<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1996
REGISTRATION NO. 333-10779
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MINDSPRING ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7389 58-2113290
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------------
1430 WEST PEACHTREE, SUITE 400
ATLANTA, GA 30309
(404) 815-0770
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
CHARLES M. BREWER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MINDSPRING ENTERPRISES, INC.
1430 WEST PEACHTREE, SUITE 400
ATLANTA, GA 30309
(404) 815-0770
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID B.H. MARTIN, JR., ESQ. GLENN W. STURM, ESQ.
NANCY J. KELLNER, ESQ. JAMES WALKER IV, ESQ.
HOGAN & HARTSON L.L.P. NELSON MULLINS
555 THIRTEENTH STREET, N.W. RILEY & SCARBOROUGH, L.L.P.
WASHINGTON, D.C. 20004 400 COLONY SQUARE, SUITE 2200
(202) 637-5600 1201 PEACHTREE STREET, N.E.
ATLANTA, GA 30361
(404) 817-6000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
---------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. / /
---------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. / /
---------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED
TITLE OF EACH CLASS AMOUNT PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE MAXIMUM OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.......... 4,025,000(1) $10.25(2) $41,256,250(2) $14,227(3)
==================================================================================================================
</TABLE>
(1) Includes 525,000 shares subject to an over-allotment option granted by the
Company to the Underwriters. See "Underwriting."
(2) Estimated solely for purposes of calculating the registration fee.
(3) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF ANY SUCH JURISDICTION.
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1996
PROSPECTUS
3,500,000 SHARES
[MINDSPRING LOGO]
COMMON STOCK
The 3,500,000 shares of Common Stock offered hereby (the "Offering") are
being sold by MindSpring Enterprises, Inc. ("MindSpring" or the "Company"). The
Common Stock is traded on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "MSPG." On September 11, 1996, the last
reported sale price of the Common Stock on the Nasdaq National Market was $9.13
per share. See "Price Range of Common Stock and Dividend Policy."
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A SIGNIFICANT
DEGREE OF RISK. SEE "RISK FACTORS" APPEARING ON PAGES 6 THROUGH 18 OF THIS
PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.............................. $ $ $
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Total(3)............................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 525,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ , and the total Proceeds to Company
will be $ . See "Underwriting."
---------------------
The shares of Common Stock are offered subject to receipt and acceptance by
the several Underwriters, to prior sale and to the Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about , 1996.
---------------------
J.C. BRADFORD & CO.
WHEAT FIRST BUTCHER SINGER
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1996
<PAGE> 3
MINDSPRING SERVICE AREA
[A color map of the continental United States appears on the inside front
cover, representing MindSpring's service area. MindSpring's corporate
headquarters is represented by a star; each MindSpring POP location is
represented by a solid dot; each PSINet POP is represented by a solid triangle.
Below the map is a key to the aforementioned symbols.]
AS OF JUNE 30, 1996, THERE WERE 40 MINDSPRING POPS IN NINE STATES AND THE
DISTRICT OF COLUMBIA, AND OVER 200 PSINET POPS IN 46 STATES AND THE DISTRICT OF
COLUMBIA. SEE "GLOSSARY OF TECHNICAL TERMS" FOR THE DEFINITION OF "POP" AS USED
HEREIN. THE COMPANY HAS OBTAINED ACCESS TO THE PSINET POPS PURSUANT TO A NETWORK
SERVICES AGREEMENT, WHICH MAY BE TERMINATED UNDER SPECIFIED CIRCUMSTANCES. SEE
"RISK FACTORS -- DEPENDENCE ON PSINET" AND "RECENT TRANSACTIONS."
-------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
-------------------
This Prospectus includes product names and trademarks of the Company and of
other organizations.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following information is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Prospective investors should carefully consider the factors set forth herein
under the caption "Risk Factors" and are urged to read this Prospectus in its
entirety. Unless otherwise indicated, the information in this Prospectus: (i)
assumes and gives effect to the Acquisition (as defined below), except for the
historical financial information; and (ii) assumes no exercise of the
Underwriters' over-allotment option. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in "Risk
Factors" and elsewhere in this Prospectus. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The "Glossary of Technical Terms" appearing
elsewhere in this Prospectus contains definitions of certain technical terms
used herein.
THE COMPANY
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is an Internet
access provider that focuses on serving individual subscribers, including
individuals with little or no prior on-line experience. MindSpring provides
easy-to-use Internet access by offering customized software, reliable network
facilities and responsive customer service. MindSpring believes that there is a
growing and unsatisfied demand for high quality Internet access for individuals.
Trends contributing to this growth in demand include the heightened consumer
awareness of the Internet, the increasing number of individuals who have
computers with modems and the expanding diversity of information, entertainment
and commercial offerings available on the Internet. Management believes that
few, if any, of the Company's major competitors have developed a comparable
level of service quality and customer support for individual subscribers and
that by targeting individual subscribers, rather than attempting to serve all
segments of the Internet access market, MindSpring can continue to increase its
subscriber base rapidly while maintaining superior quality service.
In June 1996, the Company announced its plans to become a nationwide
Internet access provider through agreements with PSINet Inc. ("PSINet") to
purchase up to 100,000 consumer dial-up subscriber accounts, a customer service
facility and certain other related assets, and to obtain access to PSINet's
national network of over 200 POPs (the "PSINet Transaction"). Prior to the
PSINet Transaction, MindSpring was a regional Internet access provider that
offered its services through 40 POPs in the southeastern United States and had
grown to approximately 34,500 subscribers from approximately 12,400 subscribers
as of December 31, 1995. On a pro forma basis as of June 30, 1996, MindSpring
would have had access to approximately 230 POPs (excluding PSINet POPs located
in areas served by MindSpring POPs) and would have had approximately 134,500
subscribers, assuming the acquisition of 100,000 subscriber accounts from
PSINet.
MindSpring's objective is to become a leading national provider of high
quality Internet access to individuals by: (i) leveraging the opportunities
afforded by the PSINet Transaction and expanding its subscriber base; (ii)
maintaining superior service and customer support and providing easy-to-use
software and reliable Internet access; (iii) expanding marketing and
distribution activities and pursuing strategic alliances with complementary
businesses; (iv) focusing on individual subscribers; and (v) engaging in
selected acquisitions.
Management believes that the PSINet Transaction will enhance the Company's
ability to achieve its strategic objectives on a cost-effective and accelerated
basis and to realize economies of scale. Management believes that the PSINet
Transaction will establish MindSpring as a leading Internet access provider with
nationwide coverage, create opportunities for the Company to pursue national
marketing and strategic alliances and reduce the need for significant up-front
capital expenditures to establish Company-owned POPs. The Company intends,
however, to maintain the flexibility to expand, open or close its own POPs or
make other capital investments as and where subscriber demand or strategic
considerations warrant.
The Company was incorporated in Georgia in February 1994 and was
reincorporated in Delaware in December 1995. The Company's executive offices are
located at 1430 West Peachtree, Suite 400, Atlanta, Georgia 30309. The Company's
telephone number is (404) 815-0770.
3
<PAGE> 5
RECENT DEVELOPMENTS
On June 28, 1996, the Company entered into a Purchase Agreement with PSINet
(as amended, the "Purchase Agreement") pursuant to which the Company agreed to
acquire up to 100,000 subscriber accounts and other assets from PSINet (the
"Acquisition"). The maximum aggregate purchase price for the Acquisition is
$21,129,000 (excluding accrued interest and increases in principal amounts under
promissory notes issued to PSINet), with the actual purchase price dependent on
the number of acquired subscriber accounts that remain MindSpring subscriber
accounts for a specified period. Management currently expects that fewer than
100,000 subscriber accounts will actually be purchased, due to subscriber
attrition over such period. The Company acquired 15,000 of these subscriber
accounts for $1,000,000 in cash and a $2,000,000 one-year promissory note on
June 28, 1996. The Company acquired substantially all of the remaining
subscriber accounts and related assets as of September 1, 1996, at which time
the Company issued an additional one-year promissory note in the amount of
$9,929,000. The balance of the purchase price is expected to be paid out of the
net proceeds from the Offering at specified intervals during the fourth quarter
of 1996 and the first quarter of 1997. The completion of the Acquisition is not
contingent upon consummation of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems and
subscriber log-in and accounting information.
On August 6, 1996, the Company and The News and Observer Publishing Company
("N&O") entered into a definitive agreement, which was amended and restated on
September 11, 1996, pursuant to which the Company agreed to acquire certain
individual dial-up subscriber accounts in North Carolina (currently expected to
number between 4,000 and 6,000) in connection with N&O's Nando.net Internet
access business (the "Nando.net Transaction"). The Nando.net Transaction is
expected to be consummated on or about September 30, 1996, subject to the
fulfillment of certain customary closing conditions. See "Recent Transactions."
THE OFFERING
Common Stock offered by the
Company.................... 3,500,000 shares
Common Stock to be outstanding
after the Offering (1)..... 8,625,793 shares
Use of proceeds............... Payment of the balance of the amounts payable
in connection with the Acquisition, the
Nando.net Transaction and other subscriber
purchases; capital expenditures through the
end of 1996; working capital and general
corporate purposes, funding of operating
deficits and possible additional strategic
acquisitions of subscriber accounts and
complementary businesses. See "Use of
Proceeds" and "Recent Transactions."
Nasdaq National Market
Symbol........................ MSPG
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1996. Does not include: (a) 100,000 shares of Common Stock issuable on
September 19, 1996 upon conversion of the Company's Class C Preferred Stock,
par value $0.01 per share ("Class C Preferred"); (b) 439,213 shares of
Common Stock issuable upon exercise of stock options granted to directors,
officers and employees of the Company at prices ranging from $0.64 to $12.38
per share; or (c) 525,000 shares of Common Stock issuable upon exercise of
the Underwriters' over-allotment option.
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully a number of factors that could
affect the Company's business, financial condition and results of operations.
Such factors are discussed elsewhere in this Prospectus under the heading "Risk
Factors."
4
<PAGE> 6
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA)
The summary historical and pro forma financial and operating data set forth
below should be read in conjunction with "Use of Proceeds," "Selected Financial
and Operating Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's financial statements and
notes thereto and other financial and operating data included elsewhere in this
Prospectus. The pro forma financial information does not purport to represent
what the Company's results of operations would have been if the PSINet
Transaction had in fact occurred on such dates, nor does it purport to indicate
the future financial position or results of future operations of the Company.
The pro forma adjustments are based on currently available information and
certain assumptions that management believes to be reasonable.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
---------------------- -----------------------------------
INCEPTION PRO FORMA PRO FORMA
PERIOD(1) 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues...................................... $ 103 $ 2,227 $ 9,013 $ 511 $ 4,307 $ 12,262
Costs and expenses:
Selling, general and administrative....... 121 2,230 9,001 504 4,342 12,362
Cost of revenues.......................... 52 966 4,359 223 1,912 5,890
Depreciation.............................. 5 265 797 48 596 929
Amortization.............................. 0 0 6,990 0 0 3,495
--------- --------- --------- --------- --------- ---------
Total costs and expenses.............. 178 3,461 21,147 775 6,850 22,676
--------- --------- --------- --------- --------- ---------
Operating loss................................ (75) (1,234) (12,134) (264) (2,543) (10,414)
Interest income (expense), net................ 0 (725) (725) 2 44 44
--------- --------- --------- --------- --------- ---------
Net loss...................................... $ (75) $ (1,959) $(12,859) $ (262) $ (2,499) $(10,370)
======== ======== ========== ======== ======== ==========
PER SHARE DATA:
Net loss per share(2)......................... $ (0.62) $ (1.93) $ (0.09) $ (0.58) $ (1.33)
Weighted average common shares
outstanding(2).............................. 3,175,376 6,675,376 2,857,119 4,309,859 7,809,859
OTHER OPERATING DATA:
Approximate number of subscribers at end of
period(3)................................... 1,000 12,410 112,410 4,370 34,460 134,460
Approximate number of POPs at end of
period(3)................................... 1 17 207 2 40 230
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------
AS ADJUSTED
ACTUAL FOR THE OFFERING(4) PRO FORMA(5)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................... $ 2,154 $31,235 $ 10,781
Property and equipment, net............................................... 6,874 6,874 9,518
Total assets.............................................................. 17,215 44,456 44,456
Total liabilities......................................................... 5,082 3,082 3,082
Accumulated deficit....................................................... (4,533) (4,533) (4,533)
Total stockholders' equity................................................ 12,133 41,374 41,374
</TABLE>
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(1) The Inception Period is the period from February 24, 1994 (inception) to
December 31, 1994.
(2) Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive Common Stock equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). For 1996, the Class C Preferred
and stock options are excluded from the calculations as their effect is
antidilutive. For 1995, Common Stock and Common Stock equivalent shares
issued at prices below the initial public offering price ($8.00 per share)
during the twelve-month period prior to the Company's initial public
offering have been included in the calculation as if they were outstanding
for all periods prior to the initial public offering, regardless of whether
they are dilutive. Accordingly, all stock options granted and the Class C
Preferred are included in the earnings per share calculations for all 1995
periods presented, even though the effect on net loss is antidilutive. For
1995, the Company's Class A Preferred Stock and Class B Preferred Stock
(which converted into shares of Common Stock on a one-for-one basis at the
time of the Company's initial public offering) have been included for the
respective weighted average periods for which such shares were outstanding,
even though their effect is antidilutive. For purposes of the pro forma
presentations, includes 3,500,000 shares of Common Stock offered hereby.
(3) The pro forma presentations assume the acquisition by the Company of 100,000
subscriber accounts and access to 190 PSINet POPs that are not located in
areas served by a MindSpring POP. Under the terms of the Purchase Agreement,
the number of subscriber accounts the Company must purchase will not be
deemed to exceed 100,000, and could be less depending on various factors
described elsewhere herein. For example, if only 66,000 PSINet subscriber
accounts are acquired, June 30, 1996 pro forma subscribers would be 100,460.
The historical number of POPs and subscribers at end of period for the six
months ended June 30, 1996 excludes the effects of the PSINet Transaction.
(4) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $9.13 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of the First PSINet Note (as defined herein)
(including accrued interest and increases in principal amount through early
October 1996), estimated to be $2,160,000 upon completion of the Offering.
See "Use of Proceeds" for a description of the Company's specific plans for
application of the net proceeds from the Offering.
(5) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $9.13 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of indebtedness to PSINet, which is assumed to
be $20,399,000 (including accrued interest and increases in principal
amounts through early October 1996), based on an assumed acquisition of
100,000 subscriber accounts from PSINet. Assumes that an additional $700,000
of net proceeds from the Offering will be used to pay certain one-time
license fees and starter kit costs associated with the transfer of PSINet
subscriber accounts to MindSpring. If only 66,000 PSINet subscriber accounts
are acquired, indebtedness to PSINet would be $13,599,000 (including accrued
interest and increases in principal amounts through early October 1996).
5
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following factors before
purchasing any of the Common Stock offered hereby.
LIMITED OPERATING HISTORY; OPERATING LOSSES. The Company was incorporated
on February 24, 1994 and commenced offering Internet access in June 1994. The
Company has had net losses in each quarter since it commenced operations and had
net losses of approximately $75,000, $1,959,000 and $2,499,000 for the years
ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively. As of June 30, 1996, the Company had an accumulated deficit of
approximately $4,533,000. The Company expects that it will continue to incur net
losses at least through the third quarter of 1997. Amortization charges in
connection with the Company's acquisition of assets related to PSINet's consumer
dial-up Internet access services will be first incurred in the third quarter of
1996 and are expected to adversely affect the Company's results of operations
through the second quarter of 1999. The Company's ability to achieve and
maintain profitability and positive cash flow is dependent upon a number of
factors, including the Company's ability to increase revenues while reducing per
subscriber costs by achieving economies of scale. There can be no assurance that
the Company will be successful in increasing or maintaining revenues or
achieving or sustaining economies of scale or positive cash flow in the future,
and any such failure could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Competition,"
"-- Factors Affecting Operating Results; Potential Fluctuations in Quarterly
Results" and "-- Need for Additional Capital to Finance Growth and Capital
Requirements."
PSINET TRANSACTION. The PSINet Transaction involves numerous risks. Such
risks include, among others: the difficulty of integrating the Company's network
and systems with PSINet's network; the potential disruption of the Company's
ongoing business; the potential inability of management to successfully
assimilate and retain subscriber accounts acquired from PSINet and convert such
subscriber accounts to the Company's billing system; potential problems that
transferring subscribers may experience with the process of converting to
MindSpring software and the potential dissatisfaction of subscribers who are
required to change their e-mail or domain address; the difficulty of
assimilating the operations and personnel of the customer service facility to be
acquired from PSINet (the "Harrisburg Facility"); the difficulty of
incorporating acquired technology and rights into the Company's service
offerings and maintaining uniform standards, controls, procedures and policies
in conjunction with a dramatically expanded subscriber base; the risks of
entering markets in which the Company has little or no direct prior experience;
and the possible impairment of relationships with former PSINet employees and
subscribers as a result of changes in management. There can be no assurance that
the Company will be successful in overcoming these risks or any other problems
encountered in connection with the PSINet Transaction. In addition, the Purchase
Agreement requires the Company to pay PSINet $200 for each subscriber whose
account is acquired by MindSpring and who remains a MindSpring subscriber on
certain measurement dates, the first of which is November 15, 1996 and the last
of which is January 15, 1997. Such subscribers may cancel their accounts at any
time, with the cancellation taking effect as of the first day of the following
month. Consequently, if any such subscriber remains a MindSpring subscriber past
the applicable measurement date but cancels MindSpring service thereafter, the
Company could receive significantly less revenue from such subscriber than the
amount it pays to PSINet for the subscriber account. There can be no assurance
that the Company will retain the subscriber accounts acquired from PSINet, or
successfully integrate the assets or subscriber accounts acquired from PSINet,
and any failure to retain subscriber accounts, or to successfully integrate the
assets or subscriber accounts acquired from PSINet, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Risks Associated With Additional Acquisitions and Purchases
of Subscriber Accounts," "-- Need for Additional Capital to Finance Growth and
Capital Requirements" and "Recent Transactions."
DEPENDENCE ON PSINET. The Services Agreement with PSINet expires on June
28, 2001, and automatically renews for additional one-year terms, but may be
terminated earlier at any time by either party upon 365 days' prior written
notice. The Services Agreement does not require PSINet to continue to operate
any POP that is not serving as a primary dial-in POP for any MindSpring
subscriber. PSINet's inability or unwillingness to provide POP access to
MindSpring's subscribers, or the Company's inability to secure alternative POP
arrangements upon partial or complete termination of the Services Agreement or
other loss of
6
<PAGE> 8
access to PSINet POPs, could significantly limit the Company's ability to
provide Internet access to its subscribers and limit the Company's ability to
expand nationally, which could, in turn, have a material adverse effect on the
Company's business, financial condition and results of operations. Other than
its intention to retain the flexibility to open new MindSpring POPs on an
as-needed basis, the Company does not currently have any plans or commitments
with respect to such alternative POP arrangements. There can be no assurance
that any such alternative arrangements will be available if and when the Company
requires them or, if available, that such arrangements will be on terms
acceptable to the Company.
Pursuant to the Services Agreement, the Company expects to rely
increasingly on PSINet to provide connectivity to MindSpring subscribers through
PSINet's nationwide network of over 200 POPs. The future success of the
Company's business will depend, in part, on the capacity, reliability and
security of PSINet's network infrastructure, over which the Company has no
control. In the event of disruptions in PSINet's network, the Company may have
no means of replacing these services on a timely basis or at all in the event of
such disruption. Any accident, incident, system failure or discontinuance of
operations involving PSINet's network that causes interruptions in the Company's
operations could have a material adverse effect on the Company's ability to
provide Internet services to its subscribers, and, in turn, on the Company's
business, financial condition and results of operations. See "-- Dependence on
Network Infrastructure; Capacity; Risk of System Failure," "-- Dependence on
Telecommunications Carriers and Other Suppliers" and "-- Security Risks."
COMPETITION. The market for the provision of Internet access to
individuals is extremely competitive and highly fragmented. There are no
substantial barriers to entry, and the Company expects that competition will
continue to intensify. The Company believes that the primary competitive factors
determining success in this market are a reputation for reliability and service,
effective customer support, pricing, easy-to-use software and geographic
coverage. Other important factors include the timing of introductions of new
products and services and industry and general economic trends. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, financial condition and results of
operations.
As a result of increased competition in the industry, the Company has
encountered and expects to continue to encounter significant pricing pressure.
In May 1996, in response to a changing competitive environment, the Company
introduced five different pricing plans for dial-up access (one of which was
discontinued in September 1996 due to low subscriber interest), compared to two
prior plan offerings. These plan changes generally represent a reduction from
the previous rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." Further reductions in rates
charged by the Company's competitors could require the Company to further reduce
prices charged to its subscribers, which could cause a decrease in total
revenues and revenue per subscriber and reduce the likelihood of the Company
achieving positive cash flow or profitability in the future. Any such reductions
in prices could materially adversely affect the Company's business, financial
condition and results of operations. In addition, telecommunications companies
may be able to offer customers reduced communications costs in connection with
their Internet access services, reducing the overall cost of their Internet
access services and significantly increasing price pressures on the Company.
Competition could also result in increased selling and marketing expenses,
related subscriber acquisition costs, and subscriber attrition, all of which
could materially adversely affect the Company's business, financial condition
and results of operations. There can be no assurance that the Company will be
able to offset the effects of any such increased costs or reductions in the
Company's prices through an increase in the number of its subscribers, higher
revenues from enhanced services, cost reductions or otherwise, or that the
Company will have the resources to continue to compete successfully.
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. In addition, every
local market the Company has entered or intends to enter is served by multiple
local Internet access providers. The Company currently competes or expects to
compete with the following types of Internet access providers: (i) national
commercial Internet access providers, such as NETCOM On-Line Communications,
Inc. ("NETCOM"); (ii) numerous regional and local commercial Internet access
providers which vary widely in quality, service offerings and pricing; (iii)
established on-line commercial information service providers, such as America
Online, Inc. ("America Online") and CompuServe Incorporated ("Com-
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puServe"); (iv) computer hardware and software and other technology companies,
such as International Business Machines Corporation ("IBM") and Microsoft Corp.
("Microsoft"); (v) national long distance carriers, such as AT&T Corp. ("AT&T"),
MCI Communications Corporation ("MCI"), MFS Communications Company, Inc.
("MFS"), Sprint Corporation ("Sprint") and WorldCom, Inc. ("WorldCom"); (vi)
regional telephone companies; (vii) cable operators, such as Comcast
Corporation, Tele-Communications, Inc. and Time Warner, Inc.; and (viii)
nonprofit or educational Internet access providers.
Congress recently enacted, and President Clinton signed, the
Telecommunications Act of 1996, P.L. 104-104 (the "1996 Telecommunications
Act"), which contains certain provisions lifting, or establishing procedures for
lifting, restrictions on Bell Operating Companies and other companies which may
permit them to engage directly in the Internet access business. In addition, the
1996 Telecommunications Act makes it easier for national long distance carriers
such as AT&T to offer local telephone service. The Company cannot predict the
extent to which the 1996 Telecommunications Act, or strategic alliances or
consolidation among Internet access providers, may result in additional
competitive pressures on the Company or have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that new competitors, including large computer
hardware and software, media and telecommunications companies, will continue to
enter the Internet access market, resulting in even greater competition for the
Company. For example, Microsoft offers an Internet access solution, including
front-end software and an on-line service called "Microsoft Network." IBM's most
recent version of its OS/2 operating system software includes Internet
utilities, and IBM offers Internet access through its own private communications
network. MCI, AT&T and Sprint have also recently entered the Internet access
market. The ability of these competitors or others to enter into business
combinations, strategic alliances or joint ventures or to bundle services and
products with Internet access could put the Company at a significant competitive
disadvantage. For example, Microsoft recently announced strategic marketing
alliances for Internet access with MCI, AT&T and NETCOM. GTE Corp. ("GTE") and
UUNet Technologies Inc. ("UUNet") (which was recently acquired by MFS) have also
recently announced a strategic alliance whereby GTE's customers will obtain
access to the Internet through UUNet's communications network. In addition,
WorldCom has recently announced its agreement to acquire MFS. The ability of
these competitors or others to enter into strategic alliances or joint ventures
or to bundle services and products with Internet access could put the Company at
a significant competitive disadvantage.
Moreover, the Company expects to face competition in the future from
companies that provide connections to consumers' homes, including local and long
distance telephone companies, cable companies, electric utility companies and
wireless communications companies. See "-- Risks of Technology Trends and
Evolving Industry Standards." Such companies could include Internet access in
their basic bundle of services or offer such access for a nominal additional
charge and could prevent the Company from delivering Internet access through the
wire and cable connections that such companies own. Any such developments could
materially adversely affect the Company's business, financial condition and
results of operations.
The Company does not currently compete internationally. To the extent that
the ability to provide Internet access internationally becomes a competitive
advantage in the Internet access industry, the Company may be at a competitive
disadvantage relative to other competitors. See "Business -- Competition."
FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN QUARTERLY
RESULTS. The Company's future success depends on a number of factors, many of
which are beyond the Company's control. These factors include: the rates of and
costs associated with new subscriber acquisition, subscriber retention, capital
expenditures and other costs relating to the expansion of operations; the
ability of the Company to successfully assimilate the assets purchased in the
Acquisition (including, but not limited to, the Harrisburg Facility and
subscriber accounts); the timing of new product and service announcements;
changes in the Company's pricing policies and those of its competitors; market
acceptance of new and enhanced versions of the Company's products and services;
changes in operating expenses; changes in the Company's strategy; personnel
changes; the introduction of alternative technologies; the viability of the
Company's arrangement with PSINet under the Services Agreement; and the effect
of potential acquisitions, increased competition in the Company's markets and
other general economic factors.
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The Company's operating results, cash flows and liquidity may fluctuate
significantly in the future. The Company's revenues depend on its ability to
attract and retain subscribers who purchase access on a month-to-month basis.
MindSpring generally offers its new subscribers a 30-day money-back satisfaction
guarantee and MindSpring subscribers have the option of discontinuing their
service at the end of any given month for any reason. The Company's expense
levels are based, in part, on its expectations as to future revenues. To the
extent that revenues are below expectations, the Company may be unable or
unwilling to reduce expenses proportionately, and operating results, cash flows
and liquidity are likely to be adversely affected. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results and/or growth rate will be below the expectations of public market
analysts and investors. In such event, the price of the Common Stock will likely
be materially adversely affected.
RISKS ASSOCIATED WITH ADDITIONAL ACQUISITIONS AND PURCHASES OF SUBSCRIBER
ACCOUNTS. As part of its business strategy, the Company has undertaken the
PSINet Transaction and the Nando.net Transaction and will continue to evaluate
additional strategic acquisitions of businesses and subscriber accounts
principally relating to its current operations. Such transactions commonly
involve certain risks including, among others: the difficulty of assimilating
the acquired operations and personnel; the potential disruption of the Company's
ongoing business; the possible inability of management to maximize the financial
and strategic position of the Company by the successful incorporation of
acquired technology and rights into the Company's service offerings and the
maintenance of uniform standards, controls, procedures and policies; the risks
of entering markets in which the Company has little or no direct prior
experience; and the potential impairment of relationships with employees and
subscribers as a result of changes in management. There can be no assurance that
the Company will be successful in overcoming these risks or any other problems
encountered in connection with the PSINet Transaction, the Nando.net Transaction
or other future transactions. In addition, any such transactions could
materially adversely affect the Company's operating results due to dilutive
issuances of equity securities, the incurrence of additional debt, and the
amortization of expenses related to goodwill and other intangible assets, if
any. Except as described in this Prospectus, the Company is not currently
engaged in any negotiations with respect to specific additional significant
acquisitions, although from time to time it has had discussions with several
companies and is continuing to assess these and other acquisition opportunities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- MindSpring Strategy."
MANAGEMENT'S DISCRETION REGARDING USE OF PROCEEDS. The Company intends to
use approximately $21,139,000 of the estimated net proceeds from the Offering to
pay: (i) the balance of the purchase price in connection with the Acquisition,
including repayment of all amounts outstanding under the PSINet Notes (as
defined under the heading "Recent Transactions") (assuming the Company pays the
maximum aggregate purchase price pursuant to the Purchase Agreement); (ii) the
balance of the amounts payable in the Nando.net Transaction; and (iii) all
amounts payable in connection with certain other purchases of subscriber
accounts. Pursuant to the terms of the Purchase Agreement, the Company will
purchase up to 100,000 subscriber accounts. To the extent that fewer than
100,000 subscriber accounts are actually acquired, the foregoing amount will be
reduced by the product of $200 and the difference between 100,000 and the number
of subscriber accounts actually acquired, and the amount of net proceeds
allocated to working capital and general corporate purposes will be increased by
a like amount. The Company does not anticipate repaying any amounts due under
any of the PSINet Notes prior to completion of the Offering. Pursuant to the
First PSINet Note (as defined under the heading "Recent Transactions"),
principal amounts thereunder will increase by 5.0% if not paid in full on or
before September 26, 1996. Principal and interest payable on the First PSINet
Note are expected to be approximately $2,100,000 and $60,000, respectively, and
principal and interest payable on the Second PSINet Note (as defined under the
heading "Recent Transactions") are expected to be $9,929,000 and $110,000,
respectively, upon completion of the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Assuming that all of the subscriber accounts acquired in
connection with the Nando.net Transaction continue to be current MindSpring
subscriber accounts on certain measurement dates, currently expected to be
December 1, 1996 and January 1, 1997, the outstanding balance of the amounts
payable (including fees for certain transition and advertising services to be
provided to the Company) in the Nando.net Transaction is expected to be
approximately $600,000 (excluding $100,000 expected to be paid at the closing of
the
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Nando.net Transaction). The amount payable in connection with certain other
purchases of subscriber accounts is expected to be approximately $140,000. See
"Recent Transactions -- Other Recent Transactions."
After paying all such amounts payable in connection with the Acquisition,
the Nando.net Transaction and the purchase of certain other subscriber accounts,
through the end of 1996 the Company expects to use approximately $5,700,000
(excluding $1,129,000 payable for the Harrisburg Facility) of the remaining
estimated net proceeds from the Offering for capital expenditures related to the
continued development of the Company's network, and approximately $2,402,000 for
working capital and general corporate purposes, funding operating deficits and
possible strategic acquisitions of complementary assets and businesses such as,
but not limited to, subscriber accounts of other access providers, World Wide
Web page developers and access providers in other markets. The Company estimates
that its cash and financing needs through mid-1997 will be met by the net
proceeds of the Offering. Beginning in mid-1997, the Company anticipates that
cash flow from operations will be sufficient to support anticipated capital
expenditures and working capital and general corporate purposes requirements.
However, any increases in the Company's anticipated growth rate, shortfalls in
anticipated net proceeds from the Offering or in anticipated revenues, increases
in anticipated expenses, or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
could require the Company to raise additional capital from public or private
equity or debt sources. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all. Other
than with respect to payment of the balance of the purchase price for the
Acquisition and the Nando.net Transaction, the Company is not required to
allocate the net proceeds of the Offering in the manner described above and, in
light of future developments and circumstances, may allocate different amounts
of the proceeds to the uses described above. See "Use of Proceeds."
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL
REQUIREMENTS. The Company must continue to enhance and develop its network in
order to maintain its competitive position and continue to meet the increasing
demands for service quality, availability and competitive pricing. As a result
of the PSINet Transaction, the Company generally anticipates opening fewer POPs.
However, the Company intends to maintain the flexibility to expand or open
MindSpring POPs or make other capital investments as and where subscriber demand
or strategic considerations may warrant. Opening new MindSpring POPs entails
significant capital equipment expenditures as well as initial commitments for
leased telecommunications facilities and advertising. In addition, the
nationwide expansion of the Company's subscriber base is likely to require
additional capital equipment expenditures to maintain the high speed and
reliability of the Company's Internet access services. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." The Company anticipates that cash requirements through
the end of 1996 will include approximately $5,700,000 for capital expenditures
(excluding $1,129,000 payable for the Harrisburg Facility) and $1,600,000 to
fund cash used in operations. In the event the net proceeds from the Offering,
after payment of the expected outstanding balance of the purchase price in the
Acquisition, the Nando.net Transaction and the purchase of certain other
subscriber accounts, and funding of operating losses (before depreciation), are
not sufficient to meet these cash requirements, the Company will need to seek
alternative sources of financing to carry out its growth and operating plans.
The Company may need to raise additional capital from public or private equity
or debt sources in order to: (i) fund growth, operating losses, increases in
expenses or cash requirements; (ii) take advantage of unanticipated
opportunities, such as major strategic alliances or other special marketing
opportunities, acquisitions of complementary businesses or assets, or the
development of new products; or (iii) otherwise respond to unanticipated
developments or competitive pressures. There can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company or at all. Such financings may be upon terms that are dilutive or
potentially dilutive to the Company's stockholders. If alternative sources of
financing are required, but are insufficient or unavailable, the Company will be
required to modify its growth and operating plans in accordance with the extent
of available funding and attempt to attain profitability in its existing
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
MANAGEMENT AND RISKS OF GROWTH. The rapid execution necessary for the
Company to fully exploit the market for its products and services requires an
effective planning and management process. MindSpring's rapid growth, the PSINet
Transaction and the Nando.net Transaction are placing, and are expected to
continue to place, a significant strain on the Company's managerial, operational
and financial resources. In
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order to effectively manage its operations, the Company will be required to
continue to implement and improve its operational, financial and management
information systems and to attract, identify, train, integrate and retain
qualified personnel. These demands will require the addition of new management
personnel and the development of additional expertise by existing management.
Seven of the Company's eleven officers have joined the Company since January
1995, including President and Chief Operating Officer Michael S. McQuary and
Vice President and Chief Financial Officer Michael G. Misikoff. The Company's
success depends to a significant extent on the ability of its officers to
operate effectively, both independently and as a group.
In particular, the successful integration of newly-acquired assets and the
implementation of a nationwide strategy and network will require close
monitoring of service quality (particularly through PSINet POPs) and, to the
extent management deems necessary, identification and acquisition of physical
sites, acquisition and installation of necessary equipment and telecommunication
facilities, implementation of marketing efforts in new as well as existing
locations, employment of qualified personnel to provide technical and marketing
support for such sites, and continued expansion of the Company's managerial,
operational and financial resources to support such development. The demands on
the Company's customer support resources have grown rapidly due to the Company's
rapidly expanding subscriber base and are expected to continue to increase as a
result of the PSINet Transaction and the Nando.net Transaction. There can be no
assurance that the Company's customer support or other resources will be
sufficient to manage any future growth in the Company's business or that the
Company will be able to implement in whole or in part its expansion program.
DEPENDENCE ON NETWORK INFRASTRUCTURE; CAPACITY; RISK OF SYSTEM
FAILURE. The future success of the Company's business will depend on the
capacity, reliability and security of its network infrastructure, including the
PSINet POPs to which the Company is granted access pursuant to the Services
Agreement. The Company will have to expand and adapt its network infrastructure
as the number of subscribers and the amount and type of information they wish to
transfer increases. Such expansion and adaptation of the Company's network
infrastructure will require substantial financial, operational and management
resources. There can be no assurance that the Company will be able to expand or
adapt its network infrastructure to meet additional demand or changing
subscriber requirements on a timely basis and at a commercially reasonable cost,
or at all.
Capacity constraints have occurred, and may occur in the future, both at
the level of particular POPs (affecting only subscribers attempting to use the
particular POP) and in connection with system-wide services (such as e-mail and
news group services). From time to time the Company has experienced delayed
delivery from suppliers of new telephone lines, modems, terminal servers and
other equipment. If delays of this nature are severe, all incoming modem lines
may become full during peak times, resulting in busy signals for subscribers who
are trying to connect to MindSpring. Similar problems can occur if the Company
is unable to expand the capacity of its information servers (for e-mail, news
and the World Wide Web) fast enough to keep up with demand from the Company's
rapidly expanding subscriber base. If the capacity of such servers is exceeded,
subscribers will experience delays when trying to use a particular service.
Further, if the Company does not maintain sufficient bandwidth capacity in its
network connections, subscribers will perceive a general slow-down of all
services on the Internet. On two occasions early in the Company's history,
management chose to suspend activation of new subscriber accounts for periods of
less than two weeks each until additional capacity could be brought on-line.
While the Company's objective is to maintain substantial excess capacity, any
failure of the Company to expand or enhance its network infrastructure on a
timely basis or to adapt it to an expanding subscriber base, changing subscriber
requirements or evolving industry standards could materially adversely affect
the Company's business, financial condition and results of operations. In
addition, while the Services Agreement requires PSINet to provide commercially
reliable service to MindSpring's subscribers with a significant assurance of
accessibility to the Internet, there can be no assurance that such services or
Internet access will meet the Company's requirements, which could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company's operations and services provided through PSINet POPs are
dependent on the extent to which the Company's and PSINet's computer equipment
is protected against damage from fire, earthquakes, power loss,
telecommunications failures and similar events. A significant portion of the
Company's computer
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equipment, including critical equipment dedicated to its Internet access
services, is located at a single facility in Atlanta, Georgia. A significant
amount of critical equipment is also located at the Harrisburg Facility, which
the Company acquired from PSINet as of September 1, 1996. Despite precautions
taken by the Company and by PSINet (over which the Company has no control), the
occurrence of a natural disaster or other unanticipated problems at the
Company's headquarters, network hub, the Harrisburg Facility or at MindSpring or
PSINet POPs could cause interruptions in the services provided by the Company.
In addition, failure of the Company's telecommunications providers to provide
the data communications capacity required by the Company as a result of a
natural disaster, operational disruption or for any other reason could cause
interruptions in the services provided by the Company. See "Business -- Network
Infrastructure." The Company does not currently maintain fully redundant or
backup Internet services or backbone facilities or other fully redundant
computing and telecommunication facilities. Any accident, incident or system
failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's ability to provide Internet services to
its subscribers, and, in turn, on the Company's business, financial condition
and results of operations.
DEPENDENCE ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS. The Company
relies on local telephone companies and other companies to provide data
communications capacity via local telecommunications lines and leased
long-distance lines. The Company will also rely on PSINet to provide
connectivity to MindSpring subscribers through PSINet's nationwide network of
POPs. The Company is subject to potential disruptions in these
telecommunications services and may have no means of replacing these services,
on a timely basis or at all, in the event of such disruption. In addition, local
phone service is currently available only from the local monopoly telephone
company in each of the markets served by the Company. Management believes that
the 1996 Telecommunications Act generally will lead to increased competition in
the provision of local telephone service, but the Company cannot predict the
timing or extent of any such developments or the effect thereof on pricing or
supply.
The Company is dependent on certain third-party suppliers of hardware
components. Certain components used by the Company in providing its networking
services are currently acquired from only one source, including modems
manufactured by U.S. Robotics, Inc., terminal servers manufactured by Livingston
Enterprises, Inc., and high-performance routers manufactured by Cisco Systems,
Inc. Expansion of network infrastructure by the Company and others is placing,
and will continue to place, a significant demand on the Company's suppliers,
some of which have limited resources and production capacity. Failure of the
Company's suppliers to adjust to meet such increasing demand may prevent them
from continuing to supply components and products in the quantities, at the
quality levels and at the times required by the Company, or at all. The
Company's inability to develop alternative sources of supply if required could
result in delays and increased costs in expanding the Company's network
infrastructure.
The Company's suppliers and telecommunications carriers also sell or lease
products and services to the Company's competitors and may be, or in the future
may become, competitors of the Company themselves. There can be no assurance
that the Company's suppliers and telecommunications carriers will not enter into
exclusive arrangements with the Company's competitors or stop selling or leasing
their products or services to the Company at commercially reasonable prices or
at all.
SECURITY RISKS. Despite the implementation of security measures, both
MindSpring's and PSINet's network infrastructures are vulnerable to computer
viruses or similar disruptive problems caused by their subscribers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to MindSpring's subscribers.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in the computer
systems of the Company or its subscribers, which may cause losses to the Company
or its subscribers or deter certain persons from subscribing to the Company's
services. Such inappropriate use of the Internet would include attempting to
gain unauthorized access to information or systems -- commonly known as
"cracking" or "hacking." Although the Company intends to continue to implement
security measures, and PSINet has publicly stated that it intends to do the
same, such measures have been circumvented in the past, and there can be no
assurance that measures implemented by the Company or PSINet will not be
circumvented in the future. Alleviating problems caused by computer viruses or
other inappropriate uses or security breaches may
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require interruptions, delays or cessation in service to the Company's
subscribers, which could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company expects that its subscribers will increasingly use the Internet for
commercial transactions in the future. Any network malfunction or security
breach could cause these transactions to be delayed, not completed at all, or
completed with compromised security. There can be no assurance that subscribers
or others will not assert claims of liability against the Company as a result of
any such failure. Further, until more comprehensive security technologies are
developed, the security and privacy concerns of existing and potential
subscribers may inhibit the growth of the Internet service industry in general
and MindSpring's subscriber base and revenues in particular.
NEW AND UNCERTAIN MARKET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM
OF COMMERCE AND COMMUNICATION. The market for Internet access and related
products is in an early stage of growth. The Company's success will depend upon
the continuing development and expansion of the Internet and the market for
Internet access. Critical issues concerning commercial and personal use of the
Internet (including security, reliability, cost, ease of use, access and quality
of service) remain unresolved and may affect the growth of Internet use. The
acceptance of the Internet for commerce and communications, particularly by
those individuals and enterprises that have historically relied upon alternative
means of commerce and communication, generally requires that such subscribers
accept a new way of conducting business and exchanging information, that
industry participants continue to provide new and compelling content and
applications, and that the Internet provide a reliable and secure computer
platform. It is difficult to predict with any assurance the rate at which the
market will grow or at which new or increased competition will result in market
saturation. The novelty of the market for Internet access may also adversely
affect the Company's ability to retain new subscribers, as subscribers
unfamiliar with the Internet may be more likely to discontinue the Company's
services after an initial trial period than other subscribers. If demand for
Internet services fails to continue to grow, grows more slowly than anticipated,
or becomes saturated with competitors, the Company's business, financial
condition and results of operations will be materially adversely affected.
RISKS OF TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS. The market for
Internet access is characterized by rapidly changing technology, evolving
industry standards, changes in subscriber needs, and frequent new service and
product introductions. The Company's future success will depend, in part, on its
ability to use leading technologies effectively, to continue to develop its
technical expertise, and to enhance its existing services and develop new
services to meet changing subscriber needs on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in using new
technologies effectively, developing new services or enhancing existing services
on a timely basis or that such new technologies or enhancements will achieve
market acceptance.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products and architectures offered by various vendors. Although the Company
intends to support emerging standards in the market for Internet access, there
can be no assurance that industry standards will be established or, if they
become established, that the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
In addition, there can be no assurance that services or technologies developed
by others will not render the Company's services or technology uncompetitive or
obsolete.
The Company is also at risk to fundamental changes in the way Internet
access is delivered. Currently, Internet services are accessed primarily by
computers connected by telephone lines. Recently, several companies have
developed cable television modems which they may offer for sale in the near
future. These cable television modems have the ability to transmit data at
substantially faster speeds than the modems the Company and its subscribers
currently use. As the Internet becomes accessible through these cable television
modems and by screen-based telephones, wireless products, televisions and other
consumer electronic devices, or as subscriber requirements change the way
Internet access is provided, the Company will have to develop new technology or
modify its existing technology to accommodate these developments. The Company's
pursuit of these technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
its Internet access business to alternate access devices and conduits.
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PROPRIETARY RIGHTS; INFRINGEMENT CLAIMS. The Company's success depends in
part upon its software and related documentation. The Company principally relies
upon copyright, trade secret and contract law to protect its proprietary
technology. There can be no assurance that the steps taken by the Company will
be adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. See "Business -- Proprietary
Rights."
The Company has obtained permission and, in certain cases, licenses from
each manufacturer of the software that the Company bundles in its front-end
software product for subscribers. Although the Company does not believe that the
software or the trademarks it uses infringe the proprietary rights of any third
parties, there can be no assurance that third parties will not assert such
claims against the Company in the future or that such claims will not be
successful. The Company could incur substantial costs and diversion of
management resources with respect to the defense of any claims relating to
proprietary rights, which could materially adversely affect the Company's
business, financial condition and results of operations. Parties making such
claims could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief that could effectively block the Company's
ability to license its products in the United States or abroad. Such a judgment
could have a material adverse effect on the Company's business, financial
condition and results of operations. In the event a claim relating to
proprietary technology or information is asserted against the Company, the
Company may seek licenses to such intellectual property. There can be no
assurance, however, that licenses could be extended or obtained on commercially
reasonable terms, if at all, or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain the necessary licenses or other
rights could materially adversely affect the Company's business, financial
condition and results of operations. See "Business -- Proprietary
Rights -- Licenses."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends upon the
continued efforts of its senior management team and its technical, marketing and
sales personnel. Such employees may voluntarily terminate their employment with
the Company at any time. The Company's success also depends on its ability to
attract and retain additional highly qualified management, technical, marketing
and sales personnel and will depend on the Company's ability to successfully
integrate former PSINet personnel hired in connection with the Acquisition who
will continue to operate the Harrisburg Facility. The process of hiring
employees with the combination of skills and attributes required to carry out
the Company's strategy can be extremely competitive and time-consuming. There
can be no assurance that the Company will be able to retain or integrate
existing personnel or identify and hire additional personnel. The loss of the
services of key personnel, or the inability to attract additional qualified
personnel, could materially adversely affect the Company's business, financial
condition and results of operations. See "Management" and
"Business -- Employees."
GOVERNMENT REGULATION. The Company provides Internet access, in part,
through transmissions over public telephone lines. These transmissions are
governed by regulatory policies establishing charges and terms for
communications. The Company is at present considered an enhanced services
provider and, therefore, is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other agency, other than
regulations applicable to businesses generally. However, the Company could
become subject in the future to regulations by the FCC and/or other regulatory
commissions as a provider of basic telecommunications services. For example, a
number of long distance telephone carriers recently filed a petition with the
FCC seeking a declaration that Internet telephone service is a
"telecommunications service" subject to common carrier regulation. Such a
declaration, if enacted, would create substantial barriers to the Company's
entry into the Internet telephone market. See "Business -- Government
Regulation."
The 1996 Telecommunications Act contains certain provisions lifting, or
establishing procedures for lifting, restrictions on Bell Operating Companies
and other companies that may permit them to engage directly in the Internet
access business and allows the Bell Operating Companies to provide electronic
publishing of information and databases. Competition from these companies could
have an adverse effect on the Company's business, financial condition and
results of operations. See "-- Competition." Further, the 1996
Telecommunications Act imposes fines on any entity that knowingly uses any
interactive computer service to send obscene or indecent material to minors or
makes indecent material available to minors. The standard for determining
whether an entity acted knowingly has not yet been established. See
"-- Potential Liability."
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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, user privacy, pricing, and copyright
infringement. Shortly after AT&T announced its plans to offer Internet access,
several Bell Operating Companies reportedly complained that AT&T should no
longer receive the benefit of a data transmission exemption to a 1983 FCC
"access charge" plan, which exemption applies to all Internet service providers.
In response to a petition or on its own motion, the FCC could eliminate this
exemption. The Company cannot predict the impact, if any, that the elimination
of this exemption or any other future regulatory changes or developments may
have on its business, financial condition and results of operations. In
addition, Tacoma, Washington has recently imposed a tax on companies that
connect people to the Internet, and other localities may impose similar taxes.
Changes in the regulatory environment relating to the Internet access industry,
including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
POTENTIAL LIABILITY. The law relating to the liability of Internet access
providers and on-line services companies for information carried on or
disseminated through their networks is unsettled. Several private lawsuits
seeking to impose such liability upon Internet access providers and on-line
services companies are currently pending. Although no such claims have been
asserted against the Company to date, there can be no assurance that such claims
will not be asserted in the future, or if asserted, will not be successful.
Furthermore, although the Company has attempted to limit its liability by the
terms of its standard service agreement, there can be no assurance that the
Company's liability would be so limited in the event of any litigation or other
claim against the Company. In addition, the Communications Decency Act of 1996,
which is Title V of the 1996 Telecommunications Act, imposes fines on any entity
that: (i) by means of a telecommunications device, knowingly sends indecent or
obscene material to a minor; (ii) by means of an interactive computer service,
sends or displays indecent material to a minor; or (iii) permits any
telecommunications facility under such entity's control to be used for the
purposes detailed above. The standard for determining whether an entity acted
knowingly has not yet been established. The following defenses to liability
under the statute exist: (i) any entity that solely provides access or
connection to or from a facility, system, or network not under that entity's
control; and (ii) the use of reasonable, effective and appropriate screening
efforts to restrict or prevent access by minors. These defenses are unavailable
to an entity that (i) is found to have conspired with another entity involved in
the creation or knowing distribution of indecent material through an interactive
computer service or telecommunications device or that knowingly advertises the
availability of such material or (ii) that solely provides access or connection
but also owns or controls a facility, system, or network engaged in the
prohibited activities. The 1996 Telecommunications Act creates the right to
challenge the law before a three-judge district court and a right of direct
appeal to the U.S. Supreme Court. Litigation was filed in federal court
challenging the constitutionality of the on-line provisions of the 1996
Telecommunications Act. On June 12, 1996, a three-judge panel of the U.S.
District Court for the Eastern District of Pennsylvania unanimously enjoined
enforcement of these provisions. The court has since clarified that its
injunction applies only to indecency issues and not to the display or
transmission of obscene material or child pornography. The U.S. Department of
Justice has announced that it will ask the U.S. Supreme Court to review the
lower court's decision.
As the law in this area develops, the potential imposition of liability
upon the Company for information carried on and disseminated through its network
could require the Company to implement measures to reduce its exposure to such
liability, which may require the expenditure of substantial resources or the
discontinuation of certain products or service offerings. Any costs that are
incurred as a result of contesting any such asserted claims or the consequent
imposition of liability could materially adversely affect the Company's
business, financial condition and results of operations.
CONTROL OF COMPANY. As of June 30, 1996, ITC Holding Company, Inc. ("ITC
Holding") owned approximately 36% and the Company's officers and directors owned
approximately 24% of the outstanding voting stock of the Company. Upon
completion of the Offering, based on beneficial ownership as of June 30, 1996,
ITC Holding and the Company's officers and directors would beneficially own
approximately 22% and 14% of the outstanding voting stock, respectively (21% and
13%, respectively, assuming that the Underwriters'
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over-allotment option is exercised in full). As a result, these stockholders,
acting together, will continue to be able to exercise significant control over
most matters requiring approval by the stockholders of the Company, including
the election of a majority of the directors and the approval of significant
corporate matters such as certain change-of-control transactions. ITC Holding
has pledged all of its stock in the Company to certain lenders in connection
with a credit facility. In the event of a default by ITC Holding under such
credit facility, the lenders or another third party may obtain ownership of all
of ITC Holding's stock in the Company. In addition, the Company's Amended and
Restated Certificate of Incorporation (the "Restated Certificate") authorizes
the Board of Directors of the Company (the "Board of Directors") to provide for
the issuance of shares of preferred stock of the Company, in one or more series,
which the Board of Directors could issue without further stockholder approval
and upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The Company has no current
plans to issue any such preferred stock. These factors could have the effect of
delaying, deferring, dissuading or preventing a change of control of the
Company. See "Principal Stockholders" and "Description of Capital Stock."
In the event that any PSINet Note (as defined under the heading "Recent
Transactions") issued in connection with the Acquisition is not repaid in full
by the first anniversary of the date of such PSINet Note, PSINet or the
registered owner of such PSINet Note will have the right to convert all, but not
less than all, of the amount due under such PSINet Note into fully paid and
non-assessable shares of Common Stock. If such conversions would result in the
aggregate issuance under all PSINet Notes of greater than 19.9% of the issued
and outstanding Common Stock as of June 28, 1996 (an "Excess Issuance"), and
approval by the Company's stockholders of such Excess Issuance has not been
obtained, a PSINet Note may be converted in part to the extent that such
conversion would not result in an Excess Issuance. The Company has agreed to
seek such stockholder approval if conversion of the PSINet Note would result in
an Excess Issuance as of the date that notices must be mailed for the Company's
next annual meeting of stockholders. If a PSINet Note is converted in part, as
described above, PSINet will be required to convert the remaining balance of
such PSINet Note upon receipt by MindSpring of stockholder approval. If all five
PSINet Notes were issued and outstanding and the Company were to default on all
amounts due thereunder, the number of shares of Common Stock into which such
PSINet Notes could be converted at the Conversion Price (as defined under the
heading "Recent Transactions") would represent approximately 50% of the voting
stock of the Company outstanding as of June 30, 1996. See "Recent
Transactions -- Acquisition of PSINet Assets."
POTENTIAL CONFLICTS OF INTEREST. ITC Holding, as a significant stockholder
of the Company, and Campbell B. Lanier, III, William H. Scott, III and O. Gene
Gabbard, who are directors, stockholders, and officers of ITC Holding and
directors of the Company, are in positions involving the possibility of
conflicts of interest with respect to certain transactions concerning the
Company. Certain decisions concerning the operations or financial structure of
the Company may present conflicts of interest between the Company and ITC
Holding and/or its affiliates. For example, if the Company is required to raise
additional capital from public or private sources in order to finance its
anticipated growth and contemplated capital expenditures, the interests of the
Company might conflict with those of ITC Holding and/or its affiliates with
respect to the particular type of financing sought. In addition, the Company may
have an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in the Company's judgment, could be beneficial to the
Company, even though such transactions might conflict with the interests of ITC
Holding and/or its affiliates. For example, Viper Computer Systems, Inc., an
indirect wholly owned subsidiary of ITC Holding, provides Web-hosting and
Internet access services primarily to companies and other organizations. If such
conflicts do occur, ITC Holding and its affiliates may exercise their influence
in their own best interests.
The Company currently engages and expects in the future to engage in
transactions with ITC Holding and/or its affiliates. The Company has purchased
leased line connections, local telephone service, and on-site technical
assistance for some of its POPs in western Georgia and Alabama from companies
controlled by ITC Holding. Any significant interruption in these services would
materially adversely affect the operation of the Company's network (as would the
interruption of service from any of the Company's telecommunications vendors).
The Company provides Internet access to various companies controlled by ITC
Holding, but the revenues the Company derives from these sources are not
substantial. The Company has adopted a policy requiring that any material
transaction between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no less
favorable to the Company than
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reasonably could have been obtained in arms' length transactions with
independent third parties. The Company believes that each current transaction in
which it is engaged with an affiliate complies with this policy. See
"Management -- Board of Directors -- Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Restated Certificate
and the Company's Amended and Restated Bylaws (the "Bylaws") and the Delaware
General Corporation Law (the "Delaware Corporation Law") could delay or impede
the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving the Company, or could discourage a third
party from attempting to acquire control of the Company, even if such events
would be beneficial to the interests of the stockholders. In particular, the
classification of the Board of Directors could have the effect of delaying a
change in control of the Company. In addition, the Restated Certificate
authorizes the Board of Directors to provide for the issuance of shares of
preferred stock of the Company, in one or more series, which the Board of
Directors could issue without further stockholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as the Board
of Directors may determine. The Company has no current plans to issue any such
preferred stock. The Company is also subject to the provisions of Section 203 of
the Delaware Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless certain
conditions are met. See "Principal Stockholders" and "Description of Capital
Stock -- Certain Charter and Statutory Provisions."
VOLATILITY OF STOCK PRICE. Since the Common Stock has been publicly
traded, the market price of the Common Stock has fluctuated over a wide range
and may continue to do so in the future. See "Price Range of Common Stock and
Dividend Policy." The market price of the Common Stock could be subject to
significant fluctuations in response to various factors and events, including,
among other things, the depth and liquidity of the trading market of the Common
Stock, quarterly variations in actual or anticipated operating results, growth
rates, changes in estimates by analysts, market conditions in the industry
(including demand for Internet access), announcements by competitors, regulatory
actions and general economic conditions. In addition, the stock market has from
time to time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of high technology
companies, and which may be unrelated to the operating performance of particular
companies. As a result of the foregoing, the Company's operating results and
prospects from time to time may be below the expectations of public market
analysts and investors. Any such event would likely result in a material adverse
effect on the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial amounts of
the Common Stock could adversely affect the market price of the Common Stock.
Several of the Company's principal stockholders hold a significant portion of
the Company's outstanding Common Stock, and a decision by one or more of these
stockholders to sell their shares could adversely affect the market price of the
Common Stock. The shares of Common Stock offered hereby (plus any shares issued
upon exercise of the Underwriters' over-allotment option) will be freely
tradable without restriction. Certain significant stockholders of the Company
and the Company's directors and executive officers have agreed to enter into
contractual agreements with the Underwriters (the "Lock-up Agreements")
generally providing that they will not offer, sell or otherwise dispose of,
directly or indirectly, any shares of Common Stock, any securities exercisable
for or convertible into Common Stock or any options to acquire Common Stock
owned by them for a period of 120 days from the completion of the Offering
without the prior written consent of J.C. Bradford & Co. As a result,
notwithstanding possible earlier eligibility for sale under the provisions of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
shares subject to the Lock-up Agreements generally will not be eligible for sale
until the Lock-up Agreements expire or their terms are waived by J.C. Bradford &
Co. Assuming J.C. Bradford & Co. does not release the stockholders from the
Lock-up Agreements, the following shares of Common Stock will be eligible for
sale in the public market at the following times: upon completion of the
Offering, approximately 5,628,000 shares (of which 103,296 shares are eligible
to be sold in accordance with Rule 144) will be immediately available for sale
in the public market; and 120 days after the completion of the Offering,
approximately 56,800 shares will be eligible for sale pursuant to Rule 701 under
the Securities Act and approximately 2,220,846 shares (all of which are held by
affiliates of the Company) will be eligible for sale pursuant to Rule 144. See
"Shares Eligible for Future Sale" and "Underwriting." In addition, the
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Company intends to register the shares of Common Stock reserved for issuance
under the Company's stock option plans as soon as practicable.
ABSENCE OF CASH DIVIDENDS. The Company has never declared or paid any cash
dividends on its capital stock and does not anticipate paying cash dividends in
the foreseeable future. See "Price Range of Common Stock and Dividend Policy."
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RECENT TRANSACTIONS
ACQUISITION OF PSINET ASSETS
On June 28, 1996, the Company and PSINet entered into: (i) the Purchase
Agreement, pursuant to which the Company agreed to acquire the tangible and
intangible assets and rights relating to the consumer dial-up Internet access
services provided by PSINet in the United States (the "PSINet Consumer
Services"); and (ii) the Services Agreement, pursuant to which the Company's
individual subscribers will be able to access the Internet through local dial-in
POPs connected to PSINet's nationwide network. The Company believes that the
PSINet Transaction effectively expands the geographic scope of the MindSpring
network throughout the United States without the need for significant up-front
capital expenditures.
PSINet has publicly stated that the PSINet Transaction is part of its new
strategy to serve the consumer Internet market by providing wholesale services
to consumer-oriented Internet access providers in the United States, such as
MindSpring, and to focus its internal marketing, sales and customer support
efforts on the corporate sector. The Company believes that it is especially
well-suited to the challenge of providing service to individual PSINet
subscribers who become MindSpring subscribers as a result of the Acquisition,
although there can be no assurance that the subscriber accounts acquired from
PSINet will remain MindSpring subscriber accounts. See "Risk Factors -- PSINet
Transaction" and "Risk Factors -- Dependence on PSINet."
The Purchase Agreement. Under the terms of the Purchase Agreement, the
Company agreed to purchase certain assets (collectively, the "Assets"),
including: (i) up to 100,000 of PSINet's subscriber accounts relating to the
PSINet Consumer Services, excluding subscriber accounts with five or more users
on a single billing account; (ii) the lease for the Harrisburg Facility, and all
related telephone switches and other equipment; (iii) the benefits of all
preexisting marketing programs relating to the PSINet Consumer Services; (iv)
all ownership rights to the software related to PSINet's Pipeline service in the
United States, including the components that allow Pipeline subscribers to
access the Internet (the "Pipeline Software"); (v) rights to the local content
published by that portion of the PSINet Consumer Services dedicated to servicing
subscribers using Pipeline Software; and (vi) a fully-paid non-exclusive license
to use and modify (but not sublicense) certain PSINet proprietary software. The
Company has also agreed to hire approximately 75 employees who are expected to
continue to operate the Harrisburg Facility. The maximum aggregate purchase
price for the Assets (the "Purchase Price") is $21,129,000 (excluding accrued
interest and increases in principal amounts under the PSINet Notes), payable in
five installments, the first of which occurred on June 28, 1996 (the "First
Closing").
The Purchase Price will be equal to the sum of: (i) the net book value of
the Harrisburg Facility, which has been determined to be approximately
$1,129,000; and (ii) the product of (a) $200 and (b) the number of subscribers
obtained from PSINet at the First Closing, the Second Closing (as defined below)
and after the Second Closing but before October 1, 1996 who remain MindSpring
subscribers and current in their payments for services on November 15, 1996 (the
"First Measurement Date"), plus those PSINet subscribers obtained by MindSpring
from October 1 through October 31, 1996 who remain MindSpring subscribers and
current in their payments for services on December 15, 1996 (the "Second
Measurement Date"), plus those PSINet subscribers obtained by MindSpring from
November 1, 1996 through November 30, 1996 who remain current in their payments
for services on January 15, 1997 (the "Third Measurement Date"), up to a maximum
of 100,000 subscribers.
At the First Closing, the Company paid PSINet $1,000,000 in cash (the "Cash
Payment") and issued a $2,000,000 promissory note to PSINet (the "First PSINet
Note") for 15,000 subscriber accounts, primarily located within the geographic
areas currently served by MindSpring POPs. At a second closing, which occurred
as of September 1, 1996 (the "Second Closing"), the Company received
substantially all of the remaining Assets and issued a second promissory note in
the amount of $9,929,000 (the "Second PSINet Note"). The Company agreed to pay
the balance of the Purchase Price (up to an aggregate of approximately
$8,200,000) in the form of cash and/or three additional promissory notes (the
"Third PSINet Note," the "Fourth PSINet Note" and the "Fifth PSINet Note"),
depending on the net proceeds from the Offering, on
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the First Measurement Date, the Second Measurement Date and the Third
Measurement Date, respectively (the First PSINet Note, Second PSINet Note, Third
PSINet Note, Fourth PSINet Note and Fifth PSINet Note are collectively referred
to as the "PSINet Notes," and each individually as a "PSINet Note"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In the event that any PSINet Note is not paid in full by the first
anniversary of the date of such PSINet Note, the registered owner of such PSINet
Note will have the right to convert all, but not less than all, of the amount
due under such PSINet Note into fully paid and non-assessable shares of Common
Stock, at a conversion price per share (the "Conversion Price") equal to $9.50.
If such conversions would result in an Excess Issuance of greater than 19.9% of
the issued and outstanding Common Stock as of June 28, 1996, and approval by the
Company's stockholders of such Excess Issuance has not been obtained, a PSINet
Note may be converted in part to the extent that such conversion would not
result in an Excess Issuance. The Company has agreed to seek such stockholder
approval if conversion of the PSINet Note would result in an Excess Issuance as
of the date that notices must be mailed for the Company's next annual meeting of
stockholders. If a PSINet Note is converted in part, as described above, PSINet
will be required to convert the remaining balance of such PSINet Note upon
receipt by MindSpring of stockholder approval. Both ITC Holding and Charles M.
Brewer have agreed to vote all shares of Common Stock and other capital stock of
the Company held by them in favor of such conversion. See "Risk
Factors -- Control of Company."
Network Services Agreement. Under the Services Agreement, PSINet has
agreed, for specified fees, to provide Internet connection services to the
Company through PSINet POPs in the United States or in the territories served
with such services by PSINet or any PSINet wholly owned subsidiary. There are
currently over 200 PSINet POPs, located in 46 states and the District of
Columbia. The Company has agreed to pay, during the term of the Services
Agreement, specified fees for each MindSpring subscriber assigned by the Company
in writing to a primary dial-in POP that is a PSINet POP. The Company also has
agreed to provide PSINet forecasts of the number of MindSpring subscribers per
price/usage plan served by each PSINet POP, and PSINet has agreed to index such
forecasts with respect to usage in order to obtain guaranteed uninterrupted
service and for the purposes of determining applicable fees.
Also pursuant to the Services Agreement, PSINet has agreed, for specified
fees: (i) to make ISDN 64 Kbps and 128 Kbps Internet connection services
available to MindSpring dial-up subscribers; (ii) to allow the Company to
co-locate equipment to provide to MindSpring subscribers being served through
PSINet's network e-mail, chat, news, World Wide Web, and/or domain name services
at a limited number of PSINet POPs; and (iii) to provide the Company network
status reports, access to PSINet's network monitoring systems and subscriber
log-in and accounting information, which will enable the Company to evaluate the
service provided to its subscribers through the PSINet POPs. PSINet has agreed
to provide to the Company, for its subscribers, Internet connection services
which meet reasonable commercial standards, including, without limitation, with
respect to access, reliability, latency, packet loss and throughput.
The term of the Services Agreement is five years, commencing on June 28,
1996, with automatic annual renewals thereafter unless either party notifies the
other in writing not less than 12 months prior to the end of such five-year
period or any 12-month extension thereof. Either party may terminate the
Services Agreement at any time during the term of the Services Agreement, upon
365 days' written notice. The Company may terminate the Services Agreement in
whole or in part without advance notice to PSINet if PSINet's network is
consistently inaccessible to a significant portion of MindSpring's subscribers,
under the circumstances specified in the Services Agreement. The Company may
also terminate the Services Agreement on a per-POP basis upon 365 days' written
notice or upon payment to PSINet of an amount equal to the aggregate amount of
the fees paid or payable by the Company for the last two months' service
provided through the PSINet POP or POPs being terminated. See "Risk
Factors -- Dependence on PSINet."
OTHER RECENT TRANSACTIONS
On August 6, 1996, the Company and N&O entered into a definitive agreement,
which was amended and restated on September 11, 1996, pursuant to which the
Company agreed to acquire certain individual dial-up
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subscriber accounts for subscribers located in North Carolina in connection with
N&O's Nando.net Internet access business. Consummation of the Nando.net
Transaction is subject to the fulfillment of customary closing conditions and is
currently expected to occur on or about September 30, 1996 (the "Closing Date").
As payment for the Nando.net Transaction, the Company is required to pay N&O:
(i) $100,000 on the Closing Date; and (ii) an additional amount based upon the
number of acquired Internet subscriber accounts which continue to be current
MindSpring subscriber accounts on certain measurement dates, currently expected
to be December 1, 1996 and January 1, 1997. The additional amounts may be paid
in the form of cash or up to two promissory notes (individually, a "Promissory
Note" and collectively, the "Promissory Notes") payable in two equal
installments on March 31, 1997 and September 30, 1997 (unless prepayment is
required due to the occurrence of one of several specified conditions). There
are no prepayment penalties under the Promissory Notes. One of the Promissory
Notes will be secured by a lien on, and a security interest in, certain Internet
customer contracts, equipment, inventory and accounts owned by the Company. The
Company currently anticipates that the aggregate amount payable for the
Nando.net Transaction (including fees for certain transition and advertising
services to be provided to the Company) will be approximately $700,000, assuming
that all of the acquired subscriber accounts continue to be current MindSpring
subscriber accounts on the applicable measurement date.
Since January 1, 1996, the Company has purchased from various Internet
access providers subscriber accounts for approximately 1,700 subscribers located
in Florida, Kentucky and Georgia. The aggregate cash consideration for such
purchases is expected to be up to approximately $200,000 (depending upon the
number of subscribers who remain MindSpring subscribers as of certain specified
measurement dates), of which the Company had paid approximately $61,000 as of
June 30, 1996. The balance of amounts payable in connection with these purchases
is due on various dates through November 1, 1996. See "Use of Proceeds." As of
June 30, 1996, approximately 1,100 of such subscribers were using the Company's
services. See "Risk Factors -- Risks Associated With Additional Acquisitions and
Purchases of Subscriber Accounts."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby are estimated to be approximately $29,241,000 (approximately $33,762,000
if the Underwriters' over-allotment option is exercised in full) after deducting
estimated underwriting discounts and commissions and other fees and expenses
payable by the Company.
The Company intends to use approximately $21,139,000 of the estimated net
proceeds from the Offering to pay: (i) the balance of the Purchase Price in
connection with the Acquisition, including repayment of all amounts outstanding
under the PSINet Notes (assuming the Company pays the maximum aggregate Purchase
Price pursuant to the Purchase Agreement); (ii) the balance of the amounts
payable (including fees for certain transition and advertising services to be
provided to the Company) in the Nando.net Transaction (currently anticipated to
be approximately $600,000, excluding $100,000 expected to be paid on the Closing
Date); and (iii) all amounts payable (currently anticipated to be approximately
$140,000) in connection with certain other purchases of subscriber accounts.
Pursuant to the terms of the Purchase Agreement, the Company will purchase up to
100,000 subscriber accounts. To the extent that fewer than 100,000 subscriber
accounts are actually acquired, the Purchase Price will be reduced by the
product of $200 and the difference between 100,000 and the number of subscriber
accounts actually acquired, and the amount of proceeds allocated to working
capital and general corporate purposes will be increased by a like amount. The
Company does not anticipate repaying any amounts due under any PSINet Note prior
to completion of the Offering. Pursuant to the First PSINet Note, principal
amounts thereunder will increase by 5.0% if not paid in full on or before
September 26, 1996. Principal and interest payable on the First PSINet Note are
expected to be approximately $2,100,000 and $60,000, respectively, and principal
and interest payable on the Second PSINet Note are expected to be $9,929,000 and
$110,000, respectively, upon completion of the Offering. The Company currently
expects to pay the balance of the Purchase Price in connection with the
Acquisition out of the net proceeds from the Offering during the fourth quarter
of 1996 and the first quarter of 1997. Each PSINet Note is due and payable in
full (including accrued interest) on the first anniversary of the date of such
note and will bear interest at the interest rate published as the "prime rate"
in the "Money Rates" section of The Wall Street Journal plus 3.0%.
After paying all such amounts payable in connection with the Acquisition,
the Nando.net Transaction and the purchase of certain other subscriber accounts,
the Company expects to use approximately $5,700,000 (excluding $1,129,000
payable for the Harrisburg Facility) of the remaining net proceeds for capital
expenditures through the end of 1996, most of which are expected to be
associated with the continued development of the Company's network, including
capacity expansion of existing POPs; and approximately $2,402,000 for working
capital and general corporate purposes, funding operating deficits and possible
strategic acquisitions of complementary assets and businesses such as, but not
limited to, subscriber accounts of other access providers, World Wide Web page
developers and access providers in other markets. The Company intends to
continue to evaluate potential strategic acquisitions. The Company estimates
that its cash and financing needs through mid-1997 will be met by the net
proceeds of the Offering. Beginning in mid-1997, the Company anticipates that
cash flow from operations will be sufficient to support anticipated capital
expenditures and working capital and general corporate purposes requirements.
However, any increases in the Company's anticipated growth rate, shortfalls in
anticipated net proceeds from the Offering or in anticipated revenues, increases
in anticipated expenses, or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
would require the Company to raise additional capital from public or private
equity or debt sources in order to finance operating losses, anticipated growth
and contemplated capital expenditures. There can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company or at all.
Except for the payment of the balance of the purchase price for the
Acquisition and the amounts payable for the Nando.net Transaction, the Company
is not required to allocate the net proceeds of the Offering in the manner
described above and, in light of future developments and circumstances, may
allocate different amounts of the proceeds to the uses described above. See
"Risk Factors -- Management's Discretion Regarding Use of Proceeds," "Risk
Factors -- Need for Additional Capital to Finance Growth and Capital
Requirements" and "Management's Discussion and Analysis of Financial Condition
and Results of Opera-
22
<PAGE> 24
tions -- Liquidity and Capital Resources." Pending such uses, the Company
intends to invest such proceeds in short-term, interest-bearing securities.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company completed its initial public offering on March 14, 1996, at a
price per share of Common Stock of $8.00. Since that date, the Common Stock has
traded on the Nasdaq National Market under the symbol "MSPG." The following
table sets forth for the periods indicated the high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
1996 HIGH LOW
--------------------------------------------------------------------- ------ -----
<S> <C> <C>
First Quarter (from March 14, 1996).................................. $ 8.88 $7.88
Second Quarter....................................................... 13.00 7.88
Third Quarter (through September 11, 1996)........................... 11.50 9.00
</TABLE>
On September 11, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $9.13 per share. At September 11, 1996, there
were 93 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future. It is the current policy of the Board of Directors to retain
earnings to finance the expansion of the Company's operations. Future
declaration and payment of dividends, if any, will be determined in light of the
then-current conditions, including the Company's earnings, operations, capital
requirements, financial condition, restrictions in financing agreements, and
other factors deemed relevant by the Board of Directors.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996: (i) on an actual basis; (ii) as adjusted to reflect the sale of shares
of Common Stock offered hereby (at an assumed price to the public of $9.13 per
share) and the increase in cash equal to the aggregate estimated net proceeds of
the Offering less repayment of the First PSINet Note; and (iii) on a pro forma
basis giving effect to the Acquisition. This table should be read in conjunction
with "Selected Financial and Operating Data," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's financial statements and notes thereto and other financial and
operating data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------------
AS ADJUSTED
ACTUAL FOR THE OFFERING PRO FORMA
------- ---------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash(1).................................................... $ 5,694 $ 32,775 $12,320
======= =========== ========
Indebtedness to PSINet(1).................................. 2,000 0 0
Stockholders' equity:
Class C preferred stock, $0.01 par value, 5,000,000
shares authorized; 100,000 shares issued and
outstanding; 100,000 shares issued and outstanding as
adjusted and pro forma(2)............................. 638 638 638
Common stock, $0.01 par value, 15,000,000 shares
authorized; 5,125,793 shares issued and outstanding;
8,625,793 issued and outstanding as adjusted and pro
forma(3).............................................. 51 86 86
Additional paid-in capital(3)............................ 15,977 45,183 45,183
Accumulated deficit...................................... (4,533) (4,533) (4,533)
------- ----------- --------
Total stockholders' equity............................ 12,133 41,374 41,374
------- ----------- --------
Total capitalization............................. $14,133 $ 41,374 $41,374
======= =========== ========
</TABLE>
- ---------------
(1) Assumes, for purposes of the pro forma presentation, that the Company has
acquired 100,000 subscriber accounts from PSINet and that the resulting
aggregate indebtedness to PSINet of $20,399,000 (including expected accrued
interest and increases in principal amount under the First PSINet Note) has
been repaid in full with a portion of the net proceeds from the Offering as
well as certain one-time license fees and starter kit costs of approximately
$700,000. See the unaudited pro forma financial statements elsewhere in this
Prospectus. Assumes, for purposes of the as adjusted presentation, that the
Company's indebtedness to PSINet under the First PSINet Note, estimated to
be approximately $2,160,000 (including accrued interest and increases in
principal amount) as of the completion of the Offering, has been repaid in
full with a portion of the net proceeds from the Offering. Under the terms
of the Purchase Agreement, the number of subscriber accounts that the
Company must purchase will not be deemed to exceed 100,000, and could be
less depending on various factors described elsewhere herein. For example,
if only 66,000 PSINet subscriber accounts are acquired, the pro forma cash
balance would be increased by $7,038,000.
(2) The 100,000 shares of Class C Preferred were issued to ITC Holding in
December 1995 as part of the consideration for the Second Loan (as defined
under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Year Ended
December 31, 1995 Compared to Inception Period") provided to the Company by
ITC Holding. See "Management -- Board of Directors -- Compensation Committee
Interlocks and Insider Participation." By their terms, these shares will
automatically convert on a one-for-one basis into shares of Common Stock on
September 19, 1996. When these shares convert, there will be no Class C
Preferred shares outstanding, 100,000 additional shares of Common Stock
outstanding and an additional $637,000 of additional paid-in capital.
(3) Does not include 439,213 shares of Common Stock reserved for issuance
pursuant to stock options granted as of June 30, 1996.
24
<PAGE> 26
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth selected financial and operating data for
the Company. The selected historical statements of operations data for the
period from February 24, 1994 (inception) to December 31, 1994 (the "Inception
Period") and the year ended December 31, 1995 and the selected historical
balance sheet data as of December 31, 1995 have been derived from financial
statements of the Company, which have been audited by Arthur Andersen LLP,
independent public accountants, whose report with respect thereto is included
elsewhere in this Prospectus. The selected historical statement of operations
data for the six months ended June 30, 1995 and June 30, 1996 and the selected
historical balance sheet data as of June 30, 1996 have been derived from the
unaudited financial statements of the Company. In the opinion of management, the
unaudited financial statements include all material adjustments (consisting of
normal recurring adjustments) necessary to present fairly the information set
forth herein. The results for the six months ended June 30, 1996 are not
necessarily indicative of the operating results for the entire year.
The pro forma statement of operations data give effect to the PSINet
Transaction and the Offering as if each had occurred at the beginning of the
periods presented, and the pro forma balance sheet data give effect to the
Acquisition and the Offering as if each had occurred at June 30, 1996. The pro
forma financial information does not purport to represent what the Company's
results of operations would have been if the PSINet Transaction and the Offering
had in fact occurred on such dates, nor does it purport to indicate the future
financial position or results of future operations of the Company. The pro forma
adjustments are based on currently available information and certain assumptions
that management believes to be reasonable. The selected historical and pro forma
financial and operating data set forth below should be read in conjunction with
"Summary Financial and Operating Data," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Company's financial statements and notes thereto and other financial and
operating data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
---------------------- -----------------------------------
INCEPTION PRO FORMA PRO FORMA
PERIOD 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.............................. $ 103 $ 2,227 $ 9,013 $ 511 $ 4,307 $ 12,262
Costs and expenses:
Selling, general and
administrative.................. 121 2,230 9,001 504 4,342 12,362
Cost of revenues.................. 52 966 4,359 223 1,912 5,890
Depreciation...................... 5 265 797 48 596 929
Amortization...................... 0 0 6,990 0 0 3,495
--------- --------- --------- --------- --------- ---------
Total costs and expenses..... 178 3,461 21,147 775 6,850 22,676
--------- --------- --------- --------- --------- ---------
Operating loss........................ (75) (1,234) (12,134) (264) (2,543) (10,414)
Interest income (expense), net........ 0 (725) (725) 2 44 44
--------- --------- --------- --------- --------- ---------
Net loss.............................. $ (75) $ (1,959) $(12,859) $ (262) $ (2,499) $(10,370)
========= ========= ========= ========= ========= =========
PER SHARE DATA:
Net loss per share(1)................. $ (0.62) $ (1.93) $ (0.09) $ (0.58) $ (1.33)
Weighted average common shares
outstanding(1)...................... 3,175,376 6,675,376 2,857,119 4,309,859 7,809,859
Pro forma supplementary net loss(2)... $ (0.55)
OTHER OPERATING DATA:
Approximate number of subscribers at
end of period(3).................... 1,000 12,410 112,410 4,370 34,460 134,460
Approximate number of POPs at end of
period(3)........................... 1 17 207 2 40 230
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------------
DECEMBER 31, AS ADJUSTED
1995 ACTUAL FOR THE OFFERING(4) PRO FORMA(5)
------------ ------- -------------------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ (3,099) $ 2,154 $ 31,235 $ 10,781
Property and equipment, net..................... 3,539 6,874 6,874 9,518
Total assets.................................... 4,845 17,215 44,456 44,456
Total liabilities............................... 4,363 5,082 3,082 3,082
Accumulated deficit............................. (2,034) (4,533) (4,533) (4,533)
Total stockholders' equity...................... 482 12,133 41,374 41,374
</TABLE>
- ---------------
(1) Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive Common Stock equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). For 1996, the Class C Preferred
and stock options have been excluded from the calculations as their effect
is antidilutive. For 1995, Common Stock and Common Stock equivalent shares
issued at prices below the initial public offering price ($8.00 per share)
during the twelve-month period prior to the Company's initial public
offering have been included in the calculation as if they were outstanding
for all periods prior to the initial public offering, regardless of whether
they are dilutive. Accordingly, all stock options granted and the Class C
Preferred are included in the earnings per share calculations for all 1995
periods presented, even though the effect on net loss is antidilutive. For
1995, the Company's Class A Preferred Stock and the Class B Preferred Stock
(which converted to shares of Common Stock on a one-for-one basis at the
time of the Company's initial public offering) have been included for the
respective weighted average periods for which such shares were outstanding,
even though their effect is antidilutive. For purposes of the pro forma
presentations, includes 3,500,000 shares of Common Stock offered hereby.
(2) Assumes that the indebtedness under the First PSINet Note as of June 30,
1996 has been repaid with the net proceeds from the sale of 239,390 shares
of the 3,500,000 shares of Common Stock expected to be sold in the Offering.
Does not include the remaining 3,260,610 shares expected to be sold in the
Offering, because the proceeds from such sale are expected to be used for
other purposes. See "Use of Proceeds."
(3) The pro forma presentations assume the acquisition by the Company of 100,000
subscriber accounts and access to 190 PSINet POPs that are not located in
areas served by a MindSpring POP. Under the terms of the Purchase Agreement,
the number of subscriber accounts the Company will acquire could be less
than 100,000 depending on various factors described elsewhere herein. For
example, if only 66,000 PSINet subscriber accounts are acquired, June 30,
1996 pro forma subscribers would be 100,460. The historical number of POPs
and subscribers at end of period for the six months ended June 30, 1996
excludes the effects of the PSINet Transaction.
(4) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $9.13 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of the First PSINet Note (including accrued
interest and increases in principal amount through October 1996), estimated
to be $2,160,000 upon completion of the Offering. See "Use of Proceeds" for
a description of the Company's specific plans for application of the net
proceeds from the Offering.
(5) Adjusted to reflect the sale of 3,500,000 shares of Common Stock offered
hereby at an assumed price to the public of $9.13 per share. Assumes an
increase to working capital equal to the aggregate estimated net proceeds of
the Offering less repayment of indebtedness to PSINet, which is assumed to
be $20,399,000 (including accrued interest and increases in principal
amounts through October 1996), based on an assumed acquisition of 100,000
subscriber accounts from PSINet. Assumes that an additional $700,000 of net
proceeds from the Offering will be used to pay certain one-time license fees
and starter kit costs associated with the transfer of PSINet subscriber
accounts to MindSpring. If only 66,000 PSINet subscriber accounts are
acquired, indebtedness to PSINet would be $13,599,000 (including accrued
interest and increases in principal amounts through October 1996).
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On June 28, 1996, the Company agreed to acquire up to 100,000 subscriber
accounts, the Harrisburg Facility and certain other assets related to the PSINet
Consumer Services and agreed to hire approximately 75 employees who are expected
to continue to operate the Harrisburg Facility. The maximum aggregate purchase
price for the Acquisition is $21,129,000 (excluding accrued interest and
increases in principal amounts under the PSINet Notes). In connection with the
Acquisition, the Company and PSINet also entered into the Services Agreement,
pursuant to which PSINet has agreed generally to provide Internet connection
services to the Company and its subscribers through PSINet's nationwide network
of over 200 POPs. Pursuant to the Services Agreement, the Company has agreed to
pay specified monthly fees for each subscriber that the Company has assigned to
a primary dial-in POP that is a PSINet POP. See "Recent Transactions --
Acquisition of PSINet Assets." Management believes that, primarily as a
consequence of the PSINet Transaction, the Company's future financial results
will not be comparable to its historical financial results.
The Company derives revenues primarily from monthly subscriptions and
start-up fees from individuals for dial-up access to the Internet. Monthly
subscription fees vary by billing plan. In May 1996, in response to a changing
competitive environment, the Company introduced five different pricing plans for
dial-up access (one of which was discontinued in September 1996 due to low
subscriber interest), compared to the two prior plan offerings. With the new
pricing plans, new and existing subscribers have a choice of two "flat rate"
plans (The Works and Unlimited Access) and two "usage-sensitive" plans (Standard
and Light). These plan changes generally represent a reduction from the previous
rates. See "Business -- MindSpring Service Plans." The Company anticipates that
additional price changes may be necessary in the future due to the dynamic
nature of the Internet access industry. Management believes that the reduction
in revenues per subscriber due to the recently effected price changes will be
offset in the near term by continuing increases in subscriber growth. However,
there can be no assurance that growth in the Company's revenues or subscriber
base will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow. See "Risk Factors -- Limited Operating
History; Operating Losses" and "Risk Factors -- Competition."
In addition, the Company earns revenues by providing Web-hosting services,
full-time dedicated access connections to the Internet and domain registration
primarily to businesses and some individual subscribers. The Company's
Web-hosting services allow a business or individual to post information on the
World Wide Web so that the information is available to anyone who has access to
the Internet. The Company provides the subscriber the ability to personalize an
e-mail address through its domain registration services. These services have
been classified as business services in the following table.
27
<PAGE> 29
The table below shows historical revenues, cost of revenues and expenses by
category and the percentage of total revenues attributable to each category.
Dollar amounts are shown in thousands.
<TABLE>
<CAPTION>
THIRD
QUARTER
ENDED FOURTH QUARTER FIRST SECOND
SEPTEMBER ENDED QUARTER ENDED QUARTER ENDED
30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Dial-up access to Internet......... $ 403 68% $ 680 60% $ 1,165 65% $ 1,506 60%
Start-up fees...................... 137 34 229 20 367 20 479 19
Business services.................. 62 11 166 15 274 15 397 16
Other revenues, net(1)............. (12) (2) 51 5 6 0 113 5
----- --- ------- ---- ------- --- ------- ---
Total revenues................ 590 100 1,126 100 1,812 100 2,495 100
Cost of revenues:
Cost of revenues -- recurring...... 178 31 288 25 542 30 755 30
Cost of subscriber start-up fees... 91 15 186 17 264 14 352 14
----- --- ------- ---- ------- --- ------- ---
Total cost of revenues........ 269 46 474 42 806 44 1,107 44
----- --- ------- ---- ------- --- ------- ---
Costs and expenses:
Selling, general and
administrative................... 644 109 1,082 96 1,738 96 2,603 104
Depreciation....................... 65 11 152 13 234 13 362 15
----- --- ------- ---- ------- --- ------- ---
Total costs and expenses...... 978 166 1,708 151 2,778 153 4,072 163
----- --- ------- ---- ------- --- ------- ---
Operating loss......................... (388) (66) (582) (51) (966) (53) (1,577) (63)
----- --- ------- ---- ------- --- ------- ---
Interest expense....................... (1) -- (730) (65) (92) (5) -- --
Interest income........................ -- -- 4 -- 19 1 117 5
----- --- ------- ---- ------- --- ------- ---
Net loss............................... $(389) (66)% $(1,308) (116)% $(1,039) (57)% $(1,460) (59)%
===== ==== ======= ==== ======= === ======= ===
Approximate subscribers at end of
period............................... 7,430 12,410 21,540 34,460
Approximate POPs at end of period...... 7 17 29 40
</TABLE>
- ---------------
(1) "Other revenues, net" include billing adjustments and miscellaneous
(primarily non-recurring) additional items.
The Company's costs include (i) cost of revenues that are primarily related
to the number of subscribers, (ii) selling, general and administrative expenses
that are associated more generally with operations, and (iii) depreciation and
amortization, which are related to the size of the Company's network. Cost of
revenues consists primarily of the startup expenses for each subscriber, certain
monthly licensing fees, and the costs of telecommunications facilities necessary
to provide service to subscribers. Start-up expenses for each subscriber include
one-time license fees paid to third parties for the right to bundle other
capabilities into the Company's software, cost of diskettes and other product
media, manuals, and packaging and delivery costs associated with the materials
provided to new subscribers. The Company does not defer any such subscriber
start-up expenses. Cost of revenues also includes monthly license fees per
subscriber for the right to receive and make available certain news services.
Telecommunications costs include the costs of providing local telephone lines
into each POP and costs associated with leased lines connecting each POP to the
Company's Atlanta hub and connecting the hub to the Internet backbone.
As the above table indicates, subscriber start-up fees have decreased
generally as a percentage of revenues as the cumulative subscriber base has
increased. Because operating margins on start-up fees are lower than margins
earned for providing monthly access services, a continuing trend of decreasing
start-up fee revenues would, by itself, tend to increase the overall margins for
the Company. However, historically, the impact of this trend has been offset by
increased costs and expenses associated with opening new POPs. See "-- Results
of Operations -- Year Ended December 31, 1995 Compared to Inception Period." As
a result of the PSINet Transaction, the Company generally anticipates opening
fewer MindSpring POPs.
Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Selling, general and administrative
costs will increase over time as the scope of the Company's operations
increases, primarily as a result of the PSINet Transaction and the related
nationwide expansion of the Company's marketing and
28
<PAGE> 30
advertising activities. However, the Company expects such costs will be more
than offset by anticipated increases in revenues attributable to the subscriber
accounts acquired as part of the Acquisition. In addition, significant levels of
marketing activity may be necessary in order for the Company to build or
increase its subscriber base in a given market to a size large enough to
generate sufficient revenues to offset such marketing expenses. The Company does
not defer any start-up expenses or subscriber acquisition costs related to
entering new markets. The costs associated with the development and registration
of the Company's trademarks have been expensed as incurred. Such costs have not
been material.
Historically, the Company has achieved growth of subscriber revenues by
providing service through new MindSpring POPs. For each new POP opened to date,
the Company has initially invested approximately $35,000 in capital expenditures
for telecommunications equipment, primarily modems and terminal servers. The
Company also incurs approximately $5,000 of installation costs for local
telephone lines and for the leased telephone lines used in transporting data
from the POP to the Company's Atlanta hub. The Company estimates that
approximately 250 subscribers can be served by the capacity provided by its
initial investment (which typically includes 24 telephone lines) in each POP,
based on current rates of usage.
Prior to the PSINet Transaction, as the demand for the Company's services
in a particular POP has grown, the Company has had to invest in additional
telecommunications equipment and provide additional local telephone lines for
that POP. The Services Agreement provides the Company the option to evaluate on
a POP-by-POP basis whether to continue to develop MindSpring POPs or to conserve
capital through utilization of PSINet POPs for a specified fee. As the Company
expands into new markets, both cost of revenues and selling, general and
administrative expenses will increase. To the extent the Company opens
MindSpring POPs, such expenses may also increase as a percentage of revenues in
the short term after a new MindSpring POP is opened because many of the fixed
costs of providing service in a new market are incurred before significant
revenues can be expected from that market. However, to the extent that the
Company expands into new markets by using PSINet POPs instead of opening
MindSpring POPs, the Company's incremental monthly recurring costs will consist
primarily of the fees to be paid per subscriber served, as provided in the
Services Agreement.
The Company estimates that as of June 30, 1996, the 40 MindSpring POPs,
which were serving approximately 34,500 subscribers as of such date, had
sufficient capacity to serve in excess of approximately 38,900 subscribers. As
of June 30, 1996, the Company and PSINet had an aggregate of 20 POPs located in
the same service areas. Pursuant to the Services Agreement, the Company has the
flexibility to offer Internet access in such overlapping POP locations through a
MindSpring POP, through a PSINet POP or a combination of both. In certain of
these locations, it may be more cost-effective for the Company to close the
MindSpring POP and offer Internet access exclusively through the PSINet POP. The
Company currently estimates that it will be offering Internet access in over 230
POPs by the end of 1996. Although the Company does not currently plan to open a
significant number of new MindSpring POPs in 1996, the Company intends to
maintain the flexibility to close, expand or open new MindSpring POPs or make
other capital investments as and where subscriber demand or strategic
considerations may warrant. Management will evaluate the closing or expansion of
existing MindSpring POPs or opening of new MindSpring POPs on a POP-by-POP
basis.
The Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure and internal staffing,
develop its systems and expand into new markets. The Company expects to continue
to focus on increasing its subscriber base and geographic coverage. Accordingly,
the Company expects that its cost of revenues, selling expenses, general and
administrative expenses, and capital expenditures will continue to increase, all
of which may have a negative impact on short-term operating results.
29
<PAGE> 31
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues. Revenues for the six months ended June 30, 1996 totaled
approximately $4,307,000, as compared to approximately $511,000 for the same
period in the prior year. Subscriber start-up fees accounted for 20% of revenues
for the six months ended June 30, 1996, as compared to 29% for the six months
ended June 30, 1995. The 743% increase in period revenues resulted primarily
from an increase of 689% in subscribers to approximately 34,460 as of June 30,
1996, compared to approximately 4,370 subscribers as of June 30, 1995. In
addition, the business services revenues in the period ended June 30, 1996
increased to approximately $671,000 or 16% of revenues, as compared to
approximately $32,000 or 6% of revenues, for the same period in the prior year,
primarily due to substantial increases in Web-hosting accounts.
Cost of revenues. For the six months ended June 30, 1996, cost of revenues
increased to approximately $1,913,000 or 44% of revenues, compared to
approximately $223,000 or 44% of revenues for the six months ended June 30,
1995. Cost of revenues increased significantly for the six months ended June 30,
1996 as a result of the capital expenditures and other costs associated with the
opening of new MindSpring POPs and the significant increase in subscribers.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $4,341,000 or 101% of
revenues for the six months ended June 30, 1996, compared to approximately
$504,000 or 99% of revenues for the six months ended June 30, 1995. The increase
as a percentage of revenues resulted primarily from increased advertising
expenses incurred to attract new subscribers, whereas in the past the Company
relied primarily on personal referrals. The overall increase in expenses was
primarily attributable to the expansion of the Company's operations in terms of
POPs, subscribers and employees between the periods. The Company was operating
40 POPs and had 177 employees as of June 30, 1996, compared to two POPs and 29
employees as of June 30, 1995.
Depreciation and amortization. Depreciation and amortization expenses
increased substantially to approximately $596,000 or 14% of revenues for the six
months ended June 30, 1996, compared to approximately $48,000 or 9% of revenues
for the same period in the prior year, reflecting a dramatic expansion in the
Company's asset base.
Interest expense. At the beginning of the first quarter of 1996, the
Company had $2,500,000 outstanding under the Second Loan with ITC Holding. In
March 1996, the outstanding amount of $3,500,000 was paid in full, plus accrued
interest of $97,000, with a portion of the proceeds from the Company's initial
public offering. The interest expense of approximately $92,000 recorded during
the first six months of 1996 represents interest on the Second Loan, which
accrued at the rate of 14% per annum. No such credit facilities existed during
the first six months of 1995.
Year Ended December 31, 1995 Compared to Inception Period
Revenues. Revenues for the year ended December 31, 1995 were approximately
$2,227,000, as compared to approximately $103,000 for the Inception Period. The
Inception Period reflects sales activity from June through December 31, 1994.
During the months of April and May 1994, the Company offered services to a
limited number of subscribers on a "test" basis. The quarter ended September 30,
1994 was the first full quarter in which the Company made its services available
to the general public. The increase in revenues in 1995 as compared to the
Inception Period was primarily attributable to the Company being operational for
the full 1995 period and the substantial increase in the number of subscribers
in 1995.
Revenues for both periods were comprised of start-up fees and monthly
service fees from subscribers. Subscriber start-up fees accounted for 26% of
total revenues in 1995, as compared to 33% in 1994. At December 31, 1994 the
Company had approximately 990 dial-up subscribers, fewer than ten dedicated
access subscribers and fewer than ten Web-hosting service subscribers. At
December 31, 1995, the Company had approximately 11,830 dial-up customers,
approximately 80 dedicated access subscribers and approximately 490 Web-hosting
service subscribers.
30
<PAGE> 32
Cost of revenues. For the year ended 1995, cost of revenues increased to
approximately $966,000 or 43% of revenues, compared to approximately $52,000 or
51% of revenues for the Inception Period. Cost of revenues increased
significantly in the year ended December 31, 1995 as a result of the significant
increase in subscribers. Cost of revenues decreased as a percentage of revenues
as a result of higher utilization of telecommunications facilities. In addition,
cost of subscriber start-up fees, which have lower associated margins than
recurring costs, were approximately 15% of revenues for the year ended December
31, 1995, as compared to 14% of revenues for the Inception Period.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to approximately $2,230,000 or 100% of
revenues for the year ended December 31, 1995, compared to approximately
$121,000 or 117% of revenues during the Inception Period. The decrease as a
percentage of revenues resulted from the substantial increase in subscriber
revenues. The increase in expenses was primarily attributable to the expansion
of the Company's operations in terms of POPs and subscribers between the
periods. The Company was operating in 17 POPs as of December 31, 1995 compared
to one POP during the Inception Period.
Depreciation and amortization. During the Inception Period, the Company
had a very small asset base, which expanded dramatically during 1995.
Consequently, depreciation and amortization expenses increased substantially, to
approximately $265,000 or 12% of revenues for the year ended December 31, 1995,
compared to approximately $5,000 or 5% of revenues for the Inception Period.
Interest expense. In August 1995, ITC Holding agreed to lend to the
Company up to $2,000,000 in aggregate principal amount for working capital,
general corporate purposes, and to fund capital expenditures (the "First Loan").
At December 15, 1995, the Company had not repaid any amounts outstanding under
the First Loan. In consideration of ITC Holding's agreement not to exercise its
rights and remedies upon such default under the First Loan, the Company agreed
to pay ITC Holding a $50,000 processing fee, which the Company recorded as a
charge to interest expense in the fourth quarter of 1995. In addition, the
Company issued to ITC Holding an immediately exercisable warrant to purchase
100,000 shares of Class C Preferred at an exercise price of $0.01 per share. The
Company recorded the $637,000 difference between the fair market value of the
warrant and the aggregate exercise price as interest expense in the fourth
quarter. In December 1995, ITC Holding agreed to lend to the Company up to
$4,000,000 for working capital and to fund capital expenditures (the "Second
Loan"). The remaining $44,000 of interest expense recorded during the fourth
quarter of 1995 represents interest on the two loans. No such credit facilities
existed during the Inception Period. The First Loan accrued interest at 11% per
annum, and the Second Loan accrued interest at 14% per annum. See
"Management -- Board of Directors -- Compensation Committee Interlocks and
Insider Participation."
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations for any period
presented. The Company has primarily financed its operations to date through
public and private sales of equity securities and loans from its principal
stockholders. During the first six months of 1996, the Company completed an
initial public offering of Common Stock, issuing 2,025,000 shares at a price of
$8.00 per share. Total cash from financing activities for the six months ended
June 30, 1996 (consisting of the gross proceeds of $14,150,000 from the initial
public offering, net of underwriting discounts and expenses) were approximately
$13,650,000, a $12,600,000 increase compared to the same period in 1995.
Cash used in investing activities was approximately $7,000,000 for the six
months ended June 30, 1996, of which approximately $5,706,000 was used during
the second quarter ended June 30, 1996, and approximately $786,000 during the
six months ended June 30, 1995, of which approximately $472,000 was used during
the second quarter ended June 30, 1995. Cash used in investing activities
consisted primarily of purchases of telecommunications equipment necessary for
the provision of service to subscribers. In addition, on June 28, 1996, in
connection with the First Closing of the Acquisition, the Company paid PSINet
$1,000,000 in cash and issued a one-year promissory note in the amount of
$2,000,000. See "Recent Transactions -- Acquisition of PSINet Assets."
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At the Second Closing of the Acquisition, which occurred as of September 1,
1996, the Company received substantially all of the remaining Assets in exchange
for issuing the Second PSINet Note in the amount of $9,929,000. The Company has
agreed to pay the balance of the Purchase Price (up to an aggregate of
$8,200,000) as follows: (i) within 10 days after the First Measurement Date, the
Company will deliver the Third PSINet Note, in an original principal amount
equal to the Purchase Price (as determined as of the First Measurement Date)
minus $12,929,000 (the sum of the Cash Payment and the original principal
amounts of the First PSINet Note and the Second PSINet Note), (ii) within 10
days after the Second Measurement Date, the Company will deliver the Fourth
PSINet Note, in an original principal amount equal to the Purchase Price (as
determined as of the Second Measurement Date) minus the sum of $12,929,000 and
the original principal amount of the Third PSINet Note and (iii) within 10 days
after the Third Measurement Date, the Company will deliver the Fifth PSINet
Note, in an original principal amount equal to the Purchase Price (as determined
as of the Third Measurement Date) minus the sum of $12,929,000 and the original
principal amounts of the Third PSINet Note and the Fourth PSINet Note. The
Purchase Agreement requires the Company to apply certain specified percentages
of the net proceeds from the Offering, depending on the amount of such net
proceeds, first, to pay down the outstanding PSINet Notes in the order of their
issuance, and second, to pay cash in lieu of issuing additional PSINet Notes
following completion of the Offering. The Company expects the net proceeds from
the Offering to be sufficient for payment of all outstanding amounts payable to
PSINet under the Purchase Agreement, and therefore expects to pay all amounts
due under the First PSINet Note and the Second PSINet Note with a portion of the
net proceeds of the Offering promptly following the Offering, and to pay cash in
lieu of issuing the Third PSINet Note, the Fourth PSINet Note and the Fifth
PSINet Note. There are no prepayment penalties under the PSINet Notes.
The First PSINet Note is, and each of the other PSINet Notes will be, due
and payable in full (including accrued interest) on the first anniversary of the
date of such PSINet Note and will bear interest at the interest rate published
as the "prime rate" in the "Money Rates" section of The Wall Street Journal plus
3.0%. In addition, in the event that any PSINet Note is not paid in full within
90 days after the date of such PSINet Note, the principal amount thereof will
increase by 5.0% of the principal then outstanding, compounding at the rate of
5.0% each 90 days thereafter until such PSINet Note is redeemed in full.
Therefore, pursuant to the Purchase Agreement, the maximum consideration
(excluding interest payable on the PSINet Notes) could increase to approximately
$24,500,000 if all of the PSINet Notes are issued and outstanding, and no
amounts payable thereunder are paid until due.
The principal amount of the First PSINet Note will increase by 5.0% if not
paid in full on or before September 26, 1996. The Company does not anticipate
making any payments on any PSINet Note prior to the completion of the Offering.
Principal and interest payable on the First PSINet Note is expected to be
approximately $2,100,000 and $60,000, respectively, and principal and interest
payable on the Second PSINet Note is expected to be approximately $9,929,000 and
$110,000, respectively, upon completion of the Offering (assuming the Offering
is completed in early October 1996).
In the event that any PSINet Note is not paid in full by the first
anniversary of the date of such PSINet Note, the registered owner of such PSINet
Note will have the right to convert all, but not less than all, of the amount
due under such PSINet Note into fully paid and non-assessable shares of Common
Stock. If such conversions would result in an Excess Issuance of greater than
19.9% of the issued and outstanding Common Stock as of June 28, 1996, and
approval by the Company's stockholders of such Excess Issuance has not been
obtained, a PSINet Note may be converted in part to the extent that such
conversion would not result in an Excess Issuance. The Company has agreed to
seek such stockholder approval if conversion of the PSINet Note would result in
an Excess Issuance as of the date that notices must be mailed for the Company's
next annual meeting of stockholders. If a PSINet Note is converted in part, as
described above, PSINet will be required to convert the remaining balance of
such PSINet Note upon receipt by MindSpring of stockholder approval. See "Risk
Factors -- Control of Company" and "Recent Transactions."
In connection with the Nando.net Transaction, the Company is required to
pay $100,000 in cash on the Closing Date, which is expected to occur on or about
September 30, 1996. The balance of the amounts payable in the Nando.net
Transaction may be paid in the form of cash or up to two Promissory Notes, one
of which will be secured. The Promissory Notes will be due and payable in two
equal installments on March 31,
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1997 and September 30, 1997. The aggregate amount payable in the Nando.net
Transaction (including fees for certain transition and advertising services to
be provided to the Company) is currently expected to be approximately $700,000.
The Company currently anticipates paying the outstanding balance of the amounts
payable in the Nando.net Transaction (anticipated to be approximately $600,000,
excluding $100,000 expected to be paid on the Closing Date) in full with a
portion of the net proceeds from the Offering. The Company is required to pay
down certain specified percentages of all sums outstanding under each Promissory
Note promptly following completion of the Offering, depending on the amount of
the net proceeds from the Offering. See "Recent Transactions."
On July 15, 1996, the Company and Bell South Telecommunications, Inc.
("BellSouth") entered into a two-year agreement (the "BellSouth Agreement"),
pursuant to which the Company agreed to purchase telecommunications services
from BellSouth for a minimum of $2,000,000 in the first year, and, in the second
year, a minimum of 90% of the amount billed to the Company during the first
year. The Company may renew the BellSouth Agreement pursuant to two one-year
renewal options. In the event the Company terminates the BellSouth Agreement
prior to its expiration, the Company is required to pay BellSouth a termination
fee equal to 50% of the amounts billed to the Company during the 12 months
preceding such termination. The Company currently has no other material
commitments except for obligations related to the First PSINet Note, the Second
PSINet Note and various operating leases entered into in the ordinary course of
the Company's business, including the Company's office space lease (which
expires on March 31, 1999).
Current anticipated capital expenditures through the end of 1996 and for
1997 required due to the nationwide expansion of MindSpring's subscriber base
primarily as a result of the Acquisition, and in connection with the expansion
of existing MindSpring POPs or, if applicable, opening of selected new
MindSpring POPs, are estimated to be $5,700,000 and $10,000,000, respectively.
At June 30, 1996, the Company's principal source of liquidity was
approximately $5,694,000 in cash. The Company anticipates that cash requirements
for the rest of 1996 will include approximately $5,700,000 for capital
expenditures (excluding approximately $1,129,000 in capital expenditures for the
Harrisburg Facility to be represented by a portion of the Second PSINet Note)
and approximately $1,600,000 to fund cash used in operations. As discussed
above, the Company estimates that cash requirements through the first quarter of
1997 will also include approximately $20,399,000 for payment of the balance of
the Purchase Price for the Acquisition (including accrued interest and increases
in principal amounts under the PSINet Notes, assuming that the Company pays the
maximum Purchase Price payable under the Purchase Agreement with the proceeds of
the Offering).
The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds of the Offering. However, any increases in the
Company's growth rate, shortfalls in anticipated net proceeds from the Offering
or in anticipated revenues, increases in anticipated expenses, or significant
acquisition opportunities could have a material adverse effect on the Company's
liquidity and capital resources and would require the Company to raise
additional capital from public or private equity or debt sources in order to
finance operating losses, anticipated growth and contemplated capital
expenditures. If such sources of financing are insufficient or unavailable, the
Company will be required to modify its growth and operating plans in accordance
with the extent of available funding and attempt to attain profitability in its
existing markets (including those accessible pursuant to the Services
Agreement). The Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, such as acquisitions of complementary
businesses or the development of new products, or otherwise respond to
unanticipated competitive pressures. There can be no assurance that the Company
will be able to raise any such capital on terms acceptable to the Company or at
all. See "Risk Factors -- Need for Additional Capital to Finance Growth and
Capital Requirements."
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BUSINESS
MindSpring is an Internet access provider that focuses on serving
individual subscribers, including individuals with little or no prior on-line
experience. MindSpring provides easy-to-use Internet access by offering
customized software, reliable network facilities and responsive customer
service. MindSpring believes that there is a growing and unsatisfied demand for
high quality Internet access for individuals. Trends contributing to this growth
in demand include the heightened consumer awareness of the Internet, the
increasing number of individuals who have computers with modems and the
expanding diversity of information, entertainment and commercial offerings
available on the Internet. Management believes that few, if any, of the
Company's major competitors have developed a comparable level of service quality
and customer support for individual subscribers and that by targeting individual
subscribers, rather than attempting to serve all segments of the Internet access
market, MindSpring can continue to increase its subscriber base rapidly while
maintaining superior quality service.
In June 1996, the Company announced its plans to become a nationwide
Internet access provider through agreements with PSINet to purchase up to
100,000 consumer dial-up subscriber accounts, a customer service facility and
certain other related assets, and to obtain access to PSINet's national network
of over 200 POPs. Prior to the PSINet Transaction, MindSpring was a regional
Internet access provider that offered its services through 40 POPs in the
southeastern United States and had grown to approximately 34,500 subscribers
from approximately 12,400 subscribers as of December 31, 1995. On a pro forma
basis as of June 30, 1996, MindSpring would have had access to approximately 230
POPs (excluding PSINet POPs located in areas served by MindSpring POPs) and
would have had approximately 134,500 subscribers, assuming the acquisition of
100,000 subscriber accounts from PSINet.
Management believes that the PSINet Transaction will enhance the Company's
ability to achieve its strategic objectives on a cost-effective and accelerated
basis and to realize economies of scale. Management believes that the PSINet
Transaction will establish MindSpring as a leading Internet access provider with
nationwide coverage, create opportunities for the Company to pursue national
marketing and strategic alliances and reduce the need for significant up-front
capital expenditures to establish Company-owned POPs. The Company intends,
however, to maintain the flexibility to expand, open or close its own POPs or
make other capital investments as and where subscriber demand or strategic
considerations warrant.
In early September 1996, the Company began sending to each PSINet
subscriber transitioning to the Company's network a copy of MindSpring's
customized software package. Those subscribers who receive new e-mail addresses
in the conversion will have any e-mail sent to their old address forwarded to
their MindSpring e-mail address for approximately twelve months from the date of
switch-over. Once they have been successfully converted to the MindSpring
system, these subscribers will generally continue to have access to all of the
applications that they could access as PSINet subscribers.
MindSpring POPs are connected to the Internet primarily through
MindSpring's network hub in Atlanta, Georgia. Leased data communication lines
from three different suppliers connect the network hub to the Internet backbone.
The Company's network hub is connected to PSINet's nationwide network of over
200 POPs at the PSINet POP located in Austel, Georgia. The Company may also
connect its network to PSINet's network at various other PSINet POP sites.
Management believes that as a result of the PSINet Transaction and the
Company's reputation for reliability and high quality, MindSpring will become
recognized as a leading national provider of high quality Internet access
services to individual subscribers. PSINet has agreed, among other things, to
provide to the Company: (i) Internet connection services which meet reasonable
commercial standards, including with respect to access and reliability; and (ii)
access to PSINet's network monitoring systems and subscriber log-in and
accounting information. In addition, by using PSINet POPs, MindSpring has
reduced the need for significant up-front capital expenditures to establish
MindSpring POPs to support the Company's growth, although the Company intends to
maintain the flexibility to expand, open or close MindSpring POPs or make other
capital investments as and where subscriber demand or strategic considerations
warrant.
The Company's largest stockholder is ITC Holding, which currently owns
approximately 36% of the Company's outstanding capital stock. See "Principal
Stockholders." ITC Holding is a diversified telecommunications company based in
West Point, Georgia, with substantial holdings in telecommunications companies
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operating throughout the southeastern United States. ITC Holding's affiliates
provide, among other things, local exchange telephone service, audio and video
teleconferencing, long distance telecommunications service, Web hosting and
Internet access services, wireless communications, and cable television, fiber
optic network and telemarketing services. MindSpring anticipates that ITC
Holding's experience and contacts in the telecommunications industry will
enhance ITC Holding's contributions to MindSpring's development. Campbell B.
Lanier, III, Chairman and Chief Executive Officer of ITC Holding, William H.
Scott, III, President and Chief Operating Officer of ITC Holding, and O. Gene
Gabbard, a director of ITC Holding, are members of the Board of Directors of
MindSpring. See "Risk Factors -- Control of Company," "Risk Factors -- Potential
Conflicts of Interest," and "Management."
The Company was incorporated in February 1994 and began offering services
in June 1994.
MINDSPRING STRATEGY
MindSpring's objective is to become a leading national provider of high
quality Internet access services to individual subscribers. The Company intends
to achieve this objective by:
Leveraging the opportunities afforded by the PSINet Transaction and
expanding its subscriber base. The Company intends to exploit the
opportunities presented by the PSINet Transaction to attract subscribers
nationwide and establish the Company as a national Internet access
provider. Management believes that the substantial increase in subscribers
and nationwide POP access resulting from the PSINet Transaction will enable
it to implement its strategy on a cost-effective and accelerated basis and
to realize economies of scale while providing the Company with
opportunities to further increase its subscriber base. Management believes
that providing exceptionally high quality service to its existing
subscribers, including subscribers who become MindSpring subscribers as a
result of acquisitions, is the most important factor in determining both
the retention of existing subscribers and the addition of new subscribers.
Historically, the Company has obtained many of its new subscribers as a
result of referrals from existing subscribers. During 1995 and the first
six months of 1996, approximately half of the Company's new subscribers
(not including the 15,000 subscribers obtained from PSINet in June 1996 or
the subscribers obtained through other purchases) indicated that they were
direct referrals from existing subscribers. The Company expects to obtain
additional subscribers through referrals from subscribers added as a result
of the PSINet Transaction and other acquisitions.
Maintaining superior service and customer support and providing
easy-to-use software and reliable Internet access. Providing superior
service and customer support is a fundamental component of the Company's
strategy. Consequently, the Company strives to maintain adequate numbers of
qualified customer support representatives to be able to provide responsive
customer support services. The Company's customer support representatives,
who are familiar with the Company's software and are experienced with
Internet issues, are generally available seven days a week to provide
technical support to subscribers. By year-end 1996, the Company expects to
have over 190 technical support employees (compared to approximately 74
full-time and four part-time employees as of June 30, 1996). In addition,
MindSpring has developed starter kits that are intended to simplify
Internet access for individual users. The Company believes that its starter
kits, which include front-end software and documentation for both Windows
and Macintosh users, and reliable network infrastructure significantly
enhance its ability to provide a positive experience to a wide variety of
potential users, including those who have little or no on-line experience.
Expanding marketing and distribution activities and pursuing strategic
alliances. The Company intends to expand and strengthen its marketing and
distribution efforts in order to establish a national presence and
nationwide name recognition. As a result of the Company's nationwide access
and reputation for reliability and high quality, the Company believes that
opportunities for nationwide strategic alliances with complementary
businesses and retail distribution and bundling arrangements will become
available to the Company. In addition, the Company plans to integrate into
its marketing plan certain PSINet marketing programs to which it will
receive the rights and benefits under the Purchase Agreement. The Company
also intends to continue to emphasize personal contacts with influential
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members of the communities it serves. These contacts include
representatives of the media, schools, universities, computer user groups,
and high technology business associations.
Focusing on individual subscribers. The Company believes that the
Internet access services market for individual subscribers is likely to
continue to grow rapidly. Trends contributing to the continued growth of
this market segment include: the increasing use of computers by individuals
in their homes for, among other things, e-mail, file transfer, remote
login, file sharing and information services; the dramatic increases in
cost-effective processing power and data storage capabilities in personal
computers; the widespread availability of multimedia, fax/modem and
networking capabilities to the home computing market; the growing awareness
of the Internet generally; and the increasing diversity of information,
entertainment and commercial offerings available on the Internet. The
Company further believes that there is a growing and unsatisfied demand for
high-quality Internet access for individuals, based on reports of start-up
problems, busy signals, poor network performance, insufficient customer
support and billing problems with other Internet access providers. The
Company believes that serving individual Internet access subscribers
requires a very different form of expertise than does serving dedicated
access subscribers. MindSpring believes that its strategy of focusing on
individual subscribers, rather than dividing its efforts between the two
types of subscribers, will make it easier to provide superior quality
service while expanding rapidly.
Engaging in selected acquisitions. Since early 1996, the Company has
accelerated its expansion efforts through selected acquisitions of
businesses and subscriber accounts, including the PSINet Transaction and
the Nando.net Transaction. As the Company continues to expand, it may in
the future acquire additional subscriber accounts and complementary
businesses. The Company further believes that its operational focus on
serving individual subscribers provides the Company with significant
acquisition opportunities given the Company's belief that a number of
Internet access providers will discontinue serving individual subscribers
in order to focus on some other segment of the market, such as dedicated
access for institutional customers. The Company expects to continue to
benefit from the significant experience of its largest stockholder, ITC
Holding, in achieving growth through acquisitions in the telecommunications
industry.
CUSTOMER SUPPORT
MindSpring believes that excellent customer support is critical to its
success in retaining existing subscribers and in attracting new subscribers.
MindSpring currently provides customer support through a call center located at
its headquarters, which is open for service from 9:00 a.m. until 9:00 p.m.
eastern time seven days a week (excluding holidays). The Company also provides
customer support through the Harrisburg Facility, which was acquired as part of
the Acquisition and is generally open for service 24 hours a day, seven days a
week. Subscribers can call these centers through a local Atlanta telephone
number or a toll-free "800" number. Subscribers can also e-mail their questions
directly to a customer support address at the Company. In addition, the Company
maintains MindSpring specific newsgroups on the Internet, where subscribers can
post requests for help, and other subscribers, as well as MindSpring support
personnel, can respond. By year-end 1996, the Company expects to have a staff of
over 190 technical support employees (compared to approximately 74 full-time and
four part-time employees as of June 30, 1996).
SALES AND MARKETING
MindSpring believes that the market for individual Internet access is
heavily influenced by person-to-person referrals. Accordingly, the Company's
marketing efforts have been geared, among other things, toward generating
positive referrals and stimulating subscriber growth and retention by providing
an exceptionally high quality service to its existing subscribers. MindSpring
also offers a $10 credit to existing subscribers each time a new subscriber
names the existing subscriber as the referral source. During 1995 and the first
six months of 1996, approximately half of the Company's new subscribers (not
including the 15,000 subscriber accounts obtained at the First Closing or the
subscriber accounts obtained through other purchases) indicated that they were
referred by an existing subscriber.
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In addition to encouraging referrals from existing subscribers, the Company
intends to establish a nationwide presence and nationwide name recognition
through moderate amounts of print publication, radio and direct mail advertising
and by pursuing the nationwide strategic alliances and retail opportunities
available to the Company as a result of MindSpring's nationwide access and
reputation for reliability and high quality. Such nationwide marketing
opportunities may include, among others: entering into large-scale bundling
arrangements with complementary products such as computers, software products,
multimedia books, and CD-ROM merchandise; entering into retail distribution
agreements for its software package with national distributors; and seeking
strategic alliances with complementary businesses operating in its service
areas, such as Internet-oriented training organizations and consulting firms,
World Wide Web content developers, computer networking firms, media companies,
telecommunications companies, local area network and World Wide Web consulting
companies, and other Internet access companies that specialize in providing
dedicated connections. The Company expects that any such alliances would be of
varying natures and terms. The Company seeks to forge these alliances through:
Trade arrangements with media companies. The Company establishes
trade arrangements with a variety of media companies, including newspapers,
radio and television stations, cable television stations, and
telecommunications companies in the POPs in which the Company provides
service. These arrangements may involve, among other things, commission
arrangements, "wholesale" purchases of Company services for resale, private
branding of Company services, or an exchange of MindSpring Internet
services for advertising or other promotional services.
Sales agent programs. MindSpring has relationships with a number of
sales agents who typically are involved in offering products or services
that are related to the Internet. The basic sales agent agreement offers a
finder's fee for each new subscriber who names the sales agent as the
referral source. MindSpring sales agents include Internet-oriented training
organizations and consulting firms, World Wide Web content developers,
computer networking firms, local area network and World Wide Web consulting
companies and computer stores. The Company anticipates expanding this
program as it expands into new POP locations as a result of the PSINet
Transaction. Pursuant to the Purchase Agreement, MindSpring will pay PSINet
a fee for each new subscriber obtained as a result of PSINet's sales
efforts.
Speaking appearances and presentations. 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.
Pursuant to the Purchase Agreement, MindSpring acquired the rights to and
benefits of all of PSINet's preexisting marketing programs that are targeted at
individual subscribers. These programs include: (i) marketing relationships with
publishers, equipment manufacturers and organizations representing potential
subscribers; (ii) relationships with individuals and organizations that receive
a commission for successfully recruiting subscribers; and (iii) certain
arrangements with retail outlets to distribute, sell or promote Internet access
services. The Company intends to integrate certain of these programs into its
marketing plan. For example, as part of the Acquisition, the Company acquired
the right to assume certain of PSINet's distribution relationships with book and
hardware vendors, pursuant to which the vendor would include the MindSpring
front-end software as part of a CD-ROM which might include other programs or as
a stand-alone CD-ROM. Pursuant to these distribution arrangements, PSINet was
required to make a one-time payment per subscriber of usually less than $10 for
each new subscriber resulting from the arrangement, and the Company will have
the same obligation for each arrangement it continues. MindSpring has contacted
every such PSINet vendor, and most have indicated their intention to continue
the distribution relationship with MindSpring.
The Company intends to continue to expand its marketing and distribution
efforts by exploiting these newly available marketing opportunities as well as
traditional advertising media in order to develop the Company's evolving
nationwide service area. The Company anticipates that the expansion of its
geographic coverage and subscriber base will require it to continue to expand
and adapt its marketing and distribution
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efforts. MindSpring will continue to closely monitor the results of its
marketing techniques as part of an ongoing effort to increase the
cost-effectiveness of its marketing efforts.
MindSpring has attempted to maintain a high degree of personal contact with
the communities that it serves, and the Company has a staff of regional managers
who are responsible for generating interest in MindSpring in these communities.
The Company plans to continue these efforts in the southeastern United States
and selectively expand them to include key metropolitan areas in other regions
of the country.
Sales are consummated by the Company's telephone sales force, which
responds to incoming subscription inquiries, as well as through an on-line
sign-up procedure. The on-line registration module, which is included in the
Company's retail software package, 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. As of June 30, 1996, the Company's
retail software package was available in 117 computer stores and other outlets
located in the southeastern United States. The Company intends to expand the
availability of the retail software package in connection with the Company's
evolving nationwide service area.
MINDSPRING SERVICE PLANS
MindSpring's primary subscribers are individuals within local dialing range
of one of the MindSpring or PSINet POPs and Web-hosting service subscribers. The
Company's objective is to offer its service in a way that enables subscribers to
have a positive experience with MindSpring and the Internet, even if they are
not expert computer users or have no on-line experience. Accordingly, the
Company provides extensive customer support services, helpful and easily
understood documentation, and a software starter kit that is designed to be easy
to install, easy to use and supports both Windows and Macintosh users. In
addition, MindSpring also provides service to dedicated access subscribers.
Dial-up Internet Access. MindSpring's primary service offering is dial-up
Internet access. The basic equipment requirements for an individual dial-up
subscriber are a Windows 3.x or later or Macintosh computer with at least 8MB of
RAM and a working modem of 14.4 Kbps speed or faster. The subscriber's
MindSpring connection is a direct PPP connection, enabling the subscriber to use
any standard Internet-capable software that will run on the subscriber's
computer.
The Company currently offers the following four price plans for dial-up
subscribers in order to accommodate both heavy and light Internet users. Each
plan requires a $35 start-up fee and includes a complete starter kit (purchasers
of the retail software package are charged only a $25 start-up fee). PSINet
subscribers who become MindSpring subscribers as a result of the Acquisition
will receive the starter kit at no charge.
The Works. For $26.95 per month, individual subscribers receive
unlimited use (not intended to be a fulltime connection) as well as 10MB of
Web space, access to the Clarinet premium news service and two extra
mailboxes.
Unlimited Access. Individual subscribers pay $19.95 per month for
unlimited use, with the restriction that the subscriber must disconnect
when not actively accessing the Internet. The subscriber is not permitted,
for example, to maintain a full-time computer connection as a World Wide
Web server.
Standard. Subscribers pay $14.95 per month for 20 hours of use and $1
per hour for each additional hour. Subscribers also receive 5MB of Web
space and access to the Clarinet premium news service.
Light. Subscribers pay $6.95 per month for five hours of use and $2
per hour for each additional hour. Subscribers also receive 5MB of Web
space.
The Company has also established a discount program for organizations that
open a group of at least ten individual accounts. The Company expects that the
typical user of this program will be a corporation or other organization that
wishes to purchase Internet access for its employees.
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Substantially all of the Company's subscribers are on month-to-month
subscriptions. The Company offers a 30-day money-back satisfaction guarantee for
new subscribers. Billing is made to the majority of subscribers by automatic
charges to subscribers' credit cards each month in advance, though some
subscribers are invoiced (for an extra charge). Subscribers, as well as the
Company, may cancel an account at any time, with the cancellation taking effect
as of the first day of the following month. The Company's liability in
connection with a subscriber's use of the Company's services may be limited by
certain provisions in the Company's standard form of service agreement. See
"Risk Factors -- Potential Liability."
A user whose primary location is within local dialing range of one of the
MindSpring POPs or PSINet POPs can access the Internet with a local telephone
call. Beginning in October 1996, subscribers will be able to access all such
POPs by using a special password. The Company also offers access to its services
through an "800" number for an additional charge. All dial-up subscribers can
connect to the MindSpring network (including the PSINet POPs) via modem at
speeds up to 28.8 Kbps. In some cities that the Company serves, individual
subscribers can also choose to connect via ISDN at 64 Kbps or 128 Kbps. There is
a one-time extra startup fee of $35 for ISDN users; otherwise, pricing is the
same as for modem subscribers. All dial-up subscribers, except subscribers to
the Unlimited Access plan, also have the option of using MindSpring servers to
publish information on the Internet through the World Wide Web or FTP.
MindSpring subscribers may use the space made available on MindSpring's servers
for each subscriber to make World Wide Web pages or computer files available to
the Internet.
Web Hosting. MindSpring also offers Web-hosting accounts for companies and
other organizations that wish to create their own World Wide Web sites without
maintaining their own Web server and high speed Internet connection. Web-hosting
subscribers can use their own domain name in their World Wide Web address. This
type of Web hosting is sometimes called "virtual hosting." Web-hosting
subscribers are responsible for building their Web sites themselves, and then
uploading the pages to a MindSpring Web server. The Company's Web-hosting
service features state-of-the-art Web servers for high speed and reliability, a
high quality connection to the Internet, specialized customer support, advanced
services features such as secure transactions and VRML (Virtual Reality Markup
Language, a feature which allows Web site visitors to navigate through a three
dimensional "virtual" world) and detailed statistical reporting on hits to the
site. Average monthly fees for Web-hosting accounts are approximately $55.
MindSpring had approximately 1,590 Web-hosting subscribers as of June 30, 1996,
compared to 490 Web-hosting subscribers as of December 31, 1995.
"Dedicated" Connections. MindSpring offers "dedicated" (i.e., full-time)
connections at the following current prices:
<TABLE>
<S> <C>
Dedicated 28.8 Kbps modem connection................ $500 start-up fee, $120 per month
Dedicated 64 Kbps ISDN connection................... $250 start-up fee, $250 per month
Dedicated 128 Kbps ISDN connection.................. $250 start-up fee, $400 per month
</TABLE>
As a result of the Company's strategy of focusing on Internet access to
individual subscribers, the Company generally intends to limit its number of
dedicated access subscribers to those currently served. In addition, MindSpring
does not provide network consulting services. Subscribers intending to use a
dedicated MindSpring connection to their own networks need to be technically
self-sufficient.
NETWORK INFRASTRUCTURE
Geographic Coverage. As of June 30, 1996, MindSpring offered Internet
access service through 40 MindSpring POPs in nine states and the District of
Columbia. In addition, as a result of the PSINet Transaction, the Company has
access to PSINet's network of over 200 POPs located in 46 states and the
District of Columbia. See "Recent Transactions -- Acquisition of PSINet Assets."
The MindSpring Network. Users located within local dialing range of a
MindSpring POP connect to the POP through telephone lines provided by the local
telephone company. Each MindSpring POP generally connects to the Company's
Atlanta hub via a leased line T-1 connection. The equipment located in the
remote POPs consists primarily of a router, rackmounted terminal servers and
modems.
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In order to continue to build its base of individual dial-up subscribers,
the Company intends to continue to evaluate the need to expand existing
MindSpring POPs, to open new MindSpring POPs and to locate servers in remote
locations to optimize network traffic. The number and location of additional
POPs that the Company may actually open depends on such factors as subscriber
demand, relative costs of telecommunications facilities, competitive
considerations, and other factors, including the ability to provide service
through access to PSINet POPs and possibly through POPs of other companies. The
Company has no current plans and is not involved in any negotiations with
respect to providing service through POPs of other companies.
MindSpring's network hub is currently connected to the Internet through
three separate leased data communications lines, one connecting to the Sprint
Communications Company, L.P. ("Sprint Communications") network, one to the Apex
Global Information Services, Inc. ("AGIS") network and one to the BBN Planet
Corporation ("BBN") network. Sprint Communications, AGIS and BBN are Internet
backbone providers that carry data traffic for MindSpring and other subscribers
and deliver it either to its end destination (if that destination is connected
directly to their network) or to the Internet gateway points where the traffic
is routed onward to its ultimate destination. As MindSpring grows, it will need
to increase the bandwidth over its connection to the rest of the Internet. This
may be done through increasing the bandwidth of the Company's connections
through these current providers, by adding new connections through these or
other providers, or by establishing leased line connections directly to the
Internet gateway points.
The Company maintains a Network Management Center at its Atlanta
headquarters through which the Company's technical staff monitors network
traffic, service quality and security, as well as equipment at individual POPs,
to ensure reliable Internet access. The Network Management Center is staffed 24
hours a day seven days a week. In addition, the Company is continuing to invest
in improved network monitoring software and hardware systems.
MindSpring Connection to PSINet POPs. In addition to its MindSpring POPs,
the Company expects to provide Internet access to its subscribers, beginning in
October 1996, through a nationwide network of over 200 PSINet POPs pursuant to
the Services Agreement. The Company believes that this arrangement will enable
it to provide Internet access services on a nationwide basis while reducing
capital expenditures. However, the Company intends to maintain the flexibility
to expand or open MindSpring POPs or make other capital investments as and where
subscriber demand or strategic considerations warrant. This approach provides
MindSpring the freedom to focus on superior customer service rather than on
establishing new POPs. See "Recent Transactions -- Acquisition of PSINet
Assets -- Network Services Agreement."
The Company's network hub is connected via a telecommunications circuit
provided by the Company to PSINet's network at the PSINet POP located in Austel,
Georgia. The Company may also co-locate equipment at various other PSINet POP
sites. The Company is responsible for all customer support, pricing, billing and
collection services that are associated with subscribers that access the
Company's network through a PSINet POP. In addition, the Company may, at its
option, enter into peering arrangements with PSINet whereby the Company would
establish connections between MindSpring's network and PSINet's network with
telecommunications circuits in order to more efficiently route traffic
originating within one party's network and destined for the other party's
network. See "Recent Transactions -- Acquisition of PSINet Assets -- Network
Services Agreement."
MINDSPRING SOFTWARE
An important component of the Company's offering for dial-up subscribers is
the MindSpring starter kit. The starter kit includes: the MindSpring
installation program, front-end software and documentation; an on-line
registration module (retail version only); network software that enables a
subscriber to connect to the Internet; and application programs. See
"-- Subscriber Applications."
The Company's objectives in developing and providing this starter kit are
to:
Simplify installation. The MindSpring Windows software package
automatically configures all the individual Internet access programs after
one-time entry by the user of a few required fields of
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information (name, username, password, etc.). The Macintosh installation
program is similar but requires subscribers to enter some additional
information.
Provide a convenient and intuitive starting place for
subscribers. The MindSpring front-end software allows subscribers to
connect and disconnect, see any current messages from MindSpring, check
their monthly usage, see if they have any e-mail, and launch any of their
Internet application programs, all from one screen. "Help" files and the
accompanying documentation contain information on trouble-shooting and
things to do on the Internet.
Enhance efficiency of the Company's support services. High-quality
software with which the Company's customer service representatives are
familiar makes it easier for the Company to provide fast and efficient
customer support. Software that is reliable and easy to install and use
also tends to reduce subscriber need for extensive support services.
Provide state-of-the-art applications. The Company uses
already-existing applications in its software package. MindSpring believes
that this approach will enable it to include state-of-the-art software in
its package and 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.
Provide open standards and flexibility. MindSpring software is based
on open standards, and the Windows package is fully Winsock-compatible.
Winsock is an industry standard programming interface definition for
Windows which specifies how TCP/IP-based network applications should
communicate with TCP/IP protocol software. Winsock has been adopted by most
vendors of network protocol software and network applications software for
Windows. Subscribers can run any standard Windows or Macintosh Internet
programs and are not limited to those programs that are included in the
starter kit but can experiment with new Internet applications as they
become available.
SUBSCRIBER APPLICATIONS
MindSpring subscribers use their accounts for communicating, retrieving
information and publishing information on the Internet. In Company surveys of
its subscribers, a substantial number of the Company's individual subscribers
report that they use their MindSpring accounts for business as well as for
personal purposes. The subscribers' 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 included in the MindSpring starter kit software package,
including:
Electronic Mail. E-mail allows subscribers to exchange electronic
messages with anyone else who has an Internet e-mail address. These
messages are usually text only, but can also include other kinds of
computer files (such as images, computer programs, or word processing
documents), which are sent as attachments. The Company's software package
includes the Eudora(R) e-mail application.
The World Wide Web. The World Wide Web allows a multimedia
presentation of material (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 application currently included in the
Company's software package is either Netscape Navigator (a trademark of
Netscape Communications Corporation ("Netscape Communications")) or
Microsoft's Internet Explorer.
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.
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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 multi-person real-time conversations.
The Company has obtained permission and, in certain cases, licenses from
each manufacturer of the software that the Company bundles in its front-end
software product for Windows and Macintosh subscribers. See "-- Proprietary
Rights."
PROPRIETARY RIGHTS
General. Although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights, the Company's success
and ability to compete is dependent in part upon its technology. The Company
relies on a combination of copyright, trademark and trade secret laws and
contractual restrictions to establish and protect its technology. It is the
Company's policy to require employees and consultants and, when possible,
suppliers to execute confidentiality agreements upon the commencement of their
relationships with the Company. These agreements provide that confidential
information developed or made known during the course of a relationship with the
Company must be kept confidential and not disclosed to third parties except in
specific circumstances. There can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology. See "Risk
Factors -- Proprietary Rights; Infringement Claims."
Licenses. The Company has obtained authorization to use the product of
each manufacturer of software that the Company bundles in its front-end software
product for Windows and Macintosh subscribers. The particular applications
included in the MindSpring starter kit have in some cases been licensed. These
licensed applications currently include: the Netscape Navigator (a trademark of
Netscape Communications) from Netscape Communications (which license expires on
December 31, 1997); WS-FTP software from Ipswitch, Inc. (which license expires
on March 1, 1997), TCP/IP software from Network TeleSystems, Inc. (which license
expires on November 11, 1996 and is renewable for one-year terms); the Eudora(R)
e-mail program from Qualcomm, Inc. (which license expires on September 28,
1996); Lview Pro graphics viewer software from MMedia Research (which license
has an indefinite term); Internet Explorer from Microsoft (which license expires
on April 29, 1997); Anarchie from Peter N. Lewis (which license expires on
January 19, 1997); Newswatcher from Northeastern University (which license
expires on March 1, 1997); Mac TCP from Apple Computer Inc. (which license
expires on December 27, 1996); FreePPP from Steve Dagley (which license expires
on March 6, 1997); Fetch from Dartmouth University (which license expires on
June 3, 1997); Free Agent from Forte Advanced Management Software, Inc. (which
license expires on November 29, 1996); and MacPPP from Merit Network, Inc.
(which license expires on March 11, 1997). License fees charged to the Company
upon enrollment of additional subscribers are included in the cost of subscriber
start-up fees. In other cases such applications are shareware that the Company
has obtained permission to distribute, or are from the public domain and are
freely distributable. The only software programs in the MindSpring starter kit
that were developed by MindSpring are the front-end programs for Windows, Win95
and Macintosh. The Company currently intends to maintain or negotiate renewals
of, as the case may be, all existing software licenses and authorizations as
necessary. The Company may also want or need to license other applications in
the future.
Trademarks. In April 1996, the Company adopted a new MindSpring logo. The
Company currently has applications pending with respect to the registration in
the United States of the trademark "MindSpring" (and design) for each of the old
and new MindSpring logos. As part of the PSINet Transaction, the Company has
acquired trademark applications for the trademarks "Pipeline" and "Pipeline
USA." The Company is evaluating whether to prosecute these applications.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
Most of the Company's individual subscribers pay their MindSpring fees
automatically by credit card each month. The Company generally sends monthly
invoices to commercial accounts with multiple users.
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Billing calculations and payment transactions are managed on the Company's
automated billing system, which was implemented in May 1995. The Company is
currently upgrading the capacity of its billing system by purchasing additional
hardware and modifying its software to facilitate the addition of all of the
PSINet subscribers who become MindSpring subscribers following the Acquisition.
The Company expects to continue to modify and upgrade its billing system in
order to maintain its ability to bill and collect amounts due and to be
responsive to changes in the market.
COMPETITION
The market for the provision of Internet access to individuals is extremely
competitive and highly fragmented. There are no substantial barriers to entry,
and the Company expects that competition will continue to intensify. The Company
believes that the primary competitive factors determining success in this market
are a reputation for reliability and service, effective customer support,
pricing, easy-to-use software and geographic coverage. Other important factors
include the timing of introductions of new products and services and industry
and general economic trends. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, financial condition and results of operations.
As a result of increased competition in the industry, the Company has
encountered and expects to continue to encounter significant pricing pressure.
In May 1996, in response to a changing competitive environment, the Company
introduced five different pricing plans for dial-up access (one of which was
discontinued in September 1996 due to low subscriber interest), compared to the
two prior plan offerings. These plan changes generally represent a reduction
from the previous rates. Further reductions in rates charged by the Company's
competitors could require the Company to further reduce prices charged to its
subscribers, which could cause a decrease in total revenues and revenue per
subscriber and reduce the likelihood of the Company achieving positive cash flow
or profitability in the future. Any such reductions in prices could materially
adversely affect the Company's business, financial condition and results of
operations. In addition, telecommunications companies may be able to offer
customers reduced communications costs in connection with their Internet access
services, reducing the overall cost of their Internet access solution and
significantly increasing price pressures on the Company. Competition could also
result in increased selling and marketing expenses, related subscriber
acquisition costs, and increased subscriber attrition, all of which could
adversely affect the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to offset
the effects of any such increased costs or reductions in the Company's prices
through an increase in the number of its subscribers, higher revenue from
enhanced services, cost reductions or otherwise, or that the Company will have
the resources to continue to compete successfully. See "Risk
Factors -- Competition."
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. In addition, every
local market the Company has entered or intends to enter is served by multiple
local Internet access providers. The Company currently competes or expects to
compete with the following types of Internet access providers: (i) national
commercial Internet access providers, such as NETCOM; (ii) numerous regional and
local commercial Internet access providers which vary widely in quality, service
offerings and pricing; (iii) established on-line commercial information service
providers, such as America Online and CompuServe; (iv) computer hardware and
software and other technology companies, such as IBM and Microsoft; (v) national
long distance carriers, such as AT&T, MCI, MFS, Sprint and WorldCom; (vi)
regional telephone companies; (vii) cable operators; and (viii) nonprofit or
educational Internet access providers.
Congress recently enacted, and President Clinton signed, the 1996
Telecommunications Act, which contains certain provisions lifting, or
establishing procedures for lifting, restrictions on Bell Operating Companies
and other companies which may permit them to engage directly in the Internet
access business. In addition, the 1996 Telecommunications Act makes it easier
for national long distance carriers such as AT&T to offer local telephone
service. The Company cannot predict the extent to which the 1996
Telecommunications Act, or strategic alliances or consolidation among Internet
access providers may result in additional
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competitive pressures on the Company or have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company believes that new competitors, including large computer
hardware and software, media and telecommunications companies, will continue to
enter the Internet access market, resulting in even greater competition for the
Company. For example, Microsoft has introduced an Internet access solution,
including front-end software and an on-line service called "Microsoft Network."
The application software for this on-line service is bundled with Microsoft's
Windows '95 operating system, which may give the service a significant advantage
over on-line and other Internet access providers, including the Company. In
connection with its plans to enter the Internet access market, Microsoft has
entered into a strategic alliance with UUNet (which was recently acquired by
MFS) (including the purchase of a minority investment in UUNet by Microsoft)
that will give Microsoft customers access to the Internet through UUNet's POPs.
In addition, WorldCom has recently announced its agreement to acquire MFS.
Microsoft also recently announced strategic marketing alliances for Internet
access with MCI, AT&T and NETCOM. GTE also recently entered into a strategic
alliance with UUNet whereby GTE's customers will obtain access to the Internet
through UUNet's communications network. AT&T began offering Internet access to
its customers in April 1996 and MCI and Sprint have also recently entered the
Internet access market. In addition, IBM's most recent version of its OS/2
operating system software includes Internet utilities, and IBM offers Internet
access through its own private communications network. The ability of these
competitors or others to enter into strategic alliances or joint ventures or to
bundle services and products with Internet access could put the Company at a
significant competitive disadvantage.
Moreover, the Company expects to face competition in the future from
companies that provide connections to consumers' homes, including local and long
distance telephone companies, cable television companies, electric utility
companies and wireless communications companies. For example, technologies have
been developed to enable cable television operators to offer high-speed Internet
access through their cable facilities. These broadband technologies promise
significantly higher access rates than existing modem speeds. Such companies
could include Internet access in their basic bundle of services or offer such
access for a nominal additional charge and could prevent the Company from
delivering Internet access through the wire and cable connections that such
companies own. Any such developments could materially adversely affect the
Company's business, financial condition and results of operations.
The Company does not currently compete internationally. To the extent that
the ability to provide Internet access internationally becomes a competitive
advantage in the Internet access industry, the Company may be at a competitive
disadvantage relative to other competitors.
INDUSTRY BACKGROUND
The Internet. The Internet is a global collection of thousands of
interconnected computer networks that enable commercial organizations,
educational institutions, governmental agencies and individuals to communicate
electronically, access and share information and conduct business. The Internet
originated with the ARPAnet, a restricted network started in 1969 by the United
States Department of Defense Advanced Research Project Agency to provide
efficient and reliable long-distance data communications among the disparate
computer systems used by government-funded researchers and organizations. Unlike
other public and private telecommunications networks that are managed by
businesses, governmental agencies and other entities, the Internet is a
cooperative interconnection of many such public and private networks. The
networks that comprise the Internet are connected in a variety of ways,
including by the public-switched telephone network and by dedicated high speed
leased lines. Open communications on the Internet are enabled by TCP/IP, the
common Internet communications protocol, which enables communication across the
Internet regardless of the hardware and software used.
Internet Growth. Recent technological advances, including the development
of easy-to-use graphical user interfaces (which provide a means of communicating
with computers by manipulating icons and "windows," in addition to text),
combined with cultural and business changes, have led to the Internet being
integrated into the activities of individuals and the operations and strategies
of commercial organizations.
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Individuals increasingly are using computers in their homes for electronic mail,
file transfer, remote login, file sharing and information services. This trend
has been facilitated by dramatic increases in cost-effective processing power
and data storage capabilities in personal computers, as well as widespread
availability of multimedia, fax/modem, and networking capabilities to the home
computing market. Much of the recent growth in Internet use by businesses and
individuals has been driven by the emergence of a network of servers and
information available on the Internet called the World Wide Web. The World Wide
Web, which is based on a client/server model and a set of standards for
information access and navigation, can be accessed using software that allows
non-technical users to exploit the capabilities of the Internet. The World Wide
Web enables users to find, retrieve and link information on the Internet easily
and consistently. The development of World Wide Web technology and associated
easy-to-use software has made the Internet easier to navigate and more
accessible to a larger number of users and for a broader range of applications.
Internet Services and Software Providers. Until recently, individuals
could access the Internet only through their employer or another organization
with a direct Internet connection or through traditional on-line services
employing closed, proprietary networks that allowed access only to limited
Internet resources. With the growth and increasing commercialization of the
Internet, a number of companies have emerged to provide Internet software and
direct access targeted to individuals. Traditional on-line services have also
begun to increase the scope and capacity of their access to the Internet.
Access providers vary widely in the geographic coverage, customer focus and
levels of Internet access provided to subscribers. For example, access providers
may concentrate on certain types of subscribers (such as businesses or
individuals) that differ substantially in the type of service and support
required. Providers may also differ according to whether they provide direct or
non-direct access to the Internet. Direct access through Internet protocols such
as SLIP or PPP enable users to establish direct connections to other computers
on the Internet, including World Wide Web sites or computers operated by other
users, and thereby have access to the full range of Internet resources. The
Company offers direct Internet access, as do most regional and national access
providers other than on-line service providers. To compete with these direct
Internet access providers, consumer on-line services (including America Online
and CompuServe) have introduced Internet access gateways.
GOVERNMENT REGULATION
The Company provides Internet access, in part, through transmissions over
public telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. The Company is at present
considered an enhanced services provider and, therefore, is not currently
subject to direct regulation by the FCC or any other agency, other than
regulations applicable to businesses generally. However, the Company could
become subject in the future to regulations by the FCC and/or other regulatory
commissions as a provider of basic telecommunications services. For example, a
number of long distance telephone carriers recently filed a petition with the
FCC seeking a declaration that Internet telephone service is a
"telecommunications service" subject to common carrier regulation. Such a
declaration, if enacted, would create substantial barriers to the Company's
entry into the Internet telephone market.
The 1996 Telecommunications Act contains certain provisions lifting, or
establishing procedures for lifting, restrictions on Bell Operating Companies
and other companies that may permit them to engage directly in the Internet
access business and allows the Bell Operating Companies to provide electronic
publishing of information and databases. Competition from these companies could
have an adverse effect on the Company's business, financial condition and
results of operations. See "-- Competition." Further, the 1996
Telecommunications Act imposes fines on any entity that knowingly uses any
interactive computer service to send obscene or indecent material to minors or
makes indecent material available to minors. The standard for determining
whether an entity acted knowingly has not yet been established.
The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. Several private lawsuits seeking to impose such liability
upon Internet access providers and on-line services companies are currently
pending. Although no such claims have been asserted against the Company to date,
there can be no assurance that such
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claims will not be asserted in the future, or if asserted, will not be
successful. Furthermore, although the Company has attempted to limit its
liability by the terms of its standard service agreement, there can be no
assurance that the Company's liability would be so limited in the event of any
litigation or other claim against the Company. In addition, the Communications
Decency Act of 1996, which is Title V of the 1996 Telecommunications Act,
imposes fines on any entity that: (i) by means of a telecommunications device,
knowingly sends indecent or obscene material to a minor; (ii) by means of an
interactive computer service, sends or displays indecent material to a minor; or
(iii) permits any telecommunications facility under such entity's control to be
used for the purposes detailed above. The standard for determining whether an
entity acted knowingly has not yet been established. The following defenses to
liability under the statute exist: (i) any entity that solely provides access or
connection to or from a facility, system, or network not under that entity's
control; and (ii) the use of reasonable, effective and appropriate screening
efforts to restrict or prevent access by minors. These defenses are unavailable
to an entity that (i) is found to have conspired with another entity involved in
the creation or knowing distribution of obscene or indecent material through an
interactive computer service or telecommunications device or that knowingly
advertises the availability of such material or (ii) that solely provides access
or connection but also owns or controls a facility, system, or network engaged
in the prohibited activities. The 1996 Telecommunications Act creates the right
to challenge the law before a three-judge district court and a right of direct
appeal to the U.S. Supreme Court. Litigation was filed in federal court
challenging the constitutionality of the on-line provisions of the 1996
Telecommunications Act. On June 12, 1996, a three-judge panel of the U.S.
District Court for the Eastern District of Pennsylvania unanimously enjoined
enforcement of these provisions. The court has since clarified that its
injunction applies only to indecency issues and not to the display or
transmission of obscene material or child pornography. The U.S. Department of
Justice has announced that it will ask the U.S. Supreme Court to review the
lower court's decision.
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, user privacy, pricing and copyright
infringement. Shortly after AT&T announced its plans to offer Internet access,
several Bell Operating Companies reportedly complained that AT&T should no
longer receive the benefit of a data transmission exemption to a 1983 FCC
"access charge" plan, which exemption applies to all Internet service providers.
In response to a petition or on its own motion, the FCC could eliminate this
exemption. The Company cannot predict the impact, if any, that the elimination
of this exemption or any other future regulatory changes or developments may
have on its business, financial condition and results of operations. In
addition, Tacoma, Washington has recently imposed a tax on companies that
connect people to the Internet, and other localities may impose similar taxes.
Changes in the regulatory environment relating to the Internet access industry,
including regulatory changes that directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
regional telephone companies or others, could have a material adverse effect on
the Company's business, financial condition and results of operations.
As the law in this area develops, the potential imposition of liability
upon the Company for information carried on and disseminated through its network
could require the Company to implement measures to reduce its exposure to such
liability, which may require the expenditure of substantial resources or the
discontinuation of certain products or service offerings. Any costs that are
incurred as a result of contesting any such asserted claims or the consequent
imposition of liability could materially adversely affect the Company's
business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1996, the Company had 177 employees, including approximately
21 part-time employees. In connection with the Purchase Agreement, and
concurrently with the Second Closing, the Company hired approximately 75 former
PSINet employees who will continue to operate the Harrisburg Facility. The
Company anticipates that the development of its business will require the hiring
of a substantial number of new employees. None of the Company's current
employees or the employees of the Harrisburg Facility are represented by a labor
organization, and the Company's management considers its employee relations to
be good.
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The Company anticipates that in connection with the development of its
network infrastructure and its expansion into new markets as a result of the
Acquisition, the Company will be required to hire a substantial number of new
employees during 1996 and 1997. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- Overview."
PROPERTIES
The Company maintains its corporate headquarters in Atlanta, Georgia. The
lease for this space expires March 31, 1999. The Company has the option to
extend this lease for an additional two years. The Company has arranged for
expansion space within the building that houses its current headquarters, and
believes that its facilities there, as expanded, will be adequate through 1996.
The Company is currently negotiating to arrange additional office space in the
vicinity of its Atlanta headquarters in order to meet the Company's anticipated
additional space requirements. The Company has also arranged for expansion space
for its POP site in Atlanta, which it believes will provide sufficient room for
growth over the expected term of its lease for such site, which expires on
December 31, 1996, but which will renew automatically for successive six-month
terms thereafter, subject to termination by either party upon 180 days written
notice. 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. MindSpring employees in remote offices are expected to
continue to work from their homes until the scope of the Company's operations in
the related market warrants multiple employees there.
In addition, as part of the Acquisition, the Company was assigned the
rights and obligations under the lease for the Harrisburg Facility, which is
located in New Cumberland, Pennsylvania. The lease for the Harrisburg Facility
expires on April 14, 1997. The Company intends to use the Harrisburg Facility
primarily to augment its current sales and customer support operations.
As part of the Nando.net Transaction, the Company exercised an option to
sublease approximately 1,900 square feet of office space in Raleigh, North
Carolina, through the end of January 1997, for an aggregate rent of
approximately $7,200. The Company intends to use the space primarily to support
the subscriber accounts to be acquired through the Nando.net Transaction. The
sublease is not renewable.
LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party.
47
<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Directors of the Company are elected at the annual meeting of stockholders.
Officers of the Company are appointed at the first meeting of the Board of
Directors after each annual meeting of stockholders. Directors and executive
officers of the Company are elected to serve until they resign or are removed,
or are otherwise disqualified to serve, or until their successors are elected
and qualified. The ages of the persons set forth below are as of July 31, 1996.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH COMPANY EXPIRES
- ------------------------- --- -------------------------------------------------- --------
<S> <C> <C> <C>
Charles M. Brewer........ 37 Chairman, Chief Executive Officer and Director 1998
Michael S. McQuary....... 36 President, Chief Operating Officer and Director 1997
Michael G. Misikoff...... 43 Vice President, Chief Financial Officer, 1996
Secretary, Treasurer and Director
James T. Markle.......... 37 Vice President of Network Operations --
Susan F. Nicholson....... 35 Vice President of Corporate Communications --
J. Fredrick Nixon........ 40 Vice President of Engineering --
Robert D. Sanders........ 22 Vice President and Chief Technical Officer --
Thomas R. Stranberg...... 51 Vice President of Business Services --
Gregory J. Stromberg..... 43 Vice President of Call Centers --
Alan J. Taetle........... 32 Vice President of Marketing --
Lance Weatherby.......... 36 Vice President of Business Development --
O. Gene Gabbard.......... 56 Director 1996
Campbell B. Lanier, 45 Director 1998
III....................
William H. Scott, III.... 49 Director 1997
</TABLE>
CHARLES M. BREWER founded the Company and has served as Chief Executive
Officer and Director of the Company since its inception in February 1994 and as
Chairman since March 1996. He also served as the President of the Company from
its inception until March 1996 and as the Secretary and Treasurer of the Company
from its inception until January 1995. From May 1993 to January 1994, Mr. Brewer
developed the concept for the Company and evaluated its prospects. Prior to
starting the Company, he served as Chief Executive Officer of AudioFax, Inc.
("AudioFax"), a software company providing fax server software, from May 1992 to
April 1993 and was the Chief Financial Officer of AudioFax from May 1989 to
April 1992. From March 1988 to April 1989, Mr. Brewer explored potential
business opportunities. Mr. Brewer was Vice President of Sanders & Company, a
venture capital firm, from September 1987 to February 1988. From November 1984
to August 1987, Mr. Brewer primarily worked toward his MBA, managed a retail
store and traveled. From November 1981 to October 1984, he was employed by
Wertheim & Company, an investment banking firm, and worked in institutional
sales. 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 the Company since March 1996,
the Chief Operating Officer of the Company since September 1995, and a Director
of the Company since December 1995. He also served as the Company's Executive
Vice President from October 1995 to March 1996 and the Company's Executive Vice
President of Sales and Marketing from July 1995 to September 1995. Prior to
joining the Company, Mr. McQuary served in a variety of management positions
with Mobil Chemical Co., a petrochemical company, from August 1984 to June 1995,
including Regional Sales Manager from April 1991 to February 1994 and Manager of
Operations (Reengineering) from February 1994 to June 1995. From September 1981
to July 1984, Mr. McQuary served as a Sales Representative, Territory Manager
and then Product Sales Manager for Lily Tulip, Inc., a food service packaging
company. Mr. McQuary received a BA in Psychology from the University of Virginia
and a MBA from Pepperdine University.
MICHAEL G. MISIKOFF has served as Vice President, Chief Financial Officer,
Secretary, Treasurer and a Director of the Company since January 1995. From
January 1992 to December 1994, Mr. Misikoff was the
48
<PAGE> 50
Acting Chief Financial Officer and a Director of InterCall Corporation, a
subsidiary of ITC Holding that provides conference call services. From March
1991 to January 1992, Mr. Misikoff worked as an independent financial
consultant. Mr. Misikoff served as Chief Financial Officer of Async Corporation
("Async"), a provider of voice messaging services, from its startup in February
1985 until March 1991. From March 1979 to February 1985, Mr. Misikoff served as
the Chief Financial Officer for TransDesigns, Inc., a multi-level marketing
company. Mr. Misikoff was a Certified Public Accountant with the firm of Arthur
Young & Co. from July 1975 until March 1979. He received a BBA in Accounting
from Georgia State University.
JAMES T. MARKLE joined the Company as Vice President of Network Operations
in April 1995. Prior to joining the Company, Mr. Markle served as the Director
of Technical Support for Concert Communications, Co., a telecommunications
company, from April 1994 until April 1995. From August 1990 to April 1994, Mr.
Markle served as Senior Manager of Network Operations for MCI. Mr. Markle served
in various operation positions at Telecom*USA, Inc. ("Telecom") and its
predecessor SouthernNet, Inc. ("SouthernNet"), including Director of Operations
for a multi-state region, from July 1985 until July 1990. Mr. Markle attended
Maryville College.
SUSAN F. NICHOLSON has served as the Company's Vice President of Corporate
Communications since September 1996, prior to which she served as Vice President
of Marketing beginning in July 1995. Ms. Nicholson served as Director of
Marketing of the Company from September 1994 until July 1995. Prior to joining
the Company, Ms. Nicholson worked for AudioFax from March 1990 to September
1994, first as a technical writer, then as Director of Marketing Communications
and then as Director of Product Management. In addition, Ms. Nicholson worked as
an independent technical writer from August 1987 to March 1990 and founded and
sold Babes in Highland, a retail store in Atlanta, Georgia between June 1986 and
May 1987. She served as a Technical Sales representative for Hewlett-Packard
Company, a computer manufacturing company, from December 1982 to June 1986. Ms.
Nicholson received a BS in Electrical Engineering from Georgia Institute of
Technology.
J. FREDRICK NIXON joined the Company as Vice President of Engineering in
August 1995. From August 1994 to July 1995, Mr. Nixon served as a consultant for
the Tennessee Valley Authority and Federal Express, Inc. He served from
September 1990 to August 1994 as an Assistant Professor of Computer Science at
the University of Tennessee at Chattanooga. From September 1989 to September
1990, Mr. Nixon served as a senior member of the Technical Staff of General
Electric Advanced Technology Labs, an operating systems research company. He was
a Senior Scientist at General Electric Research Corporation, a database systems
development company, from March 1987 to September 1989. Mr. Nixon also served as
the Principal Engineer for Token Link Corporation, a computer design and
manufacturing company, from September 1986 to March 1987. From December 1978 to
September 1982, Mr. Nixon served as a Programmer/Analyst for General Electric
Information Services Company, a general research company. Mr. Nixon received a
BA in Physics and Math and a Ph.D. in Computer Science from Vanderbilt
University.
ROBERT D. SANDERS has been the Company's Vice President since September
1996 and its Chief Technical Officer since January 1995. Mr. Sanders served as
the Company's Vice President of Network Engineering from December 1995 to
September 1996 and the Company's Senior Engineer from June 1994 to January 1995.
Prior to joining the Company, Mr. Sanders worked as the Software Engineer and
System Administrator of Harry's Farmers Market, Inc. from March 1994 to May
1994. He served as Co-op Engineer in the Line Card Development Group of Bell
Northern Research, Inc., a research subsidiary of Northern Telecom, Inc., from
March 1992 to December 1993. Mr. Sanders attended the Georgia Institute of
Technology.
THOMAS R. STRANBERG joined the Company in May 1996, as acting Vice
President of Business Services, and was appointed Vice President of Business
Services in September 1996. From September 1985 to May 1996, Mr. Stranberg
served as Executive Vice President and Chief Operating Officer for Medical
Systems Development Corporation, a software development company. Mr. Stranberg
worked for the City of Asheville, North Carolina as a Senior System Analyst from
July 1974 to December 1976 and as Data Processing Director from December 1976 to
September 1985. From October 1972 to July 1974 Mr. Stranberg worked for American
Enka Company, a textile manufacturer, as a Senior Programmer and Acting
49
<PAGE> 51
Programming Manager. Mr. Stranberg received a BS in Business Administration from
Western Illinois University in 1966 and a MBA from Western Carolina University
in 1976.
GREGORY J. STROMBERG has been the Company's Vice President of Call Centers
since September 1996, having joined the Company as Vice President of Customer
Service in October 1995. From June 1993 to September 1994, he served as a
Regional Manager for Digital Financial Services, a computer leasing company,
after which he traveled. Mr. Stromberg worked for Digital Equipment Corporation,
a computer manufacturer, and served as a Senior Sales representative from June
1983 to May 1987, Program Manager from May 1987 to May 1990, and District
Operations Manager from May 1990 to June 1993. In addition, Mr. Stromberg served
as a Large Account Sales representative and Product Manager for Burroughs Corp.,
a computer hardware company, from June 1978 to June 1983. Mr. Stromberg received
a BS in Business Management and a MBA from the University of Utah.
ALAN J. TAETLE has been the Company's Vice President of Marketing since
September 1996, having joined the Company as its Vice President of Business
Development in March 1995. Prior to joining the Company, Mr. Taetle served as
the Director of Operations and Product Management at CogniTech Corporation,
makers of a retail series of Contact Management software products, from November
1992 to March 1995. Mr. Taetle was the Director of MIS of a subsidiary of Itochu
International ("Itochu"), a Japanese trading company, from September 1989 until
November 1991, and served as the Assistant to the Executive Vice President of
Itochu from November 1991 to November 1992. From July 1985 to August 1987, Mr.
Taetle served as Systems Engineer with Electronic Data Systems, a systems
integration consulting company. Mr. Taetle received a BA in Economics from the
University of Michigan and a MBA from Harvard Business School.
LANCE WEATHERBY has been the Company's Vice President of Business
Development since September 1996 and was the Company's acting Vice President of
Business Development commencing in August 1996. Mr. Weatherby joined the Company
as Market Development Manager in September 1995. Prior to joining the Company,
Mr. Weatherby held a variety of sales, sales management and marketing positions
with Mobil Chemical Co., a petrochemical company, from October 1990 to September
1995, including District Sales Manager from December 1992 to September 1995.
From April 1990 to October 1990, Mr. Weatherby served as an Account Executive
with United Parcel Service, Inc., a shipping company. From December 1983 to
August 1987 Mr. Weatherby served as a Sales Representative for Lantech, Inc., a
packaging equipment manufacturer. Mr. Weatherby received a BBA in Marketing from
Eastern Kentucky University and a MBA from Indiana University.
O. GENE GABBARD has been a Director of the Company since December 1995. He
has worked independently as an entrepreneur and consultant since February 1993.
Mr. Gabbard currently serves as a director of ITC Holding and several of its
subsidiaries, InterCel, Inc. ("InterCel") (a wireless telecommunications
company), Masada Security, Inc. (a security monitoring services company),
Adtran, Inc. (a telecommunications equipment manufacturing company), and two
telecommunications technology companies, Dynatech Corporation and Telogy
Network, Inc. From August 1990 through January 1993, he served as Executive Vice
President and Chief Financial Officer of MCI. He served in various senior
executive capacities, including Chairman of the Board, President and Chief
Executive Officer of Telecom from December 1988 until Telcom's merger with MCI
in August 1990. From July 1984 to December 1988, he was Chairman and/or
President of SouthernNet, a long distance telecommunications company which was
the predecessor to Telecom.
CAMPBELL B. LANIER, III has served as a Director of the Company since
November 1994. Mr. Lanier serves as Chairman of the Board and Chief Executive
Officer of ITC Holding and has served as a director of ITC Holding since its
inception in 1985 through a predecessor company. In addition, Mr. Lanier is an
officer and director of several ITC Holding subsidiaries. He is a director of
National Vision Associates, Ltd. (a full service optical retailer), K&G Men's
Centers (a discount retailer of men's clothing) Vice Chairman of the Board of
AvData Systems, Inc. ("AvData") (a company providing data communications
networks) and Chairman of the Board of InterCel. He served as Chairman of the
Board of AvData from 1988 to 1990. From 1984 to 1989, Mr. Lanier served as
Chairman of the Board of Async. Mr. Lanier also served as Vice
President -- Industry Relations of Telecom from 1984 to 1988 and as Senior Vice
President -- Industry Relations from January 1989
50
<PAGE> 52
until Telecom's merger with MCI in August 1990. From 1984 to 1985, he served as
Chief Executive Officer of SouthernNet, and from 1985 to 1986 he was Vice
Chairman of the Board of SouthernNet.
WILLIAM H. SCOTT, III has been a Director of the Company since November
1994. Mr. Scott has served as President of ITC Holding since December 1991 and
has been a director of ITC Holding since May 1989. Mr. Scott is a director and
Secretary of InterCel. Mr. Scott is also currently a director of AvData. From
1985 to 1989, Mr. Scott was an officer and director of Async. Between 1984 and
1988, Mr. Scott held several offices with SouthernNet, including Chief Operating
Officer, Chief Financial Officer and Vice President -- Administration. He was a
director of SouthernNet from 1984 to 1987.
BOARD OF DIRECTORS
The Restated Certificate provides for a classified Board of Directors
consisting of three classes of directors with each class required to be as
nearly equal in number as possible. The number of directors is determined from
time to time by the Board of Directors and is currently fixed at six. A single
class of directors is elected each year at the Company's annual meeting of
stockholders. Subject to transition provisions, each director elected at each
such meeting will serve for a term ending on the date of the third annual
meeting of stockholders after his election and until his successor has been
elected and qualified. Messrs. Gabbard and Misikoff are serving for terms
expiring in 1996, Messrs. McQuary and Scott are serving for terms expiring in
1997, and Messrs. Brewer and Lanier are serving for terms expiring in 1998.
Officers of the Company are appointed annually by the Board of Directors and
serve at its discretion.
The Board of Directors currently has two committees, the Audit Committee
and the Compensation Committee. The Audit Committee, among other things,
recommends the firm to be appointed as independent accountants to audit the
Company's financial statements, discusses the scope and results of the audit
with the independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers the
adequacy of the internal accounting controls and audit procedures of the Company
and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Brewer,
Lanier and Scott.
The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's 1995
Stock Option Plan.
Compensation Committee Interlocks and Insider Participation. The current
members of the Compensation Committee are Messrs. Lanier, Scott and Gabbard.
Prior to December 1995, compensation decisions were made by the Board of
Directors, including Messrs. Brewer and Misikoff.
As of June 30, 1996, ITC Holding owned approximately 36% of the outstanding
capital stock of the Company. Both Messrs. Lanier and Scott serve as executive
officers and directors of ITC Holding. Mr. Gabbard also is a director of ITC
Holding. As of June 30, 1996, Messrs. Lanier, Scott and Gabbard beneficially
owned approximately 28%, less than 3% and less than 1%, respectively, of the
common stock of ITC Holding. As of June 30, 1996, Messrs. Brewer and Misikoff
each owned less than 1% of the common stock of ITC Holding.
In August 1995, ITC Holding agreed to extend the First Loan to the Company
in an aggregate principal amount of up to $2,000,000 at an annual interest rate
of 11%, to be used for capital expenditures and for general and working capital
purposes. All amounts outstanding under the First Loan were due and payable in
full on or before December 15, 1995. At December 15, 1995, the outstanding
aggregate principal amount of all advances under the First Loan was $2,000,000.
At December 15, 1995, the Company had not repaid any amounts outstanding
under the First Loan. In consideration of ITC Holding's agreement not to
exercise its rights and remedies upon such default under the First Loan, on
December 27, 1995 the Company agreed to pay ITC Holding a processing fee of
$50,000 and issued to ITC Holding an immediately exercisable warrant to purchase
100,000 shares of Class C Preferred at a price of $.01 per share. Accordingly,
the Company recorded a charge of approximately $637,000 in December 1995
representing the fair market value of the warrant issued less the aggregate
exercise price thereunder. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --
51
<PAGE> 53
Results of Operations -- Year Ended December 31, 1995 Compared to Inception
Period -- Interest expense." By December 31, 1995, ITC Holding had exercised
such warrant in full. All principal amounts due and owing under the First Loan
were paid in full by December 31, 1995 with proceeds from the Second Loan made
to the Company by ITC Holding. Accrued interest on the First Loan of
approximately $39,100 and the $50,000 processing fee were paid in full in
January 1996.
In December 1995, the Company executed a promissory note in favor of, and
entered into a loan agreement and a security agreement with, ITC Holding
relating to the Second Loan, pursuant to such loan agreement the Company was
entitled to borrow, from time to time, up to $4,000,000 (in aggregate
outstanding principal amount). The unpaid principal amount of the Second Loan
was due and payable in a single payment on July 15, 1996, together with interest
on the unpaid principal amount from the date of each advance, until paid in
full, at an annual rate of 14%. All of the unpaid principal amount of the Second
Loan, together with all accrued and unpaid interest thereon, in an amount equal
to approximately $3,597,000, was paid in full by the Company on March 18, 1996
with a portion of the proceeds from the Company's initial public offering.
In 1995, the Company loaned excess cash totaling approximately $300,000 to
ITC Holding. This transaction was approved by the Board of Directors. The loan
amount, plus interest thereon equal to approximately $3,000, was repaid by ITC
Holding during 1995.
The Company has also entered into certain business relationships with
several subsidiaries of ITC Holding. The Company currently leases telephone
lines from, and has contracts for maintenance and installations with, Interstate
Telephone Company, Inc. ("Interstate Telephone"), a wholly owned subsidiary of
ITC Holding. The Company pays Interstate Telephone approximately $3,000 per
month for these leased telephone lines. Charges from Interstate Telephone for
telephone lines and installation charges totaled approximately $41,000 for the
year ended December 31, 1995 and approximately $38,000 for the six months ended
June 30, 1996, of which the Company had paid approximately $34,000 as of June
30, 1996.
The Company also leases a T-1 line for data transport for some of its POPs
from Interstate FiberNet Company ("Interstate FiberNet"), a wholly owned
subsidiary of ITC Holding. The Company pays Interstate FiberNet approximately
$7,500 per month for these services. The Company had no charges from Interstate
FiberNet for the year ended December 31, 1995 and approximately $15,000 in
charges for the six months ended June 30, 1996 of which the Company had paid
approximately $9,000 as of June 30, 1996.
The Company also purchases long distance telephone services and wide area
network transport service from DeltaCom, Inc. ("DeltaCom"), a wholly owned
subsidiary of ITC Holding. The Company pays DeltaCom approximately $25,000 per
month for such services. Unpaid charges from DeltaCom totaled approximately
$50,000 for the six months ended June 30, 1996.
As of January 1, 1995, the Company entered into an agreement with AvData
providing for the rental by the Company of floor space from AvData for the
placement of the Company's equipment for its network hub and for AvData
personnel to service and maintain such equipment for a payment by the Company of
$3,000 per month. AvData may increase this monthly payment if the amount of
technical support services required by the Company exceeds ten hours per month.
The lease runs from January 1, 1995, through December 31, 1996, but either party
may terminate the lease earlier, without cause, upon 180 days prior written
notice. Unless either party gives notice to terminate, this lease will renew
automatically for successive six-month terms. As of December 31, 1995, ITC
Holding owned approximately 25.5% of the capital stock of AvData.
In February 1994, in connection with the initial capitalization of the
Company, the Company issued a total of 1,032,951 shares of Common Stock to
Charles M. Brewer for an aggregate purchase price of $200.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the cash and
non-cash compensation during fiscal years 1994 and 1995 earned by or awarded to
the Company's Chief Executive Officer. No executive officers of the Company
received a combined salary and bonus in excess of $100,000 during the fiscal
year ended December 31, 1995.
52
<PAGE> 54
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS
----------------------------------------------------------- ---- ------- -------
<S> <C> <C> <C>
Charles M. Brewer.......................................... 1995 $60,000 $10,000
President and Chief Executive Officer.................... 1994 0 0
</TABLE>
OPTION GRANTS DURING 1995
As of December 31, 1995, no options had been granted to the Chief Executive
Officer of the Company, and no executive officer of the Company received a
combined salary and bonus in excess of $100,000 during the fiscal year ended
December 31, 1995.
OPTION PLANS
Employee Stock Option Plan. Under the Company's 1995 Stock Option Plan
(the "Stock Option Plan"), as adopted on February 21, 1995, and as amended by
the Board of Directors on April 5, 1995 and December 19, 1995, and approved by
the stockholders, effective December 27, 1995, 616,668 shares of Common Stock
are reserved and authorized for issuance upon the exercise of options. All
employees of the Company and its subsidiaries are eligible to receive options
under the Stock Option Plan. The Stock Option Plan is administered by the
Compensation Committee of the Board of Directors. The purpose of the Stock
Option Plan is to further the growth and success of the Company by enabling
selected employees of the Company to acquire shares of Common Stock of the
Company, thereby increasing their personal interest in such growth and success
and to provide a means of rewarding outstanding performance by such persons.
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 will become exercisable as follows: (i) 50% of the
options will become exercisable on the second anniversary of the date of grant,
or in certain cases, the commencement date of the holder's employment; (ii) an
additional 25% of the options will become exercisable on the third anniversary
of the date of grant, or in certain cases, the commencement date of the holder's
employment; and (iii) the remaining 25% of the options will become exercisable
on the fourth anniversary of the date of grant, or in certain cases, the
commencement date of the holder's employment. See Note 4 to the December 31,
1994 and 1995 financial statements included elsewhere in this Prospectus. As of
June 30, 1996, 439,213 options have been granted at exercise prices ranging from
$0.64 to $12.375, all of which will be outstanding and unexercised as of the
consummation of the Offering. Options expire ten years after the date of grant,
or in certain cases, the commencement date of the option holder's employment. An
increase in the number of shares of Common Stock that may become available for
sale in the public market, or the perception that such sales may occur, could
adversely affect the market price prevailing from time to time of the Common
Stock in the public market and could impair the Company's ability to raise
additional capital through the sale of its equity securities. See "Shares
Eligible for Future Sale."
Directors Stock Option Plan. Under the Company's Directors Stock Option
Plan (the "Directors Plan"), adopted in December 1995, 70,000 shares of Common
Stock are authorized for issuance to nonemployee directors (in the form of
grants of 10,000 options per director) upon their initial election or
appointment to the Board of Directors, or, in the case of Messrs. Lanier and
Scott, who joined the Board of Directors prior to the creation of the Directors
Plan, upon the adoption of the Directors Plan by the Board of Directors. Options
are exercisable at the fair market value of the Common Stock (as determined by
the Board of Directors) on the date of grant. The Directors Plan does not
provide for discretionary option grants. Options generally become exercisable as
to 50% two years after the date of grant, as to an additional 25% three years
after the date of grant, and as to the remaining 25% four years after the date
of grant. As of June 30, 1996, 30,000 options had been granted at an exercise
price of $6.38 pursuant to the Directors Plan, all of which will be outstanding
and unexercised as of the Effective Date. Options expire ten years after the
date of grant. An increase in the number of shares of Common Stock that may
become available for sale in the public market, or the perception that such
sales may occur, could adversely affect the market price prevailing from time to
53
<PAGE> 55
time of the Common Stock in the public market and could impair the Company's
ability to raise additional capital through the sale of its equity securities.
See "Shares Eligible for Future Sale."
DIRECTOR COMPENSATION
Since the Company's inception, members of the Board of Directors have not
received any compensation for their service on the Board of Directors except as
provided under the Directors Plan. See "-- Option Plans -- Directors Stock
Option Plan."
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Certificate contains provisions that provide that no director
of the Company shall be liable for breach of fiduciary duty as a director except
for: (i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) liability under
Section 174 of the Delaware Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. The Restated Certificate
contains provisions that further provide for the indemnification of the
Company's directors and officers to the fullest extent permitted by the Delaware
Corporation Law. The Company also has entered into indemnity agreements with
each of its directors pursuant to which the Company has agreed to indemnify the
directors as permitted by the Delaware Corporation Law.
CERTAIN TRANSACTIONS
The Company has adopted a policy requiring that any material transactions
between the Company and persons or entities affiliated with officers, directors
or principal stockholders of the Company be on terms no less favorable to the
Company than reasonably could have been obtained in arms' length transactions
with independent third parties.
For a summary of certain transactions and relationships among the Company
and its associated entities, and among the directors, executive officers and
stockholders of the Company and its associated entities, see
"Management -- Board of Directors -- Compensation Committee Interlocks and
Insider Participation."
54
<PAGE> 56
PRINCIPAL STOCKHOLDERS
The following table provides information, as of June 30, 1996, concerning
beneficial ownership of Common Stock by: (i) each person or entity known by the
Company to beneficially own more than 5% of the outstanding Common Stock; (ii)
each director of the Company; (iii) the Chief Executive Officer; and (iv) all
directors and executive officers of the Company as a group. The information as
to beneficial ownership has been furnished by the respective stockholders,
directors and executive officers of the Company, and, unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON AMOUNT AND NATURE OF PERCENT OF COMMON
BENEFICIAL OWNERSHIP STOCK OUTSTANDING BENEFICIAL OWNERSHIP STOCK OUTSTANDING
NAME OF BENEFICIAL OWNER BEFORE OFFERING(1) BEFORE OFFERING AFTER OFFERING AFTER OFFERING(2)
- -------------------------- -------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
ITC Holding(3)(4)......... 1,933,489 37.0% 1,933,489 22.2%
Charles M. Brewer(5)...... 1,032,951 20.2 1,032,951 12.0
O. Gene Gabbard(4)........ 5,000 * 5,000 *
Campbell B. Lanier,
III(4).................. 7,400 * 7,400 *
Michael S. McQuary........ 63,920 1.2 63,920 *
Michael G. Misikoff....... 77,972 1.5 77,972 *
William H. Scott,
III(4).................. 5,500 * 5,500 *
All executive officers and
directors as a group (14
persons)(6)............. 1,220,950 23.8% 1,220,950 14.1%
</TABLE>
- ---------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a person is deemed to be the beneficial owner,
for purposes of this table, of any shares of Common Stock if such person has
or shares voting power or investment power with respect to such security, or
has the right to acquire beneficial ownership at any time within 60 days
from June 30, 1996. As used herein, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to dispose
or direct the disposition of shares.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The address of ITC Holding is 1239 O.G. Skinner Drive, West Point, Georgia
31833. Beneficial ownership presented for ITC Holding assumes conversion on
September 19, 1996 of the 100,000 shares of Class C Preferred owned by ITC
Holding into shares of Common Stock on a one-for-one basis. On January 29,
1996, ITC Holding pledged all of its stock in the Company to certain lenders
in connection with a credit facility.
(4) Mr. Lanier is Chairman of the Board, Chief Executive Officer and a
beneficial owner of approximately 28% of the common stock of ITC Holding.
Mr. Lanier's beneficial ownership of MindSpring includes 1,200 shares of
Common Stock held in trust for his son and 1,200 shares of Common Stock held
by his wife. Mr. Scott is the President and a director of ITC Holding and is
a beneficial owner of less than 3% of its common stock. Mr. Scott's
beneficial ownership of MindSpring includes 500 shares of Common Stock held
by his wife. Mr. Gabbard is a director of ITC Holding and a beneficial owner
of less than 1% of its common stock. Each of Messrs. Lanier, Scott and
Gabbard disclaims beneficial ownership of the shares of the Company's Common
Stock held by ITC Holding.
(5) The address for Charles M. Brewer is MindSpring Enterprises, Inc., 1430 West
Peachtree, Suite 400, Atlanta, Georgia 30309.
(6) Includes 12,912 shares of Common Stock that such persons have the right to
purchase within 60 days from June 30, 1996 pursuant to options.
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<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Restated
Certificate and Bylaws, which are included as exhibits to the Registration
Statement of which this Prospectus forms a part and by the provisions of
applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Restated Certificate, the Company has authority to issue
15,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000
shares of Class C Preferred, par value $0.01 per share, each having the terms
described below. In addition, under the Restated Certificate, the Board of
Directors of the Company has authority (without action by the stockholders) to
issue 1,000,000 shares of preferred stock, par value $0.01 per share, in one or
more classes or series and, within certain limitations, to determine the voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and in liquidation, and conversion and other rights
of each such series. The Company has no current plans to issue any additional
shares of preferred stock.
The rights of the holders of Common Stock discussed below are subject to
the rights of the Class C Preferred holders and to such rights as the Board of
Directors may hereafter confer on the holders of preferred stock; accordingly,
rights conferred on holders of preferred stock that may be issued in the future
under the Restated Certificate may adversely affect the rights of holders of
Common Stock.
COMMON STOCK
Voting Rights. Each holder of shares of Common Stock shall be entitled to
attend all special and annual meetings of the stockholders of the Company and,
share-for-share and without regard to class, together with the holders of all
other classes of stock entitled to attend such meetings and to vote (except any
class or series of stock having special voting rights), to cast one vote for
each outstanding share of Common Stock so held upon any matter or thing
(including, without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders.
Liquidation Rights. In the event of any dissolution, liquidation, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Common Stock and holders of any class or series of stock entitled to participate
therewith, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Company remaining after
the Company shall have paid, or provided for payment of, all debts and
liabilities of the Company and after the Company shall have paid, or set aside
for payment, to the holders of any class of stock having preference over the
Common Stock in the event of dissolution, liquidation or winding up the full
preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith as to dividends but only when
and as declared by the Board of Directors.
CLASS C PREFERRED STOCK
Voting Rights. Except as otherwise required by law, the holders of shares
of Class C Preferred are entitled, together with the holders of all other
classes of stock entitled to a vote (except any class or series of stock having
special voting rights), to cast one vote for each share registered in the name
of such holder on matters that are voted on by stockholders generally, including
the election of directors.
Liquidation Rights. In the event of any dissolution, liquidation or
winding up the Company, whether voluntary or involuntary, the holders of shares
of Class C Preferred are entitled to receive out of assets of the Company
legally available for distribution to stockholders, before any payment or
distribution is made on the Common Stock, cash in the amount of $6.38 per share
(the "Class C Preferred Liquidation Distribution"). After the Class C Preferred
Liquidation Distribution has been made and after the holders of any other class
or series having preference over the Common Stock in the event of dissolution,
liquidation or winding up have received the full preferential amounts to which
they are entitled, the holders of the shares of Common Stock and any other class
or series of stock entitled to participate with the Common Stock in the event of
dissolution,
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<PAGE> 58
liquidation or winding up are entitled to receive out of the assets of the
Company legally available for distribution to stockholders cash in an aggregate
amount equal to the amount of the Class C Preferred Liquidation Distribution.
Thereafter, the holders of shares of Class C Preferred participate equally with
the holders of the shares of Common Stock and any other class or series of stock
entitled to participate with the Common Stock in the event of dissolution,
liquidation or winding up in the distribution of any remaining assets of the
Corporation. If the assets distributable upon such dissolution, liquidation or
winding up are insufficient to pay cash in an amount equal to the Class C
Preferred Liquidation Distribution to the holders of the shares of Class C
Preferred, then such assets or the proceeds thereof are distributed among the
holders of the Class C Preferred ratably in proportion to the respective amounts
of the Class C Preferred Liquidation Distribution to which they would otherwise
be entitled.
Dividends. The Class C Preferred ranks, as to dividends, senior and prior
to the Common Stock and to all other classes or series of stock issued by the
Company.
Conversion into Common Stock. By their terms, the shares of Class C
Preferred automatically convert into fully paid and nonassessable shares of
Common Stock of the Company at the rate of one share of Common Stock for each
share of Class C Preferred (as adjusted for any stock split or reclassification)
on September 19, 1996.
OTHER AUTHORIZED PREFERRED STOCK
The Restated Certificate authorizes the Board of Directors, from time to
time and without further stockholder action, to provide for the issuance of up
to 1,000,000 shares of preferred stock, par value $.01 per share, in one or more
series, and to fix the relative rights and preferences of the shares, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date hereof, the Board of Directors has not
provided for the issuance of any series of such preferred stock, and there are
no agreements or understandings for the issuance of any such preferred stock.
Because of its broad discretion with respect to the creation and issuance of
preferred stock without stockholder approval, the Board of Directors could
adversely affect the voting power of the holders of Common Stock and, by issuing
shares of preferred stock with certain voting, conversion and/or redemption
rights, could discourage any attempt to obtain control of the Company.
CERTAIN CHARTER AND STATUTORY PROVISIONS
The Restated Certificate provides for the division of the Board of
Directors into three classes of directors, serving staggered three year terms.
The Restated Certificate further provides that the approval of the holders of at
least two-thirds of the shares entitled to vote thereon and the approval of a
majority of the entire Board of Directors are necessary for the alteration,
amendment or repeal of certain sections of the Restated Certificate relating to
the election and classification of the Board of Directors, indemnification and
the vote requirements for such amendments to the Restated Certificate. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of the Company.
The Company is subject to the provisions of Section 203 of the Delaware
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to such
date, the board approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in such person becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by certain directors or certain employee stock plans),
or (iii) on or after the date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and authorized by
the affirmative vote (and not by written consent) of at least two-thirds of the
outstanding voting stock excluding that stock owned by the interested
stockholder. A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested
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<PAGE> 59
stockholder" is a person who (other than the corporation and any direct or
indirect majority-owned subsidiary of the corporation), together with affiliates
and associates, owns (or, as an affiliate or associate, within three years
prior, did own) 15% or more of the corporation's outstanding voting stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. An increase in the number of shares of Common
Stock that may become available for sale in the public market after the
expiration of the restrictions described below could adversely affect the market
price prevailing from time to time of the Common Stock in the public market and
could impair the Company's ability to raise additional capital through the sale
of its equity securities in the future.
The Company's directors, executive officers and certain significant
stockholders have agreed to enter into Lock-up Agreements with the Underwriters
providing that, subject to certain exceptions, they will not offer, sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock, any
securities convertible into or exercisable or exchangeable for Common Stock or
any options to acquire Common Stock for a period of 120 days from the completion
of the Offering, without the prior written consent of J.C. Bradford & Co. See
"Principal Stockholders" and "Underwriting." As a result, notwithstanding
possible earlier eligibility for sale under the provisions of Rule 144 under the
Securities Act, shares subject to the Lock-up Agreements generally will not be
eligible for sale until the Lock-up Agreements expire or their terms are waived
by J.C. Bradford & Co. Assuming J.C. Bradford & Co. does not release the
stockholders from the Lock-up Agreements, the following shares of Common Stock
will be eligible for sale in the public market at the following times: upon
completion of the Offering, approximately 5,628,000 shares (of which 103,296
shares are eligible to be sold in accordance with Rule 144) will be immediately
available for sale in the public market; and 120 days after the completion of
the Offering, approximately 56,800 shares will be eligible for sale pursuant to
Rule 701 under the Securities Act and approximately 2,220,846 shares (all of
which are held by affiliates of the Company) will be eligible for sale pursuant
to Rule 144.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of "restricted securities"
from the Company or any "affiliate" of the Company, as those terms are defined
under the Securities Act, the holder is entitled to sell within any three-month
period a number of shares of Common Stock that does not exceed the greater of 1%
of the then-outstanding shares of Common Stock (approximately 86,258 shares
immediately after the Offering or approximately 91,508 shares if the
Underwriters' over-allotment option is exercised in full), or the average weekly
trading volume of shares of Common Stock on all exchanges and reported through
the automated quotation system of a registered securities association during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are also subject to certain restrictions on the manner of sales, notice
requirements and the availability of current public information about the
Company. If three years have elapsed since the date of acquisition of restricted
shares from the Company or from any "affiliate" of the Company, and the holder
thereof is deemed not to have been an "affiliate" of the Company at any time
during the 90 days preceding a sale, such person would be entitled to sell such
Common Stock in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements described above. A proposal currently pending before the
Commission would reduce the two-and three-year holding periods described above
to one-and two-years, respectively.
As of June 30, 1996, the Company had granted pursuant to the Stock Option
Plan and the Directors Plan and there remains outstanding options to purchase
439,213 shares of Common Stock out of a maximum of 686,668 shares of Common
Stock reserved for those purposes. See "Management -- Option Plans."
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<PAGE> 60
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co., Wheat, First Securities, Inc. and The Robinson-Humphrey Company, Inc., as
representatives of the several underwriters (the "Representatives"), have
agreed, severally, to purchase from the Company the number of shares of Common
Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
J.C. Bradford & Co........................................................
Wheat, First Securities, Inc..............................................
The Robinson-Humphrey Company, Inc........................................
---------
Total................................................................
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all shares of Common Stock
offered hereby if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the public offering price and such concessions may be changed by the
Underwriter.
The offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to an aggregate of
525,000 additional shares of Common Stock to cover over-allotments, if any. To
the extent the Underwriters exercise the option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
table above bears to the total number of shares in such table, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of Common Stock offered hereby.
If purchased, the Underwriters will sell these additional shares on the same
terms as those on which the 3,500,000 shares are being offered.
The Company, its executive officers and directors and certain of its
significant stockholders, owning an aggregate of approximately 3,050,939 shares
of Common Stock, have agreed that they will not offer, sell or otherwise dispose
of any shares of Common Stock, any securities exercisable for or convertible
into the Common Stock or any options to acquire Common Stock owned by them prior
to the expiration of 120 days from the date of this Prospectus, without the
prior written consent of J.C. Bradford & Co., except with respect to the grant
and exercise of stock options granted or to be granted under the Company's stock
option plans. See "Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil liabilities,
including liabilities under the Securities Act, or will
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<PAGE> 61
contribute to payments that the Underwriters or any such controlling persons may
be required to make in respect thereof.
In connection with this Offering, certain Underwriters and selling group
members (if any) who in the past have acted as market makers in the Common Stock
may engage in passive market making activities in the Common Stock on the Nasdaq
National Market in accordance with Rule 10b-6A under the Exchange Act.
Underwriters and other participants in the distribution of the Common Stock
generally are prohibited during a specified time period (the "qualifying
period"), determined in light of the timing of the distribution, from bidding
for or purchasing the Common Stock or a related security except to the extent
permitted under applicable rules, primarily Rules 10b-6 and 10b-6A. Rule 10b-6A
allows, among other things, an Underwriter or member of the selling group (if
any) for the Common Stock to effect "passive market making" transactions on the
Nasdaq National Market in the Common Stock during the qualifying period at a
price that does not exceed the highest independent bid for that security at the
time of the transaction. Such a passive market maker must not display a bid for
the subject security at a price in excess of the highest independent bid, and
generally must lower its bid if all independent bids are lowered. Moreover, the
passive market maker's net purchases of such security on each day of the
qualifying period shall not exceed 30% of its average daily trading volume
during a reference period preceding the distribution.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
are being passed upon for the Company by Hogan & Hartson L.L.P., Washington,
D.C. counsel for the Company. Hogan & Hartson L.L.P. also provides legal
services to ITC Holding, its affiliated companies and Campbell B. Lanier, III,
Chairman and Chief Executive Officer of ITC Holding. In particular, Hogan &
Hartson L.L.P. (with the consent of the Company) has represented ITC Holding in
certain transactions with the Company, including the First Loan and the Second
Loan. Anthony S. Harrington, a partner of the firm, beneficially owns 34,800
shares of ITC Holding common stock and 5,000 shares of MindSpring Common Stock.
Certain legal matters are being passed upon for the Underwriters by Nelson
Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The financial statements and financial statement schedules of the Company
and PSINet Inc. Consumer Internet Services in the United States as of December
31, 1994 and 1995 and included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements for PSINet Pipeline New York, Inc. (formerly The
Pipeline Network Inc.) as of December 31, 1994 and for the year then ended
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of the reports, proxy statements and
other information can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, upon payment of prescribed rates or in
certain cases by accessing the Commission's World Wide Web site at
http://www.sec.gov. The Common Stock of the Company is traded on the Nasdaq
National Market under the
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<PAGE> 62
symbol "MSPG", and such reports, proxy statements and other information
concerning the Company also can be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all of the information set forth in the Registration Statement. For
further information about the Company and the Common Stock, reference is made to
the Registration Statement and to the financial statements, exhibits and
schedules filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each such
document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission or, in
the case of certain such documents, by accessing the Commission's World Wide Web
site at http://www.sec.gov.
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<PAGE> 63
GLOSSARY OF TECHNICAL TERMS
BACKBONE................... A high-speed network that connects smaller,
independent networks.
BANDWIDTH.................. The number of bits of information that can move
over a communications medium in a given amount of
time.
ELECTRONIC MAIL OR
E-MAIL..................... An application that allows a user to send or
receive messages to or from any other user with an
Internet address, commonly termed an e-mail
address.
FTP........................ File Transfer Protocol. A protocol that allows file
transfer between a host and a remote computer.
GRAPHICAL USER INTERFACE... A means of communicating with a computer by
manipulating icons and windows rather than using
text commands.
INTERNET................... An open global network of interconnected
commercial, educational and governmental computer
networks that utilize a common communications
protocol, TCP/IP.
INTERNET BACKBONE.......... The Internet backbone consists of high-speed
networks that link the smaller, independent
networks of the Internet.
ISDN....................... Integrated Services Digital Network. A digital
network that combines voice and digital network
services through a single medium, making it
possible to offer subscribers digital data services
as well as voice connections.
MODEM...................... A piece of equipment that connects a computer to a
data transmission line (typically a telephone
line).
ON-LINE SERVICES........... Commercial information services that offer a
computer user access through a modem to specific
menus of information, entertainment and
communications data. These services are generally
closed systems and many offer limited, if any,
Internet access.
POP........................ Point of Presence. The Company defines a POP as a
local geographic point of presence where
subscribers can access the Company's services via a
local telephone call. To the Company's knowledge,
there is no industry-wide definition of an Internet
access POP, and other companies may define a POP
differently. For purposes of this Prospectus, the
Company has determined all POP numbers using the
Company's definition.
PPP........................ Point to Point Protocol. A communications protocol
that allows direct dial-up access to the Internet
over phone lines. Unlike SLIP, PPP can
automatically retransmit information packets if
they become corrupted.
PROTOCOL................... A formal description of message formats and the
rules two or more machines must follow in order to
exchange such messages.
ROUTER..................... A device that receives and transmits data packets
between segments in a network or different
networks.
SERVER..................... Software that allows a computer to offer a service
to another computer. Other computers contact the
server program by means of matching client
software. In addition, such term means the computer
on which server software runs.
G-1
<PAGE> 64
SLIP....................... Serial Line Interface Protocol. A communications
protocol that allows direct, dial-up access to the
Internet over phone lines.
T-1........................ A data communications line capable of transmission
speeds of 1.54 Mbps.
TCP/IP..................... Transmission Control Protocol/Internet Protocol. A
compilation of network-level and transport-level
protocols that allow computers with different
architectures and operating system software to
communicate with other computers on the Internet.
TERMINAL SERVER............ A specialized computer that supports multiple
communications connections.
WINDOWS.................... A computer operating system developed by Microsoft
Corp. that provides a graphical user interface and
multitasking capabilities.
WINSOCK.................... An industry standard programming interface
definition for Windows which specifies how
TCP/IP-based network applications should
communicate with TCP/IP protocol software. Winsock
has been adopted by most vendors of network
protocol software and network applications software
for Windows.
WORLD WIDE WEB............. A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication
of graphics, video and sound.
G-2
<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MINDSPRING ENTERPRISES, INC.
Financial Statements as of December 31, 1994 and December 31, 1995
Report of Independent Public Accountants................................... F-2
Balance Sheets as of December 31, 1994 and 1995............................ F-3
Statements of Operations for the Period from Inception (February 24, 1994)
to December 31, 1994 and for the Year Ended December 31, 1995............ F-4
Statements of Stockholders' Equity for the Period from Inception (February
24, 1994) to December 31, 1994 and for the Year Ended December 31, 1995.. F-5
Statements of Cash Flows for the Period from Inception (February 24, 1994)
to December 31, 1994 and for the Year Ended December 31, 1995............ F-6
Notes to Financial Statements.............................................. F-7
Condensed Financial Statements as of June 30, 1996 (Unaudited)
Condensed Balance Sheets as of December 31, 1995 and June 30, 1996
(Unaudited).............................................................. F-18
Condensed Statements of Operations for the Three-Month Periods Ended June
30, 1995 and 1996 and the Six-Month Periods Ended June 30, 1995 and 1996
(Unaudited).............................................................. F-19
Condensed Statement of Cash Flows for the Six-Month Periods Ended June 30,
1995 and 1996 (Unaudited)................................................ F-20
Notes to Condensed Financial Statements.................................... F-21
PSINET INC. -- CONSUMER INTERNET ACCESS SERVICES IN THE UNITED STATES
Financial Statements as of December 31, 1994 and 1995, and June 30, 1996
(Unaudited)
Report of Independent Public Accountants................................... F-23
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.......... F-24
Statements of Operations for the Period from Inception (July 1, 1994) to
December 31, 1994, the year ended December 31, 1995, and the Six Months
Ended June 30, 1995 and 1996 (Unaudited)................................. F-25
Statements of Accumulated Deficit for the Period from Inception (July 1,
1994) to December 31, 1994, the Year Ended December 31, 1995, and the Six
Months Ended June 30, 1996 (Unaudited)..................................... F-26
Statement of Cash Flows for the Period from Inception (July 1, 1994) to
December 31, 1994, the Year Ended December 31, 1995, and the Six Months
Ended June 30, 1996 (Unaudited).......................................... F-27
Notes to Financial Statements.............................................. F-28
PSINET PIPELINE NEW YORK, INC.
Financial Statements as of December 31, 1994
Report of Independent Accountants.......................................... F-35
Balance Sheet as of December 31, 1994...................................... F-36
Statement of Operations for the Year Ended December 31, 1994............... F-37
Statement of Changes in Shareholders' Equity for the Year Ended December
31, 1994................................................................. F-38
Statement of Cash Flows for the Year Ended December 31, 1994............... F-39
Notes to Financial Statements.............................................. F-40
PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Information....................................... F-44
Pro Forma Combined Balance Sheet as of June 30, 1996 (Unaudited)........... F-45
Pro Forma Combined Statements of Income for the Year Ended December 31,
1995 and the Six-Month Period Ended June 30, 1996 (Unaudited)............ F-47
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
MindSpring Enterprises, Inc.:
We have audited the accompanying balance sheets of MINDSPRING ENTERPRISES,
INC. (a Delaware corporation) as of December 31, 1994 and 1995 and the related
statements of operations, stockholders' equity, and cash flows for the period
from inception (February 24, 1994) to December 31, 1994 and for the year ended
December 31, 1995. 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, 1994 and 1995 and the results of its operations and its cash
flows for the period from inception (February 24, 1994) to December 31, 1994 and
for the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 16, 1996 (except with
respect to Note 10 as to
which the date is
August 20, 1996)
F-2
<PAGE> 67
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31,
1994 1995 1995
-------- ----------- ------------
(NOTE 9)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $584,798 $ 424,834
Trade receivables, net of allowance for doubtful accounts of $15,000 and
$45,563 at December 31, 1994 and 1995, respectively........................ 14,610 519,280
Inventory.................................................................... 0 45,415
Prepaids and other current assets (Note 2)................................... 0 273,658
-------- -----------
Total current assets................................................... 599,408 1,263,187
-------- -----------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.................................... 102,492 3,594,528
Purchased software systems................................................... 0 103,078
Other........................................................................ 0 96,890
-------- -----------
102,492 3,794,496
Less accumulated depreciation and amortization............................... (1,138) (255,560)
-------- -----------
Property and equipment, net............................................ 101,354 3,538,936
-------- -----------
PRODUCT DEVELOPMENT COSTS, net of accumulated amortization of $4,027 and
$14,288 at December 31, 1994 and 1995, respectively.......................... 15,974 34,071
-------- -----------
OTHER ASSETS................................................................... 4,830 8,606
-------- -----------
$721,566 $ 4,844,800
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan from preferred stockholder (Note 6)..................................... $ 0 $ 2,500,000
Trade accounts payable....................................................... 31,120 994,164
Accrued expenses............................................................. 17,731 532,406
Deferred revenue............................................................. 2,981 336,027
-------- -----------
Total current liabilities.............................................. 51,832 4,362,597
-------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized and 0 shares
issued and outstanding at December 31, 1994 and 1995....................... 0 0 $ 0
Class A convertible preferred stock, $0.64 par value; 1,187,895 shares
authorized, issued, and outstanding at December 31, 1994 and 1995,
respectively............................................................... 744,575 744,575 0
Class B convertible preferred stock, $1.55 par value; 645,596 shares
authorized and 0 and 645,594 shares issued and outstanding at December 31,
1994 and 1995, respectively................................................ 0 1,000,000 0
Class C convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized and 0 and 100,000 shares issued and outstanding at December 31,
1994 and 1995, respectively................................................ 0 638,000 638,000
Common stock, $0.01 par value; 15,000,000 shares authorized and 1,136,247 and
1,267,304 issued and outstanding at December 31, 1994 and 1995,
respectively............................................................... 11,362 12,673 30,119
Additional paid-in-(deficit) capital......................................... (11,142) 120,547 1,847,676
Accumulated deficit.......................................................... (75,061) (2,033,592) (2,033,592)
-------- ----------- ------------
Total stockholders' equity............................................. 669,734 482,203 $ 482,203
-------- ----------- ------------
$721,566 $ 4,844,800
======== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 68
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 1994) TO DECEMBER 31, 1994
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
-------- -----------
<S> <C> <C>
REVENUES:
Access.............................................................. $ 65,423 $ 1,506,695
Subscriber start-up fees............................................ 33,662 594,231
Other............................................................... 4,321 125,918
-------- -----------
Total revenues.............................................. 103,406 2,226,844
COSTS AND EXPENSES:
Selling, general, and administrative................................ 121,376 2,230,102
Cost of revenues -- recurring....................................... 37,329 626,404
Cost of subscriber start-up fees.................................... 14,517 339,369
Depreciation and amortization....................................... 5,245 264,683
-------- -----------
Total costs and expenses.................................... 178,467 3,460,558
-------- -----------
OPERATING LOSS........................................................ (75,061) (1,233,714)
INTEREST EXPENSE, NET................................................. 0 (724,817)
-------- -----------
NET LOSS.............................................................. $(75,061) $(1,958,531)
======== ===========
PRO FORMA NET LOSS PER SHARE (NOTE 2):
Weighted average shares outstanding -- 3,175,376 at December 31,
1995............................................................. $ (0.62)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 69
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 1994) TO DECEMBER 31, 1994
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN- PREFERRED STOCK TOTAL
------------------- (DEFICIT) ---------------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT EQUITY
--------- ------- ---------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 24, 1994
(inception)............... 0 $ 0 $ 0 0 $ 0 $ 0 $ 0
Initial issuance of common
stock (Note 3)......... 1,032,951 10,330 (10,130) 0 0 0 200
Issuance of additional
common stock (Note
3)..................... 103,296 1,032 (1,012) 0 0 0 20
Issuance of Class A
convertible preferred
stock, net of related
offering expenses...... 0 0 0 1,187,895 744,575 0 744,575
Net loss.................. 0 0 0 0 0 (75,061) (75,061)
--------- ------- ---------- --------- ---------- ----------- ------------
BALANCE, December 31,
1994...................... 1,136,247 $11,362 $ (11,142) 1,187,895 $ 744,575 $ (75,061) $ 669,734
Issuance of additional
common stock........... 131,057 1,311 131,689 0 0 0 133,000
Issuance of Class B
convertible preferred
stock.................. 0 0 0 645,594 1,000,000 0 1,000,000
Issuance of Class C
convertible preferred
stock warrant.......... 0 0 0 100,000 638,000 0 638,000
Net loss.................. 0 0 0 0 0 (1,958,531) (1,958,531)
--------- ------- ---------- --------- ---------- ----------- ------------
BALANCE, December 31,
1995...................... 1,267,304 $12,673 $ 120,547 1,933,489 $2,382,575 $(2,033,592) $ 482,203
========= ======= ========= ========= ========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 70
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 24, 1994) TO DECEMBER 31, 1994
AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss......................................................... $ (75,061) $(1,958,531)
--------- -----------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 5,245 264,683
Provision for doubtful accounts............................... 15,000 40,624
Noncash charge for warrant issuance (Note 6).................. 0 637,000
Changes in operating assets and liabilities:
Trade receivables........................................... (29,610) (545,294)
Inventory................................................... 0 (45,415)
Prepaids and other current assets........................... 0 (273,658)
Trade accounts payable...................................... 31,120 963,044
Accrued expenses............................................ 17,731 514,675
Deferred revenue............................................ 2,981 333,046
--------- -----------
Total adjustments........................................ 42,467 1,888,705
--------- -----------
Net cash used in operating activities.................... (32,594) (69,826)
--------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (102,492) (3,692,004)
Product development costs........................................ (20,001) (28,358)
Other............................................................ (4,910) (3,776)
--------- -----------
Net cash used in investing activities.................... (127,403) (3,724,138)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of loan from preferred stockholder...................... 0 2,500,000
Issuance of common stock......................................... 220 133,000
Issuance of preferred stock...................................... 744,575 1,001,000
--------- -----------
Net cash provided by financing activities................ 744,795 3,634,000
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 584,798 (159,964)
CASH AND CASH EQUIVALENTS, beginning of period..................... 0 584,798
--------- -----------
CASH AND CASH EQUIVALENTS, end of period........................... $ 584,798 $ 424,834
========= ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest........................................... $ 0 $ 0
========= ===========
Cash paid for taxes.............................................. $ 0 $ 0
========= ===========
Noncash charge for warrant issuance (Note 6)..................... $ 0 $ 637,000
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 71
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND NATURE OF BUSINESS
MindSpring Enterprises, Inc. (the "Company") was incorporated in Georgia in
February 1994. The Company is a provider of Internet access, serving primarily
individual subscribers. The Company offers subscribers Internet access comprised
of software and documentation, integrated with local dial-up and dedicated line
access and seven-day customer support.
The Company has experienced operating losses since its inception as a
result of efforts to build its network infrastructure and internal staffing,
develop its systems, and expand into new markets. The Company expects to
continue to focus on increasing its subscriber base and geographic coverage.
Accordingly, the Company expects its cost of revenues, selling, general, and
administrative expenses and capital expenditures will continue to increase
significantly, all of which will have a negative impact on short-term operating
results. In addition, the Company may change its pricing policies to respond to
a changing competitive environment. There can be no assurance that growth in the
Company's revenue or subscriber base will continue or that the Company will be
able to achieve or sustain profitability or positive cash flow.
Effective December 27, 1995, the Company reincorporated from Georgia to
Delaware.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenues when services are provided. Services are
generally billed one month in advance. Advance billings and collections relating
to future access services are recorded as deferred revenue and recognized as
revenue when earned.
The Company recognizes revenue on sales of starter kits to retail stores
when the product is shipped, net of a reserve for anticipated returns.
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. 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.
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.
F-7
<PAGE> 72
PREPAIDS AND OTHER CURRENT ASSETS
This account consists of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Deferred initial public offering fees (Note 9)................. $ 0 $199,830
Prepaid maintenance contract................................... 0 58,045
Other.......................................................... 0 15,783
-------- --------
$ 0 $273,658
======== ========
</TABLE>
INVENTORY
Inventory consists of starter kits and purchased equipment for resale and
is stated at the lower of cost or market using a specific identification method.
Starter kits consist of diskettes, manuals, and other printed material.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided for using the straight-line method over the estimated useful lives
of the assets, commencing when assets are installed or placed in service. The
estimated useful life for all assets is five years or, for leasehold
improvements, the life of the lease, if shorter.
PRODUCT DEVELOPMENT COSTS
The Company capitalizes costs incurred for the production of computer
software used in the sale of its services, including direct labor and related
overhead. All costs in the software development process that are classified as
research and development are expensed as incurred until technological
feasibility has been established. Once technological feasibility has been
established, such costs are capitalized until the software is commercially
available. Amortization is provided using the greater of the straight-line
method over three years or the ratio that current gross revenues bear to the
total of current and anticipated future gross revenues, commencing in the month
of product release. It is reasonably possible that the estimates of anticipated
future revenues, the remaining estimated economic life of the product, or both
will be reduced significantly in the near term due to competitive pressures.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and product development costs to determine if any
impairments are other than temporary. Management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1995, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which
do not choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings and earnings per
share as if SFAS 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
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.
F-8
<PAGE> 73
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
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.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of shares of common stock and dilutive common stock equivalent shares ("CSEs")
from convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common stock and CSEs issued at
prices below the expected public offering price during the 12-month period prior
to the Company's expected initial public offering (Note 9) have been included in
the calculation as if they were outstanding for all periods prior to the
offering presented, regardless of whether they are dilutive. Accordingly, all
stock options granted and the Class C convertible preferred stock are included
in the earnings per share calculations for all periods presented, even though
the effect on net loss is antidilutive. The Class A and Class B convertible
preferred stock have been included for the respective weighted periods for which
such shares were outstanding, even though their effect is antidilutive.
SOURCES OF SUPPLIES
The Company relies on 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.
Although the Company attempts to maintain multiple vendors for each
required product, its modems, terminal servers, and high-performance routers,
which are important components of its network, are each currently acquired from
only one source. In addition, some of the Company's suppliers have limited
resources and production capacity. If the suppliers are unable to meet the
Company's needs as it builds out its network infrastructure, then delays and
increased costs in the expansion of the Company's network infrastructure could
result, which would affect operating results adversely.
3. STOCKHOLDERS' EQUITY
RECAPITALIZATION
Effective December 27, 1995, the Company recapitalized on the basis of
1.936199 shares of the capital stock of the Georgia corporation for one share of
the Delaware corporation. All amounts in the accompanying financial statements
have been restated to reflect the effect of this recapitalization. As a result
of this recapitalization, the issuances of common stock of the Georgia
corporation in 1994, which were issued at the then par value of $0.0001 per
share for total proceeds of $220, have been restated in the accompanying
financial statements as if issued below the $0.01 par value of the Delaware
corporation common stock.
COMMON STOCK
The Company has authorized 15,000,000 shares of $0.01 par value common
stock. On February 24, 1994, the Company issued 1,032,951 shares of common stock
to the founder of the Company for total proceeds of $200, which represented the
estimated fair value of the stock at the time of issuance. On March 3, 1994, the
Company issued 103,296 shares of its common stock to a third party for total
proceeds of $20. In management's opinion, the estimated fair value of the stock
at the time of the March 1994 issuance was equal to the value per share of the
February 1994 stock issuance.
F-9
<PAGE> 74
During 1995, the Company issued shares of $0.01 par value common stock to
three officers of the Company at amounts equal to the estimated fair value of
the common stock on the date of sale. The following table summarizes these
transactions:
<TABLE>
<CAPTION>
NUMBER PRICE TOTAL
OF PER CONSIDERATION
SHARES SHARE PAID
------- ----- -------------
<S> <C> <C> <C>
January 18............................................... 77,472 $0.64 $ 50,000
July 27.................................................. 48,420 1.55 75,000
August 29................................................ 5,165 1.55 8,000
------- ----------
Total.......................................... 131,057 $ 133,000
======= ==========
</TABLE>
PREFERRED STOCK
On November 15, 1994, the Company issued 1,187,895 shares of its $0.64 par
value Class A convertible preferred stock to ITC Holding Company, Inc. (the
"Preferred Stockholder") in exchange for total consideration of $765,000.
Expenses of $20,425 incurred in connection with the issuance have been deducted
from the total proceeds in the accompanying financial statements. The Preferred
Stockholder is entitled to the same voting rights and powers of the common
stockholders. Accordingly, the Preferred Stockholder held a 51% voting interest
in the Company. Each share of Class A convertible preferred stock is
automatically convertible into one share of common stock at the earlier of
either a public offering of common stock by the Company or on November 15, 1999.
In the event of liquidation of the Company, whether voluntary or involuntary,
the holders of Class A convertible preferred stock are entitled to receive
preferential distributions of $0.64 per share before any distributions to common
stockholders.
In April 1995, the board of directors approved an agreement to issue
645,594 shares of $1.55 par value Class B convertible preferred stock to the
Preferred Stockholder at $1.55 per share in exchange for total consideration of
$1,000,000, which represented the estimated fair value of the Class B
convertible preferred stock as of such date. In June 1995, the Company issued
the Class B convertible preferred stock. This increased the stockholder's
ownership percentage, net of other transactions in 1995, to 59.1%. Each share of
Class B convertible preferred stock is automatically convertible into one share
of common stock at the earlier of either a public offering of common stock by
the Company or on June 30, 2000. In the event of liquidation of the Company,
whether voluntary or involuntary, the holders of convertible preferred stock are
entitled to receive preferential distributions of $1.55 per share after any
distribution to the Class A preferred stockholders but before any distributions
to common stockholders.
On December 22, 1995, the board of directors authorized the issuance of
5,000,000 shares of Class C convertible preferred stock. See Note 6 for issuance
of 100,000 shares of Class C convertible preferred stock to the Preferred
Stockholder, increasing its ownership percentage to approximately 60%. Each
share of Class C convertible preferred stock is automatically convertible into
one share of common stock at the earliest of:
- If the Security and Exchange Commission issues in calendar year 1996 an
order of effectiveness (or evidence thereof satisfactory to the Company)
(an "Effectiveness Order") as to any registration statement for the sale
of any shares of common stock of the Company under the Securities Act of
1933 (or any successor law, other than an order relating to an offering
made primarily or exclusively to employees), the 190th day after issuance;
- The date of issuance after December 31, 1996 of an Effectiveness Order;
or
- December 10, 2000.
In the event of liquidation of the Company, whether voluntary or
involuntary, the holders of Class C convertible preferred stock are entitled to
receive preferential distributions of $6.38 per share after any distribution to
the Class A and B preferred stockholders but before any distributions to common
stockholders.
F-10
<PAGE> 75
STOCKHOLDERS' AGREEMENT
The Company entered into a stockholders' agreement ("Stockholders'
Agreement") with all of the stockholders of the Company. Pursuant to the
Stockholders' Agreement, for so long as the Preferred Stockholder owns any share
of any class or series of capital stock of the Company or any right or option to
acquire any capital stock of the Company ("Equity Securities") with a combined
voting power equal to at least 50.1% of the aggregate voting power of all
outstanding Equity Securities, all of the stockholders have entered into voting
agreements relating to the Company's board of directors. These voting agreements
regard such matters as quorum and voting requirements for the board of
directors, the election to the board of directors of directors designated by the
Preferred Stockholder as shall constitute at least a majority of the directors
serving on the board of directors and the removal and replacement of directors.
None of the parties to the Stockholders' Agreement may transfer any Equity
Securities held by such party to third parties (subject to limited exceptions)
without the consent of the Company and each of the parties to the Stockholders'
Agreement and without having offered rights of first refusal to purchase such
securities to the Company and the other parties to the Stockholders' Agreement.
The Stockholders' Agreement will irrevocably terminate upon the consummation of
an initial public offering.
4. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan (the "Stock Option Plan"), as
adopted on February 21, 1995, amended by the board of directors on April 5, 1995
and December 19, 1995, and approved by the stockholders on December 27, 1995,
616,668 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 Stock Option Plan is administered by
the Compensation Committee of the board of directors. 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 to 50% two years after the date of grant, or in certain
cases, the commencement date of the holder's employment; as to an additional 25%
three years after the date of grant, or in certain cases, the commencement date
of the holder's employment; and as to the remaining 25% four years after the
date of grant, or in certain cases, the commencement date of the holder's
employment. All options were granted at an exercise price equal to the estimated
fair value of the common stock at the dates of grant as determined by the board
of directors based on equity transactions and other analyses. The options expire
ten years from the date of grant.
DIRECTORS' STOCK OPTION PLAN
Under the Company's Directors' Stock Option Plan (the "Directors' Plan"),
adopted in December 1995, 70,000 shares of Common Stock are authorized for
issuance (in the form of 10,000 options per director) to nonemployee directors
upon their initial election or appointment to the board or the date of adoption
of the plan in the case of directors on the board of directors at such adoption
date. The Directors' Plan does not provide for discretionary option grants.
Options generally become exercisable as to 50% two years after the date of
grant, as to an additional 25% three years after the date of grant, and as to
the remaining 25% four years after the grant date. 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 123 which
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to remain with
the accounting in APB 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.
F-11
<PAGE> 76
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1995 using the Black-Scholes
option-pricing model as prescribed by SFAS 123 using the following weighted
average assumptions used for grants in 1995:
<TABLE>
<S> <C>
Risk-free interest rate.......................................... 7%
Expected dividend yield.......................................... 0%
Expected lives................................................... 3 years
Expected volatility.............................................. 84.5%
</TABLE>
The total value of options granted during 1995 was computed as
approximately $409,000, 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 123, the Company's net loss and pro forma net loss
per share for the year ended December 31, 1995 would have increased by the
following pro forma amounts:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- -----------
<S> <C> <C>
Net loss.................................................. $(1,958,531) $(2,010,357)
Pro forma net loss per share.............................. $ (0.85) $ (0.90)
</TABLE>
A summary of the status of the Company's two stock options plans at
December 31, 1995 and changes during the year then ended are presented in the
following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
------- ---------
<S> <C> <C>
Grants............................................................. 375,237 $1.82
Forfeitures........................................................ (17,558) 1.00
-------
Outstanding.............................................. 357,679 1.86
=======
Weighted average fair value of options granted..................... $ 1.12
=======
</TABLE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE NUMBER WEIGHTED AVERAGE
PRICE OF AVERAGE CONTRACTUAL
RANGE SHARES PRICE LIFE
--------- ------- -------- -----------
<C> <C> <C> <S>
$0.64 182,310 $ 0.64 9.1 years
1.55 81,598 1.55 9.5
2.85-6.38 93,771 4.50 9.9
</TABLE>
No options were exercisable at December 31, 1995.
5. RELATED-PARTY TRANSACTIONS
During the period from inception to December 31, 1994, the Company received
cash advances totaling approximately $83,000 from the founder of the Company to
fund operating expenses. These advances were repaid prior to December 31, 1994.
No interest was paid in connection with these advances.
During 1995, the Company loaned excess cash totaling approximately $300,000
to the Preferred Stockholder. This transaction was approved by the board of
directors. The loan was paid back during 1995 at an interest rate of 6.25%.
The Company currently leases telephone lines from and has contracts for
maintenance and installations with a wholly owned subsidiary of the Preferred
Stockholder. The total charges for these services were approximately $41,000 for
the year ended December 31, 1995 and are reflected in cost of revenues --
recurring in the accompanying statements of operations.
F-12
<PAGE> 77
As of January 1, 1995, the Company entered into an agreement with an
affiliate of the Preferred Stockholder providing for the rental of floor space
for the placement of the Company's equipment for its network hub and for the
affiliate's personnel to service and maintain such equipment for a payment of
$3,000 per month. The affiliate may increase this monthly payment if the amount
of technical support services exceeds ten hours per month. The lease runs from
January 1, 1995 through December 31, 1996, but either party may terminate the
lease earlier, without cause, upon 180 days' prior written notice. Unless either
party gives notice to terminate, the lease will renew automatically for
successive six-month terms.
The three external members of the Company's board of directors are also
directors of the Preferred Stockholder, and two of these board members are
executive officers of the Preferred Stockholder.
On January 29, 1995, the Preferred Stockholder pledged all of its stock in
the Company to certain lenders in connection with a credit facility.
See Note 6 for a discussion of the loan facilities with the Preferred
Stockholder.
6. DEBT
In August 1995, the Preferred Stockholder agreed to extend the First Loan
to the Company, of up to $2,000,000 in aggregate principal amount at an annual
interest rate of 11% (the "First Loan") to be used for capital expenditures and
working capital purposes. All amounts outstanding under the First Loan were due
and payable in full on or before December 15, 1995. At December 15, 1995, the
outstanding aggregate principal amount of all advances under the First Loan was
$2,000,000.
At December 15, 1995, the Company had not repaid any amounts outstanding
under the First Loan. In consideration of the Preferred Stockholder's agreement
not to exercise its rights and remedies upon such default under the First Loan,
on December 27, 1995, the Company agreed to pay the Preferred Stockholder a
processing fee of $50,000 and issued to the Preferred Stockholder an immediately
exercisable warrant to purchase 100,000 shares of Class C convertible preferred
stock at a price of $0.01 per share. Accordingly, the Company recorded a charge
of approximately $637,000 in December 1995, representing the fair market value
of the warrant issued, as determined by the Black-Scholes option-pricing model.
By December 31, 1995, the Preferred Stockholder had exercised such warrant in
full. All principal amounts due and owing under the First Loan were paid in full
by December 31, 1995 with proceeds from the Second Loan (as defined below).
Accrued interest on the First Loan of approximately $39,100 and the $50,000
processing fee were paid in full in January 1996.
In December 1995, the Company executed a promissory note in favor of and
entered into the Second Loan Agreement and a security agreement with the
Preferred Stockholder, relating to the Second Loan, pursuant to which agreement
the Company may borrow from time to time up to $4,000,000 (in aggregate
outstanding principal amount) (the "Second Loan"). The unpaid principal amount
of the Second Loan is due and payable in a single payment on July 15, 1996,
together with interest on the unpaid principal amount from the date of each
advance, until paid in full, at an annual rate of 14%. The Second Loan is
secured by substantially all of the assets of the Company. As of February 15,
1996, the outstanding aggregate principal amount of all advances under the
Second Loan was $3,250,000 and accrued but unpaid interest was approximately
$54,700.
According to its terms, advances made pursuant to the Second Loan are to be
used to pay off the entire principal amount (and all accrued and unpaid
interest, as well as any other amounts due thereon) of the First Loan, pay all
costs incurred by all parties in connection with the making and documenting of
the Second Loan, and provide funds for working capital and capital expenditures
for the Company. So long as the Second Loan is outstanding, the Company may not,
without the written consent of the Preferred Stockholder, declare or pay any
dividend of any kind (other than stock dividends payable to all holders of any
class of capital stock), in cash or in property, on any class of the capital
stock of the Company, or purchase, redeem, retire or otherwise acquire for value
any shares of such stock, nor make any distribution of any kind in cash or
property in respect thereof, nor make any return of capital to stockholders, nor
make any payments in cash or property in respect of any stock options, stock
bonus or similar plan, nor grant any preemptive rights with respect to the
capital stock of the Company. In addition, the Company may not incur any other
indebtedness, except indebtedness incurred in the ordinary course of business
which individually does not exceed $25,000.
F-13
<PAGE> 78
In addition to other remedies that the Preferred Stockholder is entitled to
upon an event of default, the Preferred Stockholder has the right (the
"Conversion Privilege"), upon an event of default, to convert $2,000,000
(whether principal, interest, premium, penalty, or otherwise) of the outstanding
balance of the Second Loan into that number of fully paid and nonassessable
shares of the Class C convertible preferred stock that would give the Preferred
Stockholder, as of the date of such conversion, an aggregate equity interest in
the Company equal to 80% of all capital stock of the Company outstanding as of
such date on a fully diluted basis, except for any shares of such capital stock
sold in a registered public offering prior to such date. In the event that the
Preferred Stockholder exercises such Conversion Privilege, upon the issuance of
such Class C convertible preferred stock, the unpaid balance of the Second Loan
automatically shall be reduced by the amount of the balance of the Second Loan
that is converted into Class C convertible preferred stock, deemed to be the
restated principal of the Second Loan, and converted into a two-year term loan
(the "Term Loan"), with an annual rate of 14%. The principal amount of the Term
Loan shall be due and payable in a single payment on the second anniversary
after the date of conversion into the Term Loan.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Lease expense relates to the lease of office and equipment space. Rental
expense was approximately $65,000 and $1,250 for the year ended December 31,
1995 and the period from inception (February 24, 1994) to December 31, 1994,
respectively.
At December 31, 1995, the Company's minimum rental commitments under
noncancelable operating leases with initial or remaining terms of more than one
year were as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
---------------------------------------------------------------
<S> <C>
1996.................................................... $103,948
1997.................................................... 113,784
1998.................................................... 118,786
1999.................................................... 30,009
--------
Total........................................... $366,527
========
</TABLE>
PURCHASE COMMITMENTS
The Company has entered into an agreement with a software licensing firm to
purchase a minimum of $150,000 of connection software by November 1996.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. There are no pending legal proceedings to which the
Company is a party.
F-14
<PAGE> 79
8. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. $ 29,500 $ 527,800
Deferred debt costs........................................... 0 242,100
Allowance for doubtful accounts............................... 5,700 17,300
Accrued vacation.............................................. 0 4,750
Other......................................................... 1,100 0
-------- ---------
Total deferred tax assets............................. 36,300 791,950
Deferred tax liabilities:
Depreciation.................................................. (6,800) (16,300)
Other......................................................... 0 (4,825)
-------- ---------
Total deferred tax liabilities........................ (6,800) (21,125)
Net deferred tax asset.......................................... 29,500 770,825
Valuation allowance for deferred tax assets..................... (29,500) (770,825)
-------- ---------
Net deferred taxes.............................................. $ 0 $ 0
======== =========
</TABLE>
The Company's net operating loss carryforwards will expire between 2009 and
2010, unless utilized. Due to the fact that the Company has incurred losses
since inception, the Company has not recognized the income tax benefit of the
net operating loss carryforwards. Management has provided a 100% valuation
reserve against its net deferred tax asset, consisting primarily of net
operating loss carryforwards. In addition, the Company's ability to recognize
the benefit from the net operating loss carryforwards could be limited under
Section 382 of the Internal Revenue Code if ownership of the Company changes by
more than 50%, as defined.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the year ended December 31, 1995 and for
the period from inception (February 24, 1994) to December 31, 1994, is as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
--------- -------
<S> <C> <C>
1995:
Income tax benefit at statutory rate.................................... $ 665,900 34%
State income taxes, net of federal benefit.............................. 78,340 4
Other................................................................... (2,915) 0
Deferred tax asset valuation allowance.................................. (741,325) (38)
--------- -----
$ 0 0%
========= =====
1994:
Income tax benefit at statutory rate.................................... $ 25,500 34%
State income taxes, net of federal benefit.............................. 3,000 4
Other................................................................... 1,000 1
Deferred tax asset valuation allowance.................................. (29,500) (39)
--------- -----
$ 0 0%
========= =====
</TABLE>
F-15
<PAGE> 80
9. SUBSEQUENT EVENTS
INITIAL PUBLIC OFFERING
In March 1996, the Company completed an initial public offering of its
Common Stock. The Company issued 1,950,000 shares at an initial public offering
price of $8.00 per share. The total proceeds of the offering, net of
underwriting discounts and offering expenses, were approximately $13,672,000. In
April 1996, the Company's underwriters exercised a portion of the over-allotment
option granted in connection with the Company's initial public offering,
electing to purchase 75,000 additional shares of Common Stock. The net proceeds
to the Company were approximately $478,000.
DEBT
The Company borrowed an additional $750,000 under the Second Loan
subsequent to year-end. The Company repaid the Second Loan in full with a
portion of the net proceeds of the Company's initial public offering.
PRO FORMA STOCKHOLDERS' EQUITY
The Pro Forma Stockholders' Equity at December 31, 1995 gives effect to the
conversion of 1,187,895 shares of Class A convertible preferred stock and
645,594 shares of Class B convertible preferred stock into common stock upon the
close of the Company's initial public offering. This conversion would result in
3,100,793 shares of common stock issued and outstanding at the effective date of
the initial public offering.
STOCK OPTIONS GRANTED SUBSEQUENT TO YEAR-END
Subsequent to year-end, the Company granted an additional 64,382 options at
$6.38 per share. These shares are reflected in the pro forma net loss per share
calculations for all periods as prescribed by Security and Exchange Commission
Staff Accounting Bulletins as discussed in Note 2.
Pursuant to SFAS 123 as discussed in Note 4, the total value of these
options was computed as approximately $240,000, which would be amortized on a
pro forma basis over the four-year vesting period of the options.
10. ACQUISITIONS AND POTENTIAL STOCK OFFERING
On June 28, 1996, the Company entered into a Purchase Agreement with PSINet
(as amended, the "Purchase Agreement") pursuant to which the Company agreed to
acquire up to 100,000 subscriber accounts and other assets from PSINet (the
"Acquisition"). The maximum aggregate purchase price for the Acquisition is
$21,129,000 (excluding accrued interest and increases in principal amounts under
promissory notes issued to PSINet), with the actual purchase price dependent on
the number of acquired subscriber accounts that remain MindSpring subscriber
accounts for a specified period. Management currently expects that fewer than
100,000 subscriber accounts will actually be purchased, due to subscriber
attrition over such period. The Company acquired 15,000 of these subscriber
accounts for $1,000,000 in cash and a $2,000,000 one-year promissory note on
June 28, 1996. The Company acquired substantially all of the remaining
subscriber accounts and related assets, as of September 1, 1996, at which time
the Company issued an additional one-year promissory note in the amount of
$9,929,000. The balance of the purchase price is expected to be paid out of the
net proceeds of the Offering at specified intervals during the fourth quarter of
1996 and the first quarter of 1997. The completion of the Acquisition is not
contingent upon consummation of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems and
subscriber log-in and accounting information.
F-16
<PAGE> 81
On August 6, 1996, the Company and The News and Observer Publishing Company
("N&O") entered into a definitive agreement, which was amended and restated on
September 11, 1996, pursuant to which the Company agreed to acquire certain
individual dial-up subscriber accounts in North Carolina (currently expected to
number between 4,000 and 6,000) in connection with N&O's Nando.net Internet
access business (the "Nando.net Transaction"). The Nando.net Transaction is
expected to be consummated on or about September 30, 1996, subject to the
fulfillment of certain customary closing conditions.
In the third quarter of 1996, the Company is planning an offering of its
common stock to finance the above acquisitions and meet general expansion and
working capital requirements (the "Offering"). The Company plans to issue
3,500,000 shares in the Offering. There can, however, be no assurance that the
Offering can be completed. There are significant potential risks associated with
this offering as well as the Company's ability to compete profitably in this
industry. See the "Risk Factors" section (pages 6 to 18) in the foregoing
prospectus related to the proposed offering for a discussion of these risks.
The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds of the Offering. However, any increases in the
Company's growth rate, shortfalls in anticipated revenues, increases in
anticipated expenses, or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
would require the Company to raise additional capital from public or private
equity or debt sources in order to finance operating losses, anticipated growth
and contemplated capital expenditures. If such sources of financing are
insufficient or unavailable, the Company will be required to modify its growth
and operating plans in accordance with the extent of available funding and
attempt to attain profitability in its existing markets (including those
accessible pursuant to the Services Agreement). The Company may need to raise
additional funds in order to take advantage of unanticipated opportunities, such
as acquisitions of complementary businesses or the development of new products,
or otherwise respond to unanticipated competitive pressures. There can be no
assurance that the Company will be able to raise any such capital on terms
acceptable to the Company or at all.
F-17
<PAGE> 82
MINDSPRING ENTERPRISES, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995 JUNE 30, 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 424,834 $ 5,693,611
Trade receivables, net................................................. 519,280 1,159,367
Prepaids and other current assets...................................... 273,658 347,129
Inventory.............................................................. 45,415 36,478
------------ -------------
Total current assets.............................................. 1,263,187 7,236,585
------------ -------------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.............................. 3,594,528 7,321,409
Purchased software systems............................................. 103,078 134,996
Other.................................................................. 96,890 260,523
------------ -------------
3,794,496 7,716,928
Less: accumulated depreciation......................................... (255,560) (843,055)
------------ -------------
Property and equipment, net....................................... 3,538,936 6,873,873
------------ -------------
PRODUCT DEVELOPMENT COSTS, NET............................................. 34,071 95,920
------------ -------------
OTHER ASSETS:
Acquired customer base................................................. 0 3,000,000
Other.................................................................. 8,606 8,481
------------ -------------
Total other assets................................................ 8,606 3,008,481
------------ -------------
$ 4,844,800 $17,214,859
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan from preferred stockholder........................................ $ 2,500,000 $ 0
Notes Payable.......................................................... 0 2,000,000
Trade accounts payable................................................. 994,164 1,680,910
Accrued expenses....................................................... 532,406 708,938
Deferred revenue....................................................... 336,027 692,332
------------ -------------
Total current liabilities......................................... 4,362,597 5,082,180
------------ -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized and 0
shares issued and outstanding at December 31, 1995 and June 30, 1996,
respectively.......................................................... 0 0
Class A convertible preferred stock, $0.64 par value; 1,187,895 shares
authorized, and 1,187,895 and 0 issued and outstanding at December 31,
1995 and June 30, 1996, respectively.................................. 744,575 0
Class B convertible preferred stock, $1.55 par value; 645,596 shares
authorized and 645,594 and 0 shares issued and outstanding at December
31, 1995 and June 30, 1996, respectively.............................. 1,000,000 0
Class C convertible preferred stock, $0.01 par value; 5,000,000 shares
authorized and 100,000 issued and outstanding at December 31, 1995 and
June 30, 1996, respectively........................................... 638,000 638,000
Common stock, $0.01 par value; 15,000,000 shares authorized and
1,267,304 and 5,125,793 issued and outstanding at December 31, 1995
and June 30, 1996, respectively....................................... 12,673 51,258
Additional paid-in capital............................................. 120,547 15,976,226
Accumulated deficit.................................................... (2,033,592) (4,532,805)
------------ -------------
Total stockholders' equity........................................ 482,203 12,132,679
------------ -------------
$ 4,844,800 $17,214,859
============ ============
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-18
<PAGE> 83
MINDSPRING ENTERPRISES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1995 1996 1995 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Access................................. $ 235,633 $ 1,506,315 $ 347,363 $ 2,671,634
Subscriber start-up fees............... 91,242 478,672 146,642 845,768
Business services...................... 24,905 396,850 31,530 671,155
Other.................................. (12,359) 112,972 (14,228) 117,966
---------- ----------- ---------- -----------
Total revenues.................... 339,421 2,494,809 511,307 4,306,523
COSTS AND EXPENSES:
Cost of revenues -- recurring.......... 98,084 754,569 160,479 1,296,203
Cost of subscriber start-up fees....... 41,192 351,783 62,833 616,120
Selling................................ 56,512 991,487 84,972 1,570,411
General and administrative............. 280,249 1,611,503 419,197 2,770,542
Depreciation and amortization.......... 33,625 362,435 48,125 596,343
---------- ----------- ---------- -----------
Total operating expenses.......... 509,662 4,071,777 775,606 6,849,619
---------- ----------- ---------- -----------
OPERATING LOSS.............................. $ (170,241) $(1,576,968) $ (264,299) $(2,543,096)
INTEREST (EXPENSE) INCOME, NET.............. 1,166 117,015 2,364 43,883
---------- ----------- ---------- -----------
NET LOSS.................................... $ (169,075) $(1,459,953) $ (261,935) $(2,499,213)
========= ========== ========= ==========
NET LOSS PER SHARE.......................... $ (0.06) $ (0.29) $ (0.09) $ (0.58)
========= ========== ========= ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING............................... 2,871,229 5,111,782 2,857,119 4,309,859
========= ========== ========= ==========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-19
<PAGE> 84
MINDSPRING ENTERPRISES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1995 1996
---------- -----------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss.......................................................... $ (261,935) $(2,499,213)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization.................................. 48,125 596,343
Changes in operating assets and liabilities:
Trade receivables............................................ (166,285) (640,087)
Other current assets......................................... (1,650) (57,242)
Trade accounts payable....................................... 151,439 686,746
Accrued expenses............................................. 45,919 176,532
Deferred revenue............................................. 109,575 356,305
---------- -----------
Net cash used in operating activities..................... (74,812) (1,380,616)
---------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment............................... (710,514) (3,922,432)
Purchase of customer base......................................... -- (3,000,000)
Product development costs......................................... (74,964) (77,989)
Other............................................................. (1,012) 125
---------- -----------
Net cash used in investing activities..................... (786,490) (7,000,296)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of loan from preferred stockholder....................... -- 1,000,000
Payments of loan from preferred stockholder....................... -- (3,500,000)
Proceeds from Note Payable........................................ -- 2,000,000
Issuance of common stock.......................................... 50,000 14,149,689
Issuance of preferred stock....................................... 1,000,000 --
---------- -----------
Net cash provided by financing activities................. 1,050,000 13,649,689
---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................... 188,698 5,268,777
CASH AND CASH EQUIVALENTS, beginning of period...................... 584,798 424,834
---------- -----------
CASH AND CASH EQUIVALENTS, end of period............................ $ 773,496 $ 5,693,611
========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid..................................................... $ 0 $ 136,127
========== ===========
</TABLE>
The accompanying condensed notes to financial statements
are an integral part of these statements.
F-20
<PAGE> 85
MINDSPRING ENTERPRISES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of Regulation
S-X of the Securities and Exchange Commission. The accompanying unaudited
condensed financial statements reflect, in the opinion of management, all
adjustments necessary to achieve a fair statement of financial position and
results for the interim periods presented. All such adjustments are of a normal
and recurring nature. It is suggested that these condensed financial statements
be read in conjunction with the annual financial statements of the Company and
the notes thereto.
2. On June 28, 1996, the Company entered into a Purchase Agreement with
PSINet (as amended, the "Purchase Agreement") pursuant to which the Company
agreed to acquire up to 100,000 subscriber accounts and other assets from PSINet
(the "Acquisition"). The maximum aggregate purchase price for the Acquisition is
$21,129,000 (excluding accrued interest and increases in principal amounts under
promissory notes issued to PSINet), with the actual purchase price dependent on
the number of acquired subscriber accounts that remain MindSpring subscriber
accounts for a specified period. Management currently expects that fewer than
100,000 subscriber accounts will actually be purchased, due to subscriber
attrition over such period. The Company acquired 15,000 of these subscriber
accounts for $1,000,000 in cash and a $2,000,000 one-year promissory note on
June 28, 1996. The Company acquired substantially all of the remaining
subscriber accounts and related assets as of September 1, 1996, at which time
the Company issued an additional one-year promissory note in the amount of
$9,929,000. The balance of the purchase price is expected to be paid out of the
net proceeds from the Offering at specified intervals during the fourth quarter
of 1996 and the first quarter of 1997. The completion of the Acquisition is not
contingent upon consummation of the Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems and
subscriber log-in and accounting information.
On August 6, 1996, the Company and The News and Observer Publishing Company
("N&O") entered into a definitive agreement, which was amended and restated on
September 11, 1996, pursuant to which the Company agreed to acquire certain
individual dial-up subscriber accounts in North Carolina (currently expected to
number between 4,000 and 6,000) in connection with N&O's Nando.net Internet
access business (the "Nando.net Transaction"). The Nando.net Transaction is
expected to be consummated on or about September 30, 1996, subject to the
fulfillment of certain customary closing conditions.
In the third quarter of 1996, the Company is planning an offering of its
common stock to finance the above acquisitions and meet general expansion and
working capital requirements (the "Offering"). The Company plans to issue
3,500,000 shares in the Offering. There can, however, be no assurance that the
Offering can be completed. There are significant potential risks associated with
this offering as well as the Company's ability to compete profitably in this
industry. See the "Risk Factors" section (pages 6 to 18) in the foregoing
prospectus related to the proposed offering for a discussion of these risks.
The Company estimates that its cash and financing needs through mid-1997
will be met by the net proceeds of the Offering. However, any increases in the
Company's growth rate, shortfalls in anticipated revenues, increases in
anticipated expenses, or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
would require the Company to raise additional capital from public or private
equity or debt sources in order to finance operating losses, anticipated growth
and contemplated capital expenditures. If such sources of financing are
insufficient or unavailable, the Company will be required to modify its growth
and operating plans in accordance with the extent of available funding and
attempt to attain profitability in its existing markets (including those
accessible pursuant to the Services Agreement). The Company may need to raise
additional funds in order to take advantage of
F-21
<PAGE> 86
unanticipated opportunities, such as acquisitions of complementary businesses or
the development of new products, or otherwise respond to unanticipated
competitive pressures. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.
3. In March 1996, the Company completed an initial public offering of its
Common Stock. The Company issued 1,950,000 shares at an initial public offering
price of $8.00 per share. The total proceeds of the offering, net of
underwriting discounts and offering expenses, were approximately $13,672,000. In
April 1996, the Company's underwriters exercised a portion of the over-allotment
option granted in connection with the Company's initial public offering,
electing to purchase 75,000 additional shares of Common Stock. The net proceeds
to the Company were approximately $478,000.
4. The Company used a portion of the proceeds from the initial public
offering to repay outstanding principal amounts of $3,500,000 loaned to the
Company by ITC Holding Company, Inc. ("ITC Holding") plus accrued interest (at
the rate of 14% per annum) of approximately $97,000.
5. The net loss per share is computed using the weighted average number of
shares of common stock and dilutive common stock equivalent shares from
convertible preferred stock (using the if-converted method) and from stock
options (using the treasury stock method). For the quarter and six months ended
June 30, 1996, the Class C Preferred Stock and stock options are excluded from
the calculation as their effect is antidilutive. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common stock and common stock
equivalent shares issued by the Company at prices below the public offering
price during the twelve month period prior to the Company's initial public
offering have been included in the calculation as if they were outstanding for
all periods prior to the offering, regardless of whether they are dilutive
(using the treasury stock method and an initial public offering price of $8.00
per share). Accordingly, all stock options granted and the Class C Preferred are
included in the earnings per share calculations for all periods presented prior
to the effective date of the initial public offering (March 13, 1996), even
though the effect on net loss is antidilutive. The Class A Preferred Stock and
Class B Preferred Stock have been included for the respective weighted average
periods for which such shares were outstanding, even though their effect is
antidilutive. Concurrently with the completion of the initial public offering,
all outstanding shares of Class A Preferred Stock and Class B Preferred Stock
converted into shares of Common Stock, on the basis of one for one.
6. There was no provision for or cash payment of income taxes for the three
months and six months ended June 30, 1996 and 1995, respectively, as the Company
had a net taxable loss for these periods and anticipates a net taxable loss for
the year ended December 31, 1996.
F-22
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
PSINet Inc.:
We have audited the accompanying balance sheets of PSINET INC. CONSUMER
INTERNET ACCESS SERVICES IN THE UNITED STATES as of December 31, 1994 and 1995
and the related statements of operations, accumulated deficit, and cash flows
for the period from inception (July 1, 1994) to December 31, 1994 and for the
year ended December 31, 1995. These financial statements are the responsibility
of the Consumer Access Business'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 the Consumer Access Business
as of December 31, 1994 and 1995 and the results of its operations and its cash
flows for the period from inception (July 1, 1994) to December 31, 1994 and for
the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 30, 1996
F-23
<PAGE> 88
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995 JUNE 30, 1996
--------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................... $ 0 $ 1,014,029 $ 527,247
Accounts receivable, net of allowance for doubtful accounts
of $0, $328,656, and $20,340, at December 31, 1994 and
1995, and June 30, 1996 respectively....................... 3,408 422,478 363,304
Prepaid expenses and other assets............................ 0 10,566 36,512
--------- ------------ -------------
Total current assets.................................. 3,408 1,447,073 927,063
--------- ------------ -------------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.................... 0 1,233,234 1,614,730
Less accumulated amortization and depreciation............... 0 (132,158) (274,872)
--------- ------------ -------------
Property and equipment, net........................... 0 1,101,076 1,339,858
--------- ------------ -------------
OTHER ASSETS:
Software development costs, net of accumulated amortization
of $0, $80,946, and $119,792, at December 31, 1994 and 1995
and June 30, 1996, respectively............................ 31,624 99,720 60,874
Goodwill and other intangibles, net of accumulated
amortization of $0, $3,160,159, and $4,729,802, at December
31, 1994 and 1995 and June 30, 1996, respectively.......... 0 6,666,937 5,097,294
Other........................................................ 0 43,000 43,000
--------- ------------ -------------
Total other assets.................................... 31,624 6,809,657 5,201,168
--------- ------------ -------------
Total assets.......................................... $ 35,032 $ 9,357,806 $ 7,468,089
========== ============= =============
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current maturities of capital lease obligations.............. $ 0 $ 280,351 $ 398,170
Current portion of long-term debt............................ 0 51,607 54,648
Trade accounts payable....................................... 0 207,692 703,211
Accrued expenses............................................. 0 147,241 77,430
Deferred revenue............................................. 201,498 542,588 899,774
Due to parent company........................................ 185,047 20,926,686 28,684,996
--------- ------------ -------------
Total current liabilities............................. 386,545 22,156,165 30,818,229
--------- ------------ -------------
Long-term capital lease obligations.......................... 0 569,792 601,353
Long-term debt............................................... 0 95,439 67,315
--------- ------------ -------------
0 665,231 668,668
--------- ------------ -------------
Total liabilities..................................... 386,545 22,821,396 31,486,897
COMMITMENTS AND CONTINGENCIES (Notes 1, 4, and 8)
ACCUMULATED DEFICIT............................................ (351,513) (13,463,590) (24,018,808)
--------- ------------ -------------
Total liabilities and accumulated deficit............. $ 35,032 $ 9,357,806 $ 7,468,089
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE> 89
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
1994 1995 JUNE 30, 1995 JUNE 30, 1996
--------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Membership revenue...................... $ 408,578 $ 5,701,749 $ 1,793,030 $ 7,793,705
Start-up revenue........................ 90,794 786,542 462,110 161,761
--------- ------------ ------------- -------------
Total revenues.................. 499,372 6,488,291 2,255,140 7,955,466
--------- ------------ ------------- -------------
COSTS AND EXPENSES:
Selling, general, and administrative.... 599,104 11,321,248 3,302,353 12,017,951
Cost of revenue......................... 251,781 4,873,604 1,525,882 4,678,895
Depreciation and amortization........... 0 3,373,263 1,511,142 1,751,203
--------- ------------ ------------- -------------
850,885 19,568,115 6,339,377 18,448,049
--------- ------------ ------------- -------------
OPERATING LOSS............................ (351,513) (13,079,824) (4,084,237) (10,492,583)
INTEREST EXPENSE.......................... 0 32,253 1,443 62,635
--------- ------------ ------------- -------------
NET LOSS.................................. $(351,513) $(13,112,077) $ (4,085,680) $ (10,555,218)
========= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 90
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
------------
<S> <C>
BALANCE, July 1, 1994 (inception)............................................. $ 0
Net loss.................................................................... (351,513)
------------
BALANCE, December 31, 1994.................................................... (351,513)
Net loss.................................................................... (13,112,077)
------------
BALANCE, December 31, 1995.................................................... (13,463,590)
Net loss.................................................................... (10,555,218)
------------
BALANCE, June 30, 1996 (unaudited)............................................ $(24,018,808)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 91
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1994) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995, AND THE SIX MONTHS ENDED JUNE 30, 1995 AND
1996
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1994 1995 1995 1996
--------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(351,513) $(13,112,077) $(4,085,680) $(10,555,218)
--------- ------------ ----------- ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 0 3,373,263 1,511,142 1,751,203
Changes in current assets and
liabilities:
Accounts receivables, net.............. (3,408) (215,670) 53,616 59,174
Other current assets................... 0 (3,366) (21,864) (25,946)
Trade accounts payable................. 0 207,692 293,968 495,519
Accrued expenses....................... 0 147,241 72,006 (69,811)
Deferred revenue....................... 201,498 341,090 (4,814) 357,187
--------- ------------ ----------- ------------
Total adjustments.................... 198,090 3,850,250 1,904,054 2,567,326
--------- ------------ ----------- ------------
Net cash used in operating
activities......................... (153,423) (9,261,827) (2,181,626) (7,987,892)
--------- ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and
software development costs................ (31,624) (425,491) (259,941) (20,378)
Other....................................... 0 (43,000) (43,000) 0
--------- ------------ ----------- ------------
Net cash used in investing
activities......................... (31,624) (468,491) (302,941) (20,378)
--------- ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from parent company, net........... 185,047 10,665,637 2,893,521 7,758,310
Proceeds from the issuance of long-term
debt...................................... 0 190,055 59,770 0
Principal payments on notes payable......... 0 (43,009) (14,393) (25,083)
Principal payments on capital leases........ 0 (68,336) (2,364) (211,739)
--------- ------------ ----------- ------------
Net cash provided by financing
activities......................... 185,047 10,744,347 2,936,534 7,521,488
--------- ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 0 1,014,029 451,967 (486,782)
CASH AND CASH EQUIVALENTS, beginning of
period...................................... $ 0 $ 0 $ 0 $ 1,014,029
--------- ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period...... $ 0 $ 1,014,029 $ 451,967 $ 527,247
========== ============= ============ =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest...................... $ 0 $ 32,253 $ 1,443 $ 62,635
========== ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 92
PSINET INC. CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
PSINet Inc. (formerly Performance Systems International, Inc.) ("PSINet")
was organized in October 1988 and is engaged in providing Internet access,
services, and software. The financial statements and related footnotes contained
herein reflect the operations of PSINet's customer base of consumer Internet
access subscribers in the United States, which includes subscribers to PSINet's
"Pipeline New York," "Pipeline U.S.A.," and "InterRamp" services. InterRamp
service began in July 1994; PSINet Pipeline New York, Inc. (formerly the
Pipeline Network Inc., "Pipeline"), was acquired February 7, 1995 by PSINet
Inc.; and Pipeline U.S.A. service began in June 1995. The accompanying financial
statements present the financial position and results of operations of the
PSINet Inc. Consumer Internet Access Services in the United States by PSINet
Inc. (the "Consumer Access Business"). The Consumer Access Business, including
the Harrisburg customer service facility, is being acquired in a transaction
accounted for as a purchase by MindSpring Enterprises, Inc. ("MindSpring") (Note
8).
The Consumer Access Business has experienced operating losses since its
inception as a result of costs related to acquisitions, efforts to build its
network infrastructure, development of its systems, and expansion into new
markets. The Consumer Access Business expects to continue to focus on increasing
its subscriber base and geographic coverage. Accordingly, the Consumer Access
Business expects that its cost of revenues; selling, general, and administrative
expenses; and capital expenditures will continue to increase significantly, all
of which will have a negative impact on short-term operating results. In
addition, the Consumer Access Business may change its pricing policies to
respond to a changing competitive environment. There can be no assurance that
growth in the Consumer Access Business' revenue or subscriber base will continue
after the acquisition by MindSpring or that the Consumer Access Business will be
able to achieve or sustain profitability or positive cash flow.
See "Risk Factors" located elsewhere in this prospectus.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRESENTATION
The Consumer Access Business is not a separate subsidiary of PSINet nor has
it been operated as a separate division of PSINet. The financial statements of
the Consumer Access Business have been derived from the consolidated financial
statements of PSINet and have been prepared to present its financial position,
results of operations, and cash flows on a stand-alone basis. Accordingly, the
accompanying financial statements include certain costs and expenses which have
been allocated to the Consumer Access Business from PSINet (Note 6). These costs
have been allocated on a pro rata basis based primarily on revenues. Such
allocated expenses may not be indicative of what such expenses would have been
had the Consumer Access Business been operated as a separate entity.
The interim financial data is unaudited. However, in the opinion of
management, the interim financial data includes all adjustments, consisting only
of normal recurring adjustments, necessary for a fair statement of the results
for the interim periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and
F-28
<PAGE> 93
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Consumer Access Business
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. The cash and cash equivalents reflected
in the accompanying balance sheets represent specific accounts associated with
the Consumer Access Business. Certain other cash accounts are commingled with
PSINet funds and the PSINet portion is reflected in "Due to parent company" in
the accompanying balance sheets.
REVENUE RECOGNITION
The Consumer Access Business recognizes revenues when services are
provided. Advance billings are reflected as deferred revenue in the accompanying
financial statements.
During 1994, InterRamp offered a program whereby subscribers could prepay
for several months of service. This revenue was deferred until the services were
provided. This program was discontinued as of January 1, 1995. Accordingly,
there is no deferred revenue from this program at December 31, 1995 or June 30,
1996.
CREDIT RISK
The Consumer Access Business' accounts receivable potentially subject it to
credit risk, as collateral is generally not required. The Consumer Access
Business' 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. The concentration of credit
risk is mitigated by the large number of customers comprising the customer base.
The carrying amount of the Consumer Access Business' receivables approximates
their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over an estimated useful life of five years. The Consumer
Access Business' portion of the assets acquired as part of the Pipeline
acquisition were recorded at the estimated fair value at the acquisition date
and depreciated over the estimated remaining useful lives of the assets.
EQUIPMENT UNDER CAPITAL LEASE
The Consumer Access Business leases certain of its data communications
equipment under capital lease agreements. 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. These leases are initially recorded as
noncash transactions in the Consumer Access Business' statements of cash flows.
Assets under these capital leases are depreciated over their estimated useful
lives of five years, which are generally longer than the terms of the leases.
The following is a detail of assets under capital lease as of December 31,
1995 and June 30, 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Cost................................................ $ 956,785 $1,317,903
Accumulated Amortization............................ (103,687) (217,510)
--------- ----------
$ 853,098 $1,100,393
========= ==========
</TABLE>
F-29
<PAGE> 94
SOFTWARE DEVELOPMENT COSTS
The Consumer Access Business capitalizes costs incurred for the production
of computer software used in the sale of its services, including direct labor
and related overhead. All costs in the software development process that are
classified as research and development are expensed as incurred until
technological feasibility has been established. Once technological feasibility
has been established, such costs are capitalized until the software is
commercially available. Amortization is provided using the greater of the
straight-line method over three years or the ratio that current gross revenues
bear to the total of current and anticipated future gross revenues, commencing
in the month of product release. It is reasonably possible that the estimates of
anticipated future revenues, the remaining estimated economic life of the
product, or both will be reduced significantly in the near term due to
competitive pressures.
GOODWILL AND OTHER INTANGIBLES
Goodwill is being amortized over three years, and other intangibles
including subscriber lists, trademarks, and non-compete agreements are being
amortized over two to three years. The Consumer Access Business' portion of the
goodwill and other intangibles were acquired in connection with PSINet's
acquisition of Pipeline on February 7, 1995.
LONG-LIVED ASSETS
The Consumer Access Business periodically reviews the values assigned to
long-lived assets such as property and equipment, software development costs,
and goodwill and other intangibles to determine whether any impairments are
other than temporary. Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
DUE TO PARENT COMPANY
PSINet either advances funds to or borrows funds from the Consumer Access
Business. Funds advanced to the Consumer Access Business are used to cover fixed
asset expansion, acquisitions, and working capital requirements. The advances
and borrowings are netted and are reflected in Due to parent company in the
accompanying balance sheets (Note 6).
ACCUMULATED DEFICIT
The Consumer Access Business' accumulated deficit represents an amount
equivalent to the net assets of the Consumer Access Business at inception (July
1, 1994), decreased by the net loss in each period.
ADVERTISING COSTS
The Consumer Access Business expenses all advertising costs as incurred.
INCOME TAXES
The income tax returns of PSINet include the operations of the Consumer
Access Business. For purposes of these financial statements, income taxes
related to the Consumer Access Business have been computed and recorded on a
separate return basis based on the statutory rates in effect (Note 5).
Deferred income taxes are recorded using enacted tax laws and rates for the
years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
SOURCES OF SUPPLIES
The Consumer Access Business has few long-term contracts with its
suppliers. The Consumer Access Business is dependent on third party suppliers
for its leased line connections, or bandwidth. Certain of these suppliers are or
may become competitors of the Consumer Access Business, and such suppliers are
not subject
F-30
<PAGE> 95
to any restrictions upon their ability to compete with the Consumer Access
Business. To the extent that these suppliers change their pricing structures,
the Consumer Access Business may be adversely affected. Regulatory proposals are
pending that may affect the prices charged by certain suppliers to the Consumer
Access Business. 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.
The Consumer Access Business is also dependent on certain third-party
suppliers of hardware components. Although the Consumer Access Business attempts
to maintain a minimum of two vendors for each required product, certain
components used by the Consumer Access Business in providing its networking
services are currently acquired or available from only one source. A failure by
a supplier to deliver quality products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could materially adversely affect the Consumer Access Business. As the Consumer
Access Business's suppliers revise and upgrade their equipment technology, the
Consumer Access Business may encounter difficulties in integrating the new
technology into its network.
3. LONG-TERM DEBT
PSINet has entered into a borrowing facility with a bank for the
acquisition of equipment. While the Consumer Access Business does not
specifically enter into debt arrangements, the debt reflected in the
accompanying table relates to borrowings associated with equipment retained at
the Harrisburg customer service facility at December 31, 1995:
<TABLE>
<S> <C>
Allocation of PSINet's borrowing facility with a bank, interest at prime
plus 2.5%; monthly principal installments of $4,729 plus interest....... $147,046
Less current portion...................................................... 51,607
--------
Long-term portion......................................................... $ 95,439
========
</TABLE>
Borrowings under this facility are repayable in 36 monthly installments
from the dates of equipment purchases and are secured by a lien on the
equipment. Interest is payable monthly at a rate of prime plus 2.5%; the
interest rate was 11% at December 31, 1995.
The fair value of long-term debt, including current maturities, at December
31, 1995 is estimated to be approximately $151,808, based on a valuation
technique that considers cash flows discounted at current rates.
Maturities of long-term debt relating to the equipment retained at the
Harrisburg customer service facility outstanding at June 30, 1996 are as
follows:
<TABLE>
<S> <C>
1996 (six months ended December 31)....................................... $ 22,731
1997...................................................................... 59,289
1998...................................................................... 39,101
1999...................................................................... 842
--------
Total maturities of long-term debt at June 30, 1996............. $121,963
========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
LEASES
PSINet leases certain equipment under agreements which are classified as
capital leases. These leases have original terms of three years and contain
bargain purchase options at the end of the original lease terms. While the
Consumer Access Business does not specifically enter into capital lease
arrangements, the capital leases reflected in the accompanying table relate
specifically to leases associated with equipment retained at the Harrisburg
customer service facility.
F-31
<PAGE> 96
Future minimum payments, by year and in the aggregate, under noncancelable
capital leases and operating leases with initial or remaining terms of one year
or more consist of the following at June 30, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- --------
<S> <C> <C>
1996 (six months ended December 31)............................ $ 243,207 $129,000
1997........................................................... 523,275 79,800
1998........................................................... 400,731
1999........................................................... 22,510
--------- --------
Total minimum lease payments......................... 1,189,723 $208,800
========
Amounts representing interest.................................. 190,200
---------
Present value of net minimum payments.......................... 999,523
---------
Current portion................................................ 398,170
---------
Long-term capitalized lease obligations........................ $ 601,353
========
</TABLE>
The Consumer Access Business' rental expense for operating leases relates
to the lease of office and equipment space. Rental expense was approximately $0,
$183,000, $54,000 and $132,000 for the period from inception (July 1, 1994) to
December 31, 1994, the year ended December 31, 1995, and the six months ended
June 30, 1995 and 1996, respectively.
LEGAL PROCEEDINGS
PSINet and the Consumer Access Business are subject to legal proceedings
and claims which arise in the ordinary course of business.
5. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Consumer Access
Business is included in the consolidated return of PSINet. No tax-sharing
arrangement exists between PSINet and the Consumer Access Business, as the
Individual Internet Access Business is not a separate legal entity. The
significant components of the Consumer Access Business' allocated deferred tax
assets and liabilities as of December 31, 1994 and 1995 are as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995
---- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $102 $ 3,730
Other.......................................................... 7 168
---- -------
Total deferred tax assets................................. 109 3,898
---- -------
Deferred tax liabilities:
Acquired intangibles........................................... 0 (670)
Depreciation/amortization...................................... (12) (101)
---- -------
Total deferred tax liabilities............................ (12) (771)
---- -------
Net deferred tax asset.............................................. 97 3,127
Valuation allowance................................................. (97) (3,127)
---- -------
Net deferred taxes.................................................. $ 0 $ 0
==== =======
</TABLE>
The Consumer Access Business' portion of PSINet's net operating loss
carryforwards will expire between 2009 and 2010 unless utilized. Due to the fact
that the Consumer Access Business has incurred losses since inception, the
Consumer Access Business has not recognized the income tax benefit of the net
operating loss
F-32
<PAGE> 97
carryforwards. Management has provided a 100% valuation reserve against its net
deferred tax asset, consisting primarily of net operating loss carryforwards.
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the period from inception (July 1, 1994)
to December 31, 1994 and for the year ended December 31, 1995, is as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Income tax benefit at statutory rate.................................... 34% 34%
State income taxes, net of federal benefit.............................. 4 4
Nondeductible goodwill.................................................. 0 (10)
Deferred tax asset valuation allowance.................................. (38) (28)
---- ----
0% 0%
==== ====
</TABLE>
The Consumer Access Business paid no taxes in the periods presented herein.
6. RELATED-PARTY TRANSACTIONS
Transactions of the Consumer Access Business are performed and certain
management and administrative services are executed by PSINet. Services provided
to the Consumer Access Business include support in major functional areas such
as accounting, finance, human resources, legal, risk management, network
management, engineering, payroll, and taxes. Costs attributable to these support
functions are included in selling, general, and administrative expenses. These
costs are allocated to the Consumer Access Business based on various factors,
primarily revenue streams, as management feels this best represents relative
cost streams. The costs allocated to the Consumer Access Business were
approximately $633,000, $6,475,000, $1,851,000, and $7,797,000 for the period
from inception (July 1, 1994) to December 31, 1994, the year ended December 31,
1995, and the six months ended June 30, 1995 and 1996, respectively.
Certain costs, such as payroll for the Harrisburg customer service
facility, advertisements for the Consumer Access Business, and depreciation and
amortization, have been specifically identified, are reflected in the
accompanying statements of operations and are excluded from the cost allocation
model described previously.
Revenues reflected in the accompanying statements of operations represent
specifically identified revenues and that there have been no allocations of
revenues from PSINet.
7. ACQUISITION
On February 7, 1995, PSINet issued an aggregate of approximately 2,690,218
shares of its common stock to shareholders of Pipeline, a New York-based
Internet service provider, in exchange for all of the outstanding common stock
and preferred stock of Pipeline. The Pipeline shareholders were also granted
certain registration rights in respect of PSINet's common stock issued to them.
In addition, in exchange for their options to purchase Pipeline common stock,
certain employees of Pipeline were issued approximately 98,255 shares of
PSINet's common stock and options to purchase approximately 133,627 shares of
PSINet's common stock at an exercise price of $4.15 per share.
The acquisition was accounted for using the purchase method of accounting.
At February 7, 1995, the fair value of the 2,788,473 shares of PSINet's common
stock exchanged was based on $4.15 per share, or $11,572,000. Based on the ratio
of corporate revenue to individual subscriber revenue at the time of the
acquisition, $10,415,000 of this amount related to the Consumer Access Business
and is reflected on the
F-33
<PAGE> 98
accompanying balance sheets. The following table summarizes the net assets
allocated to the Consumer Access Business in connection with the acquisition and
the amount allocated to goodwill (in thousands):
<TABLE>
<S> <C>
Purchase price............................................................. $10,415
Assets..................................................................... (1,000)
Liabilities................................................................ 412
Identifiable intangibles................................................... (2,847)
-------
Goodwill................................................................... $ 6,980
=======
</TABLE>
The acquisition of these assets has been accounted for as a non-cash
transaction for purposes of the cash flow statements.
The following presents the Consumer Access Business' unaudited pro forma
condensed consolidated income statement data for the period from inception (July
1, 1994) to December 31, 1994 and for the year ended December 31, 1995 as if the
acquisition had occurred at the beginning of the periods presented. The revenue
and net loss below are not intended to reflect the results of operations that
would actually have been obtained if the acquisition had occurred at the
beginning of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
Revenue.............................................. $ 1,115 $ 7,205
Net loss............................................. (704) (11,302)
</TABLE>
8. SUBSEQUENT EVENT
On June 28, 1996, MindSpring (the "Company") entered into a Purchase
Agreement with PSINet (as amended, the "Purchase Agreement") pursuant to which
the Company agreed to acquire up to 100,000 subscriber accounts and other assets
from PSINet (the "Acquisition"). The maximum aggregate purchase price for the
Acquisition is $21,129,000 (excluding accrued interest and increases in
principal amount under promissory notes issued to PSINet), with the actual
purchase price dependent on the number of acquired subscriber accounts that
remain MindSpring subscriber accounts for a specified period. Management
currently expects that fewer than 100,000 subscriber accounts will actually be
purchased, due to subscriber attrition over such period. The Company acquired
15,000 of these subscriber accounts for $1,000,000 in cash and a $2,000,000
one-year promissory note on June 28, 1996. The Company expects to acquire
substantially all of the remaining subscriber accounts and related assets as of
September 1, 1996, at which time the Company issued an additional one-year
promissory note in the amount of $9,929,000. The balance of the purchase price
is expected to be paid out of the net proceeds from the Offering at specified
intervals during the fourth quarter of 1996 and the first quarter of 1997. The
completion of the Acquisition is not contingent upon consummation of the
Offering.
In connection with the Acquisition, the Company and PSINet also entered
into a Network Services Agreement (as amended, the "Services Agreement"), which
will enable MindSpring to offer nationwide Internet access through PSINet's
network of over 200 POPs. Pursuant to the Services Agreement, PSINet agreed,
among other things, to provide to the Company: (i) Internet connection services
which meet reasonable commercial standards, including with respect to access and
reliability; and (ii) access to PSINet's network monitoring systems and
subscriber log-in and accounting information.
F-34
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of PSINet Pipeline New York, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of PSINet Pipeline New
York, Inc. (formerly The Pipeline Network Inc.) at December 31, 1994, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Washington, D.C.
February 24, 1995
F-35
<PAGE> 100
PSINET PIPELINE NEW YORK, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash......................................................................... $ 322
Accounts and other receivables, net of allowance for doubtful accounts of
$80,000................................................................... 226
Prepaid expenses............................................................. 8
------
Total current assets................................................. 556
Property and equipment, net.................................................... 555
Capitalized software costs, net of accumulated amortization of $24,000......... 155
Other assets and deferred charges.............................................. 26
------
$1,292
======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................ $ 288
Deferred revenue............................................................. 49
------
Total current liabilities............................................ 337
Accrued stock compensation................................................... 383
------
Total liabilities.................................................... 720
------
Commitments (Note 6)
Shareholders' equity:
Convertible preferred stock, $0.01 par value, 129 shares authorized, issued
and outstanding........................................................... 0
Common stock, $0.01 par value, 3,000 shares authorized, 1,240 issued and
outstanding............................................................... 0
Capital in excess of par value............................................... 1,064
Retained deficit............................................................. (492)
------
Total shareholders' equity........................................... 572
------
$1,292
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 101
PSINET PIPELINE NEW YORK, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Revenue:
Service.................................................................... $ 940
Licensing.................................................................. 180
Royalty.................................................................... 40
------
Total revenue...................................................... 1,160
------
Operating costs and expenses:
Data communications and operations......................................... 729
Sales and marketing........................................................ 238
General and administrative................................................. 557
Depreciation and amortization.............................................. 95
------
Total operating costs and expenses................................. 1,619
------
Loss from operations......................................................... (459)
Interest income.............................................................. 11
------
Loss before income taxes..................................................... (448)
Income taxes................................................................. --
------
Net Loss..................................................................... $ (448)
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 102
PSINET PIPELINE NEW YORK, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL
IN TOTAL
PREFERRED PAR COMMON PAR EXCESS OF RETAINED SHAREHOLDERS'
STOCK VALUE STOCK VALUE PAR VALUE DEFICIT EQUITY
--------- ----- ------ ----- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993......... 0 $ 0 1,000 $ 0 $ 95 $ (44) $ 51
Issuance of common stock pursuant
to exercise of options........ 240 0 0 0
Issuance of convertible preferred
stock......................... 129 0 969 969
Net loss......................... (448) (448)
----- ---- ----- ---- ------- ------- --------
Balance, December 31, 1994......... 129 $ 0 1,240 $ 0 $ 1,064 $ (492) $ 572
===== ==== ===== ==== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 103
PSINET PIPELINE NEW YORK, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (448)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 95
Provision for doubtful accounts........................................... 80
Increase in accounts receivable........................................... (294)
Increase in prepaid expenses.............................................. (7)
Increase in other assets and deferred charges............................. (16)
Increase in accounts payable and accrued expenses......................... 263
Increase in deferred revenue.............................................. 40
Increase in accrued stock compensation.................................... 383
-----
Net cash provided by operating activities............................ 96
-----
Cash flows from investing activities:
Purchase of property and equipment, net...................................... (553)
Capitalized software costs................................................... (178)
-----
Net cash used in investing activities................................ (731)
-----
Cash flows from financing activities:
Proceeds from loan from shareholder.......................................... 200
Repayments of loan from shareholder.......................................... (250)
Proceeds from issuance of Series A convertible preferred stock............... 969
Proceeds from exercise of common stock options............................... 0
-----
Net cash provided by financing activities............................ 919
-----
Net increase in cash........................................................... 284
Cash, beginning of year........................................................ 38
-----
Cash, end of year.............................................................. $ 322
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 104
PSINET PIPELINE NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
PSINet Pipeline New York Inc. (formerly The Pipeline Network Inc.) (the
"Company") was incorporated in the state of New York in June 1993. The Company
provides Internet access services, principally in New York City.
Revenue Recognition
Service revenue is recognized over the period services are provided.
Licensing revenue is recognized when the software is installed at the licensee's
site. Royalty revenue is recognized in the month earned. Cash received in
advance of revenues earned is recorded as deferred revenue.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over an estimated useful life of five years.
Software Development Costs
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86. Significant development
costs incurred beyond the point of demonstrated technological feasibility are
capitalized until the product or service is available for general release to
customers. Amortization is computed on an individual product basis and is the
greater of: (a) the ratio of current gross revenues for a product to the total
current and anticipated future gross revenues for the product or (b) the
straight-line method over the estimated economic life of the product. Currently,
the Company is using an economic life of three years for all capitalized
software costs.
The Company capitalized software development costs of $178,000 in 1994.
Amortization of these costs was $24,000 in 1994.
Income Taxes
The Company was an S Corporation from its inception through August 22,
1994. Because the individual shareholders and not the entity are subject to
income taxes on S Corporation taxable income, no provision for federal income
taxes has been recorded through August 22, 1994. On August 22, 1994, the
Company's S Corporation status was terminated. Accordingly, during the period
form August 23, 1994 through December 31, 1994, the Company was taxed as a C
corporation for federal and state purposes.
Income taxes are provided using the asset and liability approach. Under
this approach, deferred taxes represent the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of the assets
and liabilities.
F-40
<PAGE> 105
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1994
--------------
(IN THOUSANDS)
<S> <C>
Data communications equipment and software..................... $488
Office and other equipment..................................... 144
----
632
Less accumulated depreciation and amortization................. (77)
----
Property and equipment, net.................................... $555
====
</TABLE>
Total depreciation expense during 1994 was $70,000.
NOTE 3 -- CONVERTIBLE PREFERRED STOCK
On August 22, 1994, the Company entered into a securities purchase
agreement with investors. Pursuant to this agreement, the investors purchased
129 shares of Series A convertible participating preferred stock (Series A) for
a purchase price of $7,752 per share. Each share of Series A is convertible into
one share of common stock at any time (subject to adjustment under certain
conditions). Holders of Series A are entitled to vote as a class on all actions
to be taken by the shareholders of the Company. Stock issuance costs of $31,000
have been charged to capital in excess of par.
Liquidation Privileges -- In the event of liquidation, consolidation,
merger or winding up of the Company prior to conversion, all holders of
preferred stock are entitled to receive, in preference to the holders of the
common stock, an equal amount to their liquidation amount or a pro rata share of
the remaining assets based on their ownership of the Company.
Automatic Conversion -- Each share of the preferred stock automatically
converts to one share of common stock (subject to adjustment under certain
conditions) at the earlier of (i) August 18, 1995 or (ii) the closing of the
sale of shares of common stock by the Company pursuant to a firm commitment
underwritten public offering.
NOTE 4 -- STOCK OPTIONS
In 1994, the Company established the 1994 Stock Incentive Plan under which
it is authorized to grant up to 120 of either incentive stock options or
non-qualified stock options. Options become exercisable over one to three years
following the date of grant and all options expire ten years after the date of
grant. The Company did not grant any stock appreciation rights or restricted
stock during 1994 as allowed under the Plan. At December 31, 1994, there were
120 shares reserved for issuance under this Plan, of which 62 shares were
subject to options outstanding and 58 shares were available for future grants of
options. Compensation expense of $383,000 was recorded for certain options
granted in 1994. At December 31, 1994, no options were exercisable.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF OPTION PRICE
COMMON STOCK PER SHARE
------------ --------------
<S> <C> <C>
Balance, December 31, 1993........................... 240 $0.10
Granted............................................ 62 100.00-7,752
Exercised.......................................... (240) 0.10
Forfeited.......................................... --
------
Balance, December 31, 1994........................... 62 $100.00-$7,752
======
</TABLE>
F-41
<PAGE> 106
NOTE 5 -- INCOME TAXES
At its inception, the Company elected to be treated as an S Corporation as
permitted under the Internal Revenue Code. Accordingly, in lieu of corporate
income taxes, the shareholders were taxed on their share of the Company's
distributive share of the Company's income or loss. On August 22, 1994, the
Company changed from S Corporation status to C Corporation status. Accordingly,
during 1994, the Company was treated as an S Corporation from January 1, 1994
through August 22, 1994 and a C Corporation from August 23, 1994 through
December 31, 1994.
Deferred tax liabilities (assets) were comprised of the following at
December 31, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Depreciation......................................................... $ 22
Software development................................................. 61
-------
Gross deferred tax liabilities....................................... 83
-------
Other................................................................ (19)
Expense on options................................................... (149)
Loss carryforwards................................................... (32)
-------
Gross deferred tax assets............................................ (200)
-------
Net deferred tax asset............................................... (117)
Valuation allowance.................................................. 117
-------
Deferred tax asset after valuation allowance......................... $ 0
=======
</TABLE>
A full valuation allowance has been placed on the net deferred tax asset
since realization of these benefits cannot be reasonably assured. Accordingly,
the net change in the valuation allowance for deferred tax assets was an
increase of $117,000.
At December 31, 1994, the Company had net operating loss carryforwards of
approximately $81,000 for income tax purposes.
Pro forma income taxes for the periods the Company operated as an S
Corporation would not differ materially from the C Corporation income taxes
because of the operating losses experienced by the Company.
NOTE 6 -- COMMITMENTS
The Company leases its facilities under non-cancellable operating leases
expiring in various years through 2000. Total rent expense for all operating
leases amounted to $27,000 in 1994.
Future minimum lease payments under non-cancellable operating leases as of
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
----------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
$ 76
1996................................................. 76
1997................................................. 76
1998................................................. 68
1999................................................. 57
Thereafter........................................... 14
------
$367
======
</TABLE>
F-42
<PAGE> 107
NOTE 7 -- SUBSEQUENT EVENTS
Sale of the Company to PSINet Inc. (formerly Performance Systems
International, Inc.)
On February 7, 1995, the Company and its shareholders completed an
agreement whereby all of the Company's outstanding shares of common stock and
preferred stock were exchanged for shares of common stock of PSINet Inc.
F-43
<PAGE> 108
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements have been prepared to give effect to the Acquisition. The
accompanying pro forma condensed statements of operations of the Company for the
six-month period ended June 30, 1996 and the year ended December 31, 1995 give
effect to the Acquisition as if it had occurred at the beginning of the
respective periods. The accompanying pro forma condensed consolidated balance
sheet as of June 30, 1996 has been prepared as if the Acquisition had occurred
as of that date. The pro forma adjustments are based upon available information
and certain assumptions that management believes to be reasonable. Final
purchase adjustments may differ from the pro forma adjustments herein.
The pro forma condensed consolidated financial statements set forth below
should be read in conjunction with "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto and other financial
information and operating information included elsewhere in this Prospectus. The
pro forma condensed consolidated financial statements and notes thereto are
provided for informational purposes only and do not purport to be indicative of
actual results had the Acquisition been completed on the dates indicated or of
future results.
The Company is currently acquiring certain other subscriber accounts.
Including the balance of the purchase price to be paid in connection with the
Nando.net Transaction, the Company currently estimates that it will need to use
approximately $740,000 (excluding $100,000 expected to be paid at the closing of
the Nando.net Transaction) of the net proceeds from the Offering if such
transactions, as currently contemplated, are consummated.
F-44
<PAGE> 109
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL PSINET
HISTORICAL CONSUMER TRANSACTION MINDSPRING
MINDSPRING(a) SERVICES(a) ADJUSTMENTS PRO FORMA
------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents.............. $ 5,693,611 $ 527,247 $ 8,141,715 (f) $12,320,326
(527,247)(e)
(1,515,000)(b)
Trade receivables.................... 1,159,367 363,304 (363,304)(e) 1,159,367
Inventory............................ 36,478 0 0 36,478
Prepaids and other................... 347,129 36,512 (36,512)(e) 347,129
------------- ----------------- ------------ -----------
Total current assets............ 7,236,585 927,063 5,699,652 13,863,300
------------- ----------------- ------------ -----------
PROPERTY AND EQUIPMENT:
Property............................. 7,716,928 1,795,396 1,515,000 (b) 10,361,229
(394,664)(e)
(271,431)(h)
Less: accumulated depreciation and
amortization....................... (843,055) (394,664) 394,664 (e) (843,055)
------------- ----------------- ------------ -----------
Property and equipment, net.......... 6,873,873 1,400,732 1,243,569 9,518,174
------------- ----------------- ------------ -----------
Product development costs................ 95,920 0 0 95,920
Intangibles, net......................... 3,000,000 5,097,294 17,970,000 (c) 20,970,000
(5,097,294)(e)
Other assets............................. 8,481 43,000 (43,000)(e) 8,481
------------- ----------------- ------------ -----------
Total assets.................... $17,214,859 $ 7,468,089 $ 19,772,927 $44,455,875
============= ================ ============= ===========
CURRENT LIABILITIES:
Notes payable to PSINet.............. $ 2,000,000 $ 0 $ (2,000,000)(g) $ 0
Current amount of capital lease
obligations........................ 0 398,170 (398,170)(e) 0
Current portions of long term debt... 0 54,648 (54,648)(e) 0
Due to parent........................ 0 28,684,996 (28,684,996)(e) 0
Trade accounts payable............... 1,680,910 703,211 (703,211)(e) 1,680,910
Accrued expenses..................... 708,938 77,430 (77,430)(e) 708,938
Deferred revenue..................... 692,332 899,774 (899,774)(e) 692,332
------------- ----------------- ------------ -----------
Total current liabilities....... 5,082,180 30,818,229 (32,818,229) 3,082,180
------------- ----------------- ------------ -----------
LONG TERM LIABILITIES:
Long term capital lease
obligations........................ 0 601,353 (601,353)(e) 0
Long term notes payable.............. 0 67,315 (67,315)(e) 0
------------- ----------------- ------------ -----------
Total long term liabilities..... 0 668,668 (668,668) 0
------------- ----------------- ------------ -----------
Total liabilities............... 5,082,180 31,486,897 (33,486,897) 3,082,180
------------- ----------------- ------------ -----------
STOCKHOLDERS' EQUITY:
Class C preferred stock.............. 638,000 0 0 638,000
Common stock......................... 51,258 0 24,417(d) 86,258
1,813(b)
8,770(f)
Additional paid-in capital........... 15,976,226 0 20,374,884(d) 45,182,242
1,513,187(b)
7,317,945(f)
Accumulated deficit.................. (4,532,805) (24,018,808) 24,018,808(e) (4,532,805)
------------- ----------------- ------------ -----------
Total equity.................... 12,132,679 (24,018,808) 53,259,824 41,373,695
------------- ----------------- ------------ -----------
Total liabilities &
stockholders' equity.......... $17,214,859 $ 7,468,089 $ 19,772,927 $44,455,875
============= ================ ============= ===========
</TABLE>
- ---------------
(a) Derived from the financial statements of the Company and the PSINet Consumer
Services appearing elsewhere in this Prospectus.
(b) Additional capital expenditures recorded by the Company to support the
PSINet subscribers being acquired to be financed by a portion of the
3,500,000 shares of Common Stock offered hereby.
F-45
<PAGE> 110
(c) Reflects the allocation of the purchase price to tangible and intangible
assets based on the estimated fair value of such assets and to identifiable
liabilities. The intangible asset resulting from the acquisition has been
determined to relate primarily to the acquired customer base, and will be
amortized over a three year period.
(d) Reflects the portion of the 3,500,000 shares of Common Stock offered hereby
utilized for the acquisition of PSINet. The Company's indebtedness to PSINet
under the First PSINet Note is estimated to be approximately $2,160,000
(including accrued interest and increases in principal amount) as of the
completion of the Offering. Assumes that the Company acquires 100,000 PSINet
subscriber accounts and the Harrisburg Facility at the Second Closing,
resulting in principal and interest outstanding under the remaining PSINet
Notes of approximately $18,239,000. The pro forma intangible assets have
been adjusted to reflect this assumption. It is the Company's intention to
repay the PSINet Notes in full with the net proceeds from the Offering.
Under the terms of the Purchase Agreement, the number of subscribers that
PSINet must pay for is not to exceed 100,000, but could be less depending on
various factors described elsewhere herein. For example, if 66,000
subscriber accounts were acquired, then the net cash proceeds would be
increased by $7,038,000 and the intangible assets reduced by the same
amount. Cost of the acquisition also includes the cost of certain
contractual obligations of the Company entered into in connection with the
acquisition to convert PSINet subscribers to MindSpring's operating system.
(e) Reflects the removal of assets and liabilities of the PSINet Consumer
Services that are not being acquired and/or assumed by MindSpring as part of
the Acquisition.
(f) Reflects net proceeds of the Offering hereby after repayment of debt and
capital expenditures discussed in (d) and (b) that are available for general
corporate purposes (see "Use of Proceeds").
(g) Reflects repayment of debt with net proceeds of Offering hereby as discussed
in (d).
(h) Reflects adjustments to fixed asset total determined at the Second Closing
as discussed elsewhere herein.
F-46
<PAGE> 111
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
HISTORICAL PSINET
HISTORICAL CONSUMER TRANSACTION MINDSPRING
MINDSPRING(a) SERVICES(a) ADJUSTMENTS PRO FORMA
------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................. $ 2,226,844 $ 6,786,291 $ 0 $ 9,013,135
Costs and expenses
Selling, general and administrative
expenses........................... 2,230,102 11,397,248 (4,626,340)(c) 9,001,010
Cost of revenues..................... 965,773 5,039,604 (1,646,458)(g) 4,358,919
Depreciation......................... 264,683 229,105 303,000 (e) 796,788
Amortization......................... 0 3,160,158 (3,160,158)(h) 6,990,000
6,990,000 (f)
------------- ----------------- ----------- ------------
Total costs and expenses................. 3,460,558 19,826,115 (2,139,956) 21,146,717
------------- ----------------- ----------- ------------
Income (loss) from operations............ (1,233,714) (13,039,824) 2,139,956 (12,133,582)
Interest income (expense)................ (724,817) (29,523) 29,253 (d) (724,817)
------------- ----------------- ----------- ------------
Net income (loss)........................ $(1,958,531) $ (13,069,077) $ 2,169,209 $(12,858,399)
============= ================ ============ =============
Weighted average common shares
outstanding........................ 3,175,376 3,175,376
Offering Shares...................... 3,500,000 3,500,000
------------
Total pro forma common shares
outstanding........................ 3,175,376 6,675,376
Historical net loss per share(b)..... $ (0.62)
=============
Pro Forma net loss per share(b)...... $ (1.93)
=============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 1996
-----------------------------------------------------------------
HISTORICAL PSINET
HISTORICAL CONSUMER TRANSACTION MINDSPRING
MINDSPRING SERVICES(a) ADJUSTMENTS PRO FORMA
------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................................. $ 4,306,523 $ 7,955,466 $ 0 $ 12,261,989
Costs and expenses
Selling, general and administrative
expenses........................... 4,340,953 12,017,951 (3,997,270)(c) 12,361,634
Cost of revenues..................... 1,912,323 4,678,895 (701,162)(g) 5,890,056
Depreciation......................... 596,343 181,560 151,500 (e) 929,403
Amortization......................... 0 1,569,643 (1,569,643)(h) 3,495,000
3,495,000 (f)
------------- ----------------- ----------- ------------
Total costs and expenses................. 6,849,619 18,448,049 (2,621,576) 22,676,093
------------- ----------------- ----------- ------------
Income (loss) from operations............ (2,543,096) (10,492,583) 2,621,576 (10,414,103)
Interest income (expense)................ 43,883 (62,635) 62,635 (d) 43,883
------------- ----------------- ----------- ------------
Net income (loss)........................ $(2,499,213) $ (10,555,218) $(2,684,211) $(10,370,220)
============= ================ ============ =============
Weighted average common shares
outstanding........................ 4,309,859 4,309,859
Offering Shares...................... 3,500,000 3,500,000
------------
Total pro forma common shares
outstanding(i)..................... 4,309,859 7,809,859
Historical net loss per share(i)..... $ (0.58)
=============
Pro Forma net loss per share(i)...... $ (1.33)
=============
</TABLE>
- ---------------
(a) Derived from the financial statements of the Company and the PSINet Consumer
Services appearing elsewhere in this Prospectus. The 1995 PSINet Consumer
Services amounts include the results of operations of PSI Pipeline New York
Inc. for the period (January 1 through February 6, 1995) prior to its
acquisition by PSINet Consumer Services.
(b) Historical net loss per share is computed using the weighted average number
of shares of Common Stock and dilutive Common Stock equivalent shares from
convertible preferred stock (using the if-converted
F-47
<PAGE> 112
method) and from stock options (using the treasury stock method). Common
Stock and Common Stock equivalent shares issued at prices below the initial
public offering price during the twelve-month period prior to the Company's
initial public offering have been included in the calculation as if they
were outstanding for all periods prior to the initial public offering,
regardless of whether they are dilutive. Accordingly, all stock options
granted and the Class C Preferred are included in the earnings per share
calculations for all periods presented, even though the effect on net loss
is antidilutive. The Class A Preferred and the Class B Preferred have been
included for the respective weighted average periods for which such shares
were outstanding, even though their effect is antidilutive. The shares of
Common Stock offered hereby have been included in the pro forma calculations
as if they were outstanding for the entire period.
(c) Reflects reduction of PSINet historical selling, general, and administrative
expenses to the historical relationship of such expenses experienced by
MindSpring as a percentage of revenues. A majority of PSINet's historical
selling, general, and administrative expenses result from functions not
being acquired by MindSpring, including certain allocations of PSINet
corporate level expenses (see historical PSINet financial statements
elsewhere in this Prospectus). The impact of expected economies of scale to
reduce selling, general, and administrative expenses below MindSpring's
historical relationship of such expenses to revenue have not been reflected,
as the amount is not determinable on a pro forma historical basis.
(d) Reflects the reversal of interest expense since the fixed assets to be
acquired by the Company as a result of the Acquisition will be free of any
encumbrances pursuant to the Purchase Agreement and the Company will not be
financing asset purchases with debt.
(e) Reflects additional depreciation expense associated with capital
expenditures detailed in Note (b) to the Unaudited Pro Forma Balance Sheet
appearing elsewhere in this Prospectus.
(f) Reflects the amortization of the excess of the purchase price over the
estimated fair value of the tangible and intangible assets to be acquired in
the Acquisition. The assigned lives of the acquired tangible and intangible
assets is three years. The above is based on the assumption that 100,000
subscriber accounts are acquired. If only 66,000 PSINet subscriber accounts
are acquired, this amount would be reduced by $2,346,000 and $1,173,000 for
the year ended December 31, 1995 and the six months ended June 30, 1996,
respectively.
(g) Reflects the difference between the Company's historical costs and the costs
that would have been incurred under the terms of the Services Agreement. See
"Recent Transactions -- Acquisition of PSINet Assets" elsewhere in the
Prospectus for a discussion of the Services Agreement.
(h) Reflects the elimination of PSINet historical amortization associated with
the Pipeline NY acquisition.
(i) Historical loss per share is computed using the weighted average number of
shares of Common Stock adjusted for the dilutive effect of Common Stock
equivalents (Class C Preferred and stock options). Such Common Stock
equivalents are excluded from this calculation as their effect is
antidilutive. Common Stock equivalents are calculated using the treasury
stock method. The shares of Common Stock offered hereby have been included
in the pro forma calculation as if they were outstanding for all of the
period.
F-48
<PAGE> 113
[A graphic depiction of MindSpring's front-end Internet access panel appears on
the inside back cover.]
<PAGE> 114
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION OR OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Recent Transactions................... 19
Use of Proceeds....................... 22
Price Range of Common Stock and
Dividend Policy..................... 23
Capitalization........................ 24
Selected Financial and Operating
Data................................ 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 34
Management............................ 48
Certain Transactions.................. 54
Principal Stockholders................ 55
Description of Capital Stock.......... 56
Shares Eligible for Future Sale....... 58
Underwriting.......................... 59
Legal Matters......................... 60
Experts............................... 60
Available Information................. 60
Glossary of Technical Terms........... G-1
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,500,000 SHARES
[MINDSPRING LOGO]
COMMON STOCK
------------------------------
P R O S P E C T U S
------------------------------
J.C. Bradford & Co.
Wheat First Butcher Singer
The Robinson-Humphrey
Company, Inc.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts except the SEC Registration
Fee and the NASD Filing Fee are estimated.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $14,227
NASD Filing Fee.................................................... 4,626
Nasdaq Stock Market Listing Fee.................................... 17,500
Blue Sky Fees and Expenses......................................... *
Accounting Fees and Expenses....................................... *
Legal Fees and Expenses............................................ *
Printing and Engraving Expenses.................................... *
Registrar and Transfer Agent Fees.................................. *
Miscellaneous...................................................... *
-------
Total.................................................... $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware Corporation Law, a corporation may
indemnify its directors, officers, employees and agents and its former
directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The Delaware
Corporation Law provides, however, that such person must have acted in good
faith and in a manner such person reasonably believed to be in (or not opposed
to) the best interests of the corporation and, in the case of a criminal action,
such person must have had no reasonable cause to believe his or her conduct was
unlawful. In addition, the Delaware Corporation Law does not permit
indemnification in an action or suit by or in the right of the corporation,
where such person has been adjudged liable to the corporation, unless, and only
to the extent that, a court determines that such person fairly and reasonably is
entitled to indemnity for costs the court deems proper in light of liability
adjudication. Indemnity is mandatory to the extent a claim, issue or matter has
been successfully defended.
The Restated Certificate contains provisions that provide that no director
of the Company shall be liable for breach of fiduciary duty as a director except
for: (i) any breach of the director's duty of loyalty to the Company or its
stockholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) liability under
Section 174 of the Delaware Corporation Law; or (iv) any transaction from which
the director derived an improper personal benefit. The Restated Certificate
contains provisions that further provide for the indemnification of directors
and officers to the fullest extent permitted by the Delaware Corporation Law.
Under the Bylaws, the Company is required to advance expenses incurred by an
officer or director in defending any such action if the director or officer
undertakes to repay such amount if it is determined that the director or officer
is not entitled to indemnification. In addition, the Company has entered into
indemnity agreements with each of its directors pursuant to which the Company
has agreed to indemnify the directors as permitted by the Delaware Corporation
Law and has obtained directors and officers liability insurance.
II-1
<PAGE> 116
The Underwriting Agreement provides for indemnification by the Underwriters
of the directors, officers and controlling persons of the Company against
certain liabilities, including liabilities under the Securities Act, under
certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From the Company's inception on February 24, 1994, through August 31, 1996,
the Company has issued and sold the securities described below in the following
unregistered transactions:
(1) In February 1994, the Company issued 1,032,951 shares of Common
Stock to its founder, Charles M. Brewer. The price per share was $0.0002,
for an aggregate consideration of $200.
(2) In March 1994, the Company issued 103,296 shares of Common Stock
to Technologic, Inc. The price per share was $0.0002, for an aggregate
consideration of $20.
(3) In November 1994, the Company issued 1,187,895 shares of the
Company's Class A Preferred Stock to ITC Holding. The price per share was
$0.64, for an aggregate consideration of $765,000.
(4) In February 1995, the Company granted to ten of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 157,519 shares of Common Stock at an exercise price of $0.64
per share. As of August 31, 1996, 12,912 of these stock options were
exercisable.
(5) In April 1995, the Company issued 77,472 shares of Common Stock
to Michael G. Misikoff. The price per share was $0.64, for an aggregate
consideration of $50,000.
(6) In April 1995, the Company granted to two of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 37,702 shares of Common Stock at an exercise price of $0.64
per share. As of August 31, 1996, none of these stock options was
exercisable.
(7) In June 1995, the Company issued 645,594 shares of the Company's
Class B Preferred Stock to ITC Holding. The price per share was $1.55, for
an aggregate consideration of $1,000,000.
(8) In June 1995, the Company issued 48,420 shares of Common Stock to
Michael S. McQuary. The price per share was $1.55, for an aggregate
consideration of approximately $75,000.
(9) In June 1995, the Company granted to six of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 62,490 shares of Common Stock at an exercise price of $1.55
per share. As of August 31, 1996, none of these stock options was
exercisable.
(10) In August 1995, the Company issued 5,165 shares of Common Stock
to J. Fredrick Nixon. The price per share was $1.55, for an aggregate
consideration of $8,000.
(11) In August 1995, the Company granted to five of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 22,206 shares of Common Stock at an exercise price of $1.55
per share. As of August 31, 1996, none of these stock options was
exercisable.
(12) In October 1995, the Company granted to five of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 9,811 shares of Common Stock at an exercise price of $2.85 per
share. As of August 31, 1996, none of these stock options was exercisable.
(13) In November 1995, the Company granted to fourteen of its
employees, pursuant to the Company's Stock Option Plan, stock options to
purchase an aggregate of 52,155 shares of Common Stock at an exercise price
of $3.56 per share. As of August 31, 1996, none of these stock options was
exercisable.
(14) In December 1995, the Company granted to five of its employees,
pursuant to the Company's Stock Option Plan, stock options to purchase an
aggregate of 3,354 shares of Common Stock at an exercise price of $6.38 per
share. As of August 31, 1996, none of these stock options was exercisable.
(15) In December 1995, the Company granted to three of its
non-employee directors, pursuant to the Company's Director Stock Option
Plan, stock options to purchase an aggregate of 30,000 shares of
II-2
<PAGE> 117
Common Stock at an exercise price of $6.38 per share, of which 10,000 were
granted to O. Gene Gabbard, 10,000 were granted to Campbell B. Lanier, III,
and 10,000 were granted to William H. Scott, III. As of August 31, 1996,
none of these stock options was exercisable.
(16) On December 27, 1995, the Company issued to ITC Holding a warrant
to purchase 100,000 shares of Class C Preferred, at an exercise price of
$.01 per share in consideration of ITC Holding's agreement not to exercise
its rights and remedies upon default by the Company on an outstanding
$2,000,000 loan from ITC Holding. By December 31, 1995, ITC Holding had
exercised such warrant, for an aggregate consideration of $1,000.
(17) In January 1996, pursuant to the Company's Stock Option Plan, the
Company granted to 19 of its employees stock options to purchase an
aggregate of 26,632 shares of Common Stock at an exercise price of $6.38
per share. As of August 31, 1996, none of these stock options was
exercisable.
(18) In February 1996, pursuant to the Company's Stock Option Plan,
the Company granted to 53 of its employees stock options to purchase an
aggregate of 37,750 shares of Common Stock at an exercise price of $6.38
per share. As of August 31, 1996, none of these stock options was
exercisable.
(19) In March 1996, pursuant to the Company's Stock Option Plan, the
Company granted to one of its employees stock options to purchase an
aggregate of 500 shares of Common Stock at an exercise price of $6.38 per
share. As of August 31, 1996, none of these stock options was exercisable.
(20) In March 1996, pursuant to the Company's Stock Option Plan, the
Company granted to two of its employees stock options to purchase an
aggregate of 1,000 shares of Common Stock at an exercise price of $8.00 per
share. As of August 31, 1996, none of these stock options was exercisable.
(21) In April 1996, pursuant to the Company's Stock Option Plan, the
Company granted to ten of its employees stock options to purchase an
aggregate of 6,000 shares of Common Stock at an exercise price of $7.88 per
share. As of August 31, 1996, none of these stock options was exercisable.
(22) In May 1996, pursuant to the Company's Stock Option Plan, the
Company granted to 12 of its employees stock options to purchase an
aggregate of 10,000 shares of Common Stock at an exercise price of $12.38
per share. As of August 31, 1996, none of these stock options was
exercisable.
(23) In June 1996, pursuant to the Company's Stock Option Plan, the
Company granted to ten of its employees stock options to purchase an
aggregate of 10,000 shares of Common Stock at an exercise price of $10.63
per share. As of August 31, 1996, none of these stock options was
exercisable.
(24) In August 1996, pursuant to the Company's Stock Option Plan, the
Company granted to 39 of its employees stock options to purchase an
aggregate of 43,102 shares of Common Stock at an exercise price of $9.75
per share. As of August 31, 1996, none of these stock options was
exercisable.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
II-3
<PAGE> 118
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement by and among MindSpring Enterprises, Inc., J.C.
Bradford & Co., Wheat, First Securities, Inc., and The Robinson-Humphrey
Company, Inc.
2(a) -- Asset Purchase Agreement dated June 28, 1996 by and between MindSpring
Enterprises, Inc. and PSINet, Inc. (Filed as Exhibit 10.1 to Current Report on
Form 8-K dated June 28, 1996, File No. 0-27890, and incorporated herein by
reference.)
2(b) -- Amendment No. 1 to Asset Purchase Agreement and Network Services Agreement dated
August 23, 1996 by and between PSINet Inc. and MindSpring Enterprises, Inc.,
effective as of June 28, 1996. (Filed as Exhibit 10.3 to Current Report on Form
8-K/A dated August 23, 1996, File No. 0-27890, and incorporated herein by
reference.)
2(c) -- Amended and Restated Asset Purchase Agreement by and between MindSpring
Enterprises, Inc. and The News and Observer Publishing Company dated as of
September 11, 1996.
3(a) -- Amended and Restated Certificate of Incorporation of MindSpring Enterprises,
Inc. (Filed as Exhibit 3(a) to Quarterly Report on Form 10-Q dated May 3, 1996,
File No. 0-27890, and incorporated herein by reference.)
3(b) -- Amended and Restated Bylaws of MindSpring Enterprises, Inc. (Filed as Exhibit
3(b) to Quarterly Report on Form 10-Q/A dated August 30, 1996, File No. 0-27890,
and incorporated herein by reference.)
4(a) -- Form of Common Stock Certificate of the Company. (Filed as Exhibit 4 to
Registration Statement on Form S-1, File No. 333-0010G ("Initial Form S-1"), and
incorporated herein by reference.)
4(b) -- Convertible Note dated June 28, 1996, as amended on August 23, 1996, effective
as of June 28, 1996.(Filed as Exhibit 4 to Current Report on Form 8-K/A dated
August 23, 1996, File No. 0-27890, and incorporated herein by reference.)
*5 -- Opinion of Hogan & Hartson L.L.P.
10(a) -- Loan Agreement by and between MindSpring Enterprises, Inc. and ITC Holding
Company, Inc. dated as of December 21, 1995. (Filed as Exhibit 10(a) to Initial
Form S-1, and incorporated herein by reference.)
10(b) -- First Amendment to Loan Agreement by and between MindSpring Enterprises, Inc.
and ITC Holding Company, Inc. (Filed as Exhibit 10(a)(1) to Initial Form S-1,
and incorporated herein by reference.)
10(c) -- Security Agreement by and between MindSpring Enterprises, Inc. and ITC Holding
Company, Inc. dated as of December 27, 1995. (Filed as Exhibit 10(b) to Initial
Form S-1, and incorporated herein by reference.)
10(d) -- Promissory Note by MindSpring Enterprises, Inc. in favor of ITC Holding Company,
Inc. dated December 27, 1995. (Filed as Exhibit 10(c) to Initial Form S-1, and
incorporated herein by reference.)
10(e) -- Internet Service Provider Navigator Distribution Agreement dated June 21, 1995
between Netscape Communications Corporation and MindSpring Enterprises, Inc., as
amended by Amendment No. 1 dated September 29, 1995 and by Amendment No. 2 dated
March 28, 1996. (Filed as Exhibit 10 to Quarterly Report on Form 10-Q/A dated
August 30, 1996, File No. 0-27890, and incorporated herein by reference.)
10(f) -- Eudora(R) Freeware Distribution Agreement dated as of September 28, 1995 between
MindSpring Enterprises, Inc. and Qualcomm Incorporated. (Filed as Exhibit 10(e)
to Initial Form S-1, and incorporated herein by reference.)
10(g) -- Agreement dated as of October 1, 1995 between Netsurfer, Inc. and MindSpring
Enterprises, Inc. (Filed as Exhibit 10(f) to Initial Form S-1, and incorporated
herein by reference.)
10(h) -- Lease and Service Agreement dated as of January 1, 1995 between AvData Systems,
Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(i) to Initial Form
S-1, and incorporated herein by reference.)
</TABLE>
II-4
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <C> <S>
10(i) -- Lease Agreement commencing on November 1, 1995 between West Peachtree Point
Partners, L.P. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(j) to
Initial Form S-1, and incorporated herein by reference.)
10(j) -- First Amendment dated February 6, 1996 to Lease Agreement dated November 1, 1995
between John Marshall Law School, Inc. (assignee of West Peachtree Point
Partners, L.P.) and MindSpring Enterprises, Inc. (Filed as Exhibit 10(cc) to
Initial Form S-1, and incorporated herein by reference.)
10(k) -- Agreement dated January 31, 1995 between Agis Net99 and MindSpring Enterprises,
Inc. (Filed as Exhibit 10(k) to Initial Form S-1, and incorporated herein by
reference.)
10(l) -- Data Communications Service Agreement dated July 23, 1995 between Sprint
Communications Company L.P. and MindSpring Enterprises, Inc. (Filed as Exhibit
10(l) to Initial Form S-1, and incorporated herein by reference.)
10(m) -- LVIEW Pro Software Distribution License Agreement dated November 22, 1995
between MMedia Research and MindSpring Enterprises, Inc. (Filed as Exhibit 10(m)
to Initial Form S-1, and incorporated herein by reference.)
10(n) -- Subscription Agreement dated as of April 27, 1995 between Michael G. Misikoff
and MindSpring Enterprises, Inc. (Filed as Exhibit 10(p) to Initial Form S-1,
and incorporated herein by reference.)
10(o) -- Subscription Agreement dated as of August 28, 1995 between Michael S. McQuary
and MindSpring Enterprises, Inc. (Filed as Exhibit 10(q) to Initial Form S-1,
and incorporated herein by reference.)
10(p) -- Subscription Agreement dated as of August 29, 1995 between J. Fredrick Nixon and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(r) to Initial Form S-1, and
incorporated herein by reference.)
10(q) -- Second Amended and Restated Stockholders' Agreement dated as of December 21,
1995 among MindSpring Enterprises, Inc. and Certain Stockholders. (Filed as
Exhibit 10(s) to Initial Form S-1, and incorporated herein by reference.)
10(r) -- Stock Purchase Agreement dated as of November 15, 1994 among ITC Holding
Company, Inc., MindSpring Enterprises, Inc., and Charles Brewer. (Filed as
Exhibit 10(t) to Initial Form S-1, and incorporated herein by reference.)
10(s) -- MindSpring Enterprises, Inc. 1995 Stock Option Plan. (Filed as Exhibit 10(u) to
Initial Form S-1, and incorporated herein by reference.)
10(t) -- Form of Stock Option Agreement. (Filed as Exhibit 10(v) to Initial Form S-1, and
incorporated herein by reference.)
10(u) -- MindSpring Enterprises, Inc. 1995 Directors Stock Option Plan. (Filed as Exhibit
10(w) to Initial Form S-1, and incorporated herein by reference.)
10(v) -- Form of Director Stock Option Agreement. (Filed as Exhibit 10(x) to Initial Form
S-1, and incorporated herein by reference.)
10(w) -- Form of MindSpring Service Agreement. (Filed as Exhibit 10(y) to Initial Form
S-1, and incorporated herein by reference.)
10(x) -- Service Provider Agreement dated December 13, 1995 between BBN Planet
Corporation and MindSpring Enterprises, Inc. (Filed as Exhibit 10(z) to Initial
Form S-1, and incorporated herein by reference.)
10(y) -- Software License Agreement dated September 1, 1995 between Ipswitch, Inc. and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(aa) to Initial Form S-1, and
incorporated herein by reference.)
10(z) -- Software License Agreement dated December 13, 1995 between Network TeleSystems,
Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(bb) to Initial Form
S-1, and incorporated herein by reference.)
10(aa) -- Form of MindSpring Director or Officer Indemnity Agreement. (Filed as Exhibit
10(dd) to Initial Form S-1, and incorporated herein by reference.)
</TABLE>
II-5
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------ --------------------------------------------------------------------------------
<C> <C> <S>
10(bb) -- Network Services Agreement dated June 28, 1996 by and between MindSpring
Enterprises, Inc. and PSINet Inc. (Filed as Exhibit 10.2 to Current Report on
Form 8-K dated June 28, 1996, File No. 0-27890, and incorporated herein by
reference.)
**10(cc) -- Master Services Agreement dated July 15, 1996 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc.
**10(dd) -- Software License Agreement dated as of March 29, 1996 between Clarify Inc. and
MindSpring Enterprises, Inc.
10(ee) -- Assignment and Assumption of Contracts and Leases by and between MindSpring
Enterprises, Inc. and PSINet, Inc. dated as of September 1, 1996.
10(ff) -- Service Provider Agreement dated December 13, 1995 between BBN Planet
Corporation and MindSpring Enterprises, Inc.
**11 -- Statement regarding Computation of Per Share Earnings.
23(a) -- Consent of Arthur Andersen LLP.
23(b) -- Consent of Price Waterhouse LLP.
*23(c) -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5)
**24 -- Powers of Attorney for the following individuals: Charles M. Brewer, Michael S.
McQuary, Michael G. Misikoff, Campbell B. Lanier, III, William H. Scott, III and
O. Gene Gabbard (included on signature page).
**27 -- Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
(b) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules are filed herewith:
Schedule II -- Valuation and Qualifying Accounts -- MindSpring
Enterprises, Inc.
Schedule II -- Valuation and Qualifying Accounts -- PSINet
Inc. -- Consumer Internet Access Services in the United States.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h)
II-6
<PAGE> 121
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment to Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on this 12th day of September, 1996.
MINDSPRING ENTERPRISES, INC.
By /s/ CHARLES M. BREWER
-----------------------------------
CHARLES M. BREWER
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed by the following persons in the
capacities and on this 12th day of September, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- ---------------------------------------
<S> <C> <C>
/s/ CHARLES M. BREWER Chairman, Chief Executive Officer and
- ---------------------------------------- Director
CHARLES M. BREWER (Principal executive officer)
* President, Chief Operating Officer and
- ---------------------------------------- Director
MICHAEL S. MCQUARY
* Vice President, Chief Financial
- ---------------------------------------- Officer, Secretary, Treasurer and
MICHAEL G. MISIKOFF Director
(Principal financial officer and
principal accounting officer)
* Director
- ----------------------------------------
CAMPBELL B. LANIER, III
* Director
- ----------------------------------------
WILLIAM H. SCOTT, III
* Director
- ----------------------------------------
O. GENE GABBARD
*By: /s/ CHARLES M. BREWER
- ----------------------------------------
CHARLES M. BREWER
Attorney-in-fact
</TABLE>
II-8
<PAGE> 123
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards,
the financial statements of MINDSPRING ENTERPRISES, INC. included in this
Registration Statement and have issued our report thereon dated February 16,
1996 (except with respect to Note 10, as to which the date is August 20, 1996).
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 16(b) is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 16, 1996
<PAGE> 124
SCHEDULE II
MINDSPRING ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(A) PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION IN THE BALANCE SHEET FROM THE
ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $ 15 $ 41 $ 0 $(10) $ 46
</TABLE>
- ---------------
(a) Represents collections of accounts previously written-off as considered to
be uncollectible.
MINDSPRING ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION IN THE BALANCE SHEET FROM THE
ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $0 $ 15 $ 0 $0 $ 15
</TABLE>
<PAGE> 125
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards,
the financial statements of PSINET INC. -- CONSUMER INTERNET ACCESS SERVICES IN
THE UNITED STATES included in this Registration Statement and have issued our
report thereon dated July 30, 1996. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 16(b) is the responsibility of the company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applies in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
July 30, 1996
<PAGE> 126
SCHEDULE II
PSINET INC. -- CONSUMER INTERNET ACCESS
SERVICES IN THE UNITED STATES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(A) PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION (INCREASE) IN THE BALANCE SHEET
FROM THE ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $ 0 $ 0 $ 0 $ (0) $ 0
</TABLE>
- ---------------
(a) Represents collections of accounts previously written-off as considered to
be uncollectible.
PSINET INC. -- CONSUMER INTERNET ACCESS
SERVICES IN THE UNITED STATES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- ---------- ------------------------ ------------ ----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
DEDUCTION (INCREASE) IN THE BALANCE SHEET
FROM THE ASSET TO WHICH IT APPLIES:
Allowance for uncollectible accounts
receivable.......................... $0 $391 $ 0 $(62) $329
</TABLE>
- ---------------
(a) Represents collections of accounts previously written-off as considered to
be uncollectible.
<PAGE> 127
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<C> <C> <S> <C>
1 -- Form of Underwriting Agreement by and among MindSpring Enterprises,
Inc., J.C. Bradford & Co., Wheat, First Securities, Inc., and The
Robinson-Humphrey Company, Inc. ......................................
2(a) -- Asset Purchase Agreement dated June 28, 1996 by and between MindSpring
Enterprises, Inc. and PSINet, Inc. (Filed as Exhibit 10.1 to Current
Report on Form 8-K dated June 28, 1996, File No. 0-27890, and
incorporated herein by reference.)....................................
2(b) -- Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement dated August 23, 1996 by and between PSINet Inc. and
MindSpring Enterprises, Inc., effective as of June 28, 1996. (Filed as
Exhibit 10.3 to Current Report on Form 8-K/A dated August 23, 1996,
File No. 0-27890, and incorporated herein by reference.)..............
2(c) -- Amended and Restated Asset Purchase Agreement by and between
MindSpring Enterprises, Inc. and The News and Observer Publishing
Company dated as of September 11, 1996. ..............................
3(a) -- Amended and Restated Certificate of Incorporation of MindSpring
Enterprises, Inc. (Filed as Exhibit 3(a) to Quarterly Report on Form
10-Q dated May 3, 1996, File No. 0-27890, and incorporated herein by
reference.) ..........................................................
3(b) -- Amended and Restated Bylaws of MindSpring Enterprises, Inc. (Filed as
Exhibit 3(b) to Quarterly Report on Form 10-Q/A dated August 30, 1996,
File No. 0-27890, and incorporated herein by reference.)..............
4(a) -- Form of Common Stock Certificate of the Company. (Filed as Exhibit 4
to Registration Statement on Form S-1, File No. 333-00108 ("Initial
Form S-1"), and incorporated herein by reference.)....................
4(b) -- Convertible Note dated June 28, 1996, as amended on August 23, 1996,
effective as of June 28, 1996. (Filed as Exhibit 4 to Current Report
on Form 8-K/A dated August 23, 1996, File No. 0-27890, and
incorporated herein by reference.)....................................
*5 -- Opinion of Hogan & Hartson L.L.P. ....................................
10(a) -- Loan Agreement by and between MindSpring Enterprises, Inc. and ITC
Holding Company, Inc. dated as of December 21, 1995. (Filed as Exhibit
10(a) to Initial Form S-1, and incorporated herein by reference.).....
10(b) -- First Amendment to Loan Agreement by and between MindSpring
Enterprises, Inc. and ITC Holding Company, Inc. (Filed as Exhibit
10(a)(1) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(c) -- Security Agreement by and between MindSpring Enterprises, Inc. and ITC
Holding Company, Inc. dated as of December 27, 1995. (Filed as Exhibit
10(b) to Initial Form S-1, and incorporated herein by reference.).....
10(d) -- Promissory Note by MindSpring Enterprises, Inc. in favor of ITC
Holding Company, Inc. dated December 27, 1995. (Filed as Exhibit 10(c)
to Initial Form S-1, and incorporated herein by reference.)...........
10(e) -- Internet Service Provider Navigator Distribution Agreement dated June
21, 1995 between Netscape Communications Corporation and MindSpring
Enterprises, Inc., as amended by Amendment No. 1 dated September 29,
1995 and by Amendment No. 2 dated March 28, 1996. (Filed as Exhibit 10
to Quarterly Report on Form 10-Q/A dated August 30, 1996, File No.
0-27890 and incorporated herein by reference.)........................
10(f) -- Eudora(R) Freeware Distribution Agreement dated as of September 28,
1995 between MindSpring Enterprises, Inc. and Qualcomm Incorporated.
(Filed as Exhibit 10(e) to Initial Form S-1, and incorporated herein
by reference.)........................................................
</TABLE>
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<C> <C> <S> <C>
10(g) -- Agreement dated as of October 1, 1995 between Netsurfer, Inc. and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(f) to Initial Form
S-1, and incorporated herein by reference.)...........................
10(h) -- Lease and Service Agreement dated as of January 1, 1995 between AvData
Systems, Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(i)
to Initial Form S-1, and incorporated herein by reference.)...........
10(i) -- Lease Agreement commencing on November 1, 1995 between West Peachtree
Point Partners, L.P. and MindSpring Enterprises, Inc. (Filed as
Exhibit 10(j) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(j) -- First Amendment dated February 6, 1996 to Lease Agreement dated
November 1, 1995 between John Marshall Law School, Inc. (assignee of
West Peachtree Point Partners, L.P.) and MindSpring Enterprises, Inc.
(Filed as Exhibit 10(cc) to Initial Form S-1, and incorporated herein
by reference.)........................................................
10(k) -- Agreement dated January 31, 1995 between Agis Net99 and MindSpring
Enterprises, Inc. (Filed as Exhibit 10(k) to Initial Form S-1, and
incorporated herein by reference.)....................................
10(l) -- Data Communications Service Agreement dated July 23, 1995 between
Sprint Communications Company L.P. and MindSpring Enterprises, Inc.
(Filed as Exhibit 10(l) to Initial Form S-1, and incorporated herein
by reference.)........................................................
10(m) -- LVIEW Pro Software Distribution License Agreement dated November 22,
1995 between MMedia Research and MindSpring Enterprises, Inc. (Filed
as Exhibit 10(m) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(n) -- Subscription Agreement dated as of April 27, 1995 between Michael G.
Misikoff and MindSpring Enterprises, Inc. (Filed as Exhibit 10(p) to
Initial Form S-1, and incorporated herein by reference.)..............
10(o) -- Subscription Agreement dated as of August 28, 1995 between Michael S.
McQuary and MindSpring Enterprises, Inc. (Filed as Exhibit 10(q) to
Initial Form S-1, and incorporated herein by reference.)..............
10(p) -- Subscription Agreement dated as of August 29, 1995 between J. Fredrick
Nixon and MindSpring Enterprises, Inc. (Filed as Exhibit 10(r) to
Initial Form S-1, and incorporated herein by reference.)..............
10(q) -- Second Amended and Restated Stockholders' Agreement dated as of
December 21, 1995 among MindSpring Enterprises, Inc. and Certain
Stockholders. (Filed as Exhibit 10(s) to Initial Form S-1, and
incorporated herein by reference.)....................................
10(r) -- Stock Purchase Agreement dated as of November 15, 1994 among ITC
Holding Company, Inc., MindSpring Enterprises, Inc., and Charles
Brewer. (Filed as Exhibit 10(t) to Initial Form S-1, and incorporated
herein by reference.).................................................
10(s) -- MindSpring Enterprises, Inc. 1995 Stock Option Plan. (Filed as Exhibit
10(u) to Initial Form S-1, and incorporated herein by reference.).....
10(t) -- Form of Stock Option Agreement. (Filed as Exhibit 10(v) to Initial
Form S-1, and incorporated herein by reference.)......................
10(u) -- MindSpring Enterprises, Inc. 1995 Directors Stock Option Plan. (Filed
as Exhibit 10(w) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(v) -- Form of Director Stock Option Agreement. (Filed as Exhibit 10(x) to
Initial Form S-1, and incorporated herein by reference.)..............
10(w) -- Form of MindSpring Service Agreement. (Filed as Exhibit 10(y) to
Initial Form S-1, and incorporated herein by reference.)..............
10(x) -- Service Provider Agreement dated December 13, 1995 between BBN Planet
Corporation and MindSpring Enterprises, Inc. (Filed as Exhibit 10(z)
to Initial Form S-1, and incorporated herein by reference.)...........
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------ ------------
<C> <C> <S> <C>
10(y) -- Software License Agreement dated September 1, 1995 between Ipswitch,
Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(aa) to
Initial Form S-1, and incorporated herein by reference.)..............
10(z) -- Software License Agreement dated December 13, 1995 between Network
TeleSystems, Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit
10(bb) to Initial Form S-1, and incorporated herein by reference.)....
10(aa) -- Form of MindSpring Director or Officer Indemnity Agreement. (Filed as
Exhibit 10(dd) to Initial Form S-1, and incorporated herein by
reference.)...........................................................
10(bb) -- Network Services Agreement dated June 28, 1996 by and between
MindSpring Enterprises, Inc. and PSINet Inc. (Filed as Exhibit 10.2 to
Current Report on Form 8-K dated June 28, 1996, File No. 0-27890, and
incorporated herein by reference.)....................................
**10(cc) -- Master Services Agreement dated July 15, 1996 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc. ............
**10(dd) -- Software License Agreement dated as of March 29, 1996 between Clarify
Inc. and MindSpring Enterprises, Inc. ................................
10(ee) -- Assignment and Assumption of Contracts and Leases by and between
MindSpring Enterprises, Inc. and PSINet, Inc. dated as of September 1,
1996. ................................................................
10(ff) -- Service Provider Agreement dated December 13, 1995 between BBN Planet
Corporation and MindSpring Enterprises, Inc. .........................
**11 -- Statement regarding Computation of Per Share Earnings. ...............
23(a) -- Consent of Arthur Andersen LLP. ......................................
23(b) -- Consent of Price Waterhouse LLP. .....................................
*23(c) -- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5).............
**24 -- Powers of Attorney for the following individuals: Charles M. Brewer,
Michael S. McQuary, Michael G. Misikoff, Campbell B. Lanier, III,
William H. Scott, III and O. Gene Gabbard (included on signature
page). ...............................................................
**27 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment
** Previously filed
<PAGE> 1
EXHIBIT 1
MINDSPRING ENTERPRISES, INC.
3,500,000 SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
_____________, 1996
J.C. BRADFORD & CO.
WHEAT, FIRST SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
MindSpring Enterprises, Inc., a Delaware corporation (the
"Company"), proposes to sell to the several underwriters named in Schedule I
hereto (the "Underwriters") for whom you are acting as the representatives
(the "Representatives") 3,500,000 shares (the "Firm Shares") of the
Company's common stock, par value $0.01 per share (the "Common Stock").
The Company has also agreed to grant to you an option (the "Option") to
purchase up to 525,000 additional shares of Common Stock (the "Option Shares")
on the terms and for the purposes set forth in Section 1(b) hereof. The Firm
Shares and the Option Shares are hereinafter collectively referred to as the
"Shares."
The Company confirms as follows its agreement with you.
1. AGREEMENT TO SELL AND PURCHASE; PUBLIC OFFERING.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to all the terms and conditions of this
Agreement, the Company agrees to sell to the Underwriters an aggregate of
3,500,000 Firm Shares, and each of the Underwriters, severally and not jointly,
agrees to purchase at the purchase price of $_______ per share, the number of
Firm Shares set forth opposite such Underwriter's name in Schedule I hereto.
(b) Subject to all the terms and conditions of this
Agreement, the Company also grants the Underwriters an Option to purchase,
severally and not jointly, up to 525,000Option Shares from the Company, each at
the same price per share as you shall pay for the Firm Shares. The Option may
be exercised only to cover over-allotments in the sale of the Firm Shares and
may be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of the Prospectus (as defined below) upon
written or telegraphic notice (the "Option Shares Notice") by you to the
Company no later than 12:00
<PAGE> 2
noon, Nashville, Tennessee time at least two and no more than ten business days
before the date and time specified for closing in the Option Shares Notice (the
"Option Closing Date") setting forth the aggregate number of Option Shares to
be purchased. On the Option Closing Date, the Company will issue and sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and unless otherwise adjusted by the Representatives, each of the
Underwriters will purchase such percentage of the Option Shares as is equal to
the percentage of Firm Shares that such Underwriter is purchasing.
(c) After the Registration Statement becomes effective,
upon the authorization by you of the release of the Shares, the several
Underwriters propose to offer the Firm Shares and the Option Shares purchased
by the Underwriters for sale initially at the price per share set forth in the
Prospectus (the initial offering price) and upon the terms set forth therein.
2. DELIVERY AND PAYMENT.
Delivery of the Firm Shares shall be made to you by or on
behalf of the Company against payment of the purchase price by certified or
official bank check payable in same day funds to the order of the Company at
the offices of J.C. Bradford & Co., J.C. Bradford Financial Center, 330
Commerce Street, Nashville, Tennessee 37201, or at such other place as may be
agreed upon by the Representatives and the Company, at 10:00 a.m., Nashville
time, on the third full business day following the date of this Agreement (the
"Closing Date"), or at such other time on such date, or at such other place, as
may be agreed upon by the Company and the Representatives.
To the extent the Option is exercised, delivery of the Option
Shares against payment therefor (in the manner specified above) will take place
at the offices specified above at the Option Closing Date (which, subject to
the requirements set forth above for the Option Shares Notice, may be the
Closing Date).
Certificates evidencing the Shares shall be in definitive form
and shall be registered in such names and in such denominations as you shall
request not less than two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the
Shares, the Company agrees to make such certificates available for inspection
at least 24 hours prior to the Closing Date or the Option Closing Date, as the
case may be, at a location to be reasonably designated by you, which may be in
New York, New York, or elsewhere.
The cost of original issue tax stamps, if any, in connection
with the issuance and delivery of the Firm Shares and Option Shares by the
Company to the Underwriters shall be borne by the Company. The Company will
pay and save each of the Underwriters and any subsequent holder of the Shares
harmless from any and all liabilities with respect to or resulting from any
failure or delay in paying Federal and state stamp and other transfer taxes, if
any, which may be payable or determined to be payable in connection with the
original issuance or sale to such Underwriter of the Firm Shares and Option
Shares.
2
<PAGE> 3
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents, warrants and covenants to each of the
Underwriters that:
(a) The Company has prepared and has filed with the
Securities and Exchange Commission (the "Commission") a registration statement
(Registration No. 333-10779) on Form S-1 relating to the Shares, including a
preliminary prospectus and such amendments to such registration statement as
may have been required to the date of this Agreement, under the provisions of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (collectively referred to as the "Rules and Regulations") of the
Commission thereunder. The term "preliminary prospectus" as used herein means
a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to you. If such registration
statement has not become effective, a further amendment to such registration
statement, including a form of final prospectus, necessary to permit such
registration statement to become effective, will be filed promptly by the
Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule
424(b) of the Rules and Regulations. The term "Registration Statement" means
the registration statement as amended at the time it becomes or became
effective (the "Effective Date"), including financial statements and all
exhibits and any information deemed to be included by Rule 430A. The term
"Prospectus" means the prospectus as first filed with the Commission pursuant
to Rule 424(b) of the Rules and Regulations or, if no such filing is required,
the form of final prospectus included in the Registration Statement at the
Effective Date.
(b) On the Effective Date, the date the Prospectus is
first filed with the Commission pursuant to Rule 424(b) (if required), at all
times subsequent thereto up to and including the Closing Date and, if later,
the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did or will comply in all material
respects with all applicable provisions of the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to
the Registration Statement becomes effective, no part of the Registration
Statement or any such amendment or supplement did or will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment
or supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not or will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions
3
<PAGE> 4
made in reliance on and in conformity with information relating to the
Underwriters furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement or Prospectus or any
amendment or supplement thereto. The Company acknowledges that the statements
set forth under the heading "Underwriting" in the Prospectus constitute the
only information relating to the Underwriters furnished in writing to the
Company by the Representatives specifically for inclusion in the Registration
Statement.
(c) The Company has no subsidiaries (as defined in the
Rules and Regulations). The Company is, and at the Closing Date will be, a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Company has, and at the Closing Date will
have, full power and authority to conduct all the activities conducted by it,
to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company is, and at the Closing Date will be, duly licensed or qualified to do
business and in good standing as a foreign corporation in all jurisdictions in
which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification necessary,
except to the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company. The Company does not
own, and at the Closing Date will not own, directly or indirectly, any shares
of stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association
or other entity. Complete and correct copies of the Amended and Restated
Certificate of Incorporation and the Amended and Restated Bylaws of the
Company and all amendments thereto have been delivered to you, and no changes
therein will be made subsequent to the date hereof and prior to the Closing
Date or, if later, the Option Closing Date.
(d) The outstanding shares of the Company's Common Stock
have been, and the Shares to be issued and sold by the Company upon such
issuance will be, duly authorized, validly issued, fully paid and nonassessable
and will not be subject to any preemptive or similar right. The Common Stock
conforms and at the Closing Date will conform to the description thereof
contained in the Registration Statement and the Prospectus, and such
description will be accurate in all material respects. Except as set forth in
the Prospectus, the Company does not have outstanding, and at the Closing Date
will not have outstanding, any options to purchase, or any rights or warrants
to subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell any shares of Common Stock or any
such warrants, convertible securities or obligations.
(e) The financial statements and schedules included in
the Registration Statement or the Prospectus present fairly the financial
condition of the Company as of the respective dates thereof and the results of
operations and cash flows of the Company for the respective periods covered
thereby, all in conformity with generally accepted accounting principles
applied on a consistent basis throughout the entire period involved, except as
otherwise disclosed in the Prospectus. The financial and statistical data set
forth in the Prospectus under the captions "Prospectus Summary," "Summary
Financial and Operating Data," "Use of Proceeds," "Capitalization," "Selected
Financial and Operating Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business," "Management" and
"Principal Stockholders" fairly presents the information set forth
4
<PAGE> 5
therein on the basis stated in the Prospectus. No other financial statements
or schedules of the Company are required by the Act, the Exchange Act (as
hereinafter defined) or the Rules and Regulations to be included in the
Registration Statement or the Prospectus. Arthur Andersen LLP (the
"Accountants"), who have reported on such financial statements and schedules,
are independent auditors with respect to the Company as required by the Act and
the Rules and Regulations.
(f) The Company believes that its system of internal
financial controls provides reasonable assurance that transactions by the
Company are executed in accordance with management's authorization; that
transactions are appropriately recorded to permit preparation of financial
statements that, in all material respects, are presented in conformity with
generally accepted accounting principles; and that assets are properly
accounted for and safeguarded against loss from unauthorized use.
(g) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Date, except as set forth in the Registration Statement and the
Prospectus, (i) there has not been and will not have been any material adverse
change in the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company, arising for any reason
whatsoever, (ii) the Company has not incurred nor will it incur any material
liabilities or obligations, direct or contingent, except in the ordinary course
of business or as contemplated hereby, (iii) the Company has not and will not
have paid or declared any dividends or other distributions of any kind on any
class of its capital stock, and (iv) there has not been and will not have been
any change in the capitalization of the Company other than pursuant to the
exercise of employee stock options or director stock options.
(h) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(i) Except as set forth in the Registration Statement and
the Prospectus, there are no actions, suits or proceedings pending or, to the
Company's knowledge, threatened against or affecting the Company or any of its
respective officers in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding would materially and adversely affect the Company or its business,
properties, business prospects, condition (financial or otherwise) or results
of operations or prevent or materially hinder the consummation of this
Agreement.
(j) The Company has, and at the Closing Date will have,
(i) all governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to carry on its business as contemplated in the
Prospectus, except where the failure to have such licenses, permits, consents,
orders, approvals and authorizations would not have a material adverse effect
on the Company, (ii) complied in all material respects with all material laws,
regulations and orders applicable to it or its business and (iii) performed all
obligations required to be performed by it, and is not, and at the Closing Date
will not be, in default, under any contract or other
5
<PAGE> 6
instrument material to it to which it is a party or by which its property is
bound or affected, except to the extent that such nonperformance or default
would not have a material adverse effect on the Company. To the knowledge of
the Company, no other party under any material contract or other material
instrument to which it is a party is in material default in any respect
thereunder. The Company is not, and at the Closing Date will not be, in
violation of any provision of its Certificate of Incorporation.
(k) No consent, approval, authorization or order of, or
any filing or declaration with, any court or governmental agency or body is
required for the consummation by the Company of the transactions on its part
herein contemplated, except such as have been obtained and such as may be
required under state securities or Blue Sky laws or the bylaws and rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection
with the purchase and distribution by the Underwriters of the Shares.
(l) The Company has full corporate power and authority to
enter into this Agreement. This Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding agreement of
the Company and is enforceable against the Company in accordance with the terms
hereof subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors' rights and subject, as to enforceability,
to general principles of equity (regardless of whether enforcement is sought in
a proceeding in equity or at law) and, except as rights to indemnity and
contribution may be limited under applicable law or governmental or public
policy. Assuming compliance with all applicable state securities and Blue Sky
laws and the bylaws and rules of the NASD, the performance of this Agreement
and the consummation of the transactions contemplated hereby, in each case by
the Company, will not result in the creation or imposition of any material
lien, charge or encumbrance upon any of the assets of the Company pursuant to
the terms or provisions of, or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or give any other party
a right to terminate any of its obligations under, or result in the
acceleration of any obligation under, the Certificate of Incorporation or
Bylaws of the Company, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument to which the
Company is a party or by which the Company or any of its or their properties
are bound or affected, or violate or conflict with any judgment, ruling,
decree, order, statute, rule or regulation of any court or other governmental
agency or body applicable to the business or properties of the Company.
(m) The Company has good and marketable title to all
properties and assets described in the Prospectus as owned by it, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
described in the Prospectus or are not material to the business of the Company.
The Company has valid, subsisting and enforceable leases for the properties
described in the Prospectus as leased by it, with such exceptions as are not
material and do not materially interfere with the use made and proposed to be
made of such properties by the Company. The Company owns, leases or otherwise
has rights to use all such properties as are necessary to its operations as now
conducted.
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<PAGE> 7
(n) There is no document or contract of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that is not described or
filed as required. All such contracts to which the Company is a party have
been duly authorized, executed and delivered by the Company, constitute valid
and binding agreements of the Company and are enforceable against the Company
in accordance with the terms thereof subject to applicable bankruptcy,
insolvency, reorganization, moratorium and similar laws affecting creditors'
rights and subject, as to enforceability, to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law) and except as may be properly described in the Prospectus or does not now
have and will not in the future have a material adverse effect on the Company.
(o) No statement, representation, warranty or covenant
made by the Company in this Agreement or made in any certificate or document
required by this Agreement to be delivered to you was or will be, when made,
inaccurate, untrue or incorrect in any material respect.
(p) Neither the Company nor any of its directors,
officers or controlling persons has taken, directly or indirectly, any action
designed, or which might reasonably be expected, to cause or result, under the
Act, in, or which has constituted, stabilization or manipulation of the price
of the Common Stock to facilitate the sale or resale of the Shares or the
Common Stock.
(q) No holder of securities of the Company has rights to
the registration of any securities of the Company because of the filing of the
Registration Statement.
(r) The Company has taken such action as is necessary to
have the Shares authorized for trading on the National Association of
Securities Dealers Automated Quotation National Market System (the "Nasdaq
Market").
(s) Other than as contemplated by this Agreement, there
is no broker or finder that is entitled to receive from the Company any
brokerage or finder's fee or commission as a result of any of the transactions
contemplated by this Agreement.
(t) The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management believes is appropriate to the business of the Company and all such
policies of insurance insuring the Company or its businesses, assets,
employees, officers and directors are in full force and effect.
(u) The Company has timely filed all required forms,
reports and other documents with the Securities and Exchange Commission (the
"SEC") all of which complied, when filed, in all material respects, with all
applicable requirements of the Act and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). As of their respective dates, such reports,
forms and other documents (including all exhibits and schedules thereto) and
documents incorporated by reference therein (the "Reports"), did not contain
any untrue statement of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Subject to normal year-end adjustments
which the Company does not anticipate being material, the unaudited interim
financial
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<PAGE> 8
statements of the Company included or incorporated by reference in such
Reports, forms and other documents were prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the periods
involved (except as may otherwise be indicated in the notes thereto), and
fairly present the financial position of the Company as of the date thereof and
the results of its operations and changes in financial position for the periods
then ended.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with each of the Underwriters
as follows:
(a) The Company will not, either prior to the Effective
Date or thereafter during such period as the Prospectus is required by law to
be delivered in connection with sales of the Shares by an underwriter or
dealer, file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to you within
a reasonable period of time prior to the filing thereof and you shall not have
reasonably objected thereto.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify you promptly, and
at your request will confirm such advice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective, (ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (iv) of the happening
of any event during the period mentioned in the second sentence of Section 4(e)
that in the judgment of the Company makes it necessary to amend or supplement
the Registration Statement or the Prospectus to comply with law or that
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
and (v) of receipt by the Company or any representatives or attorney of the
Company of any other communication from the Commission relating to the
Registration Statement, any preliminary prospectus relating thereto or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
practicable time. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to said Rule 430A and to notify
the Representatives promptly of all such filings.
(c) The Company will furnish to you, without charge,
three signed copies of the Registration Statement and of any post-effective
amendment thereto, including financial statements and schedules, and all
exhibits thereto.
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<PAGE> 9
(d) The Company will comply with all the provisions of
any undertakings on the part of the Company contained in the Registration
Statement. The Company will, from time to time, after the effective date of
the Registration Statement file with the Commission such reports as are
required by the Act, the Exchange Act, the rules and regulations
thereunder (the "Exchange Act Rules and Regulations") and the Rules and
Regulations, and shall also file with state securities commissions in states
where the Shares have been sold by you (as you shall have advised us in
writing) such reports as are required to be filed by the applicable securities
acts and the applicable regulations of those states.
(e) On the Effective Date, and thereafter from time to
time until expiration of the period mentioned in the second sentence of this
Section 4(e), the Company will deliver to each of you, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as you may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by you and by all dealers to whom the Shares
may be sold, both in connection with the offering or sale of the Shares by an
Underwriter or a dealer and for any period of time thereafter during which the
Prospectus is required by law to be delivered in connection therewith. If
during such period of time any event shall occur which in the judgment of the
Company or in the opinion of your counsel should be set forth in the Prospectus
in order to make any statement therein, in light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement
or amendment thereto, and will deliver to each of you, without charge, such
number of copies thereof as you may reasonably request.
(f) Prior to any public offering of the Shares by you,
the Company will cooperate with you and your counsel in connection with the
registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you may reasonably
request; provided, that in no event shall the Company be obligated to qualify
to do business in any jurisdiction where it is not now so qualified or to take
any action which would subject it to general service of process in any
jurisdiction where it is not now so subject.
(g) During the period of three years commencing on the
Effective Date, the Company will furnish to the Representatives copies of such
financial statements and other periodic and special reports as the Company may
from time to time distribute generally to the holders of any class of its
capital stock, and will furnish to you a copy of each annual or other report it
shall be required to file with the Commission. During such period, the Company
will promptly notify you in writing if it appears to the Company that it is
likely that the Company will not in a timely manner furnish to its stockholders
an annual report containing audited financial statements or a quarterly report
for one of the first three quarters of the fiscal year containing unaudited
financial information.
(h) The Company will make generally available to holders
of its securities as soon as may be practicable but in no event later than the
last day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months ended
9
<PAGE> 10
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Act (including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will
pay, or reimburse if paid by the Underwriters, all costs and expenses incident
to the performance of the obligations of the Company under this Agreement,
including but not limited to costs and expenses of or relating to (i) the
preparation by the Company, printing and filing of the Registration Statement
and exhibits to it, each preliminary prospectus, the Prospectus and any
amendment or supplement to the Registration Statement or the Prospectus, (ii)
the preparation and delivery of certificates representing the Shares, (iii) the
printing of this Agreement and other underwriting documents, including
Underwriter's Questionnaires, Underwriter's Powers of Attorney, Blue Sky
Memorandum, Master Agreement Among Underwriters and Master Selected Dealer
Agreements, (iv) furnishing (including costs of shipping and mailing) such
copies of the Registration Statement, the Prospectus and any preliminary
prospectus, and all amendments and supplements thereto, as may be reasonably
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold, (v) NASD approval for
the quotation of the Shares on the Nasdaq Market, (vi) any filings required to
be made with the NASD and with the Nasdaq Market, and the reasonable fees,
disbursements and other charges of your counsel in connection therewith, (vii)
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions designated pursuant to
Section 4(f), including the reasonable fees, disbursements and other charges of
your counsel in connection therewith, and the preparation and printing of
preliminary, supplemental and final Blue Sky memoranda, and (viii) the transfer
agent for the Shares.
(j) If this Agreement shall be terminated by the Company
or if for any reason (other than circumstances involving a matter within your
control or any fault of yours) the Company shall be unable to perform its
obligations hereunder, the Company will reimburse you for all reasonable
out-of-pocket expenses (including the fees, disbursements and other charges of
your counsel) reasonably incurred by them in connection herewith. If this
Agreement shall be terminated by the Underwriters based upon an Act of God or
other circumstances not involving a matter within the control of the Company or
any fault of the Company, the Company shall have no obligation to reimburse you
for any out-of-pocket expenses.
(k) The Company will not at any time, directly or
indirectly, take any action designed, or which might reasonably be expected, to
cause or result in, or which will constitute, unlawful stabilization of the
price of the shares of Common Stock to facilitate the sale or resale of any of
the Shares.
(l) The Company will apply the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds."
(m) During the period of 120 days commencing at the
Closing Date, the Company will not, without your prior written consent (which
shall not be unreasonably withheld), grant options to purchase shares of Common
Stock except under stock option plans
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<PAGE> 11
previously approved by the Company's shareholders, and except at prices equal
to or greater than "fair market value," as defined in the Company's 1995 Stock
Option Plan and the Company's Director Stock Option Plan.
(n) The Company will not, and will cause each of its
executive officers and directors and each beneficial owner of restricted
securities representing 1% or more of its outstanding Common Stock
to enter into agreements with you to the effect that they will not, for a
period of 120 days after the commencement of the public offering of the Shares,
without your prior written consent (which shall not be unreasonably withheld),
sell, contract to sell or otherwise dispose of any shares of Common Stock or
rights to acquire such shares (other than pursuant to stock option plans for
employees or directors or in connection with other employee incentive
compensation arrangements and other than as otherwise set forth in such
agreements).
(o) If at any time during the 25 day period after the
Registration Statement is declared effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which, in your
reasonable judgement, the market price for the Shares has been or is likely to
be materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising it as to the specific rumor, publication
or event and relationship to and potential effect on the Company, consult with
you concerning such matters and, subject to the mutual agreement of you and the
Company as to the necessity or advisability thereof, disseminate a press
release or other public statement with respect to such matters in form,
substance and manner (including the timing of any such dissemination), as shall
be mutually agreed upon.
5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The respective obligations of the Underwriters to purchase and
pay for the Shares shall be subject, in their discretion, to the accuracy in
all material respects of the representations and warranties of the Company
herein as of the date here of and as of the Closing Date as if made on and as
of the Closing Date, to the accuracy in all material respects of the statements
of the Company's officers made in certificates or other documents delivered
pursuant to the provisions hereof, to the performance by the Company of all of
its covenants and agreements hereunder and to the following additional
conditions:
(a) Notification that the Registration Statement has
become effective shall be received by you not later than 5:30 p.m., Nashville,
Tennessee time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by you and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction,
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<PAGE> 12
(iii) any request for additional information on the part of the staff of the
Commission or any such authorities shall have been complied with to the
satisfaction of the staff of the Commission or such authorities and to the
reasonable satisfaction of the Representatives, (iv) after the date hereof no
amendment or supplement to the Registration Statement or the Prospectus shall
have been filed unless a copy thereof was first submitted to you and you did
not reasonably object thereto, (v) the NASD, upon review of the terms of the
public offering of the Shares, shall not have objected to such offering, such
terms or the Underwriters' participation in the same, and (vi) you shall
have received certificates, dated the Closing Date and, if applicable, the
Option Closing Date and signed by the Chief Executive Officer or the Chairman
of the Board of Directors of the Company and the Chief Financial Officer of the
Company (who may, as to proceedings threatened or contemplated, certify to
their knowledge), to the effect of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there shall not
have been a material adverse change, or any development involving a prospective
material adverse change, in the general affairs, business, business prospects,
properties, management, key personnel, condition (financial or otherwise) or
results of operations of the Company, whether or not arising from transactions
in the ordinary course of business, in each case other than as set forth in the
Registration Statement and the Prospectus (or, in the case of a prospective
change, other than as contemplated by the Registration Statement and the
Prospectus), and (ii) the Company shall not have sustained any material loss or
interference with its business or properties from fire, explosion, flood,
hurricane or other casualty or calamity, whether or not covered by insurance,
or from any labor dispute or any court or legislative or other governmental
action, order or decree, which is not set forth in the Registration Statement
and the Prospectus, if in your reasonable judgment any such development makes
it impracticable or inadvisable to consummate the sale and delivery of the
Shares by you at the public offering price.
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall have been
no litigation or other proceeding instituted against the Company or any of its
officers or directors in their capacities as such, before or by any Federal,
state, or local court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would materially and adversely
affect the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company.
(e) Each of the representations and warranties of the
Company contained herein shall be true and correct in all material respects at
the Closing Date and, with respect to the Option Shares, at the Option Closing
Date, as if made at the Closing Date and, with respect to the Option Shares, at
the Option Closing Date, and all covenants and agreements herein contained to
be performed on the part of the Company and all conditions herein contained to
be fulfilled or complied with by the Company at or prior to the Closing Date
and, with respect to the Option Shares, at or prior to the Option Closing Date,
shall have been duly performed, fulfilled or complied with.
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<PAGE> 13
(f) You shall have received an opinion,
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, from Hogan & Hartson L.L.P., counsel to the Company,
substantially in the form and to the effect set forth in Exhibit A hereto and
incorporated herein by this reference.
(g) You shall have received an opinion, dated the Closing
Date and, with respect to the Option Shares, the Option Closing Date, from
Nelson Mullins Riley & Scarborough, L.L.P., as your counsel, with respect to
the Registration Statement, the Prospectus and this Agreement, which opinion
shall be satisfactory in all respects to you, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(h) You shall have received from the Accountants a
letter dated the date hereof, and at the Closing Date a second letter dated
the Closing Date, substantially in the form and to the effect set forth in
Exhibit B hereto and incorporated herein by this reference.
In the event that the letters to be delivered referred to
above set forth any material changes, decreases or increases in the
financial information included in the Prospectus, it shall be a further
condition to the obligations of the Underwriters that the Underwriters shall
have reasonably determined, after discussions with officers of the Company
responsible for financial and accounting matters and with the Accountants, that
such changes, decreases or increases as are set forth in such letters do not
reflect a material adverse change in the stockholders' equity or long-term debt
of the Company as compared with the amounts shown in the latest balance sheet
of the Company included in the Prospectus, or a material adverse change in
total net revenues or net income of the Company, in each case as compared with
the corresponding period of the prior year.
(i) At the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to you a certificate, dated the
date of its delivery, signed by each of the Chief Executive Officer and Chief
Financial Officer of the Company, in form and substance reasonably satisfactory
to you, to the effect that:
(i) Each of the representations and warranties of
the Company contained in Section 3 of this Agreement were,
when originally made, and are, at the time such certificate is
delivered, true and correct in all material respects;
(ii) Each of the covenants required herein to be
performed by the Company on or prior to the delivery of such
certificate has been performed and each condition herein
required to be complied with by the Company on or prior to the
date of such certificate has been complied with.
(j) On or prior to the Closing Date, you shall have
received the executed agreements referred to in Section 4(n).
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<PAGE> 14
(k) The Shares shall be qualified for sale in such states
as you may reasonably request, each such qualification shall be in effect and
not subject to any stop order or other proceeding on the Closing Date or the
Option Closing Date.
(l) The Shares shall have been authorized for quotation
on the Nasdaq Market upon official notice of issuance.
(m) You shall not have advised the Company that the
Registration Statement or the Prospectus, or any amendment or any supplement
thereto, contains an untrue statement of fact which, in your reasonable
judgment, is material, or omits to state a fact which, in your reasonable
judgment, is material and is required to be stated therein or necessary to make
the statements therein not misleading and the Company shall not have cured such
untrue statement of fact or omission of such statement of fact.
(n) The Company shall have furnished to you such
certificates, in addition to those specifically mentioned herein, as you may
have reasonably requested as to the accuracy and completeness at the Closing
Date and the Option Closing Date of any statement in the Registration Statement
or the Prospectus, as to the accuracy at the Closing Date and the Option
Closing Date of the representations and warranties of the Company herein, as to
the performance by the Company of its obligations hereunder, or as to the
fulfillment of the conditions concurrent and precedent to your obligations
hereunder.
6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person, if any, who controls each Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, from and against any
and all losses, claims, liabilities, expenses and damages (including any and
all investigative, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claim asserted), to which they, or any of them, may become subject under
the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
liabilities, expenses or damages are caused by (i) any inaccuracy in the
representations and warranties of the Company contained herein, (ii) any
failure of the Company to perform its obligations hereunder or under law or
(iii) any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, the Registration Statement or the
Prospectus or any amendment or supplement to the Registration Statement or the
Prospectus, or the omission or alleged omission to state in such document a
material fact required to be stated in it or necessary to make the statements
in it not misleading; provided, however, that the foregoing indemnity agreement
with respect to any preliminary prospectus or the Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if required
by law so to have been delivered, at or prior to the written confirmation of
the sale of the Shares to such person, and if the Prospectus (as so
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<PAGE> 15
amended or supplemented) would have cured the defect giving rise to such loss,
claim, damage or liability; and further provided, that the Company will not be
liable to the extent that such loss, claim, liability, expense or damage arises
from the sale of the Shares in the public offering to any person by an
Underwriter and is based on an untrue statement or omission or alleged untrue
statement or omission made in reliance on and in conformity with information
relating to an Underwriter furnished in writing to the Company by an
Underwriter, or on behalf of an Underwriter by counsel thereto, expressly for
inclusion in the Registration Statement, any preliminary prospectus or the
Prospectus. The Company acknowledges that the statements set forth under the
heading "Underwriting" in any preliminary prospectus and the Prospectus
constitute the only information relating to any Underwriter furnished in
writing to the Company by you expressly for inclusion in the Registration
Statement, any preliminary prospectus or the Prospectus. This indemnity
agreement will be in addition to any liability that the Company might otherwise
have.
(b) Each Underwriter will indemnify and hold harmless the
Company, its directors, officers, employees and agents and each person, if any,
who controls the Company within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, each director of the Company and each officer of the
Company who signs the Registration Statement to the same extent as the
foregoing indemnity from the Company to the Underwriters, but only insofar as
losses, claims, liabilities, expenses or damages arise out of or are based on
any untrue statement or omission or alleged untrue statement or omission made
in reliance on and in conformity with information relating to you furnished in
writing to the Company by you, or on your behalf by your counsel, expressly for
use in the Registration Statement, any preliminary prospectus or the
Prospectus. The Company acknowledges that the statements set forth under the
heading "Underwriting" in any preliminary prospectus and the Prospectus
constitute the only information relating to the Underwriters furnished in
writing to the Company by the Underwriters expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus. This
indemnity will be in addition to any liability that the Underwriters might
otherwise have.
(c) Any party that proposes to assert the right to be
indemnified under this Section 6 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 6, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying
party will not relieve it from any liability that it may have to any
indemnified party under the foregoing provisions of this Section 6 unless, and
only to the extent that, such omission results in the forfeiture of substantive
rights or defenses by the indemnifying party. If any such action is brought
against any indemnified party and it notifies the indemnifying party of its
commencement, the indemnifying party will be entitled to participate in and, to
the extent that it elects by delivering written notice to the indemnified party
promptly after receiving notice of the commencement of the action from the
indemnified party, jointly with any other indemnifying party similarly
notified, to assume the defense of the action, with counsel reasonably
satisfactory to the indemnified party, and after notice from the indemnifying
party to the indemnified party of its election to assume the defense, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses except as provided below. The indemnified party will have
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<PAGE> 16
the right to employ its own counsel in any such action, but the fees, expenses
and other charges of such counsel will be at the expense of such indemnified
party unless (i) the employment of counsel by the indemnified party has been
authorized in writing by the indemnifying party, (ii) the indemnified party has
reasonably concluded (based on advice of counsel) that there may be legal
defenses available to it or other indemnified parties that are different from
or in addition to those available to the indemnifying party, (iii) a conflict
of interests exists (based on advice of counsel to the indemnified party)
between the indemnified party and the indemnifying party (in which case the
indemnifying party will not have the right to direct the defense of such action
on behalf of the indemnified party) or (iv) the indemnifying party has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, in each of which
cases the reasonable fees, disbursements and other charges of counsel will be
at the expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees, disbursements and other charges of more than one separate firm admitted
to practice in such jurisdiction at any one time for all such indemnified party
or parties. All such fees, disbursements and other charges will be reimbursed
by the indemnifying party promptly as they are incurred. An indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld).
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in the
foregoing paragraphs of this Section 6 is applicable in accordance with its
terms but for any reason is held to be unavailable from the Company or the
Underwriters, then the Company and the Underwriters will contribute to the
total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Company
from persons other than the Underwriters, such as persons who control the
Company within the meaning of the Act, officers of the Company who signed the
Registration Statement and directors of the Company, who may be liable for
contribution) to which the Company and the Underwriters may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and the Underwriters. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable law, the
allocation of contribution shall be made in such proportion as is appropriate
to reflect not only the relative benefits referred to in the foregoing sentence
but also the relative fault of the Company and the Underwriters with respect to
the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters, the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the
16
<PAGE> 17
Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section 6(d) were to be determined by pro rata or per capita
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 6(d)
shall be deemed to include, for purpose of this Section 6(d), any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), an Underwriter shall not be required to
contribute any amount in excess of the underwriting discounts received by it
(less the aggregate amount of any damages which such Underwriter and its
controlling persons have otherwise been required to pay in respect of the same
or any similar claim), and no person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 6(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 6(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer and director of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof.
Any party entitled to contribution, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim for
contribution maybe made under this Section 6(d), will notify any such party or
parties from whom contribution may be sought, but the omission to notify will
not relieve the party or parties from whom contribution may be sought from any
other obligation it or they may have under this Section 6(d). No party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained
in this Section 6 and the representations and warranties of the Company
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any investigation made by the Underwriters or on their
behalf, (ii) acceptance of any of the Shares and payment therefor or (iii) any
termination of this Agreement.
7. TERMINATION.
The Underwriters' obligations under this Agreement may be
terminated at any time on or prior to the Closing Date (or, with respect to the
Option Shares, on or prior to the Option Closing Date), by notice to the
Company from the Representatives, without liability on the part of any of the
Underwriters to the Company, if, prior to delivery and payment for the Shares
(or the Option Shares, as the case may be) (i) trading in any of the equity
securities of the Company shall have been suspended by the Commission, by an
exchange that lists the Shares or by the Nasdaq Market, (ii) trading in
securities generally on the New York Stock Exchange, the American Stock
Exchange or the over-the-counter market shall have been suspended or limited or
minimum or maximum prices shall have been generally established on such
exchange, or additional material governmental restrictions, not in force on the
date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange or by order of the
17
<PAGE> 18
Commission or any court or other governmental authority, (iii) a general
banking moratorium shall have been declared by either Federal or State
authorities or (iv) any material adverse change in the financial or securities
markets in the United States or in political, financial or economic conditions
in the United States or any outbreak or material escalation of hostilities or
declaration by the United States of a national emergency or war or other
calamity or crisis shall have occurred the effect of any of which is such as to
make it, in your sole and reasonable judgment, impracticable or inadvisable to
market the Shares on the terms and in the manner contemplated by the
Prospectus.
8. SUBSTITUTION OF UNDERWRITERS.
If any Underwriter shall fail or refuse to purchase any of the
Firm Shares which it has agreed to purchase hereunder, and the aggregate number
of Firm Shares which such defaulting Underwriter agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares,
the other Underwriters shall be obligated, severally, to purchase the Firm
Shares that such defaulting Underwriter agreed but failed or refused to
purchase, in the proportions that the number of Firm Shares which they have
respectively agreed to purchase pursuant to Section 1 bears to the aggregate
number of Firm Shares that all such non-defaulting Underwriters have so agreed
to purchase, or in such other proportions as you may specify; provided, that in
no event shall the maximum number of Firm shares which an Underwriter has been
obligated to purchase pursuant to Section 1 be increased pursuant to this
Section 8 by more than one-ninth of such number of Firm Shares without the
prior written consent of such Underwriter. If an Underwriter shall fail or
refuse to purchase any Firm Shares and the aggregate number of Firm Shares
which such defaulting Underwriter agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the non-defaulting Underwriters or the Company for the purchase
of such Firm Shares are not made within 48 hours after such default, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter or the Company for the purchase or sale of any Shares under this
Agreement. In any such case the Underwriters or the Company shall have the
right to postpone the Closing Date, but in no event for longer than seven days,
in order that the required changes, if any, in the Registration Statement and
in the Prospectus or in any other documents or arrangements may be effected.
Any action taken pursuant to this Section 8 shall not relieve any defaulting
Underwriter from liability in respect to any default of such Underwriter under
this Agreement.
9. EFFECTIVE DATE. This Agreement shall become
effective at whichever of the following times shall first occur: (i) upon
execution of this Agreement assuming the Registration Statement is effective or
(ii) at such time after the Registration Statement has become effective as the
Representatives shall release the Firm Shares for sale to the public; provided,
however, that the provisions of Section 4(i), 6 and 9 hereof shall at all times
be effective. For purposes of this Section 9, the Firm Shares shall be deemed
to have been so released upon the release by the Representatives for
publication, at any time after the Registration Statement has become effective,
of any newspaper advertisement relating to the Firm Shares or upon the release
by the Representatives of telegrams offering the Firm Shares for sale to
securities dealers, whichever may occur first.
18
<PAGE> 19
10. MISCELLANEOUS.
All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be mailed or delivered or telegraphed and
confirmed in writing to the Representatives in care of J.C. Bradford & Co.,
J.C. Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee
37201, Attention: Kip Caffey, or if sent to the Company shall be mailed,
delivered or telegraphed and confirmed in writing to the Company at 1430 West
Peachtree Street, Suite 400, Atlanta, Georgia 30309, Attention: Charles M.
Brewer.
This Agreement has been and is made solely for the several
Underwriters' and the Company's benefits and of the controlling persons,
directors and officers referred to in Section 6, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" as used in this Agreement shall not include a
purchaser, as such purchaser, of Shares from an Underwriter.
This Agreement shall be governed by and construed in
accordance with the laws of the State of Tennessee.
This Agreement may be signed in two or more counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
The Company and you each hereby irrevocably waive any right
they may have to a trial by jury in respect of any claim based upon or arising
out of this Agreement or the transactions contemplated hereby.
You hereby represent and warrant to the Company that you have
authority to act hereunder on behalf of the several Underwriters, and any
action hereunder taken by you will be binding upon all the Underwriters.
Please confirm that the foregoing correctly sets forth the
agreement among the Company and you.
Very truly yours,
MINDSPRING ENTERPRISES, INC.
By:
-------------------------------
Name: Charles M. Brewer
Title: Chairman and Chief Executive Officer
19
<PAGE> 20
Confirmed and accepted as of the
date first above written.
J.C. BRADFORD & CO.
WHEAT, FIRST SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
For themselves and as Representatives
of the several Underwriters
By: J.C. Bradford & Co.
By:
------------------------------------
Name: Kip Caffey
Title: Partner
20
<PAGE> 21
SCHEDULE I
Underwriters
<TABLE>
<CAPTION>
Number of
Name of Underwriter Firm Shares
------------------- -----------
<S> <C>
J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . .
Wheat, First Securities, Inc. . . . . . . . . . . . . . . . . . .
The Robinson-Humphrey Company, Inc. . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500,000
</TABLE>
<PAGE> 1
EXHIBIT 2(c)
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
THE NEWS AND OBSERVER PUBLISHING COMPANY
AND
MINDSPRING ENTERPRISES, INC.
DATED AS OF SEPTEMBER 11, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS AND REFERENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. SALE AND PURCHASE OF ASSETS; PURCHASE PRICE; ASSUMPTION OF LIABILITIES . . . . . . . . . . . . . 1
2.1. Asset Sale and Purchase of Assets. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2. Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3. Payment of Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4. Assumption of Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5. Prepayment of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. ADDITIONAL UNDERTAKINGS AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1. Billing and Collection Efforts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2. Transfer of Subscribers; Advertising. . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3. Price for Buyer Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.4. Free Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.5. Transition Period and Transition Services. . . . . . . . . . . . . . . . . . . . . . 4
3.5.1. Cooperation in Transferring Subscribers . . . . . . . . . . . . . . . . . . 4
3.5.2. Notice to Nando.net Subscribers . . . . . . . . . . . . . . . . . . . . . . 4
3.5.3. Nando.net Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5.4. E-Mail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5.5. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.6. Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7. Transfer Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8. Access; Investigations by Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8.1. Access. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8.2. Effect of Investigation. . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.9. Operation of the Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.9.1. Conduct Business in Ordinary Course. . . . . . . . . . . . . . . . . . . . 7
3.9.2. Notice of Material Adverse Change. . . . . . . . . . . . . . . . . . . . . 8
3.10. Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.11. Certain Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.12. Allocation of Purchase Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.13. Bulk Sales Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.14. Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.15. Rocky Mount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.16. Closing Subscriber File. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.17. Cooperation with Buyer s Accountants . . . . . . . . . . . . . . . . . . . . . . . . 10
3.18. Options with respect to the Lease and Subleases . . . . . . . . . . . . . . . . . . 10
3.19. Certain Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.20. New Subscribers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. REPRESENTATIONS AND WARRANTIES BY SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1. Organization and Standing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2. Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
4.3. Certificate or Articles of Incorporation and Bylaws. . . . . . . . . . . . . . . . . 13
4.4. Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.5. Revenue Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.6. No Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.7. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.8. Conduct of Business; Absence of Material Adverse Change. . . . . . . . . . . . . . . 14
4.9. Title to the Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.10. Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.10.1. Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.10.2. Violation of Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.10.3. Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.11. Seller Customers and Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.12. Number of Subscribers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.13. Books and Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.14. Litigation; Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.14.1. No Litigation; Compliance with Law. . . . . . . . . . . . . . . . . . . . 16
4.14.2. No Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.15. Labor Relations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.16. Pension and Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.16.1. Schedule of Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.16.2. Copies of Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.16.3. Multiemployer Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.16.4. Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.16.5. Post-retirement Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.17. Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.17.1. Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.17.2. Complaints and OSHA Matters. . . . . . . . . . . . . . . . . . . . . . . . 19
4.17.3. Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.18. Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.19. Absence of Violation; Compliance with Laws. . . . . . . . . . . . . . . . . . . . . 20
4.20. Binding Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.21. Consents and Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5. REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.1. Organization and Standing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2. Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.3. Binding Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.4. Litigation; Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE . . . . . . . . . . . . . . . . . . . . . . 22
6.1. Representations and Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.2. Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.3. Delivery of Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.4. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.5. Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.6. Due Diligence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6.7. SEC Audit Requirement; Delay of Securities Offering. . . . . . . . . . . . . . . . . 23
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C>
7. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE . . . . . . . . . . . . . . . . . . . . . . 23
7.1. Representations and Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.2. Delivery of Buyer Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8. THE CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.1. Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.2. Deliveries by Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.2.1. Assignment Documents and Agreements. . . . . . . . . . . . . . . . . . . . 24
8.2.2. Confidentiality and Non-competition Agreement. . . . . . . . . . . . . . . 25
8.2.3. Certified Resolutions. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2.4. Seller Officers' Certificates. . . . . . . . . . . . . . . . . . . . . . . 25
8.2.5. Lien Searches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.2.6. Other Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3. Deliveries by Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3.1. Purchase Price Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3.2. Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3.3. Certified Resolutions. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.3.4. Officers Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.3.5. Lien Searches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
8.3.6. Other Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9. SURVIVAL; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
9.1. Survival of Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . 27
9.2. Indemnification by Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.3. Indemnification by Buyer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
9.4. Conditions of Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.4.1. Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.4.2. Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.4.3. Right to Defend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9.4.4. Non-monetary Harm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
10. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.1. Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
10.2. Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.1. Additional Actions, Documents and Information. . . . . . . . . . . . . . . . . . . . 31
11.2. Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
11.3. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
11.4. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
11.5. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.6. Benefit and Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.7. Entire Agreement; Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
11.8. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.9. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.10. Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.11. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
11.12. Signature in Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
11.13. Time of the Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
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<PAGE> 6
SCHEDULES
Schedule 3.3 Service Packages
Schedule 3.4 Free Accounts
Schedule 3.9 Changes in Employee Compensation
Schedule 3.11 Certain Employees
Schedule 3.12 Allocation of Purchase Price
Schedule 3.16 Closing Subscriber File
Schedule 4.1 Foreign Qualifications
Schedule 4.4 Employees
Schedule 4.5 Revenue Statements
Schedule 4.6 Liabilities
Schedule 4.8 Material Adverse Changes
Schedule 4.9 Title to the Assets
Schedule 4.10 Leases
Schedule 4.11 Seller Contracts
Schedule 4.12 Number of Subscribers
Schedule 4.14 Litigation; Disputes
Schedule 4.16 Pensions and Benefit Plans
Schedule 4.21 Consents
Schedule 8.2 Seller Lien Searches
Schedule 8.3 Buyer Lien Searches
Schedule 12.1 Assumed Liabilities
Schedule 12.2 Excluded Assets
ANNEX I SCHEDULE OF DEFINITIONS
<PAGE> 7
EXHIBITS
EXHIBIT A Form of Assignment and Assumption of Contracts
EXHIBIT B Form of Security Agreement
EXHIBIT C Form of Confidentiality and Non-competition Agreement
EXHIBIT D Form of First Promissory Note
EXHIBIT E Form of Real Estate Lease
EXHIBIT F Form of Sublease
EXHIBIT G Form of Second Promissory Note
<PAGE> 8
AMENDED AND RESTATED ASSET PURCHASE AGREEMENT
THIS AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (the
"Agreement") is entered into as of September 11, 1996 by and between THE NEWS
AND OBSERVER PUBLISHING COMPANY ("Seller") and MINDSPRING ENTERPRISES, INC.
("Buyer").
WHEREAS, Seller and Buyer are parties to that certain Asset
Purchase Agreement (the "Asset Purchase Agreement") dated as of August 6, 1996,
pursuant to which Seller has agreed to sell to Buyer, and Buyer has agreed to
purchase from Seller certain assets and rights in connection with the Nando.net
Internet access business currently operated by Seller (limited to consumer and
commercial dial-up (PPP) and excluding the offering by Seller of 56K, T-1 and
dedicated ISDN and dedicated PPP Internet access services and of any Internet
access or connectivity solely in connection with the creation by Seller of
commercial websites for third parties and websites for non-profit
organizations) (the "Business"); and
WHEREAS, Seller and Buyer desire to amend and restate the Asset
Purchase Agreement as set forth herein.
NOW THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth, the parties hereto
hereby agree to amend and restate the Asset Purchase Agreement as follows:
1. DEFINITIONS AND REFERENCES
Unless the context otherwise specifies or requires, capitalized
terms used herein shall have the respective meanings specified in Annex 1
attached hereto and incorporated herein for all purposes of this Agreement
(such definitions to be equally applicable to both the singular and plural
forms of the terms defined). Unless otherwise specified, all references herein
to "Articles" or "Sections" are to Articles or Sections of this Agreement.
2. SALE AND PURCHASE OF ASSETS; PURCHASE PRICE; ASSUMPTION OF
LIABILITIES
2.1. ASSET SALE AND PURCHASE OF ASSETS.
In reliance upon the representations, warranties, covenants and
agreements contained herein, and subject to the terms and conditions hereof,
Seller
<PAGE> 9
agrees to sell, assign, transfer, convey and deliver to Buyer, and Buyer agrees
to purchase from Seller, the Assets at the Closing.
2.2. PURCHASE PRICE.
For and in consideration of the conveyances and assignments
described in SECTION 2.1 and in addition to the assumption of liabilities as
set forth in SECTION 2.4, Buyer agrees to pay to Seller, and Seller agrees to
accept from Buyer, an aggregate purchase price (the "Purchase Price") equal to
the product of (a) One Hundred Five Dollars ($105.00), multiplied times (b) the
number of Continuing Subscribers.
The Purchase Price shall be payable as described in SECTION
2.3. The Purchase Price shall be allocated among the Assets in accordance with
SECTION 3.12.
2.3. PAYMENT OF PURCHASE PRICE.
The Purchase Price shall be payable to Seller as follows:
(a) Buyer shall deliver to Seller at the Closing the amount of
One Hundred Thousand Dollars ($100,000.00) by wire transfer of immediately
available federal funds to an account to be identified by Seller not less than
four days prior to the Closing Date; and
(b) If the Purchase Price, as determined in accordance with
SECTION 2.2, is greater than One Hundred Thousand Dollars ($100,000.00), Buyer
shall deliver to Seller within ten (10) days after the First Measurement Date a
fully executed copy of the First Promissory Note and a fully executed copy of
the Security Agreement, or, in the event that funds were raised through a stock
offering or other financing which Buyer would have been required to use to pay
down the principal and accrued but unpaid interest under the First Promissory
Note pursuant to SECTION 2.5, Buyer shall pay to Seller such funds, not to
exceed what would otherwise be the initial amount of the First Promissory Note,
and the initial principal amount of the First Promissory Note so issued shall
be reduced accordingly.
2.4. ASSUMPTION OF LIABILITIES.
At the Closing, Buyer shall assume the Assumed Liabilities.
Except for those liabilities and obligations expressly assumed by Buyer
pursuant to this SECTION 2.4, Buyer shall have no responsibility for any
liabilities or obligations of any kind or description of Seller, whether
connected with the Business, the Assets or otherwise.
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<PAGE> 10
2.5. PREPAYMENT OF NOTES.
Buyer shall use commercially reasonable efforts to complete a
stock offering or other financing in order to refinance the First Promissory
Note and the Second Promissory Note described in SECTION 3.20 below
(collectively, the "Promissory Notes"). In the event that the Buyer is able to
raise funds through the sale of securities, Buyer shall apply the proceeds of
such an offering to pay down the Promissory Notes according to the following
formula:
(a) if the net proceeds (which term for purposes of this
SECTION 2.5 shall mean gross proceeds less offering expenses) of any offering
or other financing exceed thirty million dollars ($30,000,000.00), Buyer shall
use all of such net proceeds, up to the amount of principal and accrued but
unpaid interest outstanding under the Promissory Notes, to pay down the
Promissory Notes in full promptly following the closing of such offering or
other financing;
(b) if the net proceeds of any offering or other
financing are more than twenty million dollars ($20,000,000.00) but less than
or equal to thirty million dollars ($30,000,000.00), Buyer shall pay down
seventy-five percent (75%) of all sums outstanding under each Promissory Note
promptly following the closing of such offering or other financing; and
(c) if the net proceeds of any offering or other
financing are more than ten million dollars ($10,000,000.00) but less than or
equal to twenty million dollars ($20,000,000.00), Buyer shall pay down fifty
percent (50%) of all sums outstanding under each Promissory Note promptly
following the closing of such offering or other financing.
3. ADDITIONAL UNDERTAKINGS AND COVENANTS
Buyer and Seller hereby represent, covenant and agree with each
other as follows:
3.1. BILLING AND COLLECTION EFFORTS.
Buyer shall bill the Nando.net Subscribers within ten (10) days
following the Closing Date and shall use its commercially reasonable best
efforts to collect any amounts owed to Buyer by such subscribers during the
Transition Period.
3.2. TRANSFER OF SUBSCRIBERS; ADVERTISING.
Each of Buyer and Seller shall use its commercially reasonable
best efforts to achieve the objective that all Nando.net subscribers as of the
date hereof
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(other than those that require services incompatible with Buyer's standard
offerings, as determined in Buyer's sole discretion) become Continuing
Subscribers.
During the 90-day period following execution of this Agreement, Seller
shall provide to Buyer advertising space in the Raleigh News and Observer
Newspaper at least equal to the equivalent of two one-quarter page
advertisements per week, and Buyer shall use such space to promote its Internet
services.
3.3. PRICE FOR BUYER SERVICES.
Buyer agrees that during the Transition Period, Buyer shall offer to
Nando.net Subscribers, at a minimum, Buyer's service packages set forth on
SCHEDULE 3.3, at the respective prices set forth on SCHEDULE 3.3.
3.4. FREE ACCOUNTS.
For a period of at least one year following the Closing Date,
Buyer shall provide, free of charge, one Internet access account to each of the
disabled persons and schools specified on SCHEDULE 3.4, none of which
schools includes any grades other than prekindergarten through twelve (12).
Seller hereby represents and warrants that the schools specified on SCHEDULE
3.4 were non-paying subscribers of the Business as of June 3, 1996.
3.5. TRANSITION PERIOD AND TRANSITION SERVICES.
3.5.1. COOPERATION IN TRANSFERRING SUBSCRIBERS
During the Transition Period, Seller shall use its commercially
reasonable best efforts to cooperate with Buyer to transfer all Nando.net
subscribers as of the date hereof (other than those that require services
incompatible with Buyer's standard offerings, as determined in Buyer's sole
discretion) to Buyer.
3.5.2. NOTICE TO NANDO.NET SUBSCRIBERS
Promptly following the execution of this Agreement, Seller
shall send an e-mail to each Nando.net Subscriber, in form and content approved
by Buyer, informing such subscriber that Buyer is acquiring the Assets from
Seller and asking such subscriber to notify Seller if he wants to continue
service with Buyer and, if so, to pick an appropriate Buyer price plan. Seller
shall also send a follow-up e-mail to each such subscriber one week following
the first e-mail in form and content approved by Buyer.
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<PAGE> 12
3.5.3. NANDO.NET INFRASTRUCTURE
During the Transition Period, Seller shall use its commercially
reasonable best efforts to assist Buyer in providing internet access services
to Nando.net Subscribers by continuing to operate the servers, POPs and other
infrastructure not being acquired by Buyer pursuant to this Agreement that were
used by Nando.net Subscribers in connection with the Business prior to the
Closing Date (the "Infrastructure Services"). The level of such Infrastructure
Services shall be the same as that used by Nando.net in connection with the
Business prior to the Closing Date, and, at Buyer's discretion, shall be
reduced during the Transition Period as Nando.net Subscribers are transferred
to Buyer's POPs. In consideration of such Infrastructure Services, Buyer shall
pay Seller a monthly fee (the "Transition Service Fee") on the 30th day of each
month beginning in the second calendar month following the Closing Date and
ending in the calendar month in which the First Measurement Date occurs in an
amount equal to the greater of: (1) 40% of the gross revenues actually received
by Buyer during the previous month for internet access services provided by
Buyer to Nando.net Subscribers who become Buyer subscribers; or (2) that
portion of Seller's access telephone bills with its telecommunications
providers (shown on Seller's accounting system as account no. 4610-23-00-00),
that is directly attributable to Nando.net Subscribers who become Buyer
subscribers. In this respect, Buyer shall bill Nando.net Subscribers who
become Buyer subscribers monthly, in advance, for Internet access services.
In the event that Seller provides such Infrastructure Services
for fewer than all days in each calendar month during the Transition Period,
the Transition Service Fee for such month shall be adjusted and shall equal a
pro-rata amount based on the actual number of days in such month that Seller
actually provides Infrastructure Services.
In the event that Buyer determines that Infrastructure Services
after the Transition Period would be desirable, the parties shall negotiate in
good faith for the provision of such Infrastructure Services after the
Transition Period.
3.5.4. E-MAIL
With respect to those Nando.net Subscribers who become Buyer
subscribers, Seller will forward e-mail received at such subscribers' e-mail
addresses with Seller to their e-mail addresses with Buyer for one year
following the Closing Date.
3.5.5. GENERAL
Except as specifically set forth in this SECTION 3.5., Seller
is not authorized to act as an agent of Buyer in any way related to Buyer's
business nor to sell or resell Buyer's products or services.
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<PAGE> 13
3.6. CONSENTS AND APPROVALS.
Seller shall use its commercially reasonable best efforts to
obtain, prior to Closing, all waivers, consents and approvals that are required
in order to transfer the Assets to Buyer. Buyer shall use its commercially
reasonable best efforts to assist Seller in Seller's efforts to obtain such
waivers, consents and approvals. In addition, Buyer and Seller further agree
to use their commercially reasonable best efforts to obtain all other waivers,
consents and approvals of all governmental authorities that are required in
order for them to consummate the transactions contemplated by this Agreement or
to perform the other obligations of such parties hereunder. Buyer and Seller
shall: (i) cooperate in the filing of all forms, notifications, reports and
information, if any, required or reasonably deemed advisable pursuant to
applicable statutes, rules, regulations or orders of any governmental or
supra-governmental authority in connection with the transactions contemplated
by this Agreement; and (ii) use their respective best efforts to cause any
applicable waiting periods thereunder to expire and any objections to the
transactions contemplated hereby to be withdrawn before the Closing.
3.7. TRANSFER TAX.
Seller shall pay all stamp, sales, income, transfer or other
taxes, Federal, state or local, imposed on it, and Buyer shall pay all such
taxes imposed on it, in respect of any and all transfers pursuant to the terms
of this Agreement.
3.8. ACCESS; INVESTIGATIONS BY BUYER.
3.8.1. ACCESS.
Seller shall, through the Closing Date, provide to
representatives of Buyer reasonable access to the offices, books, contracts,
agreements, records, officers, employees, consultants and contractors of or
related to Seller with respect to the Business and the Assets and will furnish
representatives of Buyer such financial and operating data and other
information with respect to the Business and the Assets as Buyer or such
representatives may reasonably request, including, without limitation,
agreements with clients and customers of Seller (collectively, the "Seller
Information").
3.8.2. EFFECT OF INVESTIGATION.
Buyer's investigation of the financial and operating data, the
Business, the Assets, and other information with respect to Seller shall in no
way affect the obligations of Seller with respect to the agreements,
representations, warranties, covenants and indemnification provisions set forth
in this Agreement.
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<PAGE> 14
3.9. OPERATION OF THE BUSINESS.
3.9.1. CONDUCT BUSINESS IN ORDINARY COURSE.
Seller shall, through the Closing Date: (a) use its
commercially reasonable best efforts to preserve the Assets and the Leases and
maintain its existing contracts and licenses and to preserve for Buyer Seller's
present relationships with customers, employees, lessors and any other persons
having business relations therewith. Except as contemplated by this Agreement
or as reasonably required to carry out its obligations hereunder, Seller shall,
through the Closing Date, maintain and service the Assets and the Leases only
in the Ordinary Course of Business and, in addition, shall not (except to the
extent that Buyer has consented in writing thereto or that such action or
inaction would not reasonably be expected to affect or be binding upon any part
of the Assets or any of the Continuing Employees): (i) except as set forth in
SCHEDULE 3.9, (x) grant any increase in the compensation payable or to become
payable by Seller to officers or employees of the Business other than in the
Ordinary Course of Business, or (y) enter into any bonus, insurance, pension,
profit sharing, incentive, deferred compensation, severance pay, retirement,
hospitalization, employee benefit or other similar plan, payment or arrangement
for or with any of such officers or employees other than in the Ordinary Course
of Business; (ii) enter into any agreement in connection with the Assets that
may not be terminated on less than 31 days' notice or that may reasonably be
expected to have a material adverse effect on the Assets; (iii) make any
commitments relating to the Assets that exceed, individually or in the
aggregate, $5,000; (iv) place, or allow to be placed, an Encumbrance
on any of the Assets or any Lease; (v) sell, assign, lease or otherwise
transfer or dispose of any interest in any Asset (other than in the
Ordinary Course of Business); (vi) commit any act or omit to do any act, or
engage in any activity or transaction or incur any obligation (by conduct or
otherwise), that (individually or in the aggregate) reasonably could be
expected to have a material adverse effect on the Assets; (vii) except for
actions taken or not taken in compliance with SECTION 3.6, do or omit to do any
act (or permit such action or omission) which reasonably could be expected to
cause a material breach of any Seller Contract or of any Lease; or (viii) take
any action or fail to take any action that would reasonably be expected to
cause any of the representations, warranties or covenants contained herein to
be untrue or incorrect in any material respect or incapable of being performed
or satisfied on the Closing Date. Notwithstanding the foregoing, however,
Seller shall not be obligated to solicit new subscribers or open accounts for
new subscribers. Prior to the Closing Date, Seller shall maintain in full
force and effect all of its existing casualty, liability, and other insurance
through the day following the Closing Date in amounts not less than those in
effect on the date hereof, except for changes in such insurance that are made
in the Ordinary Course of Business.
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<PAGE> 15
3.9.2. NOTICE OF MATERIAL ADVERSE CHANGE.
Promptly after Seller has knowledge thereof, Seller shall,
through the Closing Date, notify Buyer of any material adverse change in the
Assets or the Leases and shall provide Buyer with all information (including,
without limitation, copies of all documents relating thereto) reasonably
requested by Buyer concerning any Claims instituted, threatened or asserted
against or affecting the Assets, the Leases or the Employees at law or in
equity before or by any Governmental Authority.
Promptly after Seller has knowledge thereof, Seller shall,
through the Closing Date, also notify Buyer in writing of the occurrence of any
event, or the failure of any event to occur, prior to the Closing that results
in a breach of any of the covenants, representations or warranties made by or
on behalf of Seller in this Agreement or any other Seller Document furnished in
connection with or pursuant to this Agreement, but such notification shall not
excuse breaches of representations, warranties, covenants or agreements
disclosed in such notification.
Promptly after Buyer has knowledge thereof, Buyer shall,
through the Closing Date, notify Seller in writing of the occurrence of any
event, or the failure of any event to occur, prior to the Closing that results
in a breach of any of the covenants, representations or warranties made by or
on behalf of Buyer in this Agreement or any other Buyer Document furnished in
connection with or pursuant to this Agreement, but such notification shall not
excuse breaches of representations, warranties, covenants or agreements
disclosed in such notification.
3.10. PUBLIC ANNOUNCEMENTS.
Except as may be otherwise required for compliance with
applicable Laws or Nasdaq or stock exchange requirements, neither Buyer nor
Seller shall issue or approve any news release or other public announcement
concerning the transactions contemplated by this Agreement without the prior
approval of the other party hereto (which approval shall not be unreasonably
delayed or withheld), and Buyer and Seller shall cooperate as to the timing and
contents of any such prior release or public announcement.
3.11. CERTAIN EMPLOYEES.
(a) Buyer may, but shall not be obligated to, make offers of
employment effective following the Closing Date to any employees of Seller
employed with respect to the Business, and Seller shall use its commercially
reasonable best efforts to encourage such employees to accept any such offers
of employment. Seller shall promptly notify Buyer if any such employee of
Seller ceases to be employed by Seller prior to the Closing or if any such
employee advises any executive officer or manager of Seller, orally or in
writing after the date hereof
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<PAGE> 16
and before the Closing, that he or she intends to terminate his or her
employment with Seller or to refuse employment by Buyer after the Closing.
Except as expressly set forth in this SECTION 3.11, Buyer shall not be liable to
any person for any severance pay obligation arising as a result of the
transactions contemplated herein.
(b) Without limiting the foregoing, Buyer shall favorably
consider employing all of (but shall not be obligated to employ any of) the ten
current full-time employees of the Business, who are listed on SCHEDULE 3.11.
Buyer shall conduct initial interviews with such Employees as soon as
practicable and shall promptly notify Seller of its determinations as to
whether or not to employ such employees. If, within one year following the
Closing, Buyer terminates its employment of any such employee it initially
employed following the Closing (a "Continuing Employee") because such
Continuing Employee's job function is no longer required in the Raleigh/Durham,
North Carolina area, Buyer shall pay that Continuing Employee a one-time
severance payment equal to the product of (i) such Continuing Employee's
current monthly salary, multiplied times (ii) the lesser of (x) six months, or
(y) the number of months remaining in such one-year period. If, within one
year following the Closing, Buyer terminates its employment of any Continuing
Employee for any other reason (other than cause), Buyer shall pay that
Continuing Employee a one-time severance payment equal to such Continuing
Employee's current monthly salary. In no event that Buyer shall be obligated
to pay any severance if a Continuing Employee voluntarily terminates employment
with the Company.
3.12. ALLOCATION OF PURCHASE PRICE.
Seller and Buyer each represent, warrant, covenant, and agree
with each other that the Purchase Price shall be allocated among the Assets and
the Confidentiality and Non-competition Agreement as set forth on SCHEDULE
3.12. Seller and Buyer agree, pursuant to Section 1060 of the Code, that the
Purchase Price shall be allocated in accordance with this SECTION 3.12, and
that all income tax returns and reports shall be filed consistent with such
allocation.
3.13. BULK SALES LAWS.
Buyer and Seller agree to waive compliance with all bulk
transfer or similar laws that may be applicable to the transactions
contemplated by this Agreement.
3.14. CONFIDENTIALITY.
Buyer agrees and acknowledges that all Seller Information shall
constitute "Evaluation Material" for purposes of that certain letter agreement
("Letter Agreement") dated April 18, 1996, by and between Buyer and McClatchy
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<PAGE> 17
Newspapers, Inc., Seller's parent corporation and sole shareholder
("McClatchy"), and Buyer shall continue to be bound by the terms and conditions
of such Letter Agreement, which shall survive any termination of this Agreement
(other than the closing of the transactions contemplated by this Agreement);
provided, however, that each of Seller and McClatchy acknowledges and agrees
that Buyer may disclose such Seller Information as Buyer determines, upon the
advice of counsel or Buyer's underwriters, is reasonably necessary to be
disclosed in connection with the Securities Offering.
3.15. ROCKY MOUNT.
If requested by Buyer, Seller shall use its commercially
reasonable best efforts to assist Buyer in its efforts to cause Rocky Mount
School officials to continue to locate equipment at such school on
substantially similar terms as those under which Seller currently locates
equipment there.
3.16. CLOSING SUBSCRIBER FILE.
Two (2) days prior to the Closing Date, Seller shall deliver a
file of all Nando.net subscribers who have indicated to Seller, as of the date
of delivery that they wish to continue service with Buyer and who have elected
to use one of Buyer's standard dial-up plans, which list shall be acceptable to
Buyer in its reasonable discretion and shall be in the form described on, and
shall include the information set forth on, SCHEDULE 3.16 (the "Closing
Subscriber File").
3.17. COOPERATION WITH BUYER'S ACCOUNTANTS
Seller acknowledges that Buyer is attempting to conduct the
Securities Offering and agrees to cooperate with and assist Buyer and Buyer's
accountants in preparing any financial statements relating to the Leases, the
Assets or the business in connection therewith that are required by the SEC in
connection with such offering; provided, however, that Buyer shall not be
required to incur any out-of-pocket expense in connection with the preparation
of such financial statements.
3.18. OPTIONS WITH RESPECT TO THE LEASE AND SUBLEASES
Seller hereby grants to Buyer an option to sublease certain
sites at each of the locations specified on Schedule 4.10 and an option to
lease space at 505 W. Franklin Street, Chapel Hill, North Carolina 27516
(collectively, the "Options"). Each of the Options shall be exercisable upon
fourteen (14) days' prior written notice to Seller. Each unexercised Option
shall terminate on October 31, 1996. In the event Buyer exercises any Option,
each of the Seller and Buyer shall promptly (but in no event prior to the
Closing Date) execute and deliver to the other party the Real Estate Lease,
substantially in the form attached hereto as Exhibit E, or a
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<PAGE> 18
Sublease, substantially in the form attached hereto as Exhibit F, as the case
may be.
3.19. CERTAIN PAYMENTS.
In the event that Seller receives, prior to the expiration of
the Transition Period, a payment from a Nando.net Subscriber who becomes a
Buyer subscriber, which payment relates to any period following the Closing
Date for Internet access services, Seller shall promptly send the amount of
such payment to Buyer. For purposes of this SECTION 3.19, so long as Seller
has provided Buyer with documentation promptly following the Closing Date
showing amounts owed to it by Nando.net Subscribers as of the Closing Date for
services rendered on or before the Closing Date, all payments received by
Seller from Nando.net Subscribers who become Buyer subscribers shall be deemed
to relate to the period prior to and including the Closing Date, unless (i)
such payment is clearly marked otherwise, or (ii) Seller receives a payment
from a subscriber greater than the amount billed by Seller to such subscriber
for unpaid services rendered prior to and including the Closing Date (in which
case Seller shall promptly send Buyer the difference between the amount owed to
Seller and the amount of such payment).
In the event that Buyer receives, prior to the expiration of
the Transition Period, a payment from a Nando.net Subscriber who becomes a
Buyer subscriber, which payment relates to any period prior to and including
the Closing Date for Internet access services, Buyer shall promptly send the
amount of such payment to Seller. For purposes of this SECTION 3.19, all
payments received by Buyer from Nando.net Subscribers who become Buyer
subscribers shall be deemed to relate to a period following the Closing Date
unless (i) such payment is clearly marked otherwise or (ii) (a) Buyer receives
a payment from a subscriber greater than the amount billed by Buyer to such
subscriber for services rendered following the Closing Date (in which case
Buyer shall promptly send to Seller the difference between the amount owed to
Buyer and the amount of such payment) and (b) Seller provides Buyer with
documentation showing that such subscriber had not paid Seller in full for
Internet access services rendered by Seller on or prior to the Closing Date.
3.20. NEW SUBSCRIBERS
During the first calendar month following the Closing Date,
Buyer shall use its commercially reasonable efforts to take calls and inquiries
from callers located in the Raleigh-Durham Triangle Area and to sign up such
callers as Buyer's customers under one of Buyer's standard dial-up Internet
access service plans. Buyer shall waive its standard sign up fee of $35 for
each such caller (i) who signs up for such service during the first calendar
month following the Closing Date and (ii) who mentions one of the newspaper
advertisements carried by Seller which
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describe Buyer's promotion to waive its standard sign up fee for new customers
in the Raleigh-Durham Triangle Area.
Buyer shall pay Seller $70.00 for each New Subscriber (the "New
Subscriber Fee") in accordance with this SECTION 3.20; provided, however, in no
event shall the number of New Subscribers for whom Buyer shall pay the New
Subscriber Fee be greater than that number obtained by subtracting the actual
number of Continuing Subscribers from 10,000. Within ten (10) days after the
Second Measurement Date, Buyer shall deliver to Seller a report identifying the
number of New Subscribers signed up by Buyer pursuant to this SECTION 3.20 and
a fully executed copy of the Second Promissory Note (representing the aggregate
New Subscriber Fee), or, in the event that funds were raised through a stock
offering or other financing which Buyer would have been required to use to pay
down the principal and accrued but unpaid interest under the Second Promissory
Note pursuant to SECTION 2.5, Buyer shall pay to Seller such funds, not to
exceed what would otherwise be the initial principal amount of the Second
Promissory Note, and the initial principal amount of the Second Promissory Note
so issued shall be reduced accordingly.
4. REPRESENTATIONS AND WARRANTIES BY SELLER
Seller hereby represents and warrants to Buyer as follows:
4.1. ORGANIZATION AND STANDING.
Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. Seller has the
full and unrestricted corporate power and authority to own, operate, lease and
otherwise to hold the Assets, to carry on its business as currently conducted,
to execute and deliver this Agreement and each Seller Document and to carry out
the transactions contemplated hereby and thereby. Seller is duly qualified to
conduct business as a foreign corporation and is in good standing in the states
set forth on SCHEDULE 4.1. Seller is not qualified to conduct business
in any other jurisdiction, and, except as disclosed on SCHEDULE 4.1, neither
the nature of the Business nor the character of the Assets makes any such
qualification necessary, except for such jurisdictions where the failure to be
so qualified would not have a material adverse effect on the Assets or the
Business.
4.2. SUBSIDIARIES.
Seller has no subsidiaries and no equity investment or other
interest in any corporation, association, partnership, joint venture or other
entity, in each case that relates to the Business.
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4.3. CERTIFICATE OR ARTICLES OF INCORPORATION AND BYLAWS.
Seller has furnished to Buyer a true and complete copy of the
certificate or articles of incorporation of Seller, as currently in effect, and
a true and complete copy of the bylaws of Seller, as currently in effect.
4.4. EMPLOYEES.
Seller has no written employment contract with any person with
respect to the Business except any employment contracts as are set forth on
SCHEDULE 4.4. SCHEDULE 4.4 lists all current employees of Seller with respect
to the Business (collectively, the "Employees"), showing each such person's
name, position, initial employment date, and weekly base rate remuneration
(without exclusions for deduction pursuant to Code Sections 125 or 401(k)),
plus actual bonus or incentive compensation paid year to date and the total
taxable compensation for the current fiscal year. Except as set forth on
SCHEDULE 4.4 or otherwise entered into in the Ordinary Course of Business,
other than general understandings which may exist for employment at will, no
oral understandings currently exist between any executive officer or other
representative of Seller authorized to enter into such understandings on behalf
of Seller and any Employee of the Business regarding changes in compensation,
promotion or any other change in status. Except as specified on SCHEDULE 4.4,
as of the date of this Agreement, no Employee has advised any executive
officer, manager or supervisor of Seller, orally or in writing, that he or she
intends to terminate such employment or to refuse employment by Buyer after the
Closing, if Buyer offers such employment.
4.5. REVENUE STATEMENTS.
Seller has furnished to Buyer, and there are attached hereto as
SCHEDULE 4.5, true and correct copies of the Seller's revenue statements
relating to the Assets and the Business for the period from January 1, 1996
through and including June 30, 1996, which statements present fairly the
revenue generated from the Assets and the Business as of the dates indicated.
4.6. NO LIABILITIES.
Except as described in SCHEDULE 4.6, Seller has no material
liabilities (whether contingent or absolute, matured or unmatured, known or
unknown, including, without limitation, unasserted claims relating to the
Assets or any Lease), except for liabilities and obligations which were
incurred in the Ordinary Course of Business since March 31, 1996.
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4.7. TAXES.
There has been no failure to pay, collect, withhold or remit
any Taxes with respect to any period prior to and including the date of this
Agreement and the Closing Date and no failure to file any return, report or
statement affecting any Taxes with respect to any period prior to and including
the date of this Agreement and the Closing Date that will result in a lien on
the Assets or in the imposition of transferee or other liability on Buyer for
the payment of any Taxes.
4.8. CONDUCT OF BUSINESS; ABSENCE OF MATERIAL ADVERSE CHANGE.
Other than as set forth in SCHEDULE 4.8, since March 31, 1996,
there has been no material adverse change in the Business (financial or
otherwise) or the Assets. Except as set forth in SCHEDULE 4.8, since March 31,
1996, Seller has conducted the Business diligently and substantially in the
manner heretofore conducted and only in the Ordinary Course of Business. Except
as set forth in SCHEDULE 4.8 or except to the extent that such action or
inaction could not reasonably be expected to materially and adversely affect
the maintenance or servicing of the Assets, since March 31, 1996 Seller has
not: (a) mortgaged, pledged or subjected to any Encumbrance any of the Assets;
(b) sold, exchanged, transferred or otherwise disposed of any of the Assets,
except in each case in the Ordinary Course of Business; (c) made or permitted
any renewal, extension, amendment or termination of any material Seller
Contract or any Lease other than in the Ordinary Course of Business; (d)
through negotiation or otherwise made any commitment or incurred any liability
to any labor organization with respect to employees of the Business; (e) made
any accrual or arrangement for or payment of bonuses or special compensation of
any kind to any director, officer or employee of the Business, other than in
the Ordinary Course of Business; or (f) entered into any agreement to do any of
the foregoing.
4.9. TITLE TO THE ASSETS.
Seller is the sole and exclusive legal and equitable owner of,
and has good title to, the Assets free and clear of any Encumbrances, except as
set forth in SCHEDULE 4.9. On the Closing Date, Buyer shall acquire good title
to or a valid leasehold interest in, as applicable, and all right, title and
interest in, the Assets, free and clear of all Encumbrances.
4.10. REAL PROPERTY.
4.10.1. LEASES.
SCHEDULE 4.10 lists all leases and subleases of real property
occupied for use by Seller in connection with the service and maintenance of
the Assets and under which Seller is a lessor, except for Excluded Assets
(collectively, "Leases").
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Seller is the owner and holder of all the leasehold interests purported to be
granted by such Leases, in each case free and clear of all Encumbrances, except
as set forth on SCHEDULE 4.9. Each Lease is valid and binding obligation of
Seller, and to Seller's knowledge of the other parties thereto, is in full
force and effect and is legally enforceable in accordance with the terms
thereof, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium, applicable equitable principles or similar laws
from time to time in effect affecting the enforcement of creditors' rights
generally. Except as set forth on SCHEDULE 4.10, no Lease has been modified or
amended, nor any material provision thereof waived, and each Lease constitutes
the entire agreement between the landlord and tenant thereunder with respect to
the premises demised thereunder. The lessors under the Leases are holding
security deposits in the amounts set forth on SCHEDULE 4.10. Seller is not in
default under any such Lease, nor does any condition exist that, with notice or
lapse of time or both would constitute a default thereunder by Seller. To the
knowledge of Seller, no other party to any such Lease (i) is in default
thereunder in any material respect, nor does any condition exist that with
notice or lapse of time or both would constitute a material default thereunder
by any party other than Seller or (ii) has threatened in writing to cancel or
otherwise terminate any such Lease. The premises leased under the Leases are
in sufficient condition and repair, reasonable wear and tear excepted, to
operate the Business therein in the manner in which it its currently being
operated. True and complete copies of all Leases have been furnished to Buyer.
4.10.2. VIOLATION OF LAWS.
Seller has not received any written notice that the premises
leased pursuant to the Leases or the fixtures and improvements located therein
currently fail to conform with any applicable material contractual requirements
or building, zoning, subdivision, land-use, fire and other Laws pertaining to
or affecting such property.
4.10.3. CONDEMNATION.
To Seller's knowledge, no portion of any property leased
pursuant to the Leases or any fixture or improvement thereon is the subject of
any condemnation, eminent domain or inverse condemnation proceeding currently
instituted or pending, or are, or will be, the subject of any such proceeding.
4.11. SELLER CUSTOMERS AND CONTRACTS.
SCHEDULE 4.11 sets forth a true and complete list of all
customer or subscriber contracts, agreements, commitments, arrangements or
understandings (both written and oral) relating to the Business and operations
thereof to which Seller is a party, except for other instruments included in
the Excluded Assets.
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Except as set forth on SCHEDULE 4.11, Seller has not entered
into any binding agreement with respect to any Seller Contract that could
adversely affect Seller's ability to enforce its rights under such Seller
Contract. Seller has delivered true and complete copies of all written Seller
Contracts listed on SCHEDULE 4.11 (and all amendments and modifications
thereto) to Buyer prior to the execution of this Agreement.
Each Seller Contract is in full force and effect, and
constitutes a valid and binding obligation of Seller, and, to Seller's
knowledge, the other party thereto, and is legally enforceable in accordance
with its terms. Seller is not in default under any Seller Contract and, to its
knowledge, there does not exist any event that (whether with or without notice,
lapse of time, or the happening or occurrence of any other event) would
constitute such a default. To Seller's knowledge, there exists no default by
any other party to any Seller Contract. Within the last year, Seller has not
received any written notice from any other party to a Seller Contract pursuant
to which such other party threatened cancellation or revocation of such Seller
Contract.
4.12. NUMBER OF SUBSCRIBERS.
As of the date set forth in SCHEDULE 4.12, the number of
subscribers to the Business is equal to that number specified on SCHEDULE 4.12.
4.13. BOOKS AND RECORDS.
Seller has maintained adequate business records with respect to
the Employees and the Assets, and Seller is not aware of any material
deficiencies in such business records.
4.14. LITIGATION; DISPUTES.
4.14.1. NO LITIGATION; COMPLIANCE WITH LAW.
There are no actions, suits, claims, arbitrations, proceedings
or investigations pending, or to Seller's knowledge threatened or reasonably
anticipated against, or involving any Employee or Asset, or the transactions
contemplated by this Agreement or any other Seller Document, at law or in
equity, or before or by any arbitrator or Governmental Authority, domestic or
foreign. Seller is not operating under, subject to or in default with respect
to any order, award, writ, injunction, decree or judgment of any arbitrator or
Governmental Authority relating to the Employees, the Assets or the Leases.
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4.14.2. NO DISPUTES.
Except as disclosed on SCHEDULE 4.14, Seller is not currently
involved in, and does not reasonably anticipate, any dispute relating to the
Employees or the Assets with any current or former employee, customer, broker,
vendor or business consultant or any other person, where the amount in
controversy, or reasonably expected to be in controversy, is in excess of
$1,000.00.
4.15. LABOR RELATIONS.
Seller does not know of any basis for and does not reasonably
anticipate, and is not currently involved in, any disputes, strikes, work
stoppages, grievance proceedings, union organization efforts or other similar
controversies between Seller and any union or other collective bargaining unit
representing the Employees. Seller has complied and is in compliance in all
material respects with all Laws relating to employment or the workplace of the
Employees, including, without limitation, provisions relating to wages, hours,
collective bargaining, safety and health, work authorization, equal employment
opportunity, immigration, withholding, unemployment compensation, worker's
compensation, employee privacy and right to know, except for any such
noncompliance which would not have a material adverse effect on the Assets.
There are no collective bargaining agreements, employment agreements between
Seller and any of its Employees, or professional service agreements not
terminable at will relating to the Business or any of the Assets. The sale of
the Assets to Buyer pursuant to the terms of this Agreement will not cause
Buyer to incur or suffer any liability relating to, or obligation to pay,
severance, termination or other similar payments to any current or former
employee or independent contractor of Seller, except as expressly contemplated
in SECTION 3.11.
4.16. PENSION AND BENEFIT PLANS.
4.16.1. SCHEDULE OF PLANS.
Except as set forth in SCHEDULE 4.16, neither Seller nor any
Common Control Entity (a) currently sponsors or maintains or has ever sponsored
or maintained since July 1, 1990, any Plan or Other Arrangement and that covers
Employees, (b) is or has been since July 1, 1990 a party to any Plan or Other
Arrangement and that covers Employees, or (c) has any obligations under any
Plan or Other Arrangement and that covers Employees.
4.16.2. COPIES OF DOCUMENTS.
Seller has furnished to Buyer true and complete copies of: (1)
summary plan descriptions, as they currently exist, for each of the Plans that
covers Employees; (2) the complete plan document and most recent Form 5500 for
each Plan in existence as of January 1, 1996, which is a Qualified Plan and
which
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covers Employees; (3) a list of all Employees who participate in a Plan that is
a cash or deferred arrangement described in Section 401(k) of the Code, and the
percentage of compensation currently contributed by each such person; and (4) a
list of all Employees who participate in a Plan providing medical benefits, the
sex and date of birth of each such Employee and whether said participation is
on the basis of single, single plus one dependent or family coverage.
4.16.3. MULTIEMPLOYER PLANS.
Except as set forth on SCHEDULE 4.16, no Plan that covers
Employees is a Multiemployer Plan.
4.16.4. COMPLIANCE WITH LAW.
In connection with the operation of the Business, Seller has
complied with all material provisions of the Code, ERISA, the National Labor
Relations Act, as amended, Title VII of the Civil Rights Act of 1964, as
amended, the Age Discrimination in Employment Act, as amended, the Fair Labor
Standards Act, as amended, the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, as amended, and all other Laws pertaining to
the Plans, Other Arrangements and other employee or employment related benefits
to the extent that such Plans, Other Arrangements and benefits cover the
Employees, and all premiums and assessments relating to all such Plans or Other
Arrangements. Seller has no liability for any delinquent contributions within
the meaning of Section 515 of ERISA (including, without limitation, related
attorneys' fees, costs, liquidated damages and interest), or for any arrearages
of wages, on account of or on behalf of any Employee. Seller has no pending
unfair labor practice charges, contract grievances under any collective
bargaining agreement, other administrative charges, claims, grievances or
lawsuits before any court, governmental agency, regulatory body, or arbiter
arising under any Law governing any Plan that covers Employees, and there exist
no facts that could reasonably be likely to give rise to such a claim.
4.16.5. POST-RETIREMENT PLANS.
SCHEDULE 4.16 identifies all post-retirement medical, life
insurance or other post-retirement programs promised, provided or otherwise due
now or in the future under any Plan to current, former or retired Employees.
Buyer shall have no liability to any current, former or retired Employee under
any such benefit program.
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4.17. ENVIRONMENTAL.
4.17.1. COMPLIANCE WITH LAW.
Seller has complied and is in compliance with all Environmental
Laws, and has no liability under any Environmental Law with respect to the
Business, the Assets and the Leases, including, but not limited to, those
Environmental Laws relating to employment or the workplace, and Seller has no
knowledge that any property or any building, structure, fixture, appurtenance
or other improvement thereon used in connection with maintaining and servicing
the Assets are not in compliance with, all Environmental Laws.
4.17.2. COMPLAINTS AND OSHA MATTERS.
There are no citations, complaints, directives, notices or
information requests filed or issued by any governmental authority against the
Seller and relating to the Assets, the Leases or the Business (and Seller has
no knowledge of any fact(s) which might reasonably form the basis for any such
actions or notices), and there are no legal proceedings commenced or, to
Seller's knowledge, threatened by private parties against the Seller and
relating to the Assets, the Leases or the Business with respect to violations
or alleged violations of any Environmental Laws or Laws governing occupational
health and safety matters.
4.17.3. INFORMATION.
Seller has provided Buyer with true and complete copies of all
written environmental audits, assessments, inspections or occupational health
studies relating to the Assets or the Leases or the conduct of the Business
that Seller has in its possession or control and that was undertaken by, or at
the direction of, any Governmental Authority, Seller, any predecessor in
interest, or any prior potential purchaser.
4.18. AUTHORIZATION.
The execution, delivery and performance by Seller of this
Agreement, and each other Seller Document, the fulfillment of and compliance
with the respective terms and provisions hereof and thereof, and the
consummation by Seller of the transactions contemplated hereby and thereby have
been duly authorized by its Board of Directors (which authorization has not
been modified or rescinded and is in full force and effect), and do not and
will not: (a) conflict with, or violate any term or provision of (i) any Law
having applicability to Seller, any of the Assets or the Leases, or the
Business, the effect of which would have an adverse material effect on the
Assets, or (ii) any provision of the certificate or articles of incorporation
or bylaws of Seller; (b) except for the consents required as set forth on
SCHEDULE 4.21, conflict with, or result in any material breach of, or
constitute a default (or an event which with notice or lapse of time or both
would become a
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default) under, any material agreement to which Seller is a party or by which
it, or any of the Assets are bound; or (c) except for the consents required as
set forth on SCHEDULE 4.21, result in or require the creation or imposition of
or result in the acceleration of any indebtedness, or of any Encumbrance of any
nature upon, or with respect to, Seller, or any of the Assets. No other
corporate action on the part of Seller or its Affiliates is necessary for
Seller to enter into this Agreement and all other Seller Documents and to
consummate the transactions contemplated hereby and thereby.
4.19. ABSENCE OF VIOLATION; COMPLIANCE WITH LAWS.
Seller has complied and is in compliance in all material
respects with all Laws applicable to the Business, the Leases and the Assets.
Except for business licenses and qualifications necessary to
transact business as a foreign corporation, Seller is not required to hold or
obtain any permit, license, approval or similar authorization from any
Governmental Authority in any jurisdiction in order to conduct the operations
of the Business as presently conducted and to own, use and maintain the Leases
and the Assets, except where the failure to do so would not have a material
adverse effect on the Assets.
Neither Seller nor any of its officers, directors, employees or
agents has paid, given or received or has offered or promised to pay, give or
receive, any bribe or other unlawful payment of money or other thing of value,
or any other unlawful inducement, to or from any person, business association
or governmental official or entity in the United States or elsewhere in
connection with or in furtherance of the Business, including, without
limitation, any unlawful offer, payment or promise to pay money or other thing
of value (i) to any foreign official or political party (or official thereof)
for the purposes of influencing any act, decision or omission in order to
assist Seller in obtaining business for or with, or directing business to, any
person, or (ii) to any person, while knowing that all or a portion of such
money or other thing of value will be offered, given or promised to any such
official or party for such purposes. The Business is not in any manner
dependent upon the making or receipt of such unlawful payments, discounts or
other inducements.
4.20. BINDING OBLIGATION.
This Agreement and each other Seller Document constitutes a
valid and binding obligation of Seller, enforceable against Seller in
accordance with its terms.
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4.21. CONSENTS AND APPROVALS.
SCHEDULE 4.21 lists all waivers, consents and approvals that
are required in order for Seller to transfer the Assets and the Assumed
Liabilities to Buyer.
5. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
5.1. ORGANIZATION AND STANDING.
Buyer is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the full and
unrestricted corporate power and authority to carry on its business as
currently conducted, to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby.
5.2. AUTHORIZATION.
The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document, the fulfillment of and compliance with
the respective terms and provisions hereof and thereof, and the consummation by
Buyer of the transactions contemplated hereby and thereby have been duly
authorized by its Board of Directors (which authorization has not been modified
or rescinded and is in full force and effect), and do not and will not: (a)
conflict with, or violate any term or provision of (i) any Law having
applicability to Buyer, the effect of which would have a material adverse
effect on Buyer, or (ii) any provision of the certificate of incorporation or
bylaws of Buyer, or (b) conflict with, or result in any material breach of, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, any material agreement to which Buyer is a party
or by which Buyer is bound. No other corporate action is necessary on the part
of Buyer for Buyer to enter into this Agreement and all other Buyer Documents
and to consummate the transactions contemplated hereby and thereby.
5.3. BINDING OBLIGATION.
This Agreement and each other Buyer Document constitutes a
valid and binding obligation of Buyer, enforceable against Buyer in accordance
with its terms.
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5.4. LITIGATION; DISPUTES.
There are no actions or proceedings pending, or to Buyer's
knowledge threatened or reasonably anticipated seeking to restrain, prohibit or
invalidate any of the transactions contemplated by this Agreement or any other
Buyer Document, at law or in equity, or before or by any Governmental
Authority.
6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
The obligations of Buyer to purchase the Assets and to proceed
with the Closing are subject to the satisfaction (or waiver in writing by
Buyer) at or prior to the Closing of each of the following conditions:
6.1. REPRESENTATIONS AND COVENANTS.
(a) The representations and warranties of Seller made in this
Agreement or in any other Seller Document shall have been true and correct in
all material respects when made, and shall be true and correct in all material
respects on the Closing Date as though such representations and warranties were
made on and as of the Closing Date (except for any such representations or
warranties which expressly relate to a prior date); and (b) Seller shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement or any other Seller Document to be
performed or complied with by Seller prior to the Closing.
6.2. CONSENTS.
Seller shall have obtained on or prior to the Closing Date the
consents, authorizations or approvals listed on SCHEDULE 4.21, each of which
consent, authorization and approval shall be in form and substance reasonably
satisfactory to Buyer.
6.3. DELIVERY OF DOCUMENTS.
Seller shall have delivered to Buyer on or before the Closing
Date the Seller Documents and all other agreements, instruments, and documents
required to be delivered by Seller to Buyer pursuant to SECTION 8.2.
Seller shall have delivered to Buyer on or before the second
day prior to the Closing Date the Closing Subscriber File.
6.4. LEGAL PROCEEDINGS.
No action or proceeding by or before any Governmental Authority
shall have been instituted or threatened (and not subsequently dismissed,
settled or
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otherwise terminated) to restrain, prohibit or invalidate the transactions
contemplated by this Agreement or any other Seller Document, or which could
reasonably be expected to prevent, limit, restrict or impair the ownership,
use, operation or enjoyment of the Assets by Buyer, other than an action or
proceeding instituted or threatened by Buyer or its Affiliates.
6.5. MATERIAL ADVERSE CHANGE.
There shall have been no material adverse changes since March
31, 1996 in the Assets (regardless of whether or not such events or changes are
consistent with the representations and warranties given herein by Seller),
except (i) changes contemplated by this Agreement, (ii) changes in the number
of subscribers to the Business, and (iii) changes in the Ordinary Course of
Business that are not (either individually or in the aggregate) materially
adverse.
6.6. DUE DILIGENCE.
Buyer shall have completed its due diligence investigation of
Seller, the Employees and the Assets, having determined (in Buyer's reasonable
discretion) that no development has occurred or information has been discovered
that has, or is reasonably likely to have, or indicates, a material adverse
effect on the Assets (including, without limitation, Seller's revenues,
profits, liabilities, or prospects relating to the Assets), except as may
result from the items identified in SECTION 6.5 (i), (ii) or (iii) above.
6.7. SEC AUDIT REQUIREMENT; DELAY OF SECURITIES OFFERING.
The SEC shall not require: (i) the preparation of audited
financial statements concerning the Assets or the business related thereto in
connection with Buyer's Securities Offering; or (ii) any other action
specifically related to Buyer's purchase of the Assets or the other
transactions contemplated by this Agreement that would have the effect of
delaying the Securities Offering; provided, however, that in the event the SEC
requires any such audited financial statements, Buyer shall use its
commercially reasonable best efforts to demonstrate to the SEC that such
financial statements should not be required, but only so long as such efforts
would not result in a delay of the Securities Offering.
7. CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
The obligations of Seller to sell, transfer, convey and deliver
the Assets and to proceed with the Closing are subject to the satisfaction (or
waiver in writing by Seller) at or prior to the Closing of each of the
following conditions:
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7.1. REPRESENTATIONS AND COVENANTS.
The representations and warranties of Buyer made in this
Agreement or in any other Buyer Document shall have been true and correct in
all material respects when made, and shall be true and correct in all material
respects on the Closing Date as though such representations and warranties were
made on and as of the Closing Date; and Buyer shall have performed and complied
in all material respects with all covenants and agreements required by this
Agreement or any other Buyer Document to be performed or complied with by Buyer
prior to the Closing.
7.2. DELIVERY OF BUYER DOCUMENTS.
Buyer shall have delivered to Seller on or before the Closing
Date that portion of the Purchase Price required to be delivered at Closing
pursuant to Section 2.3, the Buyer Documents and all other agreements,
instruments and documents required to be delivered by Buyer to Seller pursuant
to SECTION 8.3.
7.3. LEGAL PROCEEDINGS.
No action or proceeding by or before any Governmental Authority
shall have been instituted or threatened (and not subsequently dismissed,
settled, or otherwise terminated) to restrain, prohibit, or invalidate the
transactions contemplated by this Agreement or any other Buyer Document, other
than an action or proceeding instituted or threatened by Seller or any of its
Affiliates.
8. THE CLOSING
8.1. CLOSING.
The Closing hereunder shall be held on September 30, 1996 at a
time and place agreed upon by Buyer and Seller.
8.2. DELIVERIES BY SELLER.
At or before the Closing, Seller shall deliver to Buyer the
following:
8.2.1. ASSIGNMENT DOCUMENTS AND AGREEMENTS.
The following statements, assignments and other instruments of
transfer, dated as of the Closing Date and duly executed by Seller, in form and
substance sufficient to transfer and convey to Buyer all of Seller's right,
title and interest (of the quality required in this Agreement) in and to the
Assets and reasonably satisfactory to counsel to Buyer:
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(i) the Assignment and Assumption of Contracts
substantially in the form attached hereto as Exhibit A;
(ii) each Buyer Lease substantially in the form
attached hereto as Exhibit E or Exhibit F, as appropriate; and
(iii) all such other general instruments of
transfer, assignment and conveyance, assignments, evidences of consent (as
required by SECTION 6.2) or waiver, and other instruments or documents in form
and substance reasonably satisfactory to Buyer, as shall be necessary to
evidence or perfect the sale, assignment, transfer and conveyance of the Assets
to Buyer and effectively vest in Buyer all right, title and interest in the
Assets free and clear of any and all Encumbrances, together with possession (or
constructive possession, in the case of intangibles) thereof, all in accordance
with the terms and conditions of this Agreement.
8.2.2. CONFIDENTIALITY AND NON-COMPETITION AGREEMENT.
The Confidentiality and Non-competition Agreement,
substantially in the form attached hereto as Exhibit C, dated as of the Closing
Date and duly executed by Seller.
8.2.3. CERTIFIED RESOLUTIONS.
Copies of the resolutions of the board of directors of Seller,
certified by the Secretary of Seller as being correct and complete and then in
full force and effect, authorizing the execution, delivery and performance of
this Agreement and of the other Seller Documents, and the consummation of the
transactions contemplated hereby and thereby.
8.2.4. SELLER OFFICERS' CERTIFICATES.
(i) A certificate of Seller signed by the President or a
Vice-President and the Secretary or an Assistant Secretary of Seller certifying
to the fulfillment of the conditions identified in SECTION 6.1; and
(ii) A certificate signed by the Secretary or an Assistant
Secretary of Seller as to the incumbency of the officers of Seller executing
this Agreement or any of the other Seller Documents on behalf of Seller.
8.2.5. LIEN SEARCHES.
A report dated not more than ten (10) days prior to the Closing
Date of the appropriate filing officers in the jurisdictions specified in
SCHEDULE 8.2 evidencing no financing statements, tax liens, mechanic's,
materialmen's, judgment or other statutory liens on file with respect to the
Assets, and, if such report
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evidences that financing statements, tax liens, mechanic's, materialmen's,
judgment or other statutory liens are on file with respect to any of the
Assets, a termination statement or other appropriate document signed by the
secured party or lien holder evidencing the release or termination of such
financing statement or such lien and, if applicable, a payoff letter from such
secured party or lien holder.
8.2.6. OTHER DOCUMENTS.
Such other certificates, instruments, opinions or documents as
Buyer may reasonably request in order to effect and document the transactions
contemplated hereby.
8.3. DELIVERIES BY BUYER.
At or before the Closing, Buyer shall deliver to Seller the
following:
8.3.1. PURCHASE PRICE PAYMENT.
That portion of the Purchase Price payable at the Closing in
the amount and manner set forth in SECTION 2.3.
8.3.2. AGREEMENTS.
The following agreements, dated as of the Closing Date and duly
executed by Buyer:
(i) the Assignment and Assumption of Contracts
substantially in the form attached hereto as Exhibit A;
(ii) the Confidentiality and Non-competition Agreement
substantially in the form attached hereto as Exhibit C; and
(iii) each Buyer Lease substantially in the form attached
hereto as Exhibit E or Exhibit F, as appropriate.
8.3.3. CERTIFIED RESOLUTIONS.
Copies of the resolutions of the board of directors of Buyer,
certified as being correct and complete and then in full force and effect,
authorizing the execution, delivery and performance of this Agreement and of
the other Buyer Documents, and the consummation of the transactions
contemplated hereby and thereby.
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8.3.4. OFFICERS' CERTIFICATES.
(i) A certificate of Buyer signed by the President or a
Vice President and the Secretary or an Assistant Secretary of Buyer certifying
to the fulfillment of the conditions identified in SECTION 7.1; and
(ii) a certificate signed by the Secretary or an Assistant
Secretary of Buyer as to the incumbency of the officers of the Buyer executing
this Agreement or any of the other Buyer Documents on behalf of Buyer.
8.3.5. LIEN SEARCHES.
A report dated not more than ten (10) days prior to the Closing
of the appropriate filing officers in the jurisdictions specified in SCHEDULE
8.3 evidencing no financing statements, tax liens, mechanic's, materialmen's
judgment or other statutory liens (for purposes of this section, collectively,
"Liens") on file with respect to the assets in which Buyer is granting Seller a
security interest pursuant to the Security Agreement (the "Secured Assets"),
and, if such report evidences that any Liens are on file with respect to any of
the Secured Assets, a termination statement or other appropriate document
signed by the secured party or Lien holder evidencing the release or
termination of such Lien and, if applicable, a pay-off letter from such secured
party or Lien holder; provided, however, that to the extent that any such Liens
on file relate to tangible or intangible assets acquired by Buyer from PSINet
pursuant to that certain Asset Purchase Agreement between Buyer and PSINet
dated as of June 28, 1996, as amended, and involve a secured party other than
PSINet, Buyer shall only be required to use its commercially reasonable efforts
to secure (i) a termination statement or other appropriate document evidencing
the release or termination of such Lien and (ii) if applicable, a pay off
letter from such secured party or Lien holder, and Buyer shall be deemed not to
be in breach of its obligations under this SECTION 8.3.5 if Buyer uses its
commercially reasonable efforts and fails to secure such termination statement,
other appropriate document or pay off letter.
8.3.6. OTHER DOCUMENTS.
Such other certificates, instruments, opinions or documents as
Seller may reasonably request in order to effect and document the transactions
contemplated hereby.
9. SURVIVAL; INDEMNIFICATION
9.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations, warranties and covenants contained in this
Agreement and the indemnification obligations set forth in this ARTICLE 9 shall
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survive for a period of two years following the Closing Date and shall be
unaffected by (and shall not be deemed waived by) any investigation, audit,
appraisal, or inspection at any time made by or on behalf of Buyer; provided,
however, that the representations and warranties set forth in SECTION 4.7,
SECTION 4.16 or SECTION 4.17 shall each survive until the expiration of any
applicable statute of limitations period.
Notwithstanding the foregoing, if written notice of a claim for
indemnification has been given to the Indemnifying Party by the Indemnified
Party pursuant to SECTION 9.4 prior to the expiration of the applicable
representations, warranties and covenants, all relevant representations,
warranties and covenants and the obligation to indemnify therefor shall survive
for the purposes of such claim until such claim has been finally resolved.
9.2. INDEMNIFICATION BY SELLER.
Subject to the conditions and provisions of this ARTICLE 9,
Seller agrees to indemnify, defend and hold harmless Buyer from, against and
with respect to any and all Losses, asserted against, resulting to, imposed
upon or incurred by the Buyer, directly or indirectly, by reason of or
resulting from (a) any liability or obligation of or claim against Buyer
(whether absolute, accrued, contingent or otherwise and whether a contractual,
Tax or any other type of liability or obligation or claim) not expressly
assumed by Buyer pursuant to SECTION 2.4, arising out of, relating to or
resulting from the businesses of Seller, or relating to or resulting from the
Assets during the period prior to the Closing Date or the operation of the
Business; (b) any misrepresentation or breach of the representations and
warranties of Seller contained in this Agreement or in any other Assignment
Document or in either officers' certificate delivered pursuant to SECTION 8.2.4
hereof; (c) any noncompliance by Seller with any covenants, agreements or
undertakings of Seller contained in or made pursuant to this Agreement or any
other Assignment Document; or (d) any liability or obligation of or claim
against Buyer or any of the Assets by virtue of the application of bulk sales
or other similar laws to the sale and transfer of the Assets to Buyer.
9.3. INDEMNIFICATION BY BUYER.
Subject to the conditions and provisions of this ARTICLE 9,
Buyer hereby agrees to indemnify, defend and hold harmless Seller from, against
and with respect to any and all Losses, asserted against, resulting to, imposed
upon or incurred by Seller, directly or indirectly, by reason of or resulting
from (a) any liability or obligation of or claims against Seller (whether
absolute, accrued, contingent or otherwise and whether contractual, Tax or any
other type of liability or obligation or claim) expressly assumed by Buyer
pursuant to SECTION 2.4 or relating to or resulting from the Assets during the
period from and after the Closing
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Date; (b) any misrepresentation or breach of the representations and warranties
of Buyer contained in or made pursuant to this Agreement or any other
Assignment Document or in either officers' certificate delivered pursuant to
SECTION 8.3.4; or (c) any noncompliance by Buyer with any covenants, agreements
or undertakings of Buyer contained in or made pursuant to this Agreement or any
other Assignment Document. Notwithstanding the foregoing, in no event shall
Buyer have any indemnification obligation to Seller pursuant to this SECTION
9.3 for any Losses otherwise indemnifiable hereunder to the extent that such
Losses directly relate to a liability, obligation or claim with regard to the
failure to obtain any waiver, consent or approval from any party to any Seller
Contract or Lease that is required in order for Seller to assign any such
Seller Contract to Buyer or for Seller to enter into any Buyer Lease with
Buyer, as the case may be; provided, however, that Buyer shall remain liable
for any other Losses indemnifiable pursuant to this SECTION 9.3 not directly
relating to such a liability, obligation or claim.
9.4. CONDITIONS OF INDEMNIFICATION.
The obligations and liabilities of Seller, on the one hand, and
of Buyer, on the other hand, hereunder with respect to their respective
indemnities pursuant to this ARTICLE 9, resulting from any Losses, shall be
subject to the following terms and conditions:
9.4.1. NOTICE.
The party seeking indemnification (the "Indemnified Party")
must give the other party or parties, as the case may be (the "Indemnifying
Party"), written notice of any such Losses specifically identifying the matters
which have given rise to such losses promptly after the Indemnified Party
receives notice thereof; provided that the failure to give such notice shall
not affect the rights of the Indemnified Party hereunder except to the extent
that the Indemnifying Party shall have suffered actual damage by reason of such
failure or such failure prejudices the Indemnifying Party's ability to settle
or defend such claim.
9.4.2. COUNSEL.
The Indemnifying Party shall have the right to undertake, by
counsel or other representatives of its own choosing and reasonably acceptable
to the Indemnified Party, the defense of all such Losses at the Indemnifying
Party's risk and expense. In the event the Indemnifying Party elects to
undertake such defense, the Indemnified Party shall cooperate with and furnish
reasonable assistance to the Indemnifying Party in defense of such Losses.
9.4.3. RIGHT TO DEFEND.
In the event that the Indemnifying Party shall elect not to
undertake such defense, or, within a reasonable period of time after notice
from the
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Indemnified Party of any such Losses, shall fail to defend, the Indemnified
Party (upon further written notice to the Indemnifying Party) shall have the
right to undertake the defense, compromise or settlement of such Losses, by
counsel or other representatives of its own choosing and reasonably acceptable
to the Indemnifying Party, on behalf of and for the account and risk of the
Indemnifying Party (subject to the right of the Indemnifying Party to assume
defense of such Losses at any time prior to settlement, compromise or final
determination thereof). In such event (i) the Indemnifying Party shall pay to
the Indemnified Party, in addition to the other sums required to be paid
hereunder, the reasonable costs and expenses of third parties incurred by the
Indemnified Party in connection with such defense, compromise or settlement as
and when such costs and expenses are so incurred, and (ii) the Indemnifying
Party shall cooperate with and furnish reasonable assistance to the Indemnified
Party in defense of such Losses.
9.4.4. NON-MONETARY HARM.
Anything in this SECTION 9.4 to the contrary notwithstanding,
(i) if there is a reasonable probability that Losses may materially and
adversely affect the Indemnified Party other than as a result of money
damages or other money payments, the Indemnified Party shall have the right, at
its own cost and expense, to participate with the Indemnifying Party in the
defense, compromise or settlement of the Losses, (ii) the Indemnifying Party
shall not, without the Indemnified Party's written consent, settle or compromise
any Losses or consent to entry of any judgment which does not include as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Party of a release from all liability in respect of such Losses in
form and substance reasonably satisfactory to the Indemnified Party, (iii) in
the event that the Indemnifying Party undertakes defense of any Losses, the
Indemnified Party, by counsel or other representative of its own choosing and at
its sole cost and expense, shall have the right to consult with the Indemnifying
Party and its counsel or other representatives concerning such Losses, and the
Indemnifying Party and the Indemnified Party and their respective counsel or
other representatives shall cooperate with respect to the defense of such Losses
and use their reasonable efforts in light of the prevailing circumstances to
incorporate suggested modifications if such modifications would not adversely
affect the Indemnifying Party, and (iv) in the event that the Indemnifying Party
undertakes defense of any Losses, the Indemnifying Party shall have an
obligation to keep the Indemnified Party informed of the status of the defense
of such Losses and furnish the Indemnified Party with all documents, instruments
and information that the Indemnified Party shall reasonably request in
connection therewith.
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10. TERMINATION
10.1. TERMINATION.
Subject to the provisions of SECTION 10.2 hereof, this
Agreement may, by written notice given at or prior to the Closing in the manner
hereinafter provided, be terminated at any time prior to the Closing:
(a) by mutual written consent of the parties hereto; or
(b) by Seller, on the one hand, or by Buyer, on the other
hand, if the Closing shall not have occurred on or before September 30, 1996;
provided, that such failure to close is not a result of a breach of this
Agreement by the party or parties seeking to terminate the Agreement.
10.2. EFFECT OF TERMINATION.
In the event this Agreement is terminated as provided in
SECTION 10.1, this Agreement shall be deemed null, void and of no further force
or effect, and the parties hereto shall be released from all future obligations
hereunder, provided, however, that the obligations of Buyer and Seller set
forth in SECTIONS 11.2, 11.3 and 3.14 shall survive such termination. The
parties hereto shall have any and all remedies to enforce such obligations
provided at law or in equity or otherwise (including, without limitation,
specific performance).
11. GENERAL PROVISIONS
11.1. ADDITIONAL ACTIONS, DOCUMENTS AND INFORMATION.
Each of the parties hereto agrees that it will, at any time,
prior to, at or after the Closing Date, take or cause to be taken such further
actions, and execute, deliver and file or cause to be executed, delivered and
filed such further documents and instruments and obtain such consents, as may
be reasonably requested in connection with the consummation of the purchase and
sale contemplated by this Agreement or in order to fully effectuate the
purposes, terms and conditions of this Agreement.
11.2. BROKERS.
Neither Seller nor Buyer have engaged or incurred any liability
(for any brokerage fees, finders' fees, commissions or otherwise) to, any
broker, finder or agent in connection with the transactions contemplated by
this Agreement. Seller agrees to indemnify Buyer, and Buyer agrees to
indemnify Seller, against any claims asserted against the other party(ies) for
any brokerage fees, finders' fees,
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commissions or similar liabilities incurred by the indemnified party with
respect to any person purporting to act or to have acted for or on behalf of
the indemnifying party in connection with the transactions contemplated by this
Agreement.
11.3. EXPENSES.
Each party hereto shall pay its own legal, accounting, broker
and other professional fees and expenses incurred in connection with this
Agreement and in the preparation for and consummation of the transactions
provided for herein.
11.4. NOTICES.
All notices, demands, requests, or other communications
which may be or are required to be given or made by any party to any other
party pursuant to this Agreement shall be in writing and shall be hand
delivered, mailed by first-class registered or certified mail, return receipt
requested, postage prepaid, delivered by overnight courier, addressed as
follows:
(i) If to Buyer:
MindSpring Enterprises, Inc.
1430 W. Peachtree, Suite 400
Atlanta, GA 30309
Attention: Charles Brewer
Facsimile: (404) 815-8805
(ii) If to Seller:
Nando
127 West Hargett Street, Suite 406
Raleigh, NC 27601
Attn: Christian Hendricks
President and Publisher
with a copy to: McClatchy Newspapers, Inc.
2100 Q Street
Sacramento, CA 95816
Attn: Karole Morgan-Prager
General Counsel
or such other address as the addressee may indicate by written notice to the
other parties.
Each notice, demand, request, or communication which shall be
given or made in the manner described above shall be deemed sufficiently given
or made for all purposes at such time as it is delivered to the addressee (with
the return
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receipt, the delivery receipt, or the affidavit of messenger being deemed
conclusive but not exclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
11.5. WAIVER.
No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Agreement or under any
other instrument or document given in connection with or pursuant to this
Agreement shall impair any such right, power or privilege or be construed as a
waiver of any default or any acquiescence therein. No single or partial
exercise of any such right, power or privilege shall preclude the further
exercise of such right, power or privilege, or the exercise of any other right,
power or privilege. No waiver shall be valid against any party hereto unless
made in writing and signed by the party against whom enforcement of such waiver
is sought and then only to the extent expressly specified therein.
11.6. BENEFIT AND ASSIGNMENT.
No party hereto shall assign this Agreement, in whole or in
part, whether by operation of law or otherwise, without the prior written
consent of the other parties hereto, except that Buyer may assign this
Agreement to any entity or person that acquires substantially all of the Assets
from Buyer; and any purported assignment in violation of the foregoing shall be
void.
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns as
permitted hereunder. No person or entity other than the parties hereto is or
shall be entitled to bring any action to enforce any provision of this
Agreement against any of the parties hereto, and the covenants and agreements
set forth in this Agreement shall be solely for the benefit of, and shall be
enforceable only by, the parties hereto or their respective successors and
assigns as permitted hereunder.
11.7. ENTIRE AGREEMENT; AMENDMENT.
This Agreement, including the Schedules and Exhibits hereto and
the other instruments and documents referred to herein or delivered pursuant
hereto, contains the entire agreement among the parties with respect to the
subject matter hereof and supersedes all prior oral or written agreements,
commitments or understandings with respect to such matters. No amendment,
modification or discharge of this Agreement shall be valid or binding unless
set forth in writing and duly executed by the party or parties against whom
enforcement of the amendment, modification or discharge is sought.
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11.8. SEVERABILITY.
If any part of any provision of this Agreement or any other
contract, agreement, document or writing given pursuant to or in connection
with this Agreement shall be invalid or unenforceable under applicable law,
such part shall be ineffective to the extent of such invalidity or
unenforceability only, without in any way affecting the remaining parts of such
provisions or the remaining provisions of said contract, agreement, document
or writing.
11.9. HEADINGS.
The headings of the articles, sections and subsections
contained in this Agreement are inserted for convenience only and do not form a
part or affect the meaning, construction or scope thereof.
11.10. REMEDIES CUMULATIVE.
The remedies provided herein shall be cumulative, and shall not
preclude any party from asserting any other rights or seeking any other
remedies against the other party or such other party successors or permitted
assigns, pursuant to this Agreement, as provided under other agreements, and as
provided by applicable law. Nothing contained herein shall preclude a party
from seeking equitable relief, where appropriate.
11.11. GOVERNING LAW.
This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto, shall be governed by and
construed under and in accordance with the laws of the State of North Carolina,
excluding the choice of law rules thereof.
11.12. SIGNATURE IN COUNTERPARTS.
This Agreement may be executed in separate counterparts, none
of which need contain the signatures of all parties, each of which shall be
deemed to be an original, and all of which taken together constitute one and
the same instrument. It shall not be necessary in making proof of this
Agreement to produce or account for more than the number of counterparts
containing the respective signatures of, or on behalf of, all of the parties
hereto.
11.13. TIME OF THE ESSENCE.
Time is of the essence with respect to this Agreement.
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IN WITNESS WHEREOF, each of the parties hereto has executed
this Asset Purchase Agreement, or has caused this Asset Purchase Agreement to
be duly executed and delivered in its name on its behalf, all as of the day and
year first above written.
BUYER
MINDSPRING ENTERPRISES, INC.
By: /s/ MICHAEL S. MCQUARY
--------------------------
Name: Michael S. McQuary
------------------------
Title: President & COO
-----------------------
SELLER
THE NEWS AND OBSERVER
PUBLISHING COMPANY
By: /s/ KAROLE MORGAN-PRAGER
--------------------------
Name: Karole Morgan-Prager
------------------------
Title: Secretary
-----------------------
The undersigned hereby consents and agrees to the terms of SECTION 3.14 hereof.
MCCLATCHY NEWSPAPERS, INC.
By: /s/ KAROLE MORGAN-PRAGER
---------------------------------
Name: Karole Morgan-Prager
-------------------------------
Title: General Counsel & Secretary
------------------------------
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ANNEX I
SCHEDULE OF DEFINITIONS
AFFILIATE shall mean, with respect to an entity, any person or
entity which directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with such entity. For
purposes of this definition, "control" means possession, directly or
indirectly, of power to direct or cause the direction of management or policies
(whether through ownership of voting securities, by agreement or otherwise).
AGREEMENT shall mean the Asset Purchase Agreement entered into
as of the date hereof by and between Buyer and Seller.
ASSETS shall mean, collectively, all right, title, benefit and
interest of Seller in and to the following assets, rights, benefits and
privileges, both tangible and intangible, wherever situated or located, owned,
used, held for use or otherwise held by Seller, other than the Excluded Assets:
(a) All Seller Contracts and the Buyer Leases; and
(b) All books, papers, files and records directly relating to
the Assets, including, but not limited to, customer lists.
ASSIGNMENT AND ASSUMPTION OF CONTRACTS shall mean that certain
Assignment and Assumption of Contracts, dated as of the Closing Date and
executed by Seller, substantially in the form attached hereto as Exhibit A.
ASSIGNMENT DOCUMENTS shall mean, collectively, this Agreement
and the Assignment and Assumption of Contracts.
ASSUMED LIABILITIES shall mean each of the liabilities and
obligations of Seller set forth on SCHEDULE 12.1; provided, however, that in no
event shall Buyer assume any of Seller's liabilities or obligations relating to
(a) the payment of Taxes with respect to any period prior to the Closing Date,
(b) any of Seller's Plans or Other Arrangements, which liabilities or
obligations are due to any of Seller's current (active or nonactive), former or
retired employees for any period prior to the Closing Date, or (c) any
liabilities under any Seller Contract or any Lease with respect to services
rendered, or events occurring, prior to the Closing Date.
BUSINESS shall have the meaning specified in the recitals.
BUYER shall mean MindSpring Enterprises, Inc.
<PAGE> 44
BUYER DOCUMENTS shall mean, collectively, this Agreement, the
Assignment and Assumption of Contracts, the Confidentiality and Non-competition
Agreement and, the Buyer Leases.
BUYER LEASES shall mean, collectively, the Real Estate Lease in
the event that Buyer exercises its Option therefor in a timely fashion and each
Sublease for which Buyer exercises its Option in a timely fashion.
CLAIMS shall mean any claim or other assertion of liability by
a third party.
CLOSING shall mean the closing of the purchase, assignment and
sale of the Assets contemplated hereunder.
CLOSING DATE shall mean the time and date on which the Closing
takes place, as established by SECTION 8.1.
CLOSING SUBSCRIBER FILE shall have the meaning set forth in
SECTION 3.16.
CODE shall mean the Internal Revenue Code of 1986, as amended,
and all Laws promulgated pursuant thereto or in connection therewith.
COMMON CONTROL ENTITY shall mean any trade or business under
common control (as such term is defined in Section 4.14(b) or 4.14(c) of the
Code) with Seller.
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT shall mean that
certain Confidentiality and Non-competition Agreement, dated as of the Closing
Date and executed by Buyer, Seller substantially in the form attached hereto as
Exhibit C.
CONTINUING EMPLOYEE shall have the meaning specified in SECTION
3.11.
CONTINUING SUBSCRIBERS shall mean the Nando.net Subscribers who
remain Buyer's customers and are current in their payments to Buyer for
services as of the First Measurement Date.
EMPLOYEES shall have the meaning specified in SECTION 4.4.
ENCUMBRANCES shall mean any mortgages, pledges, liens, claims,
security interests, agreements, restrictions, defects in title, easements,
restrictions, encumbrances, or charges; provided, however, "Encumbrances" shall
not include any (i) liens for current taxes and assessments not yet due and
payable, including but not limited to, liens for nondelinquent ad valorem taxes
and nondelinquent statutory liens arising other than by reason of any default
on the part of Seller or
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its Affiliates, (ii) such liens, minor imperfections of title, or easements on
real property, leasehold estates, or personality as do not in any material
respect detract from the value thereof and do not in any material respect
interfere with the present use of the property subject thereto, (iii)
materialmen's, mechanics', workmen's, repairmen's, employees', carriers',
warehousemen's and other like liens arising in the Ordinary Course of Business
or relating to any construction, rebuilding or repair of any property leased
pursuant to the Leases or of the Assets, so long as any such lien does not
materially impair the value of such leased property or the Assets, and (iv)
rights of the other parties under the Leases and the other leases and
agreements included in the Seller Contracts (other than such rights arising in
connection with a default thereunder by Seller or an event, which with notice
or the passage of time, would constitute a default thereof by Seller, except
for any such rights relating to any failure to obtain a consent required to
assign such Leases and Seller Contracts to Buyer, which failure is in
accordance with the terms of this Agreement).
ENVIRONMENTAL LAWS shall mean any laws (including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act), including any plans, other criteria, or guidelines promulgated
pursuant to such Laws, now in effect relating to pollution, protection of the
environment or public health and safety, including laws relating to the
generation, production, use, storage, treatment, transportation or disposal of
Hazardous Materials.
ERISA shall mean the Employee Retirement Income Security Act of
1974, as amended, and all Laws promulgated pursuant thereto or in connection
therewith.
EXCLUDED ASSETS shall mean all of Seller's right, title and
interest in and to the assets set forth on SCHEDULE 12.2.
FIRST MEASUREMENT DATE shall mean the first day of the third
calendar month following the Closing Date.
FIRST PROMISSORY NOTE shall mean the promissory note in the
form attached hereto as Exhibit D in the original principal amount equal to the
Purchase Price minus One Hundred Thousand Dollars ($100,000.00).
GOODWILL shall have the meaning specified in the definition of
"ASSETS".
GOVERNMENTAL AUTHORITY shall mean any agency, board, bureau,
court, commission, department, instrumentality or administration of the United
States government, any state government or any local or other governmental body
in a state, territory or possession of the United States or the District of
Columbia.
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HAZARDOUS MATERIALS shall mean any wastes, substances or
materials (whether solids, liquids or gases) that are deemed hazardous, toxic,
pollutants or contaminants, including, without limitation, substances defined
as "hazardous wastes," "hazardous substances," "toxic substances," "radioactive
materials," or other similar designations in, or otherwise subject to
regulation under, any Environmental Laws. "Hazardous Materials" includes
polychlorinated biphenyls (PCBs), asbestos, lead-based paints, and petroleum
and petroleum products (including, without limitation, crude oil or any
fraction thereof).
INDEMNIFIED PARTY and INDEMNIFYING PARTY shall have the
respective meanings specified in SECTION 9.4.1.
IRS shall mean the Internal Revenue Service.
LAWS shall mean all foreign, federal, state and local statutes,
laws, ordinances, regulations, rules, orders, determinations, writs,
injunctions, awards (including, without limitation, awards of any arbitrator),
judgments and decrees applicable to the specified persons or entities and to
the businesses and assets thereof (including, without limitation, Laws relating
to the sale, leasing, ownership or management of real property; employment
practices, terms and conditions, and wages and hours; building standards, land
use and zoning; and safety, health and fire prevention), but specifically
excluding Environmental Laws.
LEASES shall mean the leases described on SCHEDULE 4.10.
LOSSES shall mean any and all demands, actions or causes of
action, suits, proceedings, investigations, arbitrations, assessments, losses,
damages (including diminution in value), liabilities, obligations (including
those arising out of any action, such as any settlement or compromise thereof
or judgment or award therein) and the reasonable costs and expenses of an
Indemnified Party associated therewith, including, without limitation,
interest, penalties and reasonable attorneys' fees and disbursements.
MCCLATCHY shall have the meaning specified in SECTION 3.14.
MULTIEMPLOYER PLAN shall mean a Plan that is a "multiemployer
plan" as such term is defined in Section 3(37) of ERISA.
NANDO.NET SUBSCRIBERS shall mean the Nando.net account holders
identified on the Closing Subscriber File.
NEW SUBSCRIBERS FEE shall have the meaning specified in SECTION
3.20.
NEW SUBSCRIBERS shall mean new subscribers in the
Raleigh-Durham Triangle Area (i) who sign up for one of Buyer's standard
dial-up Internet access
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<PAGE> 47
service plans during the first calendar month following the Closing Date and,
when signing up for such plan, mention one of Seller's newspaper advertisements
which describe Buyer's promotion to waive its standard sign up fee for new
dial-up customers in the Raleigh-Durham Triangle Area and (ii) who are current
in their payments to Buyer for services as of the Second Measurement Date. In
addition, all New Subscribers shall be deemed not to be Continuing Subscribers.
OPTIONS shall have the meaning specified in SECTION 3.18.
ORDINARY COURSE OF BUSINESS shall mean, with respect to Seller
(i) with respect to any period prior to the date of this Agreement, the
ordinary course of business consistent with past practices of Seller, and (ii)
with respect to any period from and after the date of this Agreement up to and
including the Closing Date, the ordinary course of business consistent with
past practices of Seller and the practices of a reasonable business person in
similar situations.
OTHER ARRANGEMENT shall mean a benefit program or practice
providing for bonuses, incentive compensation, vacation pay, insurance,
restricted stock, stock options, employee discounts, company cars, tuition
reimbursement or any other prerequisite or benefit (including, without
limitation, any fringe benefit under Section 132 of the Code) to employees,
officers or independent contractors of Seller that is not a Plan.
PENSION PLAN shall mean a Plan that is an "employee pension
benefit plan" as such term is defined in Section 3(2) of ERISA.
PLAN shall mean any plan, program or arrangement, whether or
not written, that is or was (a) an "employee benefit plan" as such term is
defined in Section 3(3) of ERISA, and (b)(i) which was or is established or
maintained by Seller or a Common Control Entity at least in part for the
benefit of employees of Seller, or (b)(ii) to which Seller or a Common Control
Entity contributed or was obligated to contribute or to fund or provide
benefits at least in part for the benefit of employees of Seller.
PROMISSORY NOTES shall mean the First Promissory Note and
Second Promissory Note, collectively.
PSINET shall mean PSINet Inc.
PURCHASE PRICE shall have the meaning specified in SECTION 2.2.
QUALIFIED PLAN shall mean a Plan that is a Pension Plan and
that satisfies, or is intended by Seller or a Common Control Entity to satisfy,
the requirements for tax qualification described in Section 401 of the Code.
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<PAGE> 48
RALEIGH-DURHAM TRIANGLE AREA shall mean the local telephone
calling area encompassed by Raleigh, North Carolina, Durham, North Carolina,
Chapel Hill, North Carolina, Southern Pines, North Carolina, and Rocky Mount,
North Carolina.
REAL ESTATE LEASE shall mean, upon timely exercise of Buyer's
Option relating thereto, that certain Real Estate Lease relating to the Chapel
Hill location, substantially in the form attached hereto as Exhibit E.
SEC shall mean the Securities and Exchange Commission.
SECOND MEASUREMENT DATE shall mean the first day of the fourth
calendar month following the Closing Date.
SECOND PROMISSORY NOTE shall mean the promissory note in the
form attached hereto as Exhibit G in the original principal amount equal to the
aggregate New Subscriber Fee owed by Buyer to Seller pursuant to SECTION 3.20
hereof.
SECURITY AGREEMENT shall mean that certain Security Agreement
dated the Closing Date and executed by Buyer and Seller substantially in the
form attached hereto as Exhibit B.
SECURITIES OFFERING shall mean the offering of Buyer's
securities to the public pursuant to a registration statement to be filed with
the SEC.
SELLER shall mean The News and Observer Publishing Company.
SELLER CONTRACTS shall mean the customer contracts to which
Seller is a party that are specified on SCHEDULE 4.11 or that are entered into
in the Ordinary Course of Business after the date hereof and that are accepted
by Buyer, but specifically excluding any Excluded Assets.
SELLER DOCUMENTS shall mean, collectively, this Agreement, the
Assignment and Assumption of Contracts, the Confidentiality and Non-competition
Agreement and the Buyer Leases.
SELLER INFORMATION shall have the meaning specified in SECTION
3.8.1
SUBLEASE shall mean, collectively, upon timely exercise by
Buyer of its Options relating thereto, those certain Subleases, executed by
Seller and Buyer relating to the Raleigh, Triangle Park and Southern Pines
locations, each substantially in the form attached hereto as Exhibit F.
TAXES shall mean all federal, state, local and foreign taxes
(including, without limitation, income, profit, franchise, sales, use, real
property, personal
-6-
<PAGE> 49
property, ad valorem, excise, employment, social security and wage withholding
taxes) and installments of estimated taxes, assessments, deficiencies, levies,
imports, duties, license fees, registration fees, withholdings, or other
similar charges of every kind, character or description imposed by any
Governmental Authorities, and any interest, penalties or additions to tax
imposed thereon or in connection therewith.
TRANSITION PERIOD shall mean the period beginning on the
Closing Date and continuing until the First Measurement Date.
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<PAGE> 1
EXHIBIT 10(ee)
ASSIGNMENT AND ASSUMPTION OF CONTRACTS AND LEASES
THIS ASSIGNMENT AND ASSUMPTION OF CONTRACTS AND LEASES
("Assignment") is entered into as of September 1, 1996 by PSINET INC., a New
York corporation ("Assignor") and MINDSPRING ENTERPRISES, INC., a Delaware
corporation ("Assignee").
WHEREAS, Assignor and Assignee have entered into that certain
Asset Purchase Agreement, dated as of June 28, 1996, as amended (the "Purchase
Agreement"), which provides, among other things, for the assignment to Assignee
by Assignor, and the assumption by Assignee, of Assignor's right, title and
interest in the Assets (as defined in Annex I therein), including those assets
conveyed by this Assignment;
NOW, THEREFORE, in consideration of the mutual agreements set
forth herein and the payment by Assignee of the Purchase Price (as defined in
Section 2.2 of the Purchase Agreement), the receipt and sufficiency of which is
hereby acknowledged, and in further consideration of the mutual covenants and
agreements contained in the Purchase Agreement, and pursuant to the terms of
the Purchase Agreement, Assignor does hereby bargain, sell, assign, transfer,
convey and deliver to Assignee and its successors and assigns the contracts set
forth in Schedule 4.12 attached hereto (the "Assigned Contracts") and the
leases set forth in Schedule 4.10 attached hereto (the "Assigned Leases"), and
all of Assignor's right, title and interest in and to the Assigned Contracts
and the Assigned Leases.
TO HAVE AND TO HOLD the same unto the Assignee, its successors
and assigns, for their exclusive use and benefit forever.
Assignor fully and generally warrants to Assignee the right
and title to the Assigned Contracts and the Assigned Leases unto Assignee, its
successors and assigns, for their exclusive use and benefit forever.
Assignor does hereby agree, from and after the date hereof
upon the request of Assignee, to execute such other documents as Assignee may
require in order to obtain the full benefit of this Assignment and Assignor's
obligations hereunder.
The representations and warranties regarding the Assigned
Contracts and the Assigned Leases contained in the Purchase Agreement are
incorporated herein by reference.
The Assignee accepts the assignment of all the Assignor's
right, title and interest in and to the Assigned Contracts and the Assigned
Leases and assumes the obligations of the Assignor under the Assigned Contracts
and the Assigned Leases from and after the date hereof. Assignee shall not
assume or be
<PAGE> 2
deemed to assume any obligations of Assignor with respect to the Assigned
Contracts or the Assigned Leases except as specified herein.
The Schedules attached hereto and referred to herein are
incorporated by reference and made part of this Assignment.
To facilitate execution, this Assignment may be
executed in counterparts, and it shall be sufficient that the signature on
behalf of each party hereto appear on one or more such counterparts. Each of
such counterparts shall be deemed an original, but all of such counterparts
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, Assignor has caused this Assignment to be
executed as of the day and year first above written.
ASSIGNOR:
PSINET INC.
By: /s/ HAROLD S. WILLS
---------------------------------
Name: Harold S. Wills
-------------------------------
Title: C.O.O.
------------------------------
ASSIGNEE:
MINDSPRING ENTERPRISES, INC.
By: /s/ CHARLES M. BREWER
-------------------------------
Charles M. Brewer
Chairman & Chief Executive
Officer
- 2 -
<PAGE> 3
Assigned Leases
Schedule 4.10
Lease Agreement between Performance Systems International, Inc. (PSINet Inc.)
and Pennsylvania Dental Service Corporation dated March 30, 1995 relating to 23
Old Depot Road, New Cumberland, Pennsylvania 17070.
<PAGE> 4
SOL000501904
O F F I C E / F L E X B U I L D I N G
L E A S E A G R E E M E N T
Dated March 30, 1995
-------------------------
Between
PENNSYLVANIA DENTAL SERVICE CORPORATION
"Landlord"
and
PERFORMANCE SYSTEM INTERNATIONAL, INC.
"Tenant"
Relating to
23 Old Depot Road
New Cumberland, Pennsylvania 17070
<PAGE> 5
O F F I C E
L E A S E A G R E E M E N T
Part I
MADE and executed this 30th day of March, 1995.
By and between PENNSYLVANIA DENTAL SERVICE CORPORATION, a Pennsylvania
corporation, d/b/a Delta Dental of Pennsylvania, having its principal place of
business at One Delta Drive, Mechanicsburg, Pennsylvania 17055, herein called
"Landlord"; and PERFORMANCE SYSTEMS INTERNATIONAL, INC., a New York
corporation, having its principal place of business at 510 Huntmar Park Drive,
Herndon, Virginia 22070, herein called "Tenant".
Landlord does hereby Lease unto Tenant the "Premises" at the "Rent"
for the "Term" for the "Permitted Use" upon and under the Terms and Conditions
set forth in this Part I and Part II of the lease agreement (collectively the
"Lease") all as follows:
<TABLE>
<S> <C>
1. Premises:
1.1 Location: 23 Old Depot Road, Township of
Fairview, County of York, New
Cumberland, Pennsylvania 17070
1.2 Tenant's Rentable Square Footage: 30,025 Square Feet
1.3 Building Rentable Square Footage: 30,025 Square Feet
1.4 Tenant's Pro-Rata Share of Building: 100 Percent (100%)
2. Improvements:
2.1 ( X ) Premises leased with existing improvements.
2.2 ( ) Improvements by Landlord to be completed for
occupancy by _______________.
3. Term:
3.1 Number of Years: Two (2) Years
3.2 Term Begins: April 15, 1995
3.3 Term Ends: April 14, 1997
3.4 Termination: At any time following the first six (6)
months of the Lease Term, Tenant shall have the right
to terminate this Lease Agreement with at least sixty
(60) days prior written notice to Landlord.
4. Rent:
4.1 Base Rent for Entire Term: $531,600.00
4.2 Monthly Installment: April 15, 1995 through April
14, 1996 -- $21,500.00
April 15, 1996 through April 14, 1997 -- $22,800.00
4.3 Additional Rent:
All annual operating costs over the first year
operating costs for the Premises, as more fully
described in Section 4.2 of Part II.
4.4 Security Deposit: $43,000.00
5. Permitted Use: Office Space
6. Leasehold Furnishings: Landlord agrees that Tenant shall have
the right to use any personal property or furnishings of
Landlord located on the Leased Premises, including office
furnishings, equipment and movable office partitions. Tenant
shall be entitled to change the configuration of the office
partitions, subject, however, to the prior approval of
Landlord which shall not be unreasonably withheld, conditioned
or delayed. Tenant agrees to reimburse Landlord for any
damage or destruction of Landlord's personal property, except
for customary wear and tear. Tenant further
</TABLE>
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<PAGE> 6
agrees that it shall not pledge, assign or encumber any
personal property belonging to Landlord during Tenant's
occupancy of the Leased Premises.
IN WITNESS WHEREOF, intending to be legally bound, the Landlord and
Tenant have caused this Part I presents to be signed by their duly authorized
officers or agents and their appropriate seals to be hereunto affixed, the day
and year first above written.
PENNSYLVANIA DENTAL SERVICE
CORPORATION,
"Landlord"
3/30/95 By: [sig]
- -------------------------- ---------------------------------
Date
PERFORMANCE SYSTEMS INTERNATIONAL, INC.,
"Tenant"
President By: [sig]
- -------------------------- ----------------------------------
Title Officer/Partner
Secretary Attest: [sig]
- --------------------------- -------------------------------
Title Officer/Partner
-3-
<PAGE> 7
PART II
OF
LEASE DATED March 30, 1995
between
PENNSYLVANIA DENTAL SERVICE CORPORATION, "Landlord" and
PERFORMANCE SYSTEMS INTERNATIONAL, INC., "Tenant"
1. PREMISES.
The Landlord does hereby lease unto the Tenant and the Tenant does
hereby lease from the Landlord the Premises with the improvements erected
thereon, which is outlined in red on Exhibit "A", attached hereto and made a
part hereof, on the terms and conditions set forth in Parts I and II.
2. IMPROVEMENTS.
Tenant accepts the Premises "as-is." Notwithstanding the foregoing,
Landlord represents and warrants that the Premises are not in violation of any
applicable laws.
3. TERM.
Tenant is to have and to hold the Premises for the Term set forth in
Section 3.1 of Part I and beginning and ending as set forth in Sections 3.2 and
3.3 of Part I. If the Term shall begin on a date other than set forth in
Section 3.2 of Part I, the parties shall by stipulation certify the date on
which the Term has begun and in the absence of such stipulation the Term shall
conclusively presume to begin on the date set forth in Section 3.2 of Part I.
4. RENT.
4.1 Minimum Rent: The parties agree that the Minimum Rent (the
"Rent") for the Premises shall be as set forth in Section 4.1 of Part I, and so
long as Tenant is not in default Tenant shall pay such rent in the equal
monthly installments as set forth in Section 4.2 of Part I, in advance, on the
first day of each calendar month during the Term; provided, however, that the
rent for the first month of the Term shall be paid upon the signing of this
Lease.
4.2 Additional Rent: Beginning with the second year of occupancy,
Tenant shall pay Additional Rent, for the operation and maintenance of or with
respect to the Premises as stipulated in Section 4.3 of Part I.
4.3 Operating Expenses: Beginning with the second year of
occupancy, Tenant agrees to pay as Additional Rent, in addition to the base
rental set forth in this lease, the increase in the annual operating costs for
the Premises over the first year's actual expenses for the following: all Real
Estate taxes, fees or assessments; all Fire, Casualty, Liability, and Boiler
Insurance Premiums attributable specifically to the Building or allocated by
Landlord to the Building in the event of a Blanket Policy existing for a group
of Properties; periodic maintenance of hearing, ventilation and cooling
systems; snow removal and lawn maintenance; costs of furnishing water and
sewer, and other utility services to the extent not provided for in Section
5.1; and the cost of any other items attributable to operating or maintaining
the Premises.
The items of Additional Rent as provided in this Section 4.2 shall be
billed to Tenant by Landlord (whether or not such items have been incurred by
the time of billing) each month or at such intervals as Landlord shall, in its
sole discretion, deem appropriate. In the event total billings with respect to
an item of such additional rent shall exceed, or be less than, the actual
charge incurred for which Tenant is responsible, excess payments received from
Tenant shall be credited toward
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<PAGE> 8
subsequent billing (with any net excess at the end of the Lease term being
repaid to Tenant) and deficits shall be included with the next (or any
subsequent) billing or billings. Tenant shall have (10) days after receipt of
such statement to reimburse Landlord for these costs, after which time interest
will be applied to said late payment in accordance with Section 4.1 of this
Lease Agreement.
4.4 Security Deposit: Simultaneously with the execution of this
Lease, Tenant shall deposit with Landlord in accordance with Section 4.4 of
Part I such security deposit which shall be considered as security for the
payment and performance by Tenant of all Tenant's obligations, covenants,
conditions and agreements under the Lease. Upon the expiration of the term
hereof, Landlord shall (provided that Tenant is not in default under the terms
hereof) return and pay back such security deposit to Tenant within fifteen (15)
days, less such portion thereof as Landlord shall have used to make good any
default by Tenant with respect to any of Tenant's aforesaid obligations,
covenants, conditions and agreements. In the event of any default by Tenant
hereunder during the term of this Lease, Landlord shall have the right, but
shall not be obligated, to consider the security deposit as prepaid additional
rent and apply all or any portion of the monies available to cure such default,
in which event Tenant shall be obligated promptly to deposit with Landlord the
amount necessary to restore the security deposit to its original amount. In
the event of the sale or transfer of Landlord's interest in the Property,
Landlord shall have the right to transfer the security deposit to such
purchaser or transferee, in which event Tenant shall look only to the new
Landlord for the return of the security deposit and Landlord shall thereupon be
released from all liability to Tenant for the return of such security deposit.
Landlord shall set up a separate escrow account for the security deposit, with
interest earned to be accrued to the Tenant's benefit as part of the security
deposit.
5. UTILITIES AND SERVICES.
5.1 Utilities: Landlord shall furnish the Premises with
electricity, heating and air conditioning and water service, for the normal use
and occupancy of the Premises as general offices. Landlord reserves the right,
without any liability to Tenant, and without being in breach of any covenant of
this Lease, to interrupt or suspend service of any of the heating, ventilating,
air-conditioning, electric, sanitary, or other Building systems serving the
Premises, or the rendition of any of the other services required by Landlord
under this Lease, whenever and for so long as may be necessary by reason of
accident, emergencies, strikes or the making of repairs or changes which
Landlord is required by this Lease or by law to make or in good faith deems
advisable, or by reason or difficulty in securing proper supplies of fuel,
steam, water, electricity, labor or supplies, or by reason of any other cause
beyond Landlord's reasonable control, including without limitation mechanical
failure and governmental restrictions on the use of materials or the use of any
of the Building systems.
In each instance, however, Landlord shall exercise reasonable
diligence to eliminate the cause of interruption and to effect restoration of
service, and shall give Tenant reasonable notice, when practicable, of the
commencement and anticipated duration of such interruption. Tenant shall not
be entitled to any diminution or abatement of rent or other compensation or
damages nor shall this Lease or any of the obligations of the Tenant be
affected or reduced by reason of the interruption, stoppage or suspension of
any of the Building systems or services arising out of the causes set forth in
this paragraph. Notwithstanding the foregoing, if this interruption continues
for a period of time in excess of four (4) business days, Tenant may terminate
this Lease upon forty-eight (48) hours written notice.
5.1.1. The cost of separately metered electrical service
shall be paid by Tenant promptly upon being billed therefor, by the utility
company, and is not included as an expense under Section 4.3.
-5-
<PAGE> 9
5.2 Repairs: Landlord shall maintain in good repair at its sole
cost and expense: roof, foundation, exterior walls, downspouts and gutters;
provided, however, that Tenant shall be required to make repairs to the roof,
foundation, exterior walls, downspouts and gutters within thirty (30) days of
written notice by Landlord, if such repairs are occasioned by any act or
negligence by Tenant, its officers, employees, agents, customers or invitees.
The Tenant shall at its sole cost and expense maintain in good repair the waste
disposal systems, lighting and doors. Tenant shall return the Premises in good
condition, ordinary wear and tear excepted, and shall professionally clean the
carpets. In the event that Tenant fails to comply with any terms of this
paragraph then Landlord shall undertake such repairs and cleaning with Tenant
being liable for all costs thereof.
5.3 Heating, Ventilation and Air Conditioning Maintenance.
Landlord shall procure and keep in effect, a standard preventative maintenance
contract (See Exhibit "D"), on all heating and air conditioning equipment.
Landlord shall pay for this expense for the first year of occupancy, but in the
event of any increase in expense for this contract and repairs related thereto
after the first year of Tenant's occupancy, Landlord shall bill Tenant for this
increase in Additional Rent.
5.4 Clean Condition: The Tenant shall keep the Premises in a
clean, sanitary and safe condition. Tenant shall comply with all requirements
of law, ordinances and regulations, including those rules and regulations
attached hereto and referred to as Exhibit "E" and including those relating to
occupational safety and health which are Tenant's obligation under this Lease.
There shall be no outside storage, including above-ground storage tanks. In
the event the Tenant fails to comply with any terms of this paragraph within
thirty (30) days written notice of said violation(s), then Landlord shall
undertake such steps which are necessary to rectify the violation(s) with
Tenant being liable for all cost thereof, including any penalty or fine(s)
associated with said violation(s) and any expenses incurred by Landlord to
enforce this provision, whether court costs, attorneys' fees or any other cost
of collection and enforcement.
5.5 Janitorial Service:
TENANT'S OBLIGATION: Tenant is responsible for janitorial
services and trash removal from the Premises.
5.6 Snow Removal and Lawn Maintenance:
LANDLORD'S OBLIGATION: Landlord shall mow lawns, trim
shrubbery, weed where appropriate and remove snow from roadways and parking
areas in accordance with the minimum requirements set forth in Exhibit G. Such
snow removal and lawn maintenance service shall be included in the additional
rent as described in Part II, 4.2 and 4.3.
TENANT'S OBLIGATION: Tenant shall remove snow from the
walkways.
5.7 Security System:
Tenant shall contract directly with the vendor of the security
system now installed on the Premises. Tenant shall be responsible for
responding to emergency calls and paying service fees related to the security
system.
6. INSURANCE.
6.1 Fire Insurance: Tenant will not conduct or permit to be
conducted, any activity, or place any equipment in or about the Premises or the
Property, which will, in any way, increase the rate of fire insurance or other
insurance on the Property; and if any increase in the rate of fire insurance or
other insurance is stated by any insurance company or by the applicable
Insurance Rating Bureau to be due to any activity or equipment of, in or about
the Premises or the Property, such statement shall be conclusive evidence that
the increase in such rate is due to such activity or equipment of result
thereof, Tenant shall be liable for such increase in the cost of fire
insurance, or
-6-
<PAGE> 10
other insurance, which increase shall be considered additional rent payable
hereunder, and Tenant shall reimburse Landlord therefor upon demand.
6.2 Indemnity: The Tenant covenants with the Landlord that
Landlord shall not be liable for any damage of liability of any kind or for any
injury to or death of persons or damage to property of Tenant or any other
person during the term of this Lease, from any cause whatsoever, by reason of
the use, occupancy and enjoyment of the Premises by the Tenant or any person
thereon or holding under said Tenant, and that Tenant will indemnify and save
harmless the Landlord from all liability whatsoever, on account of any such
real or claimed damage or injury and from all liens, claims and demands arising
out of the use of the Premises and its facilities, or any repairs or
alterations which the Tenant may make upon said Premises, but the Tenant shall
not be liable for damage or injury occasioned by the negligence of the Landlord
and its designated agents, contractors, or employees. This obligation to
indemnify shall include reasonable attorney's fees and investigation costs and
all other reasonable costs, expenses and liabilities from the first notice that
any claim or demand is to be made or any be made.
6.3 Waiver of Subrogation: Each party waives rights of
subrogation against the other with respect to any insured risks to the extent
such waiver does not invalidate such insurance or reduce the proceeds.
6.4 Tenant Insurance: Tenant further covenants and agrees that
from and after the delivery of the Premises from Landlord to Tenant, Tenant
will carry and maintain, at its sole cost and expense, the following types of
insurance, the amounts specified and in the form hereinafter provided for:
6.4.1 Public Liability and Property Damage: Public
liability and property damage insurance with a combined single limit of One
Million dollars ($1,000,000.00) insuring against any and all liability of the
insured with respect to said Premises or arising out of the maintenance, use or
occupancy thereof. All such bodily injury liability insurance and property
damage liability insurance shall specifically insure the performance by Tenant
of the indemnity provisions as to liability for injury to or death of persons
and injury or, damage to property in this Section 6 contained.
6.4.2 Tenant Improvements: Tenant shall maintain casualty
issuance on all of Tenant's leasehold improvements, trade fixtures, merchandise
and personal property. In addition, Tenant shall maintain fire and extended
coverage insurance for Landlord's furniture provided for Tenant's use.
Landlord has provided Tenant with a Schedule (Schedule "A") listing the items
to be insured and their insurable value which constitute Landlord's furniture
hereunder.
6.4.3 Policy Form: All policies of insurance provided for
herein shall be issued by insurance companies with general policyholders'
rating of not less than A and a financial rating of AAA as rated in the most
current available "Best's Insurance Reports", and qualified to do business in
the State of Pennsylvania, and shall be issued in the names of Landlord, Tenant
and such other persons or firms as Landlord specifies from time to time.
Insurance provided by Tenant pursuant to Section 6.4.1 and covering Landlord's
furniture, as described in Section 6.4.2., shall name Landlord as insured.
Executed copies of such policies of insurance or certificates hereof shall be
delivered to the Landlord no later than ten (10) days before delivery of
possession of the Premises to Tenant and thereafter no less than thirty (30)
days prior to the expiration of the term of such policy. All public liability
and property damage policies shall contain a provision that the Landlord,
although named as an insured, shall nevertheless be entitled to recovery under
said policies for any loss occasioned to it, its servants, agents and employees
by reason of the negligence of the Tenant. As often as any such policy shall
expire or terminate, renewal or additional policies shall be procured and
maintained by the Tenant in like manner and to like extent. All policies of
insurance delivered to the Landlord must contain a provision that the company
writing said policy will give to the Landlord twenty (20) days' notice in
writing in advance of any cancellation or lapse or the effective date of any
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<PAGE> 11
reduction in the amounts of insurance. All public liability, property damage
and other casualty policies shall be written as primary policies, not
contributing with and not in excess of coverage which the Landlord may carry.
6.4.4 Failure of Tenant to Obtain: In the event that
Tenant fails to procure and/or maintain any insurance required by Section 6.4.1
and for Landlord's furniture pursuant to Section 6.4.2, or fails to carry
insurance required by law or governmental regulation, Landlord may (but without
obligation to do so) at any time or from time to time, and without notice,
procure such insurance in which event Tenant shall repay the Landlord all sums
so paid by Landlord, together with interest thereon as provided in Section 20
hereof, and any incidental costs or expenses incurred by Landlord in connection
therewith, within ten (10) days following Landlord's written demand to Tenant
for such payment.
6.5 Blanket Policy: Notwithstanding anything to the contrary
contained within this Section 6, the Tenant's obligations to carry the
insurance provided for herein may be brought within the coverage of a so called
blanket policy or policies of insurance carried and maintained by the Tenant;
provided, however, that the Landlord and others hereinabove mentioned shall be
named as an additional insured thereunder as their interests may appear and
that the coverage afforded the Landlord will be not reduced or diminished by
reason of the use of such blanket policy of insurance, and provided further
that the requirements set forth herein are otherwise satisfied. The Tenant
agrees to permit the Landlord at all reasonable times to inspect the policies
of insurance of the Tenant covering risks upon the Premises for which policies
or copies thereof are not required to be delivered to the Landlord.
7. FIRE INSURANCE.
Landlord shall procure and maintain in full force and effect
non-assessable fire insurance policies, which insurance shall include
protection against those occurrences covered by standard "extended coverage"
clause. Such policies shall name Landlord as the insured. In the event of
loss, insurance proceeds shall be held in escrow by Landlord's mortgagee, if
any, and otherwise by an escrow agent selected by Landlord pending repair of
the damages by Landlord, and upon completion the proceeds shall be paid to
Landlord or paid to Landlord's mortgagee if required by it. In the event
Landlord or Tenant elects to terminate the Lease as hereinafter provided,
insurance proceeds shall be paid immediately to Landlord or its mortgagee if
required by it.
8. USE OF BUILDING.
The parties hereto agree that the Premises may be used for the
permitted use set forth in Section 5 of Part I and uses incidental thereto.
Tenant shall not permit the Premises to be vacant.
9. ALTERATIONS.
Tenant shall not make any alterations, additions or improvements to
the Premises without the prior obtained written consent of Landlord which
consent shall not be unreasonably withheld or delayed. In no event shall any
such alteration, addition, or improvement weaken the structure of or impair any
Building on the Property. Any alteration, addition, or improvement to the said
Premises shall be done in accordance with the applicable City, County and State
laws and ordinances, and building and zoning rules and regulations. Tenant
hereby expressly assumes full responsibility for all damages and injuries which
may result to any person or property by reason of or resulting from
alterations, additions, or improvements made by it to the Premises, and shall
hold Landlord harmless with respect thereto. Tenant shall procure all waivers
from Mechanics Liens prior to commencement of any construction at the Property,
and copies of said waivers shall be delivered to Landlord prior to
commencement. All alterations shall remain on the Premises at the termination
of the Lease and shall become the property of the Landlord, unless at the time
the consent for the
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<PAGE> 12
alteration was given by Landlord, the Landlord directed the alterations be
removed at the termination of the lease in which event they shall be removed
and the Premises shall be returned, at the expense of Tenant, to its condition
prior to the alteration. All machines, equipment, and supplies to be placed
upon the Premises by the Tenant shall remain the property of the Tenant and
shall be removed if so directed by Landlord at the termination of the Lease;
but the Tenant agrees to repair any damage to the Premises caused by the
removal of such machines, equipment, or supplies, provided any air conditioners
shall remain even if supplied by Tenant.
10. SIGNS AND EXTERIOR ATTACHMENTS.
10.1 Signs: Landlord agrees to permit one outside sign per
building which shall include the name of Tenant as well as to letter the
entrance door to the Premises with the name of the Tenant. All signage must
conform to zoning and must be mounted on the building.
10.2 Exterior: Tenant shall not place or suffer to be placed on
the exterior of the Premises or upon the roof of any exterior door or wall or
on the exterior or interior of any window or common area wall, thereof any
sign, awning, canopy, marquee, advertising matter, decoration, lettering, or
any other thing of any kind (exclusive of the signs, if any, which may be
provided for in the original construction or improvement plans and
specifications approved by the Landlord and Tenant hereunder) without the
written consent of Landlord first had and obtained. Landlord hereby reserves
the exclusive right to the use of the roof and exterior walls of the building
of which the Premises are a part, for any purpose whatsoever.
10.3 Interior: Except as otherwise herein provided, Tenant shall
have the right, at its sole cost and expense, to erect and maintain within the
interior of the Premises all signs and advertising matter customary or
appropriate in the conduct of Tenant's business.
10.4 Windows: Tenant shall at all times maintain its windows and
signs in a neat, clean and orderly condition. If, as to any exterior sign,
Tenant shall fail to do so after five (5) days' written notice from Landlord,
Landlord may remove, repair, clean or maintain such exterior sign and the cost
thereof shall be payable by Tenant to Landlord upon demand as additional rent.
11. FIRE OR CASUALTY.
In case of damage to the Premises by a risk insured against under
Paragraph 7 of this Part II, Landlord, unless it shall otherwise elect as
hereinafter provided, shall repair or cause to be repaired such damages with
reasonable dispatch after receiving from the Tenant written notice of the
damage. If the damages are such as to render the Premises untenantable, the
rent shall be abated to an extent corresponding with the period during which
and the extent to which the Premises have become untenantable; provided,
however, if such damages are caused by the carelessness or negligence or
improper conduct of Tenant or of a Subtenant, or the agents, employees,
visitors, invitees or licensees of Tenant or of a Subtenant, then
notwithstanding such damages and untenantability, Tenant shall be liable for
rent without abatement. In the event of damage to the Premises to the extent
of more than fifty (50%) percent of the value of such Premises or if the
Tenant's operations cannot reasonably be conducted from the balance of the
Premises, Tenant shall give Landlord written notice of the damage (but failure
to give notice shall not be binding upon Landlord), after which either party
may determine with reasonable dispatch, that the Lease shall be terminated, in
which event all rent shall abate and the Lease terminate as of the date of the
occurrences of the event causing such damage.
12. EMINENT DOMAIN.
The Tenant may at its option terminate this Lease if any portion of
the Premises is condemned by any governmental body or by any other body or
organization possessing the power of
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<PAGE> 13
condemnation provided such condemnation substantially impairs the use of
enjoyment by Tenant or the Premises. In case of taking through eminent domain
of all, or any portion, of the Premises, the Landlord shall notify the Tenant
in writing of such taking. Within sixty (60) days after receipt of such
written notice, the Tenant shall notify the Landlord, in writing, whether such
taking through eminent domain in the opinion of the Tenant substantially
impairs its use or enjoyment of the Premises. If Landlord and Tenant agree
that Tenant's use or enjoyment is substantially impaired, then Tenant shall
give written notice to Landlord of its intent to vacate the Premises, which
notice shall include the time when it desires to terminate the Lease, which
time shall not be earlier than physical work (other than surveying and staking
out) shall be instituted on the Premises by the concerning authority, nor later
than sixty (60) days after the same time. The failure of the Tenant to give
notice set forth above as required and within the time limit set forth above,
shall be conclusively construed as a decision on the Tenant's part that such
taking does not substantially impair its use or enjoyment of the Premises. On
the other hand, the giving of such notice by the Tenant does not bind the
Landlord as to the correctness of the Tenant's decision that its use or
enjoyment of the Premises is substantially impaired by the taking, and Landlord
may object to same and demand a decision be made by a proper authority. Tenant
shall not be entitled to receive any part of any award or awards that may be
made to or received by Landlord, relating to the fair market value of the real
estate taken or severance damage to the remaining real estate of Landlord.
Tenant at its expense may take independent proceedings against the public
authority exercising the power of eminent domain to prove and establish any
damage Tenant may have sustained relating to Tenant's business and relocation
expenses.
13. TOXIC WASTES, ETC.
13.1 Tenant shall not use any portion of the Premises for the
production, storage, deposit or disposal of toxic, dangerous or hazardous
substances or pollutants, including, but not limited to, nuclear fuel or
wastes, and no substances or pollutants shall ever be placed or located upon
the Premises by the Tenant, which substances or pollutants, if found upon the
Premises or if found elsewhere and determined to have come from the Premises,
would subject Landlord to any damages, penalties or liabilities under any
applicable federal, state or local law, or under any civil action.
13.2 Tenant shall not bury or place any underground storage tanks
on the Premises whether or not such storage tanks would be subject to the
jurisdiction of the Environmental Protection Agency under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 and the
Resource Conservation and Recovery Act, as amended.
13.3 Tenant shall not place on or within the Premises any hazardous
material including, but not limited to, ureaformaldehyde foam insulation,
polychlorinated biphenyls and asbestos.
13.4 Tenant shall indemnify, defend and hold harmless Landlord, its
successors and assigns from and against any and all claims, legal or equitable,
damages, liability or loss (including reasonable attorney's fees) arising out
of or in any way connected to any condition caused or created by the Tenant's
failure to comply with Sections 13.1, 13.2 and 13.3 during any portion of the
lease term as set forth in Sections 3.2 and 3.3 of Part I, including, but not
limited to damage liability or loss under all federal, state and local
environmental laws, strict liability and common law.
14. NON-LIABILITY OF LANDLORD.
(a) The Landlord shall not be liable to the Tenant, any officer,
employee, agent, invitee, licensee or visitor of the Tenant, or any other
person, for damage or injury to any person or property caused by any act,
omission or neglect of the Tenant, its contractor, employees or agents,
invitee, licensee, or visitor, or any happening in any manner on the Premises
and Tenant shall indemnify, defend and hold harmless Landlord from any claim,
loss or liability therefor provided, however,
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<PAGE> 14
Landlord shall be liable for its own affirmative negligence as well as that of
its employees, contractors, agents and visitors.
(b) All property kept, stored or maintained on the Premises shall
be so kept, stored or maintained at the risk of the Tenant only, and the
Landlord shall not be liable for any loss or damage to the Tenant or his
property.
15. SUBLEASE.
15.1 The Tenant shall not have the right to sell, assign, transfer,
mortgage, pledge, sublease or sublet the Premises without the Landlord's prior
written consent. In the event that the Tenant proposes to sublease or sublet
the Premises or any portion thereof, Tenant shall give to Landlord its written
notice which notice shall set forth (i) the identity, business and financial
condition of the proposed sub-tenant, (ii) the terms and conditions of the
proposed sublease, (iii) any other relevant information requested by Landlord
and (iv) an offer by Tenant and proposed sub-tenant for the release of Tenant
from this Lease and the establishment of the Landlord-Tenant relationship
between Landlord and proposed Sub-Tenant under the terms and conditions of the
proposed sublease. Landlord shall have the right to (a) withhold consent, if
reasonable, (b) to grant consent (in which case Tenant and Landlord shall
divide equally any increase in rent net or leasing commission, build-out
expenses and attorneys' fees), or (c) to release Tenant from this Lease and
accept the offer of the proposed sub-tenant to establish the Landlord-tenant
relationship between Landlord and proposed Sub-Tenant under the terms and
conditions of the proposed sublease. In the event that the proposed sublease
is of a portion of the Premises, and Landlord consents to the sublease, the
rent in this Lease shall be prorated between the portion proposed to be
subleased and the balance of the Premises on a square foot basis.
15.2 Tenant shall pay all of Landlord's cost and expenses
(including reasonable attorneys' fees) in connection with any proposed
subletting or assignment.
16. VOLUNTARY OR INVOLUNTARY ASSIGNMENT.
Neither this Lease nor any interest therein shall be assignable or
otherwise transferable by operation of law or by voluntary assignment or for
the benefit of creditors without the written consent of the Landlord, and such
inhibition against voluntary assignment includes and comprehends any and every
assignment which might otherwise be affected or accomplished by bankruptcy,
receivership, attachment, execution or other judicial process or proceeding.
If any assignment for the benefit of its creditors should be made by the
Tenant, or if a voluntary or involuntary petition in bankruptcy, or for
reorganization, or for an arrangement should be filed by or against the Tenant,
or if the Tenant should be adjudicated a bankrupt or insolvent, or if a
receiver is appointed of or for the Tenant, or for all or a substantial part of
its property, or if any such assignment or transfer by operation of law should
occur, then and in any such event, the Landlord may at its option, terminate
this Lease by notice to the Tenant. The provisions of this paragraph shall not
apply to any of the rights, titles and interest of the Landlord in, to or under
this Lease.
17. SURRENDER AT LEASE TERMINATION.
The Tenant shall, upon the termination of the Term of this Lease,
surrender to the Landlord the Premises and al building apparatus, machinery,
equipment and fixtures stated thereon except items which may be removed under
Section 9 of Part II. All alterations, improvements, and other additions which
may be made or installed by either party to, in, upon or about the Premises
shall either be removed by Tenant under Section 9 of Part II or become the
property of the Landlord as the Landlord may elect and if Landlord elects to
keep the same they shall be surrendered to the Landlord by the Tenant without
any damage, injury or disturbance thereto, or payment therefor, and otherwise
Tenant shall repair any damage caused by removal.
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<PAGE> 15
18. DEFAULT OF TENANT.
18.1 Events of Default. If Tenant shall (i) fail to pay any
monthly installment of rent (as required by Section 4 hereof) or shall fail to
timely make any other payment required by the terms and provisions hereof
(regardless of whether or not any legal or formal demand has been made
therefor), or (ii) violate or fail to perform any of the other terms,
conditions, covenants or agreements herein made by Tenant, or (iii) abandon or
vacate the Premises, and such violation or failure of such abandonment shall
continue for a period of fifteen (15) days after written notice thereof to
Tenant by Landlord, which may be accomplished by sending notice to last known
address of Tenant and posting notice on the door of the Premises, or (iv) make
or consent to an assignment for the benefit of creditors or a common law
composition of creditors, or a receiver of Tenant's assets is appointed, or
Tenant files a voluntary petition in any bankruptcy or insolvency proceeding,
or an involuntary petition in any bankruptcy or insolvency proceeding is filed
against Tenant and not discharged by Tenant within sixty (60) days, or
adjudicated a bankrupt, then Tenant shall be held in default, and not
withstanding any other remedies allowable by law, and in any of said events,
this Lease shall, at the option of Landlord, cease and terminate and the
provisions of this Section 18 shall automatically operate as a notice to quit
(any notice to quit, or of Landlord's intention to re-enter, being hereby
expressly waived) and Landlord may proceed to recover possession under and by
virtue of the provisions of the laws of the State of Pennsylvania or by such
other proceedings, including re-entry and possession, as may be applicable.
In the event any such failure to pay rent or other default on the part
of Tenant occurs more than two (2) times in any twelve (12) month period,
Landlord shall not be required during the remainder of the term of this Lease
to send written notice before proceeding with its remedies under this Section
18. If Landlord elects to terminate this Lease, everything contained in this
Lease on the part of Landlord to be done and performed shall cease without
prejudice, however, to the right of Landlord to recover from Tenant all rent
and any other sums accrued up to the time of termination or recovery of
possession by Landlord, whichever is later.
Should this Lease be terminated before the expiration of the term of
this Lease by reason of Tenant's default as hereinabove provided, or if Tenant
shall abandon or vacate the Premises before the expiration or termination of
the term of this Lease, the Premises may be relet by Landlord for such rent and
upon such terms as are not unreasonable under the circumstances and, if the
full rental hereinabove provided and any of the costs, expenses, or damages
indicated below, shall not be realized by Landlord, Tenant shall be liable for
all damages sustained by Landlord, including without limitation, deficiency in
rent, reasonable attorneys' fees, brokerage fees, and expenses of placing the
Premises in first class rentable condition.
Any damage or loss or rent sustained by Landlord may be recovered by
Landlord, at Landlord's option, at the time of the reletting, or in separate
actions, from time to time, as said damage shall have been made more easily
ascertainable by successive relettings, or, at Landlord's option, may be
deferred until the expiration of the term of this Lease, in which event Tenant
hereby agrees that the cause of action shall not be deemed to have accrued
until the date of expiration of said term.
The provision contained in this paragraph shall be in addition to and
shall not prevent the enforcement of any claim Landlord may have against Tenant
for anticipatory breach of the unexpired term of this Lease.
18.2 Waiver. No waiver by Landlord of any breach of any covenant,
condition or agreement herein contained shall operate as a waiver of such
covenant, condition, or agreement itself, or of any subsequent breach thereof.
No payment by Tenant or receipt by Landlord of a lesser amount than the monthly
installment of rent herein stipulated shall be deemed to be other than on
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<PAGE> 16
account of rent, nor shall any endorsement or statement on any check or letter
accompanying a check for payment of rent be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such rent or to pursue any other remedy
provided in this Lease. Payment received by Landlord when Tenant is in arrears
shall be applied as Landlord determines. No re-entry by Landlord, and no
acceptance by Landlord of keys from Tenant, shall be considered an acceptance
of a surrender of the Lease.
18.3 Right of Landlord to Cure Tenant's Default. If Tenant
defaults in the making of any payment or in the doing of any act herein
required to be made or done by Tenant, then Landlord may, but shall not be
required to, make such payment or do such act, and charge the amount of the
expense thereof if made or done by Landlord, with interest thereon at the rate
per annum which is three percent (3%) greater than the prime rate then in
effect at Hamilton Bank, in Lancaster, Pennsylvania, from the date paid by
Landlord to the date of payment thereof by Tenant; provided, however, that
nothing herein contained shall be construed or implemented in such a manner to
allow Landlord to charge or receive interest in excess of the maximum legal
rate then allowed by law. Such payment and interest shall constitute
additional rent hereunder due and payable with the next monthly installment of
rent, but the making of such payment or the taking of such action by Landlord
shall not operate to cure such default or to stop Landlord from the pursuit of
any remedy to which Landlord would otherwise be entitled.
18.4 Late Payments. If Tenant fails to pay any installment of rent
(in accordance with Section 4) by the tenth (10th) day of the calendar month,
or ten (10) days after such installment has become due and payable, Tenant
shall pay to Landlord a late charge of five percent (5%) of the amount of such
installment if paid before the first of the next month; thereafter, such unpaid
installment shall bear interest at a rate per annum which is three percent (3%)
greater than the prime rate then in effect at Hamilton Bank, in Lancaster,
Pennsylvania, from the date such installment becomes due and payable to the
date of payment thereof by Tenant; provided however, that nothing herein
contained shall be construed or implemented in such a manner as to allow
Landlord to charge or receive interest in excess of the maximum legal rate then
allowed by law. Such late charge and interest shall constitute additional rent
hereunder due and payable with the next monthly installment or rent.
19. HOLDING OVER.
In the event that Tenant shall not immediately surrender the Premises
on the date or expiration or the term hereof. Tenant shall, by virtue of the
provisions hereof, become a tenant by the month at one hundred fifty percent
(150%) of the monthly rent, including all additional rent in effect during the
last month of the term of this Lease, which said monthly tenancy shall commence
with the first day next after the expiration if the term of this Lease.
Tenant, as a monthly tenant, shall be subject to all of the terms, conditions,
covenants and agreements of this Lease. Tenant shall give to Landlord at least
thirty (30) days written notice of any intention to quit the Premises, and
Tenant shall be entitled to thirty (30) days written notice of any intention to
quit the Premises, unless Tenant is in default hereunder, in which event Tenant
shall not be entitled to any notice to quit, the usual thirty (30) days notice
to quit being hereby expressly waived. In the event that Tenant shall hold
over after the expiration of the term of this Lease, and if Landlord shall
desire to regain possession of the Premises promptly at the expiration of the
terms of this Lease, then at any time prior to Landlord's acceptance of rent
from Tenant as a monthly tenant hereunder, Landlord, at its option, may
forthwith re-enter and take possession of the Premises without process, or by
any legal process in force in the State of Pennsylvania.
20. INTEREST AND COLLECTION EXPENSES.
Interest shall accrue on any monies due from Tenant to Landlord from
the date the same are due (including rent and money advanced by Landlord to
others on account of the failure of Tenant to
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<PAGE> 17
perform hereunder) at the rate per annum which is three percent (3%) greater
than the prime rate then in effect at Hamilton Bank, in Lancaster,
Pennsylvania, until the same is paid and Tenant shall pay the interest upon
demand. If Landlord consults any attorney for the collection of any sums due
from Tenant or otherwise in connection with Tenant's performance hereunder,
Tenant shall, whether or not proceedings are instituted, reimburse Landlord the
reasonable attorney fees and court costs, if any.
21. NON-DISTURBANCE.
21.1 Offset Statement. Within ten days after request therefore by
Landlord, or in the event that upon any sale, assignment or hypothecation of
the Property and/or the Land thereunder by Landlord, an offset statement shall
be required from Tenant; Tenant agrees to deliver in recordable form a
certificate to any proposed mortgagee or purchaser, or to Landlord, certifying
(if such be the case) that this Lease is in full force and effect and that
there are no defenses or offsets thereto, or stating those claimed by Tenant.
21.2 Attornment. Tenant shall, at the request of any first
mortgagee or purchaser of the Premises attorn to such mortgagee or purchaser.
21.3 Subordination. Tenant's rights hereunder are subordinate to
the lien of any mortgage or mortgages, or in the lien resulting from any other
method of financing or refinancing, now or hereafter in force against the Land
and/or buildings hereafter placed upon the land of which the Premises are a
part, and to all advances made or hereunder to be made upon the security
thereof. Regardless of the self operating provision of this Paragraph, if a
prospective mortgagee requests the Tenant to sign a subordination agreement,
the Tenant shall do so promptly.
21.4 Limited Attorney-in-Fact. In the event Tenant fails to
execute such instruments or certificates to carry out the intent of Paragraphs
21.1, 21.2, and 21.3 referenced above within fifteen (15) days of Landlord's
written request to execute such instruments or certificates, then Tenant hereby
irrevocably appoints Landlord as Attorney-in-Fact for Tenant with full power
and authority to execute and deliver in the name of the Tenant any such
instruments or certificates.
21.5 No Mortgagee. Landlord represents to Tenant that as of the
date of this Lease, there is no mortgagee related to Premises. Although no
mortgage is planned, Landlord reserves its right to enter a mortgage
relationship subject to the terms herein.
22. ADDITIONAL INSTRUMENTS.
Tenant shall, at the request of Landlord, execute such additional
instruments Landlord's mortgagee may request from time to time or as may be
required or convenient hereunder not inconsistent herewith. In such event,
Landlord agrees to pay Tenant's reasonable attorney fees.
23. LANDLORD'S COVENANT OF TITLE AND QUITE ENJOYMENT.
Landlord covenants and warrants that upon the term of the Lease
commencing, it shall have full right and lawful authority to enter into this
Lease for the full term hereof, and that Landlord will be lawfully seized of
the entire Premises and will have good title thereto and that at all times when
Tenant is not in default under the Terms and during the Terms of this Lease,
Tenant's quiet and peaceable enjoyment of the Premises shall not be disturbed
or interfered with by anyone. Landlord in person or by agent shall be
permitted to enter upon the Premises at reasonable times to examine the same or
to make such repairs as are required hereunder. Landlord shall provide
reasonable advance notice except in case of emergency and be accompanied by
Tenant's authorized agent.
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<PAGE> 18
24. WAIVER OF TRIAL BY JURY.
It is mutually agreed by and between Landlord and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matter whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's
use of or occupancy of the Premises and/or any claim of injury or damage and
any other statutory remedy. It is further mutually agreed that in the event
Landlord commences any summary proceeding for non-payment of rent, Tenant will
not interpose any counterclaim of whatever nature or description in any such
proceeding.
25. LANDLORD RIGHT OF ENTRY.
Landlord shall have the right, during the term of this Lease, to
retain the sign indicating that the Premises are "Available." During said
period, interested persons shall be admitted at reasonable hours of the day to
view the Premises. Landlord shall provide reasonable advance notice except in
case of emergency and be accompanied by Tenant's authorized agent.
26. CHANGE IN OWNERSHIP.
Tenant agrees that in the event that the Premises is sold, or in the
event of any change of legal title or equitable ownership, that all obligations
herein undertaken by Landlord, including but not limited to the obligation for
the return of any security deposit paid hereunder, shall be transferred to such
purchaser or assignee, and in such event all of Landlord's obligations shall
terminate and Landlord shall be released and relieved from all liability and
responsibility to Tenant hereunder arising subsequent to the transfer of title
and Tenant shall look solely to such purchaser or assignee for the performance
of said obligations or for the enforcement thereof. Each purchaser or assignee
shall in turn have like privileges of sale, assignment and release.
27. SUCCESSORS AND ASSIGNS.
This Lease shall inure to the benefit of and shall bind the heirs,
successors and assigns of the parties to the extent that the parties' rights
hereunder may succeed and be assigned according to the terms hereof.
28. DESCRIPTIVE HEADINGS.
The descriptive headings of the several paragraphs hereof are inserted
for convenience only and shall not control or affect the meaning or
construction of any of its provisions.
29. SERVICE OF NOTICE.
If at any time after the execution of this Lease it shall become
necessary or convenient for one of the parties hereto to serve any notice,
demand or communication upon the other party, such notice, demand or
communication shall be in writing signed by the parties serving the same, sent
by United States mail, or private carrier, to the respective addresses set
forth in the preamble of Part I, or at such other address as either party may
have furnished to the other in writing as a place for the service of notice.
Any notice so mailed shall be deemed to have been given as of five (5) days
after it is deposited in the United States mail, or with private carrier, or
upon evidence of receipt by Tenant.
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<PAGE> 19
30. CONSOLIDATION.
This Part II and the accompanying Part I constitute one agreement and
may be signed in any number of counter parts and shall be construed under the
laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, intending to be legally bound, the Landlord and
Tenant have caused this Part II presents to be signed by their duly authorized
officers or agents and their appropriate seals to be hereunto affixed, the day
and year first above written.
<TABLE>
<S> <C>
PENNSYLVANIA DENTAL SERVICE CORPORATION,
"Landlord"
3/30/95 By [sig]
- ------------------------ -------------------------------------
Date
PERFORMANCE SYSTEMS INTERNATIONAL, INC.,
"Tenant"
President By [sig]
- ------------------------ -------------------------------------
Title Officer/Partner
Attest
- ------------------------ ---------------------------------
Title Officer/Partner
</TABLE>
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<PAGE> 20
EXHIBIT "D"
SPECIFICATIONS FOR H.V.A.C. MAINTENANCE AGREEMENT
The minimum requirements for servicing HVAC Systems are set forth below:
Heat Pumps/Air Conditioning Units
Filter change - Quarterly
Pressures of refrigerant - Biannually
Lubricate - Biannually
Belt condition of air handlers - Annually
Check electrical connections - Annually
3/30/95 [sig] [sig]
- ------------------- ------------------------ ---------------------
Date Landlord's Initials Tenant's Initials
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<PAGE> 21
EXHIBIT "E"
RULES AND REGULATIONS
1. No awnings or other projections shall be attached to the outside walls
or windows of the building. No curtains, blinds, shades, or screens
shall be attached to or hung in, or used in connection with, any
window or door of the space demised to any Tenant other than those
specified or supplied by Landlord. In the event such shades or
screens are specified or supplied by Landlord, removal of same at any
time will be prohibited.
2. Tenant shall not mark, paper, paint, bore into, make any alterations
or additions to, or in any way deface any part, including equipment
and fixtures, of the leased space or the building of which it forms a
part, without the prior written consent of Landlord. Tenant
specifically agrees not to use tape or add picture hangers or nails on
the interior walls to hand items on the walls. Landlord does not
object to the Tenant's using existing hardware for that purpose.
3. Neither the whole nor any part of the space demised to Tenant shall be
used for manufacturing, without prior written approval from the
Landlord, or for the sale at auction or merchandise, goods, or
property.
4. No animals of any kind shall be brought into or kept about the
building by Tenant.
5. Tenant shall not permit others to tie in to the water supply on the
Premises without prior written consent of the Landlord.
6. Tenant shall not remove, alter or replace the building standard
ceiling light diffusers in any portion of the leased space without the
prior written consent of Landlord.
7. Tenant shall immediately notify the Landlord of any serious breakage,
or fire or disorder, which comes to its attention in the Premises.
8. Tenant shall apply, at Tenant's cost, such reasonable pest
extermination measures as Tenant deems reasonably necessary.
9. Tenant shall not burn any trash or garbage of any kind in or about the
demised premises.
10. Tenant will encourage its employees to respect the property and
privacy of neighbors.
3/30/95 [sig] [sig]
- ------------------- ------------------------ ---------------------
Date Landlord's Initials Tenant's Initials
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<PAGE> 22
EXHIBIT "F"
CLEANING SPECIFICATIONS
NOT APPLICABLE
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<PAGE> 23
EXHIBIT "G"
MINIMUM LAWN CARE AND SNOW REMOVAL REQUIREMENTS
LAWN CARE:
Established turf area on all properties are to be uniformly green
during the growing season and maintained, after cutting at a height of 2-3".
Prior to cutting, the grass is to reach a height of no more than 5-6". Grass
clippings are to be removed frequently enough to maintain a thatch of no more
than one inch.
All trees and shrubs are to be neatly trimmed and shaped yearly to
present a well groomed appearance. Mulch beds are to be neatly edged, top
dressed annually with 2" of fresh mulch, and weed free.
SNOW REMOVAL:
All driveways and parking lots will be plowed if snow accumulates more
than two (2) inches. An anti-skid material such as cinders or rice stone
should be applied to icy areas and inclines to reduce the risk of accidents.
The use of salt (NaCL) is strictly prohibited on concrete sidewalks, and Tenant
shall be responsible for any damage from use of same. Potassium Chloride is
suggested as an ice melting agent. Tenant shall be responsible for sidewalks.
Landlord shall be responsible for parking lots and driveways.
3/30/95 [sig] [sig]
- ------------------- ------------------------ ---------------------
Date Landlord's Initials Tenant's Initials
-20-
<PAGE> 24
List of Contracts, Agreements, Leases, Commitments
Schedule 4.12
The customer contracts for the customers listed in the following two
(2) MindSpring Enterprises, Inc. electronic data files:
(1) psi2msp-all.906823.tar.gz.pgp (8/23/96); and
(2) pl.lst (7/26/96).
-21-
<PAGE> 1
EXHIBIT 10(ff)
BBN PLANET
SERVICE PROVIDER AGREEMENT
(DOMESTIC - BRONZE)
(JANUARY 1996)
This Agreement (the "Agreement") made this __ day of August, 1996 is entered
into by and between BBN Planet Corporation, a Massachusetts corporation, with
principal offices at 150 CambridgePark Drive, Cambridge, MA 02140, U.S.A. ("BBN
Planet") and Mindspring Enterprises, Inc., a Delaware corporation, with
principal offices at 1430 W. Peachtree St., Suite 400, Atlanta, GA 30309
("Service Provider" or "SP").
1. SERVICES
(a) Internet Connection Service. BBN Planet shall provide Service
Provider with the Internet connection service described in
Attachment 1, Part A (the "Internet Connection Service")
subject to the terms and conditions of this Agreement and any
amendments or attachments which may then be in effect.
(b) Changes The capabilities and services available through the
Internet as a whole regularly change and expand. In order to
improve and adapt the Internet Connection Service to these
changing conditions, BBN Planet may add, delete or change the
Internet Connection Service, at its sole discretion, by
providing thirty (30) days prior written notice; provided,
however, BBN Planet shall not change the price during the
Service Period (as defined in Attachment 1). In the event that
BBN Planet makes a material change to the Internet Connection
Service which SP elects not to accept, SP may terminate this
Agreement as provided for in Subsection 11(b) below.
2. PERMITTED USE
(a) Internal Use/Third Party Access. Subject to the terms and
conditions set forth herein, BBN Planet authorizes SP:
(i) to use the Internet Connection Service for its internal
business purposes;
(ii) to provide access to the Internet Connection Service to
customers of SP located in the United States for such
customers internal personal or business use ("End User
Customers"); and
(iii) to permit customers of SP ("Reseller Customers") to
provide access to the Internet Connection Service to its
customers located in the United States for such customers
internal personal or business use (together, End User
Customers and Reseller Customers are called "SP
Customers").
(b) Non-Exclusive Arrangement. SP acknowledges and understands that
this is a non-exclusive arrangement and nothing herein shall
preclude BBN Planet from providing Internet Connection Service
or related services to any third party, or from authorizing
third parties to make Internet Connection Service available to
their customers.
3. TERM
The term of the Agreement shall extend so long as any Attachment to this
Agreement remains in effect and BBN Planet is providing Internet Connection
Service.
4. PRICE, PAYMENT AND TAXES
(a) Price. The price for Internet Connection Service shall be set
forth in Section C of the Attachment then in effect.
(b) Invoices and Payment. BBN Planet will submit invoices to SP as
provided for in the Attachment then in effect. Payment shall be
made in U.S. dollars and is due net thirty (30) days from date
of invoice.
(c) Taxes. Prices payable by SP to BBN Planet under this
<PAGE> 2
Agreement are exclusive of any tax, levy, customs duty, import
tax or similar governmental charge that may be assessed by any
jurisdiction whether based on gross revenue or delivery of
services, except for net income taxes assessed on BBN Planet.
All such taxes are the responsibility of SP.
5. TRADEMARKS/PUBLICITY
(a) Use of BBN Planet's Name and Trademarks. All trademarks,
service marks and trade names identifying BBN Planet or BBN
Planet products or services (the "Marks") are the exclusive
property of BBN Planet. SP shall take no action which
jeopardizes the Marks. SP shall not use a Mark or the name of
BBN Planet in any advertising, promotional material, or public
announcement without the prior written approval of BBN Planet.
(b) Use of SP's Name. SP acknowledges that use of the Internet
Connection Service will require that BBN Planet include SP's
name in registrations and administrative filings which are
available to the public. In addition, SP agrees that BBN
Planet may include SP's name in BBN Planet marketing brochures
and literature and indicate that SP is a BBN Planet customer.
6. CONTENT RESPONSIBILITY AND INTERNET SERVICE USE RESTRICTIONS
SP acknowledges and agrees that it is solely responsible for the Content of
its transmissions which pass through the Internet Connection Service. SP
also agrees it will not use the Internet Connection Service:
(i) for illegal purposes
(ii) to transmit threatening, obscene or harassing
materials, or
(iii) to interfere with or disrupt other network users,
network services or network equipment.
Disruptions include, but are not limited to, distribution of unsolicited
advertising or chain letters, propagation of computer worms or viruses, and
using the network to make unauthorized entry into any other machine
accessible via the network.
7. CUSTOMER FLOWDOWN PROVISIONS
(a) End User Customer. Prior to providing access to the Internet
Connection Service to an End User Customer, SP shall enter
into written agreements with SP Customers in which each such
SP Customer agrees to the same provisions which SP has agreed
to in Section 6 above as well as the additional provisions set
forth in Schedule A - Flowdown Provisions.
(b) Reseller Customers In the case of Reseller Customers, SP shall
enter into a written agreement with each Reseller Customer
obligating such customers to enter into written agreements
with customers of the Reseller Customer which contain the same
terms as required of SP in Section 7(a) above.
(c) Any breach of the foregoing obligations may result in
termination of the Internet Connection Service.
8. LICENSES
In the event that SP purchases equipment from BBN Planet in conjunction with
the Internet Connection Service, BBN Planet grants SP a limited license to
use any software provided with such equipment (the "Software") subject to
the following terms and conditions:
(a) Software provided is copyrighted and licensed for use solely
on the equipment with which it is provided for Customer's end
use only.
(b) Software provided hereunder is licensed by BBN Planet from
third parties. Title to and copyright in Software remains with
BBN Planet's licensor. BBN PLANET AND ITS LICENSOR DISCLAIM
ALL WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE USE OF
SUCH SOFTWARE, INCLUDING (WITHOUT LIMITATION) ANY WARRANTIES
OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR
<PAGE> 3
PURPOSE.
(c) All limitation of liability and indemnification provisions in
this Agreement apply to BBN Planet's licensor.
(d) Customer is authorized to make one (1) copy of Software for
backup purposes only and is prohibited from further copying
and/or transfer of Software.
(e) Customer agrees it shall not reverse assemble, reverse
compile, or otherwise translate Software or any portion
thereof.
9. DISCLAIMER OF WARRANTIES AND LIMITATION OF LIABILITY
(a) BBN Planet provides services hereunder strictly on an "AS IS"
and "AS AVAILABLE" basis without any express guarantee or
assurance of quality, reliability or functionality. Except as
expressly set forth herein, SP accepts all risk, including all
risk with respect to suitability, use and performance of
Internet Connection Service. BBN PLANET DISCLAIMS ALL EXPRESS
AND IMPLIED WARRANTIES, INCLUDING WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. In any
instance involving performance or nonperformance by BBN Planet
with respect to services provided hereunder. SP's sole remedy
shall be refund of a pro rata portion of the price paid for
Internet Connection Service which was not provided. Refunds
will be provided only for periods of lost service greater than
twenty-four (24) hours.
(b) BBN Planet will not be liable for any damage that SP or an SP
Customer may suffer arising out of use, or inability to use,
the Internet Connection Service Except for intentional acts by
BBN Planet personnel, BBN Planet will not be liable for
unauthorized access to SP's transmission facilities or premise
equipment or for unauthorized access to or alteration, theft
or destruction of SP's or SP Customers' data files, programs,
procedures or information through accident, fraudulent means
or devices, or any other method, regardless of whether such
damage occurs as a result of BBN Planet's negligence. BBN
Planet shall not be liable for indirect, consequential,
incidental, or special damages even if advised of the
possibility in advance. BBN Planet shall not be liable for any
lost property or data of SP or SP Customers. BBN Planet's
liability for damages to SP for any cause whatsoever,
regardless of form of action, shall be limited to the greater
of $25,000 or the amounts paid by SP to BBN Planet hereunder
during the twelve (12) month period preceding the incident
giving rise to the claim for damages.
10. INDEMNIFICATION
(a) Indemnification by BBN Planet. BBN Planet will defend,
indemnify and hold SP harmless from and against any claim or
demand asserted by any third party that any hardware or
software provided to SP hereunder infringes any U.S.
copyright, patent, trade secret or other intellectual property
right.
(b) Indemnification by SP. SP agrees to defend, indemnify and hold
BBN Planet harmless from and against any claim or demand
asserted by any third party due to or arising out of use by SP
or an SP Customer of services provided hereunder.
(c) Conditions. The indemnification obligations set forth above
are contingent upon compliance with the following conditions
by the party seeking indemnification:
(i) Providing prompt written notice of a claim;
(ii) Providing all information and evidence within its
control which is necessary for the indemnifying party
to conduct a defense; and
(iii) Providing the indemnifying party with sole control of
the defense and all related settlement obligations.
<PAGE> 4
11. TERMINATION
(a) Termination By Either Party. If any of the events below occur
with respect to one party, then the other party may terminate
this Agreement effective immediately upon the delivery of
written notice:
(i) A party becomes insolvent; files a voluntary petition
in bankruptcy; proposes any dissolution, liquidation,
reorganization or recapitalization; has filed against
it an involuntary petition in bankruptcy, or a
receiver is appointed or takes possession of the
party's property, and such petition is not dismissed
or stayed within ninety (90) days of such filing,
appointment or taking possession; makes an assignment
for the benefit of creditors, or is adjudicated as
bankrupt; or takes any similar action under the laws
of any jurisdiction.
(ii) Material breach of this Agreement which is not
remedied within thirty (30) days after written notice
(describing the breach with particularity) has been
given.
(iii) SP is merged into or acquired by another entity or
there is a substantial change in SP's direct or
indirect ownership or control of its voting securities
or the sale of substantially all of its assets.
(b) Termination By SP. SP may terminate this Agreement upon thirty
(30) days written notice in the event that BBN Planet makes
material changes to the Interact Connection Service which SP
elects not to accept.
(c) Effect of Termination. Upon termination SP agrees to cease all
use of the Internet Connection Service and to return any BBN
Planet-provided equipment and software.
12. EXPORT COMPLIANCE
The transfer of technology across national boundaries, including
electronic transmission thereof, is regulated by the U.S. Government.
SP agrees not to export or re-export (including by way of electronic
transmission) any technology transmitted through Internet Connection
Service without first obtaining any required export license or
governmental approval. SP agrees it will not directly or indirectly
export or re-export such technology to Iran, Iraq, the Federal Republic
of Yugoslavia (Serbia and Montenegro), the People's Republic of China,
Sudan, Syria or any of those countries listed from time-to-time in
supplements to Part 770 to Title 15 of the Code of Federal Regulations
in Country Groups Q, S, W, Y or Z. The parties acknowledge that the
foregoing lists are subject to regulatory change from time to time and
agree to update the lists as appropriate.
13. GENERAL
13.1 Governing Law; Amendments; Severability. This Agreement shall
be governed by the laws of the Commonwealth of Massachusetts
excluding its conflicts of laws provisions. This Agreement may
only be modified by a written amendment duly executed by SP
and BBN Planet. If any provision of this Agreement shall be
invalid or unenforceable, the remainder of this Agreement
shall not be affected.
13.2 Survival. Following termination or expiration of this
Agreement, neither party shall have any further obligations or
rights with respect to the other party under this Agreement
except as set forth in Sections: 4, 5, 8, 9, 10, and 13.
13.3 Force Majeure. If the performance of any obligation hereunder
is interfered with by reason of any circumstances beyond the
reasonable control of the party affected, then the party
affected shall be excused from such performance to the extent
necessary, provided that the party so affected shall use
reasonable and diligent efforts to remove such causes of
nonperformance.
<PAGE> 5
13.4 Assignment. SP may not assign this Agreement or any of its
rights, duties or obligations hereunder without the prior
written consent of BBN Planet. Any unauthorized attempt to
assign this Agreement or any of SP's rights, duties, or
obligations without such prior written consent shall be
considered void. BBN Planet may terminate this Agreement and
any licenses granted under this Agreement by notice to SP
effective on the date such notice is given if SP assigns this
Agreement or any of its rights, duties or obligations
hereunder without the prior written consent of BBN Planet.
13.5 Confidentiality. SP acknowledges that the terms of this
Agreement are confidential and agrees it shall hold such
information in confidence and not disclose such information to
any third party.
13.6 Nonwaiver. Failure of either part to assert any of its rights
on any one occasion under this Agreement shall in no way be
construed as a waiver of such rights on any other occasion,
nor shall a waiver of any right of either party constitute or
be deemed a waiver of any other right.
13.7 Independent Third Party. This Agreement creates no
relationship of joint venture, partnership or agency between
the parties. SP acknowledges and agrees that it will not
represent itself as a representative or agent of BBN Planet
for any purpose.
13.8 Notices. All notices under this Agreement shall be deemed
given if delivered by hand or five days after posting when
sent by registered or certified mail, postage prepaid, to
persons authorized by the receiving party to receive such
notices. These persons are as follows:
BBN Planet SP
BBN Planet Corporation Mindspring Enterprises, Inc.
Attn: Contracts Department 1430 West Peachtree Street
150 CambridgePark Drive Suite 400
Cambridge, MA 02140 U.S.A. Atlanta, Georgia 30309 USA
(617) 873-2000 404/815-0770
13.9 Entire Agreement. This Agreement constitutes the entire
understanding between the parties relating to the subject
matter of this Agreement and supersedes all prior writings,
negotiations, or understandings with respect thereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives, effective as of the date first set forth
above.
SP: BBN PLANET CORPORATION
By: /s/ JAMES T. MARKLE By: [sig]
------------------------------------- ---------------------------------
Name: James T. Markle Name:
----------------------------------- -------------------------------
Print or Type Print or Type
Title: Vice President Network Operations Title:
---------------------------------- ------------------------------
Date: August 6, 1996 Date:
---------------------------------- ------------------------------
(domestic DSP 1/24/96)
Attachment 1
Service Provider Agreement
(January 1996)
A BBN PLANET CORPORATION
SERVICE PROVIDER AGREEMENT
ATTACHMENT COVER SHEET
<PAGE> 6
INTERNET CONNECTION SERVICE
This Attachment to the BBN Planet Service Provider Agreement between Service
Provider and BBN Planet Corporation (the "Agreement") covers Internet
Connection Service - Bronze Service Level and is an integral part of the
Agreement. This Attachment consists of the following parts:
A. Service Description - Internet Connection Service/Bronze Service Level
B. Service Period
C. Price and Billing
D. SP Obligations
By placing its signature below, SP acknowledges that it has read and
understands each form of this Attachment and agrees to be bound.
SP: BBN PLANET CORPORATION:
By: /s/ JAMES T. MARKLE By: [sig]
---------------------------------- ------------------------------
Name: James T. Markle Name:
---------------------------------- ---------------------------
Title: Vice President Network Operations Title:
---------------------------------- ---------------------------
Date: August 6, 1996 Date:
---------------------------------- ---------------------------
(1/24/96)
Attachment 1
Service Provider Agreement
(January 1996)
A. SERVICE DESCRIPTION
Internet Advantage(SM)
Bronze Connection Service
Version 2.3
OVERVIEW
BBN Planet provides an extensive range of managed Internet connectivity
services to address customers' interorganizational communications needs. BBN
Planet's Internet Advantage(SM) Bronze Connection Service allows customers to
communicate with millions of Internet users and countless information resources
around the world. The service is seamlessly integrated into the customer's LAN
environment, and is delivered by the industry's most experienced and
professional installation, network operations, field service, and technical
support staff. Internet Advantage leverages BBN's long-standing Internet
delivery and operational expertise to provide the highest quality service to
our customers.
The Bronze Service level has been designed for customers who view the Internet
as a strategic resource and require a high level of reliability, quality, and
performance to use the Internet as a vehicle for collaboration and commerce,
but who prefer to manage elements of the service in-house, and retain control
of the Internet access premises equipment.
Bronze level customers own and assume operational management responsibility for
their Internet access premises equipment. Bronze level customers may customize
their service by selecting several advanced capabilities on an a la carte
basis.
For management purposes, the service demarcation point for BBN Planet's
Internet Advantage Bronze Connection Service is the communications circuit
interface at the customer's facility (i.e., it does not include the Internet
access premises equipment).
ACTIVATION SERVICE
<PAGE> 7
BBN Planet's Internet Advantage Bronze Connection Service customers receive
tele-activation support (remotely via telephone) for the installation of their
Internet connection. Activation support services associated with
tele-activation are described below.
SITE PLANNING AND PREPARATION
Site planning information is provided to the customer's designated point of
contact. This helps customers prepare for the installation of Internet
Advantage Connection Service. Customers need to provide space and power for the
Internet access premises equipment (typically a router and CSU/DSU), an
attachment to the customer's internal local area network, and at least one
computer with TCP/IP support.
BBN Planet will perform registration of IP network numbers, domain names (up to
10 domain names per customer are included; registration of additional domain
names may be purchased in units of 10), and routing information as required for
the customer's environment.
COMMUNICATIONS CIRCUIT ORDERING
Attachment 1
Service Provider Agreement
(January 1996)
Unless otherwise agreed, BBN Planet will order (on behalf of the customer) the
communications circuit necessary for delivery of service from a qualified
telecommunications vendor. BBN Planet arranges for the telecommunications
vendor to install and terminate the circuit within close proximity of the
planned location of the premises equipment. All one-time and recurring circuit
charges, including any inside wiring charges associated with extending the
circuit from the site's normal telco demarcation point to the premises
equipment location, are passed on to the customer.
Customers who wish to order, provision, and/or directly pay for the
communications circuit themselves are discouraged from doing so. All requests
of this nature will require approval by the Internet Advantage Service Line
Manager (SLM), and be considered on an individual case basis.
Likewise, because of variability in telecommunications carrier quality,
customers who wish to influence the selection by BBN Planet of the
telecommunications vendor chosen to provision the communications circuit will
also require formal approval by the Internet Advantage SLM.
Because BBN Planet has established agreements with specific telecommunications
vendors at particular Points of Presence (POPs), we cannot always accede to
customer requests to connect their premises via a specific telecommunications
provider. If approval is granted to permit a customer's connection into a BBN
Planet POP via an unsupported telecommunications provider, all commitments
regarding installation and/or repair times for these circuits are invalidated.
IP ADDRESS ASSIGNMENT
Current Internet Registry IP address allocation guidelines encourage all
Internet Service Providers (ISPs) to loan IP network numbers from their
assigned address space to customers for the duration of their Internet
connectivity contract, and to require that customers return those numbers to
the ISP upon termination of the connectivity contract. This policy ensures that
ISPs retain contiguous blocks of IP network numbers, which helps permit fast
and manageable message routing across the Internet. Consequently, customers
moving from one ISP to another should renumber their internal network into the
new ISP's address space.
Since IP addresses are in scarce supply, InterNIC also regulates the allocation
of IP address blocks to ISPs and their customers. To ensure that BBN Planet
continues to receive new IP address blocks as required, we only allocate IP
network numbers to our customers according to InterNIC guidelines. BBN Planet
works with Internet Advantage customers who don't currently possess legally
assigned, valid IP network numbers to determine the number required to support
their internetworking environment, and assigns a sufficiently-sized Class C IP
address block to the customer based on the following criteria: at least 25% of
the requested IP address space must be immediately assignable to the customer's
current network population, with a total of 50% to be assigned and utilized
within the forthcoming year. Based on these utilization criteria, customer
requests for one or two Class C IP network numbers will be routinely granted
with minimal justification. (Each Class C IP network number supports up to 254
unique IP addresses.) Written justification is required by BBN Planet for
customer requests of up to sixteen Class C IP network numbers. BBN
<PAGE> 8
Planet requires detailed justification (diagrams, rollout plans, subnetting
plans, etc.) from all customers requesting more than sixteen and fewer than
sixty-four Class C IP network numbers. By policy, BBN Planet does not delegate
blocks of sixty-four or more Class C IP network numbers to customers. BBN
Planet will assist customers in applying directly to InterNIC for very large
address blocks.
Additional IP addresses may be assignable over time to the customer as their
requirements grow.
Although assigned to the customer for the duration of their service contract
with BBN Planet, all BBN Planet-assigned IP network numbers remain an integral
part of BBN Planet's contiguous range of addresses and must be relinquished by
the customer within ninety (90) days of the date on which service expires or is
terminated. Customers who require or desire IP address portability should apply
for IP network numbers directly to InterNIC.
Attachment 1
Service Provider Agreement
(January 1996)
For customers who have legally assigned IP network numbers that they wish BBN
Planet to route as part of the Internet Advantage Bronze Connection Service,
BBN Planet will accept routing of those IP network numbers on behalf of these
customers, but will pass on any settlement and/or peering charges that may be
incurred (none exist today, but may in the future) associated with the carriage
of these extra routes.
For customers requesting that BBN Planet route IP network numbers belonging to
another ISP's address space, BBN Planet requires written permission from that
ISP to route those network numbers on the customer's behalf. For those Internet
Advantage Bronze Connection Service customers who are designated as Downstream
Service Providers (DSPs), whereby they resell Internet access services to
customers of their own via their Internet Advantage connection, BBN Planet will
only provide IP network numbers for the DSP's own internal networking purposes,
not for those of the DSP's customers.
EQUIPMENT PROVISIONING AND STAGING
Bronze Service customers are responsible for providing, configuring, and
installing their own Internet access premises equipment (CPE), and assume full
management and operational control of that equipment. Furthermore, the CPE must
comply with BBN Planet specifications. As a convenience, Bronze Service
customers may acquire the premises equipment through BBN Planet. Bronze Service
customers must maintain their premises equipment at appropriate hardware and
software revision levels to ensure interoperability with the BBN Planet
backbone network. Maintenance packages are available for all equipment
purchased through BBN Planet.
The typical Internet access premises equipment package that Bronze level
customers may purchase from BBN Planet consists of a TCP/IP router, CSU/DSU,
RJ45 loopback connector, transceiver/adapter, and associated cables. Ethernet
customers may choose between AUI or 10BASE-T and 10BASE-2 transceiver types.
Token Ring customers may select either a 4 or 16 Mbps adapter. Where a
different type of transceiver or adapter is required, the customer is
responsible for providing it.
INITIAL INTEGRATION SERVICE
BBN Planet provides initial Internet integration support for Internet
Advantage Bronze Service customers. This includes basic consultation and
assistance with the configuration of TCP/IP and SMTP software on the customer's
Internet computing systems (hosts and/or servers), which the customer is
responsible for providing, installing, and maintaining. BBN Planet does not
undertake detailed design or configuration of the customer's LAN or hosts as
part of Internet Advantage Bronze Service.
An implementation engineer (IE) and implementation coordinator (IC) are
assigned by BBN Planet to work with each Bronze Service customer during the
initial installation phase. The IC will call the customer's technical point of
contact within five business days of receipt of the order for service by BBN
Planer's Customer Provisioning organization. The IC will confirm the details of
the order and schedule a time for the customer to review technical details
pertaining to the Internet connection with the IE. The IE acts as a liaison
with the customer until the installation is complete and acceptance is
attained. The integration phase of activation is considered complete when the
criteria defined in section 2.6 below are met.
<PAGE> 9
ACCEPTANCE TESTING AND CRITERIA
Upon equipment installation, BBN Planet's Network Operations and Customer
Provisioning organizations conduct tests to ensure that the on-site customer
router can successfully communicate over the Internet Advantage Connection
Service. The acceptance test verities the proper operation of the on-site
equipment package, the local access facility, site routings, and the BBN Planet
Internet Advantage backbone infrastructure. Connection activation for Bronze
Service customers is considered complete and service billing is initiated when
the following criteria have been met:
1. The internet Advantage router and associated premises equipment are
installed at the customer site, and IP connectivity to the Internet
(including routing outside BBN Planet networks) exists. BBN Planet
verifies IP connectivity through a test that sends repeated pings
through the Internet to the customer site and verifies that the pings
were received. In cases where the premises equipment configuration
supports it, BBN Planet verifies IP routing through a traceroute test.
2. The registration of customer domain names with InterNIC has been
completed, and any BBN Planet-supplied primary or secondary DNS servers
are operational for the registered domains. For those customers who do
not possess previously-assigned domain names, BBN Planet will apply for
and register up to ten domain names on the customer's behalf. Unless
otherwise instructed by the customer, BBN Planet's Network Operations
Center (NOC) will be registered as a guardian at InterNIC for all
domain names registered by BBN Planet, which allows BBN Planet to make
any customer-requested changes. In all cases, the customer will be
listed as the primary technical and administrative contact for domains
BBN Planet registers on their behalf.
3. The customer has at least one working client implementation that
supports telnet, FTP, and WWW, or has acknowledged that they do not
intend to have one at this time.
BBN Planet's goal is to have the customer's email system operational such that
Internet SMTP mail can be sent and received from a single, specified host or
mail translation gateway within the customer's network. However, meeting this
goal is dependent upon the customer having their email system installed. BBN
Planet works with the customer in the activation planning phase to set
committed dates for various portions of the installation. During this period,
the customer is asked to coordinate their email installation dates with BBN
Planet. If the customer is unable to meet this committed schedule, installation
acceptance and service billing initiation are not deferred.
If, upon successful installation and testing of the customer's communications
circuit, the customer's Internet access premises equipment or internal LAN is
not yet ready for interconnection to the Internet, BBN Planet will not delay
billing for Internet Advantage Bronze Connection Service by more than two
weeks.
Service installation acceptance and billing will not be delayed if the
customer's NNTP news server is either not present or not functioning properly.
At acceptance, the customer's primary point of contact with BBN Planet for
operational issues becomes the Customer Support Center (CSC).
NETWORK OPERATIONS AND SERVICE
BBN Planet's network operations and technical support staff is dedicated to
providing high network availability and performance. Internet Advantage
Connection Service is monitored and maintained 24 hours per day, 365 days a
year by experienced operators, technicians, and analysts.
Internet Advantage Connection Service covers a wide geographic area with a
variety of technologies and links to other networks. BBN Planet coordinates
operations and maintenance with customer-assigned technical representatives,
vendors of telecommunications services and hardware, and operators of other
networks.
Under Internet Advantage Bronze Connection Service, BBN Planet's Network
Operations Center (NOC) performs proactive operations support and
troubleshooting of network and service infrastructure components, including all
customer access circuits.
NETWORK MONITORING
<PAGE> 10
BBN Planet uses SNMP-based software to monitor the network. This software is
coupled with additional tools to monitor non-SNMP-capable equipment, as well as
domain name servers, NNTP servers and news feeds, and other network services.
The monitoring software reports network status to operator consoles and
displays that are monitored throughout the day. Changes in the network status
are logged to provide BBN Planet with the ability to evaluate staff
responsiveness and network availability.
COMMUNICATION LINK MAINTENANCE
BBN Planet is responsible for maintaining any BBN Planet-provided
communications links between the customer's site and BBN Planet's network.
This includes problem diagnosis, and any necessary vendor interaction for
dispatch and repair.
Attachment 1
Service Provider Agreement
(January 1996)
PREMISES EQUIPMENT MAINTENANCE
Customers of Bronze Connection Service may acquire their Internet access
premises equipment through BBN Planet or from another source. When the Internet
Advantage premises equipment is obtained from BBN Planet, BBN Planet makes
several maintenance pricing options available to the customer.
The BBN Planet operations staff diagnoses failures with the assistance of the
customer's technical liaison, and determines whether equipment replacement is
required. The customer is responsible for the actual replacement. For failures
of premises equipment obtained from BBN Planet and covered by BBN Planet
maintenance, Internet Advantage Bronze Connection Service customers receive
replacement equipment via next-business-day courier. Due to the fact that the
equipment must be uniquely and appropriately configured for the customer's
particular environment prior to shipment, if the determination to replace the
premises equipment is made after 3:00 pm Eastern time, BBN Planet will not be
able to ship the equipment until the following business day, in which case it
would be received by the customer two business days following the diagnosed
failure. Customers needing a more rapid response should consider purchasing a
four-hour, on-site service response package or one of the optional redundancy
configurations available from BBN Planet.
When the Internet Advantage premises equipment is acquired through another
source, the customer is responsible for repairing or replacing any faulty
components.
TECHNICAL SERVICES AND SUPPORT
Bronze Service is intended for customers with the internal expertise necessary
to manage an Internet connection without advanced, end-to-end support from BBN
Planet's staff of internetworking professionals. As a result, BBN Planet does
not provide Bronze level customers with on-call services for problems related
to customer premises equipment and applications. Customers requiring on-call,
end-to-end support should consider upgrading to either Internet Advantage Gold
or Silver Service levels.
SOFTWARE AND CONFIGURATION SUPPORT
BBN Planet's equipment maintenance charge covers software updates and
configuration changes as required for the router and CSU/DSU when the Internet
Advantage premises equipment is acquired through BBN Planet. At the time of
customer provisioning, premises equipment obtained through BBN Planet is
delivered with current versions of software installed. BBN Planet's software
upgrade policy for customer premises equipment does not involve routinely
upgrading CPE software as new releases become available from the manufacturer
unless not doing so impacts our ability to deliver service and/or maintain
compatibility between the CPE and the components in the BBN Planet backbone
network. This determination is made by BBN Planet's Network Engineering staff.
Similarly, customer-specific requests for CPE software upgrades to support
customer-specific Internet-based applications will be evaluated for approval by
BBN Planet's Network Engineering staff on an individual case basis.
Customers who acquire premises equipment from a source other than BBN Planet
are required to maintain that equipment's compatibility with BBN Planet's
network.
24-HOUR HOTLINE
All hotline calls are answered by a touch-tone menu system, which facilitates
<PAGE> 11
quick connection to the appropriate BBN Planet support staff. The hotline is
staffed on a 24-hour basis.
TROUBLE TICKET SYSTEM
The BBN Planet Trouble Ticket System allows Bronze Service customer
connectivity problems to be tracked from initial report through satisfactory
resolution. As the BBN Planet staff works to resolve problems, the current
status is updated in the Trouble Ticket System. The system's electronic mail
and fax interfaces allow these entries to be provided automatically to
interested customer technical contacts. Ticket status information is also
available via finger-based interfaces.
FAULT ISOLATION AND PROBLEM RESOLUTION
Attachment 1
Service Provider Agreement
(January 1996)
Bronze Service includes access line monitoring, but not the Internet-wide,
end-to-end problem diagnosis and resolution that is provided to Internet
Advantage Gold and Silver Service customers. When a problem is encountered, the
BBN Planet NOC will work toward isolating the cause to the customer's
communications circuit, the network backbone, the customer's premises
equipment, etc. If the problem is associated with the communications line or
the backbone, BBN Planet takes responsibility for managing the resolution of
the problem. In those instances where it is unclear whether an encountered
problem is caused by the premises equipment or the access line, BBN Planet
provides a loopback plug that can be inserted at the point of demarcation; this
enables the NOC to isolate the problem to either the router, the CSU/DSU, or
the communications circuit.
SECURITY EVENT INFORMATION
BBN Planet will endeavor to inform Internet Advantage customers about security
events within BBN Planet's own network as well as within the Internet at large.
Information and advisories regarding generic security problems issued by CERT
(Computer Emergency Response Team) and/or other sources are regularly reviewed
and may be distributed to customer sites by the BBN Planet operations staff.
Several distribution methods are employed (e.g., telephone, email, fax, paging,
etc.), based on the urgency and nature of the problem. Internet Advantage
Bronze customers may designate a list of up to five security contacts who will
be authorized to request site disconnection or reconnection as necessary. In
addition, the customer may pre-authorize BBN Planet to disable their Internet
connection during a security event that is deemed serious by BBN Planet without
express customer authorization at the time of the event.
ADVANCED SERVICES
The following advanced services are provided at no additional charge as part of
Internet Advantage(SM) Bronze Connection Service.
SECONDARY DOMAIN NAME SERVICE (DNS)
BBN Planet provides Bronze Service customers with secondary domain name
service; up to 10 domains and 100 kilobytes of associated zone file data are
included. This package is comprised of two components: domain name registration
and secondary DNS administration. Included in the Bronze Service level is
registration and secondary administration of up to 10 domain names. Bronze
level customers may purchase additional secondary DNS service in units of 10
domains (10-packs).
Domain name registration includes the necessary registration of domain names
with InterNIC. The customer is responsible for any initial registration and
ongoing maintenance charges from InterNIC. These are billed directly to the
customer by InterNIC.
Secondary DNS administration is maintained on multiple servers which are
physically diverse and connected to the BBN Planet backbone at different
points.
Customers may also contract with BBN Planet for primary domain name service for
an additional charge (see section 6.1 below).
For those Internet Advantage Bronze Connection Service customers who are
designated as Downstream Service Providers (DSPs), whereby they resell Internet
access services to customers of their own via their Internet
<PAGE> 12
Advantage connection, BBN Planet will only provide domain name registration and
secondary DNS administration for the DSP's own domain names, not for those of
the DSP's customers. BBN Planet will provide secondary DNS administration for
domain names registered to customers of the DSP only in those cases where the
primary DNS administration for those domain names is being provided directly by
the DSP.
NETWORK NEWS FEED
Network News represents a forum of groups that conduct national and
international dialogues on over 20,000 topics. Millions of people throughout
the world participate in this electronic bulletin board. The forum allows
people to post and read about new findings, products, services, etc., or
provide and access commentaries within a special interest group or to a wide
audience. BBN Planet offers both comprehensive and selective customer access to
these news groups.
As a prerequisite to the Network News Feed Service, the customer must install a
news server at their premises; news reading software should also be installed
on the customer's desktop PCs and/or workstations as appropriate. Once the
server is in place and the Internet Advantage service is established, BBN
Planet feeds (downloads) customer-selected news information from BBN Planet's
central news server to the customer's server via NNTP (Network News Transfer
Protocol), where it is then available to be read by all authorized users on the
customer's internal network. Note that network news articles are never directly
accessed by clients' news reading software from BBN Planet's central news
server, but rather all news must be read from the customer's news server.
BBN Planet works with the customer to determine whether the size of the
Internet access line is sufficient to meet the customer's network news
requirements. BBN Planet continues to track the customer's evolving use of news
feeds and makes recommendations on upgrading access line bandwidth to keep pace
with news feed requirements. As a point of reference, a full network news feed
may consume an average sustained bandwidth of approximately 256 kbps; many
Internet Advantage customers select partial news feeds both to conserve
bandwidth as well as to limit their employees' access to non-critical subject
materials.
Internet Advantage customers may dynamically, and on their own, make changes to
the list of news groups fed from BBN Planet's server at any time using a BBN
Planet-supplied news feed configuration tool called ICIS.
NETWORK USAGE REPORTING
Network Usage Reporting represents a traffic summary that allows customers to
track their communications circuit's utilization and peak activity periods.
With this information, customers can proactively plan access line bandwidth
upgrades as overall utilization grows. The usage report is provided weekly and
details access line utilization as a percentage of available bandwidth during
the course of the week. As this information is collected from the CPE router
using SNMP (Simple Network Management Protocol) tools, Bronze Service customers
who wish to receive these reports must provide BBN Planet with SNMP read-only
access to their router.
The standard reporting format for usage reports is a PostScript file sent to
Internet Advantage customers via email. When downloaded to a PostScript-capable
laser printer, this file is converted to a graph that displays average access
line utilizations for every 15-minute period over the course of the previous
week. The points on the graph represent the maximum of inbound and outbound
utilizations during each 15-minute collection interval.
EMAIL BOUNCER
Email bouncer is a utility that permits customers to self-test the
configuration of an SMTP mail host. It confirms the correct formatting of SMTP
email for RFC 821 (envelope sender) and RFC 822 (reply-to) compliance to ensure
that customer email can be reliably delivered and replied to from other
Internet hosts. Upon completing configuration of an SMTP mail host, the
customer sends a message to the email bouncer through the Internet. The email
bouncer issues an automatic reply, thereby confirming that formatting in the
configuration is correct.
SMTP MAIL RELAY
Some types of SMTP gateways require a smart host to deliver outgoing (from the
customer's site) Internet email. These include the Microsoft Mail SMTP gateway
and some of the cc:Mail gateways. BBN Planet provides an Internet mail relay
<PAGE> 13
host dedicated to routing outgoing email for customers with these SMTP
gateways. If necessary, the mail relay host will temporarily store
undeliverable email sent from a customer site to an unreachable Internet
destination. The mail relay host will attempt to deliver this email until
successful, or until the mail process times out.
Attachment 1
Service Provider Agreement
(January 1996)
BBN Planet does not support inbound mail relay, whereby undeliverable incoming
Internet email destined for an Internet Advantage customer would be stored on a
BBN Planet server until the customer's email server was available to accept
mail.
NETWORK TIME PROTOCOL (NTP)
BBN Planet provides network time protocol (NTP) stratum-2 service.
OPTIONAL ADVANCED SERVICE
The following optional advanced service is available to Internet Advantage(SM)
Bronze Connection Service customers at an additional charge.
PRIMARY DOMAIN NAME SERVICE (DNS)
Translation tables of domain names (e.g., xxx.com) to underlying numerical
Internet addresses and vice versa are configured and maintained on primary
domain name servers; secondary domain name servers maintain mirror-images of
primary domain name servers, thereby providing both a backup and load sharing
function. During normal Internet operations, both primary and secondary domain
name servers perform the actual translations. Therefore, establishment of
primary DNS administration is a prerequisite for each Internet presence.
Bronze level customers may administer their own primary DNS, or purchase this
service from BBN Planet. BBN Planet engineers work with Bronze level customers
who purchase primary domain name service to develop and implement a primary DNS
strategy. Once in place, changes to the primary DNS database are performed by
BBN Planet during normal business hours and limited to an average of one
request per week. The primary DNS package is a superset of the secondary DNS
support included for all Bronze level customers (see section 5.1 above). The
primary DNS package includes all of the functionality of the secondary DNS
package, with the addition of primary DNS administration. Bronze Service
customers may purchase additional primary DNS in units of 10 domains
(10-packs).
For those Internet Advantage Bronze Connection Service customers who are
designated as Downstream Service Providers (DSPs), whereby they resell Internet
access services to customers of their own via their Internet Advantage
connection, BBN Planet will only provide primary DNS administration for the
DSP's own domain names, not for those of the DSP's customers.
FLEXIBLE PRICING
Customers whose access speed is 56 kbps pay a fixed monthly operations service
fee independent of their utilization characteristics.
BBN Planet offers flexible T1 (1.544 Mbps), 10 Mbps, and T3 (45 Mbps) pricing.
Under flexible pricing, ongoing operations service fees vary by month,
depending upon the actual inbound and outbound traffic levels of the customer.
The calculation of flexible charges is based on a peak burst algorithm. Total
inbound and outbound traffic is measured every 15 minutes throughout the
one-month billing period. The value of each 15-minute sample is then assigned
based on the maximum of the inbound and outbound data rates for that 15-minute
interval. The highest 5% of these samples are disregarded, leaving a 95th
percentile peak burst, which is then used to establish the utilization level
for billing purposes. For example, in a 30-day month there are 2,880 15-minute
samples. Applying the 95th percentile rule, the 144 highest samples
(representing 36 hours of peak customer usage over the course of the month) are
disregarded, leaving 2,736 samples. For billing purposes, the peak rate is set
at the level of the 2,736th sample for that one-month period.
Note that all traffic in a 15-minute interval is averaged out across that
period. In most cases, there will be high bursts interspersed with periods of
lower activity within that 15-minute period. As a result, the peak measurement
for that period will generally be lower than transient peaks actually attained
during that 15-minute period. In other words, traffic would need to be
sustained at 1.5 Mbps for the full fifteen minutes in order to be measured at
<PAGE> 14
the 1.5 Mbps rate.
Attachment 1
Service Provider Agreement
(January 1996)
Under this flexible pricing algorithm, BBN Planet has observed that many
customers with T1 Internet access circuits exhibit 95th percentile peaks for
billing purposes within the 128 kbps and 256 kbps usage bands.
Some customers using T1 or T3 access may choose to cap the maximum level at
which they peak as a means of controlling monthly charges. The cap is affected
by setting the CSU/DSU clock speed of T1 lines to 64, 128, 256, 384, or 768
kbps; T3 circuits may be capped at multiples of 3 Mbps (up to 30 Mbps).
Customers with utilization falling into flexible pricing bands below the capped
speed are billed at the lower applicable price.
B. SERVICE PERIOD
1. Selected Service Period. The Service Period shall be one (1) year
unless a longer Service Period is selected below.
_____ Two Years
_____ Three Years
2. The Service Period shall commence on activation of Internet Connection
Service and extend for the Service Period selected above.
3. SP's selecting a two or three year Service Period may terminate
Internet Connection Service prior to the expiration of the Service
Period effective as of the last day of the then-current annual period
by providing sixty (60) days prior notice. In the event of such early
termination, SP shall refund all multi-year discounts received; pay an
additional penalty of 5% of the estimated price of the canceled portion
of the Service Period and reimburse BBN Planet for any telephone line
cancellation charges incurred by BBN Planet as a result of such early
termination.
4. Upon expiration of the Service Period, this Attachment shall
automatically extend on a month-to-month basis at then-current list
prices unless either party provides written notice of termination at
least thirty (30) days prior to the expiration of the Service Period.
The month-to-month period may be terminated (a) by either party
providing the other at least thirty (30) days prior written notice, or
(b) upon the commencement of any new Service Period as may be agreed
upon by the parties.
Attachment 1
Service Provider Agreement
(January 1996)
C. PRICE AND BILLING
1. Pricing
a. Annual Recurring Fees.
- BBN Planet Operations Service Fees
(For 2 T-3 circuits; 1 to GIT, 1 to AST)
<TABLE>
<CAPTION>
45MB/s FLEX PRICING LIST PRICE DISCOUNTED PRICE
BANDWIDTH: (FOR 2 CIRCUITS) (2 CIRCUITS CAPPED
(95TH %TILE USAGE) (@ 45Mb/s TOTAL)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
UP TO 3 MB/S $16,000 $8,000
UP TO 6 MB/S 20,000 10,000
UP TO 9 MB/S 24,000 12,000
UP TO 12 MB/S 30,000 15,000
UP TO 15 MB/S 42,000 21,000
UP TO 18 MB/S 54,000 27,000
UP TO 21 MB/S 66,000 33,000
UP TO 24 MB/S 78,000 39,000
UP TO 27 MB/S 88,000 44,000
UP TO 30 MB/S 92,000 46,000
30 TO 45 MB/S 94,000 47,000
- T3 Circuit Port Charge (@ AST) N/A 3,500/MO.
</TABLE>
<PAGE> 15
<TABLE>
<S> <C> <C>
- LEC Leased Line from MCI/MediaOne
Transport Charges (to AST) 4,635/mo. 1,000/MO.
- LEC Leased Line from MFS
Transport Charges (to GIT) 1,500/mo. 1,500/MO.
b. One Time Fees
- Activation Fee $2,000 $2,000
- LEC Leased Line Installation $1,000 $1,000
- Hardware
HSSI Card for Cisco 7000 Router 10,000 $6,500
-----------
Total One Time Fees: $ 9,500.00
</TABLE>
* Costs for all LEC leased line fees are based on tariff rates in effect as of
the date of quotation. BBN Planet will charge actual costs of such service.
c. Notes:
Attachment 1
Service Provider Agreement
(January 1996)
2. Operations Service/Line Speed Cap
- Operations Service/Line Speed under this Agreement is not
capped at fractional T-3 level unless selected below.
- If an Operations Service/Line Speed Cap is selected, indicate
the cap below:
22.5 Mbps X (on each circuit)
-------
30 Mbps
-------
3. Billing
a. BBN Planet's pricing is structured such that SP is charged
based on actual bandwidth used. On activation of the Internet
Connection Service, BBN Planet will issue an invoice to SP for
the Service Activation Fee, other applicable one time fees and
the Operation Service Fee for the first month of the Service
Period. On a monthly basis, BBN Planet will determine SP's
actual bandwidth usage and invoice customer at the rate in
Part C.1.a above.
b. BBN Planet will invoice SP on a monthly basis for LEC charges
in addition to Operation Service Fees. In addition, Internet
registration fees are the responsibility of SP and will be
billed directly to SP by the Internic.
4. Price Protection.
BBN Planet will not increase prices charged to SP during the Service
Period. In the event BBN Planet decreases its prices during the Service
Period, BBN Planet shall reduce the prices set forth in this Attachment
effective on commencement of the next annual period.
Attachment 1
Service Provider Agreement
(January 1996)
D. SP RESPONSIBILITIES
SP shall be responsible for the following with respect to the Internet
Connection Service.
1. maintaining an organization which is trained and qualified to configure,
install and support IP connection service for SP Customers;
<PAGE> 16
2. handling all communications to and business relations with SP Customers
related to the Internet Connection Service including, but not limited to,
providing technicalsupport to and handling inquiries and questions from SP
Customers about IP connection services. BBN Planet shall have no obligation
or responsibility to respond to any questions or requests, or to address
any problems brought to its attention by SP Customer.
3. entering into written agreements with SP Customers which are valid and
binding in accordance with local law which agreements contain, at a
minimum, the terms set forth in Schedule A, Flowdown Provisions. In the
case of SP Reseller Customer, SP shall obligate such SP Reseller Customer
to enter into written agreements with its customers which contain, at a
minimum, the terms set forth in Schedule A., Flowdown Provisions;
4. providing primary Domain Name Service ("DNS") for SP Customers (at its
option, SP can purchase primary DNS service from BBN Planet at then-current
prices);
5. using the BGP4 Routing Protocol to route traffic through the Internet
Connection Service and to implement a routing and addressing plan which
makes efficient use of Internet address space and appropriate use of
international telephone circuits;
6. obtaining its own membership in associations and/or organizations which may
be required for complete Internet connectivity (e.g., the Commercial
Internet Exchange Association.
Attachment 1
Service Provider Agreement
(January 1996)
SCHEDULE A
FLOWDOWN PROVISIONS
(January 1996)
This Schedule A provides the minimum essential terms to be incorporated into
any agreement entered into by Service Provider with customers for the use of
Internet Connection Service. The term "Company" in this Schedule A means BBN
Planet Corporation and SP. The term "User" shall mean any third party
authorized by SP or an SP Customer to use the Internet Connection Service.
Service Provider may modify the wording of the essential terms set forth below,
provided that the terms as modified are not materially different in substance,
enforceability, and effect from those terms set forth below.
1. Content Responsibility.
User shall be solely responsible for the content of any transmissions over the
Internet by user and any third party utilizing user's facilities. User agrees
that it and any third party utilizing SP Customer's facilities will not use the
Internet Connection Service for illegal purposes, or to interfere with or
disrupt other network users, network services or network equipment.
Disruptions include, but are not limited to, distribution of unsolicited
advertising or chain letters, propagation of computer worms and viruses, and
using the network to make unauthorized entry to any other machine accessible
via the network.
2. Disclaimer of Warranties and Limitation of Liability.
COMPANY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING THE WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. Company shall not be
liable for any damage that user may suffer arising out of use, or inability to
use, the Internet Connection Service or products provided hereunder. Company
shall not be liable for unauthorized access by third parties to SP Customer's
transmission facilities or premise equipment or for unauthorized access to or
alteration, theft, loss or destruction of SP Customer's data files, programs,
procedures or information through accident, fraudulent means or devices, or any
other method.
3. Disclaimer of Consequential Damages.
IN NO EVENT WILL COMPANY, ITS AGENTS, OR AFFILIATES BE LIABLE FOR ANY OTHER
DAMAGES, INCLUDING LOST PROFITS, LOSS OF DATA, OR OTHER SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES, ARISING OUT OF OR IN CONNECTION WITH THE
PURCHASE, USE OR PERFORMANCE OF THE INTERNET CONNECTION SERVICE.
<PAGE> 17
August 6, 1996
MINDSPRING ADDENDUM 1
MindSpring and BBN Planet understand that the Internet connections which are to
be provided by BBN Planet require a DS3 CSU. MindSpring is willing to purchase
an additional CSU for the second DS3 similar to the unit (Kentrox) which is
installed on the existing circuit today. This unit does not provide an option
to change the DTE data rates. Should BBN Planet require a CSU which will allow
for DTE rates to be optioned, BBN Planet will provide this equipment for both
MindSpring circuits at no additional charge throughout the life of the
contract. MindSpring will return both units to BBN Planet on the termination
date of the contract.
MindSpring Enterprises, Inc: BBN Planet Corporation:
By: /s/ JAMES T. MARKLE By:
--------------------------------- -----------------------------------
Name: James T. Markle Name:
-------------------------------- --------------------------------
Title: Vice President Network Operations Title:
------------------------------ --------------------------------
Date: August 6, 1996 Date:
------------------------------- ---------------------------------
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 12, 1996
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (No. 333-10779) of our report dated
February 24, 1995 relating to the financial statements of PSINet Pipeline New
York, Inc. (formerly The Pipeline Network Inc.), which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Washington, DC
September 12, 1996
