<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 28, 1996
-----------------------------
MINDSPRING ENTERPRISES, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-27890 58-2113290
- ------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File No.) Identification No.)
1430 West Peachtree St., Suite 400, Atlanta, Georgia 30309
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(404) 815-0770
Not applicable
- ------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
On June 28, 1996, MindSpring Enterprises, Inc., a Delaware
corporation (the "Company"), entered into an Asset Purchase Agreement with
PSINet Inc., a New York corporation ("PSINet"), pursuant to which the Company
agreed to acquire certain of the tangible and intangible assets and rights in
connection with the consumer dial-up Internet access services currently
operated by PSINet in the United States (the "Consumer Services"), including
(i) up to 100,000 of the Seller's subscriber contracts relating to the Consumer
Services; (ii) the lease for a customer service facility, and all telephone
switches and other equipment and approximately 75 employees, located in New
Cumberland, Pennsylvania; (iii) the benefits of all preexisting marketing
programs; (iv) all of the ownership rights to the software used by subscribers
to the Seller's Pipeline service, including both the client and service
component which allows Pipeline subscribers to access the Internet (the
"Pipeline Software"); (v) rights to the local content published by that portion
of the Consumer Services dedicated to servicing subscribers using Pipeline
Software; (vi) all engineering, business and other books, papers, files and
records directly related to the Consumer Services; (vii) all manufacturer's
warranties with respect to the Assets; and (viii) certain intellectual property
rights used in connection with the Consumer Services (collectively, the
"Assets"). The Company and PSINet amended the Asset Purchase Agreement on
August 23, 1996, effective as of June 28, 1996, pursuant to Amendment No. 1 to
Asset Purchase Agreement and Network Services Agreement (the "Amendment"),
a copy of which is attached hereto as Exhibit 10.3. The Company intends to
use the Assets in a manner similar to which PSINet used the Assets.
Under the Asset Purchase Agreement, as amended, the Company agreed to
purchase the Assets for an aggregate purchase price of up to approximately
$21.4 million (excluding accrued interest and increases in principal amount
under the PSINet Notes, as defined below), subject to adjustment, at two
closings, the first of which occurred on June 28, 1996 (the "First Closing").
At the First Closing, the Company paid PSINet $1 million in cash (from cash on
hand), and issued a promissory note in the amount of $2 million (the "Initial
Promissory Note"), and obtained 15,000 subscriber contracts. The second
closing is to occur on a date to be mutually determined by the Company and
PSINet, and is currently anticipated to occur in early September 1996. In
addition to the consideration delivered at the First Closing, the Company
agreed to issue to PSINet four additional promissory notes (the "Additional
Promissory Notes" and collectively with the Initial Promissory Notes, the
"PSINet Notes") for the balance of the purchase price for the Assets (up to
$18.4 million (excluding accrued interest and increases in principal amount
under the PSINet Notes) depending upon (a) the number of subscribers who remain
customers of the Company as of certain specified dates and (b) the number of
new subscribers signed up by PSINet for the Company as of certain specified
dates) at scheduled intervals, the last of which is to be no later than January
15, 1997. In the event that any PSINet Note is not paid in full
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<PAGE> 3
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 of the Company. 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. ITC Holding Company, Inc. 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 any such conversions resulting in aggregate
issuances in excess of 19.9% of the outstanding Common Stock of the Company.
The Asset Purchase Agreement may be terminated by mutual written
consent of the parties, or by one of the parties if the Second Closing shall
not have occurred on or before September 15, 1996, provided that such failure
to close is not a result of a breach of the Asset Purchase Agreement by the
party or parties seeking to terminate the Asset Purchase Agreement.
In connection with the Asset Purchase Agreement, the parties also
entered into a Network Services Agreement (the "Services Agreement"), pursuant
to which PSINet has agreed generally to provide Internet connection services to
the Company and its subscribers through PSINet points-of-presence ("POPs") in
the United States or in the territories served with such services by PSINet or
any PSINet wholly-owned subsidiary. The Company and PSINet amended the
Services Agreement on August 23, 1996, effective as of June 28, 1996, pursuant
to the Amendment. Under the Services Agreement, as amended, the Company must
pay specified fees for each customer of the Company which the
Company acquired from PSINet pursuant to the Asset Purchase Agreement or
otherwise and which the Company has assigned to a primary dial-in POP that is a
PSINet POP. The Company also agreed to provide to PSINet certain subscriber
and usage information for the purpose of determining applicable fees.
Also pursuant to the Services Agreement, PSINet agreed, among other
things, (i) to make ISDN 64 Kbps and 128 Kbps Internet connection services
available to the Company for the Company's dial-up customers for specified
fees; (ii) for a specified fee, to allow the Company to co-locate
equipment to provide, to the Company's customers being served through PSINet's
network, electronic mail, chat, news, world-wide web, and/or domain name
services in a form substantially similar to the forms of those services today
in a limited number of PSINet POP sites; (iii) to provide the Company network
status reports, subscriber log-in accounting information and access to PSINet's
network monitoring systems; (iv) and for Internet connection services which
meet reasonable commercial standards.
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<PAGE> 4
The term of the Services Agreement is five years, commencing on June
28, 1996, and is automatically renewable annually thereafter unless either
party notifies the other in writing not less than 12 months prior to the end of
such five-year period or any 12-month extension thereof. Either party may
terminate the Services Agreement (the Company in whole or in part) upon 365
days written notice to the other party. The Company may terminate the
Agreement in whole or in part without advance notice to PSINet under certain
circumstances if there is a significant failure of PSINet's network.
There is no material relationship between PSINet and the Company or
any of its affiliates or any director or officer of the Company or any of their
associates, and the purchase price was determined as a result of arms-length
negotiations between the Company and PSINet. During such negotiations, the
parties considered, among other things, the present stage of development of the
business and operations of the Company, the condition of its assets and the
market for its services.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
Financial Statements for the PSINet Inc. -- Consumer Internet Access
Services and PSINet Pipeline New York, Inc. in the United States appear
immediately after Item (c) (Exhibits) below.
(b) Pro Forma Financial Information.
Unaudited Pro Forma Financial Information, consisting of a Pro Forma
Combined Balance Sheet as of June 30, 1996 (Unaudited) and Pro Forma Combined
Statements of Income for the Year Ended December 31, 1995 and the Six-Month
Period Ended June 30, 1996 (Unaudited) were filed as part of the Company's
Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1996, (File No.
0-27890) and are incorporated herein by reference.
(c) Exhibits.
4 Convertible Note dated June 28, 1996, as amended on August 23, 1996,
effective as of June 28, 1996.
10.1 Asset Purchase Agreement by and between MindSpring Enterprises, Inc.
and PSINet Inc., dated June 28, 1996 (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.)
10.2 Network Services Agreement by and between MindSpring Enterprises,
Inc. and PSINet Inc., dated June 28, 1996 (Filed as Exhibit 10.2 to
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<PAGE> 5
Current Report on Form 8-K dated June 28, 1996, File No. 0-27890, and
incorporated herein by reference.)
10.3 Amendment No. 1 to Asset Purchase Agreement and Network Services
Agreement, dated August 23, 1996, effective as of June 28, 1996.
- 5 -
<PAGE> 6
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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-2
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.......... F-3
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-4
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-5
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-6
Notes to Financial Statements.............................................. F-7
PSINET PIPELINE NEW YORK, INC.
Financial Statements as of December 31, 1994
Report of Independent Accountants.......................................... F-14
Balance Sheet as of December 31, 1994...................................... F-15
Statement of Operations for the Year Ended December 31, 1994............... F-16
Statement of Changes in Shareholders' Equity for the Year Ended December
31, 1994................................................................. F-17
Statement of Cash Flows for the Year Ended December 31, 1994............... F-18
Notes to Financial Statements.............................................. F-19
</TABLE>
F-1
<PAGE> 7
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-2
<PAGE> 8
PSINET INC.
CONSUMER INTERNET ACCESS SERVICES
IN THE UNITED STATES
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, -------------
-------------------------
1994 1995 (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-3
<PAGE> 9
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
JUNE 30, 1995 JUNE 30, 1996
1994 1995 ------------- -------------
--------- ------------ (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-4
<PAGE> 10
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-5
<PAGE> 11
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-6
<PAGE> 12
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-7
<PAGE> 13
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-8
<PAGE> 14
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-9
<PAGE> 15
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-10
<PAGE> 16
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-11
<PAGE> 17
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-12
<PAGE> 18
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 subscriber accounts and other assets from PSINet
for a purchase price of up to approximately $21,400,000 (the "Acquisition"). The
actual purchase price will depend 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 in
early September 1996, at which time the Company will issue an additional
one-year promissory note in the amount of $10,200,000. The balance of the
purchase price is expected to be paid 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-13
<PAGE> 19
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-14
<PAGE> 20
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-15
<PAGE> 21
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-16
<PAGE> 22
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-17
<PAGE> 23
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-18
<PAGE> 24
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-19
<PAGE> 25
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-20
<PAGE> 26
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>
1995................................................. $ 76
1996................................................. 76
1997................................................. 76
1998................................................. 68
1999................................................. 57
Thereafter........................................... 14
------
$367
======
</TABLE>
F-21
<PAGE> 27
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-22
<PAGE> 28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MINDSPRING ENTERPRISES, INC.
Date: August 23, 1996 By: /s/ CHARLES M. BREWER
--------------------------------------
Charles M. Brewer
Chairman and Chief Executive
Officer
Date: August 23, 1996 By: /s/ MICHAEL S. MCQUARY
--------------------------------------
Michael S. McQuary
President and Chief Operating
Officer
- 6 -
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ------------------------------------------------------------------------------
<S> <C>
4 Convertible Note dated June 28, 1996, as amended on August 23,
1996, effective as of June 28, 1996.
10.1 Asset Purchase Agreement by and between MindSpring Enterprises,
Inc. and PSINet Inc., dated June 28, 1996 (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.)
10.2 Network Services Agreement by and between MindSpring
Enterprises, Inc. and PSINet Inc., dated June 28, 1996 (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.)
10.3 Amendment No. 1 to Asset Purchase Agreement and Network
Services Agreement, dated August 23, 1996, effective as of June
28, 1996.
</TABLE>
<PAGE> 1
EXHIBIT 4
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNDER THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY NOT BE SOLD,
TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH
REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE SECURITIES LAWS OF
ANY STATE, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
MINDSPRING ENTERPRISES, INC.
CONVERTIBLE NOTE,
DUE JUNE 28, 1997
$2,000,000.00 June 28, 1996
FOR VALUE RECEIVED, the undersigned, MINDSPRING ENTERPRISES, INC., a
Delaware corporation (herein called the "Company"), hereby promises to pay to
PSINET, INC., a New York corporation, or registered assigns (hereinafter called
the "Payee"), the principal sum of Two Million Dollars ($2,000,000.00) (the
"Principal", which shall be subject to increase or decrease as set forth
below), together with interest on the unpaid principal amount hereof from the
date hereof, until paid in full, said interest to be due and payable on the
first anniversary of the date of this Note, when the entire balance of this
Note shall be due and payable in full, equal to the interest rate published as
the "prime rate" in the "Money Rates" section of The Wall Street Journal (the
"PRIME RATE") plus three percent (3%). In no event, however, shall this Note
bear interest in excess of the maximum rate of interest permitted by applicable
law. All payments hereunder shall be made in lawful money of the United States
of America, and shall be subject to the offset and deduction provisions
described herein.
In the event of a change in the Prime Rate, interest on the outstanding
principal balance hereof will be adjusted accordingly, it being the intent
hereof that the rate of said interest shall increase or decrease simultaneously
with and to the same extent as an increase or decrease in the Prime Rate.
Should The Wall Street Journal during the term hereof abolish or abandon the
practice of publishing the
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<PAGE> 2
Prime Rate, then the Prime Rate used during the remainder of said term shall be
the rate from time to time announced by Citibank, N.A. as its "prime rate".
In the event that this Note is not redeemed in full within ninety (90)
days after the date of this Note, the Principal shall increase by five percent
(5%) of the Principal then outstanding. The Principal shall increase in a like
manner each ninety (90) days thereafter that this Note is not redeemed in full.
Late Charges
If the entire amount of any principal payment and/or interest is not paid
in full within five (5) days after the date when due, the Company shall pay to
the Payee a late fee equal to two percent (2%) of the amount not paid.
Sale of Note; Transfer of Securities
Neither this Note nor the shares of Common Stock issuable upon exercise of
the conversion rights herein have been registered under the Securities Act of
1933, as amended (the "1933 Act") or under the securities laws of any state.
Neither this Note nor any such shares, when issued, may be sold, transferred,
pledged or hypothecated in the absence of (1) an effective registration
statement for this Note, or the shares, as the case may be, under the 1933 Act,
and such registration or qualification as may be necessary under the securities
laws of any state, or (2) an opinion of counsel in form and substance
reasonably satisfactory to the Company that such registration or qualification
is not required. The Company may cause the certificate or certificates
evidencing all or any of the shares issued upon exercise of the conversion
rights contained in this Note before such registration and qualification of
such shares to bear the following legend:
"The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended, or under the securities laws
of any state. The shares may not be sold, transferred, pledged or
hypothecated in the absence of an effective registration statement under
the Securities Act of 1933, as amended, and such registration or
qualification as may be necessary under the securities laws of any state,
or an opinion of counsel reasonably satisfactory to the Company that such
registration or qualification is not required."
This Note shall be registered on books of the Company that shall be kept
at its principal office for that purpose, and shall be transferable only on
such books by the registered owner hereof in person or by duly authorized
attorney upon surrender of this Note properly endorsed, and only in compliance
with the next preceding paragraph hereof.
2
<PAGE> 3
Redemption
The Company may redeem this Note, by payment, in the case of full
redemption, in full of the entire principal amount thereof then outstanding,
together with all interest accrued thereon until the date of redemption. In
the case of any partial redemption hereof, payments shall be applied first to
payment of any accrued interest owing hereunder, and then against principal
owing hereunder.
Conversion
In the event that this Note is not redeemed in full by the first
anniversary of the date of this Note, the registered owner of this Note is
hereby given the right to convert all, but not less than all, of the total
amount due under this Note into fully paid and nonassessable shares of the
common stock, $0.01 par value per share, of the Company (the "Common Stock") as
follows:
(1) Conversion Price. The registered owner of this Note shall
receive one share of Common Stock for a price equal to the closing price of the
common stock of the Company traded on the Nasdaq Stock Market as of the end of
the trading day on the Second Closing Date, provided, however, that if the
Second Closing Date has not occurred, then as of the end of the trading day on
the First Closing Date (as defined in the Purchase Agreement).
(2) Procedure for Conversion. In order to exercise the conversion
privilege, the registered owner shall surrender this Note to the Company at its
main office, accompanied by written notice to the Company that such owner
elects to convert the total amount due under this Note and an opinion of
counsel in form and substance satisfactory to the Company that the issuance of
shares of Common Stock upon such conversion has been registered under the 1933
Act and registered or qualified as necessary under applicable state securities
laws, or that such registration and qualification are not required. As
promptly as practicable after the receipt of such notice and opinion and
surrender of this Note as aforesaid, the Company shall issue and deliver to the
registered owner a certificate or certificates for the number of full shares of
Common Stock issuable upon the conversion of this Note (or specified portion
hereof). Such conversion shall be deemed to have been effected at the close of
business on the date on which such notice shall have been received by the
Company and this Note shall have been surrendered as aforesaid. If this Note
is converted in part only, upon such conversion the Company shall execute and
deliver to the Payee, at the expense of the Company, a new Note in principal
amount equal to the unconverted portion of this Note. No fractional shares
shall be issued upon conversion of this Note and any portion of the principal
or interest hereof that would otherwise be convertible into a fractional share
shall be paid in cash.
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<PAGE> 4
The Company shall at all times reserve and keep available a number of its
authorized but unissued shares of Common Stock sufficient to permit the
exercise in full by the registered owner of this Note of its conversion rights
hereunder.
Notwithstanding the foregoing, in no event shall this Note be convertible
into Common Stock if, as a result of such conversion, the aggregate amount of
Common Stock that would be issued pursuant to the Notes (as such term is
defined in the Purchase Agreement, as defined herein) exceeds 19.9% of the
issued and outstanding Common Stock as of June 28, 1996, unless approval by the
Company's stockholders has been obtained. In addition, if the approval of the
Company's stockholders referred to in the immediately preceding sentence has
not been obtained by the time this Note would otherwise be convertible as
provided above, the registered owner of this Note may convert this Note in part
on the terms and conditions set forth in this section entitled "Conversion"
(with the written notice of conversion to specify the amount to be converted);
provided, however, that if the registered holder of this Note converts this
Note in part pursuant to this sentence, the registered holder shall present to
Buyer for conversion the Note representing the unconverted balance of this Note
within ten (10) days following receipt of written notice from Buyer that the
stockholders consent referred to in the immediately preceding sentence has been
obtained.
Default
In case of the failure to pay, when due, the principal, any interest, or
any other sum payable hereunder, and continuance of such failure for five (5)
business days after the date on which such principal, interest or other sum is
due (whether upon maturity hereof, upon any installment payment date, upon any
prepayment date, upon acceleration, or otherwise), the Payee may declare this
Note to be due and payable in full.
Miscellaneous
Upon receipt by the Company of evidence satisfactory to it of the loss,
theft, destruction or mutilation of this Note, and (in case of loss, theft or
destruction) of indemnity reasonably satisfactory to it, and upon reimbursement
to the Company of all reasonable expenses incidental thereto, and upon
surrender and cancellation of this Note, if mutilated, the Company will make
and deliver a new Note of like tenor in the principal amount of this Note then
outstanding in lieu of such Note. Any Note so made and delivered shall be
dated as of the date to which interest has been paid on the Note lost, stolen,
destroyed or mutilated.
The Company shall have the right to offset and/or deduct, from time to
time and at any time, any amounts of principal or interest payable under this
Note against Losses (as defined in the Asset Purchase Agreement by and between
the Company and Payee, dated as of June 28, 1996 ("Purchase Agreement", which
term
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<PAGE> 5
shall include all amendments thereto)) asserted against, resulting to, imposed
upon or incurred by the Company for which the Company has a right or claim for
indemnification pursuant to ARTICLE 10 of the Purchase Agreement
The Company hereby waives presentment, demand, notice, protest and other
demands and notices in connection with the delivery, acceptance or enforcement
of this Note.
No delay or omission on the part of the Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note, and a waiver, delay or omission on any one occasion shall not be
construed as a bar to or waiver of any such right on any future occasion.
The Company hereby agrees to pay on demand all costs and expenses,
including, without limitation, reasonable attorneys' fees and legal expenses,
incurred or paid by Payee in enforcing this Note.
The terms of this Note shall be governed by and construed in accordance
with the laws of the State of New York (but not including the choice of law
rules thereof).
This Note shall not be valid or obligatory for any purpose until
authenticated by the execution hereof by the Chairman, President or a Vice
President of the Company and registered upon the books of the Company as
hereinabove provided.
IN WITNESS WHEREOF, MINDSPRING ENTERPRISES, INC., a Delaware corporation,
has caused this Note to be signed in its corporate name by its President or a
Vice President, by authority duly given, all as of the day and year first above
written.
MINDSPRING ENTERPRISES, INC.
By: /s/ CHARLES M. BREWER
---------------------------------------------
Title: Chief Executive Officer
------------------------------------------
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<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT AND
NETWORK SERVICES AGREEMENT
THIS AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT AND NETWORK SERVICES
AGREEMENT (the "Amendment") is entered into as of June 28, 1996 by and between
PSINET INC. ("Seller") and MINDSPRING ENTERPRISES, INC. ("Buyer").
WHEREAS, Seller and Buyer are parties to that certain Asset Purchase
Agreement of even date herewith (the "Purchase Agreement") and that certain
Network Services Agreement of even date herewith (the "Network Services
Agreement"); and
WHEREAS, capitalized terms that are used but not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement; and
WHEREAS, Seller and Buyer desire to amend the Purchase Agreement and
the Network Services Agreement, and provide for the replacement of the First
Note (as defined in the Purchase Agreement), all in accordance with and subject
to the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, the parties hereto hereby amend
the Purchase Agreement, the Network Services Agreement and the First Note, as
follows:
1. The following shall be inserted at the end of the section
entitled "Conversion" in the First Note, as replaced in accordance with
Paragraph 2 hereof, and in the corresponding section of each of the forms of
the First Note, the Second Note, the Third Note and the Fourth Note, attached
as Exhibits 2.3 (a), (b), (c), and (d), respectively, to the Purchase
Agreement:
Notwithstanding the foregoing, in no event shall this Note be
convertible into Common Stock if, as a result of such conversion, the
aggregate amount of Common Stock that would be issued pursuant to the
Notes (as such term is defined in the Purchase Agreement, as defined
herein) exceeds 19.9% of the issued and outstanding Common Stock as of
June 28, 1996, unless approval by the Company's stockholders has been
obtained. In addition, if the approval of the Company's stockholders
referred to in the immediately preceding sentence has not been obtained by
the time this Note would otherwise be convertible as provided above, the
registered owner of this Note may convert this Note in part on the terms
and conditions set forth in this section entitled "Conversion" (with the
written notice of conversion to specify the amount to be converted);
provided,
<PAGE> 2
however, that if the registered holder of this Note converts this Note in
part pursuant to this sentence, the registered holder shall present to
Buyer for conversion the Note representing the unconverted balance of this
Note within ten (10) days following receipt of written notice from Buyer
that the stockholders consent referred to in the immediately preceding
sentence has been obtained.
2. The defined term "Purchase Agreement" in the forms of the First
Note, the Second Note, the Third Note and the Fourth Note is hereby amended to
include the following:
which term shall include all amendments thereto.
3. Upon execution of this Amendment, Buyer shall re-execute the
First Note in the form attached hereto as Exhibit A and deliver the same to
Buyer, and, promptly thereafter, Seller shall return to Buyer the original
First Note, which shall be deemed replaced by such re-executed First Note.
4. If, as of the date that notice of the next annual meeting of
stockholders of Buyer is required to be mailed, any of the Notes remain
outstanding such that upon conversion, the aggregate amount of Common Stock
that would be issued pursuant to all of the Notes would exceed 19.9% of the
issued and outstanding Common Stock as of June 28, 1996, then Buyer shall
request from its stockholders at such annual meeting the approval referred to
in Paragraph 1 above.
5. By their signatures hereto, ITC Holding Company, Inc. and
Charles M. Brewer agree to vote all shares of Common Stock, and other capital
stock of Buyer, held by them in favor of the approval referred to in paragraph
1 above, whenever such approval is requested by Buyer of its stockholders.
6. Section 2.3(c) of the Purchase Agreement is hereby amended by
inserting the following at the end thereof:
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 Third Note
pursuant to Section 3.4 after the principal and accrued but unpaid
interest under the First Note and the Second Note were paid in full, Buyer
shall pay to Seller such funds, not to exceed what would otherwise be the
initial principal amount of the Third Note, and the initial principal
amount of the Third Note so issued shall be reduced accordingly.
7. Section 2.3(d) of the Purchase Agreement is hereby amended by
inserting the following at the end thereof:
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<PAGE> 3
, 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 Fourth
Note pursuant to Section 3.4 after the principal and accrued but unpaid
interest under the First Note, the Second Note and the Third Note were
paid in full, Buyer shall pay to Seller such funds, not to exceed what
would otherwise be the initial principal amount of the Fourth Note, and
the initial principal amount of the Fourth Note so issued shall be reduced
accordingly.
8. The period at the end of Section 2.3(d) of the Purchase Agreement
is hereby replaced with a semicolon and the following is hereby added to the
Purchase Agreement as new Section 2.3(e):
(e) Buyer shall deliver to Seller within ten (10) days after the
Third Measurement Date a fully executed copy of the Fifth Note, 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 Fifth Note pursuant to Section 3.4 after the
principal and accrued but unpaid interest under the First Note, the Second
Note, the Third Note and the Fourth Note were paid in full, Buyer shall pay to
Seller such funds, not to exceed what would otherwise be the initial principal
amount of the Fifth Note, and the initial principal amount of the Fifth Note so
issued shall be reduced accordingly.
9. The phrase "First Measurement Date" in Section 3.3(a) of the
Purchase Agreement is hereby replaced with "November 30, 1996." The following
is hereby inserted after the last sentence of Section 3.3(a) of the Purchase
Agreement:
No later than December 10, 1996, Buyer shall notify Seller of
the number of customers of Buyer signed up by Seller pursuant to this Section
3.3(a).
10. Section 3.3(b) of the Purchase Agreement is hereby amended and
restated to read as follows:
(b) (i) After the First Closing Date, Buyer shall use
reasonable efforts to seek confirmation from the Subscribers to Seller's
Pipeline service (A) that such Subscribers desire to be switched to Buyer's
network and (B) of the Subscribers' relevant subscription information. After
the Second Closing, Buyer shall produce and ship software and other necessary
materials (collectively, "Kits") to allow Subscribers, who have confirmed that
they desire to switch to Buyer's network to make such switch, promptly
following receipt of such confirmation. Buyer shall pay the costs of such
production and shipment initially, but on the Second Measurement Date and upon
presentation of reasonably satisfactory documentation of such costs Seller
shall pay to Buyer fifty percent (50%) of Buyer's
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<PAGE> 4
costs actually incurred in connection with such production and shipment and
Buyer shall offset the amount due from Seller against the payments otherwise
due Seller under the Notes.
(ii) After the First Closing Date, Buyer shall use
reasonable efforts to seek confirmation from the Subscribers to Seller's
Interramp service (A) that such Subscribers desire to be switched to Buyer's
network and (B) of the Subscribers' relevant subscription information. After
the Second Closing, Buyer shall assist Subscribers to Seller's Interramp
service, who have confirmed that they desire to switch to Buyer's network, to
configure their current software to work on Buyer's network. After the Second
Closing, Buyer shall also produce and ship Kits upon request to Subscribers to
Seller's Interramp service who have requested such Kits and have confirmed
their desire to switch to Buyer's network. Buyer shall pay the costs of such
production and shipment initially, but on the Second Measurement Date and upon
presentation of reasonably satisfactory documentation of such costs Seller
shall pay to Buyer fifty percent (50%) of Buyer's costs actually incurred in
connection with such production and shipment and Buyer shall offset the amount
due from Seller against the payments otherwise due Seller under the Notes.
(iii) Notwithstanding, the foregoing provisions of this
Section 3.3(b), Subscribers who do not transition to Buyer's network shall be
considered Continuing Subscribers if they otherwise satisfy the definition of
"Continuing Subscribers" set forth in Annex 1 to this Agreement. In no event
shall the aggregate payments made by Seller to Buyer under (i) and (ii) above
exceed $400,000.
11. Seller's total obligations under Sections 3.3(d) and (e) of the
Purchase Agreement shall be satisfied by paying Buyer Three Thousand Dollars
($3,000) at the Second Closing.
12. The phrase "First Measurement Date" in Section 3.3(f) of the
Purchase Agreement is hereby replaced with "date specified by Buyer in a
written notice to Seller but in no event later than December 31, 1996."
13. Section 3.4 of the Purchase Agreement is hereby amended and
restated as follows:
3.4 Securities Offering.
Buyer shall use Best Efforts to complete a stock offering or other
financing in order to refinance the 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 Notes according to the following formula:
(a) if the net proceeds (which term shall mean gross proceeds less
normal offering expenses) of any offering or other financing exceed thirty
million
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<PAGE> 5
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
Notes, to pay down the Notes promptly following the closing of such offering or
other financing;
(b) if the net proceeds of any offering or other financing are
between twenty and thirty million dollars ($20,000,000.00-30,000,000.00), Buyer
shall use seventy-five percent (75%) of such net proceeds, up to the amount of
principal and accrued but unpaid interest outstanding under the Notes, to pay
down the Notes promptly following the closing of such offering or other
financing;
(c) if the net proceeds of any offering or other financing are
between ten and twenty million dollars ($10,000,000.00-20,000,000.00), Buyer
shall use fifty percent (50%) of such net proceeds, up to the amount of
principal and accrued but unpaid interest outstanding under the Notes, to pay
down the Notes promptly following the closing of such offering or other
financing; and
(d) if the net proceeds of any offering or other financing are
between one and ten million dollars ($1,000,000.00 - $10,000,000.00), Buyer
shall use thirty-three percent (33%) of such net proceeds, up to the amount of
principal and accrued but unpaid interest outstanding under the Notes, to pay
down the Notes promptly following the closing of such offering or other
financing.
14. The following is hereby added as new Section 4.24 of the
Purchase Agreement:
4.24 INTELLECTUAL PROPERTY.
The Intellectual Property constitutes all intellectual property of
Seller, used or useful in connection with the Assets and the Business, other
than that intellectual property described on SCHEDULE 4.11 which is not
described on SCHEDULE ANNEX 2, including, without limitation, (i) all
inventions (whether patentable or unpatentable and whether or not reduced to
practice) used or useful in connection with the Assets and the Business, all
improvements thereto and all patents, patent applications and patent
disclosures, (ii) all trademarks, service marks, trade dress, logos, trade
names, and corporate names (including without limitation the Pipeline domain
name and the Pipeline Name) used or useful in connection with the Assets and
the Business, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (iii) all
copyrightable works, all copyrights and maskworks and all applications,
registrations and renewals in connection therewith used or useful in connection
with the Assets and the Business, (iv) all trade secrets and confidential
information used or useful in connection with the Assets and the Business
(including, without limitation, all ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
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<PAGE> 6
technical data, designs, drawings, specifications, customer and supplier lists,
pricing and cost information, business and marketing plans and proposals and
other information or material within the definition of a "trade secret" as set
forth in Section 1(4) of the Uniform Trade Secrets Act (1995), (v) all
computer programs (including, without limitation, data and related
documentation) used or useful in connection with the Assets and the Business
including without limitation the Pipeline Software, (vi) all other intellectual
property used or useful in connection with the Assets and the Business, (vii)
all rights as a licensee or authorized user of the intellectual property of any
third party, (ix) the source code for Seller's Interramp auto-registration
software along with a perpetual license to use and modify, but not resell, such
software, and (x) all copies and tangible embodiments of the foregoing in
whatever form or medium.
15. The outside date for the Second Closing set forth in Section 8.1
of the Purchase Agreement is hereby extended from August 31, 1996 to September
3, 1996.
16. The Network Services Agreement is hereby amended by (i)
replacing the text of Section 4.1 thereof with the following: "[intentionally
deleted]", (ii) redesignating the text of Section 1.6 thereof as Section 1.6(a)
and (iii) adding the following as Section 1.6(b):
During the term of this Agreement, PSINet shall allow MindSpring
to co-locate up to 4 racks of equipment at PSINet's network operations center,
which is currently located in Troy, New York. During the term of this
Agreement, MindSpring shall allow PSINet to co-locate up to 2 racks of
equipment at the Harrisburg Facility (as defined in the Purchase Agreement).
Each of PSINet and MindSpring may permit the other to increase the number of
racks of equipment which such person is permitted to co-locate pursuant to this
subsection at PSINet's operations center and at the Harrisburg Facility,
respectively, as may be mutually agreed. MindSpring shall pay PSINet $1,000
per month for each of MindSpring's two excess racks. In connection with the 4
racks of equipment installed by MindSpring at PSINet's network operations
center, PSINet shall supply MindSpring with bandwidth equal to the bandwidth of
a T1 line for no additional cost, and such additional bandwidth as MindSpring
may reasonably request for an additional charge equal to PSINet's T1 price.
17. The definitions of "Continuing Subscribers," "First Measurement
Date," "Intellectual Property," "Sales Term" and "Second Measurement Date" set
forth in Annex 1 to the Purchase Agreement are hereby amended to read as
follows:
CONTINUING SUBSCRIBERS shall mean those Subscribers who remain
Buyer's customers (regardless of whether or not they transition to Buyer's
network) and current in their payments to Buyer for services as of the First
Measurement Date, as well as those customers of Buyer signed up by Seller
pursuant to Section 3.3(a) who remain Buyer's customers (regardless of whether
or
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<PAGE> 7
not they transition to Buyer's network) and current in their payments to Buyer
for service as of (i) the First Measurement Date, with respect to customers
signed up before October 1, 1996, (ii) the Second Measurement Date with respect
to customers signed up between October 1, 1996 and October 31, 1996, and (iii)
the Third Measurement Date with respect to customers signed up between November
1, 1996 and November 30, 1996.
FIRST MEASUREMENT DATE shall mean November 15, 1996.
INTELLECTUAL PROPERTY shall mean all intellectual property of
Seller listed on Schedule Annex 2 attached hereto.
SALES TERM shall mean the period of five (5) years after
November 30, 1996.
SECOND MEASUREMENT DATE shall mean December 15, 1996.
18. The following are hereby added to Annex 1 to the Purchase
Agreement as new definitions:
FIFTH NOTE shall mean the promissory note in the form attached
hereto as EXHIBIT 2.3(e) in an original principal amount equal to the excess,
if any, of the Purchase Price determined as of the Third Measurement Date over
the sum of the Cash Payment and the original amounts of the First Note, Second
Note, Third Note and Fourth Note.
THIRD MEASUREMENT DATE shall mean January 15, 1997.
19. SCHEDULE 2.3(e) attached hereto shall be deemed SCHEDULE 2.3(e)
of the Purchase Agreement, as amended by this Amendment, and SCHEDULE ANNEX 2
attached hereto shall be deemed SCHEDULE ANNEX 2 of the Purchase Agreement, as
amended by this Amendment.
20. The Purchase Agreement and the Network Services Agreement are
hereby ratified and confirmed and, except as expressly modified hereby, shall
continue unmodified and in full force and effect.
21. This Amendment 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 Amendment 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.
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<PAGE> 8
IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment, or has caused this Amendment 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/ CHARLES M. BREWER (SEAL)
----------------------
Name: Charles M. Brewer
-------------------------
Title: Chief Executive Officer
------------------------
SELLER
PSINET INC.
By: /s/ HAROLD S. WILLS (SEAL)
---------------------
Name: Harold S. Wills
--------------------------
Title: Chief Operating Officer
-------------------------
By their signatures hereto, the undersigned hereby agree to the terms
of paragraph 4 above, as of the date first set forth above.
ITC HOLDING COMPANY, INC.
By: /s/ J. DOUGLAS COX (SEAL)
------------------------------
Name: J. Douglas Cox
----------------------------
Title: Vice President
and Chief Financial Officer
---------------------------
/s/ CHARLES M. BREWER (SEAL)
----------------------
CHARLES M. BREWER, individually
8
