pricing or supply.
We depend on a few third-party suppliers of hardware components. Currently,
we acquire some components we use to provide our networking services from only
one source, including modems and terminal servers manufactured by 3Com(R)
Corporation and high-performance routers manufactured by Cisco Systems, Inc. The
expansion of our network infrastructure and the expansion of Internet services
in general is placing, and will continue to place, a significant demand on our
suppliers, some of which have limited resources and production capacity. From
time to time, we have experienced delayed delivery from suppliers of new
telephone lines, modems, terminal servers, and other equipment. If delays of
this nature are severe, all incoming modem lines may become full during peak
times, resulting in busy signals for subscribers who are trying to connect to
MindSpring. If our suppliers cannot adjust to meet increasing demand, the higher
demand levels may prevent them from continuing to supply components and products
in the quantities, at the quality levels and at the times we require, or at all.
If we are unable to develop alternative sources of supply, if required, we could
experience delays and increased costs in expanding our network infrastructure.
Our suppliers and telecommunications carriers also sell or lease products
and services to our competitors and may be, or in the future may become,
competitors themselves. Our suppliers and telecommunications carriers may enter
into exclusive arrangements with our
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competitors or stop selling or leasing their products or services to us at
commercially reasonable prices, or at all.
OUR NETWORK IS VULNERABLE TO SECURITY BREACHES AND INAPPROPRIATE USE BY INTERNET
USERS WHICH COULD DISRUPT OUR SERVICE.
The future success of our business will depend on the security of our
network and, in part, on the security of the network infrastructures of our
third-party providers, over which we have no control. Despite the implementation
of security measures, our infrastructure and the infrastructures of our network
providers are vulnerable to computer viruses or similar disruptive problems
caused by our or their subscribers or other Internet users. Computer viruses or
problems caused by third parties, such as the sending of excessive volumes of
unsolicited bulk e-mail or "spam," could lead to interruptions, delays, or
cessation in service to our subscribers. Third parties could also potentially
jeopardize the security of confidential information stored in our computer
systems or our subscribers' computer systems by their inappropriate use of the
Internet, which could cause losses to us or our subscribers or deter persons
from subscribing to our services. Inappropriate use of the Internet includes
attempting to gain unauthorized access to information or systems, commonly known
as "cracking" or "hacking." Although we intend to continue to implement security
measures to prevent this, "hackers" have circumvented security measures in the
past, and others may be able to circumvent our security measures or the security
measures of our third-party network providers in the future.
To alleviate problems caused by computer viruses or other inappropriate
uses or security breaches, we may have to interrupt, delay, or cease service to
our subscribers, which could have a material adverse effect on our business,
financial condition, and results of operations. In addition, we expect that our
subscribers will increasingly use the Internet for commercial transactions in
the future. Any network malfunction or security breach could cause these
transactions to be delayed, not completed at all, or completed with compromised
security. Subscribers or others may assert claims of liability against us as a
result of any failure by us to prevent these network malfunctions and security
breaches. Until more comprehensive security technologies are developed, the
security and privacy concerns of existing and potential subscribers may inhibit
the growth of the Internet service industry in general and our subscriber base
and revenue in particular.
THE INTERNET ACCESS AND WEB HOSTING MARKETS ARE VERY COMPETITIVE.
The markets for the provision of Internet access and business services to
individuals and small businesses are extremely competitive and highly
fragmented. There are no substantial barriers to entry, and we expect that
competition will continue to intensify. We may not be able to compete
successfully against current or future competitors, many of whom may have
financial resources greater than ours. Increased competition could cause us to
increase our selling and marketing expenses and related subscriber acquisition
costs and could also result in increased subscriber attrition. We may not be
able to offset the effects of these increased costs through an increase in the
number of our subscribers or higher revenue from enhanced services and we may
not have the resources to continue to compete successfully. These developments
could adversely affect our business, financial condition and results of
operations, including our ability to repay the notes.
COMPETITIVE FACTORS. We believe that the primary competitive factors
determining success in the Internet access and business services markets are a
reputation for reliability and service, effective customer support, pricing,
easy-to-use software, and geographic
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coverage. Other important factors include the timing of introductions of new
products and services and industry and general economic trends. Our current and
prospective competitors include many large companies that have substantially
greater market presence and financial, technical, marketing, and other
resources. In addition, every local market that we have entered or intend to
enter is served by multiple local ISPs.
OUR COMPETITORS. We currently compete or expect to compete with the
following types of companies:
- established on-line commercial information service providers, such as
AOL;
- national long-distance carriers, such as AT&T Corp. and MCI WorldCom,
Inc.;
- national commercial ISPs, such as EarthLink Network, Inc.;
- computer hardware and software and other technology companies, such as
IBM Corp. and Microsoft Corporation;
- numerous regional and local commercial ISPs which vary widely in quality,
service offerings, and pricing;
- national and regional Web hosting companies that focus primarily on
providing Web hosting services;
- cable operators and on-line cable services;
- local telephone companies and regional Bell operating companies; and
- nonprofit or educational Internet service providers.
We believe that new competitors, including large computer hardware and
software, media, and telecommunications companies, will continue to enter the
Internet access and business services markets. As consumer awareness of the
Internet grows, existing competitors are likely to further increase their
emphasis on their Internet access and business services, resulting in even
greater competition for us. In addition, telecommunications companies may be
able to offer customers reduced communications costs in connection with these
services, reducing the overall cost of their Internet access and business
services solutions and significantly increasing pricing pressures on us. The
ability of our competitors to acquire other ISPs, to enter into strategic
alliances or joint ventures or to bundle other services and products with
Internet access or business services could also put us at a significant
competitive disadvantage.
BROADBAND TECHNOLOGIES. We also face competition from companies that
provide broadband connections to consumers' homes, including local and
long-distance telephone companies, cable television companies, electric utility
companies, and wireless communications companies. These companies may use
broadband technologies to include Internet access or business services such as
Web hosting in their basic bundle of services or may offer Internet access or
business services for a nominal additional charge. Broadband technologies enable
consumers to transmit and receive print, video, voice and data in digital form
at significantly faster access speeds than existing dial-up modems.
The companies that own these broadband networks could prevent us from
delivering Internet access through the wire and cable connections that they own.
Cable television companies are not currently required to allow ISPs to access
their broadband facilities and
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the availability and terms of ISP access to broadband local telephone company
networks are under regulatory review. Our ability to compete with telephone and
cable television companies that are able to support broadband transmission, and
to provide better Internet services and products, may depend on future
regulation to guarantee open access to the broadband networks. However, in
January 1999, the Federal Communications Commission declined to take any action
to mandate or otherwise regulate access by ISPs to broadband cable facilities at
this time. It is unclear whether and to what extent local and state regulatory
agencies will take any initiatives to implement this type of regulation, and
whether they will be successful in establishing their authority to do so.
Similarly, the FCC is considering proposals that could limit the right of ISPs
to connect with their customers over broadband local telephone lines. In
addition to competing directly in the ISP market, both cable and telephone
facilities operators are also aligning themselves with certain ISPs who would
receive preferential or exclusive use of broadband local connections to end
users. If high-speed, broadband facilities increasingly become the preferred
mode by which customers access the Internet and we are unable to gain access to
these facilities on reasonable terms, our business, financial condition and
results of operations could be materially adversely affected, including our
ability to repay the notes.
NO INTERNATIONAL OPERATIONS. We do not currently compete internationally,
except that we have a small number of Canadian subscribers obtained in the Spry
acquisition. If the ability to provide Internet access internationally becomes a
competitive advantage in the Internet access industry, we may be at a
competitive disadvantage relative to our competitors.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS OR AVOIDING CLAIMS
THAT WE INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.
Our success depends in part upon our software and related documentation. We
principally rely upon copyright, trade secret, and contract laws to protect our
proprietary technology. We cannot be certain that we have taken adequate steps
to prevent misappropriation of our technology or that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology.
We have permission and, in some cases, licenses from each manufacturer of
the software that we bundle in MindSpring's front-end software product for
subscribers. Although we do not believe that the software or the trademarks we
use or any of the other elements of our business infringe on the proprietary
rights of any third parties, third parties may assert claims against us for
infringement of their proprietary rights and these claims may be successful. We
might also face third party claims as a result of our acquisition of software,
trademarks and other proprietary technology from Spry and NETCOM.
We could incur substantial costs and diversion of management resources in
the defense of any claims relating to proprietary rights, which could materially
adversely affect our business, financial condition, and results of operations.
Parties making these claims could secure a judgment awarding substantial damages
as well as injunctive or other equitable relief that could effectively block our
ability to license our products in the United States or abroad. Such a judgment
could have a material adverse effect on our business, financial condition and
results of operations. If a third party asserts a claim relating to proprietary
technology or information against us, we may seek licenses to the intellectual
property from the third party. We cannot be certain, however, that third parties
will extend licenses to us on commercially reasonable terms, or at all. If we
fail to obtain the necessary licenses or
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<PAGE> 26
other rights, it could materially adversely affect our business, financial
condition and results of operations, including our ability to repay the notes.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our success depends upon the continued efforts of our senior management
team and our technical, marketing, and sales personnel. These employees may
voluntarily terminate their employment with us at any time. Our success also
depends on our ability to attract and retain additional highly qualified
management, technical, marketing, and sales personnel. The process of hiring
employees with the combination of skills and attributes required to carry out
our strategy can be extremely competitive and time-consuming. We may not be able
to successfully retain or integrate existing personnel or identify and hire
additional personnel. If we lose the services of key personnel or are unable to
attract additional qualified personnel, our business, financial condition and
results of operations could be materially and adversely affected, including our
ability to repay the notes.
ITC HOLDING COMPANY, INC., ONE OF OUR PRINCIPAL STOCKHOLDERS, AND OUR MANAGEMENT
CAN EXERCISE SIGNIFICANT INFLUENCE OVER MINDSPRING.
ITC Holding Company, Inc. indirectly owns approximately 18.5% of our common
stock as of February 28, 1999. MindSpring's executive officers and directors own
an aggregate of approximately 9.6% of our common stock as of the same date. As a
result, if ITC Holding and management act together, they would be able to
exercise significant influence over most matters requiring stockholder approval,
including the election of directors and the approval of significant corporate
matters, such as some types of change-of-control transactions. The common stock
of MindSpring owned by ITC Holding is pledged to ITC Holding's lenders in
connection with a credit facility. If ITC Holding's subsidiaries default under
the credit facility, ITC Holding could lose ownership of all of its stock in
MindSpring and someone unknown to us would become a significant stockholder of
MindSpring.
SOME OF OUR DIRECTORS HAVE CONFLICTS OF INTEREST INVOLVING ITC HOLDING.
ITC Holding, as a significant stockholder of MindSpring, and Campbell B.
Lanier, III, William H. Scott, III, and O. Gene Gabbard, who are directors of
MindSpring and directors, stockholders, and, in the case of Messrs. Lanier and
Scott, officers of ITC Holding, are in positions involving the possibility of
conflicts of interest with respect to transactions concerning MindSpring. Some
decisions concerning our operations or financial structure may present conflicts
of interest between us and ITC Holding and/or its affiliates. For example, if we
are required to raise additional capital from public or private sources to
finance our anticipated growth and contemplated capital expenditures, our
interests might conflict with those of ITC Holding and/or its affiliates with
respect to the particular type of financing sought. In addition, we may have an
interest in pursuing acquisitions, divestitures, financings, or other
transactions that, in our judgment, could be beneficial to us, even though the
transactions might conflict with the interests of ITC Holding and/or its
affiliates. If these conflicts do occur, ITC Holding and its affiliates may
exercise their influence in their own best interests.
We currently engage and expect in the future to engage in transactions with
ITC Holding and/or its affiliates. In addition, we provide Internet access to
various companies controlled by ITC Holding, although the revenue we derive from
these sources is not substantial. We have a policy that requires any material
transaction with our officers, directors, or principal
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<PAGE> 27
stockholders, or their affiliates, to be on terms no less favorable to
MindSpring than we reasonably could have obtained in arm's-length transactions
with independent third parties. We believe that each current transaction in
which we are engaged with an affiliate complies with this policy.
THE ABILITY OF OUR STOCKHOLDERS TO EFFECT CHANGES IN CONTROL OF MINDSPRING IS
LIMITED.
There are provisions in our Amended and Restated Certificate of
Incorporation, as amended, our Amended and Restated Bylaws, and the Delaware
General Corporation Law that could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer, or proxy contest
involving MindSpring or could discourage a third-party from attempting to
acquire control of MindSpring, even if these events would be beneficial to the
interests of the stockholders. In particular, our board of directors could delay
a change in control of MindSpring. In addition, our Amended and Restated
Certificate of Incorporation authorizes the board of directors to provide for
the issuance of shares of preferred stock of MindSpring, in one or more series,
which the board of directors could issue without further stockholder approval
and with terms and conditions and rights, privileges, and preferences determined
by the board of directors. We have no current plans to issue any shares of
preferred stock. We are also governed by Section 203 of the Delaware Corporation
Law. In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless specified conditions are met. These
factors could have the effect of delaying, deferring, or preventing a change of
control of MindSpring.
WE MAY BECOME REGULATED BY THE FEDERAL COMMUNICATIONS COMMISSION OR OTHER
GOVERNMENT AGENCIES.
As an Internet service provider, we are not currently directly regulated by
the Federal Communications Commission or any other agency, other than
regulations applicable to businesses generally. In a report to Congress adopted
on April 10, 1998, the FCC reaffirmed that Internet service providers should be
classified as unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the Telecommunications Act of
1996.
This finding is important because it means that regulations that apply to
telephone companies and similar carriers do not apply to us. We also are not
required to contribute a percentage of our gross revenues to support "universal
service" subsidies for local telephone services and other public policy
objectives, such as enhanced communications systems for schools, libraries, and
some health care providers. The FCC action is also likely to discourage states
from regulating Internet service providers as telecommunications carriers or
imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. We cannot predict whether in the future the FCC
will modify its current policies against regulation of ISPs.
MindSpring also could be affected by any change in the ability of customers
to reach our network through a dial-up telephone call without any additional
charges. This practice
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has allowed ISPs to offer flat-rate, non-usage-sensitive pricing, and has been
an important reason for the growth in Internet use. Recently, the FCC ruled that
connections linking end users to their ISPs are jurisdictionally interstate
rather than local, but the FCC did not subject such calling to the access
charges that apply to traditional telecommunications companies. Local telephone
companies assess access charges to long distance companies for the use of the
local telephone network to originate and terminate long distance calls,
generally on a per-minute basis. MindSpring could be adversely affected by any
regulatory change that would result in application of access charges to Internet
service because this would substantially increase the cost of using the
Internet. However, the FCC Chairman has stated that he opposes Internet-related
access charges, and we believe that this development is unlikely, with one
possible exception that is not currently relevant to our business. Specifically,
there is substantial debate as to whether carrier access charges, or the
universal support obligations discussed above, should apply to Internet-based
telephone services that substitute for conventional telephony. We have no
current plans to install gateway equipment and offer telephony, and so we do not
believe we would be directly affected by these developments were they to occur.
The law relating to the liability of Internet service providers and on-line
services companies for information carried on, stored on, or disseminated
through their network is unsettled, even with the recent enactment of the
Digital Millennium Copyright Act. While no one has ever filed a claim against us
relating to information carried on, stored on, or disseminated through our
network, someone may file a claim of that type in the future and may be
successful in imposing liability on us. If that happens, we may have to spend
significant amounts of money to defend ourselves against these claims and, if we
are not successful in our defense, the amount of damages that we will have to
pay may be significant. Any costs that we incur as a result of defending these
claims or the amount of liability that we may suffer if our defense is not
successful could materially adversely affect our business, financial condition
and results of operations, including our ability to repay any of our debt
securities.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide to
take actions to reduce our exposure to this type of liability. This may require
us to spend significant amounts of money for new equipment and may also require
us to discontinue offering some of our products or services.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to some types of
content by minors, pricing, bulk e-mail or "spam," encryption standards,
consumer protection, electronic commerce, taxation, copyright infringement, and
other intellectual property issues. We cannot predict the impact, if any, that
any future regulatory changes or developments may have on our business,
financial condition, and results of operations. Changes in the regulatory
environment relating to the Internet access industry, including regulatory
changes that directly or indirectly affect telecommunication costs or increase
the likelihood or scope of competition from regional telephone companies or
others, could have a material adverse effect on our business, financial
condition and results of operations, including our ability to repay the notes.
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<PAGE> 29
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON MINDSPRING.
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 21st century from dates in the 20th
century. As a result, various problems may arise from the improper processing of
dates and date-sensitive calculations by computers and other machinery as the
Year 2000 is approached and reached.
Our failure, or the failure of third parties on which we rely, to
adequately address Year 2000 readiness issues could result in an interruption,
or a failure, of some normal business activities or operations. Presently, we
believe that the primary risks that we face with regard to the Year 2000 are
those arising from third party services or products.
In particular, MindSpring depends heavily on a significant number of third
party vendors to provide both network services and equipment. A significant Year
2000-related disruption of these network services or equipment could cause our
customers to consider seeking alternate providers or cause an unmanageable
burden on customer service and technical support. This in turn could materially
and adversely affect MindSpring's results of operations, liquidity and financial
condition.
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, or if a large portion of our
customers are unable to access the Internet due to Year-2000 related issues in
connection with their own systems, MindSpring's results of operations, liquidity
and financial condition could be materially and adversely affected.
We also face Year 2000 risks related to the acquisitions we make. If we
fail to identify and address Year 2000 issues in connection with our
acquisitions, our results of operations, liquidity and financial condition could
be materially and adversely affected.
We have established a Year 2000 readiness program to coordinate appropriate
activity to be taken to address the Year 2000 issue. As of December 31, 1998, we
had incurred approximately $75,000 in connection with the implementation of the
program. We expect to incur an additional $250,000 to $300,000 of expenses to
implement the remainder of the Year 2000 readiness program. These estimates do
not include additional costs which may be incurred in connection with expanding
the program to include the systems and products acquired in the Spry and NETCOM
transactions. These are our best estimates, and we do not believe that the total
costs will have a material affect on our business. However, if the actual costs
resulting from implementation of the Year 2000 readiness program significantly
exceed our estimates, they may have a material adverse effect on our results of
operations, liquidity and financial condition, including our ability to repay
the notes.
OUR CREDIT FACILITY CONTAINS RESTRICTIVE COVENANTS.
Our credit facility contains restrictions on MindSpring and any of our
future subsidiaries that affect, and in some cases prohibit or significantly
limit, our ability and the ability of our future subsidiaries, if any, to:
- incur additional indebtedness, excluding the notes from this offering;
- create liens;
- make investments;
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- declare and pay cash dividends;
- issue some types of convertible and redeemable stock; and
- sell assets.
Our credit facility also requires us to maintain specified financial ratios
and satisfy financial condition tests. Our ability to meet those financial
ratios and tests can be affected by events beyond our control. We can offer no
assurance that we will meet those tests. In addition, these restrictive
covenants may adversely affect our ability to finance our future operations or
capital needs, or to engage in other business activities that may be in our
interest. A breach of any of these covenants could result in a default under the
credit facility. Upon the occurrence of an event of default under the credit
facility, our lenders could elect to declare all amounts outstanding under the
credit facility, together with any accrued interest, to be immediately due and
payable. If we were unable to repay those amounts, our lenders could proceed
against the collateral granted to them to secure that indebtedness.
Substantially all of our assets are pledged as collateral under the credit
facility. If the credit facility were to be accelerated, we can offer no
assurance that our assets would be sufficient to repay in full that
indebtedness. An event of default or acceleration of the credit facility could
have a material adverse effect on our business, financial condition and results
of operations, including our ability to repay the notes.
THE NOTES WILL RANK BELOW OUR EXISTING AND FUTURE SENIOR DEBT AND WE MAY BE
UNABLE TO REPAY OUR OBLIGATIONS UNDER THE NOTES.
The notes will be unsecured and subordinated in right of payment to all of
our existing and future senior debt, including borrowings under our secured
credit facility. Because the notes are subordinate to our senior debt, in the
event of (1) our bankruptcy, liquidation or reorganization, (2) upon the
acceleration of the notes due to an event of default under the indenture and (3)
in certain other events, we will make payments on the notes only after we have
satisfied all of our senior debt obligations. Therefore, we may not have
sufficient assets remaining to pay amounts on any or all of the notes. In
addition, although we currently do not have any subsidiaries, the notes will be
subordinate to all liabilities, including trade payables, of any subsidiaries
that we may in the future acquire or establish. Consequently, our right to
receive assets of any future subsidiaries upon their liquidation or
reorganization, and the rights of the holders of the notes to share in those
assets, would be subordinate to the claims of the subsidiaries' creditors.
The notes will be our obligations exclusively. The notes indenture does not
limit our ability, or that of any of our future subsidiaries, to incur senior
debt, other indebtedness and other liabilities. We may have difficulty paying
our obligations under the notes if we, or any future subsidiary, incur
additional indebtedness or liabilities. As of February 28, 1999, before giving
effect to the use of proceeds from this notes offering and the concurrent common
stock offering, we had approximately $84.8 million of senior debt outstanding,
including the $80 million we borrowed under our credit facility to finance the
NETCOM acquisition. We anticipate that from time to time we may incur additional
indebtedness, including senior debt, which could adversely affect our ability to
pay our obligations under the notes.
WE MAY BE UNABLE TO REPURCHASE THE NOTES.
There is no sinking fund with respect to the notes, and at maturity the
entire outstanding principal amount of the notes will become due and payable by
MindSpring. If a change of
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control, as defined in this prospectus supplement, of MindSpring occurs, each
holder of the notes may require that we repurchase all or a portion of the
notes. At maturity or if a change of control does occur, we can not assure you
that we would have sufficient funds or would be able to arrange for additional
financing to pay the repurchase price for all the notes tendered to us or due at
maturity. Under the terms of the notes indenture, we may elect, subject to
certain conditions, to pay the repurchase price with shares of common stock. Our
existing credit facility contains, and any future borrowing arrangements or
agreements relating to senior debt to which we become a party, including any
refinancings of our existing credit facility, may contain restrictions on, or
prohibitions against, our repurchase of the notes, regardless of whether such
repurchase is made with cash or common stock. In the event that the maturity
date or a change of control occurs at a time when we are prohibited from
repurchasing the notes, we could try to obtain the consent of the lenders under
those arrangements to purchase the notes or we could attempt to refinance the
borrowings that contain the restrictions. If we do not obtain the necessary
consents or refinance these borrowings, we will be unable to repurchase the
notes. In that case, our failure to repurchase any tendered notes or notes due
upon maturity would constitute an event of default under the notes indenture.
Any such default, in turn, may cause a default under the terms of our senior
debt, including under the credit facility. As a result, in such circumstances,
the subordination provisions of the notes indenture would, absent a waiver,
prohibit any repurchase of the notes until we pay in full the senior debt.
THERE MAY BE NO PUBLIC MARKET FOR THE NOTES.
The notes will be a new issue of securities with no established trading
market. Although the underwriters for this notes offering have advised us that
they intend to make a market in the notes, they have no obligation to do so and
may discontinue any such market making, at any time without notice. In addition,
such market making activity will be subject to the limits imposed by the
Securities Act and Exchange Act. Accordingly, we cannot assure you that any
market for the notes will develop or, if it does develop, that it will be
maintained. Various factors could have a materially adverse effect on the
trading price of the notes, including (1) the failure of an active market to
develop and (2) fluctuations in the prevailing interest rates. In addition, our
operating results and prospects, could from time to time be below the
expectations of public market analysts and investors, which could adversely
affect public perception of our creditworthiness and therefore, the trading
price of the notes.
OUR STOCK PRICE WILL FLUCTUATE, AND COULD FLUCTUATE SIGNIFICANTLY.
Since our common stock has been publicly traded, the market price of our
common stock has fluctuated over a wide range and may continue to do so in the
future. Significant fluctuations in the market price of our common stock may
occur in response to various factors and events, including, among other things:
- the depth and liquidity of the trading market for our common stock;
- quarterly variations in actual or anticipated operating results;
- growth rates;
- changes in estimates by analysts;
- market conditions in the industry, including demand for Internet access;
- announcements by competitors;
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- regulatory actions; and
- general economic conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations, which have particularly affected the market
prices of the stocks of high-technology companies and which may be unrelated to
the operating performance of particular companies. Furthermore, our operating
results and prospects from time to time may be below the expectations of public
market analysts and investors. The occurrence of any of these events could
result in a material decline in the price of our common stock.
WE DO NOT ANTICIPATE THAT WE WILL PAY CASH DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends in the foreseeable future. In addition,
our credit facility contains limits on our ability to declare and pay cash
dividends.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the information
incorporated by reference, include "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. 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 the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions.
Although we believe that our expectations that are expressed in these
forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be materially
different from and worse than our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations
include, without limitation:
- that MindSpring will not retain or grow its subscriber base,
- that MindSpring will not be able to successfully integrate new
subscribers and/or assets obtained through acquisitions,
- that MindSpring will fail to be competitive with existing and new
competitors,
- that MindSpring will not be able to sustain its current growth,
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- that MindSpring will not adequately respond to technological developments
affecting the Internet, and
- that financing will not be available to MindSpring if and as needed.
The above list is intended to identify some of the principal factors that
could cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors are
not intended to represent a complete list of all risks and uncertainties
inherent in MindSpring's business, and should be read in conjunction with the
more detailed cautionary statements included in this prospectus supplement under
the caption "Risk Factors."
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USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of the notes
offered with this prospectus supplement and accompanying prospectus of
approximately $174.3 million. This estimate includes the effect of the
underwriters' exercise of their over-allotment option and the deduction of the
estimated underwriting discounts and commissions and other fees and expenses
payable by us of approximately $250,000.
We intend to use the net proceeds from this offering to fund expansion of
our business, including for additional working capital and general corporate
purposes. In addition, we may apply a portion of the net proceeds from this
offering to acquire complementary businesses, subscriber accounts, products or
technologies. Depending on the nature of any such acquisitions, we could apply
all or substantially all of the net proceeds from this offering to those
acquisitions. As part of our ongoing corporate development activities, we expect
that we will continue to consider acquisition opportunities. We are not
currently evaluating any acquisition opportunities. We cannot assure you,
however, that we will identify suitable acquisition candidates or that we will
consummate any acquisition.
We currently intend to allocate substantial proceeds to each of the
foregoing uses. However, the precise allocation of funds among these uses will
depend on future technological, regulatory, and other developments in or
affecting our business, the competitive climate in which we operate and the
emergence of future opportunities. Pending such uses, we intend to invest the
net proceeds from this offering in short-term, interest-bearing securities.
Concurrently with the notes offering, we are offering 2,400,000 shares of
common stock, plus an additional 360,000 shares to cover over-allotments by the
underwriters for that offering, by means of a separate prospectus supplement.
The completion of this notes offering and the common stock offering are not
dependent on one another. We intend to use a portion of the net proceeds from
the common stock offering to repay all amounts outstanding under our credit
facility of approximately $80.8 million, which includes approximately $800,000
of interest as of April 7, 1999. If we do not complete the common stock
offering, we intend to use a portion of the proceeds from this notes offering to
repay the amounts outstanding under the credit facility. This indebtedness bears
interest, at our option, at either (a) a base rate equal to the greater of First
Union National Bank's prime lending rate or the overnight federal funds rate
plus 0.50% or (b) the reserve adjusted LIBOR rate, plus an applicable margin.
The applicable margin is an annual rate which fluctuates based on our ratio of
total debt to EBITDA and which is between 0.25% and 1.00% for base rate
borrowings and between 1.25% and 2.00% for LIBOR rate borrowings. We incurred
this indebtedness to fund a portion of the NETCOM acquisition. Our credit
facility expires on February 17, 2002.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market under the symbol
"MSPG." The following table shows for the periods indicated the high and low
sales prices per share of our common stock as reported by the Nasdaq National
Market (as adjusted for our 3-for-1 stock split effected on July 24, 1998).
<TABLE>
<CAPTION>
1997 HIGH LOW
---- ------- ------
<S> <C> <C>
First Quarter........................................ $ 3.42 $ 1.92
Second Quarter....................................... 3.79 2.21
Third Quarter........................................ 8.21 3.54
Fourth Quarter....................................... 11.54 6.08
</TABLE>
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------- ------
<S> <C> <C>
First Quarter........................................ $ 23.00 $ 9.20
Second Quarter....................................... 34.75 16.17
Third Quarter........................................ 52.38 25.31
Fourth Quarter....................................... 79.00 23.13
</TABLE>
<TABLE>
<CAPTION>
1999 HIGH LOW
---- ------- ------
<S> <C> <C>
First Quarter........................................ $125.00 $62.50
Second Quarter (through April 7, 1999)............... 111.25 85.31
</TABLE>
On April 7, 1999, the last reported sale price of the common stock on the
Nasdaq National Market was $102 per share. At April 5, 1999, there were
approximately 718 holders of record of our common stock.
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends on our common stock in the foreseeable
future. The current policy of our board of directors is to retain earnings to
finance the expansion of our operations. Our board of directors will determine
future declaration and payment of dividends, if any, in light of the
then-current conditions, including our earnings, operations, capital
requirements, financial condition, restrictions in financing agreements, and
other factors that they deem are relevant. In addition, our ability to pay
dividends is limited by the terms of our credit facility.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998
(1) on a historical basis, (2) as adjusted to reflect the sale of $179,975,000
aggregate principal amount of notes and (3) as further adjusted to reflect the
sale of 2,400,000 shares of our common stock at an offering price of $100.00 per
share and the application of the proceeds from that offering, in each case net
of MindSpring's estimated offering expenses and the underwriting discount. You
should read this table together with the section entitled "Use of Proceeds" and
our financial statements and notes thereto and other financial and operating
data included elsewhere in this prospectus supplement and the accompanying
prospectus or incorporated into this prospectus supplement and the accompanying
prospectus by reference.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------------
AS AS FURTHER
HISTORICAL(1) ADJUSTED(1) ADJUSTED(1)
------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash or cash equivalents.......................... $167,743 $342,069 $571,369
======== ======== ========
Indebtedness(2):
Capital leases.................................. 5,119 5,119 5,119
Debt............................................ 0 179,975 179,975
-------- -------- --------
Total indebtedness......................... 5,119 185,094 185,094
-------- -------- --------
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000 shares
authorized; 0 shares issued and
outstanding.................................. -- -- --
Common Stock, $.01 par value, 60,000 shares
authorized; 28,284 shares issued and
outstanding historical and as adjusted;
30,684 shares issued and outstanding as
further adjusted(3).......................... 283 283 307
Additional paid-in capital(3)..................... 209,983 209,983 439,259
Accumulated deficit............................... (3,185) (3,185) (3,185)
-------- -------- --------
Total stockholders' equity................. 207,081 207,081 436,381
-------- -------- --------
Total capitalization.............................. $212,200 $392,175 $621,475
======== ======== ========
</TABLE>
- ---------------
(1) Excludes the effects of the NETCOM acquisition and related borrowings under
our secured credit facility in February 1999 which would decrease cash and
cash equivalents by approximately $135 million, increase indebtedness by $80
million and increase stockholders' equity by $30 million on a historical
basis. On an "adjusted basis" and on an "as further adjusted basis," cash
and cash equivalents would decrease by approximately $215 million and
stockholders' equity would increase by $30 million. See note 10 to
MindSpring's audited financial statements for the fiscal year ended December
31, 1998 included in this prospectus supplement at page F-18 for certain pro
forma and other information concerning these and other events. Also see our
Current Report on Form 8-K filed with the SEC on February 25, 1999 for more
detailed pro forma information.
(2) Includes current portion of related indebtedness.
(3) Excludes approximately 2,123,000 shares of common stock reserved for
issuance upon exercise of stock options granted as of December 31, 1998.
There were 2,486,974 shares of common stock reserved for issuance upon
exercise of stock options granted as of March 31, 1999.
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SELECTED FINANCIAL AND OPERATING DATA
The following table contains selected financial and operating data for
MindSpring. The selected historical statements of operations data for the period
from February 24, 1994, MindSpring's inception, to December 31, 1994 and the
years ended December 31, 1995, 1996, 1997 and 1998 and the selected historical
balance sheet data as of December 31, 1994, 1995, 1996, 1997 and 1998 have been
derived from financial statements of MindSpring, which have been audited by
Arthur Andersen LLP, independent public accountants, whose report with respect
to these financial statements is included elsewhere in this prospectus
supplement or the accompanying prospectus. The inception period referred to in
the table below is the period from February 24, 1994, MindSpring's inception, to
December 31, 1994.
The information presented in the table excludes the effects of the NETCOM
acquisition and borrowings under our secured credit facility, both of which
occurred on February 17, 1999. See note 10 to MindSpring's audited Financial
Statements for the fiscal year ended December 31, 1998 included in this
prospectus supplement at page F-18 for certain pro forma and other information
concerning these and other events. Also see our Current Report on Form 8-K filed
with the SEC on February 25, 1999 for more detailed pro forma information.
You should read the following selected historical financial and operating
data with the sections entitled "Summary Financial and Operating Data," "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and MindSpring's financial statements and notes thereto
and other financial and operating data included elsewhere in this prospectus
supplement and the accompanying prospectus or incorporated into this prospectus
supplement and the accompanying prospectus by reference.
The total debt information included in the balance sheet data presented
below contains the current portion of related indebtedness and the stockholders'
equity information included in the balance sheet data presented below excludes
approximately 2,123,000 shares of common stock reserved for issuance upon
exercise of stock options granted as of December 31, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
INCEPTION ----------------------------------------
PERIOD 1995 1996 1997 1998
--------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Access........................................ $ 70 $ 1,455 $ 13,420 $ 40,925 $ 95,852
Business services............................. -- 260 2,286 7,711 14,735
Subscribers start-up fees..................... 33 512 2,426 3,920 4,086
----- ------- -------- -------- --------
Total revenues............................ 103 2,227 18,132 52,556 114,673
Cost and expenses:
Cost of revenues -- recurring................. 37 627 6,332 15,203 31,724
Cost of subscriber start-up fees.............. 15 339 1,876 1,619 2,612
Selling, general and administrative........... 121 2,230 14,161 30,784 57,324
Depreciation and amortization................. 5 265 3,285 8,695 15,227
----- ------- -------- -------- --------
Total operating expenses.................. 178 3,461 25,654 56,301 106,887
----- ------- -------- -------- --------
</TABLE>
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<PAGE> 38
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
INCEPTION ----------------------------------------
PERIOD 1995 1996 1997 1998
--------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating gain (loss)........................... (75) (1,234) (7,522) (3,745) 7,786
Interest income (expense), net.................. -- (725) (90) (338) 1,214
----- ------- -------- -------- --------
Income (loss) before taxes...................... (75) (1,959) (7,612) (4,083) 9,000
Income tax provision............................ -- -- -- -- 1,544
----- ------- -------- -------- --------
Net income (loss)............................... $ (75) $(1,959) $ (7,612) $ (4,083) $ 10,544
===== ======= ======== ======== ========
PER SHARE DATA:
Basic earnings (loss) per share................. $ (0.23) $ (0.48) $ (0.18) $ 0.43
Diluted earnings (loss) per share............... $ (0.20) $ (0.48) $ (0.18) $ 0.41
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic........................................... 8,664 15,758 22,542 24,611
Diluted......................................... 9,930 15,758 22,542 25,431
OTHER OPERATING DATA:
Approximate number of subscribers at end of
period........................................ 1,000 12,000 122,000 278,000 693,000
Approximate number of employees at end of
period........................................ 8 95 321 502 977
EBITDA(1)....................................... $ (70) $ (969) $ (4,237) $ 4,950 $ 23,013
EBITDA margin(1)................................ (68)% (44)% (23)% 9% 20%
CASH FLOW DATA:
Operations...................................... (33) (70) (2,005) 11,354 35,501
Investing....................................... (127) (3,724) (21,336) (9,002) (47,647)
Financing....................................... 745 3,634 32,569 (2,619) 170,503
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
INCEPTION
PERIOD 1995 1996 1997 1998
--------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $585 $ 425 $ 9,653 $ 9,386 $167,743
Working capital................................... 547 (3,100) 5,027 (5,353) 137,106
Total assets...................................... 722 4,845 35,232 44,286 247,599
Total debt, including current maturities.......... -- 2,500 4,005 9,740 5,119
Total stockholders' equity........................ 670 482 25,407 21,413 207,081
</TABLE>
- ---------------
(1) EBITDA represents operating gain (loss) plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for
operating income, net income or cash flows from operating activities for
purposes of analyzing MindSpring's operating performance, financial position
and cash flows. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
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<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All common stock numbers and per share amounts in this report give effect
to a 3-for-1 stock split effected by MindSpring in June 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;
- 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 693,000 subscribers at December 31, 1998,
including over 21,000 Web hosting customers. In February 1999, we completed the
NETCOM acquisition, which increased our subscriber base to approximately 1.1
million subscribers, including approximately 45,000 Web hosting subscribers.
This acquisition is described below.
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<PAGE> 40
In addition, we have rapidly increased revenues and have achieved
profitability ahead of other national ISPs. 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. For
the year ended December 31, 1998, we had revenues of approximately $115 million,
EBITDA of approximately $23 million, net income of approximately $8.8 million
and earnings per share of $0.35, in each case 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 and our earnings per share were
$0.41.
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 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. 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 September 10, 1998, we entered into an Asset Purchase
Agreement with AOL and Spry, a wholly owned subsidiary of AOL, to purchase
assets used in connection with the consumer dial-up Internet access business
operated by Spry. 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. These
assets included a leased customer support facility and a leased network
operations facility in Seattle, Washington. MindSpring also acquired all rights
held by Spry to the "Sprynet" name. On October 15, 1998, we completed the Spry
acquisition and we made an initial cash payment to AOL of $25 million. 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 January 5, 1999, we entered into an Asset Purchase
Agreement with NETCOM, which has changed its name to ICG PST, Inc., a wholly
owned subsidiary of ICG Communications, Inc., to purchase assets used in
connection with the
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<PAGE> 41
United States Internet access and Web hosting business operated by NETCOM. In
that 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 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 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 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. On February 17,
1999, we borrowed approximately $80 million under the credit facility to finance
the NETCOM acquisition. Our obligations under the credit facility are secured by
substantially all of MindSpring's assets. We intend to repay all amounts
outstanding under the credit facility with a portion of the net proceeds from
the offering of common stock that we are undertaking concurrently with this
notes offering. If we do not complete the common stock offering, we intend to
use a portion of the proceeds from this notes offering to repay those amounts.
See "Use of Proceeds."
Anticipated Effects of the Spry and NETCOM Acquisitions. The Spry and
NETCOM acquisitions 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 of
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
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<PAGE> 42
- attempting to bring the cost structures associated with the acquired
subscribers and assets into alignment with MindSpring's historical cost
structure.
The Spry subscribers and assets were substantially integrated into
MindSpring's operations as of December 31, 1998. Net income for the fourth
quarter of 1998 was $1.9 million, excluding a one-time tax benefit of $1.8
million, compared to approximately $4.0 million for the third quarter of 1998.
This decrease resulted primarily from $2.3 million in amortization costs during
the fourth quarter attributable to the Spry acquisition.
The NETCOM acquisition has significantly increased MindSpring's customer
base from approximately 693,000 to approximately 1,100,000. Principally as a
result of 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 reported 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 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 from monthly subscriptions
from individuals for 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
years ended December 31, 1998 and 1997, 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. Start-up fees
for new subscribers vary depending upon the promotional method by which the
subscriber is acquired, ranging from $0 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 MindSpring's individual subscribers pay their MindSpring fees
automatically by pre-authorized monthly charges to the subscriber's credit card.
In addition, MindSpring earns revenue by providing Web-hosting, full-time
dedicated access connections to the Internet, other value-added services such as
Web page design,
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<PAGE> 43
domain registration, 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 21,000
Web-hosting subscribers as of December 31, 1998, not including approximately
22,000 Web-hosting subscribers acquired from NETCOM. 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
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. 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. Start-up expenses for each subscriber include primarily the
cost of diskettes and other product media, manuals, and packaging and delivery
costs associated with the materials provided to new subscribers. MindSpring does
not defer any subscriber start-up expenses.
Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer service and 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 subscription 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 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
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<PAGE> 44
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 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 services agreement with ICG PST, we will
pay for use of ICG PST's POPs at rates that are generally comparable to the
costs of using MindSpring POPs. We have an option for a second year under that
agreement, but on potentially different terms to be negotiated and agreed upon
by both parties. The ICG PST network services 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
services 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.
The board of directors has authorized an additional 1.5 million shares of
common stock for issuance pursuant to the exercise of stock options granted
under the 1995 Stock Option Plan, as amended, raising the total number of shares
that may be issued under the plan to 4.5 million. The board intends to submit
this increase in shares to the MindSpring stockholders for approval at the 1999
annual meeting to be held in May 1999. The board has granted options to purchase
approximately 300,000 shares of common stock in excess of the number of shares
currently approved by MindSpring's stockholders for issuance under the plan.
For accounting purposes, these excess grants have not occurred until
stockholder approval is obtained which is when over 50% of the stockholders
approve the necessary increase of shares at or before the annual stockholder
meeting scheduled for May 1999. Accordingly, we are currently evaluating various
alternatives to reduce our exposure to such potential additional expense. We
believe that we will be able to resolve this matter through negotiated
arrangements with a sufficient number of the employees who received such
options, such that the related compensation expense will not have a material
impact on the Company.
If we do not take any actions to reduce, or are unsuccessful in reducing,
our exposure to this additional expense, we will be required to record
additional compensation expense over the remaining vesting period of these
options, which is approximately 33 to 45 months. The additional compensation
expense would be equal to the number of additional options multiplied by the
difference between the exercise price for those options and the market price of
the common stock on the date stockholder approval is obtained. Based on our
current stock price, the amount of such compensation expense would be
approximately
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<PAGE> 45
$4.2 million in the aggregate or approximately $115,000 per month over 33 to 45
months. If we are unable to negotiate arrangements with respect to a sufficient
number of such options and/or the price of our common stock on the applicable
measurement date is higher than the current price, the amount of additional
compensation expense could be materially greater, which may have a material
adverse effect on our business, financial condition, and results of operations,
including EBITDA and net income.
RESULTS OF OPERATIONS
The following table shows financial data for the years ended December 31,
1998, 1997, and 1996. Operating results shown for 1998 do not reflect the NETCOM
acquisition. Operating results for any period are not necessarily indicative of
results for any future period. Dollar amounts (except per share data) are shown
in thousands.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------ -------------------
% OF % OF % OF
(000'S) REVENUE (000'S) REVENUE (000'S) REVENUE
--------- ------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Dial-up access to Internet............ $ 95,852 84 $40,925 78 $ 13,420 74
Business services..................... 14,735 13 7,711 15 2,286 13
Start-up fees......................... 4,086 3 3,920 7 2,426 13
-------- --- ------- --- -------- ---
Total revenue..................... $114,673 100 $52,556 100 $ 18,132 100
Cost and expenses:
Cost of revenues-recurring............ $ 31,724 28 $15,202 29 $ 6,332 35
Cost of revenues-start-up fees........ 2,612 2 1,620 3 1,876 10
Selling, general, and
administrative...................... 57,324 50 30,784 59 14,161 78
-------- --- ------- --- -------- ---
Customer base amortization............ $ 7,048 6 $ 4,210 8 $ 1,521 8
Depreciation.......................... 8,179 7 4,485 9 1,764 10
-------- --- ------- --- -------- ---
Operating income (loss)................. 7,786 7 (3,745) (7) (7,522) (42)
Interest income (expense), net........ 1,214 1 (338) (1) (90) (1)
-------- --- ------- --- -------- ---
Pre tax income (loss)................... 9,000 8 (4,083) (8) (7,612) (42)
Provision for income taxes............ 1,544 1 -- -- -- --
-------- --- ------- --- -------- ---
Net income (loss)....................... $ 10,544 9 $(4,083) (8) $ (7,612) (42)
======== === ======= === ======== ===
PER SHARE DATA:
Diluted net income (loss) per share..... $ 0.41 $ (0.18) $ (0.48)
Weighted average common shares
outstanding........................... 25,431 22,542 15,758
OPERATING DATA:
Approximate number of subscribers at end
of year............................... 693,000 278,300 121,794
Number of MindSpring employees at end of
year.................................. 977 502 321
EBITDA (1).............................. $ 23,013 20 $ 4,950 9 $ (4,237) (23)
-------- --- ------- --- -------- ---
</TABLE>
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<PAGE> 46
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- ------------------ -------------------
% OF % OF % OF
(000'S) REVENUE (000'S) REVENUE (000'S) REVENUE
--------- ------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Cash Flow (used in) from operations..... $ 35,501 $11,354 $ (2,005)
Cash flow (used in) from investing
activities............................ $(47,647) $(9,002) $(21,336)
Cash flow (used in) from financing
activities............................ $170,503 $(2,619) $ 32,569
</TABLE>
- ---------------
(1) EBITDA represents operating income (loss) plus depreciation and
amortization. EBITDA is provided because it is a measure commonly used by
investors to analyze and compare companies on the basis of operating
performance. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be construed as a
substitute for operating income, net income or cash flows from operating
activities for purposes of analyzing MindSpring's operating performance,
financial position and cash flows. EBITDA is not necessarily comparable with
similarly titled measures for other companies.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenue for the year ended December 31, 1998 totaled
approximately $114.7 million, as compared to approximately $52.6 million for the
year ended December 31, 1997. This approximately 118% increase in period
revenues resulted primarily from an approximately 150% increase in subscribers.
The greater proportional increase in subscribers was principally due to the
acquisition of Spry subscribers from AOL during the fourth quarter of 1998.
Revenues from dial-up access to the Internet for the year ended December 31,
1998 represented approximately 84% of the revenue, compared to approximately 78%
for the year ended December 31, 1997. Business services revenue decreased as a
percentage of revenue to approximately 13% for the year ended December 31, 1998,
compared to approximately 15% for the year ended December 31, 1997. This
decrease is primarily attributable to the large amount of dial-up customers
added through acquisitions in 1998. Subscriber start-up fees accounted for 3% of
revenue for the year ended December 31, 1998, as compared to approximately 7%
for the year ended December 31, 1997. MindSpring anticipates that as its
customer base continues to expand, subscriber start-up fees will progressively
represent a smaller percentage of revenue.
Cost of revenues-recurring. For the year ended December 31, 1998, cost of
revenues-recurring decreased to approximately 28% of total revenue, compared to
approximately 29% of total revenue for the year ended December 31, 1997. Cost of
revenues-recurring also decreased as a percentage of dial-up access revenue to
approximately 33% for the year ended December 31, 1998 from approximately 37%
for the year ended December 31, 1997. Not taking into account approximately $2
million in discounts we received in 1998 under our network services agreement
with PSINet, Inc., cost of revenues-recurring would have been approximately 35%
of total dial-up access revenue. Not taking into account approximately $2.1
million in discounts we received in 1997 under the network services agreement
with PSINet, Inc., cost of revenues-recurring would have been approximately 42%
of total dial-up access revenue. The discounts earned under the network services
agreement with PSINet ended in October 1998. This decrease of cost of
revenues-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 associated with MindSpring-owned POPs.
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Selling, general, and administrative expenses. Selling, general, and
administrative expenses were approximately 50% of revenue for the year ended
December 31, 1998, compared to approximately 59% of revenue for the year ended
December 31, 1997. The decrease in selling, general, and administrative expenses
as a percentage of revenue resulted from economies of scale with respect to
costs such as payroll that do not increase in direct proportion to increases in
revenue and from cost control efforts implemented by MindSpring's management.
EBITDA margin. EBITDA margin refers to EBITDA as a percentage of revenues.
EBITDA margin increased to approximately 20% for the year ended December 31,
1998, compared to 9% for the year ended December 31, 1997. The increase is
attributable to the significant revenue growth outpacing the related cost
increases principally as a result of economies of scale related to selling,
general, and administrative expenses as well as efficiencies and economies of
scale associated with MindSpring-owned POPs.
Depreciation and amortization. Depreciation and amortization expenses
decreased to approximately 13% of revenues for the year ended December 31, 1998,
compared to approximately 17% of revenues for the year ended December 31, 1997.
Amortization expense declined slightly to 6% of total revenues for the year
ended December 31, 1998, compared to approximately 8% for the year ended
December 31, 1997. Amortization expense resulted solely from acquired subscriber
bases, which are being amortized over three years. Depreciation expense was
approximately 7% of total revenues for the year ended December 31, 1998,
compared to approximately 9% for the year ended December 31, 1997. The decrease
in depreciation expense as a percentage of total revenues resulted from adding
capacity through increased use of network services purchased from third-party
providers, as opposed to increasing capacity by building additional
MindSpring-owned POPs, and from reductions in the cost of new equipment and
improved operating efficiencies within MindSpring's network. MindSpring
anticipates amortization expense to increase as a percentage of revenues as a
result of the Spry and NETCOM acquisitions.
Interest income (expense). The following table details the increase in
interest income in 1998 compared to 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Interest on capital leases............................. $ (754,000) $(473,000)
Interest on PSINet notes............................... (136,000) (276,000)
Interest income -- other............................... 2,104,000 411,000
---------- ---------
Interest income (expense) net.......................... $1,214,000 $(338,000)
========== =========
</TABLE>
Interest on capital leases increased for the year ended December 31, 1998,
compared to the year ended December 31, 1997, because MindSpring entered into
several new capital leases for equipment at the end of 1997. Interest income
increased in 1998 due to the increase in outstanding cash balances available for
investment as a result of positive operating cash flows and two public equity
offerings completed during the year. See "Liquidity and Capital Resources".
Income tax provision. For the year ended December 31, 1998 MindSpring
recorded a benefit for income taxes due to a one time benefit taken in the
fourth quarter of the year as a result of the removal of the valuation allowance
associated with MindSpring's deferred tax assets. MindSpring is continually
assessing its income tax situation and management believes that it is "more
likely than not" that the deferred tax assets will be realized in the future. In
the future, MindSpring expects to report taxable earnings, even though we expect
to be incurring net losses at the same time. This is principally due to the
requirement that,
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for tax purposes, subscriber acquisition costs must be amortized over 15 years,
compared to the three-year period applied for accounting purposes. For the year
ended December 31, 1997, no income tax benefit was recognized as MindSpring had
a net taxable loss for the year.
Net income (loss) and income (loss) per share. As a result of the factors
discussed above, MindSpring's net income for the year ended December 31, 1998
was $10.5 million, or $0.41 income per diluted share, compared to a net loss of
$4.1 million, or $0.18 basic and diluted loss per share, for the year ended
December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the year ended December 31, 1997 totaled
approximately $52.6 million, as compared to approximately $18.1 million for the
year ended December 31, 1996. The approximately 190% increase in revenues
resulted primarily from an approximately 129% increase in subscribers. Revenues
increased in a greater proportion than subscribers due to the subscribers
acquired from PSINet Inc. during the fourth quarter of 1996. Revenues from
dial-up access to the Internet for the year ended December 31, 1997 represented
approximately 78% of the revenue, compared to approximately 74% for the year
ended December 31, 1996. Business services revenue increased slightly to
approximately 15% of revenues for the year ended December 31, 1997, compared to
approximately 13% for the year ended December 31, 1996. This increase is
primarily attributable to the increase in the number of MindSpring's Web hosting
customers. Subscriber start-up fees accounted for 7% of revenues for the year
ended December 31, 1997, as compared to approximately 13% for the year ended
December 31, 1996. MindSpring anticipates that as its customer base continues to
expand, subscriber start-up fees will progressively represent a smaller
percentage of revenues.
Cost of revenues-recurring. For the year ended December 31, 1997, cost of
revenues-recurring decreased to approximately 29% of total revenues, compared to
approximately 35% of total revenues for the year ended December 31, 1996. Cost
of revenues-recurring also decreased as a percentage of dial-up access revenue
from approximately 47% for the year ended December 31, 1996 to approximately 37%
for the year ended December 31, 1997. Not taking into account approximately $2.1
million in discounts we received in 1997 under the PSINet Services Agreement,
cost of revenues-recurring would have been approximately 42% of total dial-up
revenue for the year ended December 31, 1997, compared to approximately 47% for
the year ended December 31, 1996. This decrease in cost of revenues-recurring as
a percentage of total revenues and as a percentage of dial-up access revenues
resulted primarily from increased efficiency and reduced network costs
associated with MindSpring-owned POPs.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were approximately 59% of revenues for the year ended
December 31, 1997, compared to approximately 78% of revenues for the year ended
December 31, 1996. The decrease in selling, general, and administrative expenses
as a percentage of revenues resulted from economies of scale with respect to
costs such as payroll that do not increase in direct proportion to increases in
revenue and to cost control efforts implemented by MindSpring's management.
EBITDA margin. EBITDA margin increased to approximately 9% for the year
ended December 31, 1997, compared to (23)% for the year ended December 31, 1996.
The increase is attributable to the significant revenue growth outpacing the
related cost increases principally as a result of economies of scale related to
selling, general, and administrative
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expenses, as well as efficiencies and economies of scale associated with
MindSpring-owned POPs.
Depreciation and amortization. Depreciation and amortization expenses
decreased to approximately 16% of revenues for the year ended December 31, 1997,
compared to approximately 18% of revenues for the year ended December 31, 1996.
Amortization expense remained steady at approximately 8% of revenue for both the
years ended December 31, 1997 and December 31, 1996. Amortization expense
resulted primarily from acquired customer bases which are being amortized over
three years. Depreciation expense was approximately 8% of total revenues for the
year ended December 31, 1997, compared to approximately 10% for the year ended
December 31, 1996. The decrease in depreciation expense as a percentage of total
revenues resulted from adding capacity through increased use of network services
purchased from third-party providers, as opposed to increasing capacity by
building additional MindSpring-owned POPs, and from reductions in cost of new
equipment and improved operating efficiencies within MindSpring's network.
Interest income (expense). The following table details the increase in
interest expense in 1997 compared to 1996:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Interest on capital leases............................... $(473,000) $(91,000)
Interest on PSINet notes................................. (276,000) (324,000)
Interest income -- other................................. 411,000 325,000
--------- --------
Interest expense, net.................................... $(338,000) $(90,000)
========= ========
</TABLE>
Interest on capital leases increased for the year ended December 31, 1997,
compared to the year ended December 31, 1996, because MindSpring entered into
several new capital leases for equipment. Interest income increased in 1997 due
to the increase in outstanding cash balances available for investment as a
result of positive operating cash flows.
Income tax provision. For the years ended December 31, 1997 and 1996, no
income tax benefit was recognized because MindSpring had a net taxable loss for
the year.
Net income (loss) and income (loss) per share. As a result of the factors
discussed above, MindSpring's net loss for the year ended December 31, 1997 was
$4.1 million, or $(0.18) basic and diluted loss per share, compared to a net
loss of $7.6 million, or $(0.48) basic and diluted loss per share, for the year
ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, MindSpring generated net cash from
operations of approximately $35.5 million, compared to $11.4 million for the
year ended December 31, 1997, an increase of approximately 212.7%. During 1998,
we used approximately $27.3 million from cash flows from operations to fund
purchases of subscriber bases. $25 million of this amount was paid to AOL on
October 15, 1998 in partial payment for the Spry acquisition with the balance of
$7 million paid in March 1999. During 1998, we spent a total of approximately
$20.2 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 1998, compared to approximately $8.4 million incurred in 1997
under capital leases for equipment acquisition. At December 31, 1998,
MindSpring's capital lease obligations and minimum rental commitments under
non-cancelable operating leases with initial or remaining terms of more than one
year amounted to approximately $5.7 million for capital leases, and
approximately $10 million for non-cancelable operating leases.
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During 1998, MindSpring generated approximately $170.5 million from
financing activities, consisting primarily of two public equity offerings. In
June 1998, MindSpring sold 3,000,000 shares of common stock at a public offering
price of $17.67 per share. Proceeds from the June offering, net of underwriting
discounts and offering expenses, were approximately $49.8 million. In December
1998, MindSpring sold 2,300,000 shares of common stock at a public offering
price of $57 per share. Proceeds from the December offering, net of underwriting
discounts and offering expenses, were approximately $124.8 million. Cash used
for financing activities consisted of approximately $4.6 million for capital
lease obligations and the final payment to PSINet Inc. due under a promissory
note issued in connection with MindSpring's 1996 purchase from PSINet of
subscribers and other assets and rights related to PSINet's U.S. consumer
dial-up Internet access business. The final payment to PSINet was made in
December 1998. During 1997, cash used for financing activities consisted
primarily of approximately $2.6 million in payments for capital lease
obligations and repayments of promissory notes to PSINet.
As of December 31, 1998, MindSpring had cash on hand of approximately
$167.7 million. On February 17, 1999, we paid $215 million in cash in connection
with the closing of the NETCOM acquisition, approximately $80 million of which
we borrowed under our $100 million secured revolving credit facility. After
paying the amounts indicated for the NETCOM acquisition on February 17, 1999, we
had remaining cash on hand of approximately $35 million, of which we paid
approximately $7 million to AOL in March 1999 for the balance of the purchase
price for the Spry acquisition.
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
the credit facility, additional capital financing arrangements, and cash flow
from operations. We expect to repay all amounts outstanding under the credit
facility with a portion of the net proceeds from our offering of common stock
or, if necessary, a portion of the proceeds from this notes offering. See
"Description of Secured Credit Facility."
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
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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.
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.
Market Risks. 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 those borrowings.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, 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" applied to MindSpring. Neither statement had
any impact on MindSpring's financial statements as MindSpring does not have any
"comprehensive income" type earnings (losses) and its financial statements
reflect how the "key operating decisions maker" views the business. MindSpring
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 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. MindSpring has 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. MindSpring's Year 2000
Program Office has developed and is currently implementing a comprehensive plan
(the "Year 2000 Program") for MindSpring to become Year 2000 ready. The Year
2000 Program consists of six phases: (1) project planning and inventory of all
of MindSpring's assets, (2) assessment, (3) renovation (whether by upgrade or
replacement), (4) testing and validation, (5) implementation and (6) creation of
contingency plans in the event of year 2000 failures.
The Year 2000 Program covers: (1) software products which are supplied by
MindSpring to its customers, (2) MindSpring's information technology and
operating
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systems ("IT Systems"), and (3) MindSpring's non-information technology systems,
including embedded technology ("Non-IT Systems"). In addition, the Program calls
for MindSpring to identify and assess the systems and services of MindSpring'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.
MindSpring supplies its customers with a software package which, among
other things, allows its customers to access MindSpring'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"). MindSpring believes that the current shipping version of its
software package (including the MindSpring Internet Desktop) is Year 2000 ready.
MindSpring 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. MindSpring anticipates that it will complete the first two phases for
those systems during the second 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.
MindSpring 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 those systems. Additionally, MindSpring 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 those entities are Year 2000 compliant.
MindSpring intends to pursue appropriate responses to those inquiries and will
evaluate the responses it receives.
MindSpring recently completed its acquisition of Spry, Inc. MindSpring is
developing appropriate plans to identify and address Year 2000 related concerns
with Spry as part of the natural integration of the Spry operation into
MindSpring. Management believes that the Spry operation will not present any
significant Year 2000 issues to MindSpring.
MindSpring also recently acquired customers and assets of NETCOM, and
intends to develop plans to identify and address Year 2000 related concerns with
NETCOM as part of the natural integration of the NETCOM operation into
MindSpring.
MindSpring has not deferred any specific IT project due to the Year 2000
Program. MindSpring has engaged a consulting firm to assist it in completing the
inventory and assessment phases of its Year 2000 Program, and to assist it in
its Year 2000 Program management.
Costs. As of December 31, 1998, MindSpring has incurred expenses of
approximately $75,000 in connection with the implementation of the Year 2000
Program Office and Year 2000 Program. MindSpring estimates that an additional
$250,000 to $300,000 in expenses will be incurred by MindSpring through the
remainder of the Year 2000 Program. These costs will be expensed as incurred.
The costs and estimates provided include MindSpring's estimate of the cost of
internal resources directly attributable to MindSpring's Year 2000 Program, but
do not yet include additional costs which may be incurred in connection with
expanding the Year 2000 Program to include the systems and products acquired in
the Spry and NETCOM transactions. MindSpring 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. MindSpring currently believes these
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costs will not have a material effect on MindSpring's financial condition,
liquidity or results of operations. MindSpring's estimates of Year 2000-related
costs may change, however, depending on MindSpring's Year 2000 evaluation of the
assets acquired from NETCOM.
Risks. The failure by MindSpring to correct a material Year 2000 problem
could result in an interruption in, or a failure of, normal business activities
or operations. Presently, however, MindSpring 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, MindSpring is 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 MindSpring 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
MindSpring's results of operations, liquidity and financial condition.
MindSpring is not presently aware of any vendor related Year 2000 issue that is
likely to result in this type of disruption.
Furthermore, MindSpring's 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, MindSpring's results of
operations, liquidity and financial condition could be materially and adversely
affected.
Although there is inherent uncertainty in the Year 2000 issue, MindSpring
expects that as it progresses in its Year 2000 Program the level of uncertainty
about the impact of the Year 2000 issue on MindSpring will be reduced
significantly and MindSpring should be better positioned to identify the nature
and extent of material risk to MindSpring 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. MindSpring has established a
Contingency Plan Committee to monitor and address the development of contingency
plans. Due to the current phase in which MindSpring is in of its Year 2000
Program, MindSpring is currently unable at this time to fully assess its risks
and determine what contingency plans, if any, need to be implemented by
MindSpring. As MindSpring progresses in its Year 2000 Program and identifies
specific risk areas, MindSpring intends 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. MindSpring's 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 MindSpring's 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.
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BUSINESS
MindSpring is a leading national Internet service provider, or ISP. We
focus on serving individuals and small businesses. 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
Internet 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.
MindSpring offers subscribers complete Internet access and Web hosting
solutions, placing an emphasis on user-friendly and easy to install software,
network reliability, highly responsive customer service and superior technical
support. Through our nationwide network of MindSpring-owned and third-party
provider-owned points of presence, or POPs, our subscribers are able to access
the Internet in the 48 contiguous U.S. states and the District of Columbia via a
local telephone call.
Over the past three years, we have rapidly increased our subscriber base
and revenues by:
- providing superior customer service and technical support;
- expanding our marketing and distribution activities;
- 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.
Our subscriber base has grown from approximately 12,000 subscribers at
December 31, 1995, to over 693,000 subscribers at December 31, 1998, including
over 21,000 Web hosting subscribers. In February 1999, we completed the NETCOM
acquisition, which increased our subscriber base to approximately 1.1 million
subscribers, including approximately 45,000 Web hosting subscribers. As a
result, MindSpring is currently the fourth largest ISP in the U.S. in terms of
the number of subscribers.
By providing superior service and support to our subscribers, making good
build-versus-buy network decisions and achieving significant market penetration
in a number of our target markets, we have achieved profitability ahead of many
other national ISPs. In the last quarter of 1998, we had revenues of $39.5
million, EBITDA of $7.3 million and net income of $3.7 million. At that time,
our EBITDA margin, meaning EBITDA as a percentage of revenues, was 18% and our
earnings per share were $0.13.
MindSpring was incorporated in Georgia in February 1994, and was
reincorporated in Delaware in December 1995. Our executive offices are located
at 1430 West Peachtree St., Suite 400, Atlanta, Georgia 30309 and our telephone
number at that address is (404) 815-0770. We also maintain an Internet site on
the World Wide Web at www.mindspring.net. Information contained at our Web site
is not, and should not be deemed to be, a part of this prospectus supplement.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET
Internet access and enhanced Internet services represent two of the fastest
growing segments of the telecommunications services marketplace. The Internet
has emerged as a
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significant global communications medium, enabling millions of people to, among
other things, communicate, publish and retrieve information, and conduct
business electronically. Due to increased public awareness, lower prices for
access devices, increased functionality and improving content, International
Data Corporation estimates that the number of users accessing the World Wide Web
will increase from approximately 97 million at the end of 1998, to approximately
320 million by the end of 2002. Total ISP revenues in the United States are
projected to grow from $10.7 billion in 1998 to $37.4 billion in 2003.
ROLE OF THE ISP
Internet access services are the means by which ISPs interconnect either
businesses or individual consumers to the Internet's resources or to corporate
intranets and extranets. Access services include dial-up access for individuals
and small businesses and high-speed dedicated access designed primarily for
mid-sized and larger organizations. In addition to Internet access services, an
increasing number of Internet users are taking advantage of value-added services
such as Web hosting and Web page design. We believe that value-added services,
such as those included in MindSpring's business service offerings, are among the
fastest growing segments of the ISP marketplace. According to International Data
Corporation, revenues attributable to value-added services are projected to
increase in the United States at a compounded annual growth rate of
approximately 34%, from $3 billion in 1998, to $12.9 billion in 2003.
INTERNET USERS AND THEIR NEEDS
The rapid development and growth of the Internet has resulted in a highly
fragmented industry of over 5,000 national and local ISPs in the U.S. ISPs vary
widely in geographic coverage, customer focus and levels of Internet access
provided to subscribers. For example, access providers may concentrate on
certain types of subscribers (such as businesses or individuals) that differ
substantially in the type of service and support required by the relevant
customer constituency.
MindSpring focuses on the individual and small business segments of the
Internet marketplace. We believe that the demand for Internet service in our
target subscriber markets will grow substantially from current levels. In
addition to broad demographic and economic trends driving the overall growth of
the Internet market, the individual and small business markets are expanding as
a function of falling access costs, lower prices for access devices, more
simplified operational procedures and improved content.
USER PROFILE
Users currently accessing the Internet do so primarily by means of dial-up
services, although as described below, new ways of connecting to the Internet
are becoming more common, particularly those that take advantage of higher
speeds and broader bandwidth capacity. Access to the Internet using dial-up
services requires the user to have access to a local telephone line, the use of
a modem and an ISP account, such as a MindSpring account, through which access
can be obtained. Many of the industry's early-stage dial-up users were
technologically sophisticated users. These "early adopters" generally have not
demanded significant or intensive customer service and technical support. We
believe this is changing and will continue to change, with first-time Internet
users being much less technologically sophisticated and requiring more
user-friendly software and more intensive and responsive customer service and
technical support, all of which are the cornerstones of MindSpring's business.
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GROWING NEEDS OF CURRENT USERS
We believe that, in addition to requiring more intensive customer service
and technical support, both individual and business users of Internet access
will increasingly demand Web hosting and other services. We believe that this
demand will grow as these businesses and individuals become more familiar with
the Internet and recognize the value of maintaining an Internet presence as a
way to enable other users around the world to communicate with and access
information about them.
The Web hosting market represents a rapidly growing area of the Internet
marketplace. Web hosting enables individuals and small businesses to increase
their presence on the World Wide Web by creating a Web site, which is "hosted"
by companies such as MindSpring, without the responsibility or expense
associated with maintaining a Web server or high-speed Internet connection. We
believe that services relating to e-commerce, which is the means by which
businesses offer and sell their services and products over the Internet, will be
an important outgrowth of Web hosting services. MindSpring believes that the
individual and small business markets represent a significant area for continued
growth at MindSpring.
NEXT GENERATION SERVICES
Several different types of communications services have been delivered to
homes, including voice, video and data transmissions. Each of these
communications services was delivered to homes using separate modes of
transmissions and infrastructure. With advancing technology, many different
types of services can now be delivered over the same infrastructure with many
new devices. MindSpring believes that this phenomenon has distinct advantages
for providers of services who may take advantage of their existing customer base
to sell additional products. We further believe that this trend is likely to
accelerate as the owners of cable, telephone, and data backbone assets upgrade
their equipment to permit additional means of delivering voice, video and data
services over existing infrastructure.
As a provider of Internet services, which involves the transmission of data
in packets over a data network backbone, MindSpring is well positioned to be a
leading service provider of the additional services that are likely to become
available over the packet-switched network. While applications such as Internet
telephony are in their infancy, we believe that there are significant growth
opportunities related to the use of voice and other telephony services over the
packet-switched network. In addition, as new devices are created for data
transmission over the Internet, the demand for technical support for these
devices will increase. With our reputation for excellence in this area, we
believe we are well positioned to serve this market.
MINDSPRING STRATEGY
MindSpring's objective is to strengthen our position as a leading national
provider of high quality Internet access, Web hosting and other value-added
services to individuals and small businesses, as measured by customer
satisfaction, subscriber growth and financial performance. Key elements of our
business strategy include:
CONTINUING TO PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT
MindSpring believes that, over time, individual consumers seeking broader
access to the Internet will face increasing and significant technological
challenges, in part because the Internet is an evolving and growing medium. In
addition, as new and more complex
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applications designed for the Internet proliferate, we believe that even
sophisticated users, including those that have been MindSpring subscribers for
years, will periodically encounter problems. Consequently, we intend to continue
to focus on providing high levels of customer service and technical support in
an effort to achieve maximum levels of customer satisfaction. Historically, this
strategic focus has resulted in low churn rates, significant subscriber growth
from customer referrals and industry recognition. We have received numerous
customer service awards, including PC Computing's 1998 MVP Award for Best
National ISP. Currently, over half of our employees are engaged in a customer
service or technical support function, and are available 24 hours a day, seven
days a week, except for major holidays.
EFFICIENTLY EXPANDING OUR NATIONAL NETWORK
MindSpring intends to continue to efficiently increase the capacity and
geographic reach of our network in order to support subscriber growth, enter new
markets and accommodate increased customer usage. We pursue a hybrid network
strategy of (1) owning POPs in mature markets where we can efficiently deliver
high quality access services and (2) leasing POPs and capacity from third-party
network service providers in new or developing markets. This strategy allows us
the flexibility to modify our network cost structure on a market-by-market
basis. As of December 31, 1998, approximately 61% of MindSpring's subscribers
accessed the Internet through a MindSpring-owned POP. As a result of the NETCOM
acquisition, this percentage has decreased significantly because most of the
approximately 400,000 subscribers we acquired from NETCOM access the Internet
using third-party POPs to which we have access under our network services
agreement with ICG PST, Inc., formerly known as NETCOM.
EXPANDING OUR TARGETED MARKETING AND DISTRIBUTION ACTIVITIES
We plan to expand our targeted marketing and distribution efforts in
markets where there is the opportunity for substantial market penetration. We
believe that high geographic concentrations of subscribers improve network
economics and reduce subscriber acquisition costs, thereby resulting in higher
margins. While continuing to encourage referrals from existing subscribers, we
plan to increase our print publication, radio, television and direct mail
advertising in certain targeted metropolitan areas throughout the U.S. In
addition, we will continue to pursue nationwide strategic alliances and retail
opportunities to broaden our distribution. We currently have such relationships
with, among others, Microsoft, 3Com(R) Corporation, Compaq and IBM.
INCREASING OUR REVENUES FROM VALUE-ADDED SERVICES
We intend to continue to build on our current sales, marketing and network
capabilities to create additional revenue opportunities from value-added
services such as Web hosting, Web page design and co-location services. We
believe that value-added services are among the fastest growing segments of the
Internet marketplace. We began offering Web hosting services in 1995 and
currently have approximately 45,000 Web hosting subscribers, including
approximately 22,000 Web hosting accounts acquired from NETCOM in February 1999.
Web hosting represents approximately 13% of our revenues and is an area of
strategic growth for MindSpring.
ENGAGING IN SELECTED ACQUISITIONS
Since early 1996, we have supplemented our internal expansion efforts
through selected acquisitions of complementary businesses and subscriber
accounts. As MindSpring
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continues to expand, we may continue to pursue this strategy. We believe that as
the ISP market evolves, customers will place ever greater emphasis on ISP
performance, network coverage, reliability, and support. As a result, smaller
ISPs may be unable to remain competitive on a national or regional basis, unless
they significantly expand the scope of their operations. These trends could lead
to greater industry consolidation and, consequently, acquisition opportunities.
We intend to continue to evaluate acquisition opportunities as they become
available.
We recently completed two substantial acquisitions:
In October 1998, we purchased substantially all of Spry, Inc.'s
subscriber base of individual dial-up Internet access customers in the
United States and Canada, including approximately 130,000 individual access
accounts. We also acquired various assets used in serving those customers,
including a leased customer support facility and a leased network
operations facility in Seattle, Washington and all rights to the "Sprynet"
name. Spry was a wholly-owned subsidiary of America Online, Inc. The
purchase price for these assets was approximately $32 million.
In February 1999, we purchased substantially all of NETCOM On-Line
Communication Services, Inc.'s subscriber accounts in the U.S., including
approximately 371,000 individual access accounts, approximately 3,000
dedicated Internet access accounts and approximately 22,000 Web hosting
accounts. NETCOM, now known as ICG PST, Inc., is a wholly owned subsidiary
of ICG Communications, Inc. MindSpring also acquired assets used in serving
those customers, including leased operations facilities in San Jose,
California and Dallas, Texas and ICG PST's rights to the "NETCOM" name
(except in Canada, the United Kingdom and Brazil). ICG PST retained all of
its assets used in connection with its network operations. Under a separate
network services agreement with ICG PST, we purchase access to ICG PST's
network. We paid $245 million for the NETCOM assets, consisting of $215
million in cash and $30 million in MindSpring common stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
MINDSPRING SERVICES
Our services include dial-up Internet access and business services, which
consist of Web hosting and other services such as high-speed, dedicated Internet
access for small to medium-sized businesses, Web page design and Web-server
co-location. MindSpring'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 our customers. We continuously evaluate the need to add additional
product offerings and modify our service features based upon market demands.
INTERNET ACCESS
Dial-Up Internet Access. MindSpring's primary service offering is dial-up
Internet access. As of December 31, 1998, approximately 84% of our total
revenues were attributable to dial-up Internet access. The basic equipment
requirements for an individual dial-up subscriber are a Windows 3.1 or later
operating system or Macintosh computer with at least 8MB of RAM and a modem of
14.4 Kbps speed or faster. The subscriber's MindSpring connection is a direct,
point-to-point protocol, or "PPP," connection to the Internet. A direct PPP
connection enables a subscriber to use any standard Internet capable software
that will run on the subscriber's computer.
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MindSpring currently offers the following five price plans for dial-up
subscription, taking account of demand for both heavy and light Internet usage.
Each plan requires a start-up fee of up to $25 (except for the Commercial plan,
which has a start-up fee of $50), which is waived in certain instances depending
upon the promotional method by which the subscriber is acquired.
The Works. For $26.95 per month, individual subscribers receive unlimited
usage (not intended to be a full-time connection) as well as 10MB of Web space,
a personal Web page editor that permits subscribers to create and upload their
own Web pages, and two additional mailboxes.
Unlimited Access. Individual subscribers pay $19.95 per month for unlimited
usage and 5MB of Web space. As with the Works Plan, the subscriber must
disconnect when not actively accessing the Internet. The subscriber is not
permitted, for example, to maintain a full-time computer connection as a World
Wide Web server.
Standard. Subscribers pay $14.95 per month for 20 hours of use and $1 per
hour for each additional hour. Subscribers also receive 5MB of Web space.
Light. Subscribers pay $6.95 per month for 5 hours of use and $2 per hour
for each additional hour. Subscribers also receive 5MB of Web space.
Commercial. Designed for small businesses, subscribers pay a $50 start-up
fee and $99 per month thereafter in exchange for 160 hours of usage and $.75 for
each additional hour. Subscribers receive 10 mailboxes and are not charged for
simultaneous usage, which would permit several employees to be on-line at once
without paying additional fees.
Subscribers to each plan can also purchase additional features such as
extra mailboxes for specified fees.
Substantially all of our subscribers are on month-to-month subscriptions.
MindSpring offers a 30-day money-back satisfaction guarantee for new
subscribers. Billing is monthly, with payments made by the majority of
subscribers by a monthly charge to the subscriber's credit card. Payment is made
at the beginning of each billing cycle, although some subscribers are invoiced
(for an extra charge). Subscribers, as well as MindSpring, may cancel an account
at any time, with the cancellation taking effect as of the first day of the
following billing month.
A subscriber who is within local dialing range of one of the MindSpring
POPs or a designated third-party provider POP can access the Internet with a
local telephone call. MindSpring also offers access to its services through an
"800" number for an additional charge. All dial-up subscribers can connect to
the MindSpring network (including the third-party provider POPs) via modem at
speeds up to 33.6 Kbps and over 90% of MindSpring's subscribers can connect at
speeds up to 56 Kbps. In a majority of the cities that MindSpring serves,
individual subscribers, except subscribers to the Unlimited Access and
Commercial plans, can also choose to connect via ISDN at 64 Kbps or 128 Kbps.
There is a one-time extra start-up fee of $25 for ISDN users who subscribe to
the Standard and Light plans; otherwise, 64K ISDN pricing is the same as for
modem subscribers, and 128K users pay a small surcharge. All dial-up subscribers
also have the option of using MindSpring servers to publish information on the
Internet through the World Wide Web or FTP. MindSpring subscribers may use the
space made available on MindSpring's servers to make World Wide Web pages or
computer data files available to the Internet.
MindSpring recently introduced high-speed cable modem Internet access on a
very limited basis in the Montgomery, Alabama area. We provide this service
through an
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agreement with KNOLOGY Holdings, Inc., an affiliate of ITC Holding Company,
Inc., one of our principal stockholders. Our ability to expand our geographic
offering of this service will depend on KNOLOGY's enhancement and expansion of
its network infrastructure and our access to other third-party cable and
broadband networks. See "-- Competition -- Broadband Technologies" and "Risk
Factors -- The Internet access and Web hosting markets are very
competitive. -- Broadband Technologies."
BUSINESS SERVICES
MindSpring's business services consist of:
- Web hosting, the business of maintaining a customer's Internet Web
site,
- high-speed, dedicated Internet access,
- Web page design,
- domain name registration,
- customer Web server co-location, and
- e-commerce services.
As of December 31, 1998, our business services accounted for approximately
13% of total revenues, which were derived almost entirely from Web hosting
services.
Web Hosting. MindSpring offers Web hosting accounts for companies and
other organizations that wish to create their own World Wide Web sites without
maintaining their own Web servers and high-speed Internet connections. Web
hosting subscribers can use their own domain names in their World Wide Web
addresses. This type of Web hosting is called "virtual hosting." Web hosting
subscribers create their Web sites themselves and then upload the pages to a
MindSpring Web server. MindSpring's Web hosting service features
state-of-the-art Web servers for high speed and reliability, a high-quality
connection to the Internet, specialized customer support, advanced services
features, such as secure transactions and VRML, or Virtual Reality Markup
Language, a feature used to make Web pages seem three-dimensional, and reporting
on site usage. MindSpring currently offers three price plans for Web hosting
subscribers ranging from $19.95 to $99.95 per month. MindSpring has
approximately 45,000 Web hosting subscribers, including approximately 22,000 Web
hosting accounts acquired from NETCOM in February 1999.
Web Page Design. Our web page design services consist of four standard
design packages from which a subscriber can choose or the subscriber can create
a custom web page from scratch. The subscriber provides the text for the Web
site, and custom design work is available from MindSpring, including logo
design, additional HTML pages, and database integration.
E-commerce. We recently introduced our e-commerce hosting service, which
enables even unsophisticated subscribers to set up an Internet storefront in
virtually minutes. We offer merchants a complete suite of commercial hosting
options including:
- Web hosting,
- Web site or Web page design,
- domain name registration,
- store front and back office applications,
- customer-to-merchant e-mail services,
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- search engine registration,
- encryption security certificates to assure confidentiality of
transactions, and
- credit card and on-line payment processing services.
Dedicated Access, Domain Registration and Web Server Co-location.
MindSpring also offers domain registration services and, in some markets,
high-speed dedicated access connections to the Internet, including for the
approximately 3,000 dedicated access accounts we purchased in the NETCOM
acquisition. We also offer Web-server co-location services at our Atlanta
headquarters and at our Dallas call center for subscribers who want to maintain
their own Web servers in MindSpring's state-of-the-art telephony environment and
receive a high-speed, full-time connection to the Internet. MindSpring's
co-location services include (1) 24-hour security monitoring, (2) an
uninterrupted power supply, (3) climate control, (4) remote access for the
subscriber, (5) tape swap, and (6) secure tape storage.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
CUSTOMER SERVICE. MindSpring believes that excellent customer service and
technical support is critical to our success in retaining and in attracting new
subscribers. We currently provide customer service and technical support through
our call centers located in Atlanta, Georgia; Harrisburg, Pennsylvania; Phoenix,
Arizona; Seattle, Washington; San Jose, California; and Dallas, Texas. In
February 1999, we acquired approximately 3,000 dedicated access accounts and
related support personnel from NETCOM. These subscribers are generally small to
medium-sized businesses that require full-time, dedicated connections to the
Internet. We are in the process of integrating these subscribers into
MindSpring's operations. Dedicated access subscribers generally require
technical and customer support relating to the quality of and interruptions in
the full-time Internet connection, which in turn will require MindSpring staff
to interact and coordinate with the telephone company or other dedicated line
providers. We believe that our ability to successfully integrate and support
these acquired customers profitably will determine the extent to which we will
seek to expand this line of business.
MindSpring's customer service staff handles all questions regarding a
subscriber's account and are available from 9 a.m. to 9 p.m. eastern time seven
days a week, except for major holidays. As of February 28, 1999, we had
approximately 200 customer service employees.
Our technical support staff handles questions related to the provision of
our services such as questions regarding installation of MindSpring's service,
connection to our network and use of various software applications. MindSpring's
technical support staff is available 24 hours a day, seven days a week, except
for major holidays. As of February 28, 1999, we had approximately 820 technical
support employees. In the NETCOM acquisition, we assumed a third-party technical
support service contract through which NETCOM had provided technical support to
the subscribers we acquired. We plan to continue to provide technical support to
the acquired NETCOM subscribers under this contract until approximately the last
quarter of 1999, when we expect that substantially all of these subscribers will
have transitioned to the MindSpring software.
Subscribers can call any of our call center facilities for customer service
and technical support through a local telephone number, for those cities local
to a call center, or a toll-free "800" number. Subscribers can also e-mail their
questions directly to a customer service and technical support address at
MindSpring. In addition, we maintain MindSpring-specific
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newsgroups on the Internet where subscribers can post requests for help and
other subscribers, as well as MindSpring support personnel, can respond.
SALES AND MARKETING
MindSpring believes that the market for individual Internet access is
heavily influenced by person-to-person referrals. Accordingly, our marketing
efforts have been geared, among other things, toward generating positive
referrals and stimulating subscriber growth and retention by providing
exceptionally high-quality service to our existing subscribers. We also offer a
$10 credit to existing subscribers each time a new subscriber names the existing
subscriber as the referral source. A significant number of MindSpring's new
subscribers indicate that an existing subscriber referred them.
We also engage in targeted marketing and distribution efforts in markets
where there is the opportunity for substantial market penetration. We believe
that high geographic concentrations of subscribers improve network economics and
reduce subscriber acquisition costs, thereby resulting in higher margins. While
continuing to encourage referrals from existing subscribers, we plan to increase
our print publication, radio, television and direct mail advertising in certain
targeted major metropolitan areas throughout the United States in order to
achieve greater density in our subscriber base.
In addition, we have pursued nationwide strategic alliances available to
MindSpring as a result of the our nationwide access and reputation for
reliability and high quality. Such nationwide marketing opportunities may
include, among others, entering into large-scale bundling arrangements with
complementary products, such as computers, software products, multimedia books,
and CD-ROM merchandise, and seeking strategic alliances available with
complementary businesses operating in our service areas, such as
Internet-oriented training organizations and consulting firms, World Wide Web
content developers, computer networking firms, media companies,
telecommunications companies, local area network and World Wide Web consulting
companies, and other Internet access companies that specialize in providing
dedicated connections. The nature and terms of these alliances vary.
We intend to continue to expand our marketing and distribution efforts. We
will continue to closely monitor the results of our marketing techniques as part
of an ongoing effort to increase the cost-effectiveness of our marketing
efforts.
We have attempted to maintain a high degree of personal contact with the
communities that we serve, and we have a staff of territory managers who are
responsible for generating interest in MindSpring in these communities.
MindSpring marketing personnel spend considerable time meeting with and making
presentations to groups representing potential subscribers, such as computer
user associations, high-technology business associations, and educational
institutions. We plan to continue these efforts in the southeastern United
States, New York, California, Phoenix, Arizona and Chicago, Illinois and to
selectively expand them to include key metropolitan areas in other regions of
the country.
Sales are consummated by MindSpring's telephone sales force, which responds
to incoming subscription inquiries, as well as through an on-line sign-up
procedure. The on-line registration module, which is available in MindSpring's
retail software package, through MindSpring's Web site and through various
Original Equipment Manufacturer, or OEM, arrangements, enables a user to become
a MindSpring subscriber by selecting service plans and billing methods on-line,
without the need to speak to a MindSpring employee.
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NETWORK INFRASTRUCTURE
Geographic Coverage. Through our nationwide network of MindSpring-owned and
third-party provider-owned points of presence, or POPs, our subscribers are able
to access the Internet in the 48 contiguous U.S. states and the District of
Columbia via a local telephone call. We purchase access to third-party provider
POPs through network services agreements with PSINet, Worldcom Advanced Networks
(formerly Gridnet International, L.L.C.), GTE Internetworking Incorporated
(formerly BBN Planet Corporation) and ICG PST.
We believe that using a combination of MindSpring-owned POPs and POPs owned
by third-party network providers enables us to provide Internet access services
on a nationwide basis while managing the timing and magnitude of our capital
expenditures. We employ a strategy of leasing POPs from third-party providers in
locations where it is more economical to do so. These are typically geographic
areas where MindSpring has lower market penetration than areas we serve through
MindSpring POPs. We periodically reevaluate the economics of this strategy and,
if warranted, we may install a MindSpring POP to replace or overlap with a
leased POP.
MindSpring POPs. Each MindSpring POP typically consists of data
communications equipment such as 3Com(Registered Trademark) Total Control modem
chassis, 3Com(Registered Trademark) or Bay Networks switches and Cisco Systems
routers, the majority of which are currently co-located with a local
telecommunications or media company. The 3Com(Registered Trademark) modem
chassis employed by MindSpring support both ISDN and analog terminations.
MindSpring has upgraded all modem chassis to support the new international 56Kb
modem standard, V.90.
Each MindSpring POP is connected to MindSpring's Atlanta Network Data
Center. These connections consist of either a private line point-to-point
Internet Protocol, or "IP" connection, or a frame relay connection. In addition,
we use private peering points to more efficiently manage our network traffic. A
private peering point is a point where our network connects to the network of
one of our third-party network providers. This enables us to route network
traffic along the shortest path feasible.
We refer to some of our POPs as "super-POPs." A super-POP is a POP where
MindSpring co-locates its equipment with a competitive local exchange carrier,
or "CLEC". By co-locating with a CLEC, we are able to aggregate Internet traffic
from multiple local calling areas into a single modem pool via local telephone
numbers. This creates, in effect, a "super-POP," enabling MindSpring to offer
local dial-up access out of a single POP to areas that would otherwise require
co-location sites in each local dial-up area -- that is, multiple POPs -- to
accomplish the same task. As part of our strategy, we intend to open additional
super-POPs where demand and other economic factors warrant.
Atlanta Network Hub. MindSpring's Atlanta Network Data Center is connected
to Internet backbone providers such as GTE Internetworking via large leased
telecommunications lines called DS-3s. MindSpring's Atlanta Network Data Center
is supported by dual SONET rings provided by BellSouth Corporation and MediaOne.
The Data Center has a back-up generator for emergency use in the event of a
prolonged loss of electric power. In addition to dial-up subscribers, most of
MindSpring's Web hosting and Web-server co-location customers are served from
this location.
Network Operations Center. MindSpring maintains a Network Operations Center
at our Atlanta headquarters through which our technical staff monitors network
traffic, service quality, and security, as well as equipment at individual POPs,
to ensure reliable Internet access. The Network Operations Center is staffed 24
hours a day, 7 days a week. We also monitor network operations through our
facilities in Seattle, Washington and Dallas, Texas.
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In the future, we may use our other call center facilities to supplement or add
redundancy to this network monitoring capability. In addition, we continue to
invest in improved network monitoring software and hardware systems.
MINDSPRING SOFTWARE
An important component of our service offering for dial-up subscribers is
the MindSpring starter kit. The starter kit includes the MindSpring installation
program, front-end software and documentation, an on-line registration module
(retail version only), network software that enables a subscriber to connect to
the Internet, and application programs. See "-- Subscriber Applications." Our
subscribers acquired from Spry and NETCOM connect to the Internet using software
that we acquired in those acquisitions. Those subscribers may switch to
MindSpring software at their option at any time.
Our objectives in developing and providing the MindSpring starter kit are
to:
Simplify Installation. MindSpring's software package automatically
configures all the individual Internet access programs after one-time entry
by the user of a few required fields of information (name, user name,
password, etc.).
Provide a Convenient and Intuitive Starting Place for
Subscribers. MindSpring's front-end software allows subscribers to connect
and disconnect, see any current messages from MindSpring, check their
monthly usage, see if they have any e-mail, and launch any of their
Internet application programs, all from one screen. "Help" files and the
accompanying documentation contain information on troubleshooting and
things to do on the Internet. Links to the most popular content sites are
also provided.
Enhance Efficiency of MindSpring's Support Services. High-quality
software with which our technical support representatives are familiar
makes it easier for MindSpring to provide fast and efficient customer
service and technical support. Software that is reliable and easy to
install and use also tends to reduce subscriber need for extensive customer
service and technical support services.
Provide State-of-the-Art Applications. MindSpring uses existing
applications developed by third parties in its software package. We believe
that this approach will enable us to include state-of-the-art software in
our package and to keep pace with technology developments by replacing
applications with newer or better programs as they become available without
diverting resources by attempting to develop new applications programs.
SUBSCRIBER APPLICATIONS
MindSpring subscribers use their accounts for, among other things,
communicating, retrieving information, and publishing information on the
Internet. In our surveys of our subscribers, a substantial number of
MindSpring's individual subscribers report that they use their MindSpring
accounts for personal as well as business purposes. The subscriber's MindSpring
connection is a direct PPP connection, enabling subscribers to use any standard
Internet-capable software that will run on their computers. A complete set of
the most popular Internet applications are part of the MindSpring starter kit
software package, including:
Electronic Mail. E-mail allows subscribers to exchange electronic messages
with anyone else who has an Internet e-mail address. These messages are usually
text only but can also include other kinds of computer files (such as images,
computer programs, or
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word processing documents), which are sent as attachments. MindSpring's software
package includes the Eudora Light(R) e-mail application.
The World Wide Web. The World Wide Web allows a multimedia presentation of
material (i.e., text, graphic, sound, and video). Users can move from one World
Wide Web site to another by clicking on hypertext links and can interact with
the World Wide Web information providers through typed input. The software
programs that allow users to explore the World Wide Web are known as "browsers."
The browser applications currently included in MindSpring's software package are
Microsoft's Internet Explorer(R) and Netscape Navigator(R).
Network News. Network News provides Internet-wide, subject-specific forums
on thousands of different subjects, where users can post information and review
posted information from other users.
FTP. File transfer protocol, or FTP, is a standard Internet tool that
allows users to send and retrieve computer files. FTP is often used for
retrieving software from various archive sites on the Internet.
Internet Relay Chat. Internet Relay Chat allows users to participate in
chat sessions, in which typed comments from all participants appear on the
screen, allowing simultaneous multiperson real-time conversations.
MindSpring has obtained permission and, in certain cases, licenses from
each manufacturer of the software that we bundle in MindSpring's front-end
software product for Windows and Macintosh subscribers. See "Proprietary
Rights."
BILLING AND MANAGEMENT INFORMATION SYSTEMS
A majority of our individual subscribers pay their MindSpring fees
automatically by credit card each month. MindSpring generally sends monthly
invoices to commercial accounts with multiple users. Billing calculations and
payment transactions are managed on our automated billing system. We expect to
continue to modify and upgrade our billing system as needed in order to maintain
our ability to bill and collect amounts due and to be responsive to changes in
the market.
PROPRIETARY RIGHTS
General. Although we believe that our success is more a function of our
technical expertise and customer service than our proprietary rights,
MindSpring's success and ability to compete depends in part upon our technology.
We rely on a combination of copyright, trademark and trade secret laws, and
contractual restrictions to establish and protect our technology. It is our
policy to require employees and consultants and, when possible, suppliers to
execute confidentiality agreements upon the commencement of their relationships
with MindSpring. These agreements provide that confidential information
developed or made known during the course of a relationship with MindSpring must
be kept confidential and not disclosed to third parties except in specific
circumstances. We cannot provide any assurances that the steps we have taken
will be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
Licenses. We have obtained authorization to use the products of each
manufacturer of software that we bundle in MindSpring's front-end software
product for Windows and
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Macintosh subscribers. The particular applications included in the MindSpring
starter-kit have, in some cases, been licensed. MindSpring currently intends to
maintain or negotiate renewals of, as the case may be, all existing software
licenses and authorizations as necessary. MindSpring may also want or need to
license other applications in the future. License fees charged to MindSpring
upon enrollment of additional subscribers are included in the cost of subscriber
start-up fees. Other applications included in the MindSpring starter kit are
shareware that MindSpring has obtained permission to distribute or that are from
the public domain and are freely distributable. MindSpring developed the
front-end software programs in MindSpring's starter kit for Windows 3.1, Windows
95, and Macintosh. We have acquired some software, trademarks and other
proprietary technology from Spry and NETCOM which we may continue to use for
acquired subscribers. See "Risk Factors."
COMPETITION
The markets for the provision of Internet access and business services to
individuals and small businesses are extremely competitive and highly
fragmented. There are no substantial barriers to entry, and we expect that
competition will continue to intensify. We may not be able to compete
successfully against current or future competitors, many of whom may have
financial resources greater than ours. Increased competition could cause us to
increase our selling and marketing expenses and related subscriber acquisition
costs and could also result in increased subscriber attrition. We may not be
able to offset the effects of these increased costs through an increase in the
number of our subscribers or higher revenue from enhanced services, and we may
not have the resources to continue to compete successfully. These developments
could adversely affect our business, financial condition and results of
operations.
Competitive Factors. We believe that the primary competitive factors
determining success in the Internet access and business services markets are a
reputation for reliability and service, effective customer support, pricing,
easy-to-use software, and geographic coverage. Other important factors include
the timing of introductions of new products and services and industry and
general economic trends. Our current and prospective competitors include many
large companies that have substantially greater market presence and financial,
technical, marketing, and other resources. In addition, every local market that
we have entered or intend to enter is served by multiple local ISPs.
Our Competitors. We currently compete or expect to compete with the
following types of companies:
- established on-line commercial information service providers, such as
AOL;
- national long-distance carriers, such as AT&T Corp. and MCI WorldCom,
Inc.;
- national commercial ISPs, such as EarthLink Network, Inc.;
- computer hardware and software and other technology companies, such as
IBM Corp. and Microsoft Corporation;
- numerous regional and local commercial ISPs which vary widely in quality,
service offerings, and pricing;
- national and regional Web hosting companies that focus primarily on
providing Web hosting services;
- cable operators and on-line cable services;
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- local telephone companies and regional Bell operating companies; and
- nonprofit or educational ISPs.
We believe that new competitors, including large computer hardware and
software, media, and telecommunications companies, will continue to enter the
Internet access and business services markets. As consumer awareness of the
Internet grows, existing competitors are likely to further increase their
emphasis on their Internet access and business services, resulting in even
greater competition for us. In addition, telecommunications companies may be
able to offer customers reduced communications costs in connection with these
services, reducing the overall cost of their Internet access and business
services solutions and significantly increasing pricing pressures on us. The
ability of our competitors to acquire other ISPs, to enter into strategic
alliances or joint ventures or to bundle other services and products with
Internet access or business services could also put us at a significant
competitive disadvantage.
Broadband Technologies. We also face competition from companies that
provide broadband connections to consumers' homes, including local and
long-distance telephone companies, cable television companies, electric utility
companies, and wireless communications companies. These companies may include
Internet access or business services such as Web hosting using broadband
technologies in their basic bundle of services or may offer Internet access or
business services for a nominal additional charge. Broadband technologies enable
consumers to transmit and receive print, video, voice and data in digital form
at significantly faster access speeds than existing dial-up modems.
The companies that own these broadband networks could prevent us from
delivering Internet access through the wire and cable connections that they own.
Cable television companies are not currently required to allow ISPs to access
their broadband facilities and the availability and terms of ISP access to
broadband local telephone company networks are under regulatory review. Our
ability to compete with telephone and cable television companies that are able
to support broadband transmission, and to provide better Internet services and
products, may depend on future regulation to guarantee open access to the
broadband networks. However, in January 1999, the Federal Communications
Commission, or FCC, declined to take any action to mandate or otherwise regulate
access by ISPs to broadband cable facilities at this time. It is unclear whether
and to what extent local and state regulatory agencies will take any initiatives
to implement this type of regulation, and whether they will be successful in
establishing their authority to do so. Similarly, the FCC is considering
proposals that could limit the right of ISPs to connect with their customers
over broadband local telephone lines. In addition to competing directly in the
ISP market, both cable and telephone plant operators are also aligning
themselves with certain ISPs who would receive preferential or exclusive use of
broadband local connections to end users. If high-speed, broadband facilities
increasingly become the preferred mode by which customers access the Internet
and we are unable to gain access to these facilities on reasonable terms, our
business, financial condition and results of operations could be materially
adversely affected.
No International Operations. We do not currently compete internationally,
except that we have a small number of Canadian subscribers obtained in the Spry
acquisition. If the ability to provide Internet access internationally becomes a
competitive advantage in the Internet access industry, we may be at a
competitive disadvantage relative to our competitors.
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GOVERNMENT REGULATION
As an Internet service provider, we are not currently directly regulated by
the FCC or any other agency, other than regulations applicable to businesses
generally. In a report to Congress adopted on April 10, 1998, the FCC reaffirmed
that Internet service providers should be classified as unregulated "information
service providers" rather than regulated "telecommunications providers" under
the terms of the Telecommunications Act of 1996.
This finding is important because it means that regulations that apply to
telephone companies and similar carriers do not apply to us. We also are not
required to contribute a percentage of our gross revenues to support "universal
service" subsidies for local telephone services and other public policy
objectives, such as enhanced communications systems for schools, libraries, and
some health care providers. The FCC action is also likely to discourage states
from regulating Internet service providers as telecommunications carriers or
imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. We cannot predict whether in the future the FCC
will modify its current policies against regulation of ISPs.
MindSpring also could be affected by any change in the ability of customers
to reach our network through a dial-up telephone call without any additional
charges. This practice has allowed ISPs to offer flat-rate, non-usage-sensitive
pricing, and has been an important reason for the growth in Internet use.
Recently the FCC ruled that connections linking end users to their ISPs are
jurisdictionally interstate rather than local, but the FCC did not subject such
calling to the access charges that apply to traditional telecommunications
companies. Local telephone companies assess access charges to long distance
companies for the use of the local telephone network to originate and terminate
long distance calls, generally on a per-minute basis. MindSpring could be
adversely affected by any regulatory change that would result in application of
access charges to Internet service because this would substantially increase the
cost of using the Internet. However, the FCC Chairman has stated that he opposes
Internet-related access charges, and we believe that this development is
unlikely, with one possible exception that is not currently relevant to our
business. Specifically, there is substantial debate as to whether carrier access
charges, or the universal support obligations discussed above, should apply to
Internet-based telephone services that substitute for conventional telephony. We
have no current plans to install gateway equipment and offer telephony, and so
we do not believe we would be directly affected by these developments were they
to occur.
The law relating to the liability of Internet service providers and on-line
services companies for information carried on, stored on, or disseminated
through their network is unsettled, even with the recent enactment of the
Digital Millennium Copyright Act. While no one has ever filed a claim against us
relating to information carried on, stored on, or disseminated through our
network, someone may file a claim of that type in the future and may be
successful in imposing liability on us. If that happens, we may have to spend
significant amounts of money to defend ourselves against these claims and, if we
are not successful in our defense, the amount of damages that we will have to
pay may be significant. Any costs that we incur as a result of defending these
claims or the amount of liability that we may suffer if our defense is not
successful could materially adversely affect our business, financial condition
and results of operations.
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If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide to
take actions to reduce our exposure to this type of liability. This may require
us to spend significant amounts of money for new equipment and may also require
us to discontinue offering some of our products or services.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to some types of
content by minors, pricing, bulk e-mail or "spam," encryption standards,
consumer protection, electronic commerce, taxation, copyright infringement, and
other intellectual property issues. We cannot predict the impact, if any, that
any future regulatory changes or developments may have on our business,
financial condition, and results of operations. Changes in the regulatory
environment relating to the Internet access industry, including regulatory
changes that directly or indirectly affect telecommunication costs or increase
the likelihood or scope of competition from regional telephone companies or
others, could have a material adverse effect on our business, financial
condition and results of operations.
EMPLOYEES
As of February 28, 1999, MindSpring had approximately 1,600 employees, of
which approximately 300 were added in connection with the NETCOM acquisition.
None of MindSpring's current employees is represented by a labor organization,
and we consider our relations with our employees to be good.
PROPERTIES
Our corporate headquarters are located in Atlanta, Georgia. The leases for
this space expire on March 31, 2001 and July 14, 2002. We also lease additional
office space in the vicinity of our Atlanta headquarters in order to meet
MindSpring's existing and anticipated space requirements. The lease for this
additional office space expires on March 31, 2002. We believe that these
facilities will provide sufficient capacity for MindSpring's operations for the
foreseeable future. Equipment for POPs other than the Atlanta POP site is
generally co-located with and in space leased from other companies operating in
the area of the particular POP.
We also maintain call center and/or network operations facilities in the
following locations:
- Harrisburg, Pennsylvania -- The lease for this facility expires on
December 15, 1999. We have the option to extend this lease for one
additional year.
- Phoenix, Arizona -- The lease for this facility expires on October 31,
2004. We have the option to extend this lease for two successive
five-year terms.
- Seattle, Washington -- The lease for this facility expires on February
29, 2000. We have the option to extend this lease for one additional
year.
- Bellevue, Washington -- The lease for this facility expires on December
31, 2000. We have the option to extend this lease for one five-year term.
- Dallas, Texas -- The lease for this facility expires on April 30, 2003.
We have the option to extend this lease for two successive three-year
terms.
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- San Jose, California -- The lease for this facility expires on October
31, 1999. We have the option to extend this lease for two successive
three-year terms.
LEGAL PROCEEDINGS
We are not currently involved in any pending legal proceedings that are
likely to have a material impact on MindSpring.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors of MindSpring are elected at the annual meeting of stockholders.
Officers of MindSpring are appointed at the first meeting of the board of
directors after each annual meeting of stockholders. Directors and executive
officers of MindSpring are elected to serve until they resign or are removed, or
are otherwise disqualified to serve, or until their successors are elected and
qualified. The ages of the persons set forth below are as of March 1, 1999.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH MINDSPRING EXPIRES
---- --- ------------------------------------ --------
<S> <C> <C> <C>
Charles M. Brewer................... 40 Chairman, Chief Executive Officer 2001
and Director
Michael S. McQuary.................. 39 President, Chief Operating Officer 2000
and Director
Juliet M. Reising(1)................ 48 Executive Vice President, Chief --
Financial Officer and Treasurer
Samuel R. DeSimone, Jr.............. 39 Executive Vice President, General --
Counsel and Secretary
Lance Weatherby..................... 39 Executive Vice President of Sales --
and Marketing
Gregory J. Stromberg................ 46 Executive Vice President --
O. Gene Gabbard(2)(3)............... 58 Director 1999
Campbell B. Lanier, III(2)(3)....... 48 Director 2001
William H. Scott, III(2)(3)......... 51 Director 2000
</TABLE>
- ---------------
(1) Ms. Reising became an executive officer on February 19, 1999.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Charles M. Brewer founded MindSpring and has served as Chief Executive
Officer and Director of MindSpring since its inception in February 1994 and as
Chairman since March 1996. He also served as the President of MindSpring from
its inception until March 1996 and as the Secretary and Treasurer of MindSpring
from its inception until January 1995. From May 1993 to January 1994, Mr. Brewer
developed the concept for MindSpring and evaluated its prospects. Prior to
starting MindSpring, he served as Chief Executive Officer of AudioFax, Inc., a
software company providing fax server software, from May 1992 to April 1993 and
was the Chief Financial Officer of AudioFax from May 1989 to April 1992. Mr.
Brewer received a BA in Economics from, and was a Phi Beta Kappa graduate of,
Amherst College and received a MBA from Stanford University.
Michael S. McQuary has been the President of MindSpring since March 1996,
the Chief Operating Officer of MindSpring since September 1995, and a Director
of MindSpring since December 1995. He also served as MindSpring's Executive Vice
President from October 1995 to March 1996 and MindSpring's Executive Vice
President of Sales and Marketing from July 1995 to September 1995. Prior to
joining MindSpring, Mr. McQuary served in a variety of management positions with
Mobil Chemical Co., a petrochemical company, from August 1984 to June 1995,
including Regional Sales Manager from
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April 1991 to February 1994 and Manager of Operations (Reengineering) from
February 1994 to June 1995. Mr. McQuary received a BA in Psychology from the
University of Virginia and a MBA from Pepperdine University.
Juliet M. Reising has served as Executive Vice President, Chief Financial
Officer and Treasurer of MindSpring since February 1999. From September 1998 to
February 1999, Ms. Reising served as Chief Financial Officer with AvData
Systems, Inc. ("AvData"), a provider of network management services. From
September 1997 to January 1998, Ms. Reising served as Vice President and Chief
Financial Officer of Composit Communications International, a start-up call
center software developer. From August 1995 to August 1997, she served as Vice
President and Chief Financial Officer of InterServ Services Corp., a marketing
services provider. From September 1994 to August 1995, she served as Senior Vice
President and Chief Financial Officer of Media Marketing Services, a promotional
travel incentive company. From July 1993 to September 1994, she was a financial
consultant and from June 1992 to June 1993, she served as Executive Vice
President and Chief Financial Officer of Coin, Inc., a computer systems
developer. Ms. Reising started her career as a CPA with Ernst & Young and
received a BBA in Accounting from the University of Georgia.
Samuel R. DeSimone, Jr. has served as the Executive Vice President, General
Counsel and Secretary of MindSpring since November 1998. From September 1995 to
August 1998, Mr. DeSimone served as Vice President of Corporate Development with
Merix Corporation of Forest Grove, Oregon, a printed circuit board manufacturer.
From June 1990 to August 1995, he was an associate attorney and partner with
Lane Powell Spears Lubersky of Portland, Oregon. Mr. DeSimone received a BA
from, and was a Phi Beta Kappa graduate of, Amherst College and received a JD
from New York University School of Law.
Lance Weatherby has served as MindSpring's Executive Vice President of
Sales and Marketing since April 1998. Mr. Weatherby served as MindSpring's Vice
President of Business Development from September 1996 to April 1998,
MindSpring's Acting Vice President of Business Development from August 1996 to
September 1996, and a Market Development Manager from September 1995 to August
1996. Mr. Weatherby held a variety of sales, sales management and marketing
positions with Mobil from October 1990 to September 1995, including District
Sales Manager from December 1992 to September 1995. Mr. Weatherby received a BBA
in Marketing from Eastern Kentucky University and an MBA from Indiana
University.
Gregory J. Stromberg has served as MindSpring's Executive Vice President
and has managed the Netcom customer integration into MindSpring since January
1999. Mr. Stromberg served as MindSpring's Executive Vice President of
Technology from August 1998 until January 1999, Executive Vice President of Call
Centers from March 1998 until August 1998, Vice President of Call Centers from
June 1996 to March 1998, and Vice President of Technical Support from October
1995 until June 1996. From June 1993 to September 1994, Mr. Stromberg worked as
a Regional Manager for Digital Financial Services, a subsidiary of GE Capital.
Mr. Stromberg worked in various sales, product management, operations and
management positions with Digital Equipment Corporation from June 1983 to June
1993. Mr. Stromberg received a BS in Business Management and an MBA from the
University of Utah.
O. Gene Gabbard has been a Director of MindSpring since December 1995. He
has worked independently as an entrepreneur and consultant since February 1993.
Mr. Gabbard currently serves as a director of ITC Holding and several of its
subsidiaries, as well as
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ITC(+)DeltaCom, Inc. ("ITC(+)DeltaCom"), a carriers' carrier and retail
telecommunications company, and Powertel, Inc. ("Powertel"), a wireless
telecommunications company formerly known as InterCel, Inc., and as a director
and Chairman of ClearSource, Inc., a provider of broadband telecommunications
services. From August 1990 through January 1993, he served as Executive Vice
President and Chief Financial Officer of MCI Communications Corporation ("MCI"),
a telecommunications company. Mr. Gabbard has served as a Managing Director of
South Atlantic Private Equity Fund IV, Limited Partnership since 1997.
Campbell B. Lanier, III has served as a Director of MindSpring since
November 1994. Mr. Lanier has served as Chairman of the Board and Chief
Executive Officer of ITC Holding (or its predecessors) since its inception in
1985. In addition, Mr. Lanier is an officer and director of several ITC Holding
subsidiaries. He is also the Chairman of ITC(+)DeltaCom and is a director of
ITC(+)DeltaCom, KNOLOGY Holdings, Inc. ("KNOLOGY"), a broadband
telecommunications services company formerly known as CyberNet Holding, Inc.,
Vista Eyecare, Inc., a full service optical retailer, K&G Men's Centers, a
discount retailer of men's clothing, Innotrac Corporation ("Innotrac"), which
provides customized, technology-based marketing support services, and is Vice
Chairman of the Board of AvData and Chairman of the Board of Powertel. Mr.
Lanier has served as a Managing Director of South Atlantic Private Equity Fund
IV, Limited Partnership since 1997.
William H. Scott, III has been a Director of MindSpring since November
1994. Mr. Scott has served as President of ITC Holding (or its predecessors)
since December 1991 and has been a director of ITC Holding (or its predecessors)
since May 1989. He is also an officer and director of several ITC Holding
subsidiaries. Mr. Scott is a director of ITC(+)DeltaCom, KNOLOGY, Powertel,
Innotrac and AvData.
BOARD OF DIRECTORS
Our Certificate of Incorporation provides for a classified board of
directors consisting of three classes of directors with each class required to
be as nearly equal in number as possible. The number of directors is determined
from time to time by the board of directors and is currently fixed at six. A
single class of directors is elected each year at MindSpring's annual meeting of
stockholders. Subject to transition provisions, each director elected at each
such meeting will serve for a term ending on the date of the third annual
meeting of stockholders after his election and until his successor has been
elected and qualified. Mr. Gabbard is serving for a term expiring in 1999,
Messrs. McQuary and Scott are serving for terms expiring in 2000 and Messrs.
Brewer and Lanier are serving for terms expiring in 2001. Effective February 19,
1999, Michael G. Misikoff resigned his position as director. Mr. Misikoff's term
was to have expired in 1999. Officers of MindSpring are appointed annually by
the board of directors and serve at its discretion.
The board of directors currently has two committees, the audit committee
and the compensation committee. The audit committee, among other things,
recommends the firm to be appointed as independent accountants to audit
MindSpring's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants MindSpring's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of MindSpring
and reviews the non-audit services to be performed by the independent
accountants. The current members of the audit committee are Messrs. Gabbard,
Lanier, and Scott.
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The compensation committee reviews and recommends the compensation
arrangements for management of MindSpring and administers MindSpring's 1995
Stock Option Plan, as amended. The members of the compensation committee for the
year ended December 31, 1998 were Messrs. Gabbard, Lanier, and Scott.
DIRECTOR COMPENSATION
Since MindSpring's inception, members of the board of directors have not
received any compensation for their service on the board of directors except
pursuant to MindSpring's Directors Stock Option Plan (the "Directors Plan").
Under the Directors Plan, 210,000 shares of Common Stock are authorized for
issuance to non-employee directors (in the form of grants of 30,000 options per
director) upon their initial election or appointment to the board, or, in the
case of Messrs. Lanier, Scott and Gabbard, who joined the board prior to the
creation of the Directors Plan, upon the adoption of the Directors Plan by the
board. Options are exercisable at the fair market value of the common stock (as
determined by the board) on the date of grant. The Directors Plan was amended in
1998 to provide for discretionary option grants. Upon adoption of this
amendment, each of Messrs. Lanier, Scott and Gabbard received a grant of 15,000
options.
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DESCRIPTION OF NOTES
THE NOTES WILL BE ISSUED UNDER AN INDENTURE DATED AS OF APRIL 14, 1999,
BETWEEN MINDSPRING AND UNITED STATES TRUST COMPANY OF NEW YORK, AS TRUSTEE, A
COPY OF WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, AND A FIRST
SUPPLEMENTAL INDENTURE DATED AS OF APRIL 14, 1999 (COLLECTIVELY REFERRED TO
HEREIN AS THE "NOTES INDENTURE" OR THE "INDENTURE") BETWEEN MINDSPRING AND THE
TRUSTEE. WHEREVER PARTICULAR DEFINED TERMS OF THE NOTES INDENTURE (INCLUDING THE
NOTES) ARE REFERRED TO, SUCH DEFINED TERMS ARE INCORPORATED HEREIN BY REFERENCE
(THE NOTES ARE REFERRED TO IN THE NOTES INDENTURE AS "SECURITIES"). THE
FOLLOWING SUMMARIES OF CERTAIN PROVISIONS OF THE NOTES INDENTURE DO NOT PURPORT
TO BE COMPLETE AND ARE SUBJECT TO, AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO, THE DETAILED PROVISIONS OF THE NOTES AND THE NOTES INDENTURE,
INCLUDING THE DEFINITIONS THEREIN OF CERTAIN TERMS.
GENERAL
The notes will be unsecured, direct, general, subordinated obligations of
MindSpring, will be limited to $179,975,000 aggregate principal amount and will
mature on April 15, 2006. Payment in full of the principal amount of the notes
will be due on April 15, 2006 at a price of 100% of the principal amount
thereof.
The notes will bear interest at the rate per annum shown on the front cover
of this prospectus supplement from April 14, 1999 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on April 15 and October 15 of each year, commencing October 15,
1999 until the principal thereof is paid or made available for payment, to the
person in whose name the note is registered at the close of business on the
preceding April 1 or October 1, as the case may be.
The notes will be convertible into shares of common stock initially at the
conversion rate stated on the front cover of this prospectus supplement, subject
to adjustment upon the occurrence of certain events described under
"-- Conversion Rights," at any time following the initial issue date of the
notes and before the close of business on the Business Day immediately preceding
April 15, 2006, unless previously redeemed or repurchased.
The notes are redeemable at the option of MindSpring, at any time on or
after April 15, 2002, in whole or in part, at the redemption prices set forth
below under " -- Optional Redemption by MindSpring," plus accrued and unpaid
interest to the redemption date. Under certain circumstances, the notes are
subject to provisional redemption before April 15, 2002, in whole or in part, as
specified below under "-- Provisional Redemption by MindSpring." The notes also
are subject to repurchase by MindSpring at the option of the holders, as
described below under "-- Repurchase at Option of Holders Upon a Change of
Control."
The principal of, premium, if any, and interest on the notes will be
payable, and the notes may be surrendered for registration of transfer, exchange
and conversion, at the office or agency of the trustee in the Borough of
Manhattan, The City of New York. In addition, payment of interest may, at the
option of MindSpring, be made by check mailed to the address of the person
entitled thereto as it appears in the Security Register. See "-- Payment and
Conversion." Payments, transfers, exchanges and conversions relating to
beneficial interests in notes issued in book-entry form will be subject to the
procedures applicable to global notes described below.
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MindSpring initially will appoint the trustee at its Corporate Trust Office
as paying agent, transfer agent, registrar and conversion agent for the notes.
In such capacities, the trustee will be responsible for, among other things, (1)
maintaining a record of the aggregate holdings of notes represented by the
global note, as defined below, and accepting notes for exchange and registration
of transfer, (2) ensuring that payments of principal, premium, if any, and
interest received by the trustee from MindSpring in respect of the notes are
duly paid to DTC or its nominees, (3) transmitting to MindSpring any notices
from holders of the notes, (4) accepting conversion notices and related
documents and transmitting the relevant items to MindSpring and (5) delivering
certificates for common stock issued upon conversion of the notes.
MindSpring will cause each transfer agent to act as a registrar and will
cause to be kept at the office of such transfer agent a register in which,
subject to such reasonable regulations as it may prescribe, MindSpring will
provide for registration of transfers of the notes. MindSpring may vary or
terminate the appointment of any paying agent, transfer agent or conversion
agent, or appoint additional or other such agents or approve any change in the
office through which any such agent acts, provided that there shall at all times
be maintained by MindSpring, a paying agent, a transfer agent and a conversion
agent in the Borough of Manhattan, The City of New York. MindSpring will cause
notice of any resignation, termination or appointment of the trustee or any
paying agent, transfer agent or conversion agent, and of any change in the
office through which any such agent will act, to be provided to holders of the
notes.
No service charge will be made for any registration of transfer or exchange
of notes, but MindSpring may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
Notes will be issued only in fully registered form, without interest
coupons, in minimum denominations of $1,000 and integral multiples in excess
thereof. Notes sold in the offering will be issued only against payment therefor
in immediately available funds.
The notes initially will be represented by one or more notes in registered,
global form without interest coupons (collectively, the "global notes" or
"global note"). The global notes will be deposited upon issuance with the
trustee as custodian for DTC, in New York, New York, and registered in the name
of DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below.
Transfers of beneficial interests in the global notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
Except as set forth below, the global notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for notes
in certificated form except in the limited circumstances described below under
"-- Exchanges of Book-Entry Notes for Certificated Notes."
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EXCHANGES OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES.
A beneficial interest in a global note may not be exchanged for a note in
certificated form unless (1) DTC (x) notifies MindSpring that it is unwilling or
unable to continue as Depositary for the global note or (y) has ceased to be a
clearing agency registered under the Exchange Act and in either case MindSpring
thereupon fails to appoint a successor Depositary within 90 days, (2)
MindSpring, at its option, notifies the trustee in writing that it elects to
cause the issuance of the notes in certificated form or (3) there shall have
occurred and be continuing an Event of Default or any event which after notice
or lapse of time or both would be an Event of Default with respect to the notes.
In all cases, certificated notes delivered in exchange for any global note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by or on behalf of the Depositary, in
accordance with its customary procedures.
CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL NOTES. THE DESCRIPTIONS OF THE
OPERATIONS AND PROCEDURES OF DTC THAT FOLLOW ARE PROVIDED SOLELY AS A MATTER OF
CONVENIENCE. THESE OPERATIONS AND PROCEDURES ARE SOLELY WITHIN THE CONTROL OF
DTC AND ARE SUBJECT TO CHANGES BY THEM FROM TIME TO TIME. MINDSPRING TAKES NO
RESPONSIBILITY FOR THESE OPERATIONS AND PROCEDURES AND URGES INVESTORS TO
CONTACT DTC OR ITS PARTICIPANTS DIRECTLY TO DISCUSS THESE MATTERS.
DTC has advised MindSpring as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Certain of
such participants, or their representatives, together with other entities, own
DTC. Indirect access to the DTC system is available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
DTC has advised MindSpring that its current practice, upon the issuance of
a global note, is to credit, on its internal system, the respective principal
amount of the individual beneficial interests represented by such global note to
the accounts with DTC of the participants through which such interests are to be
held. Ownership of beneficial interests in the global note will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by DTC or its nominees, with respect to interests of participants, and the
records of participants and indirect participants, with respect to interests of
persons other than participants.
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL NOTE,
DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND
HOLDER OF THE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE
INDENTURE AND THE NOTES. Except in the limited circumstances described above
under "-- Exchanges of Book-Entry Notes for Certificated Notes," owners of
beneficial interests in a global note will not be entitled to have any portions
of such global note registered in their names, will not receive or be entitled
to
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receive physical delivery of notes in definitive form and will not be considered
the owners or holders of the global note, or any notes represented thereby,
under the notes indenture or the notes. Accordingly, each person owning a
beneficial interest in the global note must rely on the procedures of DTC and,
if such person is not a participant, those of the participant through which such
person owns its interest, in order to exercise any rights of a holder under the
indenture or such note.
Investors may hold their interests in the global note directly through DTC,
if they are participants in such system, or indirectly through organizations
that are participants in such system. All interests in a global note will be
subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a global note to such persons may be limited to
that extent. Because DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants and certain banks, the ability of a
person having beneficial interests in a global note to pledge such interest to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Cash payment of the principal of, interest on, or the redemption or
repurchase of the global note will be made to DTC or its nominee, as the case
may be, as the registered owner of the global note by wire transfer of
immediately available funds on each relevant payment date. Neither MindSpring,
the trustee nor any of their respective agents will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a global note including any delay by DTC or
any participant or indirect participant in identifying the beneficial ownership
interests, and MindSpring and the trustee may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes.
MindSpring expects that DTC or its nominee, upon receipt of any cash
payment of principal, interest or the redemption or repurchase price in respect
of a global note representing any notes held by it or its nominee, will
immediately credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the principal amount of such global
note for such notes as shown on the records of DTC or its nominee (adjusted as
necessary so that such payments are made with respect of whole notes only),
unless DTC has reason to believe that it will not receive payment on such
payment date. MindSpring also expects that payments by participants to owners of
beneficial interests in such global note held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in "street name."
Such payments will be the responsibility of such participants.
Redemption notices will be sent to DTC or its nominee. If less than all
notes are being redeemed, DTC's practice is to determine by lot the amount of
the holdings of each participant in such issue to be redeemed.
Neither DTC or its nominee will consent or vote with respect to the notes.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date. The omnibus proxy assigns DTC's, or its
nominee's, consenting or voting rights
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to those participants to whose accounts the notes are credited on the record
date identified in a listing attached to the omnibus proxy.
Interests in the global notes will trade in DTC's Same-Day Funds Settlement
System, and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised MindSpring that it will take any action permitted to be
taken by a holder of notes, including the presentation of notes for exchange as
described below and the conversion of notes, only at the direction of one or
more participants to whose account with DTC interests in the global notes are
credited and only in respect of such portion of the aggregate principal amount
of the notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default, as defined below, under the
notes, DTC reserves the right to exchange the global notes for notes in
certificated form, and to distribute such notes to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the global note among
participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.
None of MindSpring, the trustee nor any of their respective agents will
have any responsibility for the performance by DTC, its participants or indirect
participants of their respective obligations under the rules and procedures
governing its operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial ownership
interests in global notes.
PAYMENT AND CONVERSION
The principal of the notes will be payable in U.S. dollars, against
surrender thereof at the Corporate Trust Office of the trustee in the Borough of
Manhattan, The City of New York, in U.S. currency by dollar check or by transfer
to a dollar account maintained by the holder with a bank in New York City.
Payment of interest on a note may be made by dollar check mailed to the address
of the person entitled thereto as such address shall appear in the Security
Register, or, upon written application by the holder to the Security Registrar
setting forth instructions not later than the relevant Record Date, by transfer
to a dollar account maintained by the holder with a bank in the United States.
Transfers to dollar accounts will be made only to holders of an aggregate
principal amount of notes in excess of $2,000,000.
Payments in respect of the principal of, and premium, if any, and interest
on any global note registered in the name of DTC or its nominee will be payable
by the trustee to DTC or its nominee in its capacity as the registered holder
under the notes indenture. Under the terms of the notes indenture, MindSpring
and the trustee will treat the persons in whose names the notes, including the
global notes, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither MindSpring, the trustee nor any agent of MindSpring or the trustee has
or will have any responsibility or liability for:
(1) any aspect of DTC's records or any participant's or indirect
participant's records relating to or payments made on account of beneficial
ownership interests in the
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global notes, or for maintaining, supervising or reviewing any of DTC's
records or any participant's or indirect participant's records relating to
the beneficial ownership interests in the global notes, or
(2) any other matter relating to the actions and practices of DTC or
any of its participants or indirect participants.
Any payment on a note due on any day that is not a Business Day need not be
made on such day, but may be made on the next succeeding Business Day with the
same force and effect as if made on such due date, and no interest shall accrue
on such payment for the period from and after such date. "Business Day," when
used with respect to any place of payment, place of conversion or any other
place, as the case may be, means each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in such place of payment,
place of conversion or other place, as the case may be, are authorized or
obligated by law or executive order to close.
Notes may be surrendered for conversion at the Corporate Trust Office of
the trustee in the Borough of Manhattan, The City of New York. In the case of
global notes, conversion will be effected by DTC upon notice from the holder of
a beneficial interest in a global note in accordance with its rules and
procedures. notes surrendered for conversion must be accompanied by a conversion
notice and any payments in respect of interest, as applicable, as described
below under "-- Conversion Rights."
All moneys (1) deposited with the trustee or any paying agent or (2) then
held by MindSpring in trust for the payment of principal, premium, if any, or
interest on any notes which remain unclaimed at the end of two years after such
payment has become due and payable will be repaid to MindSpring, and the holder
of such note will thereafter look only to MindSpring for payment thereof.
CONVERSION RIGHTS
The holder of any note will have the right, at the holder's option, to
convert any portion of the principal amount of a note that is an integral
multiple of $1,000 into shares of common stock at any time following the
original issue date of the notes and prior to the close of business on the
Business Day immediately preceding the maturity date, unless previously redeemed
or repurchased, at a conversion rate equal to the number of shares per $1,000
principal amount of notes shown on the front cover of this prospectus supplement
(the "Conversion Rate"), subject to adjustment in certain events as described
below. The right to convert a note called for redemption or delivered for
repurchase will terminate at the close of business on the Business Day
immediately preceding the Redemption Date or Repurchase Date for such note,
unless MindSpring defaults in making the payment due upon redemption or
repurchase, as the case may be.
The right of conversion attaching to any note may be exercised by the
holder by delivering the note at the Corporate Trust Office of the trustee in
the Borough of Manhattan, The City of New York, accompanied by a duly signed and
completed notice of conversion, a copy of which may be obtained from the
trustee. The conversion date will be the date on which the note and the duly
signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, MindSpring will issue and deliver
to the trustee a certificate or certificates for the number of full shares of
common stock issuable upon conversion, together with payment in lieu of any
fraction of a share; such certificate will be sent by the trustee to the
Conversion Agent for delivery to the holder. Such
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shares of common stock issuable upon conversion of the notes, in accordance with
the provisions of the notes indenture, will be fully paid and nonassessable and
will also rank pari passu with the other shares of the common stock outstanding
from time to time.
Holders that surrender notes for conversion on a date that is not an
Interest Payment Date are not entitled to receive any interest for the period
from the next preceding Interest Payment Date to the date of conversion, except
as described below. However, holders of notes on a Regular Record Date,
including notes surrendered for conversion after the Regular Record Date, will
receive the interest payable on such notes on the next succeeding Interest
Payment Date. Accordingly, any note surrendered for conversion during the period
from the close of business on a Regular Record Date to the opening of business
on the next succeeding Interest Payment Date must be accompanied by payment of
an amount equal to the interest payable on such Interest Payment Date on the
principal amount of notes being surrendered for conversion; provided, however,
that no such payment will be required upon the conversion of any note, or
portion thereof, that has been called for redemption or that is eligible to be
delivered for repurchase if, as a result, the right to convert such note would
terminate during the period between such Regular Record Date and the close of
business on the next succeeding Interest Payment Date.
No other payment or adjustment for interest, or for any dividends in
respect of common stock, will be made upon conversion. Holders of common stock
issued upon conversion will not be entitled to receive any dividends payable to
holders of common stock as of any record date before the close of business on
the conversion date. No fractional shares will be issued upon conversion but, in
lieu thereof, an appropriate amount will be paid in cash by MindSpring based on
the market price of the common stock at the close of business on the date of
conversion.
A holder delivering a note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of common stock on
conversion. However, MindSpring shall not be required to pay any tax or duty
that may be payable in respect of any transfer involved in the issue or delivery
of the common stock in a name other than that of the holder of the note.
Certificates representing shares of common stock will not be issued or delivered
unless the person requesting such issue has paid to MindSpring the amount of any
such tax or duty or has established to the satisfaction of MindSpring that such
tax or duty has been paid.
The Conversion Rate is subject to adjustment in certain events, including
without duplication:
(a) dividends, and other distributions, payable in common stock on
shares of capital stock of MindSpring,
(b) the issuance to all holders of common stock of rights, options or
warrants entitling them to subscribe for or purchase common stock at less
than the then Current Market Price of such common stock as of the record
date for holders entitled to receive such rights, options or warrants,
provided, however, that if such rights, options or warrants are only
exercisable upon the occurrence of certain triggering events, then the
Conversion Rate will not be adjusted until such triggering events occur,
(c) subdivisions, combinations and reclassifications of common stock,
(d) distributions to all holders of common stock of evidences of
indebtedness of MindSpring, shares of capital stock, cash or assets,
including securities, but excluding
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those dividends, rights, options, warrants and distributions referred to in
clauses (a) and (b) above, dividends and distributions paid exclusively in
cash and distributions upon mergers or consolidations to which the next
succeeding paragraph applies,
(e) distributions consisting exclusively of cash, excluding any cash
portion of distributions referred to in (d) above, or cash distributed upon
a merger or consolidation to which the next succeeding paragraph applies,
to all holders of common stock in an aggregate amount that, combined
together with (1) other such all-cash distributions made within the
preceding 12 months in respect of which no adjustment has been made and (2)
any cash and the fair market value of other consideration payable in
respect of any tender offer by MindSpring or any of its Subsidiaries for
common stock concluded within the preceding 12 months in respect of which
no adjustment has been made, exceeds 10% of MindSpring's market
capitalization, being the product of the Current Market Price per share of
the common stock on the record date for such distribution and the number of
shares of common stock then outstanding),
(f) the successful completion of a tender offer made by MindSpring or
any of its subsidiaries for common stock which involves an aggregate
consideration that, together with (1) any cash and other consideration
payable in a tender offer by MindSpring or any of its subsidiaries for
common stock expiring within the 12 months preceding the expiration of such
tender offer in respect of which no adjustment has been made and (2) the
aggregate amount of any such all-cash distributions referred to in (e)
above to all holders of common stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have
been made, exceeds 10% of MindSpring's market capitalization on the
expiration of such tender offer, and
(g) payment in respect of a tender offer or exchange offer by a person
other than MindSpring, any Subsidiary of MindSpring, ITC Holding Company,
Inc. or any direct or indirect wholly owned subsidiary of ITC Holding
Company, Inc. in which, as the closing of the offer, the Board of Directors
of MindSpring is not recommending rejection of the offer.
The adjustment referred to in clause (g) above will only be made if the tender
offer or exchange offer is for an amount which increases that person's ownership
of common stock to more than 25% of the total shares of common stock
outstanding, and only if the cash and value of any other consideration included
in such payment per share of common stock exceeds the Current Market Price per
share of the common stock on the business day next succeeding the last date on
which tenders or exchanges may be made pursuant to such tender or exchange. The
adjustment referred to in clause (g) above will not be made, however, if, as of
the closing of the offer, the offering documents with respect to such offer
disclose a plan or an intention to cause MindSpring to engage in any transaction
described below in "-- Mergers and Sales of Assets by MindSpring." MindSpring
reserves the right to make such increases in the Conversion Rate in addition to
those required in the foregoing provisions as it considers to be advisable in
order that any event treated for United States federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the recipients. No
adjustment of the Conversion Rate will be required to be made until the
cumulative adjustments amount to 1.0% or more of the Conversion Rate. MindSpring
shall compute any adjustments to the Conversion Rate pursuant to this paragraph
and will give notice to the holders of any such adjustments.
In case of any consolidation or merger of MindSpring with or into another
person or any merger of another person into MindSpring, other than a merger
which does not result in any
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reclassification, conversion, exchange or cancellation of the common stock, or
in the case of any sale or transfer of all or substantially all of the assets of
MindSpring, each note then outstanding will, without the consent of the holder
of any note, become convertible only into the kind and amount of securities,
cash and other property receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of common stock into which such
note was convertible immediately prior thereto, assuming such holder of common
stock failed to exercise any rights of election and that such note was then
convertible.
MindSpring from time to time may increase the Conversion Rate by any amount
for any period of at least 20 days, in which case MindSpring shall give at least
15 days' notice of such increase, if the Board of Directors has made a
determination that such increase would be in the best interests of MindSpring,
which determination shall be conclusive. No such increase shall be taken into
account for purposes of determining whether the closing price of the common
stock exceeds the Conversion Price, as defined below, by 105% in connection with
an event which otherwise would be a Change of Control.
If at any time MindSpring makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for United
States federal income tax purposes, e.g., distributions of evidences of
indebtedness or assets of MindSpring, but generally not stock dividends on
common stock or rights to subscribe for common stock, and, pursuant to the
anti-dilution provisions of the notes indenture, the number of shares into which
notes are convertible is increased, such increase may be deemed for United
States federal income tax purposes to be the payment of a taxable dividend to
holders of notes. See "Certain United States Federal Tax
Considerations -- United States Holders".
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the
notes, including amounts payable on any redemption or repurchase, will be
subordinated in right of payment to the extent set forth in the notes indenture
to the prior full and final payment of all Senior Debt of MindSpring. "Senior
Debt" means the principal of, and premium, if any, and interest, including all
interest accruing subsequent to the commencement of any bankruptcy or similar
proceeding, whether or not a claim for post-petition interest is allowable as a
claim in any such proceeding, on, and all fees and other amounts payable in
connection with, the following, whether absolute or contingent, secured or
unsecured, due or to become due, outstanding on the date of the notes indenture
or thereafter created, incurred or assumed:
(a) indebtedness of MindSpring evidenced by a credit or loan
agreement, note, bond, debenture or other written obligation,
(b) all obligations of MindSpring for money borrowed,
(c) all obligations of MindSpring evidenced by a note or similar
instrument given in connection with the acquisition of any businesses,
properties or assets of any kind,
(d) obligations of MindSpring (1) as lessee under leases required to
be capitalized on the balance sheet of the lessee under generally accepted
accounting principles and (2) as lessee under other leases for facilities,
capital equipment or related assets, whether or not capitalized, entered
into or leased for financing purposes,
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(e) all obligations of MindSpring under interest rate and currency
swaps, caps, floors, collars, hedge agreements, forward contracts or
similar agreements or arrangements,
(f) all obligations of MindSpring with respect to letters of credit,
bankers' acceptances and similar facilities, including reimbursement
obligations with respect to the foregoing,
(g) all obligations of MindSpring issued or assumed as the deferred
purchase price of property or services, but excluding trade accounts
payable and accrued liabilities arising in the ordinary course of business,
(h) all obligations of the type referred to in clauses (a) through (g)
above of another person and all dividends of another person, the payment of
which, in either case, MindSpring has assumed or guaranteed, or for which
MindSpring is responsible or liable, directly or indirectly, jointly or
severally, as obligor, guarantor or otherwise, or which is secured by a
lien on the property of MindSpring, and
(i) renewals, extensions, modifications, replacements, restatements
and refundings of, or any indebtedness or obligation issued in exchange
for, any such indebtedness or obligation described in clauses (a) through
(h) of this paragraph; provided, however, that Senior Debt shall not
include (A) the note or any such indebtedness or obligation if the terms of
such indebtedness or obligation, or the terms of the instrument under
which, or pursuant to which it is issued expressly provide that such
indebtedness or obligation is not superior in right of payment to the notes
or (B) any particular indebtedness or obligation that is owed by MindSpring
to any of its direct or indirect Subsidiaries.
No payment on account of principal of or premium, if any, or interest on,
or redemption or repurchase of, the notes may be made by MindSpring if (1) a
default in the payment of principal, premium, if any, or interest, including a
default under any repurchase or redemption obligation, or other amounts with
respect to Senior Debt occurs and is continuing beyond the applicable grace
period or (2) any other event of default occurs and is continuing with respect
to Designated Senior Debt, as defined below, that permits the holders thereof to
accelerate the maturity thereof, and the trustee receives a notice of such
default (a "Payment Blockage Notice") from a holder of such Designated Senior
Debt or other person permitted to give such notice under the notes indenture.
Payments on the notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b) in the
case of a nonpayment default, the earlier of the date on which such nonpayment
default is cured or waived or 179 days after the date on which the Payment
Blockage Notice is received, if the maturity of such Designated Senior Debt has
not been accelerated. No new payment blockage period may be commenced unless and
until (1) 365 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice and (2) all scheduled payments of principal, premium, if
any, and interest on the notes that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the trustee shall be, or be made, the
basis for any subsequent Payment Blockage Notice. "Designated Senior Debt" means
MindSpring's obligations under (1) the credit facility as now in effect and as
described below in "-- Description of Secured Credit Facility," and as the same
may from time to time be amended, modified or supplemented, together with all
extensions, replacements, refinancings and substitutions thereof, whether in
whole or in part, and (2) any particular Senior Debt in which the
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instrument creating or evidencing the same or the assumption or guarantee
thereof, or related agreements or documents to which MindSpring is a party,
expressly provides that such indebtedness shall be "Designated Senior Debt" for
purposes of the notes indenture, provided that such instrument, agreement or
other document may place limitations and conditions on the right of such Senior
Debt to exercise the rights of Designated Senior Debt. In addition, upon any
acceleration of the principal due on the notes as a result of an Event of
Default or payment or distribution of assets of MindSpring to creditors upon any
dissolution, winding up, liquidation or reorganization, whether voluntary or
involuntary, marshaling of assets, assignment for the benefit of credits, or in
bankruptcy, insolvency, receivership or other similar proceedings, of
MindSpring, all principal, premium, if any, interest and other amounts due on
all Senior Debt must be paid in full before the holders of the notes are
entitled to receive any payment. By reason of such subordination, in the event
of insolvency, creditors of MindSpring who are holders of Senior Debt may
recover more, ratably, than the holders of the notes, and such subordination may
result in a reduction or elimination of payments to the holders of the notes. As
of February 28, 1999 MindSpring had approximately $84.8 million of Senior Debt
outstanding.
In addition, the notes will be structurally subordinated to all
indebtedness and other liabilities, including trade payables and lease
obligations, of MindSpring's subsidiaries, as any right of MindSpring to receive
any assets of its subsidiaries upon their liquidation or reorganization, and the
consequent right of the holders of the notes to participate in those assets,
will be effectively subordinated to the claims of that subsidiary's creditors,
including trade creditors, except to the extent that MindSpring itself is
recognized as a creditor of such subsidiary, in which case the claims of
MindSpring would still be subordinate to any security interest in the assets of
such subsidiary and any indebtedness of such subsidiary senior to that held by
MindSpring.
The notes indenture does not limit the ability of MindSpring or any of its
subsidiaries to incur indebtedness, including Senior Debt.
PROVISIONAL REDEMPTION BY MINDSPRING
The notes may be redeemed by MindSpring, in whole or in part, at any time
prior to April 15, 2002, at a redemption price equal to $1,000 per $1,000 note
to be redeemed plus accrued and unpaid interest, if any, to the Redemption Date
(the "Provisional Redemption Date") if the closing price of the common stock
shall have exceeded 150% of the Conversion Price, as defined below, then in
effect for at least 20 trading days in any consecutive 30-trading day period
ending on the trading day prior to the date of mailing of the notice of
provisional redemption (the "Notice Date," which such date shall be no more than
60 nor less than 30 days prior to the Provisional Redemption Date).
Upon any Provisional Redemption, MindSpring will make an additional payment
in cash (the "Make-Whole Payment") with respect to the notes called for
redemption to holders on the Notice Date in an amount equal to $200 per $1,000
note, less the amount of any interest actually paid on such note prior to the
Notice Date. MINDSPRING WILL BE OBLIGATED TO MAKE THE MAKE-WHOLE PAYMENT ON ALL
NOTES CALLED FOR PROVISIONAL REDEMPTION, INCLUDING ANY NOTES CONVERTED AFTER THE
NOTICE DATE AND PRIOR TO THE PROVISIONAL REDEMPTION DATE. If the secured credit
facility is in effect at the time of any such proposed redemption, MindSpring
may be required to obtain the prior consent of the lenders under the secured
credit facility or terminate the credit facility to redeem the notes.
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OPTIONAL REDEMPTION BY MINDSPRING
On and after April 15, 2002, the notes may be redeemed, in whole or in
part, at the option of MindSpring, at the redemption prices specified below,
upon not less than 30 nor more than 60 days' prior notice as provided under
"-- Notices" below. The redemption price, expressed as a percentage of principal
amount, is as follows for the 12-month periods beginning on April 15 of the
following years:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002....................................................... 102.86%
2003....................................................... 102.14%
2004....................................................... 101.43%
2005....................................................... 100.71%
</TABLE>
and 100% of the principal amount on April 15, 2006, in each case together with
accrued interest to the redemption date. If the secured credit facility is in
effect at the time of any such proposed redemption, MindSpring may be required
to obtain the prior consent of the lenders under the secured credit facility or
terminate the credit facility to redeem the notes.
No sinking fund is provided for the notes.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control, as defined below, occurs, each holder of notes
shall have the right, at the holder's option, to require MindSpring to
repurchase all of such holder's notes not theretofore called for redemption, or
any portion of the principal amount thereof that is equal to $5,000 or an
integral multiple of $1,000 in excess thereof, on the date (the "Repurchase
Date") that is 45 days after the date of the Company Notice, as defined below,
at a price equal to 100% of the principal amount of the notes to be repurchased,
together with interest accrued to the Repurchase Date (the "Repurchase Price").
MindSpring may, at its option, in lieu of paying the Repurchase Price in
cash, pay the Repurchase Price in common stock valued at 95% of the average of
the closing sales prices of the common stock for the five trading days
immediately preceding and including the third day prior to the Repurchase Date;
provided that payment may not be made in common stock unless MindSpring
satisfies certain conditions with respect thereto prior to the Repurchase Date
as provided in the notes indenture.
Within 30 days after the occurrence of a Change of Control, MindSpring is
obligated to give to all holders of the notes notice, as provided in the notes
indenture (the "Company Notice"), of the occurrence of such Change of Control
and of the repurchase right arising as a result thereof. MindSpring must also
deliver a copy of the Company Notice to the trustee. To exercise the repurchase
right, a holder of notes must deliver on or before the 30th day after the date
of the Company Notice irrevocable written notice to the trustee of the
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holder's exercise of such right, together with the notes with respect to which
the right is being exercised.
A Change of Control shall be deemed to have occurred at such time after the
original issuance of the notes as there shall occur:
(1) the acquisition by any person, including any syndicate or group
deemed to be a "person" under Section 13(d) (3) of the Exchange Act of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of
capital stock of MindSpring entitling such person to exercise 50% or more
of the total voting power of all shares of capital stock of MindSpring
entitled to vote generally in elections of directors, other than any such
acquisition by MindSpring, any Subsidiary of MindSpring or any employee
benefit plan of MindSpring; or
(2) any consolidation or merger of MindSpring with or into any other
person, any merger of another person into MindSpring, or any conveyance,
transfer, sale, lease or other disposition of all or substantially all of
the properties and assets of MindSpring to another person, other than (a)
any such transaction (x) that does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of capital stock
of MindSpring and (y) pursuant to which holders of common stock immediately
prior to such transaction have the entitlement to exercise, directly or
indirectly, 50% or more of the total voting power of all shares of capital
stock entitled to vote generally in the election of directors of the
continuing or surviving person immediately after such transaction and (b)
any merger which is effected solely to change the jurisdiction of
incorporation of MindSpring and results in a reclassification, conversion
or exchange of outstanding shares of common stock solely into shares of
common stock of the surviving entity;
provided, however, that a Change of Control shall not be deemed to have occurred
if the closing sales price per share of the common stock for any five trading
days within the period of 10 consecutive trading days ending immediately after
the later of the Change of Control or the public announcement of the Change of
Control, in the case of a Change of Control under clause (1) above, or the
period of 10 consecutive trading days ending immediately before the Change of
Control, in the case of a Change of Control under clause (2) above, shall equal
or exceed 105% of the Conversion Price of the notes in effect on each such
trading day. The "Conversion Price" is equal to $1,000 divided by the Conversion
Rate. "Beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act. "Person" includes any
syndicate or group which would be deemed to be a "person" under Section 13(d)(3)
of the Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to holders of
the notes. MindSpring will comply with this rule to the extent applicable at
that time.
MindSpring may, to the extent permitted by applicable law, at any time
purchase notes in the open market or by tender at any price or by private
agreement. Any note so purchased by MindSpring may, to the extent permitted by
applicable law, be reissued or resold or may, at MindSpring's option, be
surrendered to the trustee for cancellation. Any notes surrendered as aforesaid
may not be reissued or resold and will be canceled promptly.
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The foregoing provisions would not necessarily afford holders of the notes
protection in the event of highly leveraged or other transactions involving
MindSpring that may adversely affect holders.
MindSpring's ability to repurchase notes upon the occurrence of a Change in
Control is subject to important limitations. A Change in Control would be an
event of default under the current terms of the secured credit facility.
Moreover, the occurrence of a Change in Control could cause an event of default
under, or be prohibited or limited by, the terms of other Senior Debt of
MindSpring. As a result, in each case, any repurchase of the notes would, absent
a waiver, be prohibited under the subordination provisions of the notes
indenture until the Senior Debt is paid in full. Further, we cannot assure you
that MindSpring would have the financial resources, or would be able to arrange
financing, to pay the Repurchase Price for all the notes that might be delivered
by holders of notes seeking to exercise the repurchase right. Moreover, although
under the notes indenture MindSpring may elect, subject to satisfaction of
certain conditions, to pay the repurchase price for the notes using shares of
common stock, the terms of the Credit Facility would also prohibit this form of
prepayment of any principal of, or interest on, the notes. MindSpring's ability
to repurchase notes with cash may also be limited by the terms of its
Subsidiaries' borrowing arrangements due to dividend restrictions. Any failure
by MindSpring to repurchase the notes when required following a Change in
Control would result in an Event of Default under the notes indenture whether or
not such repurchase is permitted by the subordination provisions of the notes
indenture. Any such default may, in turn, cause a default under Senior Debt of
MindSpring. See "-- Subordination".
MERGERS AND SALES OF ASSETS BY MINDSPRING
MindSpring may not consolidate with or merge into any other person or
convey, transfer, sell or lease its properties and assets substantially as an
entirety to any person, and MindSpring shall not permit any person to
consolidate with or merge into MindSpring or convey, transfer, sell or lease
such person's properties and assets substantially as an entirety to MindSpring,
unless (a) the person formed by such consolidation or into or with which
MindSpring is merged or the person to which the properties and assets of
MindSpring are so conveyed, transferred, sold or leased, is a corporation,
limited liability company, partnership or trust organized and existing under the
laws of the United States, any State thereof or the District of Columbia and, if
other than MindSpring, shall expressly assume the due and punctual payment of
the principal of and, premium, if any, and interest on the notes and the
performance of the other covenants of MindSpring under the notes indenture; (b)
immediately after giving effect to such transaction, no Event of Default, and no
event which, after notice or lapse of time or both, would become an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion relating to the conditions described in (a) and (b) above is
delivered to the trustee.
EVENTS OF DEFAULT
The following will be Events of Default under the notes indenture:
(a) failure to pay principal of or premium, if any, on any note when
due, whether or not such payment is prohibited by the subordination
provisions of the notes indenture,
(b) failure to pay any interest on any note when due, continuing for
30 days, whether or not such payment is prohibited by the subordination
provisions of the notes indenture;
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(c) failure to provide a Company Notice in the event of a Change of
Control, whether or not such notice is prohibited by the subordination
provisions of the notes indenture;
(d) failure to perform any other covenant of MindSpring in the notes
indenture, continuing for 60 days after written notice to MindSpring by the
trustee or the holders of at least 25% in aggregate principal amount of
outstanding notes;
(e) failure to pay when due the principal of, or acceleration of, any
indebtedness for money borrowed by MindSpring or any Subsidiary in excess
of $25 million if such indebtedness is not discharged, or such acceleration
is not annulled, within 30 days after written notice to MindSpring by the
trustee or the holders of at least 25% in aggregate principal amount of
outstanding notes; and
(f) certain events of bankruptcy, insolvency or reorganization.
Subject to the provisions of the notes indenture relating to the duties of
the trustee in case an Event of Default shall occur and be continuing, the
trustee will be under no obligation to exercise any of its rights or powers
under the notes indenture at the request or direction of any of the holders,
unless such holders shall have offered to the trustee reasonable indemnity.
Subject to such provisions for the indemnification of the trustee, the holders
of a majority in aggregate principal amount of the outstanding notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the trustee or exercising any trust or power conferred
on the trustee.
If an Event of Default, other than an Event of Default specified in clause
(f) above, occurs and is continuing, either the trustee or the holders of at
least 25% in principal amount of the outstanding notes may accelerate the
maturity of all notes; provided, however, that after such acceleration, but
before a judgment or decree based on acceleration, the holders of a majority in
aggregate principal amount of outstanding notes may, under certain circumstances
as set forth in the notes indenture, rescind and annul such acceleration if all
Events of Default, other than the nonpayment of principal of the notes which
have become due solely by such declaration of acceleration, have been cured or
waived as provided in the notes indenture. If an Event of Default specified in
clause (f) occurs and is continuing, then the principal of, and accrued interest
on, all of the notes shall automatically become immediately due and payable
without any declaration or other act on the part of the holders of the notes or
the trustee. For information as to waiver of defaults, see "-- Modification and
Waiver" below.
No holder of any note will have any right to institute any proceeding with
respect to the notes indenture or for any remedy thereunder, unless such holder
shall have previously given to the trustee written notice of a continuing Event
of Default and the holders of at least 25% in aggregate principal amount of the
outstanding notes shall have made written request, and offered reasonable
indemnity, to the trustee to institute such proceeding as trustee, and the
trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of a
note for the enforcement of payment of the principal of or premium, if any, or
interest on such note on or after the respective due dates expressed in such
note or of the right to convert such note in accordance with the notes
indenture.
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MindSpring will be required to furnish to the trustee annually a statement
as to the performance by MindSpring of certain of its obligations under the
notes indenture and as to any default in such performance.
MODIFICATION AND WAIVER
Certain limited modifications of the notes indenture may be made without
the necessity of obtaining the consent of the holders of the notes. Other
modifications and amendments of the notes indenture may be made, and certain
past defaults by MindSpring may be waived, either (1) with the written consent
of the holders of not less than a majority in aggregate principal amount of the
notes at the time outstanding or (2) by the adoption of a resolution, at a
meeting of holders of the notes at which a quorum is present, by the holders of
at least 66 2/3% in aggregate principal amount of the notes represented at such
meeting. However, no such modification or amendment may, without the consent of
the holder of each outstanding note affected thereby
(a) change the stated maturity of the principal of, or any installment
of interest on, any note,
(b) reduce the principal amount of, or the premium, if any, or
interest on, any note,
(c) reduce the amount payable upon a redemption or mandatory
repurchase,
(d) modify the provisions with respect to the repurchase right of the
holders in a manner adverse to the holders,
(e) change the place or currency of payment of principal of, premium,
if any, or interest on, any note (including any payment of the Repurchase
Price in respect of such note),
(f) impair the right to institute suit for the enforcement of any
payment on or with respect to any note,
(g) modify the obligation of MindSpring to maintain an office or
agency in New York City,
(h) except as otherwise permitted or contemplated by provisions
concerning consolidation, merger, conveyance, transfer, sale or lease of
all or substantially all of the property and assets of MindSpring,
adversely affect the right of holders to convert any of the notes or to
require MindSpring to repurchase any note other than as provided in the
notes indenture,
(i) modify the subordination provisions in a manner adverse to the
holders of the notes,
(j) reduce the above-stated percentage of outstanding notes necessary
to modify or amend the notes indenture,
(k) reduce the percentage of aggregate principal amount of outstanding
notes necessary for waiver of compliance with certain provisions of the
notes indenture or for waiver of certain defaults, or
(l) reduce the percentage in aggregate principal amount of outstanding
notes required for the adoption of a resolution or the quorum required at
any meeting of holders of notes at which a resolution is adopted. The
quorum at any meeting called to
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adopt a resolution will be persons holding or representing a majority in
aggregate principal amount of the notes at the time outstanding and, at any
reconvened meeting adjourned for lack of a quorum, 25% of such aggregate
principal amount.
The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by MindSpring with certain restrictive provisions of
the notes indenture by written consent or by the adoption of a resolution at a
meeting. The holders of a majority in aggregate principal amount of the
outstanding notes also may waive any past default under the notes indenture,
except a default in the payment of principal, premium, if any, or interest, by
written consent.
The notes indenture contains provisions for convening meetings of holders
of notes.
NOTICES
Notice to holders of the notes will be given by mail to the addresses of
such holders as they appear in the Security Register. Such notices will be
deemed to have been given on the date of mailing of the notice.
Notice of a redemption of notes will be given at least once not less than
30 nor more than 60 days prior to the Redemption Date, which notice shall be
irrevocable, and will specify the Redemption Date.
REPLACEMENT OF NOTES
Notes that become mutilated, destroyed, stolen or lost will be replaced by
MindSpring at the expense of the holder upon delivery to the trustee of the
mutilated notes or evidence of the loss, theft or destruction thereof
satisfactory to MindSpring and the trustee. In the case of a lost, stolen or
destroyed note, indemnity satisfactory to the trustee and MindSpring may be
required at the expense of the holder of such note before a replacement note
will be issued.
PAYMENT OF STAMP AND OTHER TAXES
MindSpring shall pay all stamp and similar duties, if any, which may be
imposed by the United States or the United Kingdom or any political subdivision
thereof or taxing authority thereof or therein with respect to the issuance of
the notes. MindSpring will not be required to make any payment with respect to
any other tax, assessment or governmental charge imposed by any government or
any political subdivision thereof or taxing authority thereof or therein.
SATISFACTION AND DISCHARGE
The provisions in the indenture relating to defeasance, other than those
relating to covenant defeasance, will be applicable to the notes.
GOVERNING LAW
The notes indenture and the notes will be governed by and construed in
accordance with the laws of the State of New York.
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THE TRUSTEE
The trustee for the holders of notes issued under the notes indenture will
be United States Trust Company of New York. In case an Event of Default shall
occur, and shall not be cured, the trustee will be required to use the degree of
care of a prudent person in the conduct of his own affairs in the exercise of
its powers. Subject to such provisions, the trustee will be under no obligation
to exercise any of its rights or powers under the notes indenture at the request
of any of the holders of notes, unless they shall have offered to the trustee
reasonable security or indemnity.
The notes indenture and the Trust Indenture Act contain limitations on the
rights of the trustee, should the trustee become a creditor of MindSpring, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
Trust Indenture Act, the trustee will be permitted to engage in other
transactions with MindSpring or any affiliate of MindSpring; provided, that if
the trustee acquires any conflicting interest as described in the Trust
Indenture Act, it must eliminate such conflict or resign.
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DESCRIPTION OF SECURED CREDIT FACILITY
We have a credit agreement, dated as of February 17, 1999, with First Union
National Bank as lender and as administrative agent for the other lenders, which
agreement provides for a $100,000,000 secured revolving credit facility. The
credit facility will mature on February 17, 2002. The credit facility may be
increased at our option to $200,000,000 with the approval of lenders holding at
least 51% of the aggregate unpaid principal amount of the notes thereunder or,
if no amounts are outstanding, lenders holding at least 51% of the aggregate
commitment of the lenders. We are obligated under the credit agreement to
deliver to the lenders specific consents and related documents in connection
with eleven significant operating contracts by May 19, 1999. If we fail to do
so, then on May 20, 1999, (1) our option to increase the commitment to
$200,000,000 will terminate, (2) the commitment will be automatically and
permanently reduced to $20,000,000 plus an incremental amount based upon the
extent of our compliance with the requirement concerning consents and related
documents (with the exception that if we do not deliver the consents and related
documents for our Atlanta, Georgia leased property, no incremental amount will
be added to the $20,000,000 amount); and (3) the applicable margin will be
increased between .375% and 1.00% for both Base Rate borrowings and LIBOR rate
borrowings. While at present we do not anticipate difficulties in obtaining the
consents and related documents by the specified deadline, there can be no
assurance that we will be able to do so.
On February 17, 1999, we borrowed $80 million under the credit facility to
finance the NETCOM acquisition. We intend to repay all amounts outstanding under
the credit facility, approximately $80.8 million including accrued interest,
through April 7, 1999, with a portion of the proceeds from our common stock
offering, or, if we do not complete the common stock offering, with a portion of
the proceeds from this notes offering. See "Use of Proceeds." Assuming we obtain
the necessary consents described above, the total commitment under the credit
facility will be $100 million.
The credit facility may also be used to finance permitted acquisitions and
for working capital and general corporate requirements. The following summary of
the material provisions of the credit agreement does not purport to be complete
and is qualified in its entirety by reference to the credit agreement. Some of
the capitalized terms used in this description of the credit facility are
defined at the end of this section.
Amounts drawn under the credit facility will bear interest, at our option,
at either the Base Rate or the reserve adjusted LIBOR rate, plus an applicable
margin. The applicable margin will be an annual rate which will fluctuate based
on our ratio of total debt to EBITDA and which will be between 0.25% and 1.00%
for Base Rate borrowings and between 1.25% and 2.00% for LIBOR rate borrowings.
The credit agreement requires us to repay indebtedness outstanding under
the credit facility with the net cash proceeds from all debt issuances, other
than the proceeds from the notes offering, from some types of sales of our
assets, and from some types of insurance proceeds. In addition, the total loan
commitment will be reduced by the amount of net cash proceeds from debt
issuances, other than the proceeds from the notes offering, and, to the extent
not reinvested in similar assets or used to finance the repair or replacement of
damaged assets, as the case may be, within 120 days after receipt of those
proceeds, by the amount of net cash proceeds from some types of asset sales and
from some types of insurance proceeds.
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Our obligations under the credit facility will be guaranteed by all of our
future subsidiaries. Our obligations are secured by a first priority lien on all
of our current and future assets and properties and will be secured by a first
priority pledge of the capital stock of any subsidiary that we organize or
acquire.
The credit agreement contains negative covenants limiting our ability and
that of our future subsidiaries to:
- incur debt, excluding the notes from this offering;
- guaranty obligations;
- create liens;
- make loans, advances, investments and acquisitions;
- engage in mergers and liquidations;
- sell assets;
- pay dividends and make distributions;
- exchange and issue some types of convertible or redeemable capital
stock;
- engage in transactions with affiliates;
- amend subordinated debt; and
- enter into restrictive agreements and change our fiscal year or
accounting method.
In addition, the credit agreement contains affirmative covenants, including
- covenants requiring compliance with laws and material contracts;
- maintenance of corporate existence, properties and insurance;
- payment of taxes and all other obligations;
- year 2000 compatibility; and
- the delivery of financial and other information.
The credit agreement also requires us to comply with specific financial
tests and to maintain specific financial ratios. We must maintain
(1) as of the end of any fiscal quarter, a ratio of EBITDA to interest
expense for the immediately preceding four consecutive fiscal quarters of
no less than 3.0:1.0;
(2) a maximum total debt to EBITDA ratio no greater than 3.0:1.0 and
(3) a net worth not less than $175,000,000 plus 50% of net income, to
the extent positive) plus 75% of the net cash proceeds of equity issuances.
Failure to satisfy any of the financial covenants constitutes an event of
default under the credit facility, notwithstanding our ability to meet our debt
service obligations. The credit agreement also includes other customary events
of default, including, without limitation, cross default to other debt and
material contracts; insolvency or bankruptcy; occurrence of certain ERISA
events; material undischarged judgments and change in control.
"Base Rate" means the greater of First Union National Bank's prime lending
rate or the overnight federal funds rate plus 0.50%.
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"EBITDA" means, for any period, the sum of the following on a consolidated
basis, without duplication, for MindSpring and our Subsidiaries, as defined in
the credit agreement in accordance with generally accepted accounting
principles:
(A) net income for such period plus
(B) the sum of the following to the extent deducted in determining net
income:
(1) income and franchise taxes,
(2) interest expense,
(3) amortization, depreciation and other non-cash charges less
(C) interest income and any extraordinary gains.
EBITDA will be adjusted in a manner reasonably satisfactory to First Union
National Bank to include on a pro forma basis as of the first day of any
calculation period any acquisition consummated during that period as permitted
by the credit agreement and exclude on a pro forma basis as of the first day of
any calculation any Subsidiary or assets sold during that period as permitted by
the credit agreement.
"LIBOR" means the rate of interest per annum determined on the basis of the
rate for deposits in dollars in minimum amounts of at least $5,000,000 for a
period equal to the applicable Interest Period, as defined in the credit
agreement) which appears on the Telerate Page 3750 at approximately 11:00 a.m.
(London time) two business days prior to the first day of the applicable
Interest Period. If, for any reason, the rate does not appear on Telerate Page
3750, then "LIBOR" will be determined by First Union National Bank to be the
arithmetic average of the rate per annum at which deposits in dollars would be
offered by first class banks in the London interbank market to First Union
National Bank at approximately 11:00 a.m. (London time) two business days prior
to the first day of the applicable Interest Period for a period equal to that
Interest Period and in an amount substantially equal to the amount of the
applicable loan.
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IMPORTANT UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relating to the purchase, ownership and disposition of the notes
and of common stock into which notes may be converted. For purposes of this
summary (1) the Internal Revenue Code of 1986, as amended, is referred to as
"the Code" and (2) the Internal Revenue Service is referred to as "the IRS."
This summary:
- does not purport to be a complete analysis of all the potential tax
considerations that may be relevant to holders in light of their
particular circumstances;
- is based on laws, rulings and decisions now in effect, all of which are
subject to change, possibly on a retroactive basis;
- deals only with holders that will hold notes and common stock into which
notes may be converted as "capital assets" within the meaning of Section
1221 of the Internal Revenue Code of 1986, as amended;
- does not address tax considerations applicable to investors that may be
subject to special tax rules, such as banks, tax-exempt organizations,
insurance companies, dealers in securities or currencies, or persons that
will hold notes as a position in a hedging transaction, "straddle," or
"conversion transaction" for tax purposes, or persons deemed to sell
notes or common stock under the recently enacted constructive sale
provisions of the Code.
- discusses only the tax considerations applicable to the initial
purchasers of the notes who purchase the notes at their "issue price" as
defined in Section 1273 of the Code and does not discuss the tax
considerations applicable to subsequent purchasers of the notes.
MindSpring has not sought any ruling from the IRS with respect to the
statements made and the conclusions reached in the following summary, and we
cannot assure you that the IRS will agree with the statements and conclusions
expressed in this summary. In addition, the IRS is not precluded from
successfully adopting a contrary position. This summary does not consider the
effect of any applicable foreign, state, local, or other tax laws.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME AND
ESTATE TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR
UNDER ANY APPLICABLE TAX TREATY.
As used herein, the term "United States Holder" means a beneficial owner of
a note or common stock that is, for United States federal income tax purposes,
- a citizen or resident, as defined in Section 7701(b) of the Code, of the
United States,
- a corporation, partnership or other entity created or organized under the
laws of the United States or political subdivision thereof,
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- an estate the income of which is subject to federal income taxation
regardless of its source, or
- in general, a trust subject to the primary supervision of a United States
court and the control of one or more United States persons.
A "Foreign Holder" is a beneficial owner of notes or common stock that is not a
United States Holder.
UNITED STATES HOLDERS
PAYMENT OF INTEREST
Interest on a note generally will be includable in the income of a United
States Holder as ordinary income at the time such interest is received or
accrued, in accordance with such United States Holder's regular method of
accounting for United States federal income tax purposes.
SALE, EXCHANGE OR REDEMPTION OF A NOTE
Upon the sale, exchange or redemption of a note, a United States Holder
generally will recognize capital gain or loss equal to the difference between
(1) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption, except to the extent such amount
is attributable to accrued interest not previously included in income, which is
taxable as ordinary income, and (2) such United States Holder's adjusted tax
basis in the note. A United States Holder's adjusted tax basis in a note
generally will equal the cost of the note to such United States Holder, less any
principal payments received by such United States Holder.
For certain non-corporate taxpayers, including individuals, the rate of
taxation of capital gains will depend upon:
(1) the taxpayer's holding period in the capital asset, with
preferential rates available for capital assets held for more than 12
months or 18 months, and
(2) the taxpayer's marginal tax rate for ordinary income. The
deductibility of capital losses is subject to limitations.
United States Holders are urged to consult their own tax advisors with respect
to the rate of taxation of capital gains and the ability to deduct capital
losses.
CONVERSION OF THE NOTES
A United States Holder generally will not recognize any income, gain or
loss upon conversion of a note into common stock except to the extent the common
stock is considered attributable to accrued interest not previously included in
income, which is taxable as ordinary income, or with respect to cash received in
lieu of a fractional share of common stock. A United States Holder's tax basis
in the Common Stock received on conversion of a note will be the same as such
United States Holder's adjusted tax basis in the note at the time of conversion,
reduced by any basis allocable to a fractional share interest, and the holding
period for the common stock received on conversion will generally include the
holding period of the note converted. However, a United States Holder's tax
basis in shares of common stock considered attributable to accrued interest as
described
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above generally will equal the amount of such accrued interest included in
income, and the holding period for such shares shall begin on the date of
conversion.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally will result in capital gain or loss, measured by the difference
between the cash received for the fractional share and the United States
Holder's adjusted tax basis in the fractional share.
DIVIDENDS, ADJUSTMENTS TO CONVERSION RATE
Dividends, if any, paid on the common stock generally will be includable in
the income of a United States Holder as ordinary income to the extent of
MindSpring's current or accumulated earnings and profits. Dividends paid to
holders that are United States corporations may qualify for the dividends
received deduction. To the extent, if any, that a United States Holder receives
distributions on shares of common stock that would otherwise constitute
dividends for United States federal income tax purposes but that exceed the
current and accumulated earnings and profits of MindSpring, such distributions
will be treated first as non-taxable return of capital reducing the holder's
basis in the shares of common stock. Any such distributions in excess of the
holder's basis in the shares of common stock generally will be treated as
capital gain realized on the disposition of common stock.
If at any time
(1) MindSpring makes a distribution of cash or property to its
stockholders or purchases common stock and such distribution or purchase
would be taxable to such stock-holders as a dividend for United States
federal income tax purposes -- for example, distributions of evidence of
indebtedness or assets of MindSpring, but generally not stock dividends or
rights to subscribe for common stock -- and, pursuant to the antidilution
provisions of the notes indenture, the conversion rate of the notes is
increased, or
(2) the conversion rate of the notes is increased at the discretion of
MindSpring,
such an increase in the conversion rate may be deemed be the payment of a
taxable dividend to holders of notes under Section 305 of the Code. Holders of
notes could therefore have taxable income as a result of an event pursuant to
which they received no cash or property.
SALE OF COMMON STOCK
Upon the sale or exchange of common stock, a United States Holder generally
will recognize capital gain or loss equal to the difference between (1) the
amount of cash and the fair market value of any property received upon the sale
or exchange and (2) such United States Holder's adjusted tax basis in the common
stock.
For certain non-corporate taxpayers (including individuals), the rate of
taxation of capital gains will depend upon (1) the taxpayer's holding period in
the capital asset (with preferential rates available for capital assets held for
more than 12 months or 18 months) and (2) the taxpayer's marginal tax rate for
ordinary income. The deductibility of capital losses is subject to limitations.
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FOREIGN HOLDERS
STATED INTEREST
Payments of principal and interest on a note to a Foreign Holder will not
be subject to United States federal withholding tax provided that
(1) the holder does not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of MindSpring
entitled to vote,
(2) the holder is not a controlled foreign corporation that is related
to MindSpring through stock ownership and
(3) either (A) the beneficial owner of the note, under penalties of
perjury, provides MindSpring or its agent with its name and address and
certifies that it is not a United States person or (B) a securities
clearing organization, bank, or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution") certifies to MindSpring or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes to
MindSpring or its agent a copy thereof.
For purposes of this summary, we refer to this exemption from United States
federal withholding tax as the "Portfolio Interest Exemption". Under United
States Treasury regulations, which generally are effective for payments made
after December 31, 1999, subject to certain transition rules, the certification
described in clause (3) above may also be provided by a qualified intermediary
on behalf of one or more beneficial owners or other intermediaries, provided
that such intermediary has entered into a withholding agreement with the IRS and
certain other conditions are met.
The gross amount of payments to a Foreign Holder of interest that does not
qualify for the Portfolio Interest Exemption and that is not effectively
connected to a United States trade or business will be subject to United States
federal withholding tax at the rate of 30%, unless a United States income tax
treaty applies to reduce or eliminate withholding.
A Foreign Holder will generally be subject to tax in the same manner as a
United States corporation or resident with respect to payments of interest if
such payments are effectively connected with the conduct or trade or business in
the Unites States. Such effectively connected income received by a Foreign
Holder which is a corporation may in certain circumstances be subject to an
additional "branch profits tax" at a 30% rate or, if applicable, a lower treaty
rate.
Foreign Holders should consult their own tax advisors regarding applicable
income tax treaties, which may provide different rules.
To claim the benefit of a tax treaty or to claim exemption from withholding
because the income is effectively connected with a U.S. trade or business, the
Foreign Holder must provide a properly executed Form 1001 or 4224, as
applicable, prior to the payment of interest. These forms must be periodically
updated. United States Treasury regulations, which generally are effective for
payments made after December 31, 1999, subject to certain transition rules,
require Foreign Holders or, under certain circumstances, a qualified
intermediary to file a withholding certificate with the Company's withholding
agent to obtain the benefit of an applicable tax treaty providing for a lower
rate of withholding tax. Such certificate must contain, among other information,
the name and address of the Foreign Holder.
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SALE, EXCHANGE OR REDEMPTION OF A NOTE
A Foreign Holder generally will not be subject to United States federal
income tax or withholding tax on gain realized on the sale or exchange of notes
unless (1) the holder is an individual who was present in the United States for
183 days or more during the taxable year, such gain is U.S. source and certain
other conditions are met, or (2) the gain is effectively connected with the
conduct of a trade or business of the holder in the United States and, if a
treaty applies, such gain is attributable to an office or other fixed place of
business maintained in the United States by such holder.
In general, no United States federal income tax or withholding tax will be
imposed upon the conversion of a note into common stock by a Foreign Holder
except (1) to the extent the common stock is considered attributable to accrued
interest not previously included in income, which may be taxable under the rules
set forth in "Foreign Holders -- Stated Interest," (2) with respect to the
receipt of cash in lieu of fractional shares by Foreign Holders upon conversion
of a note, in each case where either the conditions described in (1) or (2)
above under "Foreign Holders -- Sale, Exchange or Redemption of a note" is
satisfied or (3) MindSpring is a United States real property holding corporation
as discussed below.
SALE OR EXCHANGE OF COMMON STOCK
A Foreign Holder will generally not be subject to United States federal
income tax or withholding tax on the sale or exchange of common stock unless
either of the conditions described in (1) or (2) above under "Foreign
Holders -- Sale, Exchange or Redemption of a note" is satisfied or MindSpring is
or has been a United States real property holding corporation, or a "USRPHC,"
for United States federal income tax purposes at any time within the shorter of
the five year period preceding such disposition or such Foreign Holder's holding
period. MindSpring has not determined whether it is or has been within the
prescribed period a USRPHC. In general, MindSpring will be treated as a USRPHC
if the fair market value of its U.S. real property interests equals or exceeds
50% of the total fair market value of its U.S. and non-U.S. real property and
its other assets used or held in a trade or business. If MindSpring is, has been
or becomes a USRPHC, so long as the common stock continues to be regularly
traded on an established securities market within the meaning of Section
897(c)(3), only a Foreign Holder who holds or held, at any time during the
shorter of the five-year period preceding the date of disposition or the
holder's holding period, more than 5% of the common stock will be subject to
U.S. federal income tax on the disposition of the common stock.
DIVIDENDS
Distributions by MindSpring with respect to the common stock that are
treated as dividends paid or deemed paid, as described above under "United
States Holders -- Dividends, Adjustments to Conversion Rate", to a Foreign
Holder, excluding dividends that are effectively connected with the conduct of a
trade or business in the United States by such Holder which are taxable as
described below, will be subject to United States federal withholding tax at a
30% rate, or lower rate provided under any applicable income tax treaty. Except
to the extent that an applicable tax treaty otherwise provides, a Foreign Holder
will be subject to tax in the same manner as a United States Holder on dividends
paid or deemed paid that are effectively connected with the conduct of a trade
or business in the United States by the Foreign Holder. If such Foreign Holder
is a foreign corporation, it may
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<PAGE> 101
also be subject to a United States "branch profits tax" on such effectively
connected income at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Even though such effectively connected dividends
are subject to income tax, and may be subject to the branch profits tax, they
will not be subject to U.S. withholding tax if the Foreign Holder delivers IRS
Form 4224 to the payer.
Under current United States Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country, unless the payer has knowledge to the contrary, for purposes of the
withholding discussed above, and under the current interpretation of United
States Treasury Regulations, for purposes of determining the applicability of a
tax treaty rate. Under United States Treasury regulations, which generally are
effective for payments made after December 31, 1999, subject to certain
transition rules, however, a Foreign Holder of common stock who wishes to claim
the benefit of an applicable treaty rate would be required to satisfy applicable
certification requirements. In addition, under current United States Treasury
Regulations, in the case of common stock held by a foreign partnership, or other
fiscally transparent entities, the certification requirement would generally be
applied to the partners of the partnership and the partnership would be required
to provide certain information, including a United States taxpayer
identification number. The Treasury Regulations also provide look-through rules
for tiered partnerships.
DEATH OF A FOREIGN HOLDER
A note held by an individual who is not a citizen or resident of the United
States at the time of death will not be includable in the decedent's gross
estate for United States estate tax purposes, provided that such holder or
beneficial owner did not at the time of death actually or constructively own 10%
or more of the combined voting power of all classes of stock of MindSpring
entitled to vote, and provided that, at the time of death, payments with respect
to such note would not have been effectively connected with the conduct by such
Foreign Holder of a trade or business within the United States.
Common stock actually or beneficially held, other than through a foreign
corporation, by an individual who is not a citizen or resident of the United
States at the time of his or her death, or previously transferred subject to
certain retained rights or powers, will be subject to United States federal
estate tax unless otherwise provided by an applicable estate tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a note, dividends on common stock,
and payments of the proceeds of the sale of a note or common stock to certain
non-corporate United States Holders, and a 31% backup withholding tax may apply
to such payment if the United States Holder (1) fails to furnish or certify his
correct taxpayer identification number to the payer in the manner required, (2)
is notified by the IRS that he has failed to report payments of interest or
dividends property or (3) under certain circumstances, fails to certify that he
has not been notified by the IRS that he is subject to backup withholding for
failure to report interest or dividend payments.
Information reporting requirements will apply to payments of interest or
dividends to Foreign Holders where such interest or dividends are subject to
withholding or are exempt from United States withholding tax pursuant to a tax
treaty, or where such interest is exempt
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<PAGE> 102
from United States tax under the Portfolio Interest Exemption. Copies of these
information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities of the country in which the
Foreign Holder resides.
Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal on the notes by MindSpring to
a Foreign Holder if the Foreign Holder certifies as to its status as a Foreign
Holder under penalties of perjury or otherwise establishes an exemption
(provided that neither MindSpring nor its paying agent has actual knowledge that
the holder is a United States person or that the conditions of any other
exemption are not, in fact, satisfied.)
The payment of the proceeds from the disposition of notes or common stock
to or through the United States office of any broker, United States or foreign,
will be subject to information reporting and possible backup withholding unless
the owner certifies as to its non-United States status under penalty of perjury
or otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a United States person or that the
conditions of any other exemption are not, in fact, satisfied. The payment of
the proceeds from the disposition of a note or common stock to or through a
non-United States office of a non-United States broker that is not a United
States related person will not be subject to information reporting or backup
withholding. For this purpose, a "United States related person" is
(1) a "controlled foreign corporation" for United States federal
income tax purposes or
(2) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker has
been in existence, is derived from activities that are effectively
connected with the conduct of a United States trade or business.
In the case of the payment of proceeds from the disposition of notes or
common stock to or through a non-United States office of a broker that is either
a United States person or a United States related person, Treasury Regulations
require information reporting on the payment unless the broker has documentary
evidence in its files that the owner is a Foreign Holder and the broker has no
knowledge to the contrary.
The preceding discussion of certain United States federal income tax
consequences is for general information only and is not tax advice. Accordingly,
holders of the notes should consult their own tax advisers as to particular tax
consequences to them or purchasing, holding and disposing of the notes and the
common stock, including the applicability and effect of any state, local or
foreign tax laws, and of any proposed changes in applicable law.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
United States Treasury regulations, which generally are effective for
payments made after December 31, 1999, subject to certain transition rules, will
generally expand the circumstances under which information reporting and backup
withholding may apply. Holders of notes should consult their tax advisors
regarding the application of the information and reporting and backup
withholding rules, including such Treasury regulations.
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<PAGE> 103
UNDERWRITING
MindSpring and the underwriters for the offering named below have entered
into an underwriting agreement with respect to the notes being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
principal amount of notes indicated in the following table.
<TABLE>
<CAPTION>
Principal Amount
Underwriters of Notes
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... $109,550,000
ING Baring Furman Selz LLC.................................. 15,650,000
J.C. Bradford & Co. ........................................ 7,825,000
Donaldson, Lufkin & Jenrette
Securities Corporation.................................... 7,825,000
First Union Capital Markets Corp. .......................... 7,825,000
Jefferies & Company, Inc. .................................. 7,825,000
------------
Total............................................. $156,500,000
</TABLE>
The underwriters have exercised their over-allotment option to buy an
additional $23,475,000 aggregate principal amount of notes from MindSpring.
The following table shows the per note and total underwriting discounts and
commissions to be paid to the underwriters by MindSpring. These amounts reflect
the full exercise of the underwriters' option to purchase additional notes.
<TABLE>
<CAPTION>
Paid by
MindSpring
------------------
Full Exercise
------------------
<S> <C>
Per Note.............................................. $ 30
Total................................................. $5,399,250
</TABLE>
Notes sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus
supplement. Any notes sold by the underwriters to securities dealers may be sold
at a discount from the initial public offering price of up to 1.80% of the
principal amount of the notes. Any such securities dealers may resell any notes
purchased from the underwriters to certain other brokers or dealers at a
discount from the initial public offering price of up to 0.01% of the principal
amount of the notes. If all the notes are not sold at the initial public
offering price, the underwriters may change the offering price and the other
selling terms.
MindSpring, its executive officers and directors and certain stockholders
of MindSpring have agreed, subject to certain exceptions, not to: (1) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of common stock or any securities convertible into or exercisable or
exchangeable for common stock; or (2) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any common stock (regardless of whether any of the transactions
described in clause (1)
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<PAGE> 104
or (2) is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise) for a period of 90 days after the date of this
prospectus supplement without the prior written consent of Goldman, Sachs & Co.
In addition, during such period, MindSpring has also agreed not to file any
registration statement with respect to, and its executive officers, directors
and certain stockholders of MindSpring have agreed not to make any demand for,
or exercise any right with respect to, the registration of any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock without the prior written consent of Goldman, Sachs & Co.
In connection with MindSpring's acquisition of NETCOM on February 17, 1999,
MindSpring issued to NETCOM 376,116 shares of common stock in a private
placement. As required by the terms of the acquisition, in order to permit
public resales of these shares, MindSpring has filed a registration statement
with the SEC, which permits continuous public sales of those shares for a 60-day
period beginning April 6, 1999, the date that the NETCOM registration statement
was declared effective by the SEC. NETCOM is not a party to a lock-up agreement
as described in the preceding paragraph.
In June 1998, MindSpring issued and sold 3,000,000 shares of its common
stock in a public offering underwritten by Donaldson, Lufkin & Jenrette
Securities Corporation, J.C. Bradford & Co., Furman Selz LLC (now known as ING
Baring Furman Selz LLC) and Wheat First Securities, Inc. (now known as First
Union Capital Markets Corp.) for which such underwriters received customary
compensation. In December 1998, MindSpring issued and sold 2,300,000 shares of
its common stock in a public offering underwritten by the underwriters, other
than Goldman, Sachs & Co., for which these underwriters received customary
compensation. In addition, in February 1999, MindSpring paid ING Baring Furman
Selz LLC a cash fee of $2.45 million for advising MindSpring in connection with
its acquisition of NETCOM. Affiliates of Goldman, Sachs & Co., First Union
Capital Markets Corp. and ING Baring Furman Selz LLC are among the lenders under
MindSpring's credit agreement. See "Use of Proceeds."
In connection with the offering, the underwriters may purchase and sell
notes in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater principal
amount of notes than they are required to purchase from MindSpring in this
offering. Stabilizing transactions consist of certain bids or purchases made for
the purpose of preventing or retarding a decline in the market price of the
notes while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters have repurchased notes sold by
or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the notes. As a result, the price of the notes may be
higher than the price that otherwise might exist in the open market. If these
activities are commenced, they may be discontinued by the underwriters at any
time. These transactions may be effected in the over-the-counter market or
otherwise.
The notes are a new issue of securities with no established trading market.
MindSpring has been advised by the underwriters that the underwriters intend to
make a market in the
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<PAGE> 105
notes but are not obligated to do so and may discontinue market making at any
time without notice. No assurance can be given as to the liquidity of the
trading market for the notes.
Each underwriter has also agreed that (a) it has not offered or sold and
prior to the date six months after the date of issue of the notes will not offer
or sell any of the notes to persons in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations 1995, (b) it has complied, and will
comply with, all applicable provisions of the Financial Services Act 1986 of
Great Britain with respect to anything done by it in relation to the notes in,
from or otherwise involving the United Kingdom, and (c) it has only issued or
passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issuance of the notes to a person who is
of a kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 (as amended) of Great
Britain or is a person to whom the document may otherwise lawfully be issued or
passed on.
MindSpring estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$250,000.
MindSpring has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Concurrently with this notes offering, MindSpring is offering 2,400,000
shares of common stock, plus an additional 360,000 shares to cover
over-allotments by the underwriters for that offering, by means of a separate
prospectus supplement. The completion of the notes offering and the common stock
offering are not dependent on one another. The underwriters for the notes
offering are the representatives of the underwriters for the common stock
offering. The underwriters will receive customary compensation in connection
with the common stock offering.
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<PAGE> 106
LEGAL MATTERS
The validity of the notes offered by this prospectus supplement is being
passed upon for MindSpring by Hogan & Hartson L.L.P., Washington, D.C., counsel
for MindSpring. Hogan & Hartson L.L.P. provides legal services to ITC Holding,
its affiliated companies and Campbell B. Lanier, III, Chairman and Chief
Executive Officer of ITC Holding. With the consent of MindSpring, Hogan &
Hartson L.L.P. has represented ITC Holding in certain transactions with
MindSpring. Anthony S. Harrington, a partner of Hogan & Hartson L.L.P.,
beneficially owns 115,568 shares of ITC Holding common stock. Certain legal
matters are being passed upon for the underwriters by Alston & Bird LLP,
Atlanta, Georgia. Alston & Bird LLP also provides legal services to ITC Holding
and certain of its affiliated companies, including MindSpring.
EXPERTS
The financial statements of MindSpring as of December 31, 1997 and 1998 and
for the three years ended December 31, 1998, and the financial statement
schedule of MindSpring for the two years ended December 31, 1997; the financial
statements of Spry, Inc. as of April 30, 1997 and January 31, 1998 and for the
years ended April 30, 1996 and 1997 and the nine months ended January 31, 1998,
and the financial statements of NETCOM On-Line Communication Services, Inc.
Domestic Subscriber Operations as of December 31, 1997 and 1998, and for the
three years ended December 31, 1998 that are included or incorporated by
reference in this prospectus supplement, the accompanying prospectus and the
related registration statement have been audited by Arthur Andersen LLP,
independent certified public accountants, as indicated in their reports with
respect to these financial statements, and are included in this prospectus
supplement, the accompanying prospectus and the related registration statement
in reliance upon the authority of Arthur Andersen LLP as experts in giving these
reports.
S-106
<PAGE> 107
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MINDSPRING ENTERPRISES, INC.
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1998 and 1997............. F-3
Statement of Operations for the years ended December 31,
1998, 1997 and 1996....................................... F-4
Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996....................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MindSpring Enterprises, Inc.:
We have audited the accompanying balance sheets of MINDSPRING ENTERPRISES,
INC. (a Delaware corporation) as of December 31, 1998 and 1997 and the related
statements of operations, stockholders' equity, and cash flows for the three
years ended December 31, 1998, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MindSpring Enterprises, Inc.
as of December 31, 1998 and 1997 and the results of its operations and its cash
flows for the three years ended December 31, 1998, 1997 and 1996 in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
February 17, 1999
F-2
<PAGE> 109
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $167,743 $ 9,386
Trade receivables, net of allowance for doubtful accounts of
$1,224 and $751 at December 31, 1998 and 1997,
respectively.............................................. 3,278 2,002
Deferred income taxes (Note 8).............................. 3,421 --
Prepaids and other current assets........................... 758 1,042
-------- --------
Total current assets...................................... 175,200 12,430
-------- --------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment................... 35,580 18,050
Assets under capital lease.................................. 9,546 9,916
Other....................................................... 4,821 1,805
-------- --------
49,947 29,771
Less: accumulated depreciation.............................. (14,106) (6,133)
-------- --------
Property and equipment, net............................... 35,841 23,638
-------- --------
OTHER ASSETS:
Acquired customer base, net (Notes 1 and 2)................. 34,742 7,478
Deferred income taxes (Note 8).............................. 1,123 --
Other....................................................... 693 740
-------- --------
Total other assets........................................ 36,558 8,218
-------- --------
$247,599 $ 44,286
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable...................................... $ 3,462 $ 4,306
Current portion of capital lease liability (Note 7)......... 2,695 2,607
Telecommunications costs payable............................ 2,831 2,233
Deferred revenue (Note 1)................................... 7,443 2,198
Current portion of notes payable (Note 6)................... -- 2,043
Other accrued expenses...................................... 5,105 1,776
Due to America Online, Inc. (Note 2)........................ 7,000 --
Accrued compensation expense................................ 2,550 1,404
Income tax payable.......................................... 2,566 --
Network services payable.................................... 4,442 1,216
-------- --------
Total current liabilities................................. 38,094 17,783
-------- --------
LONG-TERM LIABILITIES:
Capital lease liability (Note 7)............................ 2,424 5,090
-------- --------
Total long-term liabilities............................... 2,424 5,090
-------- --------
Total liabilities......................................... 40,518 22,873
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY (NOTE 3):
Common stock, $.01 par value; 60,000 and 45,000 shares
authorized at December 31, 1998 and 1997 and 28,284 and
22,603 issued and outstanding at December 31, 1998 and
1997, respectively........................................ 283 226
Additional paid-in capital.................................. 209,983 34,916
Accumulated deficit......................................... (3,185) (13,729)
-------- --------
Total stockholders' equity................................ 207,081 21,413
-------- --------
$247,599 $ 44,286
======== ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-3
<PAGE> 110
MINDSPRING ENTERPRISES, INC.
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
REVENUES:
Access..................................................... $ 95,852 $40,925 $13,420
Business services.......................................... 14,735 7,711 2,286
Subscriber start-up fees................................... 4,086 3,920 2,426
-------- ------- -------
Total revenues........................................... 114,673 52,556 18,132
-------- ------- -------
COST AND EXPENSES:
Cost of revenues -- recurring.............................. 31,724 15,203 6,332
Cost of subscriber start-up fees........................... 2,612 1,619 1,876
General and administrative................................. 38,443 22,265 10,072
Selling.................................................... 18,881 8,519 4,089
Depreciation and amortization.............................. 15,227 8,695 3,285
-------- ------- -------
Total operating expenses................................. 106,887 56,301 25,654
-------- ------- -------
OPERATING INCOME (LOSS).................................... 7,786 (3,745) (7,522)
INTEREST INCOME (EXPENSE), NET............................. 1,214 (338) (90)
-------- ------- -------
INCOME (LOSS) BEFORE TAXES................................. $ 9,000 $(4,083) $(7,612)
-------- ------- -------
INCOME TAX BENEFIT......................................... 1,544 -- --
-------- ------- -------
NET INCOME (LOSS).......................................... $ 10,544 $(4,083) $(7,612)
======== ======= =======
NET INCOME (LOSS) PER SHARE:
Basic...................................................... $ 0.43 $ (0.18) $ (0.48)
======== ======= =======
Diluted.................................................... $ 0.41 $ (0.18) $ (0.48)
======== ======= =======
SHARES USED FOR COMPUTING NET INCOME (LOSS) PER SHARE:
Basic...................................................... 24,611 22,542 15,758
======== ======= =======
Diluted.................................................... 25,431 22,542 15,758
======== ======= =======
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-4
<PAGE> 111
MINDSPRING ENTERPRISES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PREFERRED STOCK TOTAL
--------------- PAID-IN ---------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
------ ------ ---------- ------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................ 3,802 $ 38 $ 95 1,933 $ 2,383 $ (2,034) $ 482
Conversion of Class A preferred stock to
common.................................. 3,563 36 709 (1,188) (745) -- --
Conversion of Class B preferred stock to
common.................................. 1,937 19 981 (645) (1,000) -- --
Issuance of additional common stock, net
of related offering expenses............ 6,075 60 14,089 -- -- -- 14,149
Conversion of Class C preferred stock to
common.................................. 300 3 635 (100) (638) -- --
Issuance of additional common stock, net
of related offering expenses............ 6,750 68 18,319 -- -- -- 18,387
Issuance of common stock pursuant to
exercise of options..................... 4 -- 1 -- -- -- 1
Net loss............................ -- -- -- -- -- (7,612) (7,612)
------ ---- -------- ------ ------- -------- --------
Balance, December 31, 1996................ 22,431 $224 $ 34,829 -- $ -- $ (9,646) $ 25,407
Issuance of common stock pursuant to
exercise of options..................... 172 2 87 -- -- -- 89
Net loss............................ -- -- -- -- -- (4,083) (4,083)
------ ---- -------- ------ ------- -------- --------
Balance, December 31, 1997................ 22,603 $226 $ 34,916 -- $ -- $(13,729) $ 21,413
Issuance of additional common stock, net
of related offering expenses............ 3,000 30 49,726 -- -- -- 49,756
Issuance of additional common stock, net
of related offering expenses............ 2,300 23 124,761 -- -- -- 124,784
Issuance of common stock pursuant to
exercise of options..................... 381 4 580 -- -- -- 584
Net income................................ -- -- -- -- -- 10,544 10,544
------ ---- -------- ------ ------- -------- --------
Balance, December 31, 1998................ 28,284 $283 $209,983 -- $ -- $ (3,185) $207,081
====== ==== ======== ====== ======= ======== ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-5
<PAGE> 112
MINDSPRING ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 10,544 $(4,083) $ (7,612)
-------- ------- --------
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 15,227 8,695 3,285
Deferred income taxes..................................... (4,544) -- --
Changes in operating assets and liabilities:
Trade receivables....................................... (1,276) (5) (1,477)
Other current assets.................................... 284 (565) (158)
Trade accounts payable.................................. (844) 2,352 1,106
Telecommunications cost payable......................... 598 1,332 700
Deferred revenue........................................ 5,245 1,782 80
Other accrued expenses.................................. 3,329 1,166 246
Accrued compensation expense............................ 1,146 769 520
Income taxes payable.................................... 2,566 -- --
Network services payable................................ 3,226 (89) 1,305
-------- ------- --------
Total adjustments.................................. 24,957 15,437 5,607
-------- ------- --------
Net Cash Provided By (Used In) Operating
Activities.................................... 35,501 11,354 (2,005)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (20,176) (8,042) (8,298)
Purchase of customer base................................... (27,312) (960) (12,249)
Other....................................................... (159) -- (789)
-------- ------- --------
Net Cash Used In Investing Activities............ (47,647) (9,002) (21,336)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of loan from preferred stockholder................. -- -- 1,000
Payments of loan from preferred stockholder................. -- -- (3,500)
Proceeds from notes payable................................. -- -- 11,488
Payments of notes payable................................... (2,043) (624) (8,822)
Payments of capital lease obligations....................... (2,578) (2,084) (134)
Issuance of common stock.................................... 175,124 89 32,537
-------- ------- --------
Net Cash Provided By (Used In) Financing
Activities.................................... 170,503 (2,619) 32,569
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 158,357 (267) 9,228
CASH AND CASH EQUIVALENTS, beginning of year................ 9,386 9,653 425
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $167,743 $ 9,386 $ 9,653
======== ======= ========
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION:
Interest paid............................................... $ 890 $ 749 $ 402
======== ======= ========
Income taxes paid........................................... $ 434 $ -- $ --
======== ======= ========
SUPPLEMENTAL NONCASH DISCLOSURES:
Assets acquired under capital lease......................... $ -- $ 8,443 $ 1,473
======== ======= ========
Noncash accrual for acquired subscriber base................ $ 7,000 $ -- $ --
======== ======= ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-6
<PAGE> 113
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. ORGANIZATION AND NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a national
provider of Internet access. The Company was incorporated in Georgia on February
24, 1994 and began marketing its services in June 1994. The Company
reincorporated in Delaware and effected a recapitalization in December 1995.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
PRESENTATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
SOURCES OF SUPPLIES
The Company relies on third-party networks, local telephone companies, and
other companies to provide data communications capacity. Although management
feels alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on
operating results.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards, and the ability to terminate
access on delinquent accounts. In addition, the concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful lives
of the assets, commencing when assets are installed or placed in service. The
estimated useful life for all assets is five years or, for leasehold
improvements, the life of the lease, if shorter.
F-7
<PAGE> 114
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communication and other equipment
under lease agreements accounted for as capital. The assets and liabilities
under capital leases are recorded at the lesser of the present value of
aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Assets under capital lease
are depreciated over their estimated useful lives of five years, which are
longer than the terms of the leases.
ACQUIRED CUSTOMER BASE
The Company capitalizes specific costs incurred for the purchase of
customer bases from other Internet Service Providers ("ISPs"). The customer
acquisition costs include the actual fee paid to the selling ISP, as well as
legal and other expenses specifically related to the transactions. Subscriber
acquisition costs capitalized at December 31, 1998 and 1997 were $47,521,000 and
$13,209,000, respectively. Amortization is provided using the straight-line
method over three years commencing when the customer base is received.
Amortization expense for the years ended December 31, 1998, 1997, and 1996 was
$7,048,000, $4,210,000, and $1,521,000, respectively. See Note 2 for further
discussion.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and acquired customer bases, to determine whether
any impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
INCOME TAXES
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." The disclosure option of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" requires
that companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted.
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. During 1998, the Company began offering
prepaid services. Advance billings including prepaid services and collections
relating to future access services are recorded as deferred revenue and
recognized as revenue when earned.
F-8
<PAGE> 115
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BARTER TRANSACTIONS
The Company engages in certain exchanges of services for advertising and
promotional services. The Company records these transactions at the market value
of the services provided. Such transactions are not material for the periods
presented.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
NET INCOME (LOSS) PER SHARE
The Company calculates net income (loss) per share as required by SFAS No.
128, "Earnings Per Share." 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 year ended. The effect of the Company's
stock options (using the treasury stock method) was included in the computation
of diluted EPS for the year ended December 31, 1998. For the years ended
December 31, 1997 and 1996, the effect of the options is excluded as their
effect is anti-dilutive. The following table summarizes the shares used in the
calculations:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
(In Thousands)
Weighted average shares outstanding -- basic................ 24,611 22,542 15,758
Effect of dilutive stock options............................ 820 -- --
------ ------ ------
Shares used for diluted earnings per share.................. 25,431 22,542 15,758
====== ====== ======
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In 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 decisions 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.
2. CUSTOMER BASE ACQUISITIONS
On June 28, 1996, the Company entered into a purchase agreement (as amended
on January 27, 1997, the "Purchase Agreement") with PSINet Inc. ("PSINet"),
pursuant to which the Company agreed to acquire certain of the tangible and
intangible assets and rights related to the consumer dial-up Internet access
services provided by PSINet in the United States, including (i) certain of
PSINet's individual subscriber accounts and (ii) the lease for a customer
support call center near Harrisburg, Pennsylvania (the "Harrisburg
F-9
<PAGE> 116
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Facility"), and all related telephone switches and other equipment (the
"Assets") for $12,929,000 (excluding accrued interest and increases in principal
amount under the First and Second PSINet Notes previously paid by the Company)
(the "Purchase Price"). In connection with fixing the aggregate amount of the
Purchase Price, the Company and PSINet amended the Second PSINet Note to, among
other things, reduce the principal amount owed thereunder to $3,078,000, an
amount equal to the remaining balance of the Purchase Price as of January 24,
1997. As amended, the Second PSINet Note no longer accrued interest, was payable
over a two-year period, and was discounted for financial statement purposes
using the same rate of interest (Prime + 3%) as the prior PSINet Notes. The
Company accreted the difference between the principal and total payable amount
of $3,078,000 over the two years of the note.
In connection with the PSINet transaction, the parties also entered into a
network services agreement (as amended, the "Services Agreement") which enables
MindSpring to offer nationwide Internet access through PSINet's network of over
200 points of presence ("POPs"). The term of the Services Agreement is 5 years
commencing on June 28, 1996 and is automatically renewable annually thereafter
unless either party notifies the other in writing not less than 12 months prior
to the end of such 5-year period or any 12-month extension thereof. Either party
may terminate the Services Agreement at any time upon 60 days' written notice
without penalty. The Company and PSINet amended the Services Agreement effective
January 1, 1997 to provide for certain discounts to the monthly service fees
which otherwise would have been payable by the Company to PSINet. The Company
earned credits of $2,000,000 and $2,050,000 during 1998 and 1997, respectively,
and the discounts are reflected as reductions of cost of revenue. This
arrangement ended in October 1998.
On September 10, 1998, MindSpring entered into an Asset Purchase Agreement
with America Online, Inc. ("AOL") and Spry, Inc. ("Spry"), a wholly owned
subsidiary of AOL, to purchase certain assets used in connection with the
consumer dial-up Internet access business operated by Spry (the "Spry
Agreement"). Pursuant to the Spry 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 "Spry" name.
The acquisition was closed on October 15, 1998 and in accordance with the
agreement MindSpring paid the initial payment of $25,000,000 in cash to AOL The
ultimate purchase price for these assets was based primarily upon the number of
acquired subscribers who remain active with MindSpring as continuing users in
good standing as of December 31, 1998. The Company has calculated the final
purchase price to be approximately $32,000,000 and has accordingly accrued an
additional $7,000,000 in the accompanying balance sheet. The transaction is
being accounted for as a purchase. See Note 10 for further discussion.
3. STOCKHOLDERS' EQUITY
At the annual meeting of stockholders in May 1998 the Company voted to
approve and adopt an amendment to Article 4 of the Company's Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of $.01 par value common stock from 15,000,000 to 60,000,000 and to
eliminate the Company's Class C Preferred Stock.
F-10
<PAGE> 117
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK SPLIT
On June 24, 1998 the Company effected a three-for-one stock split of the
outstanding shares of common stock in the form of a stock dividend. Accordingly,
all data shown in the accompanying financial statements and notes has been
retroactively adjusted to reflect the stock split.
COMMON STOCK
In June 1998, the Company issued 3,000,000 shares at a public offering
price of $17.67. The total proceeds of the offering, net of underwriting
discounts and offering expenses, were approximately $49,756,000.
In December 1998, the Company issued 2,300,000 shares at a public offering
price of $57.00. The total proceeds of the offering, net of underwriting
discounts and offering expenses were approximately $124,784,000.
4. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan, as amended (the "Stock Option
Plan"), 3,000,000 shares of common stock are reserved and authorized for
issuance upon the exercise of options. All employees of the Company are eligible
to receive options under the Stock Option Plan. The compensation committee of
the board of directors administers the Stock Option Plan. Options granted under
the Stock Option Plan are intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended. Options generally
become exercisable as follows: (i) 50% of the options become exercisable two
years after the date of grant or, in certain cases, the commencement date of the
holder's employment; (ii) an additional 25% of the options become exercisable
three years after the date of grant or, in certain cases, the commencement date
of the holder's employment; and (iii) the remaining 25% of the options become
exercisable four years after the date of grant or, in certain cases, the
commencement date of the holder's employment. Except as noted in the next
sentence, all options were granted at an exercise price equal to the estimated
fair value of the common stock on the dates of grant as determined by the board
of directors based on equity transactions and other analyses. Options granted to
holders of 10% or more of the outstanding common stock were granted at an
exercise price equal to 110% of the estimated fair value of the common stock on
the dates of grant as determined by the board of directors based on equity
transactions and other analyses. The options expire ten years from the date of
grant or, in certain circumstances, the commencement date of the option holder's
employment.
F-11
<PAGE> 118
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DIRECTORS' STOCK OPTION PLAN
Under the Company's Directors' Stock Option Plan (the "Directors' Plan"),
adopted in December 1995, 210,000 shares of common stock are authorized for
issuance to nonemployee directors (in the form of 30,000 options per director)
upon their initial election or appointment to the board or, in the case of
directors who joined the board prior to the creation of the Directors' Plan,
upon the adoption of the Directors' Plan by the board of directors. The
Directors' Plan, as amended by the board of directors on March 25, 1998 and
approved by the stockholders on May 20, 1998, provides for discretionary option
grants. Options become exercisable as follows: (i) 50% of the options become
exercisable two years after the date of grant, (ii) an additional 25% of the
options become exercisable three years after the date of grant, and (iii) the
remaining 25% of the options become exercisable four years after the date of
grant. All options were granted at an exercise price equal to the estimated fair
value of the common stock at the dates of grant as determined by the board of
directors based upon equity transactions and other analyses. The options expire
ten years from the date of grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which defines a fair value-based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock-based compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by APB No. 25. Entities
electing to remain with the accounting in APB No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share as if the fair
value-based method of accounting defined in this statement had been applied.
The Company has elected to account for its stock-based compensation plans
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1998, 1997, and 1996 using the
Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the
following weighted average assumptions used for grants in 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate................................ 5.3% 6.4% 6.4%
Expected dividend yield................................ 0% 0% 0%
Expected lives......................................... 3.5 years 3.5 years 3.5 years
Expected volatility.................................... 95.0% 58.4% 69.3%
</TABLE>
The total value of options granted during 1998, 1997, and 1996 was computed
as approximately $38,679,000, $3,735,000 and $601,000, respectively, which would
be amortized on a pro forma basis over the four-year vesting period of the
options. If the Company had accounted for these plans in accordance with SFAS
No. 123, the Company's net income
F-12
<PAGE> 119
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(loss) and pro forma net income (loss) per share for the years ended December
31, 1998, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
(In Thousands Except Per Share Data)
1996
Net loss.................................................... $(7,612) $(7,836)
Net loss per share.......................................... $ (0.48) $ (0.50)
1997
Net loss.................................................... $(4,083) $(5,402)
Net loss per share.......................................... $ (0.18) $ (0.24)
1998
Net income.................................................. $10,544 $ 2,291
Net income per diluted share................................ $ 0.41 $ 0.09
</TABLE>
A summary of the status of the Company's two stock options plans at
December 31, 1998, 1997 and 1996 and changes during the years then ended are
presented in the following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE PER
(IN THOUSANDS) SHARE
-------------- ---------
<S> <C> <C>
December 31, 1995........................................... 1,071 $ 0.62
Grants...................................................... 756 2.87
Exercised................................................... (3) 0.21
Forfeitures................................................. (90) 2.01
------ ------
December 31, 1996........................................... 1,734 1.53
Grants...................................................... 453 4.21
Exercised................................................... (171) 0.29
Forfeitures................................................. (174) 3.12
------ ------
December 31, 1997........................................... 1,842 2.15
Grants...................................................... 861 37.53
Exercised................................................... (382) 1.53
Forfeitures................................................. (198) 7.96
------ ------
December 31, 1998........................................... 2,123 16.10
====== ======
Weighted average fair value of options granted in 1998...... $ 45
======
</TABLE>
F-13
<PAGE> 120
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the number of options outstanding by year of
grant:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE WEIGHTED REMAINING
SHARES PRICE AVERAGE CONTRACTUAL
YEAR OF GRANT (IN THOUSANDS) RANGE PRICE LIFE
------------- -------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
1998............................. 808 $10.94-60.69 $38.59 9.6 years
1997............................. 341 2.33- 9.71 4.40 8.4
1996............................. 388 2.13- 4.13 2.79 7.6
1995............................. 586 0.21- 2.13 0.67 6.5
</TABLE>
The following table summarizes the options exercisable as of December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF WEIGHTED REMAINING
SHARES AVERAGE CONTRACTUAL
AS OF (IN THOUSANDS) PRICE LIFE
----- -------------- -------- -----------
<S> <C> <C> <C>
Dec. 31, 1998................................... 537 $1.16 6.8 years
Dec. 31, 1997................................... 366 $0.73 7.5
Dec. 31, 1996................................... 210 $0.21 8.1
</TABLE>
EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Annually, the Company determines whether to make a discretionary matching
contribution equal to a percentage, determined by the Company, of the employee's
deferred compensation contribution. The Company has not made any matching
contributions to the Savings Plan.
5. RELATED-PARTY TRANSACTIONS
The Company has entered into certain business relationships with several
subsidiaries and affiliates of ITC Holding Company, Inc. ("ITC Holding"). Except
as noted below, none of these transactions were material for the periods
presented.
The Company purchases long-distance telephone services and wide area
network transport service from ITC/\DeltaCom, Inc. ("ITC/\DeltaCom"), a related
party through relationships with ITC Holding. Long-distance charges from
ITC/\DeltaCom totaled approximately $3,672,000, $1,942,000 and $677,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F-14
<PAGE> 121
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT
The Company's only debt obligation for the periods presented is a
promissory note issued in connection with the PSINet transaction. The final
payment on this note was made in December 1998.
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
PSINet Note, due October, 1998.............................. $ -- $ 2,043
Less current maturities..................................... -- (2,043)
------- -------
Long-term obligations....................................... $ -- $ --
======= =======
</TABLE>
The carrying value of the PSINet Note approximated the market value as of
December 31, 1997.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under agreements, which are classified
as capital leases. These leases have original terms of three years or less and
contain bargain purchase options at the end of the original lease terms. The
Company also has operating leases, which relate to the lease of office and
equipment space. Rental expense attributable to these operating leases was
approximately $1,953,000, $1,420,000, and $519,000 for the year ended December
31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company's capital lease obligations and minimum
rental commitments under non-cancelable operating leases with initial or
remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 3,103 $ 3,385
2000........................................................ 2,595 3,392
2001........................................................ -- 1,441
2002........................................................ -- 829
2003 and thereafter......................................... -- 963
------- -------
Total minimum lease payments...................... $ 5,698 $10,010
======= =======
Amounts representing interest............................... (579)
-------
Present value of net minimum payments....................... 5,119
Current portion............................................. (2,695)
-------
Long-term capitalized lease obligations..................... $ 2,424
=======
</TABLE>
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. As of December 31, 1998, management is not aware of
any asserted or
F-15
<PAGE> 122
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
pending litigation or claims against the Company that would have a material
adverse effect on the Company's financial condition, results of operations, or
liquidity.
8. INCOME TAXES
The provision for income taxes is attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.................................................... $ 3,000 $ -- $ --
Deferred................................................... 654 (1,574) (2,915)
Increase in (reversal of) valuation allowance.............. (5,198) 1,574 2,915
------- ------- -------
Income tax provision (benefit)........................ $(1,544) $ -- $ --
======= ======= =======
</TABLE>
A reconciliation of the income tax provision (benefit) computed at
statutory tax rates to the income tax benefit for the year ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax benefit at statutory rate........................ 34% (34)% (34)%
State income taxes, net of federal benefit.................. 4 (4) (4)
Other....................................................... 2 0 0
Valuation allowance......................................... (57) 38 38
--- --- ---
Total income tax provision (benefit).............. (17)% 0% 0%
=== === ===
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ -- $ 3,866
Acquired customer base.................................... 3,902 1,742
Deferred revenue.......................................... 2,221 835
Allowance for doubtful accounts........................... 465 285
Prepaid revenue........................................... 608 --
Accrued vacation.......................................... 371 --
Other accrued liabilities................................. -- 126
------- -------
Total deferred tax assets......................... $ 7,567 $ 6,854
------- -------
</TABLE>
F-16
<PAGE> 123
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $(2,779) $(1,608)
Other..................................................... (244) (48)
------- -------
Total deferred tax liabilities.................... (3,023) (1,656)
------- -------
Net deferred tax asset...................................... 4,544 5,198
Valuation allowance for deferred tax assets................. -- (5,198)
------- -------
Net deferred taxes.......................................... $ 4,544 $ --
======= =======
</TABLE>
The Company's net operating loss carryforwards will expire between 2009 and
2012 unless utilized. Due to the fact that prior to 1998 the Company incurred
losses since inception, the Company did not recognize the income tax benefit of
the net operating loss carryforwards. Management provided a 100% valuation
reserve against its net deferred tax asset, consisting primarily of net
operating loss carryforwards. Management reviewed this position based on the net
income generated in 1998 as well as the projections of future income and
determined that it was more likely than not that the deferred tax assets would
be realized. Accordingly, the Company reversed its entire valuation allowance in
1998. In addition, the Company's ability to recognize the benefit from the net
operating loss carryforwards could be limited under Section 382 of the Internal
Revenue Code if ownership of the Company changes by more than 50%, as defined.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results for 1998,
1997, and 1996: (In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
NET INCOME
(LOSS) PER
SHARE
OPERATING NET ---------------
QUARTER ENDED REVENUE INCOME (LOSS) INCOME (LOSS) BASIC DILUTED
------------- ------- ------------- ------------- ----- -------
<S> <C> <C> <C> <C> <C>
December 31, 1998................ $39,534 $ 1,299 $ 3,679 $ .14 $ .13
September 30, 1998............... 28,695 3,440 3,985 .15 .15
June 30, 1998.................... 25,060 1,994 2,020 .09 .08
March 31, 1998................... 21,384 1,053 860 .04 .04
December 31, 1997................ $17,209 $ 646 $ 498 $ .02 $ .02
September 30, 1997............... 13,967 (465) (626) (.03) (.03)
June 30, 1997.................... 11,600 (1,421) (1,430) (.06) (.06)
March 31, 1997................... 9,780 (2,505) (2,525) (.11) (.11)
December 31, 1996................ $ 8,524 $(2,378) $(2,411) $(.11) $(.11)
September 30, 1996............... 5,301 (2,601) (2,702) (.18) (.18)
June 30, 1996.................... 2,495 (1,577) (1,460) (.10) (.10)
March 31, 1996................... 1,812 (966) (1,039) (.10) (.10)
</TABLE>
See Note 1 for a discussion of earnings per share.
F-17
<PAGE> 124
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENT
ACQUISITION
On February 17, 1999, MindSpring acquired certain tangible and intangible
assets and rights used in connection with the Internet services business
operated in the United States by NETCOM On-Line Communication Services, Inc.
("NETCOM"), a Delaware corporation and an indirect wholly owned subsidiary of
ICG Communications, Inc. including, (i) approximately 400,000 of NETCOM's
individual Internet access accounts; (ii) approximately 3,000 dedicated Internet
access accounts; (iii) approximately 18,000 Web hosting accounts; and (iv)
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 Brazil, Canada and the United Kingdom). The
acquisition was effected pursuant to an Asset Purchase Agreement dated January
5, 1999 between MindSpring and NETCOM. MindSpring paid NETCOM approximately
$245,000,000, including $215,000,000 in cash and $30,000,000 in MindSpring
stock.
The NETCOM operations outside the United States are not included in this
transaction. In addition, NETCOM (which will change its name in the near future)
will retain all of the assets used in connection with its network operations.
Under a separate network services agreement, NETCOM (operating under a new
corporate name) will sell MindSpring wholesale access to its network. The
agreement has an initial term of one year, with an option for a second year on
potentially different terms to be negotiated and accepted by both parties.
The transaction will be accounted for as a purchase. The purchase price
will be allocated to the underlying assets purchased and liabilities assumed
based on their fair market values at the acquisition date.
The following table summarizes the net assets purchased in connection with
the NETCOM and Spry acquisitions and the amount attributable to cost in excess
of net assets acquired in millions:
<TABLE>
<CAPTION>
NETCOM SPRY
------ -----
<S> <C> <C>
Working capital............................................. $(3.0) $ --
Property and equipment...................................... 17.2 --
Other assets................................................ 0.2 --
Acquired customer base...................................... 230.6 32.0
</TABLE>
The preliminary estimate of net assets represents management's best
estimate based on currently available information; however, such estimate may be
revised up to one year from the acquisition date. Acquired subscriber bases are
amortized over 3 years.
The following unaudited pro forma condensed statements of operations (in
millions) assumes the NETCOM and Spry acquisitions occurred on January 1, 1997.
In the opinion of
F-18
<PAGE> 125
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
management, all adjustments necessary to present fairly such unaudited pro forma
condensed statements of operations have been made.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revenue..................................................... $ 294.9 $ 250.3
Net Loss.................................................... (101.5) (101.0)
Net Loss per share.......................................... (3.57) (3.58)
</TABLE>
CREDIT FACILITY
Subsequent to year end, the Company obtained a $100 million secured
revolving credit facility from First Union National Bank and certain other
lenders. The credit facility may be increased to $200 million with the approval
of 51% of the lenders. The credit facility has an interest rate of either the
bank rate plus 25 to 100 basis points (defined as the banks prime rate or the
overnight federal funds rate plus 50 basis points) or LIBOR plus 125-200 basis
points depending upon the ratio of total debt to EBITDA. The facility is
available for 36 months and contains certain restrictive covenants including
certain financial ratios. Additionally, borrowings are secured by all assets and
properties. To complete the NETCOM acquisition, the Company borrowed $80 million
under this facility. The proceeds from any future debt issuances and certain
sales of assets and insurance proceeds must be used to repay any outstanding
borrowings.
F-19
<PAGE> 126
PROSPECTUS
MINDSPRING ENTERPRISES, INC.
$800,000,000
DEBT SECURITIES, COMMON STOCK, PREFERRED STOCK, DEPOSITARY SHARES,
WARRANTS, SUBSCRIPTION RIGHTS, STOCK PURCHASE CONTRACTS TO PURCHASE
COMMON STOCK OR PREFERRED STOCK AND STOCK PURCHASE UNITS
By this prospectus, we may offer, from time to time, in one or more series
or classes the following securities:
- shares of our common stock,
- shares of our preferred stock,
- shares of our preferred stock represented by depositary shares,
- our debt securities,
- warrants exercisable for our debt securities, common stock, preferred
stock or depositary shares,
- subscription rights evidencing the right to purchase any of the above
securities, and
- stock purchase contracts to purchase common stock or preferred stock and
stock purchase units.
The aggregate initial offering price of these "offered securities" that we
may issue will not exceed $800,000,000. If we issue debt securities at a
discount from their original principal stated amount, then, for purposes of
calculating the aggregate initial offering price of the offered securities
issued under this prospectus, we will treat the initial offering price of the
debt securities as the total original principal amount of the debt securities.
Our common stock is listed for trading on The Nasdaq Stock Market's
National Market under the symbol "MSPG." On April 7, 1999, the last reported
sale price of our common stock on the Nasdaq National Market was $102.
We may offer the offered securities in amounts, at prices and on terms
determined at the time of the offering. We will provide you with specific terms
of the applicable offered securities in supplements to this prospectus.
You should read this prospectus and any prospectus supplement carefully
before you decide to invest. This prospectus may not be used to consummate sales
of the offered securities unless it is accompanied by a prospectus supplement
describing the method and terms of the offering of those offered securities.
------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these offered securities or determined
if this prospectus is truthful or complete. It is illegal for any person to tell
you otherwise.
------------------------------------
The date of this prospectus is April 7, 1999.
<PAGE> 127
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS PAGE
- ---------- ----
<S> <C>
Cautionary Note Regarding Forward-Looking Statements........ 3
About This Prospectus....................................... 4
Where You Can Find More Information......................... 4
About MindSpring............................................ 6
Ratios of Earnings to Fixed Charges......................... 7
Use of Proceeds............................................. 7
ERISA Matters............................................... 7
Description of Debt Securities.............................. 8
Description of Common Stock................................. 20
Description of Preferred Stock.............................. 22
Description of Depositary Shares............................ 25
Description of Warrants..................................... 29
Description of Stock Purchase Contracts to Purchase Common
Stock or Preferred Stock and Stock Purchase Units......... 30
Description of Subscription Rights.......................... 31
Plan of Distribution........................................ 32
Legal Matters............................................... 33
Experts..................................................... 34
</TABLE>
<PAGE> 128
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, any prospectus supplement and the information incorporated
by reference, may include "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend
the forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. 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 the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions.
Although we believe that our expectations that are expressed in these
forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be materially
different from and worse than our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations
include, without limitation, (1) that MindSpring will not retain or grow its
subscriber base, (2) that MindSpring will not be able to successfully integrate
new subscribers and/or assets obtained through acquisitions, (3) that MindSpring
will fail to be competitive with existing and new competitors, (4) that
MindSpring will not be able to sustain its current growth, (5) that MindSpring
will not adequately respond to technological developments impacting the
Internet, and (6) that financing will not be available to MindSpring if and as
needed. This list is intended to identify some of the principal factors that
could cause actual results to differ materially from those described in the
forward-looking statements included elsewhere in this report. These factors are
not intended to represent a complete list of all risks and uncertainties
inherent in MindSpring's business, and should be read in conjunction with the
more detailed cautionary statements included in this prospectus and/or any
prospectus supplement under the caption "Risk Factors."
As used in this prospectus and in the accompanying prospectus supplement,
"MindSpring" means MindSpring Enterprises, Inc., a Delaware corporation.
3
<PAGE> 129
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using a "shelf" registration process under the Securities Act of 1933. Under
the shelf process, we may, from time to time, sell any combination of the
offered securities described in this prospectus in one or more offerings up to a
total dollar amount of $800,000,000.
This prospectus and the accompanying prospectus supplement do not contain
all of the information included in the registration statement. We have omitted
parts of the registration statement as permitted by the rules and regulations of
the SEC. For further information, we refer you to the registration statement on
Form S-3, including its exhibits. Statements contained in this prospectus and
any accompanying prospectus supplement about the provisions or contents of any
agreement or other document are not necessarily complete. If SEC rules and
regulations require that any agreement or document be filed as an exhibit to the
registration statement, you should refer to that agreement or document for a
complete description of these matters. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of
any date other than the date on the front of each document.
This prospectus provides you with a general description of the offered
securities. Each time we sell offered securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change any
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information described
under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy materials that we have filed
with the SEC, including the registration statement, at the following SEC public
reference rooms:
<TABLE>
<S> <C> <C>
450 Fifth Street, N.W 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.
Our common stock is quoted on the Nasdaq National Market under the symbol
"MSPG," and our SEC filings can also be read at the following Nasdaq address:
Nasdaq Operations
1735 K Street, N.W.
Washington, D.C. 20006
Our SEC filings are also available to the public on the SEC's Web Site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below:
- Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed with the SEC on March 30, 1999.
- Our Current Reports on Form 8-K, filed with the SEC on:
-- January 8, 1999; and
-- February 25, 1999.
- The description of our common stock included in a registration statement
on Form 8-A, filed with the SEC on March 1, 1996, including any
amendments or reports filed for the purpose of updating that
description.
4
<PAGE> 130
In addition to the documents listed above, we also incorporate by reference any
future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, including any filings after the date of
initial filing and prior to the effectiveness of the registration statement of
which this prospectus is a part, until we have sold all of the offered
securities to which this prospectus relates or the offering is otherwise
terminated.
You may request a copy of these filings, at no cost, by writing to us at
the following address or telephoning us at (404) 815-0770 between the hours of
9:00 a.m. and 4:00 p.m., Atlanta, Georgia local time:
INVESTOR RELATIONS
MINDSPRING ENTERPRISES, INC.
1430 WEST PEACHTREE STREET, SUITE 400
ATLANTA, GEORGIA 30309
5
<PAGE> 131
ABOUT MINDSPRING
MindSpring Enterprises, Inc., which began operations in February 1994, 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 Internet 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.
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. This reliable network enables subscribers in the 48 contiguous U.S.
states and the District of Columbia to access the Internet via a local telephone
call.
Our objective is to strengthen MindSpring's position as a leading national
provider of high quality Internet access, Web hosting and other value-added
services to individuals and small businesses. We believe that to achieve this
objective we need to continue to:
-- provide superior customer service and technical support by maintaining
and, as necessary, increasing our staff of qualified service and support
personnel;
-- efficiently expand our national network through a combination of
MindSpring-owned POPs and POPs we lease from third-party network service
providers;
-- expand our targeted marketing and distribution activities in markets
where there is the opportunity for substantial market penetration;
-- increase our revenues from value-added services, such as Web hosting and
Web page design, by continuing to take advantage of our current sales,
marketing and network capabilities; and
-- engage in selected and strategic acquisitions of businesses and
subscriber accounts.
In October 1998, we acquired approximately 130,000 subscriber accounts and
some related assets from Spry, Inc., a wholly owned subsidiary of America
Online, Inc. In February 1999, we acquired approximately 400,000 subscriber
accounts and some related assets from NETCOM On-Line Communication Services,
Inc., a wholly owned subsidiary of ICG Communications, Inc. These acquisitions
increased our subscriber base to approximately 1,100,000 subscribers, compared
to approximately 12,000 subscribers at the end of 1995, our first full year of
operations. We intend to continue to evaluate new acquisition opportunities as
they become available.
Our principal executive offices are located at 1430 West Peachtree Street,
Suite 400, Atlanta, Georgia 30309, and our telephone number at that address is
(404) 815-0770.
6
<PAGE> 132
RATIOS OF EARNINGS TO FIXED CHARGES
The following table shows MindSpring's ratios of earnings to fixed charges
on a historical basis for the fiscal years indicated, expect for 1994,
MindSpring's initial year of operations, which began on February 24, 1994. The
amount shown as "Pro Forma 1998" gives effect to the NETCOM acquisition and
related borrowings under our credit facility, which occurred on February 17,
1999, as if each had occurred on January 1, 1998. Earnings consist of income
before income taxes plus fixed charges. Fixed charges consist of interest
charges and the portion of rent expense under operating leases representing
interest, which is estimated to be one-third of rent expense. To date,
MindSpring has not issued any preferred stock; therefore, the ratios of earnings
to combined fixed charges and preference dividends are the same as the ratios
shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRO
------------------------------------ FORMA
1994 1995 1996 1997 1998 1998
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges............ -- -- -- -- 9.7x --
Amount by which earnings insufficient to cover
fixed charges (in millions)................. $0.1 $2.0 $7.6 $4.1 -- $96.2
</TABLE>
USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus supplement, we
anticipate that any net proceeds from the sale of offered securities will be
used to fund expansion of our business, including for:
- additional working capital,
- capital expenditures,
- repayment of debt, including amounts we may have borrowed under our
secured, revolving credit facility,
- funding net losses,
- acquisitions, and
- general corporate purposes.
When we offer a particular series of offered securities, the prospectus
supplement relating to that offering will set forth the intended use of the net
proceeds received from that offering. Pending the application of the net
proceeds, we expect to invest the proceeds from the sale of offered securities
in short-term, interest-bearing instruments or other investment-grade debt
securities.
ERISA MATTERS
MindSpring or any of our affiliates may be considered a "party in
interest," within the meaning of the Employee Retirement Income Security Act, or
a "disqualified person," within the meaning of Section 4975 of the Internal
Revenue Code, with respect to many employee benefit plans that are subject to
ERISA. The purchase and/or holding of offered securities by an ERISA plan,
including an individual retirement plan, that is subject to the fiduciary
responsibility provisions of ERISA or the prohibited transaction provisions of
the Internal Revenue Code and with respect to which MindSpring or any of our
affiliates is a service provider, or otherwise is a party in interest or a
disqualified person, may constitute or result in a prohibited transaction under
ERISA or the Internal Revenue Code, unless such offered securities are acquired
pursuant to and in accordance with an applicable federal statutory exemption, or
administrative exemption issued on a class-wide basis by the United States
Department of Labor. Any pension or other employee benefit plan proposing to
acquire any offered securities should consult with its counsel.
7
<PAGE> 133
DESCRIPTION OF DEBT SECURITIES
GENERAL
The debt securities that we may issue will be unsecured, direct, general
obligations of MindSpring. We may issue either senior debt securities or
subordinated debt securities. Our senior debt securities and our subordinated
debt securities will be subordinated to our secured indebtedness, including
amounts we have borrowed under any secured, revolving credit facility. Our
senior debt securities will rank equally with all other unsecured and
unsubordinated indebtedness of MindSpring. Our subordinated debt securities will
be subordinated in right of payment to the prior payment in full of the "senior
debt" of MindSpring, as described below under "-- Subordination of Subordinated
Debt Securities" and in the prospectus supplement applicable to any subordinated
debt securities that we may offer.
Senior debt securities will be issued under a "senior debt indenture" and
subordinated debt securities will be issued under a separate "subordinated debt
indenture." Provisions relating to the issuance of debt securities may also be
set forth in a supplemental indenture to either of the indentures. For purposes
of the descriptions under this heading, we may refer to the senior debt
indenture and the subordinated debt indenture, and any related supplemental
indentures, as "an indenture" or, collectively, as "the indentures." The
indentures will be subject to and governed by the Trust Indenture Act of 1939.
Each indenture will be between MindSpring and a trustee that meets the
requirements of the Trust Indenture Act of 1939. We expect that each indenture
will provide that there may be more than one trustee under that indenture, each
with respect to one or more series of debt securities. Any trustee under an
indenture may resign or be removed with respect to one or more series of debt
securities and, in that event, we may appoint a successor trustee. Except as
otherwise provided in the indenture or supplemental indenture, any action
permitted to be taken by a trustee may be taken by that trustee only with
respect to the one or more series of debt securities for which it is trustee
under the applicable indenture.
The descriptions under this heading relating to the debt securities and the
indentures are summaries of their anticipated provisions. The summaries are not
complete and are qualified in their entirety by reference to the actual
indentures and debt securities. A form of the senior debt indenture and a form
of the subordinated debt indenture under which we may issue our debt securities
have been filed as exhibits to the registration statement of which this
prospectus is a part. In the summaries we have included references to section
numbers of the forms of indenture so that you can easily locate these
provisions. Whenever we refer in this prospectus or in the prospectus supplement
to particular sections or defined terms of an indenture, those sections or
defined terms are incorporated by reference in this prospectus or in the
prospectus supplement, as applicable. You should read the indentures for
provisions that may be important to you. The forms of the indentures can be
examined at the locations listed above under the heading "Where You Can Find
More Information."
The terms and conditions described under this heading are of terms and
conditions that apply generally to the debt securities. The particular terms of
any series of debt securities will be summarized in the applicable prospectus
supplement. Those terms may differ from the terms summarized below.
Except as set forth in the applicable indenture or in one or more
supplemental indentures and described in an applicable prospectus supplement, we
may issue the debt securities in one or more series and without limitation as to
aggregate principal amount. We are not required to issue all of the debt
securities of one series at the same time and, unless otherwise provided in the
applicable indenture, supplemental indenture or prospectus supplement, we may
reopen a series and issue additional debt securities under that series without
the consent of the holders of the outstanding debt securities of that series.
TERMS OF DEBT SECURITIES TO BE INCLUDED IN THE PROSPECTUS SUPPLEMENT
The prospectus supplement relating to any series of debt securities that we
may offer will set forth the price or prices at which the debt securities will
be offered, and will contain the specific terms of the debt securities of that
series. These terms may include, without limitation, the following:
8
<PAGE> 134
(1) the title of the debt securities, whether they are senior debt
securities or subordinated debt securities and, if subordinated, the
terms of subordination;
(2) the aggregate principal amount of the debt securities and any limit on
that aggregate principal amount;
(3) the percentage of the principal amount at which the debt securities
will be issued and, if other than the principal amount of those debt
securities, the portion of the principal amount payable upon
declaration of acceleration of the maturity of those debt securities;
(4) the date or dates, or the method for determining the date or dates, on
which the principal of the debt securities will be payable;
(5) the rate or rates, which may be fixed or variable, or the method by
which the rate or rates are to be determined, at which the debt
securities will bear interest, if any;
(6) the date or dates, or the method for determining the date or dates,
from which any interest will accrue, the dates on which any interest
will be payable, the regular record dates for interest payment dates,
or the method by which record dates may be determined, the persons to
whom interest will be payable, and the basis upon which interest is to
be calculated if other than that of a 360-day year of twelve 30-day
months;
(7) the place or places where the principal of (and premium, if any) and
interest, if any, on the debt securities will be payable, where the
debt securities may be surrendered for registration of transfer or
exchange and where notices or demands to or upon MindSpring in respect
of the debt securities and the applicable indenture may be served;
(8) the period or periods within which, the price or prices at which and
the other terms and conditions upon which the debt securities may be
redeemed, in whole or in part, at the option of MindSpring, if
MindSpring is to have such an option;
(9) the right or obligation, if any, of MindSpring to redeem, repay or
purchase the debt securities pursuant to any sinking fund or analogous
provision or at the option of a holder of the debt securities, and the
period or periods within which, or the date and dates on which, the
price or prices at which and the other terms and conditions upon which
the debt securities will be redeemed, repaid or purchased, in whole or
in part, pursuant to that obligation;
(10) if other than U.S. dollars, the currency or currencies in which the
debt securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the related terms and conditions;
(11) whether the amount of payments of principal of (and premium, if any)
or interest, if any, on the debt securities may be determined with
reference to an index, formula or other method, which index, formula
or method may, but need not be, based on a currency, currencies,
currency unit or units or composite currency or currencies, and the
manner in which the amounts are to be determined;
(12) any additions to, modifications of or deletions from the terms of the
debt securities with respect to events of default, amendments, merger,
consolidation and sale or covenants set forth in the applicable
indenture;
(13) whether the debt securities will be issued in certificated or
book-entry form;
(14) whether the debt securities will be in registered or bearer form and,
if in registered form, their denominations, if other than $1,000 and
any integral multiple thereof, and, if in bearer form, their
denominations, if other than $5,000, and the related terms and
conditions;
(15) if the debt securities will be issuable only in the form of a Global
Security as described below under the subheading "-- Global
Securities," the depositary or its nominee with respect to the debt
9
<PAGE> 135
securities and the circumstances under which the Global Security may
be registered for transfer or exchange in the name of a person other
than the depositary or its nominee;
(16) the applicability, if any, of the defeasance and covenant defeasance
provisions of the indenture and any additional or different terms on
which the series of debt securities may be defeased;
(17) whether and the extent to which the debt securities will be
guaranteed, any guarantors and the form of any such guarantee;
(18) in the case of subordinated debt securities, whether the securities
may be converted into or exchanged for other securities of MindSpring
and the terms and conditions of conversion or exchange;
(19) whether the debt securities will be sold as part of Units consisting
of debt securities and other securities;
(20) if the debt securities are to be issued upon the exercise of warrants,
the time, manner and place for the debt securities to be authenticated
and delivered;
(21) whether and under what circumstances MindSpring will pay any
additional amounts on the debt securities in respect of any tax,
assessment or governmental charge and, if so, whether MindSpring will
have the option to redeem the debt securities instead of paying any
additional amounts; and
(22) any other terms of the debt securities not inconsistent with the
provisions of the applicable indenture (Section 301).
The debt securities may be offered and sold at a substantial discount below
their stated principal amount and may be "original issue discount securities."
"Original issue discount securities" means that less than the entire principal
amount of the securities will be payable upon declaration of acceleration of
their maturity. Special federal income tax, accounting and other considerations
applicable to original issue discount securities will be described in the
applicable prospectus supplement.
Debt securities may bear interest at a fixed rate or a floating rate. Debt
securities bearing no interest or interest at a rate that at the time of
issuance is below the prevailing market rate or as part of units consisting of
debt securities and other securities may be sold or deemed to be sold at a
discount below their stated principal amount. With respect to any debt
securities as to which MindSpring has the right to defer interest, the holders
of these debt securities may be allocated interest income for federal and state
income tax purposes without receiving equivalent, or any, interest payments. Any
material federal income tax considerations applicable to any such discounted
debt securities or to certain debt securities issued at par that are treated as
having been issued at a discount for federal income tax purposes will be
described in the applicable prospectus supplement.
Except as set forth in the applicable indenture or in one or more
supplemental indentures, the applicable indenture will not contain any
provisions that would limit the ability of MindSpring to incur indebtedness or
that would afford holders of debt securities protection in the event of a highly
leveraged or similar transaction involving MindSpring. The applicable indenture
may contain provisions that would afford debt security holders protection in the
event of a change of control. You should refer to the applicable prospectus
supplement for information with respect to any deletions from, modifications of
or additions to the events of default or covenants of MindSpring that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
As of the date of this prospectus, MindSpring has no subsidiaries. However,
in the event that MindSpring establishes one or more subsidiaries in the future,
some of the terms and provisions of the indentures would apply to those
subsidiaries. For purposes of the descriptions under this heading (1)
"Subsidiary" means a corporation or a partnership a majority of the outstanding
voting stock or partnership interests, as the case may be, of which is owned or
controlled, directly or indirectly, by MindSpring or by one or more other
Subsidiaries of MindSpring. For the purposes of this definition, "voting stock"
means stock having voting power for the election of directors, or trustees, as
the case may be, whether at all times or only so long as no senior class of
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stock has such voting power by reason of any contingency; and (2) "Significant
Subsidiary" means any Subsidiary of MindSpring that is a "significant
subsidiary," within the meaning of Regulation S-X promulgated by the SEC under
the Securities Act.
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
To the extent provided in the subordinated debt indenture and any
supplemental indenture, the payment of the principal of, and premium, if any,
and interest on any subordinated debt securities, (including amounts payable on
any redemption or repurchase,) will be subordinated in right of payment to the
prior payment in full in cash of all "senior debt," as defined below (Sections
1501 and 1502 of the subordinated debt indenture). In the event of (1) a
distribution to creditors in a liquidation or dissolution, or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to
MindSpring or (2) an event of default with respect to senior debt which results
in suspension of payment on the subordinated debt securities, MindSpring will
have to make payment on the senior debt before making payments on any
subordinated debt securities. The obligation described in the previous sentence
of MindSpring to make payment on the senior debt will not otherwise affect
MindSpring's obligation to make payment of the principal, and premium, if any,
and interest on the subordinated debt securities. (Section 1508 of the
subordinated debt indenture). Upon any distribution to creditors of MindSpring
in a liquidation or dissolution, or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding, the holders of senior debt will first be
entitled to receive payment in full in cash of all amounts due on the senior
debt before any payments may be made on the subordinated debt securities. By
reason of this subordination, in the event of a distribution of assets upon
insolvency, specific general creditors of MindSpring may recover more, ratably,
than holders of subordinated debt securities.
The supplemental indenture will set forth the terms and conditions under
which, if any, MindSpring will not be permitted to pay principal, premium, if
any, or interest on the related subordinated debt securities upon the occurrence
of an event of default or other circumstances arising under or with respect to
"senior debt" which is defined below. (Section 1503 of the subordinated debt
indenture). After all senior debt is paid in full and until the subordinated
debt securities are paid in full, holders of subordinated debt securities will
succeed to the right of holders of senior debt to the extent that distributions
otherwise payable to holders of subordinated debt securities have been applied
to the payment of senior debt (Section 1507 of the subordinated debt indenture).
The subordinated debt indenture will define "senior debt" generally as the
principal of, and premium, if any, and interest, (including interest accruing
after the commencement of any bankruptcy proceeding relating to MindSpring,) on,
or substantially similar payments to be made by MindSpring in respect of, the
following, whether outstanding at the date of execution of the applicable
indenture or thereafter incurred, created or assumed:
(1) indebtedness of MindSpring evidenced by notes, debentures, or bonds or
other securities issued under the provisions of an indenture, fiscal
agency agreement or other agreement, including the senior debt
securities that may be offered by means of this prospectus and one or
more prospectus supplements,
(2) indebtedness of MindSpring for money borrowed or represented by
purchase-money obligations, as defined below,
(3) obligations of MindSpring as lessee under leases of property either
made as part of a sale and leaseback transaction to which MindSpring
is a party or otherwise,
(4) indebtedness, obligations and liabilities of others in respect of
which MindSpring is liable contingently or otherwise to pay or advance
money or property or as guarantor, endorser or otherwise or which
MindSpring has agreed to purchase or otherwise acquire,
(5) reimbursement and other obligations relating to letters of credit,
bankers' acceptances and similar obligations,
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(6) obligations under various hedging arrangements and agreements,
including interest rate and currency hedging agreements,
(7) all obligations of MindSpring issued or assumed as the deferred
purchase price of property or services, but excluding trade accounts
payable and accrued liabilities arising in the ordinary course of
business, and
(8) renewals, extensions, modifications, replacements, restatements and
refundings of, or any indebtedness or obligation issued in exchange
for, any of the indebtedness or obligations described in clauses (1)
through (7), above,
in each case other than:
(1) any indebtedness, obligation or liability referred to in clauses (1)
through (8) above as to which, in the instrument creating or
evidencing that indebtedness, obligation or liability, it is expressly
provided that such indebtedness, obligation or liability is not senior
in right of payment to the subordinated debt securities or ranks
equally with the subordinated debt securities;
(2) any such indebtedness, obligation or liability which is subordinated
to indebtedness of MindSpring to substantially the same extent as or
to a greater extent than the subordinated debt securities are
subordinated; and
(3) the subordinated debt securities (Section 101 of the subordinated debt
indenture).
As used above, the term "purchase money obligations" is defined to mean
indebtedness or obligations evidenced by a note, debenture, bond or other
instrument, whether or not secured by a lien or other security interest but
excluding indebtedness or obligations for which recourse is limited to the
property purchased, issued or assumed as all or a part of the consideration for
the acquisition of property or services, whether by purchase, merger,
consolidation or otherwise, but does not include any trade accounts payable.
There will not be any restrictions in an indenture relating to subordinated debt
securities upon the creation of additional senior debt.
The applicable prospectus supplement may further describe the provisions, if
any, applicable to the subordination of the subordinated debt securities of a
particular series. The applicable prospectus supplement or the information
incorporated therein or herein by reference will describe as of a recent date
the approximate amount of our senior debt outstanding as to which the
subordinated debt of that series will be subordinated.
In addition, the subordinated debt securities will be structurally subordinated
to all indebtedness and other liabilities (including trade payables and lease
obligations) of MindSpring's subsidiaries, as any right of MindSpring to receive
any assets of its subsidiaries upon their liquidation or reorganization (and the
consequent right of the holders of the subordinated debt securities to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors (including trade creditors), except to the extent
that MindSpring itself is recognized as a creditor of such subsidiary, in which
case the claims of MindSpring would still be subordinate to any security
interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by MindSpring.
CONVERSION OR EXCHANGE OF SUBORDINATED DEBT SECURITIES
The applicable prospectus supplement will set forth the terms, if any, on
which a series of subordinated debt securities may be converted into or
exchanged for other securities of MindSpring. These terms will include whether
conversion or exchange is mandatory, or is at MindSpring's option or at the
option of the holder. We will also describe in the applicable prospectus
supplement how we will calculate the number of securities that holders of
subordinated debt securities would receive if they were to convert or exchange
their debt securities, the conversion price and other terms related to
conversion and any anti-dilution protections.
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REDEMPTION OF SECURITIES
The indentures will provide that the debt securities may be redeemed at any
time at the option of MindSpring, in whole or in part, at the prescribed
redemption price, except as may otherwise be provided in connection with any
debt securities or series of debt securities.
From and after notice has been given as provided in the indentures, if
funds for the redemption of any debt securities called for redemption have been
made available on the applicable redemption date, the debt securities will cease
to bear interest on the date fixed for the redemption specified in the notice,
and the only right of the holders of the debt securities will be to receive
payment of the redemption price.
Notice of any optional redemption by MindSpring of any debt securities is
required to be given to holders at their addresses, as shown in the Security
Register, not more than 60 nor less than 30 days before the date fixed for
redemption. The notice of redemption will be required to specify, among other
items, the redemption price and the principal amount of the debt securities held
by the holder to be redeemed.
If MindSpring elects to redeem debt securities, it will be required to
notify the trustee at least 45 days before the redemption date (or such shorter
period as is satisfactory to the trustee) of the aggregate principal amount of
debt securities to be redeemed and the redemption date. If fewer than all the
debt securities are to be redeemed, the trustee is required to select the debt
securities to be redeemed pro rata, by lot or in such manner as it deems fair
and appropriate.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise specified in the applicable prospectus supplement, we will
issue the debt securities in denominations of $1,000 and integral multiples of
those $1,000 denominations if in registered form and, if in bearer form, we will
issue the debt securities in denominations of $5,000 (Section 302).
Unless otherwise specified in the applicable prospectus supplement, the
principal of (and applicable premium, if any) and interest on any series of debt
securities will be payable at the corporate trust office of the trustee, the
address of which will be stated in the applicable prospectus supplements. At the
option of MindSpring, payment of interest may be made by check mailed to the
address of the person entitled to the interest payment as it appears in the
register for the applicable debt securities or by wire transfer of funds to such
person at an account maintained within the United States (Sections 301, 305,
306, 307 and 1002).
Any interest not punctually paid or duly provided for on any Interest
Payment Date with respect to a debt security ("Defaulted Interest") will
immediately cease to be payable to the holder on the applicable regular record
date and may either be paid to the person in whose name the debt security is
registered at the close of business on a special record date (the "Special
Record Date") for the payment of such Defaulted Interest to be fixed by the
trustee, notice of which is to be given to the holder of the debt security not
less than ten days before such Special Record Date, or may be paid at any time
in any other lawful manner, all as more completely described in the applicable
indenture or supplemental indenture (Section 307).
Subject to limitations imposed upon debt securities issued in book-entry
form, the debt securities of any series will be exchangeable for other debt
securities of the same series and of a like aggregate principal amount and tenor
of different authorized denominations upon surrender of the debt securities at
the corporate trust office of the applicable trustee. In addition, subject to
limitations imposed upon debt securities issued in book-entry form, the debt
securities of any series may be surrendered for registration of transfer or
exchange at the corporate trust office of the applicable trustee. Every debt
security surrendered for registration of transfer or exchange must be duly
endorsed or accompanied by a written instrument of transfer. No service charge
will be imposed for any registration of transfer or exchange of any debt
securities, but MindSpring may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection with any registration of
transfer or exchange of any debt securities. If the applicable prospectus
supplement refers to any transfer agent (in addition to the applicable trustee)
initially designated by MindSpring with respect to any series of debt
securities, MindSpring may at any time rescind the designation of that transfer
agent or approve a change in the location through which any such transfer agent
acts, except that MindSpring will be
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required to maintain a transfer agent in each place of payment for that series.
MindSpring may at any time designate additional transfer agents with respect to
any series of debt securities (Section 1002).
Neither MindSpring nor any trustee will be required to:
(1) issue, register the transfer of, or exchange debt securities of any
series during a period beginning at the opening of business 15 days
before any selection of debt securities of that series to be redeemed
and ending at the close of business on the day of mailing of the
relevant notice of redemption;
(2) register the transfer of, or exchange any debt security, or portion of
any debt security, called for redemption, except the unredeemed
portion of any debt security being redeemed in part; or
(3) issue, register the transfer of, or exchange any debt security that
has been surrendered for repayment at the option of the holder, except
the portion, if any, of the debt security not to be repaid (Section
305).
GLOBAL SECURITIES
We may issue the debt securities of a series in whole or in part in the
form of one or more global securities to be deposited with, or on behalf of, a
depository identified in the applicable prospectus supplement relating to such
series. We may issue global securities in either registered or bearer form and
in either temporary or permanent form. The specific terms of the depository
arrangement with respect to a series of debt securities will be described in the
applicable prospectus supplement relating to that series.
MERGER, CONSOLIDATION OR SALE OF ASSETS
MindSpring will not be permitted to consolidate with, or sell, lease or
convey all or substantially all of its assets to, or merge with or into, any
other entity, unless:
(1) either (A) MindSpring is the continuing entity, or (B) the successor
entity, if other than MindSpring, formed by or resulting from any such
consolidation or merger, or which has received the transfer of
MindSpring's assets, expressly assumes payment of the principal of,
and premium, if any, and interest on all of the outstanding debt
securities and the due and punctual performance and observance of all
of the covenants and conditions contained in each indenture;
(2) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of MindSpring or any
Subsidiary as a result of that transaction as having been incurred by
MindSpring or a Subsidiary at the time of the transaction, no event of
default under the indentures or supplemental indentures, and no event
which, after notice or the lapse of time, or both, would become such
an event of default, will have occurred and be continuing; and
(3) an officer's certificate and legal opinion relating to the conditions
described in (1) and (2) above is delivered to each trustee (Sections
801 and 803).
SELECTED COVENANTS
Existence. Except as described above under "Merger, Consolidation or Sale
of Assets," MindSpring will be required to do or cause to be done all things
necessary to preserve and keep in full force and effect its existence, rights
(by certificate of incorporation, by-laws and statute) and franchises, but
MindSpring will not be required to preserve any right or franchise if it
determines that its preservation is no longer desirable in the conduct of
MindSpring's business and that its loss is not disadvantageous in any material
respect to the holders of the debt securities (Section 1004).
Maintenance of Properties. MindSpring will be required to, and will be
required to cause each of its Subsidiaries to, keep all of its and its
Subsidiaries' properties that are used or useful in the conduct of its business
or the business of any Subsidiary to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment. MindSpring
will also cause all necessary repairs, renewals,
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replacements, and improvements of those properties to be made, all as in
MindSpring's judgment may be necessary for the conduct of its business. (Section
1005).
Payment of Taxes and Other Claims. MindSpring will be required to pay or
discharge or cause to be paid or discharged, before the same become delinquent:
(1) all material taxes, assessments and governmental charges levied or
imposed upon it or any Subsidiary or upon the income, profits or
property of MindSpring or any Subsidiary; and
(2) all material lawful claims for labor, materials and supplies that, if
unpaid, might by law become a lien upon the property of MindSpring or
any Subsidiary;
but MindSpring will not be required to pay or discharge or cause to be paid or
discharged any tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith in appropriate proceedings (Section
1007).
ADDITIONAL COVENANTS AND/OR MODIFICATIONS TO THE COVENANTS DESCRIBED ABOVE
Any additional covenants of MindSpring and/or modifications to the
covenants described above with respect to any series of debt securities,
including any covenants relating to limitations on incurrence of indebtedness or
other financial covenants, will be set forth in the applicable indenture or
supplemental indenture and described in the prospectus supplement relating to
that series of debt securities.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Events of Default. Each indenture will provide that the following events
are "events of default" with respect to any series of debt securities issued
under it, subject to any modifications or deletions provided in any supplemental
indenture with respect to any specific series of debt securities:
(1) failure to pay any installment of interest on any debt security of the
series for 30 days;
(2) failure to pay principal of, or premium, if any, on, any debt security
of the series when due;
(3) default in making any sinking fund payment, if required, for any debt
security of the series;
(4) default in the performance or breach of any other covenant or warranty
of MindSpring contained in the applicable indenture, other than a
covenant added to the indenture solely for the benefit of any other
series of debt securities issued under that indenture, continued for
60 days after written notice as provided in the applicable indenture;
(5) default in the payment of an aggregate principal amount exceeding
$25,000,000 of any indebtedness of MindSpring or any mortgage,
indenture or other instrument under which such indebtedness is issued
or by which such indebtedness is secured, such default having occurred
after the expiration of any applicable grace period and having
resulted in the acceleration of the maturity of such indebtedness, but
only if such indebtedness is not discharged or the acceleration is not
rescinded or annulled within 30 days after written notice as provided
in the applicable indenture;
(6) specific events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of MindSpring or any
Significant Subsidiary or either of their property;
(7) if any guarantee of a debt security by a guarantor ceases to be, or
MindSpring or the guarantor asserts in writing that the guarantee is
not, in full force and effect or enforceable in accordance with its
terms; and
(8) any other event of default provided with respect to a particular
series of debt securities (Section 501).
If an event of default under any indenture with respect to debt securities
of any series at the time outstanding occurs and is continuing, then in every
case other than in the case described in clause (6) above, in which case
acceleration will be automatic, the applicable trustee or the holders of not
less than 25% of the
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principal amount of the outstanding debt securities of that series will have the
right to declare the principal amount (or, if the debt securities of that series
are "original issue discount securities" or indexed securities, such portion of
the principal amount as may be specified in the terms of that series) of all the
debt securities of that series to be due and payable immediately by written
notice to MindSpring, and to the applicable trustee if given by the holders. At
any time after such a declaration of acceleration has been made with respect to
debt securities of such series, or of all debt securities then outstanding under
any indenture, as the case may be, but before a judgment or decree for payment
of the money due has been obtained by the applicable trustee, however, the
holders of not less than a majority in principal amount of the outstanding debt
securities of that series, or of all debt securities then outstanding under the
applicable indenture, as the case may be, may rescind and annul the declaration
of acceleration and its consequences if:
(1) MindSpring has deposited with the applicable trustee all required
payments of the principal of, and premium, if any, and interest on the
debt securities of that series, or of all debt securities then
outstanding under the applicable indenture, as the case may be, plus
specified fees, expenses, disbursements and advances of the applicable
trustee; and
(2) all events of default, other than the non-payment of all or a
specified portion of the accelerated principal, with respect to debt
securities of that series, or of all debt securities then outstanding
under the applicable indenture, as the case may be, have been cured or
waived as provided in such indenture (Section 502).
Waiver. Each indenture also will provide that the holders of not less than
a majority in principal amount of the outstanding debt securities of any series,
or of all debt securities then outstanding under the applicable indenture, as
the case may be, may waive any past default with respect to that series and its
consequences, except a default:
(1) in the payment of the principal of, or premium, if any, or interest on
any debt security of that series; or
(2) in respect of a covenant or provision contained in the applicable
indenture that cannot be modified or amended without the consent of
each affected holder of an outstanding debt security (Section 513).
Notice. Each trustee will be required to give notice to the holders of the
applicable debt securities within 90 days of a default under the applicable
indenture unless the default has been cured or waived; but the trustee may
withhold notice of any default (except a default in the payment of the principal
of, or premium, if any, or interest on such debt securities or in the payment of
any sinking fund installment in respect of the debt securities) if specified
responsible officers of the trustee consider the withholding to be in the
interest of the holders (Section 601).
Each indenture will provide that no holders of debt securities of any
series may institute any proceedings, judicial or otherwise, with respect to
that indenture or for any remedy under that indenture, except in the cases of
failure of the applicable trustee, for 60 days, to act after it has received a
written request to institute proceedings in respect of an event of default from
the holders of not less than 25% in principal amount of the outstanding debt
securities of that series, as well as an offer of indemnity reasonably
satisfactory to it (Section 507). This provision will not prevent any holder of
debt securities from instituting suit for the enforcement of payment of the
principal of (and premium, if any) and interest on the debt securities at their
respective due dates (Section 508).
Subject to provisions in each indenture relating to its duties in case of
default, no trustee will be under any obligation to exercise any of its rights
or powers under an indenture at the request or direction of any holders of any
series of debt securities then outstanding under that indenture, unless the
holders offer to the trustee reasonable security or indemnity (Section 602). The
holders of not less than a majority in principal amount of the outstanding debt
securities of any series (or of all debt securities then outstanding under an
indenture, as the case may be) will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
applicable trustee, or of exercising any trust or power conferred upon the
trustee. A trustee may refuse, however, to follow any direction that is in
conflict with any law or the applicable
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indenture that may involve the trustee in personal liability or may be unduly
prejudicial to the holders of debt securities of that series not joining in the
direction (Section 512).
Within 120 days after the end of each fiscal year, MindSpring will be
required to deliver to each trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the applicable indenture and, if so, specifying each such default
and the nature and status thereof (Section 1008).
MODIFICATION OF THE INDENTURES
Except as otherwise specifically provided in the indenture, modifications
and amendments of an indenture generally will be permitted to be made only with
the consent of the holders of not less than a majority in principal amount of
all outstanding debt securities issued under that indenture that are affected by
the modification or amendment. In any case, however, no modification or
amendment may, without the consent of the holder of each debt security affected
by the modification or amendment:
(1) change the stated maturity of the principal of, or any installment of
interest (or the premium, if any) on, any debt security;
(2) reduce the principal amount of, or the rate or amount of interest on,
or any premium payable on redemption of, any debt security, or reduce
the amount of principal of an "original issue discount security" that
would be due and payable upon declaration of acceleration of its
maturity or would be provable in bankruptcy, or adversely affect any
right of repayment of the holder of any debt security;
(3) change the place of payment, or the coin or currency for payment, of
principal (or premium, if any) or interest on any debt security;
(4) impair the right to institute suit for the enforcement of any payment
on or with respect to any debt security;
(5) release any guarantors from their guarantees of the debt securities,
or, except as contemplated in any supplemental indenture, make any
change in a guarantee of a debt security that would adversely affect
the interests of the holders of those debt securities;
(6) in the case of subordinated debt securities, modify the ranking or
priority of the securities;
(7) reduce the percentage of outstanding debt securities of any series
necessary to modify or amend the applicable indenture, to waive
compliance with specific provisions of or certain defaults and
consequences under the applicable indenture, or to reduce the quorum
or voting requirements set forth in the applicable indenture; or
(8) modify any of the foregoing provisions or any of the provisions
relating to the waiver of specific past defaults or specific
covenants, except to increase the required percentage to effect such
action or to provide that specific other provisions may not be
modified or waived without the consent of the holder of that debt
security (Section 902).
The holders of not less than a majority in principal amount of the
outstanding debt securities of each series affected by the modification or
amendment will have the right to waive compliance by MindSpring with specific
covenants in the indenture (Section 1010).
Modifications and amendments of an indenture will be permitted to be made
by MindSpring and the respective trustee under the indenture without the consent
of any holder of debt securities for any of the following purposes:
(1) to evidence the succession of another person to MindSpring as obligor
under the indenture or to evidence the addition or release of any
guarantor in accordance with the indenture or any supplemental
indenture;
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(2) to add to the covenants of MindSpring for the benefit of the holders
of all or any series of debt securities or to surrender any right or
power conferred upon MindSpring in the indenture;
(3) to add events of default for the benefit of the holders of all or any
series of debt securities;
(4) to add or change any provisions of an indenture to facilitate the
issuance of, or to liberalize specific terms of, debt securities in
bearer form, or to permit or facilitate the issuance of debt
securities in uncertificated form, provided that such action shall not
adversely affect the interests of the holders of the debt securities
of any series in any material respect;
(5) to change or eliminate any provisions of an indenture, if the change
or elimination becomes effective only when there are no debt
securities outstanding of any series created prior to the change or
elimination that are entitled to the benefit of the changed or
eliminated provision;
(6) to secure the debt securities;
(7) to establish the form or terms of debt securities of any series;
(8) to provide for the acceptance of appointment by a successor trustee or
facilitate the administration of the trusts under an indenture by more
than one trustee;
(9) to cure any ambiguity, defect or inconsistency in an indenture;
(10) to supplement any of the provisions of an indenture to the extent
necessary to permit or facilitate defeasance and discharge of any
series of such debt securities, provided that the supplement does not
adversely affect the interests of the holders of the debt securities
of any series in any material respect; or
(11) to make any change that does not adversely affect the legal rights
under an indenture of any holder of debt securities of any series
issued under that indenture (Section 901).
Each indenture will provide that in determining whether the holders of the
requisite principal amount of outstanding debt securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver under
the indenture or whether a quorum is present at a meeting of holders of debt
securities:
(1) the principal amount of an "original issue discount security" that is
deemed to be outstanding will be the amount of the principal of that
"original issue discount security" that would be due and payable as of
the date of the determination upon declaration of acceleration of the
maturity of that "original issue discount security";
(2) the principal amount of any debt security denominated in a foreign
currency that is deemed outstanding will be the U.S. dollar
equivalent, determined on the issue date for that debt security, of
the principal amount (or, in the case of an "original issue discount
security", the U.S. dollar equivalent on the issue date of that debt
security of the amount determined as provided in (1) above);
(3) the principal amount of an indexed security that is deemed outstanding
will be the principal face amount of such indexed security at original
issuance, unless otherwise provided with respect to such indexed
security under the applicable indenture; and
(4) debt securities owned by MindSpring or any other obligor upon the debt
securities or any affiliate of MindSpring or of any other obligor are
to be disregarded.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Discharge. MindSpring may be permitted under the applicable indenture to
discharge specific obligations to holders of any series of debt securities (1)
that have not already been delivered to the applicable trustee for cancellation
and (2) that either have become due and payable or will, within one year, become
due and payable or scheduled for redemption, by irrevocably depositing with the
applicable trustee, in trust, an
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amount of funds sufficient to pay the principal, and premium, if any, and
interest to the date of deposit, if such debt securities have become due and
payable, or to the stated maturity or redemption date, as the case may be.
Defeasance and Covenant Defeasance. Each indenture will provide that, if
the provisions in that indenture relating to defeasance and covenant defeasance
are made applicable to the debt securities of or within any series, MindSpring
may elect either:
(1) "defeasance," which means MindSpring elects to defease and be
discharged from any and all obligations with respect to the debt
securities, except for the obligations to register the transfer or
exchange of the debt securities, to replace temporary or mutilated,
destroyed, lost or stolen debt securities, to maintain an office or
agency in respect of the debt securities and to hold moneys for
payment in trust (Section 1302); or
(2) "covenant defeasance," which means MindSpring elects to be released
from its obligations with respect to the debt securities under
specified sections of Article Ten of the applicable indenture, which
relate to covenants, as described in the applicable prospectus
supplement and any omission to comply with its obligations shall not
constitute an event of default with respect to such debt securities
(Section 1303);
in either case upon the irrevocable deposit by MindSpring with the applicable
trustee, in trust, of an amount, in such currency or currencies or U.S.
"Government Obligations" as defined in Section 101 of the indentures, or both,
sufficient without reinvestment to make scheduled payments of the principal of,
and premium, if any, and interest on the debt securities, and any mandatory
sinking fund or analogous payments.
Such a trust will only be permitted to be established if, among other
things, MindSpring has delivered to the applicable trustee an opinion of
counsel, as specified in the applicable indenture, to the effect that the
holders of the debt securities will not recognize income, gain or loss for
federal income tax purposes as a result of the defeasance or covenant defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred, and the opinion of counsel, in the case of
defeasance, will be required to refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable U.S. federal income tax law
occurring after the date of the indenture (Section 1304).
In general, if MindSpring elects covenant defeasance with respect to any
debt securities and payments on those debt securities are declared due and
payable because of the occurrence of an event of default, the amount of money
and/or Government Obligations on deposit with the applicable trustee would be
sufficient to pay amounts due on those debt securities at the time of their
stated maturity, but may not be sufficient to pay amounts due on those debt
securities at the time of the acceleration resulting from such event of default.
In that case, MindSpring would remain liable to make payment of the amounts due
on the debt securities at the time of acceleration.
The applicable prospectus supplement may further describe the provisions,
if any, permitting defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the debt
securities of or within a particular series.
GOVERNING LAW
The indentures and the debt securities will be governed by, and construed
in accordance with, the internal laws of the State of New York (Section 112).
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DESCRIPTION OF COMMON STOCK
The following description is a general summary of the terms of the common
stock which MindSpring may issue. The description below and in any prospectus
supplement does not purport to be complete and is subject to and qualified in
its entirety by reference to MindSpring's Amended and Restated Certificate of
Incorporation, as amended, and Restated Bylaws, each of which will be made
available upon request.
GENERAL
Our Amended and Restated Certificate of Incorporation, as amended, provides
that we have authority to issue 60,000,000 shares of our common stock, par value
$.01 per share. At March 31, 1999, there were 28,918,264 shares of common stock
outstanding. The board of directors has authorized an increase in the number of
shares of common stock that we have authority to issue from 60,000,000 to
400,000,000. The board intends to submit this increase in authorized shares of
common stock to the MindSpring stockholders for approval at the 1999 annual
meeting to be held in May 1999.
Voting Rights. Each holder of shares of our common stock is entitled to
attend all special and annual meetings of our stockholders. In addition, each
holder is entitled, share-for-share and without regard to class, together with
the holders of all other classes of stock entitled to attend the special and
annual meetings of our stockholders and to vote, except any class or series of
stock having special voting rights, to cast one vote for each outstanding share
of common stock held upon any matter or thing, including, without limitation,
the election of one or more directors, properly considered and acted upon by the
stockholders.
Liquidation Rights. The holders of our common stock and the holders of any
class or series of stock entitled to participate with the holders of our common
stock as to the distribution of assets in the event of any dissolution,
liquidation, or winding up of MindSpring, whether voluntary or involuntary,
shall become entitled to participate in the distribution of any assets of
MindSpring remaining after MindSpring has paid, or provided for the payment of,
all of its debts and liabilities and after MindSpring has paid, or set aside for
payment, to the holders of any class of stock having preference over the common
stock in the event of dissolution, liquidation or winding up, the full
preferential amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on the common stock and on any class or
series of stock entitled to participate with the common stock as to dividends,
but only when and as declared by our board of directors.
SOME IMPORTANT CHARTER AND STATUTORY PROVISIONS
Our Certificate of Incorporation provides for the division of our board of
directors into three classes of directors, each serving staggered, three-year
terms. The Certificate of Incorporation further provides that any alteration,
amendment or repeal of certain sections of the Certificate of Incorporation
relating to the election and classification of the board of directors,
indemnification and the vote requirements for such amendments to the Certificate
of Incorporation requires the:
(1) approval of the holders of at least two-thirds of the shares entitled
to vote thereon; and
(2) approval of a majority of the entire board of directors.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of MindSpring.
MindSpring is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless:
(1) prior to such date, the board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
(2) upon consummation of the transaction that resulted in such person
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding, for purposes of determining
the number of shares outstanding, shares owned by certain directors or
certain employee stock plans; or
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(3) on or after the date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and
authorized by the affirmative vote, and not by the written consent, of
at least two-thirds of the outstanding voting stock, excluding the
stock owned by the interested stockholder.
A "business combination" includes a merger, asset sale, or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, other than the corporation and any direct or
indirect majority-owned subsidiary of the corporation, together with affiliates
and associates, owns or, as an affiliate or associate, within three years prior,
did own, 15% or more of the corporation's outstanding voting stock.
NASDAQ LISTING
The common stock is listed on The Nasdaq Stock Market's National Market
under the symbol "MSPG."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
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DESCRIPTION OF PREFERRED STOCK
The following description is a general summary of the terms of the
preferred stock which MindSpring may issue. The description below and in any
prospectus supplement does not purport to be complete and is subject to and
qualified in its entirety by reference to our Certificate of Incorporation, the
applicable Certificate of Designation to our Certificate of Incorporation,
determining the terms of the related series of preferred stock and our Restated
Bylaws, each of which will be made available upon request.
GENERAL
Our Certificate of Incorporation authorizes our board of directors, from
time to time and without further stockholder action, to provide for the issuance
of up to 1,000,000 shares of preferred stock, par value $.01 per share, in one
or more series, and to fix the relative rights and preferences of the shares,
including voting powers, dividend rights, liquidation preferences, redemption
rights and conversion privileges. As of the date of this prospectus, no shares
of preferred stock are outstanding, the board of directors has not provided for
the issuance of any series of preferred stock, and there are no agreements or
understandings for the issuance of any preferred stock. As a result of its broad
discretion with respect to the creation and issuance of preferred stock without
stockholder approval, the board of directors could adversely affect the voting
power of the holders of common stock and, by issuing shares of preferred stock
with certain voting, conversion and/or redemption rights, could discourage any
attempt to obtain control of MindSpring.
You should refer to the prospectus supplement relating to the class or
series of preferred stock being offered for the specific terms of that class or
series, including:
(1) the title and stated value of the preferred stock being offered;
(2) the number of shares of preferred stock being offered, their
liquidation preference per share and their purchase price;
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculating the payment date(s) applicable to the preferred stock
being offered;
(4) whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on the preferred stock being
offered shall accumulate;
(5) the procedures for any auction and remarketing, if any, for the
preferred stock being offered;
(6) the provisions for a sinking fund, if any, for the preferred stock
being offered;
(7) the provisions for redemption, if applicable, of the preferred stock
being offered;
(8) any listing of the preferred stock being offered on any securities
exchange or market;
(9) the terms and conditions, if applicable, upon which the preferred
stock being offered will be convertible into common stock of
MindSpring, including the conversion price, or the manner of
calculating the conversion price, and the conversion period;
(10) the terms and conditions, if applicable, upon which the preferred
stock being offered will be exchangeable into debt securities,
including the exchange price, or the manner of calculating the
exchange price, and the exchange period;
(11) voting rights, if any, of the preferred stock being offered;
(12) whether interests in the preferred stock being offered will be
represented by depositary shares;
(13) a discussion of any material and/or special United States federal
income tax considerations applicable to the preferred stock being
offered;
(14) the relative ranking and preferences of the preferred stock being
offered as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of MindSpring;
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(15) any limitations on the issuance of any class or series of preferred
stock ranking senior to or on a parity with the series of preferred
stock being offered as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of MindSpring; and
(16) any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock being offered.
RANK
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of MindSpring, rank:
(1) senior to all classes or series of common stock of MindSpring and to
all equity securities the terms of which specifically provide that
such equity securities rank junior to the preferred stock being
offered;
(2) on a parity with all equity securities issued by MindSpring other than
those referred to in clauses (1) and (3) of this subheading; and
(3) junior to all equity securities issued by MindSpring the terms of
which specifically provide that such equity securities rank senior to
the preferred stock being offered.
For purposes of this description, the term "equity securities" does not include
convertible debt securities.
DISTRIBUTIONS
Holders of the preferred stock of each series will be entitled to receive,
when, as and if declared by our board of directors, out of assets of MindSpring
legally available for payment to stockholders, cash distributions, or
distributions in kind or in other property if expressly permitted and described
in the applicable prospectus supplement, at such rates and on such dates as will
be set forth in the applicable prospectus supplement. Each such distribution
shall be payable to holders of record as they appear on the stock transfer books
of MindSpring on such record dates as shall be fixed by our board of directors.
Distributions on any series of preferred stock, if cumulative, will be
cumulative from and after the date set forth in the applicable prospectus
supplement.
REDEMPTION
If so provided in the applicable prospectus supplement, the preferred stock
will be subject to mandatory redemption or redemption at the option of
MindSpring, in whole or in part, in each case upon the terms, at the times and
at the redemption prices set forth in such prospectus supplement.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of MindSpring, then, before any distribution or payment shall be
made to the holders of any common stock or any other class or series of shares
of capital stock of MindSpring ranking junior to the preferred stock in the
distribution of assets upon any liquidation, dissolution or winding up of
MindSpring, the holders of each series of preferred stock shall be entitled to
receive out of assets of MindSpring legally available for distribution to
shareholders liquidating distributions in the amount of the liquidation
preference set forth in the applicable prospectus supplement, plus an amount
equal to all accumulated and unpaid distributions. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of shares of preferred stock will have no right or claim to any of the remaining
assets of MindSpring. If, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of MindSpring are insufficient
to pay the amount of the liquidating distributions on all outstanding shares of
preferred stock and the corresponding amounts payable on all shares of other
classes or series of shares of capital stock of MindSpring ranking on a parity
with the preferred stock in the distribution of assets, then the holders of the
preferred stock and all
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other such classes or series of shares of capital stock shall share ratably in
any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
preferred stock, the remaining assets of MindSpring shall be distributed among
the holders of any other classes or series of shares of capital stock ranking
junior to the preferred stock upon liquidation, dissolution or winding up,
according to their respective rights and preferences and in each case according
to their respective number of shares. For such purposes, the consolidation or
merger of MindSpring with or into any other corporation, trust or entity, or the
sale, lease or conveyance of all or substantially all of the property or
business of MindSpring, shall not be deemed to constitute a liquidation,
dissolution or winding up of MindSpring.
VOTING RIGHTS
Holders of preferred stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law, or as indicated
in the applicable prospectus supplement.
Under the Delaware General Corporation Law, holders of outstanding shares
of a series of preferred stock may be entitled to vote as a separate class on a
proposed amendment to the terms of that series of preferred stock or
MindSpring's Restated Certificate if the amendment would:
(1) increase or decrease the aggregate number of authorized shares of that
series of preferred stock;
(2) increase or decrease the par value of that series of preferred stock;
or
(3) alter or change the powers, preferences or special rights of the
shares of such class so as to affect them adversely,
in which case the approval of proposed amendment would require the affirmative
vote of at least a majority of the outstanding shares of that series of
preferred stock.
CONVERSION RIGHTS
The terms and conditions, if any, upon which any series of preferred stock
is convertible into common stock will be set forth in the applicable prospectus
supplement relating thereto. Such terms will include the number of shares of
common stock into which the shares of preferred stock are convertible, the
conversion price or the manner of calculating the conversion price, the
conversion date(s) or period(s), provisions as to whether conversion will be at
the option of the holders of the preferred stock or at MindSpring's option, the
events requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such series of preferred stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the preferred stock will be set forth
in the applicable prospectus supplement.
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DESCRIPTION OF DEPOSITARY SHARES
GENERAL
MindSpring may issue depositary receipts for depositary shares, each of
which will represent a fractional interest of a share of a particular series of
preferred stock, as specified in the applicable prospectus supplement. Shares of
preferred stock of each series represented by depositary shares will be
deposited under a separate Deposit Agreement among MindSpring and the
"depositary" named in the Deposit Agreement. Subject to the terms of the Deposit
Agreement, each owner of a depositary receipt will be entitled, in proportion to
the fractional interest of a share of a particular series of preferred stock
represented by the depositary shares evidenced by that depositary receipt, to
all the rights and preferences of the preferred stock represented by those
depositary shares, including dividend, voting, conversion, redemption and
liquidation rights.
The depositary shares will be evidenced by depositary receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the issuance
and delivery of the preferred stock by MindSpring to the depositary, MindSpring
will cause the depositary to issue, on behalf of MindSpring, the depositary
receipts. Copies of the applicable form of Deposit Agreement and depositary
receipt may be obtained from MindSpring upon request, and the statements made in
this summary relating to the Deposit Agreement and the depositary receipts to be
issued under the Deposit Agreement are summaries of provisions of the Deposit
Agreement and the related depositary receipts. This summary does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
all of the provisions of the applicable Deposit Agreement and related depositary
receipts.
DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary will distribute all cash dividends or other cash
distributions received in respect of the preferred stock to the record holders
of depositary receipts evidencing the related depositary shares in proportion to
the number of such depositary receipts owned by such holders, subject to the
obligations of holders to file proofs, certificates and other information and to
pay some charges and expenses to the depositary.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
entitled to that property, subject to the obligations of holders to file proofs,
certificates and other information and to pay some charges and expenses to the
depositary, unless the depositary determines that it is not feasible to make the
distribution, in which case the depositary may, with the approval of MindSpring,
sell the property and distribute the net proceeds from the sale to the holders.
No distribution will be made in respect of any depositary share to the
extent that it represents any preferred stock converted into other securities.
WITHDRAWAL OF STOCK
Upon surrender of the depositary receipts at the corporate trust office of
the depositary, unless the related depositary shares have previously been called
for redemption or converted into other securities, the holders of those
depositary receipts will be entitled to delivery at the corporate trust office,
to or upon the holder's order, of the number of whole or fractional shares of
the preferred stock and any money or other property represented by the
depositary shares evidenced by the depositary receipts. Holders of depositary
receipts will be entitled to receive whole or fractional shares of the related
preferred stock on the basis of the proportion of preferred stock represented by
the depositary share as specified in the applicable prospectus supplement, but
holders of the shares of preferred stock will not thereafter be entitled to
receive depositary shares therefor. If the depositary receipts delivered by the
holder evidence a number of depositary shares in excess of the number of
depositary shares representing the number of shares of preferred stock to be
withdrawn, the depositary will deliver to the holder at the same time a new
depositary receipt evidencing the excess number of depositary shares.
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REDEMPTION OF DEPOSITARY SHARES
Whenever MindSpring redeems shares of preferred stock held by the
depositary, the depositary will redeem, as of the same redemption date, the
number of depositary shares representing shares of the preferred stock so
redeemed, provided MindSpring shall have paid in full to the depositary the
redemption price of the preferred stock to be redeemed plus an amount equal to
any accrued and unpaid dividends thereon to the date fixed for redemption. The
redemption price per depositary share will be equal to the corresponding
proportion of the redemption price and any other amounts per share payable with
respect to the preferred stock. If fewer than all the depositary shares are to
be redeemed, the depositary shares to be redeemed will be selected pro rata, as
nearly as may be practicable without creating fractional depositary shares, or
by any other equitable method determined by MindSpring.
From and after the date fixed for redemption, all dividends in respect of
the shares of preferred stock so called for redemption will cease to accrue, the
depositary shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the depositary receipts evidencing
the depositary shares so called for redemption will cease, except the right to
receive any moneys payable upon the redemption and any money or other property
to which the holders of the depositary receipts were entitled the redemption and
surrender thereof to the depositary.
VOTING OF THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in the notice of meeting to the record holders of the depositary receipts
evidencing the depositary shares which represent the preferred stock. Each
record holder of depositary receipts evidencing depositary shares on the record
date, which will be the same date as the record date for the preferred stock,
will be entitled to instruct the depositary as to the exercise of the voting
rights pertaining to the amount of preferred stock represented by the holder's
depositary shares. The depositary will vote the amount of preferred stock
represented by the depositary shares in accordance with the instructions, and
MindSpring will agree to take all reasonable action which may be deemed
necessary by the depositary in order to enable the depositary to do so. The
depositary will abstain from voting the amount of preferred stock represented by
the depositary shares to the extent it does not receive specific instructions
from the holders of depositary receipts evidencing the depositary shares. The
depositary shall not be responsible for any failure to carry out any instruction
to vote, or for the manner or effect of any such vote made, as long as such
action or non-action is in good faith and does not result from negligence or
willful misconduct of the depositary.
LIQUIDATION PREFERENCE
In the event of the liquidation, dissolution or winding up of MindSpring,
whether voluntary or involuntary, the holders of each depositary receipt will be
entitled to the fraction of the liquidation preference accorded each share of
preferred stock represented by the depositary shares evidenced by such
depositary receipt, as set forth in the applicable prospectus supplement.
CONVERSION OF PREFERRED STOCK
The depositary shares, as such, are not convertible into common stock or
any other securities or property of MindSpring. Nevertheless, if so specified in
the applicable prospectus supplement relating to an offering of depositary
shares, the depositary receipts may be surrendered by their holders to the
depositary with written instructions to the depositary to instruct MindSpring to
cause conversion of the preferred stock represented by the depositary shares
evidenced by the depositary receipts into whole shares of common stock, other
shares of preferred stock of MindSpring or other shares of stock, and MindSpring
has agreed that upon receipt of those instructions and any amounts payable in
respect thereof, it will cause the conversion thereof utilizing the same
procedures as those provided for delivery of preferred stock to effect such
conversion. If the depositary shares evidenced by a depositary receipt are to be
converted in part only, a new depositary receipt or receipts will be issued for
any depositary shares not to be converted. No fractional shares of common stock
will be issued upon conversion, and if such conversion would result in a
fractional share being issued, an amount
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will be paid in cash by MindSpring equal to the value of the fractional interest
based upon the closing price of the common stock on the last business day prior
to the conversion.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of depositary receipt evidencing the depositary shares which
represent the preferred stock and any provision of the Deposit Agreement may at
any time be amended by agreement between MindSpring and the depositary. However,
any amendment that materially and adversely alters the rights of the holders of
depositary receipts or that would be materially and adversely inconsistent with
the rights granted to the holders of the related preferred stock will not be
effective unless such amendment has been approved by the existing holders of at
least 66% of the depositary shares evidenced by the depositary receipts then
outstanding. No amendment shall impair the right, subject to certain exceptions
in the Deposit Agreement, of any holder of depositary receipts to surrender any
depositary receipt with instructions to deliver to the holder the related
preferred stock and all money and other property, if any, represented thereby,
except in order to comply with law. Every holder of an outstanding depositary
receipt at the time any such amendment becomes effective shall be deemed, by
continuing to hold such receipt, to consent and agree to such amendment and to
be bound by the Deposit Agreement as amended thereby.
The Deposit Agreement may be terminated by MindSpring upon not less than 30
days prior written notice to the depositary if a majority of each series of
preferred stock affected by such termination consents to such termination,
whereupon the depositary shall deliver or make available to each holder of
Depositary Receipts, upon surrender of the depositary receipts held by such
holder, such number of whole or fractional shares of preferred stock as are
represented by the depositary shares evidenced by such depositary receipts
together with any other property held by the depositary with respect to such
depositary receipt. In addition, the Deposit Agreement will automatically
terminate if:
(1) all outstanding depositary shares shall have been redeemed;
(2) there shall have been a final distribution in respect of the related
preferred stock in connection with any liquidation, dissolution or
winding up of MindSpring and such distribution shall have been
distributed to the holders of depositary receipts evidencing the
depositary shares representing such preferred stock; or
(3) each share of the related preferred stock shall have been converted
into securities of MindSpring not so represented by depositary shares.
CHARGES OF PREFERRED STOCK DEPOSITARY
MindSpring will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition,
MindSpring will pay the fees and expenses of the depositary in connection with
the performance of its duties under the Deposit Agreement. However, holders of
depositary receipts will pay the fees and expenses of the depositary for any
duties requested by such holders to be performed which are outside of those
expressly provided for in the Deposit Agreement.
RESIGNATION AND REMOVAL OF DEPOSITARY
The depositary may resign at any time by delivering to MindSpring notice of
its election to do so, and MindSpring may at any time remove the depositary, any
such resignation or removal to take effect upon the appointment of a successor
depositary. A successor depositary must be appointed within 60 days after
delivery of the notice of resignation or removal and must be a bank or trust
company having its principal office in the United States and having a combined
capital and surplus of at least $50,000,000.
MISCELLANEOUS
The depositary will forward to holders of depositary receipts any reports
and communications from MindSpring which are received by the depositary with
respect to the related preferred stock.
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Neither the depositary nor MindSpring will be liable if it is prevented
from or delayed in, by law or any circumstances beyond its control, performing
its obligations under the Deposit Agreement. The obligations of MindSpring and
the depositary under the Deposit Agreement will be limited to performing their
duties thereunder in good faith and without negligence, in the case of any
action or inaction in the voting of preferred stock represented by the
depositary shares, gross negligence or willful misconduct, and MindSpring and
the depositary will not be obligated to prosecute or defend any legal proceeding
in respect of any depositary receipts, depositary shares or shares of preferred
stock represented thereby unless satisfactory indemnity is furnished. MindSpring
and the depositary may rely on written advice of counsel or accountants, or
information provided by persons presenting shares of preferred stock represented
thereby for deposit, holders of depositary receipts or other persons believed in
good faith to be competent to give such information, and on documents believed
in good faith to be genuine and signed by a proper party.
In the event the depositary shall receive conflicting claims, requests or
instructions from any holders of depositary receipts, on the one hand, and
MindSpring, on the other hand, the depositary shall be entitled to act on such
claims, requests or instructions received from MindSpring.
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DESCRIPTION OF WARRANTS
GENERAL
MindSpring may issue warrants to purchase its debt securities, common
stock, preferred stock, or depositary shares. MindSpring may issue warrants
independently or together with any offered securities and may be attached to or
separate from those offered securities. MindSpring will issue the warrants under
Warrant Agreements to be entered into between MindSpring and a bank or trust
company, as warrant agent, all as shall be set forth in the applicable
prospectus supplement. The warrant agent will act solely as an agent of
MindSpring in connection with the warrants of the series being offered and will
not assume any obligation or relationship of agency or trust for or with any
holders or beneficial owners of warrants.
The applicable prospectus supplement will describe the following terms,
where applicable, of warrants in respect of which this prospectus is being
delivered:
(1) the title of the warrants;
(2) the designation, amount and terms of the securities for which the
warrants are exercisable;
(3) the designation and terms of the other securities, if any, with which
the warrants are to be issued and the number of warrants issued with
each such security;
(4) the price or prices at which the warrants will be issued;
(5) the aggregate number of warrants;
(6) any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants;
(7) the price or prices at which the securities purchasable upon exercise
of the warrants may be purchased;
(8) if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be
separately transferable;
(9) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of the warrants;
(10) any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants;
(11) the date on which the right to exercise the warrants shall commence,
and the date on which the right shall expire;
(12) the maximum or minimum number of warrants which may be exercised at
any time; and
(13) information with respect to book-entry procedures, if any.
EXERCISE OF WARRANTS
Each warrant will entitle the holder of warrants to purchase for cash the
amount of debt securities, shares of preferred stock, shares of common stock or
depositary shares at the exercise price as shall in each case be set forth in,
or be determinable as set forth in, the prospectus supplement relating to the
warrants offered thereby. Warrants may be exercised at any time up to the close
of business on the expiration date set forth in the prospectus supplement
relating to the warrants offered thereby. After the close of business on the
expiration date, unexercised warrants will become void.
Warrants may be exercised as set forth in the prospectus supplement
relating to the warrants offered thereby. Upon receipt of payment and the
warrant certificate properly completed and duly executed at the corporate trust
office of the warrant agent or any other office indicated in the prospectus
supplement, MindSpring will, as soon as practicable, forward the debt
securities, shares of preferred stock, shares of common stock or depositary
shares purchasable upon such exercise. If less than all of the warrants
represented by the warrant certificate are exercised, a new warrant certificate
will be issued for the remaining warrants.
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DESCRIPTION OF STOCK PURCHASE CONTRACTS TO PURCHASE COMMON STOCK OR
PREFERRED STOCK AND STOCK PURCHASE UNITS
Unless otherwise specified in the applicable prospectus supplement,
MindSpring may issue stock purchase contracts, including contracts obligating
holders to purchase from MindSpring, and MindSpring to sell to the holders, a
specified number of shares of common stock or preferred stock at a future date
or dates. The consideration per share of common stock or preferred stock may be
fixed at the time the stock purchase contracts are issued or may be determined
by a specific reference to a formula set forth in the stock purchase contracts.
The stock purchase contracts may be issued separately or as part of stock
purchase units consisting of (1) a stock purchase contract and (2) debt
securities, preferred securities or debt obligations of third parties, including
U.S. Treasury securities, securing the holders' obligations to purchase the
common stock or the preferred stock under the stock purchase contracts. The
stock purchase contracts may require MindSpring to make periodic payments to the
holders of the stock purchase units or vice versa, and such payments may be
unsecured or prefunded on some basis. The stock purchase contracts may require
holders to secure their obligations thereunder in a specified manner.
The securities related to the stock purchase contracts will be pledged to a
collateral agent, for the benefit of MindSpring, pursuant to a pledge agreement.
The pledged securities will secure the obligations of holders of stock purchase
contracts to purchase common stock or preferred stock under the related stock
purchase contracts. The rights of holders of stock purchase contracts to the
related pledged securities will be subject to MindSpring's security interest in
those pledged securities. That security interest will be created by the pledge
agreement. No holder of stock purchase contracts will be permitted to withdraw
the pledged securities related to such stock purchase contracts from the pledge
arrangement except upon the termination or early settlement of the related stock
purchase contracts. Subject to that security interest and the terms of the
purchase contract agreement and the pledge agreement, each holder of a stock
purchase contract will retain full beneficial ownership of the related pledged
securities.
Except as described in the applicable prospectus supplement, the collateral
agent will, upon receipt of distributions on the pledged securities, distribute
such payments to MindSpring or a purchase contract agent, as provided in the
pledge agreement. The purchase contract agent will in turn distribute payments
it receives as provided in the stock purchase contract. The applicable
prospectus supplement will describe the terms of any stock purchase contracts or
stock purchase units. The description in the prospectus supplement will not
necessarily be complete and will be qualified in its entirety by reference to
the stock purchase contracts, and, if applicable, collateral arrangements and
depositary arrangements, relating to such stock purchase contracts or stock
purchase units.
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DESCRIPTION OF SUBSCRIPTION RIGHTS
GENERAL
MindSpring may issue subscription rights to purchase debt securities,
common stock, preferred stock, depositary shares or warrants to purchase debt
securities, preferred stock or common stock. MindSpring may issue subscription
rights independently or together with any other offered security. The
subscription rights may or may not be transferable by the purchaser receiving
the subscription rights. In connection with any subscription rights offering to
MindSpring's stockholders, MindSpring may enter into a standby underwriting
arrangement with one or more underwriters pursuant to which the underwriter(s)
will purchase any offered securities remaining unsubscribed for after the
subscription rights offering. In connection with a subscription rights offering
to MindSpring's stockholders, certificates evidencing the subscription rights
and a prospectus supplement will be distributed to MindSpring's stockholders on
the record date for receiving subscription rights in the subscription rights
offering set by MindSpring.
The applicable prospectus supplement will describe the following terms of
subscription rights in respect of which this prospectus is being delivered:
(1) the title of the subscription rights;
(2) the securities for which the subscription rights are exercisable;
(3) the exercise price for the subscription rights;
(4) the number of subscription rights issued to each stockholder;
(5) the extent to which the subscription rights are transferable;
(6) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of
the subscription rights;
(7) any other terms of the subscription rights, including terms,
procedures and limitations relating to the exchange and exercise of
the subscription rights;
(8) the date on which the right to exercise the subscription rights shall
commence, and the date on which the right shall expire;
(9) the extent to which the subscription rights include an
over-subscription privilege with respect to unsubscribed securities;
and
(10) if applicable, the material terms of any standby underwriting
arrangement entered into by MindSpring in connection with the
subscription rights offering.
EXERCISE OF SUBSCRIPTION RIGHTS
Each subscription right will entitle the holder of subscription rights to
purchase for cash the principal amount of debt securities, shares of preferred
stock, depositary shares, common stock, warrants or any combination thereof, at
the exercise price as shall in each case be set forth in, or be determinable as
set forth in, the prospectus supplement relating to the subscription rights
offered thereby. Subscription rights may be exercised at any time up to the
close of business on the expiration date for such subscription rights set forth
in the prospectus supplement. After the close of business on the expiration
date, all unexercised subscription rights will become void.
Subscription rights may be exercised as set forth in the prospectus
supplement relating to the subscription rights offered thereby. Upon receipt of
payment and the subscription rights certificate properly completed and duly
executed at the corporate trust office of the subscription rights agent or any
other office indicated in the prospectus supplement, MindSpring will, as soon as
practicable, forward the debt securities, shares of preferred stock or common
stock, depositary shares or warrants purchasable upon such exercise. In the
event that not all of the subscription rights issued in any offering are
exercised, MindSpring may determine to offer any unsubscribed offered securities
directly to persons other than stockholders, to or through agents, underwriters
or dealers or through a combination of such methods, including pursuant to
standby underwriting arrangements, as set forth in the applicable prospectus
supplement.
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PLAN OF DISTRIBUTION
MindSpring may sell the offered securities:
- directly to purchasers,
- through agents,
- through dealers,
- through underwriters,
- directly to its stockholders, or
- through a combination of any of these methods of sale.
In addition, MindSpring may issue the offered securities as a dividend or
distribution.
We may effect the distribution of the offered securities from time to time
in one or more transactions either:
- at a fixed price or prices, which may be changed,
- at market prices prevailing at the time of sale,
- at prices related to such prevailing market prices, or
- at negotiated prices.
MindSpring may directly solicit offers to purchase offered securities.
Agents designated by MindSpring from time to time may also solicit offers to
purchase offered securities. Any agent designated by MindSpring, who may be
deemed to be an "underwriter" as that term is defined in the Securities Act,
involved in the offer or sale of the offered securities in respect of which this
prospectus is delivered will be named, and any commissions payable by MindSpring
to such agent will be set forth in the prospectus supplement.
If a dealer is utilized in the sale of the offered securities in respect of
which this prospectus is delivered, MindSpring will sell such offered securities
to the dealer, as principal. The dealer, who may be deemed to be an
"underwriter" as that term is defined in the Securities Act, may then resell
such offered securities to the public at varying prices to be determined by such
dealer at the time of resale.
If an underwriter is, or underwriters are, utilized in the sale, MindSpring
will execute an underwriting agreement with such underwriters at the time of
sale to them and the names of the underwriters will be set forth in the
prospectus supplement, which will be used by the underwriter to make resales of
the offered securities in respect of which this prospectus is delivered to the
public. In connection with the sale of offered securities, such underwriter may
be deemed to have received compensation from MindSpring in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of offered securities for whom they may act as agents. Underwriters
may also sell offered securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Any underwriting compensation paid by MindSpring to underwriters in
connection with the offering of offered securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement.
Pursuant to any standby underwriting agreement entered into in connection
with a subscription rights offering to MindSpring's stockholders, persons acting
as standby underwriters may receive a commitment fee for all securities
underlying the subscription rights that the underwriter commits to purchase on a
standby basis. Additionally, prior to the expiration date with respect to any
subscription rights, any standby underwriters in a subscription rights offering
to MindSpring's stockholders may offer such securities on a when-issued basis,
including securities to be acquired through the purchase and exercise of
subscription rights, at prices set from time to time by the standby
underwriters. After the expiration date with respect to such subscription
rights, the underwriters may offer securities of the type underlying the
subscription rights,
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whether acquired pursuant to a standby underwriting agreement, the exercise of
the subscription rights or the purchase of such securities in the market, to the
public at a price or prices to be determined by the underwriters. The standby
underwriters may thus realize profits or losses independent of the underwriting
discounts or commissions paid by MindSpring. If MindSpring does not enter into a
standby underwriting arrangement in connection with a subscription rights
offering to MindSpring's stockholders, MindSpring may elect to retain a
dealer-manager to manage such a subscription rights offering for MindSpring. Any
such dealer-manager may offer securities of the type underlying the subscription
rights acquired or to be acquired pursuant to the purchase and exercise of
subscription rights and may thus realize profits or losses independent of any
dealer-manager fee paid by MindSpring.
Underwriters, dealers, agents and other persons may be entitled, under
agreements that may be entered into with MindSpring, to indemnification by
MindSpring against certain civil liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments which they may be
required to make in respect thereof. Underwriters and agents may engage in
transactions with, or perform services for, MindSpring in the ordinary course of
business.
If so indicated in the applicable prospectus supplement, MindSpring will
authorize underwriters, dealers or other persons to solicit offers by certain
institutions to purchase offered securities pursuant to contracts providing for
payment and delivery on a future date or dates. Institutions with which such
contracts may be made include commercial and savings banks, insurance companies,
pension funds, investment companies, educational and charitable institutions and
others. The obligations of any purchasers under any such contract will not be
subject to any conditions except that:
- the purchase of the offered securities shall not at the time of delivery
be prohibited under the laws of the jurisdiction to which such purchaser
is subject; and
- if the offered securities are also being sold to underwriters,
MindSpring shall have sold to such underwriters the offered securities
not sold for delayed delivery.
The underwriters, dealers and such other persons will not have any
responsibility in respect of the validity or performance of such contracts. The
prospectus supplement relating to such contracts will set forth the price to be
paid for offered securities pursuant to such contracts, the commission payable
for solicitation of such contracts and the date or dates in the future for
delivery of offered securities pursuant to such contracts.
Any underwriter may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 under the Exchange Act. Rule 104
permits stabilizing bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. The underwriters may
over-allot shares of the offered securities in connection with an offering of
offered securities, thereby creating a short position in the underwriters'
account. Syndicate covering transactions involve purchases of the offered
securities in the open market after the distribution has been completed in order
to cover syndicate short positions. Stabilizing and syndicate covering
transactions may cause the price of the offered securities to be higher than it
would otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
The anticipated date of delivery of offered securities will be set forth in
the applicable prospectus supplement relating to each offer.
LEGAL MATTERS
The validity of the offered securities will be passed upon for MindSpring
by Hogan & Hartson L.L.P., Washington, D.C., counsel to MindSpring. Hogan &
Hartson L.L.P. provides legal services to ITC Holding, its affiliated companies
and Campbell B. Lanier, III, Chairman and Chief Executive Officer of ITC
Holding. With the consent of MindSpring, Hogan & Hartson L.L.P. has represented
ITC Holding in certain transactions with MindSpring. Anthony S. Harrington, a
partner of Hogan & Hartson L.L.P., beneficially owns 115,568 shares of ITC
Holding common stock. If the offered securities are distributed in an
underwritten
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offering or through agents, certain legal matters may be passed upon for any
agents or underwriters by counsel for such agents or underwriters identified in
the applicable prospectus supplement.
EXPERTS
The financial statements of MindSpring as of December 31, 1997 and 1998 and
for the three years ended December 31, 1998, and the financial statement
schedule of MindSpring for the two years ended December 31, 1997; the financial
statements of Spry, Inc. as of April 30, 1997 and January 31, 1998 and for the
years ended April 30, 1996 and 1997 and the nine months ended January 31, 1998,
and the financial statements of NETCOM On-Line Communication Services, Inc.
Domestic Subscriber Operations as of December 31, 1997 and 1998, and for the
three years ended December 31, 1998 that are incorporated by reference in this
prospectus have been audited by Arthur Andersen LLP, independent certified
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the notes offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary..................................... S-3
Risk Factors................................ S-15
Cautionary Note Regarding Forward-Looking
Statements................................ S-32
Use of Proceeds............................. S-34
Price Range of Common Stock and Dividend
Policy.................................... S-35
Capitalization.............................. S-36
Selected Financial and Operating Data....... S-37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ S-39
Business.................................... S-54
Management.................................. S-71
Description of Notes........................ S-75
Description of Secured Credit Facility...... S-93
Important United States Federal Income Tax
Considerations............................ S-96
Underwriting................................ S-103
Legal Matters............................... S-106
Experts..................................... S-106
Financial Statements........................ F-1
Prospectus
Cautionary Note Regarding Forward-Looking
Statements................................ 3
About This Prospectus....................... 4
Where You Can Find More Information......... 4
About MindSpring............................ 6
Ratio of Earnings to Fixed Charges.......... 7
Use of Proceeds............................. 7
ERISA Matters............................... 7
Description of Debt Securities.............. 8
Description of Common Stock................. 20
Description of Preferred Stock.............. 22
Description of Depositary Shares............ 25
Description of Warrants..................... 29
Description of Stock Purchase Contracts to
Purchase Common Stock or Preferred Stock
and Stock Purchase Units.................. 30
Description of Subscription Rights.......... 31
Plan of Distribution........................ 32
Legal Matters............................... 33
Experts..................................... 34
</TABLE>
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$179,975,000
MINDSPRING
ENTERPRISES, INC.
5% Convertible
Subordinated Notes due 2006
----------------------
PROSPECTUS SUPPLEMENT
----------------------
GOLDMAN, SACHS & CO.
ING BARING FURMAN SELZ LLC
J.C. BRADFORD & CO.
DONALDSON, LUFKIN & JENRETTE
FIRST UNION CAPITAL MARKETS CORP.
JEFFERIES & COMPANY, INC.
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