<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
ONEMAIN.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7375 11-3460073
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
50 HAWTHORNE ROAD
SOUTHAMPTON, NY 11968
(516) 287-4084
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
STEPHEN E. SMITH
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONEMAIN.COM, INC.
50 HAWTHORNE ROAD
SOUTHAMPTON, NY 11968
(516) 287-4084
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
STEVEN A. MUSELES R.W. SMITH, JR.
HOGAN & HARTSON L.L.P. PIPER & MARBURY L.L.P.
555 THIRTEENTH STREET, N.W. 36 SOUTH CHARLES STREET
WASHINGTON, D.C. 20004 BALTIMORE, MD 21201
(202) 637-5600 (410) 539-2530
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $.001 per share... $143,750,000 $39,963
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of computing the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH THE PROVISIONS
OF SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE +
+CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS +
+PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT +
+SEEK OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR +
+SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION,
DATED DECEMBER 30, 1998
Shares
[LOGO]
ONEMAIN.COM, INC.
Common Stock
OneMain.com, Inc. provides Internet access and related services to individuals
and businesses located predominantly in secondary, tertiary and rural markets
throughout the United States. Upon completion of this offering, we will
immediately become one of the ten largest (based on number of subscribers)
independent Internet service providers in the United States with approximately
273,000 subscribers.
This is the initial public offering of our common stock. We expect the initial
public offering price will be between $ and $ per share. The price per
share in this offering may not reflect the price of our shares in the public
market after this offering is complete. We intend to have our common stock
trade on the Nasdaq National Market.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. PLEASE READ THE RISK
FACTORS BEGINNING ON PAGE 8 BEFORE MAKING A DECISION TO INVEST IN THE COMPANY'S
COMMON STOCK.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discounts and Commissions..................... $ $
Proceeds, before expenses, to OneMain.Com, Inc. ........... $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES OF COMMON STOCK OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY
PERSON TO TELL YOU OTHERWISE.
----------
OneMain.com, Inc. has granted the underwriters the right, at any time until 30
days after the date of this prospectus, to purchase up to an additional
shares to cover any over-allotments of shares the underwriters may make in this
offering.
----------
The underwriters expect to deliver the shares against payment in Baltimore,
Maryland on , 1999.
BT ALEX. BROWN
SOUNDVIEW TECHNOLOGY GROUP
WIT CAPITAL CORPORATION
AS E-MANAGER(TM)
, 1999
<PAGE>
[GRAPHIC: MAP OF THE CONTINENTAL UNITED STATES WITH SHADING TO SHOW THE AREAS
WITHIN WHICH A SUBSCRIBER MAY ACCESS THE INTERNET BY A LOCAL TELEPHONE CALL
THROUGH ONE OF THE ONEMAIN.COM, INC. ISPS.]
i
<PAGE>
This prospectus contains certain forward-looking statements and information
relating to OneMain.com. We intend to identify forward-looking statements in
this prospectus using words such as "believes," "intends," "expects," "may,"
"will," "should," "plan," "projected," "contemplates," "anticipates" or similar
statements.
These statements are based on our beliefs as well as assumptions we made
using information currently available to us. Because these statements reflect
our current views concerning future events, these statements involve certain
risks, uncertainties and assumptions. Actual future results may differ
significantly from the results discussed in the forward-looking statements.
Some, but not all, of the factors that may cause such a difference include
those discussed in the Risk Factors section beginning on page 8 of this
prospectus.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 8
The Company.............................................................. 20
The Transactions......................................................... 20
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Combined Pro Forma Financial Data............................... 27
Selected Historical Financial Data for Our ISPs.......................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 65
Management............................................................... 76
Certain Transactions..................................................... 83
Principal Stockholders................................................... 86
Description of Capital Stock............................................. 87
Shares Available for Future Sale......................................... 91
Underwriting............................................................. 94
Experts.................................................................. 97
Legal Matters............................................................ 100
Additional Information................................................... 100
Glossary of Technical Terms.............................................. G-1
Index to Financial Statements............................................ F-1
</TABLE>
iii
<PAGE>
SUMMARY
Simultaneously with the consummation of this offering, OneMain.com, Inc. will
acquire 17 existing Internet service providers ("ISPs") in exchange for cash
and shares of our common stock (the "Transactions"). As used in this
prospectus, "Company" means OneMain.com, Inc. and the ISPs that we will acquire
in the Transactions or, as applicable, one or more of these ISPs on a combined
basis. All references to the historical activities of the Company refer to the
activities of our ISPs.
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you. To understand
our business and this offering fully, you should read this entire prospectus
carefully, including the consolidated financial statements and the related
notes beginning on page F-1. See the Glossary beginning on page G-1 for the
meaning of certain technical terms that are used in this prospectus.
ONEMAIN.COM, INC.
OUR BUSINESS
We provide Internet access and related services to individuals and businesses
located predominantly in secondary, tertiary and rural markets throughout the
United States. We believe individuals in these markets have traditionally been
under-served or not served at all by national on-line service providers and
therefore present a significant growth opportunity for us. Upon completion of
this offering and the Transactions, we will immediately become one of the ten
largest (based on number of subscribers) independent Internet service providers
in the United States with approximately 273,000 subscribers at September 30,
1998.
The 15 largest Metropolitan Statistical Areas in the United States comprise
only 37% of the U.S. population, leaving approximately 167 million individuals
in hundreds of secondary, tertiary and rural markets in the United States as
potential subscribers. Currently, approximately 34 million people, or 13% of
the U.S. population, are able to access one of our ISP networks through a local
telephone call. Many of the national on-line service providers with whom we
compete provide access in our markets only through long distance calls, which
make access more expensive for subscribers. We believe our ability to provide
Internet access through local calls provides us with a significant competitive
advantage. We also expect to benefit from the managerial talent, technological
competence and localized sales and marketing skills that we will acquire
through what we believe are some of the fastest growing local ISPs in the
United States.
On a pro forma combined basis, our ISPs generated $14.4 million in total
revenues for the three months ended September 30, 1998 and $37.5 million in
total revenues for the nine months ended September 30, 1998. On a sequential
quarter basis, our revenue growth has averaged 16.6% during the six-quarter
period ended September 30, 1998, and our subscriber growth has averaged 19.9%
over this period. Our pro forma combined subscriber turnover level, or "churn
rate," of % per month for the quarter ended December 31, 1998 illustrates
1
<PAGE>
the stability of our subscriber base. "Churn rate" means the percentage
obtained by dividing the number of subscribers that cancel or do not renew
their subscriptions during a period by the number of subscribers at the end of
the period.
OUR STRATEGY
Our strategy is to meet the customer service and content requirements of our
target markets while benefitting from the scale advantages now enjoyed by
national on-line service providers. The following are the key elements of our
strategy:
Manage our ISPs through Operating Groups. We intend to organize our ISPs into
operating groups. These operating groups will manage our ISPs on a day-to-day
basis, identify acquisitions, integrate acquired subscribers and support growth
at the local ISP level.
Grow Our Subscriber Base. We will continue to attract new and retain existing
subscribers primarily by enhancing our subscribers' on-line experience and
migrating to a national brand.
Integrate our ISPs. We plan to integrate our ISPs by eliminating redundant
network costs and consolidating certain operations, including back office
functions.
Leverage our Scale. The primary role of our corporate level management team
will be to build and leverage our combined scale to increase revenues and
reduce costs.
Offer Higher Margin Products and Services. We intend to capitalize on
opportunities to sell higher margin value-added products and services to our
subscribers.
OUR HISTORY AND STRUCTURE
We formed OneMain.com for the purpose of acquiring existing ISPs serving
subscribers predominantly in secondary, tertiary and rural markets. Upon
completion of this offering, we will acquire 17 ISPs in the Transactions for a
combination of common stock and cash. We will conduct our operations through
our ISPs, which will be organized into seven operating groups. Our executive
offices are located at 50 Hawthorne Road, Southampton, New York 11968, and our
telephone number is (516) 287-4084.
2
<PAGE>
THE OFFERING
Stock Offered by the Company............ shares of common stock.
Stock Outstanding after this
Offering(1)............................ shares of common stock.
Use of Proceeds......................... We will use the proceeds of this
offering to pay the cash portion of
the purchase prices payable in the
Transactions, repay certain
indebtedness of our ISPs and for
general corporate purposes, including
acquisitions and working capital.
Proposed Nasdaq Symbol..................
Dividend Policy......................... We do not anticipate paying cash
dividends on our common stock.
- --------
(1) Includes the shares of common stock we will issue in the offering,
4,777,500 shares of common stock issued to the founders and initial
investors in OneMain.com and the approximately 6,087,211 shares of common
stock we will issue at the closing of the Transactions. The actual number
of common shares we will issue at the closing of the Transactions will be
determined based on the financial condition of the ISPs as of the closing
date of this offering. See "Risk Factors--We may be Obliged to Pay
Substantial Additional Consideration Under Agreements entered into in
Connection with the Transactions" at page 11 below and "The Transactions"
at page 20 below. Upon completion of this offering, we also will have
outstanding options to purchase shares of common stock at the initial
public offering price, of which options to purchase 841,600 shares will be
exercisable immediately following completion of this offering.
3
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
We began business as a newly formed corporation in August 1998, and we have
not conducted any operations yet, except negotiating and documenting the
acquisitions of the 17 ISPs we will acquire in the Transactions, preparing this
prospectus and the related documents for this offering and developing our
management team and corporate structure. We present below certain summary pro
forma combined financial data for the Company based on historical data for the
year ended December 31, 1997, the nine months ended September 30, 1997 and the
nine months ended September 30, 1998, considering the combined historical
results for the Company and the 17 ISPs we will acquire in the Transactions. We
present the pro forma combined balance sheet data as of September 30, 1998
based on historical data and as adjusted for this offering. The pro forma
combined statement of operations data for the year ended December 31, 1997 and
the nine months ended September 30, 1997 and 1998 assume that the Transactions
and this offering were consummated on January 1, 1997. The pro forma combined
balance sheet data assume that the Transactions were consummated on September
30, 1998. The summary pro forma financial data do not necessarily indicate the
operating results or financial position which would have resulted from the
operation of the Company on a combined basis during the periods presented, nor
does this pro forma data necessarily represent any future operating results or
financial position of the Company. In addition to this summary financial data,
you should also refer to the more complete financial information included
elsewhere in this prospectus, including more complete historical results for
certain of the companies to be acquired in the Transactions.
4
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS
DATA(1):
Revenues:
Access revenues................... $ 27,251,573 $ 18,634,404 $ 35,865,317
Other revenues.................... 1,872,046 1,396,764 1,585,633
------------ ------------ ------------
Total revenues.................. 29,123,619 20,031,168 37,450,950
Costs and expenses:
Cost of access revenues........... 11,774,867 7,761,015 15,682,667
Cost of other revenues............ 997,086 671,711 697,343
Operations and customer support... 5,492,274 4,409,687 6,423,112
Sales and marketing............... 3,523,164 2,448,329 4,178,888
General and administrative(1)..... 10,904,190 7,038,708 10,282,197
Amortization(2)................... 17,933,873 13,426,490 13,666,416
Depreciation...................... 2,737,589 1,929,174 2,801,461
------------ ------------ ------------
Total costs and expenses........ 53,363,043 37,685,114 53,732,084
------------ ------------ ------------
Loss from operations................ (24,239,424) (17,653,946) (16,281,134)
Interest income..................... 26,612 10,825 69,274
Other income (expense), net......... 9,442 26,442 (247,907)
------------ ------------ ------------
Loss before provision for income
taxes.............................. (24,203,370) (17,616,679) (16,459,767)
Provision for income taxes.......... 262,641 264,857 189,452
------------ ------------ ------------
Net loss............................ $(24,466,011) $(17,881,536) $(16,649,219)
============ ============ ============
OTHER OPERATING DATA:
Approximate number of subscribers,
end of period...................... 154,467 126,033 273,238
EBITDA(3)........................... $ (3,567,962) $ (2,298,282) $ 186,743
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
PRO FORMA AS
COMBINED ADJUSTED
------------ ------------
<S> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Working capital(4).................................. $(77,489,033) $ 28,072,019
Total assets........................................ 200,254,351 235,255,825
Total long-term debt and other liabilities.......... 7,759,636 757,188
Stockholders' equity(5)............................. 109,520,299 222,082,799
</TABLE>
- --------
(1) The pro forma combined statement of operations data for the year ended
December 31, 1997 and for the nine-month periods ended September 30, 1997
and 1998 reflect an aggregate change in compensation and increases in
expenses associated with corporate management and costs associated with
being a public company of $4,369,374, $3,378,975 and $(922,075),
respectively.
(2) Consists of amortization of goodwill to be recorded as a result of the
Transactions in the amount of $17,674,946, $13,256,210 and $13,256,210, for
the year ended December 31, 1997, and the nine month periods ended
September 30, 1998 and 1997, respectively. The goodwill will be amortized
over a 10-year period and computed on the basis described in the Notes to
the Unaudited Pro Forma Combined Financial Statements.
(3) EBITDA represents loss from operations plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for
operating income, net income or cash flows from operating activities for
purposes of analyzing the Company's operating performance, financial
position and cash flows. EBITDA is not necessarily comparable with
similarly titled measures for other companies.
(4) Includes $66,593,293 representing the cash portion of the purchase price
which will be paid on consummation of the Transactions, subject to
adjustment based on the financial condition of certain of the ISPs as of
the closing date of this offering. See "The Transactions," "Use of
Proceeds" and Notes to the Unaudited Pro Forma Combined Financial
Statements.
(5) Adjusted to reflect the sale of the shares of common stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
5
<PAGE>
SUMMARY HISTORICAL INDIVIDUAL ISP FINANCIAL DATA
The following table presents certain summary historical statement of
operations data for certain of the ISPs for each of their three most recent
fiscal years and the nine-month periods ended September 30, 1997 and 1998. The
historical statement of operations data presented below has not been adjusted
for the pro forma adjustments reflected in the Unaudited Pro Forma Combined
Financial Statements included elsewhere in this prospectus. See "Selected
Historical Financial Data for Our ISPs" beginning on page 29 below. Where data
has not been provided for certain periods, the data was either unavailable or
the ISP had not yet commenced operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ---------------------
1995 1996 1997 1997 1998
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
NORTHEAST GROUP
D&E SuperNet, Inc.
Revenues............... $119,545 $ 841,537 $1,749,207 $1,217,711 $2,619,301
Subscribers............ 4,406 8,980 7,378 20,968
SunLink, Inc.
Revenues............... $ 6,620 $ 224,966 $ 798,237 $ 538,299 $1,016,954
Subscribers............ 1,390 3,730 3,126 7,038
LebaNet, Inc.
Revenues............... $ 149,299 $ 199,571 $ 129,329 $ 216,048
Subscribers............ 289 246 250 235
PLAINS STATES GROUP
SouthWind Internet
Access, Inc.
Revenues............... $202,140 $ 836,587 $1,437,848 $1,033,223 $1,504,456
Subscribers............ 5,185 8,116 7,167 10,545
Horizon Internet
Technologies, Inc.
Revenues............... $ 1,921 $ 148,686 $ 434,615 $ 301,632 $ 791,323
Subscribers............ 807 3,380 2,578 7,893
SOUTHEAST GROUP
United States Internet,
Inc.
Revenues............... $889,902 $2,506,732 $4,173,803 $2,992,752 $4,228,545
Subscribers............ 15,192 23,111 21,094 32,311
Internet Partners of
America, LC
Revenues............... $ 28,155 $ 930,989 $1,856,801 $1,231,776 $3,005,105
Subscribers............ 6,789 13,060 11,596 22,240
Netrox, LLC
Revenues............... $ 74,882 $ 623,793 $1,196,977 $ 868,926 $1,062,601
Subscribers............ 3,361 3,964 3,694 4,365
ZoomNet, Inc.
Revenues............... $ 18,701 $ 272,692 $ 857,619 $ 571,406 $1,316,779
Subscribers............ 1,997 5,309 4,382 9,912
Palm.Net, USA, Inc.
Revenues............... $ 95,918 $ 432,411 $ 312,975 $ 455,615
Subscribers............ 1,600 2,824 2,476 3,160
Internet Access Group,
Inc.
Revenues............... $393,165 $ 951,345 $1,179,434 $ 849,192 $1,089,770
Subscribers............ 2,574 3,887 3,564 4,764
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
MIDWEST SOUTH GROUP
Midwest Internet,
L.L.C.
Revenues............. $ 186,143 $ 1,790,376 $ 2,523,128 $ 1,803,849 $ 2,757,988
Subscribers.......... 11,529 11,474 9,976 16,100
Internet Solutions,
LLC
Revenues............. $ 7,004 $ 140,701 $ 446,057 $ 287,581 $ 672,551
Subscribers.......... 1,010 4,608 3,680 8,064
MIDWEST NORTH GROUP
FGInet, Inc.
Revenues............. $ 34,161 $ 274,965 $ 818,445 $ 582,283 $ 984,834
Subscribers.......... 2,919 5,727 5,078 8,034
NORTH CENTRAL GROUP
Superhighway, Inc.
d/b/a Indynet
Revenues............. $ 248,479 $ 1,248,751 $ 2,106,290 $ 1,541,797 $ 2,242,106
Subscribers.......... 6,556 12,468 11,073 16,783
CALIFORNIA GROUP
Lightspeed Net, Inc.
Revenues............. $ 84,771 $ 1,124,474 $ 3,085,901 $ 2,086,100 $ 3,521,630
Subscribers.......... 4,059 11,464 9,548 16,313
JPS.Net Corporation
Revenues............. -- -- $ 2,074,398 $ 1,057,205 $ 5,942,734
Subscribers.......... -- -- 32,119 19,373 84,513
TOTAL
Revenues(1)............ $2,295,589 $12,161,811 $25,370,742 $17,406,036 $33,428,310
Subscribers............ 69,663 154,467 126,033 273,238
</TABLE>
- --------
(1) The revenues reported above do not necessarily correspond to revenues
reflected in the Pro Forma Combined Statement of Operations as a result of
acquisitions which our ISPs completed that are included in the Pro Forma
Combined Statement of Operations but not reflected in the historical data
shown above.
7
<PAGE>
RISK FACTORS
An investment in our common stock involves certain risks. To understand
these risks and to evaluate an investment in our common stock, you should read
this entire prospectus, including the following risk factors.
WE DO NOT HAVE ANY COMBINED OPERATING HISTORY, AND OUR BUSINESS MODEL IS
UNTESTED
We are a newly formed company. Upon completion of this offering, we will
acquire 17 independent ISPs serving subscribers and other customers
predominantly in secondary, tertiary and rural markets. We will combine these
separate ISPs into a new company, and we may not be able to achieve or
maintain profitability of any of our individual ISPs or overall. In
particular, we will be applying an untested business model building on the
strengths of these existing ISPs and the planned centralization of certain of
our business functions. It may take us longer than anticipated to implement
our business model, and some components of our model may not prove to be
feasible or possible. We cannot assure potential investors that our business
will produce the level of profitability we hope to achieve.
WE MAY FAIL TO INTEGRATE OUR ACQUISITIONS OR MANAGE OUR FUTURE GROWTH
SUCCESSFULLY
Our success as a new national ISP will depend in large part on our ability
to integrate the operations and management of the 17 independent ISPs we will
acquire in the Transactions and our ability to integrate additional ISPs we
may acquire in the future. We will have to expend substantial managerial,
operating, financial and other resources to integrate these businesses and
implement our business model. In particular, to integrate our newly acquired
ISPs successfully, we must install and standardize adequate operational and
control systems, deploy certain equipment and telecommunications facilities,
implement new marketing efforts in new as well as existing locations, employ
qualified personnel to provide technical and marketing support for our various
operating sites and continue the expansion of our managerial, operational,
technical and financial resources. Failure to integrate our ISPs successfully
may result in significant operating inefficiencies, which may hurt our
operating results.
We expect our business to grow rapidly. This rapid growth is likely to place
a significant strain on our business resources. To manage this growth
effectively, we must implement additional management information systems
capabilities, further develop our operating, administrative, financial and
accounting systems and controls, improve coordination among accounting,
finance, marketing and operations and hire and train additional personnel. As
a result, we will have to hire new management personnel and existing
management will have to develop additional expertise. In particular, we cannot
assure investors that customer support resources will be sufficient to manage
the growth in our business or that we will be successful in implementing our
expansion program in whole or in part.
WE COMPETE WITH OTHER INTERNET ACCESS PROVIDERS, WHICH COULD CAUSE US TO LOWER
PRICES RESULTING IN REDUCED REVENUES
We face a competitive environment in the market for Internet access and
related services. We expect that competition will continue to intensify as
more people begin using
8
<PAGE>
the Internet. We believe both new companies and existing businesses in other
industries will seek to enter the ISP market. Current and prospective
competitors include other national, regional and local ISPs, long distance and
local exchange telecommunications companies, cable television companies, direct
broadcast satellite and wireless communications providers and on-line service
providers. As a result of an increase in the number of competitors, and
vertical and horizontal integration in the industry, we currently face and
expect to continue to face significant pricing pressure and other competition
in the future. Advances in technology and changes in the marketplace and the
regulatory environment will continue, and we cannot predict the effect that
ongoing or future developments may have on us or the pricing of our products
and services.
Our current primary competitors include national on-line service providers
with a significant national presence which focus on individual and small
business subscribers, such as America Online, Microsoft Network, Prodigy,
MindSpring and EarthLink. Most of these competitors have significantly greater
market presence, brand recognition and financial, technical and personnel
resources than we do. They also have extensive coast-to-coast access to
Internet backbones which provides them with greater scalability and can provide
better service quality. We also compete with independent regional and local
ISPs in many of our markets. We expect increased competition over time in the
secondary, tertiary and rural markets where we operate as national on-line
service providers and other ISPs enter and increase their focus on these
markets.
All of the major long distance companies (also known as interexchange
carriers or IXCs), including AT&T, MCI WORLDCOM and Sprint, offer Internet
access services and compete with us. Local exchange carriers ("LECs"),
including the Regional Bell Operating Companies ("RBOCs") and competitive local
exchange carriers ("CLECs") also have entered the ISP market. We believe long
distance and local carriers are moving toward horizontal integration through
acquisitions of, and joint ventures with, ISPs. Accordingly, we expect we will
experience increased competition from the traditional telecommunications
carriers both for subscribers and potential acquisitions. Many of these
telecommunications carriers, in addition to their substantially greater
coverage, market presence, and financial, technical and personnel resources,
also have large, existing commercial subscriber bases. Furthermore,
telecommunications providers may have the ability to bundle Internet access
with basic local and long distance telecommunications services. This bundling
of services may make it difficult for us to compete effectively with the
telecommunications providers and may result in pricing pressure on us that
could have an adverse effect on our business, financial condition and results
of operations.
In addition, Tele-Communications, Inc. and Time Warner, among other cable
companies, offer high speed Internet access via cable modem in a growing number
of markets, either directly or through alliances with Internet access providers
such as @Home Corporation. Certain other alternative service companies are
approaching the Internet connectivity market with various newer wireless
terrestrial- and satellite-based service technologies.
CERTAIN OF THE ISPS WE WILL ACQUIRE IN THE TRANSACTIONS HAVE A HISTORY OF
OPERATING LOSSES AND NEGATIVE CASH FLOW
On a pro forma combined basis, we had operating losses of $24.2 million for
the year ended December 31, 1997 and $16.3 million for the nine months ended
September 30, 1998.
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In addition, for the nine months ended September 30, 1998 and the year ended
December 31, 1997, six and eight, respectively, of our ISPs reported operating
losses or negative operating cash flow. The extent to which we experience
operating losses or negative operating cash flow will depend upon a number of
factors including the number and size of our acquisitions and investments, our
ability to generate increasing revenues and cash flow, the amount of
expenditures incurred at the corporate and national level and any potential
adverse regulatory developments. We cannot assure investors that we will
achieve or sustain positive operating cash flow or generate operating income at
our ISPs on an individual or combined basis in the future.
WE MAY FAIL TO USE EXISTING AND NEW TECHNOLOGY PROPERLY AND WE MAY FALL BEHIND
TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS
The ISP market is characterized by rapidly changing technology, evolving
industry standards, changes in subscriber needs and frequent new service and
product introductions. Our future success will depend, in part, on our ability
to use new technologies effectively, to continue to develop our technical
expertise, to enhance our existing services and to develop new services to meet
changing subscriber needs on a timely and cost-effective basis. We are not
certain that we will successfully:
. use new technologies effectively or achieve market acceptance of new
technologies;
. develop new products and services to take advantage of new technologies
or secure market acceptance for new products; or
. enhance existing services on a timely basis or achieve market acceptance
for these enhancements.
Our ability to compete successfully also depends upon the continued
compatibility of our services with products and architectures offered by
various vendors. Although we intend to support emerging standards in the market
for Internet access, we cannot assure investors that industry standards will be
established or, if they become established, that we will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. In addition, we cannot assure investors that services or
technologies developed by others will not render our services or technology
noncompetitive or obsolete.
WE MAY FAIL TO IDENTIFY OR CONSUMMATE ADDITIONAL ACQUISITIONS
Our business strategy depends, in part, upon our ability to expand into new
markets and enhance our presence in our existing markets by identifying and
acquiring ISPs that meet our acquisition criteria. In pursuing these
opportunities, we may compete with other ISPs with similar acquisition
strategies, many of which may be larger than we are and have greater financial
and other resources than we have. We will compete for potential acquisitions
based on a number of factors, including price, terms and conditions, size,
access to capital and ability to offer cash, stock or other forms of
consideration. We cannot assure investors that we will be able to identify
suitable ISPs or, that once a suitable ISP is
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identified, we will be able to consummate the acquisition of that ISP on terms
and conditions acceptable to us. Once consummated, these acquisitions will
continue to present certain risks, including:
. the difficulty of assimilating the acquired operations, technology and
personnel;
. the possible inability of management to maximize our financial and
strategic position by the successful incorporation of acquired
technology and rights into our service offerings and to maintain uniform
standards, controls, procedures and policies;
. the possible acquisition of substantial contingent or undisclosed
liabilities;
. the risks of entering markets in which we have little or no direct prior
experience; and
. the potential impairment of relationships with employees and subscribers
as a result of changes in management.
We may not be successful in overcoming these risks or any other problems
encountered in connection with future acquisitions. In addition, future
acquisitions could materially adversely affect our operating results as a
result of dilutive issuances of equity securities, the incurrence of additional
debt or the amortization of expenses related to goodwill and other intangible
assets.
WE MAY ACQUIRE CONTINGENT OR UNDISCLOSED LIABILITIES IN THE TRANSACTIONS
We may acquire liabilities in the Transactions which we did not know about at
the time we negotiated the Transactions or which are contingent and are
realized or prove to be larger than anticipated. If such liabilities arise, we
have only limited recourse against the former owners of our ISPs. If any
substantial contingent obligations are realized or if we discover any
substantial unknown liabilities, we may suffer an adverse impact on our
financial condition.
WE MAY BE OBLIGATED TO PAY SUBSTANTIAL ADDITIONAL CONSIDERATION UNDER
AGREEMENTS ENTERED INTO IN CONNECTION WITH THE TRANSACTIONS
For certain of the ISPs we will acquire in the Transactions the total
consideration to be paid will not be determined until the closing date of the
Transactions when the final purchase price for these ISPs will be adjusted
based on the financial condition of these ISPs as of the closing date of this
offering. Generally, we will adjust the purchase price based on the net worth
and debt level of each of these ISPs. The amounts of cash and common stock
payable upon the closing of the Transactions set forth in this prospectus
reflect the adjustments to the purchase prices for the ISPs which would have
been made if the Transactions had closed on June 30, 1998 with regard to the
net worth of each of the ISPs, or, in the case of JPS.Net Corporation,
September 30, 1998, and on September 30, 1998 with regard to the debt of each
of the ISPs.
In addition to the purchase price paid upon the closing of the Transactions,
we have agreed to pay to the former owners of each of our ISPs an amount based
on a percentage
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(generally 10% to 20% or, in the case of JPS.Net Corporation, 50%) of the
amount by which the total revenues for the ISP for the 12 months ending June
30, 1999 exceeds the annualized revenues for the ISP for the three months
ended June 30, 1998 (or, in the case of JPS.Net Corporation, the amount by
which its total revenues for the 12 months ending September 30, 1999 exceeds
its annualized revenues for the three months ended September 30, 1998) after
giving effect to certain adjustments and provided, in certain cases, that the
ISP has at least a 5% EBITDA (earnings before interest, taxes, depreciation
and amortization) margin for the 12 months ending June 30, 1999. We cannot
predict at this time the amount of the additional consideration that will be
paid to the former owners of our ISPs; and no provision for such obligation
has been reflected in our financial statement as of September 30, 1998.
We must pay any amounts owing to these former owners of our ISPs based on
this calculation prior to December 31, 1999, and may make any such payments in
cash or in stock, at our option, or, in the case of one of our ISPs, at the
option of the former owners of that ISP. If we pay these amounts in common
stock, we will issue a number of new shares based on the fair market value of
our common stock on June 30, 1999. Payment of these amounts in cash may
substantially deplete our cash reserves and could result in an immediate,
adverse effect on our business, financial condition and results of operations.
In addition, on June 30, 1999, we will grant additional options to certain
former owners, employees and affiliates of our ISPs. For each of our ISPs, we
will grant options on June 30, 1999 to purchase a number of shares of common
stock equal to the greater of (i) 20 times (A) the incremental revenues for
the ISP for the 12 months ending June 30, 1999 over the annualized revenues
for the ISP for the three months ended June 30, 1998, after giving effect to
certain adjustments, divided by (B) $1,000, or (ii) the incremental increase
in the number of subscribers for the ISP at June 30, 1999 compared to June 30,
1998, multiplied by five. These options will have an exercise price equal to
the fair market value of the common stock at June 30, 1999 and will vest one-
third on each of June 30, 2005, 2006 and 2007, subject to accelerated vesting
based on the performance of our ISPs.
If we issue common stock to satisfy these obligations, the issuance of such
stock would result in dilution to existing stockholders.
WE DEPEND ON DEMAND FOR INTERNET ACCESS, AND THIS DEMAND MAY NOT GROW IF THE
INTERNET FAILS TO BECOME A MAJOR MEDIUM OF COMMERCE AND COMMUNICATIONS
Our business relies on demand for access to the Internet and for products
and services related to the Internet. The Internet has experienced rapid
growth in recent years, but demand and market acceptance for recently
introduced Internet-related products and services are subject to a high level
of uncertainty. In addition, critical issues concerning the commercial use of
the Internet remain unresolved and may impact the growth of Internet use. Many
individuals and businesses have been deterred from purchasing Internet access
services for a number of reasons, including:
. inconsistent quality of service;
. lack of availability of cost-effective, high-speed options;
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. a limited number of local access points;
. inadequate protection of stored data and information moving across the
Internet; and
. a lack of tools to simplify Internet access and use.
In particular, numerous published reports have indicated that a perceived
lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial use of the Internet to date. There can be no
assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Published reports have also
indicated that capacity constraints that cause delays, transmission errors and
other difficulties, unless resolved, may impede further development of the
Internet. As the delivery of Internet solutions undergoes significant
technological changes, we may not be able to integrate technological advances
or successfully adapt our network. We cannot assure investors that commerce and
communication over the Internet will continue to develop and expand, or that
our offered Internet access and communications services will become widely
adopted for these purposes. If the market for Internet access services fails to
develop, develops more slowly than expected or becomes saturated with
competitors, or if the Internet access and related products and services we
offer are not broadly accepted, our business, operating results and financial
condition will be materially adversely affected.
WE MAY NOT RETAIN OUR SUBSCRIBERS
The sales, marketing and other costs of acquiring new subscribers are
substantial relative to the monthly fees derived from these subscribers.
Accordingly, we believe our long-term success largely depends on our ability to
retain existing subscribers while continuing to attract new subscribers. Our
ISPs have invested and, after the consummation of this offering, we will
continue to invest significant resources in our subscriber service and
technical support capabilities. However, we cannot assure investors that this
investment will maintain or improve subscriber retention. Some of our
competitors offer many free hours of services for new subscribers, and we
believe these offers may cause some of our subscribers to switch to
competitors' services. In addition, a certain number of new subscribers
experience the Internet only as a novelty and do not become consistent users of
Internet services. These factors adversely affect our subscriber retention
rates. Any decline in subscriber retention rates could have a material impact
on our business, financial condition and results of operations.
WE DEPEND ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS
We rely on local and long-distance telecommunications companies to provide
data communications capacity. These providers may experience disruptions of
service or may have limited capacity, which could disrupt our services or limit
Internet access for our subscribers. We may not be able to replace or
supplement these services on a timely basis or at all. In addition, because we
rely on third-party telecommunications services providers for our backbone
connection to the Internet, we face the following limitations on our ability to
serve our existing subscribers and grow our subscriber base:
. we do not control decisions regarding availability of service at any
particular time;
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. we may not be able to deploy new technologies when we wish to because
our telecommunications providers may not be able to support that
technology on their backbones;
. we may not be able to establish new points of presence ("POPs") rapidly
enough to respond to increased subscriber demand; and
. we may not be able to negotiate favorable interconnectivity agreements
with other ISPs.
We also depend on certain third-party suppliers of hardware components. As we
and other ISPs and on-line service providers grow, our suppliers will face a
significant demand for their products, and some of these suppliers have limited
resources and production capacity. If our suppliers fail to adjust to meet
increasing demand, they may be unable to supply components and products in the
quantities, at the quality levels and at the times required by us, or at all.
In addition, prices for these components and products may increase
significantly. If a failure of our current suppliers occurs and we are unable
to develop alternative sources of supply, we will experience delays and
increased costs in expanding our network.
Our suppliers and telecommunications carriers also sell or lease products and
services to our competitors and may be, or in the future may become,
competitors themselves. We cannot assure investors that our suppliers and
telecommunications carriers will not enter into exclusive arrangements with our
competitors or stop selling or leasing their products or services to us at
commercially reasonable prices or at all.
WE DEPEND ON THE CAPACITY AND RELIABILITY OF OUR NETWORK, AND A SYSTEM FAILURE
COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
The future success of our business depends on the capacity, reliability and
security of our network. We will have to expand and adapt our network as the
number of subscribers and the amount and type of information they wish to
transfer increase. This expansion and adaptation of our network, in turn, will
require substantial financial, operational, technical and management resources.
We cannot assure investors that we will be able to expand or adapt our network
to meet additional demand or changing subscriber requirements on a timely
basis, at a commercially reasonable cost or at all.
We face capacity constraints both at the level of particular POPs (affecting
only subscribers attempting to use that POP) and in connection with system-wide
services (such as e-mail services). From time to time, we have experienced
delayed delivery from suppliers of new telephone lines, modems, terminal
servers and other equipment. If we experience significant delays of this
nature, all our incoming modem lines may become full during peak times,
resulting in busy signals for subscribers who are trying to connect to our
network. We may experience similar problems if we are unable to expand the
capacity of our information servers (for e-mail, news, and the World Wide Web)
fast enough to keep up with demand from a growing subscriber base. If the
capacity of our servers is exceeded, subscribers will experience delays when
trying to use a particular service. Further, if we do not maintain sufficient
bandwidth capacity in our network connections, subscribers will experience a
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general slowdown of all services on the Internet. If we fail to expand or
enhance our network on a timely basis or to adapt it to changing subscriber
requirements or evolving industry standards, we could lose subscribers, which
could result in adverse changes in our business, financial condition and
results of operations.
Our operations and services also depend on the extent to which our computer
equipment is protected against damage from fire, earthquakes, power loss,
telecommunications failures and similar events. The occurrence of a natural
disaster or other unanticipated problems at one of our POPs could cause service
interruptions for our subscribers. In addition, if our telecommunications
providers fail to provide the data communications capacity we require as a
result of a natural disaster, or operational disruption or for any other
reason, our subscribers could experience service disruptions. We do not
currently maintain fully redundant or back-up Internet services or backbone
facilities or other fully redundant computing and telecommunications
facilities. Any accident, incident or system failure that causes interruptions
in our operations could have a material adverse effect on our ability to
provide Internet services to our subscribers and, in turn, on our business,
financial condition and results of operations.
WE DEPEND ON OUR KEY PERSONNEL
Our success depends to a large degree upon the efforts of our senior
management team and our technical, marketing and sales personnel. Our success
also depends on our ability to attract and retain additional qualified
management, technical, marketing and sales personnel. Hiring employees with the
combination of skills and attributes required to carry out our strategy is
extremely competitive and time-consuming. There can be no assurance that we
will be able to retain or integrate existing personnel or identify and hire
additional personnel. The loss of the services of key personnel or the
inability to attract additional qualified personnel could materially adversely
affect our business, financial condition, and results of operations.
OUR SECURITY MEASURES MAY FAIL
Problems caused by third parties could lead to interruptions, delays or
cessation in service to our subscribers. Inappropriate use of the Internet by
third parties could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company or our subscribers,
which could cause losses to us or our subscribers or deter certain persons from
subscribing to our services. Such inappropriate use of the Internet would
include attempting to gain unauthorized access to information or systems,
commonly known as "cracking" or "hacking." We cannot assure investors that
security measures implemented by us will not fail. Fixing problems caused by
computer viruses or other inappropriate uses or security breaches may require
interruptions, delays or stops in service to our subscribers, which could have
a material adverse effect on our business, financial condition and results of
operations. In addition, we expect our subscribers will increasingly use the
Internet for commercial transactions in the future. Any network malfunction or
security breach could cause these transactions to be delayed, not completed at
all, or completed with compromised security. We cannot assure that subscribers
or others will not
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assert claims of liability against us as a result of any such failure. Further,
until more comprehensive security technologies are developed, the security
concerns of existing and potential subscribers may inhibit the growth of the
Internet service industry in general and our subscriber base and revenue in
particular.
THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
The Year 2000 issue is the result of computer programs only being able to use
two digits rather than four to define the applicable year. Thus, date-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations, causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities. In connection with the Transactions, we have received
representations from the former owners of our ISPs that none of our ISPs face
material, unresolved Year 2000 issues. We have not conducted our own audit of
our ISPs to confirm that these representations are true. To the extent these
representations are breached and we suffer damages, our operating results and
financial condition may be adversely affected. Although we rely on external
vendors and third-party network service providers, we do not anticipate that
these third parties' Year 2000 problems will significantly impact our
operations. To the extent that we rely on external vendors or third-party
network service providers with Year 2000 exposure, however, any failure by
these vendors or third-party network service providers to resolve any Year 2000
issues on a timely basis or in a manner that is compatible with our systems
could have a material adverse effect on our financial condition.
COMPLIANCE WITH CERTAIN REGULATIONS MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION
Although we are not currently subject to direct regulation by the Federal
Communications Commission (the "FCC") or any other federal or state agency,
changes in the regulatory environment relating to the Internet connectivity
market, including regulatory changes which directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from the RBOCs or other telecommunications companies, could affect the prices
at which we may sell our services. For example, the FCC currently is
considering whether subscriber calls to ISPs should be classified as "local" or
"interstate" calls. Although the FCC to date has determined that ISPs should
not be required to pay interstate access charges to local telephone companies
for each minute that dial-up users spend connected to ISPs through telephone
company switches, this decision may be reconsidered in the future if the FCC
finds these calls to be "interstate." In particular, the FCC has stated
publicly that it would be inclined to hold the provision of "phone-to-phone"
Internet protocol ("IP") telephony to be a telecommunications service and
therefore subject to access charges and universal service contribution
requirements, as discussed below. The imposition of access charges would
increase our costs of serving dial-up customers and could have a material
adverse effect on the our business, operating results and financial condition.
Moreover, the FCC may, in the future, reconsider its past ruling that
Internet access service is not "telecommunications" and that ISPs are not
subject to the requirement to pay a percentage of their gross revenues as a
"universal service contribution." The FCC has not determined conclusively
whether or not Internet backbone service is a form of
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"telecommunications" subject to the universal service contribution requirement.
If the FCC were to require universal service contributions from providers of
Internet access or Internet backbone services, our costs of doing business
could increase substantially, and there is no assurance that we could recover
these costs from our customers. Also, the FCC is considering measures that
could stimulate development of high-speed transmission facilities for customers
to obtain access to ISPs. Such regulatory measures also could broaden or narrow
the ability of ISPs that are not affiliated with transmission providers to use
these high-speed facilities. In addition, state public utility commissions may
make regulatory changes which could affect us.
WE MAY BE LIABLE FOR INFORMATION DISSEMINATED OVER OUR NETWORK
We may face liability for information carried on or disseminated through our
network. A number of lawsuits have sought to impose liability on ISPs or on-
line service providers for defamatory speech and infringement of copyrighted
materials. Although a growing number of courts have ruled that the 1996
Telecommunications Act immunizes ISPs from liability for defamatory material
carried on their facilities, we cannot assure investors that other courts will
take a similar approach. Some courts have held that ISPs and on-line service
providers may, under certain circumstances, be subject to damages for copying,
distributing or displaying copyrighted materials, although the recently enacted
Digital Millennium Copyright Act establishes "safe harbor" procedures that
enable ISPs to avoid monetary liability for copyright infringement. A recently
enacted federal statute, the Child On-Line Protection Act ("COPA"), provides
criminal penalties for the commercial distribution of material on the World
Wide Web considered to be "harmful to minors." A federal district court has
enjoined enforcement of COPA pending further proceedings in that litigation. In
addition, other state and federal statutes continue to prohibit distribution of
"obscene" materials and child pornography. ISPs are subject to new federal
requirements that they report the presence of child pornography when made aware
of it, although the law does not require ISPs to monitor information
distributed through their systems. The imposition upon ISPs or Web server hosts
of potential liability for materials carried on or disseminated through their
systems could require us to implement measures to reduce our exposure to this
liability. These measures, as well as existing and proposed federal and state
legislation, may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings, any of which could
have a material adverse effect on our business, operating results and financial
condition.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
The operating results for our ISPs have fluctuated in the past, and our
operating results may fluctuate significantly in the future depending upon a
variety of factors, including the incurrence of capital costs and costs
associated with the introduction of new products and services. Other factors
that may contribute to changes in operating results include:
. the pricing and mix of services that we offer;
. our subscriber retention rates;
. changes in pricing policies and product offerings by our competitors;
. growth in demand for Internet access services;
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. one-time costs associated with acquisitions; and
. general telecommunications services' performance and availability.
As a result, variations in the timing and amounts of revenues could have a
material adverse effect on our quarterly operating results. Due to the
foregoing factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and that these comparisons
should not be relied upon as indicators of future performance.
WE MAY NOT COMPLETE ALL OF THE CONTEMPLATED ACQUISITIONS
The closing under each of the acquisition agreements for our ISPs is subject
to the satisfactory completion of this offering as well as certain other normal
and customary closing conditions. We cannot assure investors that all the
conditions to these acquisitions will be satisfied prior to the closing of this
offering, and we may not be able to consummate the acquisitions of one or more
of the ISPs at the time of this offering or at all. In such an event, we will
use the proceeds of this offering which otherwise would have been used to
complete that transaction in the same manner as the other proceeds of this
offering remaining after funding the Transactions. See "Use of Proceeds" on
page 23 below.
WE HAVE DISCRETION TO USE A PORTION OF THE NET OFFERING PROCEEDS
We will retain discretion over how to use a significant portion
(approximately $35.0 million) of the net proceeds of this offering. We have not
identified specific uses for these proceeds, but we intend to use these
proceeds for general corporate purposes, which may include acquisitions,
working capital expenditures and payment of additional amounts payable under
the acquisition agreements in the Transactions. However, because of the number
and variability of factors that determine our use of the net proceeds of this
offering, we cannot assure investors that these applications will not vary
substantially from our current intentions. Pending this utilization, we intend
to invest the net proceeds of this offering in short-term investment grade and
government securities.
THE BOOK VALUE OF YOUR COMMON STOCK WILL BE SUBSTANTIALLY DILUTED IN THIS
OFFERING
The public offering price will be substantially higher than the pro forma
tangible book value per share of outstanding common stock. Purchasers of shares
in this offering will therefore experience immediate and substantial dilution
in tangible book value per share, and the existing stockholders (not including
the former shareholders of our ISPs who will receive common stock in the
Transactions) will receive a material increase in the tangible book value per
share of their shares of common stock. The dilution to investors in this
offering will be $ per share.
THE LARGE NUMBER OF SHARES OF COMMON STOCK AVAILABLE FOR FUTURE SALE COULD
ADVERSELY AFFECT THE PRICE OF OUR PUBLICLY TRADED COMMON STOCK
Upon completion of this offering, we will have shares of common stock
outstanding (assuming the initial public offering price is greater than $8.00
per share) (or shares if the Underwriters' over-allotment option is
exercised in full) of which
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will be "restricted shares." In addition, we may, at our election, pay
additional amounts of cash or issue additional shares of common stock as
consideration in the Transactions based on the operating results of our ISPs
for the 12 months ending June 30, 1999. See "The Transactions" on page 19 below
for a discussion of how such additional consideration will be determined.
The shares (or up to shares if the Underwriters' over-allotment
option is exercised in full) of common stock sold in this offering will be
freely tradable without further restriction or further registration under the
Securities Act, except for shares purchased by an affiliate (as this term is
defined in the Securities Act) of ours, which will be subject to the
limitations of Rule 144 ("Rule 144") under the Securities Act. Subject to
certain contractual limitations, holders of restricted shares generally will be
entitled to sell these shares in the public securities market without
registration either pursuant to Rule 144 or any other applicable exemption
under the Securities Act.
Within approximately 180 days after the date of this prospectus, we intend to
file one or more registration statements under the Securities Act to register
shares of common stock subject to outstanding stock options or reserved for
issuance under our equity compensation plans. Upon completion of this offering,
options to purchase approximately shares will be outstanding under our
equity compensation plans.
In addition, upon completion of this offering, the holders of shares of
common stock will be entitled to certain piggy-back registration rights with
respect to these shares, which will allow these stockholders to sell these
shares in the market simultaneously with any further public offerings by us of
our equity securities. Sales of a substantial amount of common stock in the
public market, or the perception that these sales may occur, could adversely
affect the market price of the common stock prevailing from time to time in the
public market and could impair our ability to raise additional capital through
the sale of our equity securities.
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THE COMPANY
OneMain.com, Inc. is a newly formed Delaware corporation. We have not
engaged in any significant independent business to date. As discussed below
under "The Transactions," upon completion of this offering, we will acquire 17
existing ISPs serving subscribers predominantly in secondary, tertiary and
rural markets and will implement our national business strategy through these
ISPs. Our executive offices are located at 50 Hawthorne Road, Southampton, New
York 11968, and our telephone number is (516) 287-4084.
THE TRANSACTIONS
We formed OneMain.com, Inc. for the purpose of acquiring existing ISPs
serving subscribers in secondary, tertiary and rural markets. Upon completion
of this offering, we will close the Transactions, and our ISPs will have
approximately 273,000 subscribers in the aggregate, at September 30, 1998, and
will be organized into seven operating groups.
We will consummate the Transactions in accordance with acquisition
agreements negotiated with the current owners of each of our ISPs. We
generally negotiated a purchase price for each ISP based upon a multiple of
revenues generated by that ISP. At closing we will pay to each owner of that
ISP cash or a combination of common stock and cash in exchange for all of the
equity interests in the ISP owned by that person. We will adjust the purchase
price for certain of the ISPs based on the net worth and the debt level of
these ISPs as of the closing date of this offering. The Transactions will
occur simultaneously with the closing of this offering using a portion of the
offering proceeds and newly issued common stock to pay the purchase price. All
debt, other than certain capitalized lease obligations of our ISPs, will be
paid off in connection with the Transactions.
The combined purchase price payable by us in the Transactions will consist
of approximately $66.6 million in cash and approximately 6,087,211 shares of
common stock, subject to the net worth and debt adjustments described above.
However, if the initial public offering price is $8.00 or less per share, we
will increase the number of shares issued in the Transactions so that the
former owners of our ISPs receiving common stock in the Transactions receive
an aggregate of approximately $60.9 million of common stock valued at the
initial public offering price. If this offering is not completed prior to
March 31, 1999, we will increase the purchase price for certain of our ISPs by
3%, payable in cash and common stock.
We also will grant at the closing of the Transactions to certain of the
former owners, employees and affiliates of our ISPs:
(i) options to purchase 841,600 shares of common stock at the initial
public offering price, which will be vested in full immediately upon
completion of the Transactions and this offering; and
(ii) options to purchase shares of common stock at the initial
public offering price, which will vest one-third on each of the sixth,
seventh and eighth anniversaries of the closing date of the Transactions
and this offering, subject to accelerated vesting based on the performance
of our ISPs.
20
<PAGE>
In addition to the purchase price paid at the closing of the Transactions and
this offering, we have agreed to pay to certain former owners of each of our
ISPs an amount based on a percentage (generally 10% to 20%, or, in the case of
JPS.Net Corporation, 50%) of the amount, if any, by which the total revenues
for the ISP for the 12 months ending June 30, 1999 exceeds the annualized
revenues for the ISP for the three months ended June 30, 1998 (or, in the case
of JPS.Net Corporation, the amount by which its total revenues for the 12
months ending September 30, 1999 exceeds its annualized revenues for the three
months ended September 30, 1998) after giving effect to certain adjustments and
provided, in certain cases, that the ISP has at least a 5% EBITDA margin for
the 12 months ending June 30, 1999. We must pay any amounts owing to these
former ISP owners based on this calculation prior to December 31, 1999 and may
make any such payments in cash or in stock, at our option or, in the case of
one of our ISPs, at the option of the former owners of that ISP. In addition,
on June 30, 1999, we will grant additional options to certain former owners,
employees and affiliates of our ISPs. For each of our ISPs, we will grant
options on June 30, 1999 to purchase a number of shares of common stock equal
to the greater of (i) 20 times (A) the incremental revenues for the ISP for the
12 months ending June 30, 1999 over the annualized revenues for the ISP for the
three months ended June 30, 1998, after giving effect to certain adjustments,
divided by (B) $1,000, or (ii) the incremental increase in the number of
subscribers for the ISP at June 30, 1999 compared to June 30, 1998, multiplied
by five. These options will have an exercise price equal to the fair market
value of the common stock at June 30, 1999 and will vest one-third on each of
June 30, 2005, 2006 and 2007, subject to accelerated vesting based on the
performance of our ISPs.
Upon the closing of the Transactions and this offering, we will enter into
employment agreements with certain of the key employees at each of our ISPs.
We will account for the Transactions as a purchase for financial reporting
purposes. We will allocate the excess of the purchase price for each ISP over
the fair value of that ISP's net tangible assets (approximately $176.5 million
excess in the aggregate) primarily to goodwill, subscriber lists and employee
base. We will amortize amounts allocated to intangibles over an average life of
10 years from the closing of this offering. As a result, we will record annual
amortization expenses for the intangible assets acquired in the Transactions of
approximately $17.7 million each year during the 10 years following completion
of this offering. To the extent we become obligated to pay additional
consideration in the Transactions, as described above, or if we make additional
acquisitions after completion of this offering, we may record additional
amortization expenses associated with those obligations or acquisitions.
21
<PAGE>
We have set forth below certain information about the ISPs we will acquire in
the Transactions.
<TABLE>
<CAPTION>
NUMBER OF TOTAL REVENUES FOR THE
SUBSCRIBERS AT THREE MONTHS ENDED
NAME HEADQUARTERS SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
- ---- --------------------- ------------------ ----------------------
<S> <C> <C> <C>
D&E SuperNet, Inc....... Lancaster, PA 20,968 $ 1,352,172
SunLink, Inc. .......... Lebanon, PA 7,038 374,534
LebaNet, Inc. .......... Cornwall, PA 235 76,973
SouthWind Internet
Access, Inc. .......... Wichita, KS 10,545 539,523
Horizon Internet
Technologies, Inc. .... Winfield, KS 7,893 319,888
United States Internet,
Inc. .................. Knoxville, TN 32,311 1,575,507
Internet Partners of
America, LC ........... Fort Smith, AR 22,240 2,349,944
Netrox, LLC............. Miami, FL 4,365 357,830
ZoomNet, Inc. .......... Portsmouth, OH 9,912 490,178
Palm.Net, USA, Inc. .... Merritt Island, FL 3,160 163,025
Internet Access Group,
Inc. .................. Altamonte Springs, FL 4,764 450,814
Midwest Internet,
L.L.C. ................ Carbondale, IL 16,100 1,183,366
Internet Solutions,
LLC.................... Sullivan, MO 8,064 262,476
FGInet, Inc. ........... Springfield, IL 8,034 367,675
SuperHighway, Inc. d/b/a
IndyNet................ Indianapolis, IN 16,783 800,437
Lightspeed Net, Inc. ... Bakersfield, CA 16,313 1,227,522
JPS.Net Corporation .... Sacramento, CA 84,513 2,557,713
------- -----------
Totals...................................... 273,238 $14,449,577
======= ===========
</TABLE>
22
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $112.6 million in net proceeds
from this offering based upon an assumed initial public offering price equal to
$ per share. This amount reflects deductions from the gross proceeds of the
offering of (i) approximately $8.4 million, which will be retained by the
Underwriters as discounts and commissions, and (ii) $4.0 million, representing
our estimated expenses for this offering and the Transactions, including
$500,000, plus accrued interest at the prime rate from November 25, 1998 to the
closing date of this offering, as repayment of a loan made to us to fund
certain of the expenses of the Transactions and this offering. We will use
approximately $66.6 million of the net proceeds of this offering to pay the
cash portion of the purchase prices payable in the Transactions, which will
close simultaneously with the closing of this offering. We will use an
additional $11.0 million of the net proceeds of this offering to pay off
certain indebtedness and liabilities (including amounts due to affiliates) of
the ISPs.
We will use the remainder of the net proceeds (approximately $35.0 million)
for general corporate purposes, which may include acquisitions, working capital
and the payment of any additional amounts payable to certain former owners of
our ISPs under the earn-out provisions of the acquisition agreements we entered
into with these former owners in the Transactions, to the extent we make any of
these payments in cash. This use of proceeds does not reflect the exercise of
the Underwriters' over-allotment option. We estimate that we will receive $17.5
million in additional net proceeds from this offering if the Underwriters
exercise their over-allotment option in full. Until we apply the net proceeds
of this offering as described above or otherwise in our business, we intend to
invest these net proceeds in short-term investment-grade securities.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to finance the expansion of our
business and for general corporate purposes. Our Board of Directors will have
the authority to declare dividends on the common stock at any time following
completion of this offering and may declare dividends on the common stock at
any time, subject to certain statutory requirements on the availability of
funds for the payment of dividends.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1998, (i) on a pro forma combined basis, considering the combined
historical balance sheets for the Company and the 17 ISPs we will acquire upon
the closing of the Transactions, and applying certain pro forma adjustments to
the historical information, and (ii) on a pro forma as adjusted basis,
reflecting the pro forma adjustments and the consummation of this offering at
an assumed initial public offering price of $ per share and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" on page 23 above
and "Selected Combined Pro Forma Financial Data" on page 27 below. You also
should refer to the Company's Unaudited Pro Forma Combined Financial Statements
and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(1)
------------ --------------
<S> <C> <C>
Short-term debt and current portion of long-term
debt and capital lease obligations................. $ 1,315,572 741,319
------------ -------
Due to affiliates/stockholders...................... 69,984,325 --
Long-term debt and capital lease obligations, less
current portion.................................... 2,469,968 547,832
Stockholders' equity:
Preferred stock, $.001 par value per share:
10,000,000 shares authorized;
No shares issued and outstanding on a pro forma
combined basis;
No shares issued and outstanding on a pro forma
as adjusted basis;............................. -- --
Common stock, $.001 par value per share:
100,000,000 shares authorized; shares issued
and outstanding on a pro forma combined basis;
shares issued and outstanding on a pro forma as
adjusted basis................................... 10,837
Additional paid-in capital........................ 109,606,461
Accumulated deficit............................... (76,999)
Stock subscription receivable..................... (20,000)
------------ -------
Total stockholders' equity...................... 109,520,299
------------ -------
Total capitalization................................ $181,974,592 $
============ =======
</TABLE>
- --------
(1) Assumes that we will issue shares of common stock upon the closing of
the Transactions, based on the net worth and debt level of each of our ISPs
as of December 31, 1998. The actual number of shares of common stock to be
issued upon the closing of the Transactions will be adjusted based on the
net worth and the debt level of certain of our ISPs as of the closing date
of this offering. Does not include: (i) shares of common stock which may be
issued to the former owners of our ISPs pursuant to the earn-out
arrangements to be calculated with reference to the ISPs' total revenues
for the 12 months ending June 30, 1999, or, in the case of JPS.Net
Corporation, September 30, 1999; (ii) shares of common stock reserved
for issuance under our 1999 Stock Option and Incentive Plan, of which
options to purchase 841,600 shares of common stock at the initial public
offering price will be exercisable upon completion of this offering; and
(iii) shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan.
24
<PAGE>
DILUTION
The Company's pro forma net tangible book value at September 30, 1998 was
$ , or $ per share of common stock. Pro forma net tangible book value per
share is determined by dividing the pro forma net tangible book value (total
pro forma tangible assets less total pro forma liabilities) of the Company by
the number of shares of common stock outstanding on a pro forma basis after
giving effect to the Transactions. Assuming (i) no increase in the purchase
prices of our ISPs to reflect any acquisitions made by any of our ISPs prior to
the closing, and without taking into account any changes in the pro forma net
tangible book value of the Company, other than to give effect to the sale of
the shares of common stock offered hereby (assuming an initial public offering
price of $ per share) and the application of the net proceeds therefrom as
described under "Use of Proceeds," the Company's pro forma as adjusted net
tangible book value at September 30, 1998 would have been $ , or $ per
share of common stock. This represents an immediate increase in pro forma as
adjusted net tangible book value of $ per share to existing stockholders
(including the former owners of our ISPs who will receive shares of common
stock as partial payment for their equity interests in our ISPs upon completion
of this offering) and an immediate dilution in pro forma as adjusted net
tangible book value of $ per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma as adjusted net tangible book value per share at
September 30, 1998............................................. $
Pro forma increase per share attributable to new investors......
Pro forma as adjusted net tangible book value per share after
the offering...................................................
----
Pro forma dilution per share to new investors................... $
====
</TABLE>
The following table summarizes, as of September 30, 1998, on a pro forma as
adjusted basis after giving effect to the Transactions and this offering, (i)
the number of shares of common stock purchased by existing stockholders
(including the former owners of our ISPs who will receive shares of common
stock as partial payment for their equity interests in our ISPs upon completion
of this offering) and the total consideration (valuing the shares issued to the
former owners of our ISPs as partial payment for their equity interests in our
ISPs at the initial public offering price) and the average price per share paid
to the Company for these shares, (ii) the number of shares of common stock
purchased by new investors in this offering and the total consideration and the
price per share paid by them for these shares and (iii) the percentage of
shares purchased by the existing stockholders and new investors and the
percentages of consideration paid to the Company for these shares by existing
stockholders and new investors. This table assumes no exercise of the
Underwriters' over-allotment option and no exercise of any outstanding stock
options. Upon completion of this offering, there will be options outstanding to
purchase shares of common stock at a weighted average exercise price of
$ (based on an assumed initial public offering price of $ per share). We
also have reserved additional shares for future issuance
25
<PAGE>
under our 1999 Stock Option and Incentive Plan and 1999 Employee Stock Purchase
Plan. To the extent any of these options are exercised or shares issued, there
will be future dilution to new investors. See "Shares Eligible for Future Sale"
at page 88 below.
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
-------------- -------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... % $ % $
New investors......................
--- ----- ----- ----- ----
Total............................ 100.0% $ 100.0% $
=== ===== ===== ===== ====
</TABLE>
- --------
(1) Does not include: (i) shares of common stock which may be issued to the
former owners of our ISPs pursuant to the earn-out arrangements to be
calculated with reference to the ISPs' total revenues for the 12 months
ended June 30, 1999, or, in the case of JPS.Net Corporation, September 30,
1999; (ii) shares of common stock reserved for issuance under our 1999
Stock Option and Incentive Plan, of which options to purchase 841,600
shares of common stock at the initial public offering price will be
exercisable upon completion of this offering; and (iii) shares of
common stock reserved for issuance under our 1999 Employee Stock Purchase
Plan.
26
<PAGE>
SELECTED COMBINED PRO FORMA FINANCIAL DATA
We began business as a newly formed corporation in August 1998, and we have
not conducted any operations yet, except negotiating and documenting the
acquisitions of the 17 ISPs we will acquire in the Transactions, preparing this
prospectus and the related documents for this offering and developing our
management team and corporate structure. We present below certain summary pro
forma combined financial data for the Company based on historical data for the
year ended December 31, 1997, the nine months ended September 30, 1997 and the
nine months ended September 30, 1998, considering the combined historical
results for the Company and the 17 ISPs we will acquire in the Transactions. We
present the pro forma combined balance sheet data for the nine months ended
September 30, 1998 based on historical data and as adjusted for this offering.
The pro forma combined statement of operations data for the year ended December
31, 1997 and the nine months ended September 30, 1998 assume that the
Transactions and this offering were consummated on January 1, 1997. The pro
forma combined balance sheet data assume that the Transactions were consummated
on September 30, 1998. The summary pro forma financial data do not necessarily
indicate the operating results or financial position which would have resulted
from the operation of the Company on a combined basis during the periods
presented, nor does this pro forma data necessarily represent any future
operating results or financial position of the Company. In addition to this
summary financial data, you should also refer to the more complete financial
information included elsewhere in this prospectus, including more complete
historical results for certain of the ISPs to be acquired in the Transactions.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1997 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS
DATA:
Revenues:
Access revenues.................... $ 27,251,573 $ 18,634,404 $ 35,865,317
Other revenues..................... 1,872,046 1,396,764 1,585,633
------------ ------------ ------------
Total net revenues............... 29,123,619 20,031,168 37,450,950
Costs and expenses:
Cost of access revenues............ 11,774,867 7,761,015 15,682,667
Cost of other revenues............. 997,086 671,711 697,343
Operations and customer support.... 5,492,274 4,409,687 6,423,112
Sales and marketing................ 3,523,164 2,448,329 4,178,888
General and administrative(1)...... 10,904,190 7,038,708 10,282,197
Amortization(2).................... 17,933,873 13,426,490 13,666,416
Depreciation--non operating
equipment......................... 2,737,589 1,929,174 2,801,461
------------ ------------ ------------
Total costs and expenses......... 53,363,043 37,685,114 53,732,084
------------ ------------ ------------
Loss from operations................ (24,239,424) (17,653,946) (16,281,134)
Interest income..................... 26,612 10,825 69,274
Other income (expense), net......... 9,442 26,442 (247,907)
------------ ------------ ------------
Loss before provision for income
taxes.............................. (24,203,370) (17,616,679) (16,459,767)
Provision for income taxes.......... 262,641 264,857 189,452
------------ ------------ ------------
Net loss............................ $(24,466,011) $(17,881,536) $(16,649,219)
============ ============ ============
OTHER OPERATING DATA:
Approximate number of subscribers,
end of period...................... 154,467 126,033 273,238
EBITDA(3)........................... $ (3,567,962) $ (2,298,282) $ 186,743
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------
PRO FORMA AS
COMBINED ADJUSTED
------------ ------------
<S> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Working capital(4).................................. $(77,489,033) $ 28,072,019
Total assets........................................ 200,254,351 235,255,825
Total long-term debt and other liabilities.......... 7,759,636 757,188
Stockholders' equity(5)............................. 109,520,299 222,082,799
</TABLE>
- --------
(1) The pro forma combined statement of operations data for the year ended
December 31, 1997 and the nine-month periods ended September 30, 1997 and
1998 reflect an aggregate change in compensation, and increases in expenses
associated with corporate management, and costs associated with being a
public company of $4,369,374, $3,378,975 and $(922,075), respectively.
(2) Consists of amortization of goodwill to be recorded as a result of the
Transactions in the amount of $17,674,946, $13,256,210 and $13,256,210 for
the year ended December 31, 1997 and the nine- month periods ended
September 30, 1998 and 1997, respectively. The goodwill will be amortized
over a 10-year period and computed on the basis described in the Notes to
the Unaudited Pro Forma Combined Financial Statements.
(3) EBITDA represents loss from operations plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for
operating income, net income or cash flows from operating activities for
purposes of analyzing the Company's operating performance, financial
position or cash flows. EBITDA is not necessarily comparable with similarly
titled measures for other companies.
(4) Includes $66,593,293 representing the cash portion of the purchase price
payable in the Transactions, subject to adjustment based on the financial
condition of certain of the ISPs as of the closing date of this offering.
See "The Transactions," "Use of Proceeds" and Notes to the Unaudited Pro
Forma Combined Financial Statements.
(5) Adjusted to reflect the sale of the shares of common stock offered
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
28
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS
The selected financial data of our ISPs are derived in part from the more
detailed historical financial statements and notes thereto of our ISPs included
elsewhere in this prospectus. The balance sheet data as of December 31, 1995,
1996 and 1997 and the statement of operations data for the years ended December
31, 1995, 1996 and 1997 for D&E SuperNet, Inc.; SunLink, Inc.; SouthWind
Internet Access, Inc.; Horizon Internet Technologies, Inc.; United States
Internet, Inc.; Internet Partners of America, LC; Netrox, LLC; ZoomNet, Inc.;
Internet Access Group, Inc.; Midwest Internet, LLC; Internet Solutions, LLC;
FGInet, Inc.; Superhighway, Inc.; and Lightspeed Net, Inc. have been derived
from the audited financial statements included elsewhere herein. The balance
sheet data as of December 31, 1996 and 1997 and the statement of operations
data for the years ended December 31, 1996 and 1997 for LebaNet, Inc. and
Palm.Net, USA, Inc. have been derived from the audited financial statements
included elsewhere herein. The balance sheet data as of December 31, 1997 and
September 30, 1998 and the statement of operations data for the period January
31, 1997 (inception) to December 31, 1997 and the nine-month period ended
September 30, 1998 for JPS.Net Corporation have been derived from the audited
financial statements included elsewhere herein.
The selected individual financial data of D&E SuperNet, Inc.; SunLink, Inc.;
LebaNet, Inc.; SouthWind Internet Access, Inc.; Horizon Internet Technologies,
Inc.; United States Internet, Inc.; Internet Partners of America, LC; Netrox,
LLC; ZoomNet, Inc.; Palm.Net, USA, Inc.; Internet Access Group, Inc.; Midwest
Internet, LLC; Internet Solutions, LLC; FGInet, Inc.; Superhighway, Inc.; and
Lightspeed Net, Inc. as of September 30, 1997 and 1998 and for the nine months
ended September 30, 1997 and 1998 have been derived from the unaudited
financial statements included elsewhere herein. The selected individual
financial data of JPS.Net Corporation for the period January 31, 1997 through
September 30, 1997 have been derived from the unaudited financial statements
included elsewhere herein. Such selected financial data are not necessarily
indicative of the results to be expected for the full year.
In our opinion, the unaudited financial statements of our ISPs reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations of the
ISPs for those periods in accordance with generally accepted accounting
principles. The following selected financial data of the ISPs should be read in
conjunction with the historical financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. All our ISPs have fiscal
years ending December 31.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS (CONTINUED)
The following table presents selected historical financial data for our ISPs
for the stated periods. Where data has not been provided for certain periods,
the data was either unavailable or the ISP had not yet commenced operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
NORTHEAST GROUP
D&E SuperNet, Inc.
Revenues............. $ 119,545 $ 841,537 $1,749,207 $1,217,711 $ 2,619,301
Operating income
(loss).............. $ (190,067) $ (11,029) $ 116,737 $ 68,264 $ 272,716
Subscribers.......... 4,406 8,980 7,378 20,968
SunLink, Inc.
Revenues............. $ 6,620 $ 224,966 $ 798,237 $ 538,299 $ 1,016,954
Operating income
(loss).............. $ (9,185) $ 80 $ 149,583 $ 109,754 $ (53,837)
Subscribers.......... 1,390 3,730 3,126 7,038
LebaNet, Inc.
Revenues............. $ 149,299 $ 199,571 $ 129,329 $ 216,048
Operating income..... $ 52,717 $ 34,928 $ 27,405 $ 72,361
Subscribers.......... 289 246 250 235
PLAINS STATES GROUP
SouthWind Internet
Access, Inc.
Revenues............. $ 202,140 $ 836,587 $1,437,848 $1,033,223 $ 1,504,456
Operating income..... $ 4,449 $ 187,196 $ 365,186 $ 268,973 $ 270,628
Subscribers.......... 5,185 8,116 7,167 10,545
Horizon Internet
Technologies, Inc.
Revenues............. $ 1,921 $ 148,686 $ 434,615 $ 301,632 $ 791,323
Operating income
(loss).............. $ (13,749) $ 351 $ (53,069) $ (23,599) $ 26,289
Subscribers.......... 807 3,380 2,578 7,893
SOUTHEAST GROUP
United States
Internet, Inc.
Revenues............. $ 889,902 $ 2,506,732 $4,173,803 $2,992,752 $ 4,228,545
Operating income
(loss)(2)........... $(2,592,725) $(1,850,915) $ (226,406) $ (226,531) $(4,085,176)
Subscribers.......... 15,192 23,111 21,094 32,311
Internet Partners of
America, LC
Revenues............. $ 28,155 $ 930,989 $1,856,801 $1,231,776 $ 3,005,105
Operating income
(loss).............. $ (150,265) $(1,162,396) $ (979,102) $ (705,019) $ (570,085)
Subscribers.......... 6,789 13,060 11,596 22,240
Netrox, LLC
Revenues............. $ 74,882 $ 623,793 $1,196,977 $ 868,926 $ 1,062,601
Operating income
(loss).............. $ (217,709) $ (139,441) $ (296,341) $ (56,486) $ (239,504)
Subscribers.......... 3,361 3,964 3,694 4,365
ZoomNet, Inc.
Revenues............. $ 18,701 $ 272,692 $ 857,619 $ 571,406 $ 1,316,779
Operating income
(loss).............. $ (1,418) $ (12,533) $ 161,550 $ 100,994 $ 113,975
Subscribers.......... 1,997 5,309 4,382 9,912
Palm.Net, USA, Inc.
Revenues............. $ 95,918 $ 432,411 $ 312,975 $ 455,615
Operating income
(loss).............. $ (52,110) $ 79,831 $ 66,037 $ 116,981
Subscribers.......... 1,600 2,824 2,476 3,160
Internet Access Group,
Inc.
Revenues............. $ 393,165 $ 951,345 $1,179,434 $ 849,192 $ 1,089,770
Operating income
(loss).............. $ (138,036) $ 32,954 $ 36,137 $ 26,019 $ (112,455)
Subscribers.......... 2,574 3,887 3,564 4,764
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
MIDWEST SOUTH GROUP
Midwest Internet,
L.L.C.
Revenues............. $ 186,143 $ 1,790,376 $ 2,523,128 $ 1,803,849 $ 2,757,988
Operating income
(loss).............. $ (196,800) $ (482,368) $ 58,570 $ (7,285) $ 292,704
Subscribers.......... 11,529 11,474 9,976 16,100
Internet Solutions,
LLC
Revenues............. $ 7,004 $ 140,701 $ 446,057 $ 287,581 $ 672,551
Operating income
(loss).............. $ (47,136) $ (74,102) $ 11,740 $ 5,960 $ 99,958
Subscribers.......... 1,010 4,608 3,680 8,064
MIDWEST NORTH GROUP
FGInet, Inc.
Revenues............. $ 34,161 $ 274,965 $ 818,445 $ 582,283 $ 984,834
Operating income
(loss).............. $ (3,790) $ (125,093) $ 119 $ 26,792 $ (33,707)
Subscribers.......... 2,919 5,727 5,078 8,034
NORTH CENTRAL GROUP
Superhighway, Inc.
d/b/a Indynet
Revenues............. $ 248,479 $ 1,248,751 $ 2,106,290 $ 1,541,797 $ 2,242,106
Operating income..... $ 28,427 $ 238,579 $ 460,012 $ 491,368 $ 314,838
Subscribers.......... 6,556 12,468 11,073 16,783
CALIFORNIA GROUP
Lightspeed Net, Inc.
Revenues............. $ 84,771 $ 1,124,474 $ 3,085,901 $ 2,086,100 $ 3,521,630
Operating loss....... $ (385,229) $(1,065,560) $(1,242,859) $ (890,320) $ (80,772)
Subscribers.......... 4,059 11,464 9,548 16,313
JPS.Net Corporation
Revenues............. $ 2,074,398 $ 1,057,205 $ 5,942,734
Operating loss....... $ (992,646) $ (361,609) $ (796,505)
Subscribers.......... 32,119 19,373 84,513
TOTAL
Revenues(1) ........... $ 2,295,589 $12,161,811 $25,370,742 $17,406,036 $33,428,310
Operating income
(loss)................ $(3,913,233) $(4,463,670) $(2,316,030) $(1,079,283) $(4,391,591)
Subscribers............ 69,663 154,467 126,033 273,238
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
NORTHEAST GROUP
D&E SuperNet, Inc.
Total assets......... $ 227,716 $ 596,488 $ 767,247 $ 728,172 $ 2,200,804
Long-term debt....... -- -- -- -- 1,006,250
Total stockholders'
equity.............. (51,517) (443) 46,130 13,134 475,352
SunLink, Inc.
Total assets......... 21,988 149,149 463,575 323,424 635,764
Long-term debt....... 5,000 7,500 12,941 7,500 199,357
Total stockholders'
equity.............. 11,310 17,926 157,327 86,549 91,507
LebaNet, Inc.
Total assets......... 75,340 115,249 94,142 104,064
Long-term debt....... -- -- -- --
Total stockholders'
equity.............. 24,716 49,204 43,946 71,635
PLAINS STATES GROUP
SouthWind Internet
Access, Inc.
Total assets......... 158,735 427,912 609,336 572,340 613,989
Long-term debt....... 59,050 129,283 70,433 84,729 44,899
Total stockholders'
equity.............. 31,254 206,855 397,840 302,938 431,627
Horizon Internet
Technologies, Inc.
Total assets......... 36,301 79,987 177,844 161,850 337,175
Long-term debt....... 12,791 48,018 80,904 80,521 185,049
Total stockholders'
equity (deficit).... 8,251 7,367 (49,486) (18,604) (37,198)
SOUTHEAST GROUP
United States
Internet, Inc.
Total assets......... 751,795 1,902,158 2,228,337 2,517,332 3,848,738
Long-term debt....... 137,632 1,583,570 773,810 1,753,858 1,932,361
Stock appreciation
rights liability.... 1,780,840 2,362,218 1,763,357 1,338,461 5,080,312
Total stockholders'
deficit............. (1,853,742) (3,307,922) (2,799,234) (2,671,220) (5,817,065)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------------
1995 1996 1997 1997 1998
--------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Internet Partners of
America, LC
Total assets......... $ 297,758 $1,500,578 $2,360,033 $2,085,075 $ 3,633,400
Long-term debt....... 100,000 254,007 337,307 1,220,126 2,630,188
Total stockholders'
equity (deficit).... 149,735 573,220 (318,811) (267,761) (1,067,890)
Netrox, LLC
Total assets......... 140,961 290,462 378,563 364,979 348,643
Long-term debt....... -- -- -- -- --
Total stockholders'
equity.............. (228,692) (412,360) (767,882) (497,359) (1,071,679)
ZoomNet, Inc.
Total assets......... 31,585 170,159 681,281 498,843 1,193,737
Long-term debt....... 5,397 15,701 219,957 121,439 136,328
Total stockholders'
equity.............. 18,582 60,768 146,833 115,286 194,594
Palm.Net, USA, Inc.
Total assets......... 74,304 128,762 136,975 209,881
Long-term debt....... -- -- -- --
Total stockholders'
(deficit) equity.... (50,413) 13,920 7,812 126,777
Internet Access Group,
Inc.
Total assets......... 82,526 292,868 289,775 295,935 447,151
Long-term debt....... 46,000 153,521 198,680 196,607 256,359
Total stockholders'
(deficit)........... (146,223) (123,758) (111,636) (115,042) (249,987)
MIDWEST SOUTH GROUP
Midwest Internet
L.L.C.
Total assets......... 434,841 759,993 747,249 740,000 701,497
Long-term debt....... 86,212 38,822 127,691 104,000 79,682
Total stockholders'
(deficit)........... (123,023) (582,892) (589,057) (671,000) (377,599)
Internet Solutions,
LLC
Total assets......... 61,828 107,462 307,076 230,054 602,375
Long-term debt....... -- -- -- -- --
Total stockholders'
equity.............. 42,864 81,080 102,703 98,851 158,105
MIDWEST NORTH GROUP
FGInet, Inc.
Total assets......... 27,556 243,321 375,388 349,414 1,166,704
Long-term debt....... -- -- -- 9,079 --
Total stockholders'
equity.............. 13,000 159,336 211,227 196,631 304,144
NORTH CENTRAL GROUP
Superhighway, Inc.
d/b/a IndyNet
Total assets......... 171,289 435,399 918,678 817,133 1,211,758
Long-term debt....... -- -- 28,889 28,889 12,021
Total stockholders'
equity.............. 112,930 316,766 703,332 756,948 928,385
CALIFORNIA GROUP
Lightspeed Net, Inc.
Total assets......... 310,136 1,081,951 1,483,961 1,451,059 1,546,007
Long-term debt....... -- -- -- -- --
Total stockholders'
equity.............. 297,553 874,751 848,248 1,041,569 959,671
JPS.Net Corporation
Total assets......... 1,248,241 879,455 3,127,012
Long-term debt....... -- -- 830,952
Total stockholders'
equity (deficit).... (979,307) (345,158) (2,822,517)
</TABLE>
- --------
(1) The revenues reported above do not necessarily correspond to revenues
reflected in the Pro Forma Combined Statement of Operations as a result of
acquisitions which our ISPs completed that are included in the Pro Forma
Combined Statement of Operation, but not reflected in the historical data
shown above.
(2) Operating income (loss) for the years ended December 31, 1995, 1996 and
1997, and the nine-month periods ended September 30, 1997 and 1998 includes
compensation expense (benefit) of $1,680,840, $581,378, ($598,861),
($449,145) and $3,316,955, respectively. This expense (benefit) is
attributable to compensation expense related to United States Internet's
stock appreciation rights.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based on the combined pro forma
results of the Company and the historical results for each of the Company's
ISPs for which such separate data has been included in this prospectus. See
"Selected Combined Pro Forma Financial Data" on page 27 above for the basis of
the pro forma presentation for the Company.
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Reform Act. The safe harbor provisions provided in
Section 27A of the Securities Act and Section 21E of the Exchange Act do not
apply to forward-looking statements made in connection with an initial public
offering. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
these forward-looking statements. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on these forward-looking
statements.
OVERVIEW
OneMain.com provides Internet access and related services to individuals and
businesses located predominantly in secondary, tertiary and rural markets
throughout the United States. Upon completion of this offering, we will
immediately become one of the ten largest (based on number of subscribers)
independent Internet providers in the United States with approximately 273,000
subscribers at September 30, 1998.
The Company derives Internet access revenues primarily from subscriptions
from individuals and small businesses for dial-up access to the Internet.
Subscription fees vary among the Company's ISPs and by billing plan within the
subscriber base for a particular ISP. The Company also earns access revenues by
providing dedicated Internet access and web-hosting services.
The Company earns non-access revenues by charging set-up and installation
fees, providing web page development and other technical services and selling
advertising, equipment and software. Revenues from the sale of these products
and services have been classified as other revenues in the Pro Forma Results of
Operations table set forth below.
The Company's costs and expenses include (i) cost of access revenues, (ii)
cost of other revenues, (iii) operations and customer support, (iv) sales and
marketing, (v) general and administrative, (vi) amortization and (vii)
depreciation.
Costs of access revenues consist primarily of the cost of routers and access
servers and the recurring telecommunications costs associated with providing
service to subscribers, including the cost of local telephone lines to carry
subscriber calls to our POPs, the costs associated with leased lines connecting
the POPs to the Internet and our operations centers, and Internet backbone
costs.
33
<PAGE>
Cost of access revenues will increase over time to support the Company's
growing subscriber base. We will seek to leverage the combined scale of our
ISPs to lower telecommunications costs as a percentage of revenues by: (1)
negotiating one or more relationships with national backbone providers to
connect our ISPs to the Internet; (2) negotiating favorable local loop
contracts and establishing co-location arrangements with incumbent and
competitive local exchange carriers; and (3) establishing private peering
relationships to reduce our costs and improve access and reliability for our
subscribers. Negotiation of discounts with equipment vendors will also reduce
this expense category as a percentage of revenues. Increases in individual
subscriber usage will tend to offset the per subscriber cost savings we may be
able to achieve.
Costs of other revenues consist primarily of the salaries and benefits of the
personnel providing installation, web development and technical services, as
well as the cost of purchasing the equipment to provide these services. In the
case of equipment and software sales, the costs of other revenues includes the
cost of licensing software and purchasing equipment for resale.
Operations and customer support includes the expenses associated with
customer service and technical support, and consists primarily of the salaries
and employment costs of the employees responsible for those efforts. Operations
and customer support expenses are expected to increase over time to support new
and existing subscribers. In the short term, new subscribers tend to be
particularly heavy customer service and technical support users. Customer
service and technical support provided on a 24 X 7 basis in certain markets
will also serve to increase these expenses on an absolute basis. In the longer
term, as a percentage of revenues, we believe that operations and customer
support expenses should decline as the existing subscriber base is less
dependent on customer service, and this relatively fixed expense category is
leveraged by a growing subscriber base.
Sales and marketing includes the expenses associated with acquiring
subscribers, including salaries, bonuses, sales commissions, advertising and
referral bonuses. Sales and marketing expense is expected to increase over time
with the growth in the subscriber base. On a percentage of revenue basis, sales
and marketing expense is a relatively variable cost and may increase with the
migration to a unified national brand supported by a community-based marketing
program.
General and administrative expenses consist primarily of the salaries of our
employees and associated benefits, as well as the cost of travel,
entertainment, rent and utilities. General and administrative costs are
expected to increase to support the growth of the Company, particularly as a
network operations center and common billing and financial reporting systems
are implemented in the near term. Over time, we expect these relatively fixed
expenses to decrease as a percentage of revenues.
Amortization expense primarily relates, on a pro forma basis, to the
amortization of goodwill, covenants not to compete and other intangibles
acquired in the Transactions and is provided over the useful lives of these
intangibles ranging from three to 10 years. Amortization expense is expected to
increase as additional acquisitions are closed, and will
34
<PAGE>
vary according to purchase price and tangible assets. The Company's policy in
future acquisitions will be to amortize the portion of the acquisition
purchase price attributable to goodwill and other intangible assets over an
average 10-year period.
Depreciation primarily relates to the Company's hardware infrastructure and
is provided over the estimated useful lives of the assets ranging from three
to five years using the straight line method. Depreciation expense is expected
to increase as the operating groups build scale in their networks to support
new and acquired subscribers and as corporate management builds a network
operations center and common billing and reporting systems.
35
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The pro forma operating results include the effects of the pro forma
adjustments that are included in the Unaudited Pro Forma Combined Statements
appearing on page F-5. This data may not be comparable to and may not be
indicative of the Company's past combined results of operations because (i) the
operating subsidiaries were not under common control of management during the
periods presented, (ii) the ISPs used different tax structures (generally,
partnerships, S corporations and C corporations) during the periods presented,
(iii) the Company will incur incremental costs related to its new corporate
management and the costs of being a public company, (iv) the Company will use
the purchase method of accounting to record the Transactions, resulting in the
recording of intangibles that will be amortized over an average life of ten
years, and (v) the historical combined data does not reflect the compensation
differential and potential benefits and cost savings the Company expects to
realize when operating as a combined entity.
The following table presents the combined unaudited pro forma operating
results of the Company for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998. For a discussion of the pro forma
adjustments, see the Unaudited Pro Forma Combined Financial Statements and the
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------------------
1997 1997 1998
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Access revenues....... $ 27,251.6 93.6% $ 18,634.4 93.0% 35,865.3 95.8%
Other revenues........ 1,872.0 6.4 1,396.8 7.0 1,585.6 4.2
---------- ----- ---------- ----- ---------- -----
Total net revenues.. 29,123.6 100.0 20,031.2 100.0 37,450.9 100.0
Cost and expenses:
Cost of access
revenues............. 11,774.9 40.4 7,761.0 38.7 15,682.7 41.9
Cost of other
revenues............. 997.1 3.4 671.7 3.4 697.3 1.9
Operations and
customer support..... 5,492.2 18.8 4,409.6 22.0 6,423.1 17.1
Sales and marketing... 3,523.2 12.1 2,448.3 12.2 4,178.9 11.2
General and
administrative....... 10,904.1 37.4 7,038.7 35.1 10,282.3 27.4
Amortization.......... 17,933.9 61.6 13,426.5 67.0 13,666.4 36.5
Depreciation.......... 2,737.5 9.4 1,929.2 9.6 2,801.5 7.5
---------- ----- ---------- ----- ---------- -----
Total cost and
expenses........... 53,363.0 183.6 37,685.2 188.1 53,732.0 143.4
---------- ----- ---------- ----- ---------- -----
Loss from operations.... $(24,239.4) (83.2)% $(17,653.9) (88.1)% $(16,281.1) (43.5)%
========== ===== ========== ===== ========== =====
EBITDA.................. $ (2,804.2) 9.6% $ (1,725.3) 8.6% $ 186.7 0.4%
========== ===== ========== ===== ========== =====
</TABLE>
36
<PAGE>
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues.
. Access revenues increased $17.3 million, or 92.5%, from $18.6 million to
$35.9 million primarily as a result of an increase in subscribers, and
in part due to an increase in the price of access services. Pro forma
combined subscribers increased from 71,475 at January 1, 1997 to 126,033
at September 30, 1997, and from 154,467 subscribers at January 1, 1998
to 273,238 at September 30, 1998.
. Other revenues increased $200,000, or 13.5%, from $1.4 million to $1.6
million primarily as a result of slight increases in revenues generated
from set-up and installation fees and web development services.
Cost and Expenses.
. Total cost and expenses increased $16.0 million, or 42.6% from $37.1
million to $53.7 million, on a pro forma basis, primarily as a result of
personnel increases and infrastructure expansion to service the growing
subscriber base.
. Cost of access revenues increased $7.9 million, or 102%, from $7.8
million to $15.7 million. The increase was primarily the result of
increased costs associated with (i) adding local telephone lines,
increased capacity and leased equipment to add additional POPs and to
service the growing subscriber base and (ii) the transition from analog
to digital remote access servers. Cost of access revenues as a
percentage of access revenues increased from 41.6% to 43.7% primarily as
a result of costs associated with expanding the Company's infrastructure
in advance of subscriber growth.
. Cost of other revenues increased $30,000, or 3.8%, from $670,000 to
$700,000, and as a percentage of other revenues decreased from 48.1% to
44.0% as a result of a decreasing focus on higher margin consulting and
web development services.
. Operations and customer support expenses increased $2.0 million, or
45.6%, from $4.4 million to $6.4 million, primarily as a result of
hiring additional technical and customer support personnel on a pro
forma basis to service the growing subscriber base. Operations and
customer support expenses as a percentage of total revenues decreased
from 22.0% to 17.2% as a result of leveraging personnel over the growing
subscriber base.
. Sales and marketing expense increased $1.8 million, or 70.7%, from $2.4
million to $4.2 million, primarily as a result of adding additional
sales personnel on a pro forma basis and the increasing number of
referral bonuses paid to service resellers.
. General and administrative expenses increased $3.3 million, or 46.9%,
from $7.0 million to $10.3 million, primarily as a result of hiring
additional personnel to support the growing subscriber base and the
relocation of a number of our ISPs to larger offices. General and
administrative expenses as a percentage of revenues
37
<PAGE>
decreased from 35.1% to 27.5% primarily because costs of management and
administrative personnel were spread over a larger revenue base.
. Amortization costs increased $200,000, or 1.7%, from $13.4 million to
$13.6 million. Amortization costs as a percentage of revenues decreased
from 67.0% to 36.5%.
. Depreciation costs increased $900,000, or 45.2%, from $1.9 million to
$2.8 million, primarily as a result of increased equipment purchases.
Depreciation costs as a percentage of revenues decreased from 9.6% to
7.6% as a result of higher revenues in conjunction with a small increase
in depreciation costs.
Loss from Operations.
. Loss from operations decreased $1.4 million, or 7.8%, from $17.7 million
to $16.3 million as a result of higher revenues in conjunction with
moderate increases in non-access revenues costs and other expenses. Loss
from operations as a percentage of revenues decreased from 88.1% to
43.5%, primarily as a result of amortization of acquisition costs over a
larger revenue base, and leverage of operations, customer support and
general and administrative expenses over a larger subscriber base.
COMBINED QUARTERLY RESULTS OF OPERATIONS
The operating results for our ISPs have fluctuated in the past, and our
operating results in the future may fluctuate significantly depending upon a
variety of factors, including the incurrence of capital costs and costs
associated with the introduction of new products and services and new services
by the Company. Additional factors that may contribute to variability of
operating results include: the pricing and mix of services we offer; subscriber
retention rate; changes in pricing policies and product offerings by our
competitors; growth in demand for connectivity and Internet access services;
one-time costs associated with acquisitions and general telecommunications
services' performance and availability. On a pro forma basis, we also have
experienced seasonal variation in Internet use and, therefore, revenue streams
have fluctuated. As a result, variations in the timing and amounts of revenues
could have a material adverse effect on our quarterly operating results. Due to
the foregoing factors, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and that these comparisons
cannot be relied upon as indicators of future performance.
Our ISPs have in the past experienced quarterly variations in revenues,
operating income (including operating losses), net income (including net
losses) and cash flows. We expect to continue to experience such quarterly
fluctuations in operating results (including possible net losses) due to the
factors discussed above and may also experience quarterly fluctuations as a
result of other factors including additional sales and marketing and general
and administrative expenses to acquire and support new subscribers and the
timing and magnitude of required capital expenditures. See "Risk Factors -- Our
Quarterly Operating Results May Fluctuate" at page 17 above.
38
<PAGE>
The following table sets forth our pro forma statement of operations data for
the four quarters ended December 31, 1997 and the three quarters ended
September 30, 1998. This information, in our opinion, reflects all the
adjustments that we consider necessary for fair presentation of this
information in accordance with generally accepted accounting principles. The
results of these quarters are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------
1997 1998
------------------------------------------ -------------------------------
MARCH 31 JUNE 30 SEP 30 DEC 31 MARCH 31 JUNE 30 SEP 30
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $ 5,892.2 $ 6,551.0 $ 7,588.0 $ 9092.4 $10,708.7 $12,292.7 $14,449.6
Cost of Access and Other
Revenues 2,693.8 2,832.7 2,906.2 4,339.3 4,414.0 5,399.8 6,566.1
Operations and Customer
Support 1,191.5 1,330.3 1,887.9 1,082.6 1,718.7 2,247.7 2,456.7
Sales and Marketing 769.2 778.8 900.3 1,074.9 1,194.2 1,483.1 1,501.6
General and
Administrative 2,271.8 2,584.8 2,182.1 3,865.5 3,033.1 3,345.0 3,904.1
Amortization 4,437.5 4,456.1 4,532.9 4,507.4 4,521.2 4,549.3 4,595.9
Depreciation 529.8 560.5 838.9 808.4 922.6 970.3 908.6
--------- --------- --------- --------- --------- --------- ---------
Operating Income (Loss) $(6,001.4) $(5,992.2) $(5,660.3) $(6,585.7) $(5,095.1) $(5,702.5) $(5,483.4)
========= ========= ========= ========= ========= ========= =========
</TABLE>
RESULTS OF OPERATIONS -- D&E SuperNet, Inc. ("SuperNet")
SuperNet was organized on June 22, 1995 in the Commonwealth of Pennsylvania
and began marketing services in July 1995. SuperNet's target market is the
Commonwealth of Pennsylvania. The following table sets forth certain historical
data and such data as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
JUNE 22 NINE MONTHS ENDED
THROUGH DEC. 31, YEARS ENDED DECEMBER 31, SEPTEMBER 30,
1995 ------------------------------ ------------------------------
PERIOD 1996 1997 1997 1998
------------------ ------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 119.5 100.0% $841.5 100.0% $1,749.2 100.0% $1,217.7 100.0% $2,619.3 100.0%
Cost of access and other
revenues............... 174.7 146.2 443.4 52.7 874.5 50.0 634.0 52.1 1,148.8 43.9
Operating expenses...... 134.9 112.8 409.2 48.6 758.0 43.3 515.4 42.3 1,197.7 45.7
-------- ------- ------ ----- -------- ----- -------- ----- -------- -----
Income (loss) from
operations............. $(190.1) (159.0)% $(11.1) (1.3)% $ 116.7 6.7% $ 68.3 5.6% $ 272.8 10.4%
======== ======= ====== ===== ======== ===== ======== ===== ======== =====
Approximate total
subscribers............ 4,406 8,980 7,378 20,968
</TABLE>
SUPERNET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 115.1% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 81.2% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service new subscribers. Cost of access and other
revenues as a percentage of revenues decreased from
39
<PAGE>
52.1% for the 1997 period to 43.9% for the 1998 period, primarily as a result
of existing excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 132.4% from the 1997 period
to the 1998 period, primarily as a result of hiring customer support and
administrative personnel. Operating expenses as a percentage of revenues
increased from 42.3% in the 1997 period to 45.7% in the 1998 period, primarily
as a result of the personnel increases highlighted above.
SUPERNET. 1997 COMPARED TO 1996
Revenues. Revenues increased 107.9% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 97.2% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
new subscribers. Cost of services as a percentage of revenues decreased from
52.7% for the 1996 period to 50.0% for the 1997 period. The decrease was
primarily attributable to existing excess capacity being used to satisfy new
subscriber growth.
Operating expenses. Operating expenses increased 85.2% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 48.6% in 1996 to
43.3% in 1997, primarily as a result of leveraging existing personnel over a
growing subscriber base.
SUPERNET. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 604.2% from the 1995 period to 1996. The
increase was primarily attributable to revenue being generated over a six-month
period in 1995 as opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 153.8% from the 1995 period to 1996. Cost of services as a percentage
of revenues decreased from 146.2% for the 1995 period to 52.7% in 1996,
primarily as a result of existing excess capacity being used to satisfy new
subscriber growth.
Operating expenses. Operating expenses increased 203.3% from the 1995 period
to 1996. Operating expenses as a percentage of revenues decreased from 112.8%
for the 1995 period to 48.6% in 1996, primarily as a result of leveraging
existing personnel over a growing subscriber base.
40
<PAGE>
RESULTS OF OPERATIONS -- SunLink, Inc. ("SunLink")
SunLink was incorporated on October 1, 1991 in the Commonwealth of
Pennsylvania and began providing Internet access services on October 1, 1995.
The following table sets forth certain historical data and such data as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
OCT. 1
THROUGH NINE MONTHS
DEC. 31, YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1995 -------------------------- -----------------------------
PERIOD 1996 1997 1997 1998
------------- ------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 6.6 100.0% $225.0 100.0% $798.2 100.0% $538.3 100.0% $1,016.9 100.0%
Cost of access and other
revenue................ 6.5 98.4 85.8 38.1 241.9 30.3 150.1 27.8 418.6 41.1
Operating expenses...... 9.4 142.4 139.1 61.8 406.7 50.9 278.4 51.7 652.1 64.1
----- ------ ------ ----- ------ ----- ------ ----- -------- -----
Income (loss) from
operations............. $(9.3) (140.9)% $ 0.1 0.0% $149.8 18.8% $100.8 18.7% $ (53.8) (5.2)%
===== ====== ====== ===== ====== ===== ====== ===== ======== =====
Approximate total
subscribers............ 1,390 3,730 3,126 7,038
</TABLE>
SUNLINK. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 88.9% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the total number of
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 178.8% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service new subscribers. Cost of access and other
revenues as a percentage of revenues increased from 27.8% for the 1997 period
to 41.1% for the 1998 period, primarily as a result of telephone lines and
capacity additions in advance of subscriber growth.
Operating expenses. Operating expenses increased 131.8% from the 1997 period
to the 1998 period, primarily as a result of increased depreciation costs
incurred due to equipment purchases. Operating expenses as a percentage of
revenues increased from 51.7% in the 1997 period to 64.1% in the 1998 period,
primarily as a result of increases in customer support personnel and increases
in general and administrative costs.
SUNLINK. 1997 COMPARED TO 1996
Revenues. Revenues increased 254.8% from 1996 to 1997. The increase was
primarily attributable to an increase in the total number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 181.9% from 1996 to 1997, primarily as a result of the increased
costs associated with adding local telephone lines and increased capacity to
service new subscribers. Cost of access and other revenues as a percentage of
revenues decreased from 38.1% for the 1996 period to 30.3% for the 1997,
primarily as a result of existing excess capacity being used to service new
subscribers.
41
<PAGE>
Operating expenses. Operating expenses increased 192.3% from 1996 to 1997,
primarily due to the increased depreciation expense incurred for equipment
purchases made in 1997. Operating expenses as a percentage of revenues
decreased from 61.8% in 1996 to 50.9% in 1997, primarily as a result of
leveraging existing personnel over a growing subscriber base.
SUNLINK. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 3,309.1% from the 1995 period to 1996. The
increase was primarily attributable to revenues being generated over a three-
month period in 1995 as opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 1,220.0% from the 1995 period to 1996. Cost of access and other
revenues as a percentage of revenues decreased from 98.4% for the 1995 period
to 38.1% in 1996, primarily as a result of existing excess capacity being used
to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 1,379.7% from the 1995
period to 1996. Operating expenses as a percentage of revenues decreased from
142.4% in the 1995 period to 61.8% in 1996, primarily as a result of leveraging
existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- LebaNet, Inc. ("LebaNet")
LebaNet began marketing services in the Commonwealth of Pennsylvania as a
sole proprietorship in December 1994 and was incorporated on March 1, 1996 as a
Pennsylvania corporation. LebaNet's target market is central Pennsylvania. The
following table sets forth certain historical data and such data as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1997 1998
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $149.3 100.0% $199.6 100.0% $129.3 100.0% $216.0 100.0%
Cost of access and other
revenues............... 55.5 37.2 107.8 54.0 61.0 47.2 93.6 43.3
Operating expenses...... 41.0 27.5 56.9 28.5 40.9 31.6 50.0 23.1
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............. $ 52.8 35.3% $ 34.9 17.5% $ 27.4 21.2% $ 72.4 34.0%
====== ===== ====== ===== ====== ===== ====== =====
Approximate total
subscribers............ 289 246 250 235
</TABLE>
LEBANET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 67.1% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of
dedicated subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 53.4% from the 1997 period to the 1998 period, primarily as a result
of deploying digital technology and the increased costs associated with adding
local telephone lines and increased capacity to service new subscribers. Cost
of access and other revenues as a percentage of revenues
42
<PAGE>
decreased from 47.2% for the 1997 period to 43.3% for the 1998 period,
primarily as a result of existing excess capacity being used to service new
subscribers.
Operating expenses. Operating expenses increased 22.2% from the 1997 period
to the 1998 period, primarily as a result of increased marketing and
advertising costs. Operating expenses as a percentage of revenues decreased
from 31.6% in 1997 to 23.1% in 1998, primarily as a result of leveraging
existing personnel over a growing subscriber base.
LEBANET. 1997 YEAR COMPARED TO THE 1996 PERIOD
Revenues. Revenues increased 33.7% from the 1996 period to 1997. The increase
was attributable in part to growth in dedicated subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 94.2% from the 1996 period to 1997, primarily as a result of
increased local telephone rates and the increased costs associated with adding
local telephone lines and increased capacity to service new subscribers. Cost
of access and other revenues as a percentage of revenues increased from 37.2%
in the 1996 period to 54.0% in 1997. The increase was primarily attributable to
additions of telephone lines and capacity in advance of subscriber growth.
Operating expenses. Operating expenses increased 38.7% from the 1996 period
to 1997. Operating expenses as a percentage of revenues remained relatively
constant at 27.5% for the 1996 period and 28.5% for 1997.
RESULTS OF OPERATIONS -- SouthWind Internet Access, Inc. ("SouthWind")
SouthWind Internet Access was incorporated in Kansas on July 6, 1994, and
began marketing services in October 1994. SouthWind's target market is the
state of Kansas. The following table sets forth certain historical data and
such data as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------
1995 1996 1997 1997 1998
------------ ------------ -------------------------------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $202.1 100.0% $836.6 100.0% $ 1,437.8 100.0% $1,033.2 100.0% $1,504.5 100.0%
Cost of access and other
revenues............... 125.8 62.2 396.0 47.3 654.5 45.5 464.2 44.9 778.3 51.7
Operating expenses...... 71.9 35.6 253.3 30.3 418.2 29.1 300.1 29.1 455.5 30.3
------ ----- ------ ----- ------------ --------- -------- ----- -------- -----
Income (loss) from
operations............. $ 4.4 2.2% $187.3 22.4% $ 365.1 25.4% $ 268.9 26.0% $ 270.7 18.0%
====== ===== ====== ===== ============ ========= ======== ===== ======== =====
Approximate total
subscribers............ 5,185 8,116 7,167 10,545
</TABLE>
SOUTHWIND. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 45.6% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
43
<PAGE>
Cost of access and other revenues. Cost of access and other revenues
increased 67.7% from the 1997 period to the 1998 period, primarily as a result
of increased local telephone rates, additional local telephone lines and
increased capacity to service new subscribers. Cost of access and other
revenues as a percentage of revenues increased from 44.9% for the 1997 period
to 51.7% for the 1998 period, primarily as a result of capacity additions in
advance of subscriber growth.
Operating expenses. Operating expenses increased 51.8% from the 1997 period
to the 1998 period, primarily as a result of increased costs relating to the
hiring of additional customer support personnel. Operating expenses as a
percentage of revenues remained relatively constant at 29.1% for the 1997
period and 30.3% for the 1998 period.
SOUTHWIND. 1997 COMPARED TO 1996
Revenues. Revenues increased 71.9% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 65.3% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity. Cost of
access and other revenues remained relatively constant at 47.3% in 1996 and
45.5% in 1997.
Operating expenses. Operating expenses increased 65.1% from 1996 to 1997,
primarily as a result of increased costs relating to the hiring of additional
customer support personnel. Operating expenses as a percentage of revenues
remained relatively constant at 30.3% in 1996 to 29.1% in 1997.
SOUTHWIND. 1996 COMPARED TO 1995
Revenues. Revenues increased 314.0% from 1995 to 1996. The increase was
primarily attributable to an increase in the number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 214.8% from 1995 to 1996, primarily as a result of the increased
costs associated with adding local telephone lines and increased capacity to
service new subscribers. Cost of access and other revenues as a percentage of
revenues decreased from 62.2% in 1995 to 47.3% in 1996, primarily as a result
of existing excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 252.3% from 1995 to 1996,
primarily as a result of the hiring of operational and technical personnel.
Operating expenses as a percentage of revenues decreased from 35.6% in 1995 to
30.3% in 1996, primarily as a result of leveraging personnel over a growing
subscriber base.
44
<PAGE>
RESULTS OF OPERATIONS -- Horizon Internet Technologies, Inc. ("Horizon")
Horizon was incorporated in Kansas on July 26, 1995. Horizon's target markets
include Missouri, Oklahoma and Kansas. The following table sets forth certain
historical data and such data as a percentage of revenue for the periods
indicated:
<TABLE>
<CAPTION>
JULY 26
THROUGH NINE MONTHS
DEC. 31, YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1995 --------------------------- ----------------------------
PERIOD 1996 1997 1997 1998
-------------- ------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 1.9 100.0% $148.7 100.0% $434.6 100.0% $301.6 100.0% $791.3 100.0%
Cost of access and other
revenues............... 10.1 531.6 78.8 53.0 232.3 53.4 163.9 54.3 339.1 42.9
Operating expenses...... 5.6 294.7 69.5 46.7 255.4 55.4 161.3 53.4 425.9 53.8
------ ------ ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............. $(13.8) (726.3)% $ 0.4 0.3% $(53.1) (12.2)% $(23.6) (7.8)% $ 26.3 3.3%
====== ====== ====== ===== ====== ===== ====== ===== ====== =====
Approximate total
subscribers............ 807 3,380 2,578 7,893
</TABLE>
HORIZON. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 162.3% from the 1997 period to the 1998 period.
The increase was primarily attributable to the increase in the total number of
dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 106.9% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service the growing subscriber base. Cost of access and
other revenues as a percentage of revenues decreased from 54.3% for the 1997
period to 42.9% for the 1998 period, primarily as a result of excess capacity
being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 164.1% from the 1997 period
to the 1998 period, primarily as a result of relocating to a larger facility.
Operating expenses as a percentage of revenues remained relatively constant at
53.8% for the 1997 period and 53.4% for the 1998 period.
HORIZON. 1997 COMPARED TO 1996
Revenues. Revenues increased 192.3% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 194.7% from 1996 to 1997, primarily as a result of deploying digital
technology and the increased costs associated with adding local telephone lines
and increased capacity to service the growing subscriber base. Cost of access
and other revenues as a percentage of revenues increased from 53.0% in 1996 to
53.4% in 1997.
45
<PAGE>
Operating expenses. Operating expenses increased 267.5% from 1996 to 1997,
primarily as a result of increased costs relating to the hiring of additional
operating and technical personnel. Operating expenses as a percentage of
revenues increased from 46.7% in 1996 to 58.8% in 1997, also as a result of the
increased number of employees.
HORIZON. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 7,726.3% from the 1995 period to 1996. The
increase was primarily attributable to revenues being generated over a five-
month period in 1995 as opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 680.2% from the 1995 period to 1996, primarily as a result of
revenues being generated over a five-month period in 1995 as opposed to 12
months in 1996. Cost of access and other revenues as a percentage of revenues
decreased from 531.6% in the 1995 period to 78.8% in 1996, primarily as a
result of excess capacity being used to service new subscribers.
Operating expenses. Operating expenses increased 1,141.1% from the 1995
period to 1996. Operating expenses as a percentage of revenues decreased from
294.7% in the 1995 period to 46.7% in 1996, primarily as a result of leveraging
existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- United States Internet, Inc. ("United States
Internet")
United States Internet was incorporated in 1994 and has points of presence in
Tennessee, Virginia, Kentucky and Alabama. The following table sets forth
certain historical data and such data as a percentage of revenue for the
periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------- ----------------------------------
1995 1996 1997 1997 1998
----------------- ---------------- --------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 889.9 100.0% $ 2,506.7 100.0% $4,173.8 100.0% $2,992.8 100.0% $ 4,228.5 100.0%
Cost of access and other
revenues............... 512.5 57.6 931.7 37.2 1,999.2 47.9 1,434.6 47.9 2,351.2 55.6
Operating expenses(1)... 2,970.1 333.8 3,426.0 136.7 2,401.0 57.5 1,784.7 59.6 5,962.5 141.0
--------- ------ --------- ----- -------- ----- -------- ----- --------- -----
Income (loss) from
operations............. $(2,592.7) (291.3)% $(1,851.0) (73.8)%$ (226.4) (5.4)% $ (226.5) (7.6)% $(4,085.2) (96.6)%
========= ====== ========= ===== ======== ===== ======== ===== ========= =====
Approximate total
subscribers............ 15,192 23,111 21,094 32,311
</TABLE>
- --------
(1) As part of operating expense, the Company has included stock compensation
expense (benefit). For the years ended December 31, 1995, 1996 and 1997,
the Company incurred expenses of approximately $1,680.8, $581.4, and a
benefit of ($598.9), respectively. For the months ended September 30, 1997
and 1998, the Company incurred a benefit of ($449.1) and an expense of
$3,316.9, respectively.
UNITED STATES INTERNET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 41.3% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers as well as the integration of 1,400 subscribers acquired during the
quarter ended March 31, 1998.
46
<PAGE>
Cost of access and other revenues. Cost of access and other revenues
increased 63.9% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with increased capacity and additional leased
equipment costs. Cost of access and other revenues as a percentage of revenues
increased from 47.9% for the 1997 period to 55.6% for the 1998 period,
primarily as a result the addition of leased equipment and capacity in advance
of subscriber growth.
Operating expenses. Operating expenses increased 234.1% from the 1997 period
to the 1998 period, primarily as a result of increased costs relating to the
hiring of additional sales and customer support personnel. Included within this
increase is a $3,316,955 stock compensation expense attributable to certain
stock appreciation rights. Operating expenses as a percentage of revenues
increased from 59.6% in the 1997 period to 141.0% in the 1998 period primarily
as a result of the increase in stock compensation expense.
UNITED STATES INTERNET. 1997 COMPARED TO 1996
Revenues. Revenues increased 66.5% from 1996 to 1997. The increase was
primarily attributable to the increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 114.6% from 1996 to 1997. The increase was primarily attributable to
(i) increases in the number of access lines, capacity and leased remote access
equipment required by the change from metered dial-up access accounts to
unlimited access accounts, (ii) the change to digital remote access servers and
(iii) the integration expenses related to five acquisitions. Cost of services
as a percentage of revenues increased from 37.2% in 1996 to 47.9% in 1997,
primarily as a result of capacity additions in advance of subscriber growth.
Operating expenses. Operating expenses decreased 29.9% from 1996 to 1997
primarily as a result of $600,000 stock compensation benefit in 1997. Operating
expenses as a percentage of revenues decreased from 136.7% in 1996 to 57.5% in
1997 primarily as a result of the $600,000 stock compensation benefit recorded
in 1997.
UNITED STATES INTERNET. 1996 COMPARED TO 1995
Revenues. Revenues increased 181.7% from 1995 to 1996. The increase was
primarily attributable to strategic focus on growth through expansion of the
number of POPs, new subscriber promotions associated with new POPs and the
acquisition of four ISPs.
Cost of access and other revenues. Cost of access and other revenues
increased 81.8% from 1995 to 1996. The increase was primarily a result of the
increase in the number of access lines, capacity and leased remote access
equipment and the change to digital remote access servers. Cost of services as
a percentage of revenues decreased from 57.6% in 1995 to 37.2% in 1996. The
decrease was primarily attributable to excess equipment capacity being used to
satisfy new subscriber growth.
Operating expenses. Operating expenses increased 15.3% from 1995 to 1996.
Operating expenses as a percentage of revenues decreased from 333.8% in 1995 to
136.7% in 1996
47
<PAGE>
primarily as a result of leveraging existing personnel over a growing
subscriber base, as well as a stock compensation expense of approximately $1.1
million from 1995 to 1996.
RESULTS OF OPERATIONS -- Internet Partners of America, LC ("Internet Partners
of America")
Internet Partners of America was formed in Arkansas on May 12, 1995 and began
marketing services in June 1995. Internet Partners of America's target markets
include Arkansas, Missouri, and Oklahoma. The following table sets forth
certain historical data and such data as a percentage of revenue for the
periods indicated:
<TABLE>
<CAPTION>
MAY 12 NINE MONTHS
THROUGH YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DEC. 31, 1995 ----------------------------------- ---------------------------------
PERIOD 1996 1997 1997 1998
--------------- ----------------- --------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 28.2 100.0% $ 931.0 100.0% $1,856.8 100.0% $1,231.8 100.0% $3,005.1 100.0%
Cost of access and other
revenues............... 61.9 219.5 685.5 73.6 1,087.9 58.6 721.8 58.6 1,803.6 60.0
Operating expenses...... 116.6 414.0 1,407.9 151.2 1,747.9 94.1 1,215.0 98.6 1,771.6 59.0
------- ------ --------- ------ -------- ----- -------- ----- -------- -----
Income (loss) from
operations............. $(150.3) (533.7)% $(1,162.4) (124.9)% $ (979.0) (52.7)% $ (705.0) (57.2)% $ (570.1) (19.0)%
======= ====== ========= ====== ======== ===== ======== ===== ======== =====
Approximate total
subscribers............ 6,789 13,060 11,596 22,240
</TABLE>
INTERNET PARTNERS OF AMERICA. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 144.0% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers as well as the integration of 3,500 subscribers acquired during the
quarter ended June 30, 1998.
Cost of access and other revenues. Cost of access and other revenues
increased 149.9% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service the growing subscriber base. Cost of access and
other revenues as a percentage of revenues remained relatively constant at
58.6% for the 1997 period and 60.0% for the 1998 period.
Operating expenses. Operating expenses increased 45.8% from the 1997 period
to the 1998 period primarily as a result of increased costs relating to the
hiring of additional technical and customer support personnel. Operating
expenses as a percentage of revenues decreased from 98.6% in the 1997 period to
59.0% for the 1998 period primarily as a result of leveraging existing
personnel over a growing subscriber base.
INTERNET PARTNERS OF AMERICA. 1997 COMPARED TO 1996
Revenues. Revenues increased 99.4% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers as
well as the integration of certain subscribers acquired during 1997.
Cost of access and other revenues. Cost of access and other revenues
increased 58.7% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local
48
<PAGE>
telephone lines and increased capacity to service the growing subscriber base.
Cost of access and other revenues as a percentage of revenues decreased from
73.6% in 1996 to 58.6% in 1997 primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 24.1% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 151.2% in 1996 to
94.1% in 1997, primarily as a result of the closing of the Little Rock,
Arkansas office and the elimination of personnel associated with that office,
as well as leveraging existing personnel over a growing subscriber base.
INTERNET PARTNERS OF AMERICA. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 3,201% from the 1995 period to 1996. The
increase was primarily attributable to an increase in the number of subscribers
and revenues being generated over an eight-month period in 1995 as opposed to
the 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 1,007.4% from the 1995 period to 1996. Cost of access and other
revenues as a percentage of revenues decreased from 219.5% for the 1995 period
to 73.6% in 1996, primarily as a result of existing excess capacity being used
to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 1,107.5% from the 1995
period to 1996. Operating expenses as a percentage of revenues decreased from
414.0% in the 1995 period to 151.2% in 1996, primarily as a result of
leveraging existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- Netrox, LLC ("Netrox")
Netrox was formed under the name Bridgenet L.C. in Florida on February 24,
1995 and began marketing services on April 1, 1995. On September 27, 1997,
Netrox changed its name to Netrox, LLC. Netrox's target market is Florida. The
following table sets forth certain data and such data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
FEB. 24 YEARS ENDED NINE MONTHS
THROUGH DECEMBER 31, ENDED SEPTEMBER 30,
DEC. 31, -------------------------------- -------------------------------
1995
PERIOD 1996 1997 1997 1998
--------------- -------------- --------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 74.9 100.0 % $ 623.8 100.0 % $1,197.0 100.0% $868.9 100.0 % $1,062.6 100.0 %
Cost of access and other
revenues............... 71.3 95.2 226.4 36.3 421.1 35.2 223.0 25.7 383.4 36.1
Operating expenses...... 221.2 295.3 536.8 86.1 1,072.2 89.6 702.4 80.8 918.7 86.4
------- ------ ------- ----- -------- ----- ------ ----- -------- -----
Income (loss) from
operations............. $(217.6) (290.5)% $(139.4) (22.3)% $ (296.3) (24.8)% $(56.5) (6.5)% $ (239.5) (22.5)%
======= ====== ======= ===== ======== ===== ====== ===== ======== =====
Approximate total
subscribers............ 3,964 3,694 4,365
</TABLE>
49
<PAGE>
NETROX. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 22.3% from the 1997 period to the 1998 period.
The increase was primarily attributable to the increase in the number of web
hosting and dedicated subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 71.9% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity. Cost of access and other revenues as a percentage of
revenues increased from 25.7% for the 1997 period to 36.1% for the 1998 period,
primarily as a result of the addition of capacity in advance of subscriber
growth.
Operating expenses. Operating expenses increased 30.8% from the 1997 period
to the 1998 period, primarily as a result of increased costs relating to the
hiring of data entry personnel in connection with its Cyberchefs division.
Operating expenses as a percentage of revenues increased from 80.8% in the 1997
period to 86.4% in the 1998 period.
NETROX. 1997 COMPARED TO 1996
Revenues. Revenues increased 91.9% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of subscribers and revenues
from web development.
Cost of access and other revenues. Cost of access and other revenues
increased 86.0% from 1996 to 1997. The increase was primarily attributable to
the cost of purchasing equipment for resale pursuant to a major service
contract. Cost of access and other revenues as a percentage of revenues
remained relatively constant at 36.3% in 1996 and 35.2% in 1997.
Operating expenses. Operating expenses increased 99.7% from 1996 to 1997,
primarily as a result of increased advertising and marketing costs and costs
relating to the hiring of web development personnel. Operating expenses as a
percentage of revenues remained relatively constant at 86.1% in 1996 and 89.6%
in 1997.
NETROX. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 732.8% from the 1995 period to 1996. The
increase was primarily attributable to revenues being generated over a nine-
month period in 1995 as opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 217.5% from the 1995 period to 1996. Cost of access and other
revenues as a percentage of revenues decreased from 95.2% for the 1995 period
to 36.3% in 1996, primarily as a result of existing excess capacity being used
to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 142.7% from the 1995 period
to 1996. Operating expenses as a percentage of revenues decreased from 295.3%
in the 1995
50
<PAGE>
period to 86.1% in 1996, primarily as a result of leveraging existing personnel
over a growing subscriber base.
RESULTS OF OPERATIONS -- ZoomNet, Inc. ("ZoomNet")
ZoomNet was founded on June 19, 1995 and began marketing services in August
1995. ZoomNet's target markets include Ohio, Kentucky and West Virginia. The
following table sets forth certain historical data and such data as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
JUNE 19
THROUGH YEARS ENDED NINE MONTHS
DEC. 31, DECEMBER 31, ENDED SEPTEMBER 30,
1995 ---------------------------- ----------------------------
PERIOD 1996 1997 1997 1998
------------ ------------- ------------ ------------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $18.7 100.0 % $272.7 100.0 % $857.6 100.0% $571.4 100.0% $1,316.8 100.0%
Cost of access and other
revenues............... 6.5 34.8 139.4 51.1 262.7 30.6 187.0 32.7 547.5 41.6
Operating expenses...... 13.6 72.7 145.8 53.5 433.4 50.5 283.4 50.0 655.3 49.8
----- ----- ------ ----- ------ ----- ------ ----- -------- -----
Income (loss) from
operations............. $(1.4) (7.5)% $(12.5) (4.6)% $161.6 18.8% $101.0 17.7% $ 114.0 8.7%
===== ===== ====== ===== ====== ===== ====== ===== ======== =====
Approximate total
subscribers............ 1,997 5,309 4,382 9,912
</TABLE>
ZOOMNET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 130.4% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 192.8% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service the growing subscriber base. Cost of services as
a percentage of revenues increased from 32.7% for the 1997 period to 41.6% for
the 1998 period. The increase was primarily attributable to the addition of two
new access locations.
Operating expenses. Operating expenses increased 131.2% from the 1997 period
to the 1998 period, primarily as a result of hiring additional technical and
customer support personnel and increased use of television and print
advertising. Operating expenses as a percentage of revenues remained relatively
constant at 50.0% in the 1997 period and 47.8% in the 1998 period.
ZOOMNET. 1997 COMPARED TO 1996
Revenues. Revenues increased 214.5% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 88.5% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
the growing subscriber base. Cost of services as a percentage of revenues
decreased from 51.1% for the 1996 period to 30.6% for
51
<PAGE>
the 1997 period, primarily as a result of existing excess capacity being used
to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 197.2% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 53.5% in 1996 to
50.5% in 1997, primarily as a result of improved efficiency in operations.
ZOOMNET. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 1,358.3% from the 1995 period to 1996. The
increase was primarily attributable to revenues being generated over a six-
month period in 1995 as opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 2,044.6% from 1995 to 1996. Cost of services as a percentage of
revenues increased from 34.8% for the 1995 period to 51.1% for the 1996 period,
primarily as a result of telephone line and capacity additions in advance of
subscriber growth.
Operating expenses. Operating expenses increased 972.1% from the 1995 period
to 1996. Operating expenses as a percentage of revenues decreased from 72.7% in
1995 to 53.5% in 1996, primarily as a result of leveraging existing personnel
over a growing subscriber base.
RESULTS OF OPERATIONS -- Palm.Net, USA, Inc. ("Palm.Net")
Palm.Net was formed on January 3, 1996 and operates in Brevard County,
Florida. The following table sets forth certain historical data and such data
as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
JAN. 3
THROUGH NINE MONTHS
DEC. 31, YEAR ENDED ENDED SEPTEMBER 30,
1996 DECEMBER 31, --------------------------
PERIOD 1997 1997 1998
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 95.9 100.0% $432.4 100.0% $313.0 100.0% $455.6 100.0%
Cost of access and other
revenues............... 43.2 45.0 138.5 32.0 92.8 29.6 108.8 23.9
Operating expenses...... 104.9 109.4 214.0 49.5 154.1 49.3 229.9 50.5
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............. $(52.1) (54.3)% $ 79.9 18.5% $ 66.1 21.1% $117.0 25.7%
====== ===== ====== ===== ====== ===== ====== =====
Approximate total
subscribers............ 1,600 2,824 2,476 3,160
</TABLE>
PALM.NET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 45.6% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 17.2% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service the growing
52
<PAGE>
subscriber base. Cost of access and other revenues as a percentage of revenues
decreased from 29.6% for the 1997 period to 23.9% for the 1998 period,
primarily attributable to a reduction in access line costs realized by a switch
from an RBOC to a CLEC.
Operating expenses. Operating expenses increased 49.1% from the 1997 period
to the 1998 period, primarily due to an increase in salary costs. Operating
expenses as a percentage of revenues remained relatively constant at 49.3% for
the 1997 period and 50.5% for the 1998 period.
PALM.NET. 1997 YEAR COMPARED TO THE 1996 PERIOD
Revenues. Revenues increased 350.9% from the 1996 period to 1997. The
increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 220.6%, from the 1996 period to 1997. Cost of access and other
revenues as a percentage of revenues decreased from 45.0% for the 1996 period
to 32.0% for the 1997 period, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 104.0% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 109.4% in the
1996 period to 49.5% in 1997, primarily as a result of leveraging existing
personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- Internet Access Group, Inc. ("Internet Access Group")
Internet Access Group was incorporated in December 1994. Internet Access
Group's target markets include Orlando, Florida and its six surrounding
communities. The following table sets forth certain historical data and such
data as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
-------------- ------------ -------------- ------------ ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 393.2 100.0% $951.3 100.0% $1,179.4 100.0% $849.2 100.0% $1,089.8 100.0%
Cost of access and other
revenues............... 181.4 46.1 317.2 33.3 432.9 36.7 311.7 36.7 428.0 39.3
Operating expenses...... 349.8 89.0 601.2 63.2 710.4 60.2 512.2 60.3 774.2 71.0
------- ----- ------ ----- -------- ----- ------ ----- -------- ------
Income (loss) from
operations............. $(138.0) (35.1)% $ 32.9 3.5% $ 36.1 3.1% $ 25.3 3.0% $ (112.4) (10.3)%
======= ===== ====== ===== ======== ===== ====== ===== ======== ======
Approximate total
subscribers............ 2,574 3,887 3,564 4,764
</TABLE>
INTERNET ACCESS GROUP. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 28.3% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 37.3% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service new
53
<PAGE>
subscribers. Cost of access and other revenues remained relatively constant at
36.7% for the 1997 period and 39.3% for the 1998 period.
Operating expenses. Operating expenses increased 51.2% from the 1997 period
to the 1998 period, primarily as a result of hiring additional administrative,
technical and customer support personnel. Operating expenses as a percentage of
revenues increased from 60.3% in the 1997 period to 71.0% in the 1998 period,
primarily as a result of the personnel increases highlighted above.
INTERNET ACCESS GROUP. 1997 COMPARED TO 1996
Revenues. Revenues increased 24.0% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 36.5% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
new subscribers. Cost of access and other revenues as a percentage of revenues
remained relatively constant at 33.3% in 1996 compared to 36.7% in the 1997
period.
Operating expenses. Operating expenses increased 18.2% from 1996 to 1997.
Operating expenses as a percentage of revenues remained relatively constant at
63.2% in the 1996 period and 60.2% in the 1997 period.
INTERNET ACCESS GROUP. 1996 COMPARED TO 1995
Revenues. Revenues increased 142.0% from 1995 to 1996. The increase was
primarily attributable to an increase in the number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 74.9% from 1995 to 1996, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
new subscribers. Cost of access and other revenues as a percentage of revenues
decreased from 46.1% for 1995 to 33.3% for 1996. The decrease was primarily
attributable to existing excess capacity being used to satisfy new subscriber
growth.
Operating expenses. Operating expenses increased 71.9% from 1995 to 1996,
primarily as a result of increases in customer support personnel and increases
in general and administrative costs. Operating expenses as a percentage of
revenues decreased from 89.0% in 1995 to 63.2% in 1996, primarily as a result
of leveraging existing personnel over a growing subscriber base.
54
<PAGE>
RESULTS OF OPERATIONS -- Midwest Internet, L.L.C. ("Midwest Internet")
Midwest Internet was organized in Illinois on February 2, 1995 and began
marketing services in November 1995. Midwest Internet's target markets include
residential and business in Illinois, Tennessee, Kentucky and Missouri. The
following table sets forth certain historical data and such data as a
percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
FEB. 2
THROUGH NINE MONTHS
DEC. 31, YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1995 -------------------------------- --------------------------------
PERIOD 1996 1997 1997 1998
--------------- --------------- -------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 186.1 100.0% $1,790.4 100.0% $2,523.1 100.0% $1,803.9 100.0% $2,757.9 100.0%
Cost of access and other
revenues............... 98.3 52.9 666.7 37.2 937.1 37.1 759.2 42.1 997.3 36.2
Operating expenses...... 284.6 152.9 1,606.0 89.7 1,527.5 60.5 1,051.9 58.3 1,468.0 53.2
------- ------ -------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from
operations............. $(196.8) (105.7)% $ (482.3) (26.9)% $ 58.5 2.3% $ (7.2) (0.4)% $ 292.0 10.6%
======= ====== ======== ===== ======== ===== ======== ===== ======== =====
Approximate total
subscribers............ 11,529 11,474 9,976 16,100
</TABLE>
MIDWEST INTERNET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 52.9% from the 1997 period to the 1998 period.
The increase was primarily attributable to the increase in dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 31.3% from the 1997 period to the 1998 period, primarily as a result
of deploying digital technology and the increased costs associated with adding
local telephone lines and increased capacity to service the growing subscriber
base. Cost of services as a percentage of revenues decreased from 42.1% for the
1997 period to 36.2% for the 1998 period, primarily as a result of existing
access capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 39.6% from the 1997 period
to the 1998 period, primarily as a result of hiring additional technical and
customer support personnel. Operating expenses as a percentage of revenues
remained relatively constant at 58.3% for the 1997 period and 53.2% for the
1998 period.
MIDWEST INTERNET. 1997 COMPARED TO 1996
Revenues. Revenues increased 40.9% from 1996 to 1997. The increase was
primarily attributable to an increase in dedicated subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 40.6% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
the growing subscriber base. Cost of services as a percentage of revenues
remained relatively constant at 37.2% in 1996 and 37.1% in 1997.
Operating expenses. Operating expenses decreased 4.9% from 1996 to 1997,
primarily as a result of reductions in sales and marketing personnel. Operating
expenses as a
55
<PAGE>
percentage of revenues decreased from 89.7% in 1996 to 60.5% in 1997 primarily
as a result of the personnel reductions highlighted above.
MIDWEST INTERNET. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 862.1% from the 1995 period to 1996. The
increase was primarily attributable to growth in subscribers as Midwest
Internet was founded in 1995.
Cost of access and other revenues. Cost of access and other revenues
increased 578.2% from the 1995 period to 1996. Cost of services as a percentage
of revenues decreased from 52.9% for the 1995 period to 37.2% in 1996,
primarily as a result of existing excess capacity being used to satisfy new
subscriber growth.
Operating expenses. Operating expenses increased 464.3% from the 1995 period
to 1996. Operating expenses as a percentage of revenues decreased from 152.9%
in 1995 to 89.7% in 1996, primarily as a result of leveraging existing
personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- Internet Solutions, LLC ("Internet Solutions")
Internet Solutions was organized in Missouri on August 30, 1995 and began
providing services on October 1, 1996. Internet Solutions' target market
includes rural areas of Missouri. The following table sets forth certain
historical data and such data as a percentage of revenue for the periods
indicated:
<TABLE>
<CAPTION>
AUG. 30 NINE MONTHS
THROUGH YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
DEC. 31, 1995 ---------------------------- --------------------------
PERIOD 1996 1997 1997 1998
-------------- ------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 7.0 100.0% $140.7 100.0% $446.1 100.0% $287.6 100.0% $672.5 100.0%
Cost of access and other
revenues............... 17.2 245.7 84.4 60.0 162.7 36.5 107.4 37.3 229.2 34.1
Operating expenses...... 37.0 528.6 130.4 92.7 271.6 60.9 174.2 60.6 343.4 51.1
------ ------ ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............. $(47.2) (672.8)% $(74.1) (52.7)% $ 11.8 2.6% $ 6.0 2.1% $ 99.9 14.8%
====== ====== ====== ===== ====== ===== ====== ===== ====== =====
Approximate total
subscribers............ 1,010 4,608 3,680 8,064
</TABLE>
INTERNET SOLUTIONS. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 133.8% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 113.4% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service the growing subscriber base. Cost of access and
other revenues as a percentage of revenues decreased from 37.3% for the 1997
period to 34.1% for the 1998 period.
56
<PAGE>
Operating expenses. Operating expenses increased 97.1%, from the 1997 period
to the 1998 period, primarily as a result of hiring additional customer support
personnel. Operating expenses as a percentage of revenues decreased from 60.6%
in the 1997 period to 51.1% in the 1998 period. This decrease was primarily
attributable to improved efficiency in operations resulting in employees being
able to service more subscribers.
INTERNET SOLUTIONS. 1997 COMPARED TO 1996
Revenues. Revenues increased 217.1% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 92.8% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
the growing subscriber base. Cost of access and other revenues as a percentage
of revenues decreased from 60.0% in 1996 to 36.5% in 1997, primarily as a
result of existing excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 108.3% from 1996 to 1997,
primarily as a result of hiring additional customer support and clerical
personnel. Operating expenses as a percentage of revenues decreased from 92.7%
in 1996 to 60.9% in 1997, primarily as a result of improved efficiencies in
operations resulting in employees being able to service more subscribers.
INTERNET SOLUTIONS. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 1,910.0% from the 1995 period to 1996. The
increase was primarily attributable to revenues being generated over a three-
month period in 1995 as opposed to a 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 390.7% from the 1995 period to 1996, primarily as a result of
increased costs associated with adding local telephone lines and increased
capacity to service new subscribers. Cost of access and other revenues as a
percentage of revenues decreased from 245.7% in the 1995 period to 60.0% in
1996, primarily as a result of existing excess capacity being used to service
new subscribers.
Operating expenses. Operating expenses increased 252.4% from the 1995 period
to 1996, primarily as a result of revenues being generated over a three-month
period in 1995 as opposed to 12 months in 1996. Operating expenses as a
percentage of revenues decreased from 528.6% in the 1995 period to 92.7% in
1996, primarily as a result of leveraging existing personnel over a growing
subscriber base.
57
<PAGE>
RESULTS OF OPERATIONS -- FGInet, Inc. ("FGInet")
FGInet was incorporated on September 16, 1994 and began marketing services in
late 1994. FGInet's targeted market is the state of Illinois. The following
table sets forth certain historical data and such data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
------------ -------------- ------------ ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $34.2 100.0% $ 275.0 100.0% $818.4 100.0% $582.3 100.0% $984.8 100.0%
Cost of access and other
revenues............... 16.0 46.8 194.5 70.7 386.1 47.2 254.8 43.8 551.6 56.0
Operating expenses...... 22.0 64.3 205.6 74.8 432.2 52.8 300.7 51.6 466.9 47.4
----- ----- ------- ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............. $(3.8) (11.1)% $(125.1) (45.5)% $ 0.1 0.0% $ 26.8 4.6% $(33.7) (3.4)%
===== ===== ======= ===== ====== ===== ====== ===== ====== =====
Approximate total
subscribers............ 2,919 5,727 5,078 8,034
</TABLE>
FGINET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 69.1% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 116.5% from the 1997 period to the 1998 period, primarily as a result
of deploying digital technology and the increased costs associated with adding
local telephone lines and increased capacity to service the growing subscriber
base. Cost of access and other revenues as a percentage of revenues increased
from 43.8% for the 1997 period to 56.0% for the 1998 period. The increase was
primarily attributable to redundant access line costs while digital access
servers were being installed.
Operating expenses. Operating expenses increased 55.3% from the 1997 period
to the 1998 period, primarily as a result of hiring additional customer support
personnel as well as relocating to a new office facility. Operating expenses as
a percentage of revenues decreased from 51.6% in the 1997 period to 47.4% in
the 1998 period, primarily as a result of existing personnel servicing a larger
subscriber base.
FGINET. 1997 COMPARED TO 1996
Revenues. Revenues increased 197.7% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 98.5% from 1996 to 1997, primarily as a result of deploying digital
technology and the increased costs associated with adding local telephone lines
and increased capacity to service new subscribers. Cost of access and other
revenues as a percentage of revenues decreased from 70.7% in 1996 to 47.2% in
1997 period. The decrease was primarily attributable to existing excess
capacity being used to satisfy new subscriber growth.
58
<PAGE>
Operating expenses. Operating expenses increased 110.2% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 74.8% in 1996 to
52.8% in 1997, primarily as a result of existing personnel servicing a larger
subscriber base.
FGINET. 1996 COMPARED TO 1995
Revenues. Revenues increased 704.1% from 1995 to 1996. The increase was
primarily attributable to an increase in the number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 1,115.6% from 1995 to 1996, primarily as a result of adding capacity
to service new subscribers. Cost of access and other revenues as a percentage
of revenues increased from 46.8% in 1995 to 70.7% in 1996. The increase was
primarily attributable to additions of telephone lines and capacity in advance
of subscriber growth.
Operating expenses. Operating expenses increased 834.5% from 1995 to 1996,
primarily as a result of hiring customer support personnel. Operating expenses
as a percentage of revenues increased from 64.3% in 1995 to 74.8% in 1996,
primarily as a result of the personnel increases highlighted above.
RESULTS OF OPERATIONS -- Superhighway, Inc. d/b/a/ Indynet ("Superhighway")
Superhighway was incorporated on June 1, 1995. Superhighway's target market
includes central Indiana and surrounding communities. The following table sets
forth certain historical data and such data as a percentage of revenue for the
periods indicated.
<TABLE>
<CAPTION>
JUNE 1
THROUGH NINE MONTHS
DEC. 31, YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1995 ------------------------------ ------------------------------
PERIOD 1996 1997 1997 1998
------------ -------------- -------------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $248.5 100.0% $1,248.8 100.0% $2,106.3 100.0% $1,541.8 100.0% $2,242.1 100.0%
Cost of access and other
revenues............... 74.0 29.8 436.1 34.9 752.6 35.7 340.7 22.1 935.5 41.7
Operating expenses...... 146.1 58.8 574.1 46.0 893.6 42.4 709.8 46.0 991.8 44.2
------ ----- -------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from
operations............. $ 28.4 11.4% $ 238.6 19.1% $ 460.1 21.9% $ 491.3 31.9% $ 314.8 14.1%
====== ===== ======== ===== ======== ===== ======== ===== ======== =====
Approximate total
subscribers............ 6,556 12,468 11,073 16,783
</TABLE>
SUPERHIGHWAY. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 45.4% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 174.6% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity to service new subscribers. Cost of access and other
revenues as a percentage of revenues increased from 22.1% in the 1997 period to
41.7% in the 1998 period. The increase was primarily attributable to increases
in telecommunications related costs in advance of subscriber growth.
59
<PAGE>
Operating expenses. Operating expenses increased 39.7% from the 1997 period
to the 1998 period, primarily as a result of increased costs associated with
the hiring of additional technical support and sales and marketing personnel.
Operating expenses as a percentage of revenues remained relatively constant at
46.0% in the 1997 period and 44.2% in the 1998 period.
SUPERHIGHWAY. 1997 COMPARED TO 1996
Revenues. Revenues increased 68.7% from 1996 to 1997. The increase was
primarily attributable to an increase in the number of dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 72.6% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines and increased capacity to service
new subscribers. Cost of access and other revenues as a percentage of revenues
remained relatively constant at 34.9% for the 1996 period and 35.7% for the
1997 period.
Operating expenses. Operating expenses increased 55.7% from 1996 to 1997,
primarily as a result of hiring administrative and technical support personnel.
Operating expenses as a percentage of revenues decreased from 46.0% in 1996 to
42.4% in 1997, primarily as a result of better pricing from suppliers and
tighter controls on spending as well as leveraging existing personnel over a
growing subscriber base.
SUPERHIGHWAY. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 402.5% from the 1995 period to 1996, primarily
as a result of revenues being generated over a seven-month period in 1995 as
opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 489.3% from the 1995 period to 1996. Cost of access and other
revenues as a percentage of revenues increased from 29.8% in the 1995 period to
34.9% in 1996, primarily as a result of telephone lines and capacity additions
in advance of subscriber growth.
Operating expenses. Operating expenses increased 293.0% from the 1995 period
to 1996. Operating expenses as a percentage of revenues decreased from 58.8% in
the 1995 period to 46.0% in 1996, primarily as a result of leveraging existing
personnel over a growing subscriber base.
60
<PAGE>
RESULTS OF OPERATIONS -- Lightspeed Net, Inc. ("Lightspeed Net")
Lightspeed Net was incorporated on June 28, 1996. Lightspeed Net's target
market is central California and surrounding communities. The following table
sets forth certain historical data and such data as a percentage of revenue for
the periods indicated:
<TABLE>
<CAPTION>
JUNE 28
THROUGH NINE MONTHS
DEC. 31, YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
1995 ----------------------------------- ---------------------------------
PERIOD 1996 1997 1997 1998
--------------- ---------------- ---------------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 84.8 100.0% $ 1,124.5 100.0% $ 3,085.9 100.0% $2,086.1 100.0% $3,521.6 100.0%
Cost of access and other
revenues............... 125.5 148.0 820.9 73.0 1,537.0 49.8 1,003.0 48.1 1,347.8 38.3
Operating expenses...... 344.5 406.3 1,369.2 121.8 2,791.7 90.5 1,973.5 94.6 2,254.6 64.0
------- ------ --------- ----- --------- ----- -------- ----- -------- -----
Income (loss) from
operations............. $(385.2) (454.3)% $(1,065.6) (94.8)% $(1,242.8) (40.3)% $ (890.4) (42.7)% $ (80.8) (2.3)%
======= ====== ========= ===== ========= ===== ======== ===== ======== =====
Approximate total
subscribers............ 4,059 11,464 9,548 16,313
</TABLE>
LIGHTSPEED NET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased 68.8% from the 1997 period to the 1998 period.
The increase was primarily attributable to the 71% growth in the total number
of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 34.4% from the 1997 period to the 1998 period primarily as a result
of the increased costs associated with adding local telephone lines and
increased capacity. Cost of access and other revenues as a percentage of
revenues decreased from 48.1% for the 1997 period to 38.3% for the 1998 period,
primarily as a result of existing excess capacity being used to satisfy new
subscriber growth.
Operating expenses. Operating expenses increased 14.2% from the 1997 period
to the 1998 period, primarily as a result of increased costs associated with
the hiring of sales and marketing, technical support and customer support
personnel. Operating expenses as a percentage of revenues decreased from 94.6%
in the 1997 period to 64.0% in the 1998 period, primarily as a result of
leveraging existing personnel over a growing subscriber base, as well as
increased prices in services to dial-up subscribers.
LIGHTSPEED NET. 1997 COMPARED TO 1996
Revenues. Revenues increased 174.4% from 1996 to 1997. The increase was
primarily as a result of the 168% growth in dial-up subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 87.2% from 1996 to 1997, primarily as a result of the increased costs
associated with adding local telephone lines to service new subscribers. Cost
of access and other revenues as a percentage of revenues decreased from 73.0%
for the 1996 period to 49.8% for the 1997 period, primarily as a result of
existing excess capacity being used to service new subscribers.
Operating expenses. Operating expenses increased 103.9% from 1996 to 1997,
primarily as a result of hiring new customer support and network personnel.
Operating expenses as
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a percentage of revenues decreased from 121.8% in 1996 to 90.5% in 1997,
primarily as a result of leveraging personnel over a growing subscriber base.
LIGHTSPEED NET. 1996 YEAR COMPARED TO THE 1995 PERIOD
Revenues. Revenues increased 1,226.1% from the 1995 period to 1996. The
increase was primarily as a result of revenues being generated over a six-month
period in 1995 as opposed to 12 months in 1996.
Cost of access and other revenues. Cost of access and other revenues
increased 554.1% from the 1995 period to 1996. Cost of access and other
revenues as a percentage of revenues decreased from 148.0% for the 1995 period
to 73.0% in 1996, primarily as a result of existing excess capacity being used
to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 297.4% from the 1995 period
to 1996. Operating expenses as a percentage of revenues decreased from 406.3%
in 1995 to 121.8% in 1996, primarily as a result of leveraging existing
personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- JPS.Net Corporation ("JPS.Net")
JPS.Net was incorporated on January 31, 1997. JPS.Net's target markets
include northern California with a primary focus on Sacramento and surrounding
communities. The following table sets forth certain historical data and such
data as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------------
1997 1997 1998
--------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $2,074.4 100.0% $1,057.2 100.0% $5,942.7 100.0%
Cost of access and other
revenues............... 1,121.4 54.1 513.5 48.6 2,400.3 40.4
Operating expenses...... 1,945.7 93.8 905.3 85.6 4,338.9 73.0
-------- ----- -------- ----- -------- ------
Income (loss) from
operations............. $ (992.7) (47.9)% $ (361.6) (34.2)% $ (796.5) (13.4)%
======== ===== ======== ===== ======== ======
Approximate total
subscribers............ 32,119 19,373 84,513
</TABLE>
JPS.NET. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenues increased 462.1% from the 1997 period to the 1998 period.
The increase was primarily attributable to an increase in the number of dial-up
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 367.5% from the 1997 period to the 1998 period, primarily as a result
of the increased costs associated with adding local telephone lines, increased
capacity and equipment leases to service new subscribers. Cost of access and
other revenues as a percentage of revenues decreased from 48.6% in the 1997
period to 40.4% in the 1998 period, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
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Operating expenses. Operating expenses increased 379.3% from the 1997 period
to the 1998 period, primarily as a result of hiring of operating and technical
support personnel. Operating expenses as a percentage of revenues decreased
from 85.6% in the 1997 period to 73.0% in the 1998 period, primarily as a
result of leveraging existing personnel over a growing subscriber base.
LIQUIDITY AND CAPITAL RESOURCES
We formed the Company to acquire existing companies which provide Internet
access and related services to subscribers in secondary, tertiary and rural
markets. We anticipated accessing the capital markets in conjunction with
consummation of the Transactions, and, as a result, we were not concerned with
the liquidity of any of the individual companies which we intend to acquire in
the Transactions. Certain of these companies are very thinly capitalized, with
little initial capital invested, and the growth of these businesses has been
financed primarily through operations. In addition, the nature of the
subscription-based Internet access business model requires the investment of
capital in advance to build network infrastructure and acquire subscribers. As
a result of these factors, six of the 17 companies which we will acquire upon
completion of this offering received opinions from their auditors which
expressed doubt as to their ability to continue independently as going
concerns. However, because of the benefits of consolidation and anticipated
reductions in cost, as well as the net proceeds from this offering our
liquidity is very different than that of the individual entities, and our
liquidity should be analyzed on a combined basis assuming completion of the
offering.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
We are a holding company that will conduct significant operations through our
subsidiaries. We expect the Company will be a source of growth capital for our
subsidiaries, and we expect to invest in our ISPs to allow them to increase the
number of their subscribers and fund their operations. Upon completion of the
offering and after funding the Transactions and repaying debt, we will have
approximately $37.6 million of cash on hand and $1.3, million of debt in the
form of capitalized lease obligations outstanding. If the underwriters' over-
allotment option is exercised, we will have approximately $55.1 million of cash
on hand.
On a combined basis, we generated cash flow from operations of $3.9 million
during the nine months ended September 30, 1998, and $2.2 million during 1997.
In addition, we utilized cash flow in investing activities of $8.1 million
during the nine months ended September 30, 1998, and $5.3 million during 1997.
We generated $4.7 million from financing activities for the nine months ended
September 30, 1998, and $4.1 million for the year ended December 31, 1997. We
believe that our cash flow from operations and proceeds from the offering will
provide the cash required to execute our business plan through December 1999.
We intend to pursue an acquisition program that we will fund through the
issuance of additional common stock and cash flow from operations.
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YEAR 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Thus, date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in system failures or miscalculations, causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices or engage in similar normal business activities. In
connection with the transactions, we have received a representation from the
former owner of our ISPs that none of our ISPs face material, unresolved Year
2000 issues. We have not conducted our own audit of our ISPs to confirm that
these representations are true. To the extent these representations are
breached and we suffer damages, our operating results and financial condition
may be adversely affected. Although we rely on external vendors and third-party
network service providers, we do not anticipate that these third parties' Year
2000 problems will significantly impact our operations. To the extent that we
rely on external vendors or third-party network service providers with Year
2000 exposure, however, any failure by these vendors or third-party network
service providers to resolve any Year 2000 issues on a timely basis or in a
manner that is compatible with our systems could have a material adverse effect
on our financial condition.
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<PAGE>
BUSINESS
OneMain.com provides Internet access and related services to individuals and
businesses located predominantly in secondary, tertiary and rural markets
throughout the United States. We believe individuals in these markets have
traditionally been under-served or not served at all by national on-line
service providers and therefore present a significant growth opportunity for
us. Upon completion of this offering and the Transactions, we will immediately
become one of the ten largest (based on number of subscribers) independent
Internet service providers in the United States with approximately 273,000
subscribers at September 30, 1998.
Our target markets are those metropolitan statistical areas ("MSAs") not in
the top 15 (based on population) in the United States. Our ISPs benefit from
the relatively low fixed costs for personnel and facilities in secondary,
tertiary and rural markets. We also expect to benefit from the reduced
telecommunications and operating costs resulting from our national scale. Based
on the experience of our ISPs, we believe the typical subscribers in our
markets are best described as individuals who:
. derive a high utility from the Internet because information, shopping
and entertainment options generally are limited in their local
communities;
. typically have been referred to our service by acquaintances, and are
either new users of Internet access services or have left large,
national on-line service providers because they were not satisfied with
the services provided by those companies;
. are interested in local content and appreciative of friendly, local,
reliable service and, therefore, tend to reward ISPs which exhibit these
characteristics with strong loyalty; and
. are driven primarily by local customer service, and thus place a lower
emphasis on price and technology.
We believe most national ISPs have focused on the 35 largest MSAs in the
United States and have not addressed to any significant degree the demand for
Internet services in secondary, tertiary and rural markets. The 15 largest MSAs
comprise only 37% of the U.S. population, leaving approximately 167 million
individuals in hundreds of secondary, tertiary and rural markets in the United
States as potential subscribers. Currently, approximately 34 million people, or
13% of the U.S. population, are able to access one of our ISP networks through
a local telephone call. Many of the national on-line service providers with
whom we compete provide access in our markets only through long distance calls,
which make access more expensive for subscribers. We believe that our ability
to provide Internet access through local calls provides us with a significant
competitive advantage. We also expect to benefit from the managerial talent,
technological competence and localized sales and marketing skills that we will
acquire through what we believe are some of the fastest growing local ISPs in
the United States.
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<PAGE>
On a pro forma combined basis, our ISPs generated $14.4 million in total
revenues for the three months ended September 30, 1998 and $37.5 million in
total revenues for the nine months ended September 30, 1998. These amounts
represented increases of 92.6% and 87.0%, respectively, over the same three-
month and nine-month periods in 1997. The number of our subscribers grew 116.8%
to 273,238 at September 30, 1998 from 126,033 at September 30, 1997. On a
sequential quarter basis, our revenue growth has averaged 16.6% during the six-
quarter period ended September 30, 1998, and our subscriber growth has averaged
19.9% over this period. Our churn rate of % per month for the quarter ended
December 31, 1998 illustrates the stability of our subscriber base.
INDUSTRY BACKGROUND
Growth of the Internet. The Internet has become a global medium that enables
millions of people to obtain and share information, communicate and conduct
business electronically. The Internet has grown rapidly since its introduction
to the public in the early 1990's. International Data Corporation ("IDC")
estimates that by the end of 2002 the number of Internet users will increase to
over 135 million in the United States and over 319 million worldwide, a 29% and
a 36% compound annual growth rate for each of these markets since 1997. The
growth in the number of Internet users and the number of Web sites is being
driven by a number of factors, including the large and growing installed base
of personal computers, advances in the performance and speed and reduction in
cost of personal computers and modems, improvements in network infrastructure,
easier and cheaper access to the Internet and the increasing importance of the
Internet as a communications medium, an information resource and a sales and
distribution channel.
The Internet Services Market. The Internet services market currently consists
primarily of access services, which include dial-up access for individuals and
small businesses and high-speed dedicated access primarily for larger
organizations. Forrester Research, Inc. ("Forrester") projects that revenues
from Internet access services in the United States will grow from $4.7 billion
in 1997 to $15.3 billion in 2001. Additionally, a 1997 Jupiter Communications
Research report projected that independent ISPs would serve approximately 22.6
million of the 28.7 million on-line households in 1998, a market share of
approximately 79%. Dial-up access technology during 1998 is projected by
Forrester to represent 27.7 million of these 28.7 million on-line accounts, or
approximately 97%.
The rapid development and growth of the Internet has resulted in a highly
fragmented industry comprised of 4,855 national and local ISPs in the United
States as of September 1, 1998 based on Boardwatch data, most of which operate
as small, local businesses. The Internet services industry is expected to
undergo substantial consolidation over the next few years, especially among
small- and mid-sized ISPs. ISPs vary widely in geographic coverage, customer
focus and the nature and quality of services provided to subscribers.
Relatively few ISPs offer nationwide coverage, have a brand name with national
recognition or have the ability to grow significantly without additional
investment in infrastructure. We believe consumers generally focus on customer
service, speed and reliability of access, ease of use and price when they
evaluate an ISP.
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The OneMain.com Opportunity. We believe subscribers in secondary, tertiary
and rural markets generally are under-served or not served at all by national
on-line service providers. According to Forrester, independent regional and
local ISPs have successfully captured approximately one-half of the total ISP
market, despite the substantially greater resources of the national providers.
However, while regional and local ISPs can tailor their support services and
content to the particular needs of their target markets, they cannot capture
the cost benefits that large national providers enjoy as a result of their
scale. We believe these factors have created an opportunity for a national
company such as OneMain.com to provide the customer support and content
requirements of a smaller region or town while benefitting from the scale
advantages now enjoyed by national providers.
OUR STRATEGY
We intend to create shareholder value by continuing to build scale through
both organic growth and acquisitions and then leveraging our large scale to
increase revenues and reduce costs. The following are the key elements of our
strategy:
. MANAGE OUR ISPS THROUGH OPERATING GROUPS. We intend to organize our ISPs
into operating groups. These operating groups will manage our ISPs on a day-
to-day basis, identify acquisitions, integrate acquired subscribers and
support organic growth at the local ISP level. Our operating groups will be
formed by our largest ISPs and typically will have the following
characteristics:
.substantial operating and financial scale;
. scalability, as defined by operating infrastructure, which can be
leveraged by adding subscribers;
.a focus on increasing the ratio of subscribers to POPs; and
.experience, whenever possible, in acquiring and integrating ISPs.
Initially, we intend to manage our business through seven operating
groups, each focused on increasing subscriber density, reducing local
telecommunications costs, managing regional accounting and billing systems,
and maintaining customer support and network management functions. Our
operating group leaders will be the individuals who manage our largest ISPs
prior to this offering. Certain of the operating group leaders have
substantial experience in identifying, consummating and integrating
acquisitions, and we expect that acquisitions in existing and contiguous
markets will be driven by our operating group leaders.
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Our ISPs have been successful both in attracting new subscribers and
retaining existing subscribers. The table below demonstrates the scale we
have achieved through the growth in our subscriber base on a combined basis
over the last seven quarters:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF GROWTH FROM
DATE SUBSCRIBERS PREVIOUS QUARTER
---- ----------- ----------------
<S> <C> <C>
March 31, 1997................................ 92,643 29.6%
June 30, 1997................................. 104,656 13.0
September 30, 1997............................ 126,033 20.4
December 31, 1997............................. 154,467 22.6
March 31, 1998................................ 195,806 26.8
June 30, 1998................................. 230,381 17.7
September 30, 1998............................ 273,238 18.6
</TABLE>
. GROW OUR SUBSCRIBER BASE. We intend to grow our subscriber base through a
combination of organic and acquisition-driven growth. This growth will help
us to increase the density of our subscriber base on a subscriber per POP
basis, which should allow us to leverage our cost structure, particularly
those costs associated with network operations, customer support, back
office functions and management overhead. We expect our operating groups to
generate organic subscriber growth primarily by enhancing our subscribers'
on-line experience and migrating to a national brand.
Enhance Subscribers' On-line Experience. We intend to maintain our high
subscriber retention rates and add new subscribers by enhancing our on-line
service:
. Ease of Use. Develop and implement a common, easy-to-use CD-based
software package that automatically configures all the individual
Internet access programs after one-time entry by the user of a few
required fields of information (name, user name, password, etc.),
thereby making Internet access for our subscribers as easy as "10
clicks and you're on."
. Local Content. Source local, customized, community-specific content,
such as weather, crop reports, business club meetings and high
school and college sports information, through national providers of
local content or partnerships with businesses and organizations in
our subscribers' local communities.
. New Products and Services. Offer subscribers new products and
services, such as IP telephony or audio-visual streaming, as the
technologies supporting these products and services become stable
and profitable.
. Co-Marketing Opportunities. Develop our affinity-based marketing
programs to offer products and services, such as co-branded credit
cards and long distance telephone service, to our subscribers in
exchange for fee-based revenues.
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Migrate to a National Brand. We will also seek to support organic growth
by migrating to a national brand supported by community-based marketing
programs. This strategy includes two components:
. National Brand. Migrate our strong regional brands to our national
brand, OneMain.com--"Your Hometown Internet." We will begin to
migrate these brands on a market by market basis as we implement
service enhancements to improve subscriber satisfaction.
. Community-Based Marketing. Continue to build goodwill through
community involvement, such as providing free service to libraries
and educational institutions, sponsoring local sports teams and
other community organizations and furthering relationships with
local retailers to promote our products and services in their
stores.
Grow Through Acquisitions. The ISP industry remains fragmented, with
4,855 ISPs in the United States as of September 1, 1998. Many of these ISPs
operate in the secondary, tertiary and rural markets in which we will focus
our strategy. We intend to continue our growth by acquiring additional ISPs
within existing and contiguous markets to increase our density in these
markets and by acquiring independent ISPs in targeted new markets to
increase our scale and geographic scope. When determining which ISPs to
acquire, we focus on the following criteria:
.rapid revenue and subscriber growth;
.low subscriber turnover or churn rates;
.high density as defined by a high ratio of subscribers to POPs;
.limited competition;
. consistent network platforms provided by common vendors that can be
integrated readily into our network; and
.experienced and capable management teams.
We believe ISPs in our target markets will continue to be attracted to
and benefit from the opportunity to affiliate with us. We believe we offer
local ISP owners an attractive opportunity based upon, among other factors:
. enpowering local ISP owners to leverage their local market knowledge
to build market share and density by acquiring competitors and
having access to sufficient capital and resources; and
. offering a combination of liquidity and upside potential through
equity ownership in a publicly traded entity to current owners and
employees.
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. INTEGRATE OUR ISPS. We plan to integrate our ISPs at the operating group
level to achieve the following:
.elimination of redundant network costs;
.consolidation of certain operations, including back office functions;
and
.retention of sales staff and key managers.
. LEVERAGE OUR SCALE. The primary role of our corporate level management team
will be to build and leverage our combined scale to increase revenues and
reduce costs. We will seek to realize the benefits of scale in the following
areas:
. Incremental Revenue Streams. We can leverage our growing subscriber
base and combined user traffic to obtain revenues from: (i) sponsors
and advertisers; (ii) relationships with internet portals and
content providers; and (iii) co-branded affiliate marketing
programs.
. Reduce Costs. We intend to take advantage of our national scale to
leverage purchasing power and consolidate certain business functions
and thereby reduce our costs and improve profitability.
Specifically, we intend to implement the following steps to reduce
costs:
. reduce our telecommunications costs system-wide by negotiating
one or more relationships with national backbone providers to
connect our ISPs to the Internet;
. negotiate favorable local loop contracts and establish co-
location arrangements with incumbent and competitive local
exchange carriers to reduce substantially our local loop costs;
. establish private peering relationships to reduce our costs and
improve access and reliability for our subscribers;
. reduce costs through the implementation of a standardized
billing system;
. negotiate discounts with equipment vendors; and
. manage financial information through a central, common
accounting system.
. OFFER HIGHER MARGIN PRODUCTS AND SERVICES. We intend to capitalize on
opportunities to sell higher margin value-added products and services to our
subscribers. We intend to monitor our subscribers' usage habits and market
certain of our products to subscribers who exhibit characteristics which
indicate a demand for these products and services. For example, we can
identify subscribers who spend a great deal of time on-line through use of a
dial-up modem and therefore are likely candidates for enhanced access
capability such as through dedicated access services.
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SERVICES
We offer Internet services tailored to meet the needs of our individual and
business customers. Our primary service offerings are dial-up Internet access
and value-added services for individual customers. Our business customers take
advantage of dedicated high speed Internet access, Web hosting and other
services. Our ISPs offer their services in various prices and packages so that
subscribers may customize their subscription with services that meet their
particular requirements. We plan on offering a common nationwide pricing plan
as soon as practical.
The majority of our customers have month-to-month subscriptions, though
certain of our ISPs also offer annual subscriptions, in some instances, with
significant discounts. Customers can subscribe to our services by mail, over
the telephone, by walking into the office of one of our ISPs, or by enrolling
through an individual ISP's web site. The majority of our customers are billed
through automatic charges to their credit cards or bank accounts, although
some customers are invoiced.
Our primary services are dial-up Internet services including Internet access
and various Internet applications such as e-mail, the World Wide Web, Internet
relay chat ("IRC"), File Transfer Protocol ("FTP") and Usenet news access.
Some of our ISPs currently offer unlimited use pricing, while others offer
tiered levels of pricing plans. We intend to offer a common nationwide pricing
plan as soon as practical, possibly with tiered levels of pricing based upon
number of hours per month of usage. Included in the Internet access package
provided by each ISP is a CD-ROM with web browsers (such as Netscape Navigator
or Microsoft Internet Explorer), client programs for other services such as
IRC and Usenet news and utility programs. We expect to consolidate all our
ISPs' CD-ROM offerings into one national CD-ROM as soon as practical.
In addition to offering dial-up and dedicated analog access, we offer our
business customers dedicated ISDN access and full and partial T-1
connectivity. These high speed connections can service hundreds of users at
once, and are often used by businesses to connect their offices directly to
the Internet. Our ISPs offer numerous services related to a customer's T-1
connection, including hardware configuration and local loop installation.
Certain of our ISPs offer Web hosting for businesses and other organizations
that wish to create their own World Wide Web sites without maintaining their
own Web servers and high-speed Internet connections. Our Web hosting services
feature state-of-the-art Web servers for high speed and reliability, a high
quality connection to the Internet, specialized customer support and advanced
services features, such as secure transactions and site usage reports.
Some of our ISPs also offer Web design services. These range from simple one
page Web design requests to full company presentations. Some of our ISPs have
created turnkey Web site designs of great detail, using the talents of their
in-house art and web designers and technical staff. Often, we sell our Web
design services and Web hosting as a package.
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SALES AND MARKETING
Currently our ISPs possess a series of strong regional and local brands. We
attract our new subscribers primarily through referrals, re-seller programs and
direct sales efforts. Our direct sales effort is conducted through our local
sales forces at the individual ISP level. Because they are locally based, our
sales teams are able to meet face-to-face with prospective subscribers to
discuss their Internet needs and technical requirements as well as develop
tailored solutions. Co-branding relationships will serve as an essential
element of our future sales and marketing program. We intend to pursue co-
branding opportunities with one or more national backbone providers, affinity-
based marketing partners and Internet content providers. We believe these co-
branding relationships will help us add subscribers, build revenue and enhance
subscriber loyalty through improved utility.
We plan to continue to develop programs to attract and train high quality,
motivated sales representatives that have the necessary technical skills,
consultative sales experience and knowledge of their local markets, and we will
support our sales teams through integrated marketing efforts, particularly at
the community level, as we migrate to one national brand.
CUSTOMER SUPPORT
We believe superior customer support is critical to our ability to retain
existing subscribers and attract new subscribers. Our subscribers depend on the
speed and reliability of our network and our ability to keep them connected to
the Internet at all times. The knowledge and service-orientation of our local
customer support personnel is a key element in our ability to assist our
subscribers in quickly resolving problems.
To address individual subscriber problems, we plan to provide customer
support 24 hours a day, seven days a week, in markets where it is economically
feasible. This support will be initially provided through our ISPs and
ultimately supported through a national call center. Each of our ISPs will
provide direct customer support to the markets it serves through local customer
support representatives who will be trained to respond to referrals from the
national call center. We believe this local support is crucial to maintaining
the local, personalized feel of our service and, in most cases, will allow us
to take advantage of the lower cost of labor in our markets. In addition, our
subscribers have the ability to reach our customer support representatives by
e-mail or schedule a telephone appointment at a time that is convenient to the
subscriber. The strategy of creating a partnership between local support teams
and a national call center should enable us to capture economies of scale,
improve quality and responsiveness and increase productivity, while allowing
local personnel to focus on relationships with subscribers.
OUR NETWORK
Currently, our network consists of the 17 individual networks maintained by
the ISPs we will acquire in the Transactions. Our plans include establishment
of our own national backbone network, insistence on common technology,
reduction of redundant POPs,
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operation of a national Network Operations Center ("NOC") and continued
deployment of stable technology.
We plan to establish a national backbone within our first year of operation,
by utilizing the resources of one or more large communications carriers. At
completion, our individual companies will utilize this national backbone for
Internet connectivity. As part of our national network, we intend to establish
private peering relationships, a central NOC and a standby NOC facility.
One of our acquisition criteria was that each ISP use a common technology
infrastructure. At this time, all of our ISPs are utilizing routers from Cisco,
access servers from Lucent, Ascend, 3Com or Cisco and are based on the Unix
operating system. We plan to continue to utilize several key vendors to build
our network in the future, and will seek to implement similar arrangements with
other companies we may acquire. Currently, we maintain approximately 770 POPs
covering approximately 13% of the U.S. population. We will consolidate POPs as
soon as possible to eliminate duplicate resources from our network.
We plan to operate a centralized NOC. This NOC will be designed to survive
fiber optic or power failure, and will be backed by a remote standby facility.
Network management will be coordinated through the NOC, with individual
operating groups responsible for installation and maintenance of equipment
within their regions. The NOC will also act as a central resource for tracking
all problems and incidents relating to network outages, repair and installation
activity.
COMPETITION
The market for providing Internet access to individuals is extremely
competitive and highly fragmented. We currently compete or expect to compete
with the following types of Internet access providers: (i) national commercial
Internet access providers, such as MindSpring and EarthLink; (ii) established
on-line commercial information service providers, such as America Online and
Prodigy; (iii) numerous regional and local commercial Internet access providers
that vary widely in quality, service offerings and pricing; (iv) cable
operaters; (v) national long-distance carriers, such as AT&T, MCI WORLDCOM and
Sprint; (vi) the RBOCs and certain CLECs; (vii) computer hardware and software
and other technology companies, such as IBM and Microsoft; and (viii) nonprofit
or educational Internet access providers. We also believe that new competitors,
including large computer hardware and software, media and telecommunications
companies, will continue to enter the Internet access market. Additionally, we
face competition from companies that provide connections to consumers' homes,
including local and long-distance telephone companies, cable television
companies, electric utility companies and wireless communications companies.
We believe the primary competitive factors determining success for Internet
access providers in the secondary, tertiary and rural markets that we serve are
local presence, knowledgeable salespeople, responsive subscriber satisfaction
personnel and quality technical support. Other important factors include price,
the timing of introductions of new products and services and industry and
general economic trends. See "Risk Factors--We Compete with
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other Internet Access Providers, which could cause us to Lower Prices Resulting
in Reduced Revenues" on page 8.
GOVERNMENT REGULATION
We provide Internet access, in part, through transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. As an Internet access
provider, we are not currently subject to direct regulation by the FCC or any
other agency, other than regulations applicable to businesses generally.
However, we could become subject in the future to regulations by the FCC and/or
other regulatory commissions as a provider of basic telecommunications
services.
These regulations could affect the charges that we pay to connect to the
local telephone network or for other purposes. Currently, we, like other
Internet access providers, are not required to pay carrier access charges.
Access charges are assessed by local telephone companies to long-distance
companies for the use of the local telephone network to originate and terminate
long-distance calls, generally on a per minute basis. Access charges have been
a matter of continuing dispute, with long-distance companies complaining that
the rates are substantially in excess of cost and local telephone companies
arguing that access rates are justified to subsidize lower local rates for end
users and other purposes. In May 1997, the FCC reaffirmed its decision that
Internet access providers should not be required to pay carrier access charges.
In a related order, the FCC also concluded that Internet access providers
should not be required to contribute to a new universal service fund
established to replace current local rate subsidies and to meet other public
policy objectives, such as enhanced communications systems for schools,
libraries and certain health care providers. As a result, unlike
telecommunications carriers and other telecommunications providers, Internet
access providers will not have to contribute a percentage of their revenues to
the federal universal service fund and are not likely to be required to
contribute to similar funds being established at the state level. However, both
the access charge and universal service treatment of Internet access providers
are the subjects of further proceedings and could change. Telephone companies
are actively seeking reconsideration or reversal of the FCC decisions, and
their arguments are gaining more support as Internet-based telephony begins to
compete with conventional telecommunications companies. We are not in a
position to predict how these matters will be resolved, but we could be
adversely affected if, in the future, we and other ISPs are required to pay
access charges or contribute to universal service support.
We also face risks that the way Internet access is provided may change
fundamentally. Currently, users access Internet services primarily by computers
connected by telephone lines. Several companies have started to offer Internet
access through other means, such as cable and satellite, that have the ability
to transmit data at substantially faster speeds than the modems we and our
subscribers currently use. As the Internet becomes accessible through these and
other consumer electronic devices, or as subscriber requirements change the way
Internet access is provided, we will have to develop new technology or modify
our existing technology to accommodate these developments. These efforts may
require substantial time and expense, and we cannot assure investors that we
will be successful in adapting our Internet access business to alternate access
devices and conduits.
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The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. Although no claims seeking to impose such liability have
been asserted against the Company to date, there can be no assurance that these
claims will not be asserted in the future or, if asserted, will not be
successful. As the law in this area develops, the potential imposition of
liability upon the Company for information carried on and disseminated through
our network could require us to implement measures to reduce our exposure to
such liability, which may require the expenditure of substantial resources or
the discontinuation of certain products or service offerings. Any costs that
are incurred as a result of contesting any such asserted claims or the
consequent imposition of liability could materially adversely affect our
business, financial condition and results of operations.
Due to the increasing popularity and use of the Internet, a number of laws
and regulations have been adopted in recent months, and it is possible that
additional laws and regulations may be adopted with respect to the Internet,
covering issues such as content, user privacy, pricing and copyright
infringement. Such laws and regulations potentially affecting us have been
adopted, and may be adopted in the future, by federal, and state governments,
as well as by foreign governments. We cannot predict the impact, if any, that
recent and any future regulatory changes or developments may have on our
business, financial condition and results of operations. Changes in the
regulatory environment relating
to the Internet access industry, including regulatory changes that directly or
indirectly affect telecommunication costs or increase the likelihood or scope
of competition from regional telephone companies or others, could have a
material adverse effect on our business, financial condition and results of
operations.
PERSONNEL
As of September 30, 1998, on a pro forma basis, we employed approximately 600
individuals, including approximately: (i) 119 sales and marketing personnel;
(ii) 285 subscriber and technical support representatives; (iii) 86 network
operations employees; and (iv) 110 administrative personnel. None of these
employees are represented by a labor union, and neither the Company nor any of
its ISPs is a party to any collective bargaining agreement.
PROPERTIES
Our ISPs lease space in their markets for their POPs and also for office
space. We anticipate that we will require additional space for POPs as we
expand, and we believe that we will be able to obtain suitable space as needed.
LEGAL PROCEEDINGS
We are not a party to, and none of our ISPs is the subject of, any material
pending legal proceeding.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
We set forth below certain information regarding the persons who will serve
as the executive officers, key employees and directors of the Company following
completion of the offering:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
---- --- -------------------------
<S> <C> <C>
Stephen E. Smith........... 38 President, Chief Executive Officer, Chairman of
the Board and Director
Dewey K. Shay.............. 40 Vice President, Chief Financial Officer and
Director Nominee
Martin R. Lyons............ 34 Vice President and Chief Technology Officer
Allon H. Lefever........... 52 Director Nominee
Michael C. Crabtree........ 49 Director Nominee
Thomas R. Eisenmann........ 41 Director Nominee
</TABLE>
Stephen E. Smith has served as our President and Chief Executive Officer and
sole director since our inception in August 1998. Mr. Smith was an investment
banker having worked both in the Corporate Finance and Mergers and Acquisitions
Departments at Morgan Stanley & Co. Incorporated from March 1991 to July 1998.
From 1988 to 1991, Mr. Smith worked for the Trammell Crow Companies.
Dewey K. Shay has served as our Vice President and Chief Financial Officer
since our inception and is a director nominee. Mr. Shay was the President and
founder of Unison Partners, Inc., which was formed in May 1997 to pursue
strategic consolidation opportunities. Mr. Shay was the Senior Executive Vice
President and Chief Administrative Officer of Donna Karan International, a
designer apparel company, from December 1996 to May 1997. Mr. Shay was an
investment banker having worked in both the Corporate Finance and Mergers and
Acquisitions Departments at Morgan Stanley & Co. Incorporated from August 1986
to December 1996.
Martin R. Lyons has served as our Vice President and Chief Technology Officer
since October 1998. Mr. Lyons was the President and Chief Executive Officer of
Sprocket Labs, Inc., a technology consulting firm from January 1997 until he
joined us. Mr. Lyons was the Director of Network Operations at America Online
from November 1993 to December 1996, with responsibilities for network
architecture, engineering and systems.
Allon H. Lefever will become one of our directors and Vice Chairman of the
Board as well as President of our Northeast and Plains States operating groups
upon completion of this offering. Mr. Lefever has been the founder, director
and treasurer of SuperNet Interactive Services, Inc. from May 1994 to the
present and a founder and director of Supernet, one of our ISPs, from July 1995
to the present. Mr. Lefever has also served as senior business executive for
High Industries, Inc. since April 1988. Mr. Lefever is a director of U.S.
Office Products, Inc. and a director and treasurer of Goodville Mutual
Insurance Company.
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Michael C. Crabtree will become one of our directors as well as the President
of our Southeast operating group upon completion of this offering. Mr. Crabtree
has been the Chairman of United States Internet, one of our ISPs, since July
1995 and has been Chief Executive Officer of United States Internet, since
April 1998. Mr. Crabtree originally joined United States Internet as its Chief
Operating Officer in December 1994. Mr. Crabtree was a technical business
consultant from July 1994 to December 1994 and was Vice President of New
Business Development of CTI Services, responsible for developing regional
Positron Emission Tomography (PET) compound distribution center sites, from
June 1993 to July 1994.
Thomas R. Eisenmann will become one of our directors upon completion of this
offering. Mr. Eisenmann is an Assistant Professor in the Entrepreneurial
Management/Service Management Unit at the Harvard Business School. Mr.
Eisenmann entered the Doctoral Program at the Harvard Business School in 1994
and received his Doctor of Business Administration degree in 1998 after
completing a doctoral thesis examining the consolidation patterns in the U.S.
cable television industry. From 1990 through 1994, Mr. Eisenmann served as the
co-head of McKinsey & Company's Media and Entertainment Practice where he
directed teams addressing a broad range of strategic, organizational and
operational issues for clients engaged in network television broadcasting,
cable programming services, newspaper, magazine and book publishing and motion
picture production.
We anticipate hiring additional executive officers and key employees and
adding additional directors prior to completion of this offering.
Our Board of Directors will consist of between three and 15 directors. Prior
to completion of this offering, the Board of Directors of the Company will be
divided into three classes, as nearly equal in number as possible. Each
director will serve until the director's successor is duly elected and
qualified or until the director's earlier death, resignation or removal. At
each annual meeting of stockholders, the successors to the class of directors
whose term expires at that meeting will be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election and until their successors have been duly elected
and qualified or until any such director's earlier death, resignation or
removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Within 90 days following completion of this offering, our Board of Directors
intends to establish a compensation committee to consist solely of non-employee
directors. The compensation committee will provide a general review of our
compensation plans to ensure that they meet corporate objectives and will
administer our stock plans. Also within 90 days following completion of this
offering, our Board of Directors intends to establish an audit committee which
will be comprised solely of independent directors. The responsibilities of the
audit committee will include recommending to our Board of Directors the
independent public accountants to be selected to conduct the annual audit of
our books and records, reviewing the proposed scope of the audit and approving
the audit fees to be paid, reviewing accounting and financial controls with the
independent public accountants and our financial and accounting staff and
reviewing and approving transactions between us and our directors, officers and
affiliates.
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DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers, employees
or consultants of ours are entitled to receive an annual retainer fee of
$25,000, plus reimbursement of expenses for each meeting of the Board of
Directors and each committee meeting that they attend in person. In addition,
non-employee directors will receive certain formula grants of options to
acquire shares of common stock under the 1999 Stock Option and Incentive Plan
consisting of an initial grant to purchase 25,000 shares upon becoming a
director and subsequent grants to purchase 5,000 shares on each annual meeting
date thereafter. See "--1999 Stock Option and Incentive Plan" on page 79 below.
EXECUTIVE COMPENSATION
We were founded in August 1998 and had no significant operations during 1998.
The following table summarizes the compensation paid to our Chief Executive
Officer during 1998:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS COMPENSATION IN 1998
- ---------------------------- --------------------
<S> <C>
Stephen E. Smith, Chairman,
President and Chief Executive Officer $23,561
</TABLE>
None of our other executive officers was paid or earned compensation in
excess of $100,000 in 1998. For information regarding the compensation to be
paid to our executive officers following completion of this offering, see "--
Employment Agreements" below.
EMPLOYMENT AGREEMENTS
We have entered into Senior Management Agreements with each of our executive
officers, each of which has a term of three years, subject to extension for two
additional years unless we or the executive officer elects to terminate the
agreement within 60 days of the third anniversary of the executive officer's
date of employment. Under these agreements, our executive officers will receive
an initial annual base salary as set forth below, subject to increase at the
discretion of our Board of Directors based on performance objectives
established by our Board of Directors, and an annual bonus of up to the amount
set forth below for each executive officer based upon the Company's
performance. Mr. Lyons also will receive a one-time bonus of $50,000 upon
consummation of this offering. Pursuant to these Senior Management Agreements,
our executive officers also will receive options to acquire the number of
shares of common stock set forth below at the initial public offering price.
One-fourth of these options will vest on the first anniversary of the closing
date of this offering, and the remaining three-fourths of these options will
vest at a rate of 1/36th per month thereafter, provided that all these options
will vest in full upon a change in control of the Company. Mr. Lyons also
purchased 200,000 shares of restricted common stock at a purchase price of
$0.05 per share. Of these, 100,000 shares vested on the date Mr. Lyons entered
into his Senior Management Agreement with us, and the remaining 100,000 shares
will vest upon completion of this offering.
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<TABLE>
<CAPTION>
INITIAL ANNUAL
EXECUTIVE OFFICER BASE SALARY MAXIMUM ANNUAL BONUS OPTIONS
----------------- -------------- ------------------------- -------
<S> <C> <C> <C>
Stephen E. Smith............ $150,000 $50,000
Dewey K. Shay............... $150,000 $50,000
Martin R. Lyons............. $150,000 10% of Annual Base Salary 300,000
</TABLE>
If, during the term of a Senior Management Agreement, we terminate the
executive officer's employment without cause (as defined in the agreement) or
the executive officer terminates his or her employment for good reason (as
defined in the agreement), then the executive officer will be entitled to
receive his or her base salary (but not any bonus) and all employee benefits
for a period of one year from the date of the termination of his or her
employment.
Under the terms of their Senior Management Agreements, our executive officers
have agreed to preserve the confidentiality and the proprietary nature of all
information relating to the Company, our ISPs and our business during the term
of the agreement and for five years thereafter. In addition, each of our
executive officers has agreed to certain non-competition and non-solicitation
provisions which will be in effect during the term of his or her Senior
Management Agreement and for two years thereafter.
1999 STOCK OPTION AND INCENTIVE PLAN
Prior to the completion of the offering, we will adopt the OneMain.com, Inc.
1999 Stock Option and Incentive Plan to provide incentives to attract and
retain executive officers, directors, employees and other key personnel. A
committee of the Board will administer the Stock Option and Incentive Plan. The
maximum number of shares available for issuance under the Stock Option and
Incentive Plan will be .
The Stock Option and Incentive Plan authorizes the grant of stock options,
stock appreciation rights, restricted stock, deferred stock, unrestricted
stock, dividend equivalents, other stock-based awards, performance awards and
annual incentive awards ("Incentive Awards"). In each fiscal year, any person
who is eligible to participate may not be granted Incentive Awards relating to
more than shares subject to adjustment. In addition, the maximum amount that
may be earned as an annual Incentive Award or other cash award in any fiscal
year by any one participant is $300,000 and the maximum amount that may be
earned as an Incentive Award or other cash award in respect of a performance
period by any one participant is $900,000. If and to the extent that the
committee determines that an award to be granted to a participant should
qualify as "performance-based compensation" for purposes of Code Section
162(m), the grant, exercise and/or settlement of such award will be contingent
upon achievement of preestablished performance goals. The performance goals
shall be one or more of the following business criteria for the Company, on a
consolidated basis, and/or specified subsidiaries or business units of the
Company (except with respect to the total stockholder return and earnings per
share criteria): (1) total stockholder return; (2) total stockholder return as
compared to total return (on a comparable basis) of a publicly available index
such as, but not limited to, the Standard & Poor's 500 Stock Index; (3) net
income; (4) pretax earnings; (5) earnings before interest expense, taxes,
depreciation and amortization; (6) pretax operating earnings after interest
expense and before bonuses, service
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fees, and extraordinary or special items; (7) operating margin; (8) earnings
per share; (9) return on equity; (10) return on capital; (11) return on
investment; (12) operating earnings; (13) working capital; and (14) ratio of
debt to stockholders' equity.
Stock Options. The Stock Option and Incentive Plan permits the granting of
(i) options to purchase shares of common stock intended to qualify as incentive
options under Section 422 of the Internal Revenue Code and (ii) options that do
not so qualify. The option exercise price of each option will be determined by
the Committee but may not be less than 100% of the fair market value of the
common stock on the date of grant.
The term of each option will be fixed by the committee and may not exceed ten
years from the date of grant. The committee will determine at what time or
times each option may be exercised and, subject to the provisions of the Stock
Option and Incentive Plan, the period of time, if any, after retirement, death,
disability or termination of employment during which options may be exercised.
Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the committee.
Upon exercise of options, the option exercise price must be paid in full
either in cash or cash equivalents by delivery of shares of common stock
already owned by the optionee. The exercise price may also be delivered by a
broker pursuant to irrevocable instructions to the broker from the optionee.
At the discretion of the committee, options granted under the Stock Option
and Incentive Plan may include a "re-load" feature pursuant to which an
optionee exercising an option by the delivery of shares of common stock would
automatically be granted an additional option (with an exercise price equal to
the fair market value of the common stock on the date the additional option is
granted) to purchase that number of shares of common stock equal to the number
delivered to exercise the original option.
Restricted Stock. The committee may also award shares of common stock to
participants, subject to such conditions and restrictions as the committee may
determine. These conditions and restrictions may include the achievement of
certain performance goals and/or continued employment with us through a
specified restricted period. If the performance goals and any other
restrictions are not attained, the participants would forfeit their restricted
shares. The purchase price of restricted shares of common stock will be
determined by the committee.
Deferred Stock. The committee may also award deferred stock units, which are
ultimately payable in the form of unrestricted shares of common stock. The
deferred stock may be subject to such conditions and restrictions as the
committee may determine. These conditions and restrictions may include the
achievement of certain performance goals and/or continued employment with us
through a specified restricted period. If the performance goals and other
restrictions are not attained, the participants will forfeit their deferred
stock units. During the deferral period, subject to terms and conditions
imposed by the committee, the deferred stock units may be credited with
dividend equivalent rights.
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Unrestricted Stock. The committee may also grant shares of common stock (at
no cost or for a purchase price determined by the committee) which are free
from any restrictions under the Stock Option and Incentive Plan. Unrestricted
shares of common stock may be issued to participants in recognition of past
services or other valid consideration, and may be issued in lieu of cash
compensation to be paid to such participants.
Performance Stock Awards. The committee may also grant performance shares
awards to participants entitling the participants to receive shares of common
stock upon the achievement of individual or Company performance goals and such
other conditions as the committee shall determine.
Dividend Equivalent Rights. The committee may grant dividend equivalent
rights, which entitle the recipient to receive credits for distributions that
would be paid if the recipient had held a specified number of shares of common
stock. Dividend equivalent rights may be granted as a component of another
award or as a freestanding award. Dividend equivalent rights credited under the
Stock Option and Incentive Plan may be paid currently or be deemed to be
reinvested in additional shares of common stock, and may thereafter accrue
additional dividend equivalent rights at fair market value at the time of
deemed reinvestment. Dividend equivalent rights may be settled in cash, shares
or a combination thereof, in a single installment or installments, as specified
in the award. Awards payable in cash on a deferred basis may provide for
crediting and payment of interest equivalents.
Stock Appreciation Rights. The committee may approve the grant of a right to
receive a number of shares or, in the discretion of the committee, an amount in
cash or a combination of shares and cash, based on the increase in the fair
market value of the shares subject to the right during such period as is
specified by the committee ("SAR"). The committee may approve the grant of SARs
related or unrelated to stock options. Upon exercise of an SAR that is related
to a stock option granted, the holder of the related option will surrender such
option (or any portion thereof to the extent unexercised) with respect to the
number of shares as to which such SAR is exercised and will receive payment of
an amount computed pursuant to the SAR.
Subject to any conditions on the exercise of the SAR that may be imposed by
the committee at the time such SAR is granted, an SAR granted in connection
with a stock option will be exercisable at such time or times, and only to the
extent that, the related stock option is exercisable, and will be transferable
except to the extent that such related option may be transferable.
Performance and Annual Incentive Awards. The Stock Option and Incentive Plan
authorizes the committee to grant multiyear and annual incentive awards based
upon achievement of preestablished performance goals described above, including
Performance Awards (as defined in the Stock Option and Incentive Plan) and
Annual Incentive Awards (as described in the Stock Option and Incentive Plan)
that qualify as "performance-based compensation" for purposes of the Code
Section 162(m). The grant, exercise and/or settlement of a Performance Award
may be made contingent upon achievement of preestablished performance goals
described above. Achievement of performance goals in
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respect of such Performance Awards is measured over a performance period of up
to ten years, as specified by the committee.
The amount of an Annual Incentive Award is based upon the achievement of a
performance goal or goals based on one or more of the business criteria
described above during the given performance period specified by the committee.
The committee may specify the amount of the Annual Incentive Award as a
percentage of such business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a strictly
mathematical relationship to such business criteria.
Other Stock-Based Awards. The committee is authorized, subject to limitations
under applicable law, to grant to participants such other Incentive Awards that
may be denominated or payable in, valued in whole or in part by reference to,
or otherwise based on, or related to, shares, including, without limitation,
convertible or exchangeable debt securities, other rights convertible or
exchangeable into shares, purchase rights for shares, Incentive Awards with
value and payment contingent upon performance of the Company, and Incentive
Awards valued by reference to the book value of shares or the value of
securities of or the performance of specified subsidiaries or business units.
Adjustments for Stock Dividends, Mergers and Similar Events. The committee
will make appropriate adjustments in outstanding awards to reflect common stock
dividends, splits and similar events. In the event of a merger, liquidation,
sale of the Company or similar event, the committee, in its discretion, may
provide for substitution or adjustment of outstanding awards, or may terminate
all awards with payment of cash or in-kind consideration.
Amendments and Termination. The Board may at any time amend or discontinue
the Stock Option and Incentive Plan and the committee may at any time amend or
cancel outstanding awards for the purpose of satisfying changes in law or for
any other lawful purpose. However, no such action may be taken which adversely
affects any rights under an outstanding award without the holder's consent.
Further, amendments may be subject to approval by our stockholders if and to
the extent required by the Internal Revenue Code.
1999 EMPLOYEE STOCK PURCHASE PLAN
Prior to completion of this offering, we will adopt an Employee Stock
Purchase Plan. This plan will permit eligible employees to purchase shares of
common stock at a discount. During purchase periods, we will withhold amounts
through payroll deduction for eligible employees who elect to participate in
this plan. At the end of each purchase period, we will use accumulated payroll
deductions to purchase stock at a price equal to 85% of the market price on
behalf of our eligible employees who are participating in the plan. We have
reserved shares of common stock for issuance under this plan.
The Employee Stock Purchase Plan will remain in effect until terminated by
the Board. The Employee Stock Purchase Plan may be amended by the Board without
the consent of our stockholders, except that any amendment, although effective
when made, will be subject to stockholder approval if required by any federal
or state law or regulation or by the rules of any stock exchange or automated
quotation system on which the common stock may then be listed or quoted.
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CERTAIN TRANSACTIONS
On August 19, 1998, in connection with the formation of the Company, we
entered into subscription agreements with Stephen E. Smith, Dewey K. Shay and
Jonathan J. Ledecky, who were the founders of the Company. Pursuant to these
subscription agreements, these three founders purchased shares of common stock
in the following amounts:
(i) Mr. Smith purchased 1,500,000 shares of common stock at a purchase
price of $0.01 per share, for an aggregate consideration of $15,000.
Mr. Smith subsequently transferred beneficial ownership of 140,000 of
these shares to other persons.
(ii) Mr. Shay purchased 1,052,500 shares of common stock at a purchase
price of $0.01 per share, for an aggregate consideration of $10,525.
Mr. Shay subsequently transferred beneficial ownership of 52,500 of
these shares to other persons.
(iii) Jonathan J. Ledecky purchased 2,000,000 shares of common stock at a
purchase price of $0.01 per share, for an aggregate consideration of
$20,000. Mr. Ledecky subsequently transferred beneficial ownership of
all of these shares to Ironbound Capital Management, LLC
("Ironbound"), a corporation of which he is the sole stockholder.
On November 25, 1998, we issued a promissory note to Mr. Ledecky in exchange
for a loan in the amount of $500,000, the proceeds of which we will use to pay
certain of the costs of the Transactions and this offering. The note bears
interest at the prime rate and is payable on demand from Mr. Ledecky or upon
completion of this offering. We will pay off this note upon completion of this
offering and estimate we will pay Mr. Ledecky $500,000, plus accrued interest,
at that time as payment in full of the note.
On December 21, 1998, we entered into an agreement with SuperNet and its sole
shareholder to acquire all the shares of SuperNet upon completion of this
offering. Allon H. Lefever, who will become one of our directors and Vice
Chairman of the Board, and President of our Northeastern and Plains States
operating groups upon completion of this offering, has an interest in an entity
which indirectly owns 50% of SuperNet. Upon completion of this offering, in
exchange for his interest in SuperNet, Mr. Lefever will receive approximately
$900,000 in cash, 125,603 shares of common stock and options to acquire an
additional 33,000 shares of common stock. These options will vest one-third on
each of the sixth, seventh and eighth anniversaries of the closing date of the
Transactions, subject to accelerated vesting based on the performance of
SuperNet. Mr. Lefever may receive additional consideration in the form of cash
or stock, at our election, and may receive additional options to acquire shares
of common stock based on the performance of SuperNet and certain other ISPs in
the Northeast and Plains States operating groups over the 12 months ending June
30, 1999 as compared to the annualized performance of these ISPs for the three
months ended June 30, 1998. For a discussion of how such additional
consideration, and the number of additional options to be granted to Mr.
Lefever, if any, will be determined, see "The Transactions" on page 20 above.
Upon the closing of the Transactions, we will enter into a Senior Management
Agreement with Mr. Lefever, which will have a term of three years from the
closing date, subject to extension for two additional years unless we or Mr.
Lefever elects to terminate the
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agreement within 60 days of the third anniversary of the closing of the
Transactions. Under his agreement, Mr. Lefever will receive a base salary of
$200,000 per year, subject to increase at the discretion of our Board of
Directors based on performance objectives established by our Board of
Directors. Mr. Lefever also will be eligible to receive an annual bonus of up
to $50,000 each year based upon the Company's overall performance and the
performance of the ISPs managed by the Northeastern and Plains States operating
groups.
If, during the term of Mr. Lefever's Senior Management Agreement, we
terminate his employment without cause (as defined in the agreement) or he
terminates his employment for good reason (as defined in the agreement), then
Mr. Lefever will be entitled to receive his base salary (but not any bonus) and
all employee benefits for a period of one year from the date of the termination
of his employment.
Under the terms of his Senior Management Agreement, Mr. Lefever has agreed to
preserve the confidentiality and the proprietary nature of all information
relating to the Company, our ISPs and our business during the term of the
agreement and for five years thereafter. In addition, Mr. Lefever has agreed to
certain non-competition and non-solicitation provisions which will be in effect
during the term of his Senior Management Agreement and for two years
thereafter.
Pursuant to his Senior Management Agreement, Mr. Lefever also will receive
options to acquire 200,000 shares of common stock at the initial public
offering price. One-fourth of these options will vest on the first anniversary
of the closing date of this offering, and the remaining three-fourths of these
options will vest at a rate of 1/36th per month, or 4,167 per month,
thereafter, provided that all these options will vest in full upon a change in
control of the Company.
On December 21, 1998, we entered into an agreement with United States
Internet and its shareholders to acquire all the shares of United States
Internet upon completion of the Transactions. Michael C. Crabtree, who will
become one of our directors and President of our Southeast operating group upon
completion of this offering, is one of the shareholders of United States
Internet. Upon completion of the Transactions, in exchange for his interest in
United States Internet, Mr. Crabtree will receive approximately $900,000 in
cash, 154,963 shares of common stock and options to acquire an additional
40,000 shares of common stock which will vest one-third on each of the sixth,
seventh and eighth anniversaries of the closing date of the Transactions,
subject to accelerated vesting based on the performance of United States
Internet. Mr. Crabtree may receive additional consideration in the form of cash
or stock, at our election, and may receive additional options to acquire shares
of common stock based on the performance of United States Internet over the
12 months ending June 30, 1999 as compared to the annualized performance of
United States Internet for the three months ended June 30, 1998. For a
discussion of how such additional consideration, and the number of additional
options to be granted to Mr. Crabtree, if any, will be determined, see "The
Transactions" on page 20 above.
Upon completion of this offering and the Transactions, we will enter into an
Employment Agreement with Mr. Crabtree, which will have an initial term of
three years
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from the closing date, subject to one-year renewal terms if Mr. Crabtree elects
so to renew the agreement within 60 days of the termination date. Under his
agreement, Mr. Crabtree will receive a base salary of $125,000 per year. Mr.
Crabtree also will be eligible to receive an annual bonus of up to $50,000 each
year based upon the performance of the ISPs managed by the Southeast operating
group.
If, during the term of Mr. Crabtree's Employment Agreement, we terminate his
employment without cause (as defined in the agreement), then Mr. Crabtree will
be entitled to receive his base salary (but not any bonus) and all employee
benefits for a period of six months from the date of the termination of his
employment.
Under the terms of his Employment Agreement, Mr. Crabtree has agreed to
preserve the confidentiality and the proprietary nature of all information
relating to the Company, our ISPs and our business during the term of the
agreement and for two years thereafter. In addition, Mr. Crabtree has agreed to
certain non-competition and non-solicitation provisions which will be in effect
during the term of his Employment Agreement and for two years thereafter.
We also have entered into Senior Management Agreements with each of our
executive officers. For the details of these agreements, please refer to
"Management--Employment Agreements" on page 78 above.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of our common stock that were owned as of December 30, 1998 and that
will be owned following completion of this offering and the Transactions by (i)
all persons known by us to own beneficially more than 5% of the common stock,
(ii) each director, director nominee and executive officer and (iii) all
directors, director nominees and executive officers as a group. This table
assumes no exercise of the Underwriters' over-allotment option. As ofDecember
30, 1998, there were 4,777,500 shares of common stock outstanding. Upon
completion of this offering, we will have outstanding shares of common
stock, including approximately 6,087,211 shares of common stock we will issue
in the Transactions. At the time of the closing of this offering we will also
have outstanding options to purchase shares of common stock at the initial
public offering price, of which 841,600 options will be exercisable immediately
following completion of this offering.
<TABLE>
<CAPTION>
PRIOR TO OFFERING AFTER OFFERING
----------------------- -----------------------
NUMBER OF NUMBER OF
SHARES SHARES
BENEFICIALLY PERCENTAGE BENEFICIALLY PERCENTAGE
NAME AND ADDRESS(1) OWNED (2) OWNERSHIP OWNED (2) OWNERSHIP
- ------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Stephen E. Smith............... 1,360,000 28.5% 1,360,000 %
Dewey K. Shay.................. 1,000,000 20.9 1,000,000
Martin R. Lyons................ 200,000 * 200,000
Allon H. Lefever............... 40,000 * 165,603
Michael C. Crabtree............ -- -- 154,963
Thomas R. Eisenmann............ -- --
Ironbound Capital Management, 2,000,000 41.9 2,000,000
LLC(3) .......................
Bradley L. Jenkins............. -- -- 1,000,000
All directors, director 2,600,000 54.7% %
nominees and executive
officers as a group (6
persons)......................
</TABLE>
- --------
* Less than 1%.
(1) The business address for Stephen E. Smith, Dewey K. Shay and Martin R.
Lyons is 50 Hawthorne Road, Southhampton, New York 11968. The business
address for Allon F. Lefever is 212 Spottswood Lane, Lancaster,
Pennsylvania 17601. The business address for Michael C. Crabtree is 1127
North Broadway, Knoxville, Tennessee 37919. The business address for Thomas
R. Eisenmann is Harvard Business School, Baker West 188, Soldiers Field,
Boston, MA 02163. The business address for Ironbound Capital Management,
LLC is 800 Connecticut Avenue, N.W., Suite 1111, Washington, D.C. 20006.
The business address for Bradley L. Jenkins is 770 L Street, Suite 960,
Sacramento, CA 95814.
(2) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, a person
has beneficial ownership of any securities as to which the person, directly
or indirectly, through any contract, arrangement, undertaking, relationship
or otherwise has or shares voting power and/or investment power and as to
which the person has the right to acquire such voting and/or investment
power within 60 days. Percentage of beneficial ownership as to any person
as of a particular date is calculated by dividing the number of shares
beneficially owned by the person by the sum of the number of shares
outstanding as of such date and the number of shares as to which the person
has the right to acquire voting and/or investment power within 60 days.
(3) The sole shareholder of Ironbound is Jonathan J. Ledecky, and his business
address is the same as that of Ironbound.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. As of December 30, 1998, there were 4,777,500 shares of the
company's stock outstanding, held by 16 holders of record. We do not have any
outstanding shares of preferred stock.
Upon completion of this offering, we will have outstanding shares of
common stock (assuming the initial public offering price is greater than $8.00
per share) (or shares if the Underwriters' over-allotment option is
exercised in full).
The following is a description of our capital stock.
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock. Each
stockholder of record will be entitled to one vote for each outstanding share
of our common stock owned by that stockholder on every matter properly
submitted to the stockholders for their vote. Subject to the dividend rights of
holders of preferred stock, holders of common stock are entitled to any
dividend declared by the Board of Directors out of funds legally available for
this purpose, and, after the payment of liquidation preferences to all holders
of preferred stock, holders of common stock are entitled to receive on a pro
rata basis all our remaining assets available for distribution to the
stockholders in the event of our liquidation, dissolution, or winding up.
Holders of common stock do not have any preemptive right to become subscribers
or purchasers of additional shares of any class of our capital stock. The
outstanding shares of common stock are, and the shares of common stock offered
in this offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future.
PREFERRED STOCK
Our Certificate of Incorporation allows us to issue without stockholder
approval preferred stock having rights senior to those of the common stock.
Following completion of this offering, no shares of preferred stock will be
outstanding. Thereafter, our Board of Directors will be authorized, without
further stockholder approval, to issue up to 10,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption and liquidation preferences, and to fix the number
of shares constituting any series and the designations of these series.
The issuance of preferred stock may have the effect of delaying or preventing
a change in control of the Company. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of the common stock. In certain
circumstances, the issuance could have the effect of decreasing the market
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price of the common stock. We currently have no plans to issue any shares of
preferred stock.
LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, our Certificate of
Incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporate Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption of stock
or (iv) for any transaction from which the director derives an improper
personal benefit. As a result of this provision, we and our stockholders may be
unable to obtain monetary damages from a director for breach of his or her duty
of care.
Our Certificate of Incorporation and Bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by, and subject
to the conditions set forth in the Delaware General Corporate Law, except that
we will indemnify a director or officer in connection with a proceeding (or
part thereof) initiated by such person only if the proceeding (or part thereof)
was authorized by our Board of Directors. The indemnification provided under
the Certificate of Incorporation and the Bylaws includes the right to be paid
the expenses (including attorneys' fees) in advance of any proceeding for which
indemnification may be had, provided that the payment of these expenses
(including attorneys' fees) incurred by a director or officer in advance of the
final disposition of a proceeding may be made only upon delivery to us of an
undertaking by or on behalf of the director or officer to repay all amounts so
paid in advance if it is ultimately determined that the director or officer is
not entitled to be indemnified. Pursuant to the Bylaws, if we do not pay a
claim for indemnification within 60 days after we have received a written
claim, the claimant may at any time thereafter bring an action to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
will be entitled to be paid also the expense of prosecuting the action.
Under the Bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee,
partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, against any liability asserted against the person or incurred by
the person in any such capacity, or arising out of the person's status as such,
and related expenses, whether or not we would have the power to indemnify the
person against such liability under the provisions of the Delaware General
Corporate Law. We intend to purchase director and officer liability insurance
on behalf of our directors and officers.
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CERTAIN ANTI-TAKEOVER EFFECTS
Our Certificate of Incorporation and Bylaws contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and in the policies formulated by our
Board of Directors. In addition certain provisions of Delaware law may hinder
or delay an attempted takeover of the Company other than through negotiation
with our Board of Directors. These provisions could have the effect of
discouraging certain attempts to acquire us or remove incumbent management even
if some or a majority of our stockholders were to deem such an attempt to be in
their best interest, including attempts that might result in the stockholders'
receiving a premium over the market price for the shares of common stock held
by stockholders.
Classified Board of Directors; Removal; Vacancies. Our Certificate of
Incorporation will be amended prior to completion of this offering to provide
that the Board of Directors will be divided into three classes of directors
serving staggered three-year terms. The classification of directors will have
the effect of making it more difficult for stockholders to change the
composition of the Board of Directors in a relatively short period of time. Our
Certificate of Incorporation will further provide that directors may be removed
only for cause. In addition, vacancies and newly created directorships
resulting from any increase in the size of the Board of Directors may be filled
only by the affirmative vote of a majority of the directors then in office,
although fewer than a quorum, or by a sole remaining director. The foregoing
provisions would prevent stockholders from removing incumbent directors without
cause and filling the resulting vacancies with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our Bylaws will establish an advance notice procedure
with regard to the nomination, other than by the Board of Directors, of
candidates for election to the Board of Directors and with regard to certain
matters to be brought before an annual meeting of our stockholders. For
nominations and other business to be brought properly before an annual meeting
by a stockholder, the stockholder must deliver notice to us not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting. Separate provisions based on public notice by us specify
how this advance notice requirement operates if the date of the annual meeting
is advanced by more than 30 days or delayed by more than 60 days from the
anniversary date. The stockholder's notice must set forth specified information
regarding the stockholder and its holdings, as well as certain background
information regarding any director nominee (together with the person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected) and a brief description of any business desired to be
brought before the meeting, the reasons for conducting the business at the
meeting and any material interest of the stockholder in the business proposed.
In the case of a special meeting of stockholders called for the purpose of
electing directors, nominations by a stockholder may be made only by delivery
to us, no later than the tenth day following the day on which public
announcement of the special meeting is made, a notice that complies with the
above requirements. Although the Bylaws will not give our Board of Directors
any power to approve or disapprove stockholder nominations for the election of
directors or any other business desired by stockholders to be conducted at an
annual meeting, the Bylaws (i) may have the effect of
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precluding a nomination for the election of directors or precluding the conduct
of certain business at a particular annual meeting if the proper procedures are
not followed or (ii) may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of the Company, even if the conduct of this
solicitation or such attempt might be beneficial to the Company and its
stockholders.
Special Stockholders' Meetings. Under our Certificate of Incorporation and
the Bylaws, special meetings of the stockholders, unless otherwise prescribed
by statute, may be called only (i) by the Board of Directors or by our Chairman
or President or (ii) by stockholders of the Company upon the written request of
the holders of at least majority of the securities of the Company outstanding
and entitled to vote generally in the election of directors.
Limitations on Stockholder Action by Written Consent. Our Certificate of
Incorporation also provides that any action required or permitted to be taken
at a stockholders' meeting may be taken without a meeting, without prior notice
and without a vote, if the action is taken by persons who would be entitled to
vote at a meeting and who hold shares having voting power equal to not less
than the minimum number of votes of each class or series that would be
necessary to authorize or take the action at a meeting at which all shares of
each class or series entitled to vote were present and voted.
Section 203 of Delaware Law. In addition to the foregoing provisions of the
Certificate of Incorporation and the Bylaws, we will be subject to the
provisions of Section 203 of the Delaware General Corporate Law. Section 203
prohibits publicly held Delaware corporations from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed
manner. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock. These provisions could have the
effect of delaying, deferring or preventing a change in control of the Company
or reducing the price that certain investors might be willing to pay in the
future for shares of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is .
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SHARES AVAILABLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of common stock
outstanding (assuming the initial public offering price is greater than $8.00
per share) (or shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the shares ( shares if the
Underwriters' over-allotment option is exercised in full) to be sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by our affiliates,
as that term is defined in Rule 144, may generally only be sold in compliance
with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining shares of common stock outstanding upon completion of this
offering, and any shares of common stock we issue to certain former owners of
our ISPs as payment of the earn out amounts payable to these former owners
under the acquisition agreements we entered into with these former owners in
the Transactions, will be restricted shares under the terms of the Securities
Act. Of the restricted shares to be outstanding upon completion of this
offering, shares are subject to lock-up agreements with the Underwriters
and shares are subject to lock-up agreements with us as described below.
Subject to these lock-up agreements, the owners of these restricted shares will
be eligible to sell these shares in the public market from time to time
beginning one year after the person acquired the restricted shares.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate of ours, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any three-
month period, a number of these restricted shares that does not exceed the
greater of (i) one percent of the then outstanding shares of common stock
(approximately shares immediately after this offering) or (ii) the
average weekly trading volume in the common stock on the Nasdaq Stock Market
during the four calendar weeks preceding the date on which notice of the sale
is filed, provided certain requirements concerning availability of public
information, manner of sale and notice of sale are satisfied. In addition, our
affiliates must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, to sell shares of common
stock which are not restricted securities.
Under Rule 144(k), a person who is not currently, and who has not been for at
least three months prior to the sale, an affiliate of ours and who has
beneficially owned restricted shares for at least two years may resell these
restricted shares without compliance with the foregoing requirements. In
meeting the one- and two-year holding periods described above, a holder of
restricted shares may include the holding periods of a prior owner who was not
an affiliate of ours. The one- and two-year holding periods described above do
not begin to run until the full purchase price or other consideration is paid
by the person acquiring the restricted shares from us or an affiliate of ours.
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We have entered into a Registration Rights Agreement with certain of our
stockholders (including the current owners of our ISPs who will receive shares
of our common stock in the Transactions) who upon closing of this offering and
the Transactions will own an aggregate of shares of common stock. If we
propose to register our securities under the Securities Act after this
offering, these stockholders will be entitled to notice of the registration and
to include their shares in the registration provided that the underwriters for
any proposed offering will have the right to limit the number of shares
included in the registration.
COMMON STOCK AND OPTIONS ISSUABLE UNDER THE STOCK OPTION AND INCENTIVE PLAN
Simultaneously with the completion of this offering, we will issue options to
acquire shares of common stock at the initial public offering price. The
options will be granted in the amounts and under the terms set forth below:
(i) options to purchase 841,600 shares of common stock to be granted to
certain former owners, employees and affiliates of our ISPs and which
will be vested in full immediately upon completion of this offering;
(ii) options to purchase 1,142,887 shares of common stock to be granted to
certain former owners, employees and affiliates of our ISPs and which
will vest one third on each of the sixth, seventh and eighth
anniversaries of the closing date of this offering, subject to
accelerated vesting based on the performance of our ISPs; and
(iii) options to purchase shares of common stock to be granted to our
management team and certain other of our key employees and which
generally will vest over four years from the date of this offering.
In addition, for each of our ISPs, we will grant options on June 30, 1999 to
purchase a number of shares of common stock equal to the greater of (i) 20
times (A) the incremental revenues for the ISP for the 12 months ending June
30, 1999 over the annualized revenues for the ISP for the three months ended
June 30, 1998, after giving effect to certain adjustments, divided by (B)
$1,000, or (ii) the incremental increase in the number of subscribers for the
ISP at June 30, 1999 compared to June 30, 1998, multiplied by five. These
options will have an exercise price equal to the fair market value of the
common stock at June 30, 1999 and will vest one-third on each of June 30, 2005,
2006 and 2007, subject to accelerated vesting based on the performance of our
ISPs. See "The Transactions" on page 20 above.
We intend to file one or more registration statements under the Securities
Act within approximately 180 days after the date of this prospectus to register
up to shares of common stock subject to outstanding stock options or
reserved for issuance under our 1999 Stock Option and Incentive Plan. We expect
these registration statements will become effective upon filing and shares
covered by these registration statements will be eligible for sale in the
public market immediately after the effective dates of these registration
statements.
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Prior to this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of
common stock or the availability of shares of common stock for sale will have
on the market price of the common stock prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices and could impair our future
ability to raise capital through the sale of our equity securities.
LOCK-UP AGREEMENTS
Our officers and directors and certain of our other stockholders, who will
hold an aggregate of shares of common stock upon completion of this
offering, have agreed that they will not, without the prior written consent of
BT Alex. Brown Incorporated, offer, sell, pledge or otherwise dispose of any
shares of our capital stock or any securities convertible into or exercisable
or exchangeable for, or any rights to acquire or purchase, any of our capital
stock, or publicly announce an intention to effect any such transaction, for a
period of 180 days after the date of the Underwriting Agreement, other than
shares of common stock disposed of as bona fide gifts approved by BT Alex.
Brown Incorporated.
In addition, certain of our stockholders who will receive shares of common
stock in the Transactions have agreed that they will not, without our prior
written consent, offer, sell, pledge or otherwise dispose of any shares of our
capital stock or any securities convertible into or exercisable or exchangeable
for our capital stock, or publicly announce an intention to effect any such
transaction, (i) with respect to 50% of the shares received in the
Transactions, for a period of 12 months after the date of the closing of this
offering, (ii) with respect to an additional 25% of the shares received in the
Transactions, for a period of 18 months after the date of the closing of this
offering and (iii) with respect to the remaining 25% of the shares of common
stock received in the Transactions, for a period of two years after the date of
the closing of this offering.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated the
date hereof (the "Underwriting Agreement"), the Underwriters named below,
through their representatives BT Alex. Brown Incorporated, SoundView Technology
Group, Inc. and Wit Capital Corporation, have severally agreed to purchase from
the Company the following respective numbers of shares of common stock at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated........................................
SoundView Technology Group, Inc. ..................................
Wit Capital Corporation (as e-Manager(TM)).........................
---
Total............................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions. The Underwriters are obligated to purchase all of the
shares of common stock offered hereby, other than those covered by the over-
allotment option described below, if any such shares are purchased.
The Underwriters propose to offer the shares of common stock to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at a price that represents a concession not in excess of $
per share under the public offering price. The Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per share to certain
other dealers. After the initial offering, the offering price and other selling
terms may be changed by the representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this prospectus, to purchase up to
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of the common stock offered hereby.
To the extent that the Underwriters exercise such options, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of additional shares of common stock as the
number of shares of common stock to be purchased by it in the above table bears
to . The Company will be obligated, pursuant to the option, to sell such
shares to the Underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the Underwriters will offer
additional shares on the same terms as those on which the shares are being
offered.
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The Underwriters, at our request, have reserved for sale at the initial
public offering price up to shares of common stock to subscribers and
visitors to one of the websites maintained by the ISPs we will acquire upon
completion of this offering who express an interest in purchasing these shares.
The sale of these shares will be made by Wit Capital Corporation ("Wit
Capital") acting as e-Manager(TM) in this offering. Purchases of reserved
shares are to be made through an account at Wit Capital in accordance with Wit
Capital's procedures for opening an account and transacting in securities. Any
reserved shares not purchased by subscribers and visitors to one of these
websites will be offered by the Underwriters on the same basis as shares
offered hereby.
A prospectus in electronic format is being made available on an Internet
website maintained by Wit Capital. In addition, pursuant to an e-Dealer
Agreement, all dealers purchasing shares from Wit Capital in this offering (the
"e-Dealers") similarly have agreed to make a prospectus in electronic format
available on websites maintained by each of the e-Dealers. The information on
these websites relating to this offering is filed as an exhibit to the
Registration Statement of which the prospectus forms a part. Please refer to
the exhibit for a more complete description of the information relating to this
offering contained on these websites.
At our request, the Underwriters have reserved for sale, at the initial
public offering price, up to shares of the common stock offered hereby for
purchase by our directors, officers and employees and certain of their business
associates and related persons. The number of shares of our common stock
offered to the public will be reduced to the extent these persons purchase such
reserved shares. The Underwriters will offer to the public on the same basis as
the other shares offered hereby any reserved shares which are not so purchased
by these persons.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Each of the Company's officers and directors and certain of the Company's
stockholders have agreed not to offer, sell, contract to sell or otherwise
dispose of, or enter into any transaction which is designed to, or could be
expected to, result in the disposition of any portion of, any common stock for
a period of 180 days after the effective date of the registration statement of
which this prospectus is a part without the prior written consent of BT Alex.
Brown Incorporated. This consent may be given at any time without public
notice.
The Company has entered into a similar agreement, except that we may issue,
and grant options or warrants to purchase, shares of common stock or any
securities convertible into, exercisable for or exchangeable for shares of
common stock, pursuant to the exercise of outstanding options and warrants and
our issuance of options and stock granted under the existing stock option and
stock purchase plans and in connection with acquisition transactions.
The representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
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In order to facilitate the offering of the common stock, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. Specifically, the Underwriters may over-allot shares
of the common stock in connection with this offering, thereby creating a short
position in the common stock for their own account. Additionally, to cover such
over-allotments or to stabilize the market price of the common stock, the
Underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the Underwriters, also may
reclaim selling concessions allowed to an Underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that Underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation among the Company and the representatives of the
Underwriters. Among the factors to be considered in determining the public
offering price will be:
. the history and prospects of the Company's business and the industry in
which it competes;
. an assessment of the Company's management and the present state of the
Company's development;
. prevailing market conditions in the U.S. economy and the industry in which
the Company competes;
. the Company's revenues, operating cash flow and earnings in recent periods;
. the market capitalizations and stages of development of other companies
which the representatives of the Underwriters believe to be comparable to
us; and
. estimates of the Company's business potential.
96
<PAGE>
EXPERTS
The financial statements of OneMain.com, Inc. as of September 30, 1998, and
for the period from August 19, 1998 (inception) to September 30, 1998,
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
The financial statements of D&E SuperNet, Inc. as of December 31, 1996 and
1997, and for the period from June 22, 1995 (inception) to December 31, 1995
and for each of the two years in the period ended December 31, 1997, appearing
in this prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon (which
contains an explanatory paragraph describing conditions that raise substantial
doubt about the ability of D&E SuperNet, Inc. to continue as a going concern as
described in Note 2 to the financial statements) appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in auditing and accounting.
The financial statements of SunLink, Inc. as of December 31, 1996 and 1997,
and for the period from October 1, 1995 (inception) to December 31, 1995 and
for each of the two years in the period ended December 31, 1997, appearing in
this prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which contains
an explanatory paragraph describing conditions that raise substantial doubt
about the ability of SunLink, Inc. to continue as a going concern as described
in Note 2 to the financial statements) appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in auditing and accounting.
The financial statements of LebaNet, Inc. as of December 31, 1996 and 1997,
and for the period from March 1, 1996 (inception) to December 31, 1996 and for
the year ended December 31, 1997, appearing in this prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
auditing and accounting.
The financial statements of SouthWind Internet Access, Inc. as of December
31, 1996 and 1997, and for each of the three years in the period ended December
31, 1997, appearing in this Prospectus and Registration Statement have been
audited by Grant Thornton LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in auditing and
accounting.
The financial statements of Horizon Internet Technologies, Inc. as of
December 31, 1996 and 1997, and for the period from July 26, 1995 (inception)
to December 31, 1995 and for
97
<PAGE>
each of the two years in the period ended December 31, 1997, appearing in this
prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in auditing and accounting.
The financial statements of United States Internet, Inc. as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing in this prospectus and Registration Statement have been audited
by Coulter & Justus, P.C., independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in auditing and
accounting.
The financial statements of Internet Partners of America, LC as of December
31, 1996 and 1997, and for the period from May 12, 1995 (inception) to December
31, 1995 and for each of the two years in the period ended December 31, 1997,
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
The financial statements of Netrox, LLC as of December 31, 1995, 1996 and
1997, and for each of the three years in the period ended December 31, 1997,
appearing in this prospectus and Registration Statement have been audited by
Lopez Levi & Associates, P.A., independent auditors, as set forth in their
report thereon (which contains an explanatory paragraph describing conditions
that raise substantial doubt about the ability of Netrox, LLC to continue as a
going concern as described in Note B to the financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in auditing and accounting.
The financial statements of ZoomNet, Inc. as of December 31, 1996 and 1997,
and for the period from June 19, 1995 (inception) to December 31, 1995 and for
each of the two years in the period ended December 31, 1997, appearing in this
prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in auditing and accounting.
The financial statements of Palm.Net, Inc. as of December 31, 1996 and 1997,
and for the period from January 3, 1996 (inception) to December 31, 1996 and
for the year ended December 31, 1997, appearing in this prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in auditing and accounting.
The financial statements of Internet Access Group, Inc. as of December 31,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing
98
<PAGE>
in this prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon (which
contains an explanatory paragraph describing conditions that raise substantial
doubt about the ability of Internet Access Group, Inc. to continue as a going
concern as described in Note 2 to the financial statements) appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in auditing and accounting.
The financial statements of Midwest Internet, L.L.C. as of December 31, 1996
and 1997, and for the period from February 24, 1995 (inception) to December 31,
1995 and for each of the two years in the period ended December 31, 1997,
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
The financial statements of Internet Solutions, LLC as of December 31, 1995,
1996 and 1997, and for each of the three years in the period ended December 31,
1997, appearing in this prospectus and Registration Statement have been audited
by Kevin J. Tochtrop, independent auditor, as set forth in his report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such independent auditor as an expert in auditing and
accounting.
The financial statements of FGInet, Inc. as of December 31, 1996 and 1997,
and for each of the three years in the period ended December 31, 1997,
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
The financial statements of Superhighway, Inc. d/b/a Indynet as of December
31, 1996 and 1997, and for the period from June 1, 1995 (inception) to December
31, 1995 and for each of the two years in the period ended December 31, 1997,
appearing in this prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in auditing and accounting.
The financial statements of Lightspeed Net, Inc. as of December 31, 1996 and
1997, and for the period from March 27, 1995 (inception) to December 31, 1995
and for each of the two years in the period ended December 31, 1997, appearing
in this prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon (which
contains an explanatory paragraph describing conditions that raise substantial
doubt about the ability of Lightspeed Net, Inc. to continue as a going concern
as described in Note 2 to the financial statements) appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in auditing and accounting.
99
<PAGE>
The financial statements of JPS.Net Corporation as of September 30, 1998 and
December 31, 1997, and for the nine months ended September 30, 1998 and for the
period from January 31, 1997 (inception) to December 31, 1997, appearing in
this prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon (which contains
an explanatory paragraph describing conditions that raise substantial doubt
about the ability of JPS.Net Corporation to continue as a going concern as
described in Note 2 to the financial statements) appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of shares of common stock will be passed upon on our behalf by
Hogan & Hartson L.L.P., Washington, D.C. Certain legal matters will be passed
upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form S-1 (including
exhibits, schedules and amendments) pursuant to the Securities Act with respect
to this offering of our common stock. This prospectus is a part of the Form S-1
but does not contain all of the information in the Form S-1. We refer you to
the Form S-1 for further information about the Company, our common stock and
this offering. Statements in this prospectus about documents filed as exhibits
to the Form S-1 are necessarily summaries of these documents, and each of these
statements is qualified in its entirety by reference to the copy of the
applicable document filed with the SEC. The Form S-1 is available for
inspection and copying at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site that contains the Form S-1. The
address of the SEC's Internet site is "http://www.sec.gov."
The Company intends to furnish its stockholders annual reports containing
financial statements audited by its independent accountants.
100
<PAGE>
GLOSSARY OF TECHNICAL TERMS
<TABLE>
<S> <C>
BACKBONE................ A high-speed network that connects smaller, independent
networks.
BANDWIDTH............... The number of bits of information that can move over a
communications medium in a given amount of time; the
capacity of a telecommunications circuit/network to carry
voice, data and video information. Typically measured in
Kbps and Mbps.
BROADBAND............... A transmission facility that has a bandwidth greater than a
voice grade line of 3 kHz and which can carry numerous
voice, video and data channels simultaneously.
CLEC.................... Competitive local exchange carrier.
ELECTRONIC MAIL OR E-
MAIL................... An application that allows a user to send or receive
messages to or from any other user with an Internet address,
commonly termed an e-mail address.
FRAME RELAY............. A communications standard that is optimized for efficient
switching of variable-length data packets.
GRAPHICAL USER
INTERFACE.............. A means of communicating with a computer by manipulating
icons and windows rather than using text commands.
INTERNET................ An open global network of interconnected commercial,
educational and governmental computer networks that utilize
a common communications protocol, TCP/IP.
INTERNET BACKBONE....... The Internet backbone consists of high-speed networks that
link the smaller, independent networks of the Internet.
IP...................... Internet Protocol. Network protocols that allow computers
with different architectures and operating system software
to communicate with other computers on the Internet.
ISDN.................... Integrated Services Digital Network. A digital network that
combines voice and digital network services through a single
medium, making it possible to offer subscribers digital data
services as well as voice connections.
ISPS.................... Internet Service Providers. Companies formed to provide
access to the Internet to consumers and business customers
via local networks.
IXC..................... Interexchange Carrier. A telecommunications company that
provides telecommunications services between local exchanges
on an interstate or intrastate basis.
KBPS.................... Kilobits per second. A transmission rate. One kilobit equals
1,024 bits of information.
LEC..................... Local Exchange Carrier. A telecommunications company that
provides telecommunications services in a geographic area in
which calls generally are transmitted without toll charges.
LECs include both RBOCs and CLECs.
MBPS.................... Megabits per second. A transmission rate. One megabit equals
1,024 kilobits.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
MODEM............ A piece of equipment that connects a computer to a data
transmission line (typically a telephone line).
ON-LINE
SERVICES........ Commercial information services that offer a computer user
access through a modem to specific menus of information,
entertainment and communications data. These services are
generally closed systems and many offer limited, if any,
Internet access.
PEERING.......... The commercial practice under which ISPs exchange each
other's traffic without the payment of settlement charges.
Peering occurs at both public and private exchange points.
POP.............. Point of Presence. A telecommunications facility through
which subscribers can access a network or the Internet via a
local telephone call.
PROTOCOL......... A formal description of message formats and the rules two or
more machines must follow to exchange messages.
RBOC............. Regional Bell Operating Company.
ROUTER........... A device that receives and transmits data packets between
segments in a network or different networks.
SERVER........... Software that allows a computer to offer a service to
another computer. Other computers contact the server program
by means of matching client software. In addition, this term
means the computer on which server software runs.
TCP/IP........... Transmission Control Protocol/Internet Protocol. A
compilation of network-level and transport-level protocols
that allow computers with different architectures and
operating system software to communicate with other
computers on the Internet.
TERMINAL SERVER.. A specialized computer that supports multiple communications
connections.
WEB SITE......... A server connected to the Internet from which Internet users
can obtain information.
WINDOWS.......... A computer operating system developed by Microsoft
Corporation that provides a graphical user interface and
multitasking capabilities.
WORLD WIDE WEB... A network of computer servers that uses a special
communications protocol to link different servers throughout
the Internet and permits communication of graphics, video
and sound.
</TABLE>
G-2
<PAGE>
ONEMAIN.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ONEMAIN.COM, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements........ F-5
Unaudited Pro Forma Combined Balance Sheet............................... F-6
Unaudited Pro Forma Combined Statements of Operations.................... F-8
Notes to Unaudited Pro Forma Combined Financial Statements............... F-14
ONEMAIN.COM, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-22
Balance Sheet ........................................................... F-23
Statement of Operations.................................................. F-24
Statement of Stockholders' Equity........................................ F-25
Statement of Cash Flows.................................................. F-26
Notes to Financial Statements............................................ F-27
D&E SUPERNET, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-31
Balance Sheets........................................................... F-32
Statements of Operations................................................. F-33
Statements of Partners' Capital.......................................... F-34
Statements of Cash Flows................................................. F-35
Notes to Financial Statements............................................ F-36
SUNLINK, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-44
Balance Sheets........................................................... F-45
Statements of Operations................................................. F-46
Statements of Stockholders' Equity....................................... F-47
Statements of Cash Flows................................................. F-48
Notes to Financial Statements............................................ F-49
LEBANET, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-55
Balance Sheets........................................................... F-56
Statements of Operations................................................. F-57
Statements of Stockholder's Equity....................................... F-58
Statements of Cash Flows................................................. F-59
Notes to Financial Statements............................................ F-60
SOUTHWIND INTERNET ACCESS, INC.
Report of Grant Thornton LLP, Independent Auditors....................... F-65
Balance Sheets........................................................... F-66
Statements of Operations................................................. F-67
Statements of Stockholders' Equity....................................... F-68
Statements of Cash Flows................................................. F-69
Notes to Financial Statements............................................ F-70
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
HORIZON INTERNET TECHNOLOGIES, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-76
Balance Sheets.......................................................... F-77
Statements of Operations................................................ F-78
Statements of Stockholders' Equity (Deficit)............................ F-79
Statements of Cash Flows................................................ F-80
Notes to Financial Statements........................................... F-81
UNITED STATES INTERNET, INC.
Report of Coulter & Justus, P.C., Independent Auditors.................. F-88
Balance Sheets.......................................................... F-89
Statements of Operations................................................ F-90
Statements of Stockholders' Deficit..................................... F-91
Statements of Cash Flows................................................ F-92
Notes to Financial Statements........................................... F-93
INTERNET PARTNERS OF AMERICA, LC
Report of Ernst & Young LLP, Independent Auditors....................... F-103
Balance Sheets.......................................................... F-104
Statements of Operations................................................ F-105
Statements of Members' Equity (Deficit)................................. F-106
Statements of Cash Flows................................................ F-107
Notes to Financial Statements........................................... F-108
NETROX, LLC
Report of Lopez, Levi & Associates, P.A., Independent Auditors.......... F-115
Balance Sheets.......................................................... F-116
Statements of Operations................................................ F-117
Statements of Changes in Members' Deficit............................... F-118
Statements of Cash Flows................................................ F-119
Notes to Financial Statements........................................... F-120
ZOOMNET, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-126
Balance Sheets.......................................................... F-127
Statements of Operations................................................ F-128
Statements of Stockholders' Equity...................................... F-129
Statements of Cash Flows................................................ F-130
Notes to Financial Statements........................................... F-131
PALM.NET, USA, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-138
Balance Sheets.......................................................... F-139
Statements of Operations................................................ F-140
Statements of Stockholders' Equity (Deficit)............................ F-141
Statements of Cash Flows................................................ F-142
Notes to Financial Statements........................................... F-143
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
INTERNET ACCESS GROUP, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-148
Combined Balance Sheets................................................. F-149
Combined Statements of Operations....................................... F-150
Combined Statements of Stockholders' Equity (Deficit)................... F-151
Combined Statements of Cash Flows....................................... F-152
Notes to Combined Financial Statements.................................. F-153
MIDWEST INTERNET, L.L.C.
Report of Ernst & Young LLP, Independent Auditors....................... F-160
Balance Sheets.......................................................... F-161
Statements of Operations................................................ F-162
Statements of Changes in Members' Deficit............................... F-163
Statements of Cash Flows................................................ F-164
Notes to Financial Statements........................................... F-165
INTERNET SOLUTIONS, LLC
Report of Kevin J. Tochtrop, Independent Auditor........................ F-173
Balance Sheets.......................................................... F-174
Statements of Operations................................................ F-175
Statements of Members' Equity........................................... F-176
Statements of Cash Flows................................................ F-177
Notes to Financial Statements........................................... F-178
FGINET, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-184
Balance Sheets.......................................................... F-185
Statements of Operations................................................ F-186
Statements of Stockholders' Equity...................................... F-187
Statements of Cash Flows................................................ F-188
Notes to Financial Statements........................................... F-189
SUPERHIGHWAY, INC. d/b/a Indynet
Report of Ernst & Young LLP, Independent Auditors....................... F-198
Balance Sheets.......................................................... F-199
Statements of Operations................................................ F-200
Statements of Stockholder's Equity...................................... F-201
Statements of Cash Flows................................................ F-202
Notes to Financial Statements........................................... F-203
LIGHTSPEED NET, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-208
Balance Sheets.......................................................... F-209
Statements of Operations................................................ F-210
Statements of Stockholder's Equity...................................... F-211
Statements of Cash Flows................................................ F-212
Notes to Financial Statements........................................... F-213
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C>
JPS.NET CORPORATION
Report of Ernest & Young LLP, Independent Auditors...................... F-221
Balance Sheets.......................................................... F-222
Statements of Operations................................................ F-223
Statements of Stockholders' Equity...................................... F-224
Statements of Cash Flows................................................ F-225
Notes to Financial Statements........................................... F-226
</TABLE>
F-4
<PAGE>
ONEMAIN.COM, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the acquisitions by OneMain.com, Inc. (the "Company" or "OneMain.com") of
the outstanding capital stock of D&E SuperNet, Inc. ("SuperNet"), SunLink, Inc.
("SunLink"), LebaNet, Inc. ("LebaNet"), SouthWind Internet Access, Inc.
("SouthWind"), Horizon Internet Technologies, Inc. ("Horizon"), United States
Internet, Inc. ("United States Internet"), Internet Partners of America, LC
("IPA"), Netrox, LLC ("Netrox"), ZoomNet, Inc. ("ZoomNet"), Palm.Net, USA, Inc.
("Palm.Net"), Internet Access Group, Inc. ("IAG"), Midwest Internet, L.L.C.
("Midwest Internet"), Internet Solutions, LLC ("Internet Solutions"), FGInet,
Inc. ("FGI"), Superhighway, Inc. d/b/a Indynet ("Indynet"), Lightspeed Net,
Inc. ("Lightspeed") and JPS.Net Corporation ("JPS") (the "ISPs"). These
acquisitions (the "Transactions") will occur simultaneously with the closing of
the Company's initial public offering (the "IPO") and will be accounted for
using the purchase method of accounting. The Company is deemed to be the
accounting acquiror.
The unaudited pro forma combined balance sheet gives effect to the
Transactions and the IPO as if they had occurred on September 30, 1998. The
unaudited pro forma combined statement of operations reflect the operating
results of the ISPs for the nine months ended September 30, 1998, the nine
months ended September 30, 1997, and the year ended December 31, 1997, and
gives effect to these transactions as if they had occurred on January 1, 1997.
The Company, which was incorporated on August 19, 1998, conducted limited
operations during the period prior to September 30, 1998. The Company and the
ISPs have fiscal years ending December 31.
The Company has preliminarily analyzed the additional expense that it expects
to incur from increases in salaries payable to the owners of the ISPs and has
reflected theses amounts in the unaudited pro forma combined statements of
operations. With respect to potential cost savings, the Company has not and
cannot quantify these savings until completion of the combination of the ISPs.
Additionally, the pro forma combined statements of operations give effect to
anticipated compensation of the Company's new corporate management and
associated costs of being a public company.
The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since the ISPs were not under common control
or management, historical combined results may not be comparable to, or
indicative of, future performance. The unaudited pro forma combined financial
statements should be read in conjunction with the financial statements and
notes thereto included elsewhere in this Prospectus. See "Risk Factors"
included elsewhere herein.
F-5
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
UNITED
STATES
ONEMAIN.COM SUPERNET SUNLINK LEBANET SOUTHWIND HORIZON INTERNET IPA NETROX
----------- ---------- -------- -------- --------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents.... $ 27,500 $ 86,804 $ -- $ 9,467 $ -- $ -- $ 535,537 $ -- $ 493
Accounts
receivable,
net............ -- 81,828 29,646 8,862 30,789 21,403 324,334 88,381 --
Inventory....... -- 17,786 7,600 -- -- -- 103,636 -- --
Prepaid
expenses....... -- 57,068 -- 7,727 6,989 -- 44,127 -- --
Other current
assets......... -- -- -- -- 395 (3,352) 142,380 -- --
Deferred
financing
costs.......... 247,250 -- -- -- -- -- -- -- --
Deferred tax
asset.......... -- -- -- -- -- -- -- -- --
-------- ---------- -------- -------- -------- -------- ------------ ----------- -----------
Total current
assets..... .. 274,750 243,486 37,246 26,056 38,173 18,051 1,150,014 88,381 493
Property and
equipment,
net............ -- 1,039,347 598,518 78,008 575,235 315,749 2,419,144 2,174,126 314,900
Goodwill and
Intangibles,
net............ -- 1,148,704 -- -- 581 -- 660,000 1,370,304 --
Deferred tax
asset.......... -- -- -- -- -- -- -- -- --
Due from
affiliates/stockholders.. -- -- -- -- -- -- -- -- --
Other assets.... -- 1,186 -- -- -- 3,375 342,340 589 33,250
-------- ---------- -------- -------- -------- -------- ------------ ----------- -----------
Total assets .. $274,750 $2,432,723 $635,764 $104,064 $613,989 $337,175 $ 4,571,498 $ 3,633,400 $ 348,643
======== ========== ======== ======== ======== ======== ============ =========== ===========
LIABILITIES AND
SOCKHOLDERS'TEQUITY
Accounts
payable........ $247,250 $112,163 $ 73,115 $ 18,936 $ 11,812 $ 62,116 $ 1,072,074 $ 445,039 $ 87,568
Accrued
expenses....... 76,999 94,620 12,207 3,386 12,264 1,547 226,511 85,242 78,436
Current portion
of unearned
revenue........ -- 334,515 151,749 10,107 61,002 7,039 750,266 33,732 34,642
Income tax
payable........ -- -- -- -- -- -- -- -- --
Line of credit.. -- 200,000 75,000 -- -- 41,499 -- 375,000 --
Current portion
of long-term
debt........... -- 64,744 32,829 -- 38,246 72,946 841,706 475,108 --
Current portion
of capital
lease
obligations.... -- 37,584 -- -- -- 4,177 480,747 -- 10,119
Other current
liabilities.... -- 13,133 -- -- 14,139 -- 11,200 629,481 --
Due to
affiliates/stockholders.. -- 104,682 -- -- 24,484 -- 392,668 27,500 1,198,618
-------- ---------- -------- -------- -------- -------- ------------ ----------- -----------
Total current
liabilities .. 324,249 961,441 344,900 32,429 161,947 189,324 3,775,172 2,071,102 1,409,383
Deferred tax
liability...... -- -- -- -- -- -- -- -- --
Long-term debt,
net of current
portion........ -- 1,045,443 199,357 -- 20,415 144,026 1,502,909 2,630,188 --
Capital lease
obligations,
net of current
portion........ -- -- -- -- -- 41,023 315,727 -- 10,939
Other
liabilities.... -- -- -- -- -- -- 3,040 -- --
Stock
appreciation
rights
liability...... -- -- -- -- -- -- 5,080,312 -- --
-------- ---------- -------- -------- -------- -------- ------------ ----------- -----------
Total
liabilities .. 324,249 2,006,884 544,257 32,429 182,362 374,373 10,677,160 4,701,290 1,420,322
Stockholders'
equity
(deficit)
Preferred
stock.......... -- -- -- -- -- -- -- -- --
Common stock.... 4,750 12,100 2,050 -- 45,000 3,000 4,023,734 -- --
Additional paid-
in capital..... 42,750 52,469 30,145 100 -- 19,065 18,721 -- --
Partners'
capital........ -- 515,614 -- 600 -- -- -- 2,195,927 --
Retained
earnings
(accumulated
deficit)....... (76,999) (154,344) 59,312 70,935 386,627 (59,263) (10,148,117) (3,263,817) (1,071,679)
Stock
subscription
receivable..... (20,000) -- -- -- -- -- -- -- --
-------- ---------- -------- -------- -------- -------- ------------ ----------- -----------
Total
stockholders'
equity
(deficit).. .. (49,499) 425,839 91,507 71,635 431,627 (37,198) (6,105,662) (1,067,890) (1,071,679)
-------- ---------- -------- -------- -------- -------- ------------ ----------- -----------
Total
liabilities and
stockholders'
equity......... $274,750 $2,432,723 $635,764 $104,064 $613,989 $337,175 $ 4,571,498 $ 3,633,400 $ 348,643
======== ========== ======== ======== ======== ======== ============ =========== ===========
<CAPTION>
ZOOMNET PALM.NET
---------- --------
<S> <C> <C>
ASSETS
Cash and cash
equivalents.... $ 35,721 $ 47,298
Accounts
receivable,
net............ 32,638 5,796
Inventory....... -- --
Prepaid
expenses....... 650 2,535
Other current
assets......... -- 2,216
Deferred
financing
costs.......... -- --
Deferred tax
asset.......... 69,030 --
---------- --------
Total current
assets..... .. 138,039 57,845
Property and
equipment,
net............ 814,132 134,385
Goodwill and
Intangibles,
net............ 232,800 --
Deferred tax
asset.......... -- --
Due from
affiliates/stockholders.. -- 17,651
Other assets.... 8,766 --
---------- --------
Total assets .. $1,193,737 $209,881
========== ========
LIABILITIES AND
SOCKHOLDERS'TEQUITY
Accounts
payable........ $ 142,196 $ 24,468
Accrued
expenses....... 18,146 --
Current portion
of unearned
revenue........ 46,066 58,636
Income tax
payable........ 98,664 --
Line of credit.. -- --
Current portion
of long-term
debt........... 182,035 --
Current portion
of capital
lease
obligations.... 36,625 --
Other current
liabilities.... -- --
Due to
affiliates/stockholders.. 284,301 --
---------- --------
Total current
liabilities .. 808,033 83,104
Deferred tax
liability...... 53,522 --
Long-term debt,
net of current
portion........ 131,448 --
Capital lease
obligations,
net of current
portion........ 4,880 --
Other
liabilities.... 1,260 --
Stock
appreciation
rights
liability...... -- --
---------- --------
Total
liabilities .. 999,143 83,104
Stockholders'
equity
(deficit)
Preferred
stock.......... -- --
Common stock.... 15,000 100
Additional paid-
in capital..... 55,000 400
Partners'
capital........ -- --
Retained
earnings
(accumulated
deficit)....... 124,594 126,277
Stock
subscription
receivable..... -- --
---------- --------
Total
stockholders'
equity
(deficit).. .. 194,594 126,777
---------- --------
Total
liabilities and
stockholders'
equity......... $1,193,737 $209,881
========== ========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-6
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
MIDWEST INTERNET TRANSACTIONS PRO FORMA
IAG INTERNET SOLUTIONS FGI INDYNET LIGHTSPEED JPS COMBINED ADJUSTMENTS COMBINED
- --------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 33,109 $ 202,579 $ 52,134 $ 61,709 $ 30,606 $ 63,546 $1,416,760 $ 2,603,263 $ -- $ 2,603,263
68,405 204,049 21,275 13,675 356,806 218,549 135,859 1,642,295 -- 1,642,295
-- -- -- 1,945 -- -- -- 130,967 -- 130,967
-- -- -- 2,870 -- 2,029 -- 123,995 -- 123,995
9,490 1,687 7,877 5,378 -- 23,184 480,328 669,583 -- 669,583
-- -- -- -- -- -- -- 247,250 -- 247,250
-- -- -- -- -- -- -- 69,030 -- 69,030
- --------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
111,004 408,315 81,286 85,577 387,412 307,308 2,032,947 5,486,383 -- 5,485,383
235,996 513,845 252,771 495,518 787,096 1,223,437 787,437 12,759,644 -- 12,759,644
-- -- 268,318 585,204 -- -- -- 4,265,911 176,470,384 180,736,295
-- -- -- 405 -- -- -- 405 402,590 402,995
100,151 -- -- -- -- -- 264,325 382,127 -- 382,127
-- 2,586 -- -- 37,250 15,262 42,303 486,907 -- 486,907
- --------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
$ 447,151 $ 924,746 $602,375 $1,166,704 $1,211,758 $1,546,007 $3,127,012 $23,381,377 $176,872,974 $200,254,351
========= ========== ======== ========== ========== ========== ========== =========== ============ ============
$ 158,859 $ 196,823 $ 8,275 $ 30,237 $ 115,244 $ 32,088 $ 191,263 $ 3,029,526 $ -- $ 3,029,526
-- 28,784 59,413 9,950 22,753 48,949 381,944 1,161,151 -- 1,161,151
186,459 71,982 87,671 143,658 -- 436,105 4,268,750 6,682,379 -- 6,682,379
-- -- -- -- -- -- -- 98,664 -- 98,664
-- -- -- -- 98,500 -- -- 789,999 (616,499) 173,500
28,354 634,088 134,736 -- 22,230 -- -- 2,527,022 (2,126,269) 400,753
67,107 104,960 -- -- -- -- -- 741,319 -- 741,319
-- 18,046 4,175 -- 12,625 -- -- 702,799 -- 702,799
-- 7,485 150,000 678,715 -- 69,194 1,107,572 4,045,219 65,939,106 69,984,325
- --------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
440,779 1,062,168 444,270 862,560 271,352 586,336 5,949,529 19,778,078 63,196,338 82,974,416
-- -- -- -- -- -- -- 53,522 151,534 205,056
160,778 102,402 -- -- 12,021 -- -- 5,948,987 (4,026,851) 1,922,136
95,581 79,682 -- -- -- -- -- 547,832 -- 547,832
-- -- -- -- -- -- -- 4,300 -- 4,300
-- -- -- -- -- -- 5,080,312 -- 5,080,312
- --------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
697,138 1,244,252 444,270 862,560 283,373 586,336 5,949,529 31,413,031 59,321,021 90,734,052
-- -- -- 406,000 -- -- -- 406,000 (406,000) --
100 100 -- 53,089 87,503 874,751 12,582 5,133,859 (5,123,022) 10,837
17,570 -- -- -- -- 1,430,962 -- 1,667,182 107,939,279 109,606,461
-- -- 191,863 -- -- -- -- 2,904,004 (2,904,004) --
(267,657) (319,606) (33,758) (154,945) 840,882 (1,346,042) (2,835,099) (18,122,699) 18,045,700 (76,999)
-- -- -- -- -- -- -- (20,000) -- (20,000)
- --------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
(249,987) (319,506) 158,105 304,144 928,385 959,671 (2,822,517) (8,031,654) 117,551,953 109,520,299
- --------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------ ------------
$ 447,151 $ 924,746 $602,375 $1,166,704 $1,211,758 $1,546,007 $3,127,012 $23,381,377 $176,872,974 $200,254,351
========= ========== ======== ========== ========== ========== ========== =========== ============ ============
<CAPTION>
PRO FORMA
OFFERING
ADJUSTMENTS
(SEE NOTE AS
3) ADJUSTED
------------ -------------
<C> <C>
$35,001,474 $ 37,604,737
-- 1,642,295
-- 130,967
-- 123,995
-- 669,583
-- 247,250
-- 69,030
------------ -------------
35,001,474 40,487,857
-- 12,759,644
-- 180,736,295
-- 402,995
-- 382,127
-- 486,907
------------ -------------
$35,001,474 $235,255,825
============ =============
$ -- $ 3,029,526
-- 1,161,151
-- 6,682,379
-- 98,664
(173,500) --
(400,753) --
-- 741,319
-- 702,799
(69,984,325) --
------------ -------------
(70,558,578) 12,415,838
-- 205,056
(1,922,136) --
-- 547,832
-- 4,300
(5,080,312) --
------------ -------------
(77,561,026) 13,173,026
-- --
-- 10,837
112,562,500 222,168,961
-- --
-- (76,999)
-- (20,000)
------------ -------------
112,562,500 222,082,799
------------ -------------
$35,001,474 $235,255,825
============ =============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-7
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
UNITED
STATES
ONEMAIN.COM SUPERNET SUNLINK LEBANET SOUTHWIND HORIZON INTERNET IPA NETROX
----------- ---------- ---------- -------- ---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Access revenues.. $ -- $3,548,341 $1,016,954 $149,257 $1,411,678 $732,993 $ 5,873,612 $3,005,105 $ 888,361
Other revenues... -- 276,042 -- 66,791 92,778 58,330 387,703 -- 174,240
-------- ---------- ---------- -------- ---------- -------- ----------- ---------- ----------
Total revenues... -- 3,824,383 1,016,954 216,048 1,504,456 791,323 6,261,315 3,005,105 1,062,601
COST AND EXPENSES:
Cost of access
revenues........ -- 1,517,662 418,669 65,642 763,820 297,133 3,033,841 1,803,634 306,439
Cost of other
revenues........ -- 152,679 -- 28,001 14,526 42,006 199,830 -- 76,952
Operations and
customer
support......... -- 313,000 360,859 15,084 72,250 97,934 4,417,998 853,956 240,492
Sales and
marketing....... -- 345,716 69,068 448 50,411 14,162 820,305 132,339 361,547
General and
administrative.. 76,999 827,936 128,341 16,741 218,602 267,253 1,244,879 347,519 225,512
Amortization..... -- 23,681 -- -- -- 501 167,256 92,335 --
Depreciation..... -- 224,992 93,854 17,771 114,219 46,045 576,082 345,407 91,163
-------- ---------- ---------- -------- ---------- -------- ----------- ---------- ----------
Total cost and
expenses........ 76,999 3,405,666 1,070,791 143,687 1,233,828 765,034 10,460,191 3,575,190 1,302,105
-------- ---------- ---------- -------- ---------- -------- ----------- ---------- ----------
Income (loss) from
operations....... (76,999) 418,717 (53,837) 72,361 270,628 26,289 (4,198,876) (570,085) (239,504)
OTHER INCOME
(EXPENSE):
Interest income.. -- 367 -- -- 328 -- 30,234 -- --
Interest
expense......... -- (78,176) (11,983) -- (10,645) (14,001) (218,758) (178,994) (64,293)
Other income
(expense), net.. -- (52,070) -- -- -- -- (190,127) -- --
-------- ---------- ---------- -------- ---------- -------- ----------- ---------- ----------
Income before
provision
(benefit) for
income taxes..... (76,999) 288,838 (65,820) 72,361 260,311 12,288 (4,577,527) (749,079) (303,797)
Provision
(benefit) for
income taxes..... -- -- -- -- -- -- -- -- --
-------- ---------- ---------- -------- ---------- -------- ----------- ---------- ----------
Net income
(loss)........... $(76,999) $ 288,838 $ (65,820) $ 72,361 $ 260,311 $ 12,288 $(4,577,527) $ (749,079) $ (303,797)
======== ========== ========== ======== ========== ======== =========== ========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-8
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MIDWEST INTERNET TRANSACTIONS
ZOOMNET PALM.NET IAG INTERNET SOLUTIONS FGI INDYNET LIGHTSPEED JPS COMBINED ADJUSTMENTS
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,311,615 $431,704 $1,005,402 $3,081,775 $667,856 $1,170,221 $2,176,760 $3,479,935 $5,913,748 $35,865,317 $ --
5,164 23,911 84,368 133,998 4,695 141,586 65,346 41,695 28,986 1,585,633 --
- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------
1,316,779 455,615 1,089,770 3,215,773 672,551 1,311,807 2,242,106 3,521,630 5,942,734 37,450,950 --
547,501 108,770 407,014 997,255 229,221 559,819 898,970 1,326,932 2,400,345 15,682,667 --
-- -- 20,980 -- -- 104,942 36,546 20,881 -- 697,343 --
223,949 101,189 517,803 395,854 129,395 72,119 384,696 488,987 1,054,502 9,740,067 (3,316,955)
172,025 -- 27,898 372,897 33,700 175,953 232,104 560,572 809,743 4,178,888 --
114,810 103,695 187,003 460,873 118,485 271,497 257,687 719,031 2,300,454 7,887,317 2,394,880
-- -- -- -- 19,703 13,936 596 6,732 85,466 410,206 13,256,210
144,519 24,980 41,527 297,798 42,089 56,350 116,669 479,267 88,729 2,801,461 --
- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------
1,202,804 338,634 1,202,225 2,524,677 572,593 1,254,616 1,927,268 3,602,402 6,739,239 41,397,949 12,334,135
- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------
113,975 116,981 (112,455) 691,096 99,958 57,191 314,838 (80,772) (796,505) (3,946,999) (12,334,135)
-- 2,075 932 -- 208 1,185 100 1,506 32,339 69,274 --
(34,275) (6,199) (26,828) (76,205) (11,827) (654) (11,298) -- (4,175) (748,311) 748,311
-- -- -- 420 -- 3,931 (10,061) -- -- (247,907) --
- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------
79,700 112,857 (138,351) 615,311 88,339 61,653 293,579 (79,266) (768,341) (4,873,943) (11,585,824)
31,939 -- -- -- -- 9,603 -- -- -- 41,542 147,910
- ---------- -------- ---------- ---------- -------- ---------- ---------- ---------- ---------- ----------- ------------
$ 47,761 $112,857 $(138,351) $ 615,311 $ 88,339 $ 52,050 $ 293,579 $ (79,266) $ (768,341) $(4,915,485) $(11,733,734)
========== ======== ========== ========== ======== ========== ========== ========== ========== =========== ============
<CAPTION>
PRO FORMA
ADJUSTED
-------------
<C>
$ 35,865,317
1,585,633
-------------
37,450,950
15,682,667
697,343
6,423,112
4,178,888
10,282,197
13,666,416
2,801,461
-------------
53,732,084
-------------
(16,281,134)
69,274
--
(247,907)
-------------
(16,459,767)
189,452
-------------
(16,649,219)
=============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-9
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
UNITED
STATES
ONEMAIN.COM SUPERNET SUNLINK LEBANET SOUTHWIND HORIZON INTERNET IPA NETROX
----------- ---------- -------- -------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ -- $1,968,930 $532,684 $126,409 $ 937,937 $251,585 $3,936,413 $1,231,776 $681,344
Other revenues......... -- 236,339 5,615 2,920 95,286 50,047 339,618 -- 187,582
---- ---------- -------- -------- ---------- -------- ---------- ---------- --------
Total revenues....... -- 2,205,269 538,299 129,329 1,033,223 301,632 4,276,031 1,231,776 868,926
COST AND EXPENSES:
Cost of access
revenues.............. -- 945,988 144,693 59,442 455,422 127,154 1,591,121 721,820 204,143
Cost of other
revenues.............. -- 155,804 5,435 1,592 8,777 36,795 311,808 -- 18,890
Operations and
customer support...... -- 232,383 133,192 14,993 45,227 18,508 1,087,428 561,470 190,567
Sales and marketing.... -- 172,060 24,299 853 33,234 5,017 606,545 120,934 274,764
General and
administrative........ -- 424,399 72,696 11,041 140,427 121,063 656,151 95,578 172,981
Amortization........... -- 412 -- -- -- 504 93,534 52,797 --
Depreciation - non
operating equipment... -- 115,650 48,230 14,003 81,163 16,190 278,212 384,196 64,067
---- ---------- -------- -------- ---------- -------- ---------- ---------- --------
Total cost and
expenses............ -- 2,046,696 428,545 101,924 764,250 325,231 4,624,799 1,936,795 925,412
---- ---------- -------- -------- ---------- -------- ---------- ---------- --------
Income (loss) from
operations............. -- 158,573 109,754 27,405 268,973 (23,599) (348,768) (705,019) (56,486)
OTHER INCOME (EXPENSE):
Interest income........ -- 344 -- -- 3,843 -- 2,251 -- --
Interest expense....... -- (50,442) (8,011) -- (8,733) (2,373) (222,479) (153,863) (32,352)
Other income
(expense), net........ -- (12,667) -- -- -- -- 18,423 24,750 --
---- ---------- -------- -------- ---------- -------- ---------- ---------- --------
Income before provision
(benefit) for income
taxes.................. -- 95,808 101,743 27,405 264,083 (25,972) (550,573) (834,132) (88,838)
Provision (benefit) for
income taxes........... -- -- -- -- -- -- -- -- --
---- ---------- -------- -------- ---------- -------- ---------- ---------- --------
Net income (loss)....... $ -- $ 95,808 $101,743 $ 27,405 $ 264,083 $(25,972) $ (550,573) $ (834,132) $(88,838)
==== ========== ======== ======== ========== ======== ========== ========== ========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-10
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MIDWEST INTERNET TRANSACTIONS
ZOOMNET PALM.NET IAG INTERNET SOLUTIONS FGI INDYNET LIGHTSPEED JPS COMBINED ADJUSTMENTS
-------- -------- -------- ---------- --------- -------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$571,406 $294,319 $682,525 $1,826,309 $287,581 $689,481 $1,501,049 $2,071,459 $1,043,197 $18,634,404 $ --
-- 18,656 166,667 153,342 -- 71,295 40,748 14,641 14,008 1,396,764 --
-------- -------- -------- ---------- -------- -------- ---------- ---------- ---------- ----------- ------------
571,406 312,975 849,192 1,979,651 287,581 760,776 1,541,797 2,086,100 1,057,205 20,031,168 --
187,030 92,780 238,326 759,232 107,429 293,935 320,620 998,384 513,496 7,761,015 --
-- -- 72,686 -- -- 35,283 20,057 4,584 -- 671,711 --
120,778 72,714 343,375 380,154 22,100 49,685 263,357 424,611 -- 3,960,542 449,145
41,229 -- 27,400 135,243 7,259 99,362 143,847 626,939 129,344 2,448,329 --
52,387 64,741 122,162 310,570 122,777 240,620 147,946 623,788 729,551 4,108,878 2,929,830
-- -- -- -- -- 9,465 -- -- 13,568 170,280 13,256,210
68,988 16,703 19,224 266,410 22,056 48,511 154,602 298,114 32,855 1,929,174 --
-------- -------- -------- ---------- -------- -------- ---------- ---------- ---------- ----------- ------------
470,412 246,938 823,173 1,851,609 281,621 776,861 1,050,429 2,976,420 1,418,814 21,049,929 16,635,185
-------- -------- -------- ---------- -------- -------- ---------- ---------- ---------- ----------- ------------
100,994 66,037 26,019 128,042 5,960 (16,085) 491,368 (890,320) (361,609) (1,018,761) (16,635,185)
-- 116 87 -- 56 (1,014) -- 1,062 4,080 10,825 --
(10,154) (8,053) (17,378) (80,751) (5,988) -- (2,220) -- (989) (603,786) 603,786
-- (132) -- (448) -- 5,835 (9,319) -- -- 26,442 --
-------- -------- -------- ---------- -------- -------- ---------- ---------- ---------- ----------- ------------
90,840 57,968 8,728 46,843 28 (11,264) 479,829 (889,258) (358,518) (1,585,280) (16,031,399)
36,322 -- -- -- -- 16,239 -- -- -- 52,561 212,296
-------- -------- -------- ---------- -------- -------- ---------- ---------- ---------- ----------- ------------
$ 54,518 $ 57,968 $ 8,728 $ 46,843 $ 28 $(27,503) $ 479,829 $ (889,258) $ (358,518) $(1,637,841) $(16,243,695)
======== ======== ======== ========== ======== ======== ========== ========== ========== =========== ============
<CAPTION>
PRO FORMA
ADJUSTED
-------------
<C>
$ 18,634,404
1,396,764
-------------
20,031,168
7,761,015
671,711
4,409,687
2,448,329
7,038,708
13,426,490
1,929,174
-------------
37,685,114
-------------
(17,653,946)
10,825
--
26,442
-------------
(17,616,679)
264,857
-------------
$(17,881,536)
=============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-11
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNITED
STATES
ONEMAIN.COM SUPERNET SUNLINK LEBANET SOUTHWIND HORIZON INTERNET IPA NETROX
----------- ---------- -------- -------- ---------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Access revenues..... $ -- $2,813,020 $786,324 $179,764 $1,317,530 $376,357 $5,606,745 $1,856,801 $ 976,912
Other revenues...... -- 319,127 11,913 19,807 120,318 58,258 394,920 -- 220,065
---- ---------- -------- -------- ---------- -------- ---------- ----------- ----------
Total revenues.... -- 3,132,147 798,237 199,571 1,437,848 434,615 6,001,665 1,856,801 1,196,977
COST AND EXPENSES:
Cost of access
revenues........... -- 1,311,768 230,379 105,898 641,868 189,690 2,201,138 1,087,980 371,743
Cost of other
revenues........... -- 213,763 11,531 1,888 12,605 42,564 458,586 -- 49,327
Operations and
customer support... -- 333,424 211,712 19,928 56,536 31,103 888,988 773,336 274,089
Sales and
marketing.......... -- 234,316 33,625 1,949 46,598 7,531 787,922 173,015 451,138
General and
administrative..... -- 606,341 97,100 16,310 199,560 191,032 1,436,137 271,416 257,749
Amortization........ -- 550 -- -- -- 671 132,612 77,986 --
Depreciation........ -- 194,218 64,307 18,670 115,495 25,093 485,103 452,170 89,272
---- ---------- -------- -------- ---------- -------- ---------- ----------- ----------
Total cost and
expenses......... -- 2,894,380 648,654 164,643 1,072,662 487,684 6,390,486 2,835,903 1,493,318
---- ---------- -------- -------- ---------- -------- ---------- ----------- ----------
Income (loss) from
operations.......... -- 237,767 149,583 34,928 365,186 (53,069) (388,821) (979,102) (296,341)
OTHER INCOME
(EXPENSE):
Interest income..... -- 517 -- -- 5,464 -- 7,307 -- --
Interest expense.... -- (69,622) (10,682) -- (11,665) (3,785) (297,655) (218,936) (59,181)
Other income
(expense), net..... -- (13,223) -- (15) -- -- 32,997 24,750 --
---- ---------- -------- -------- ---------- -------- ---------- ----------- ----------
Income before
provision (benefit)
for income taxes.... -- 155,439 138,901 34,913 358,985 (56,854) (646,172) (1,173,288) (355,522)
Provision (benefit)
for income taxes.... -- -- -- -- -- -- -- -- --
---- ---------- -------- -------- ---------- -------- ---------- ----------- ----------
Net income (loss).... $ -- $ 155,439 $138,901 $ 34,913 $ 358,985 $(56,854) $ (646,172) $(1,173,288) $ (355,522)
==== ========== ======== ======== ========== ======== ========== =========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-12
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MIDWEST INTERNET
ZOOMNET PALM.NET IAG INTERNET SOLUTIONS FGI INDYNET LIGHTSPEED JPS COMBINED
-------- -------- ---------- ---------- --------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$854,779 $406,811 $ 947,952 $2,580,718 $443,424 $ 968,697 $2,004,474 $ 3,070,875 $2,060,390 $27,251,573
2,840 25,600 231,482 220,426 2,633 113,807 101,816 15,026 14,008 1,872,046
-------- -------- ---------- ---------- -------- ---------- ---------- ----------- ---------- -----------
857,619 432,411 1,179,434 2,801,144 446,057 1,082,504 2,106,290 3,085,901 2,074,398 29,123,619
262,710 138,535 331,901 937,102 162,731 426,168 725,579 1,528,309 1,121,368 11,774,867
-- -- 100,953 -- -- 70,064 27,064 8,741 -- 997,086
178,210 100,690 476,910 454,675 53,105 71,580 357,454 611,673 -- 4,893,413
68,460 -- 38,055 198,937 19,961 150,090 197,944 818,782 294,841 3,523,164
84,087 90,153 169,671 572,598 157,507 348,921 200,806 860,563 1,573,726 7,133,677
-- -- -- -- 8,313 12,618 -- 1,496 24,681 258,927
102,602 23,202 25,807 355,213 32,700 64,682 137,431 499,196 52,428 2,737,589
-------- -------- ---------- ---------- -------- ---------- ---------- ----------- ---------- -----------
696,069 352,580 1,143,297 2,518,525 434,317 1,144,123 1,646,278 4,328,760 3,067,044 31,318,723
-------- -------- ---------- ---------- -------- ---------- ---------- ----------- ---------- -----------
161,550 79,831 36,137 282,619 11,740 (61,619) 460,012 (1,242,859) (992,646) (2,195,104)
-- 170 121 -- 277 2,335 -- 1,510 8,911 26,612
(18,144) (11,541) (24,136) (102,004) (12,794) (3,906) (4,045) -- (8,932) (857,028)
-- (4,127) -- 37,269 -- 6,451 (49,233) (25,427) -- 9,442
-------- -------- ---------- ---------- -------- ---------- ---------- ----------- ---------- -----------
143,406 64,333 12,122 217,884 (777) (56,739) 406,734 (1,266,776) (992,667) (3,016,078)
57,341 -- -- -- -- 9,603 -- -- -- 66,944
-------- -------- ---------- ---------- -------- ---------- ---------- ----------- ---------- -----------
$ 86,065 $ 64,333 $ 12,122 $ 217,884 $ (777) $ (66,342) $ 406,734 $(1,266,776) $ (992,667) $(3,083,022)
======== ======== ========== ========== ======== ========== ========== =========== ========== ===========
<CAPTION>
TRANSACTIONS PRO FORMA
ADJUSTMENTS ADJUSTED
------------- -------------
<C> <C>
$ -- $ 27,251,573
-- 1,872,046
------------- -------------
-- 29,123,619
-- 11,774,867
-- 997,086
598,861 5,492,274
-- 3,523,164
3,770,513 10,904,190
17,674,946 17,933,873
-- 2,737,589
------------- -------------
22,044,320 53,363,043
------------- -------------
(22,044,320) (24,239,424)
-- 26,612
857,028 --
-- 9,442
------------- -------------
(21,187,292) (24,203,370)
195,697 262,641
------------- -------------
$(21,382,989) $(24,466,011)
============= =============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-13
<PAGE>
ONEMAIN.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1--GENERAL
OneMain.com, Inc. (the "Company") was founded in August, 1998 to create a
national consolidator and integrator of regional Internet access providers. The
Company has conducted limited operations to date and will acquire the ISPs
concurrently with the closing of this IPO.
The historical financial statements reflect the financial position and
results of operations of the Company and the ISPs and were derived from the
Company and the respective ISPs' financial statements as indicated. The
unaudited pro forma combined financial statements include the results of
operations of the ISPs as of and for the nine months ended September 30, 1998.
The unaudited historical financial statements included elsewhere herein have
been included in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 80.
NOTE 2--ACQUISITION OF ISP'S
Concurrent with this IPO, the Company will acquire either all of the
outstanding capital stock or substantially all of the assets of the ISPs. The
acquisitions will be accounted for using the purchase method of accounting with
the Company being treated as the accounting acquiror.
The following table sets forth the consideration to be paid (the "Purchase
Consideration") (a) in cash and (b) in shares of Common Stock to the owners of
each of the ISPs, and the allocation of the consideration to the fair values of
the net assets acquired and resulting goodwill. For purposes of computing the
estimated purchase price for accounting purposes, the value of shares is
determined using an estimated fair value of $18 per share, which represents a
discount of 10% from the assumed IPO price of $20 per share, due to
restrictions on the sale and transferability of the shares issued. The total
Purchase Consideration does not reflect contingent consideration related to
earn out arrangements included in the definitive agreements for certain ISPs.
These arrangements provide for the Company to pay additional consideration,
contingent upon certain operational and earnings margin requirements, which
shall be generally equal to 10% to 20%, or in the case of JPS.Net Corporation,
50% of the amount by which total revenues for the ISP for the 12 months ending
June 30, 1999 exceeds the annualized revenues for the ISP for the three months
ended June 30, 1998 (or, in the case of JPS.Net Corporation, the amount by
which its total revenues for the 12 months ending September 30, 1999 exceeds
its annualized revenues for the three months ended September 30, 1998) after
giving effect to certain adjustments. The amount of the additional
consideration will be payable in either cash or the Company's common stock at
the option of the Company.
The purchase price has been allocated to the Company's historical assets and
liabilities based on their respective carrying values, as these carrying values
are deemed to represent fair market values of these assets and liabilities.
Additionally, adjustments have been made for debt and other liabilities not
assumed and the establishment of a deferred income tax liabilities and assets
related to the transaction for purposes of determining the excess of the
purchase price over the fair value of the net assets acquired. The allocation
of the purchase
F-14
<PAGE>
ONEMAIN.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
price is considered preliminary until such time as the consummation of the
Transactions. The Company does not anticipate that the final allocation of
purchase price will differ significantly from that presented herein. Contingent
consideration payments, if any, will be accounted for as additional purchase
price.
The following table reflects the consideration to be paid in cash and shares
of common stock, the allocation of the consideration to net assets acquired and
resulting goodwill as of September 30, 1998, assuming an initial public
offering price per share of $18.00.
<TABLE>
<CAPTION>
SHARES OF VALUE OF TOTAL NET ASSETS
CASH COMMON STOCK SHARES CONSIDERATION ACQUIRED GOODWILL
----------- ------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
SuperNet................ $ 7,100,329 666,438 $ 11,995,884 $ 19,096,213 $ 1,840,708 $ 17,255,505
SunLink................. 1,047,945 214,240 3,856,320 4,904,265 323,688 4,580,577
LebaNet................. 210,336 21,034 378,612 588,948 62,958 525,990
SouthWind............... 2,062,200 207,500 3,735,000 5,797,200 476,840 5,320,360
Horizon................. 1,044,722 136,500 2,457,000 3,501,722 207,208 3,294,514
United States Internet.. 13,285,860 1,226,414 22,075,452 35,361,312 (6,105,662) 41,466,974
IPA..................... 7,818,640 368,136 6,626,448 14,445,088 2,439,906 12,005,182
Netrox.................. 2,512,595 144,200 2,595,600 5,108,195 411,400 4,696,795
ZoomNet................. 2,524,303 200,850 3,615,300 6,139,603 688,432 5,451,171
Palm.Net................ 1,346,289 15,310 275,580 1,621,869 140,960 1,480,909
IAG..................... 1,032,948 156,550 2,817,900 3,850,848 (249,987) 4,100,835
Midwest Internet........ 3,185,833 550,280 9,905,040 13,090,873 (283,424) 13,374,297
Internet Solutions...... 1,450,370 101,320 1,823,760 3,274,130 126,383 3,147,747
FGI..................... 2,217,169 244,173 4,395,114 6,612,283 304,144 6,308,139
Indynet................. 3,900,076 390,008 7,020,144 10,920,220 869,248 10,050,972
Lightspeed.............. 6,895,098 548,400 9,871,200 16,766,298 1,262,423 15,503,875
JPS..................... 8,958,580 895,858 16,125,444 25,084,024 (2,822,517) 27,906,541
----------- --------- ------------ ------------ ----------- ------------
Total................ $66,593,293 6,087,211 $109,569,798 $176,163,091 $ (307,292) $176,470,383
=========== ========= ============ ============ =========== ============
</TABLE>
The purchase price will be allocated to the Company's historical assets and
liabilities based on their respective carrying values, as these carrying values
are deemed to represent fair market value of the assets and liabilities.
Additionally, adjustments have been made for assets not acquired, debt and
other not assumed liabilities and the establishment of a deferred income tax
liabilities and assets related to the transaction for the purposes of
determining the excess of the purchase price over the fair value of the net
assets acquired. The allocation of the purchase price is considered preliminary
until such time as the closing of the transaction and consummation of the
Transactions. The Company does not expect that the final allocation of the
purchase price will differ significantly from that presented herein. Contingent
consideration payments, if any, will be accounted for as additional purchase
price.
F-15
<PAGE>
ONEMAIN.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
NOTE 3--UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table summarizes unaudited pro forma combined balance sheet
adjustments.
<TABLE>
<CAPTION>
TRANSACTIONS ADJUSTMENTS PRO FORMA OFFERING ADJUSTMENTS
----------------------------------- TRANSACTIONS --------------------------------------
(A) (B) (C) ADJUSTMENTS (D) (E) (F)
----------- -------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents..... $ -- $ -- $ -- $ -- $112,562,500 $(7,576,701) $(69,984,325)
Accounts
receivable,
net............. -- -- -- -- -- -- --
Inventory........ -- -- -- -- -- -- --
Prepaid
expenses........ -- -- -- -- -- -- --
Other current
assets.......... -- -- -- -- -- -- --
Deferred
financing
costs........... -- -- -- -- -- -- --
Deferred tax
asset........... -- -- -- -- -- -- --
----------- -------- ------------ ------------ ------------ ----------- ------------
Total current
assets.......... -- -- -- -- 112,562,500 (7,576,701) (69,984,325)
Property and
equipment, net.. -- -- -- -- -- -- --
Goodwill and
intangibles,
net............. -- (251,056) 176,721,440 176,470,384 -- -- --
Deferred tax
asset........... -- 402,590 -- 402,590 -- -- --
Due from
affiliates/stockholders.. -- -- -- -- -- -- --
Other assets..... -- -- -- -- -- -- --
----------- -------- ------------ ------------ ------------ ----------- ------------
Total assets..... $ -- $151,534 $176,721,440 $176,872,974 $112,562,500 $(7,576,701) $(69,984,325)
=========== ======== ============ ============ ============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts
payable......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accrued
expenses........ -- -- -- -- -- -- --
Current portion
of unearned
revenue......... -- -- -- -- -- -- --
Income tax
payable......... -- -- -- -- -- -- --
Line of credit... -- -- (616,499) (616,499) -- (173,500) --
Current portion
of long-term
debt............ -- -- (2,126,269) (2,126,269) -- (400,753) --
Current portion
of capital lease
obligations..... -- -- -- -- -- -- --
Deferred tax
liability....... -- 151,534 -- 151,534 -- -- --
Other current
liabilities..... -- -- -- -- -- -- --
Due to
affiliates/stockholders.. 66,593,293 -- (654,187) 65,939,106 -- -- (69,984,325)
----------- -------- ------------ ------------ ------------ ----------- ------------
Total current
liabilities..... 66,593,293 151,534 (3,396,955) 63,347,872 -- (574,253) (69,984,325)
Long-term portion
of unearned
revenues........ -- -- -- -- -- -- --
Long-term debt,
net of current
portion......... -- -- (4,026,851) (4,026,851) -- (1,922,136) --
Capital lease
obligations, net
of current
portion......... -- -- -- -- -- -- --
Stock
appreciation
rights
liability....... -- -- -- -- -- (5,080,312) --
----------- -------- ------------ ------------ ------------ ----------- ------------
Total
liabilities..... 66,593,293 151,534 (7,423,806) 59,321,021 -- (7,576,701) (69,984,325)
Stockholders'
equity (deficit)
Preferred
stock........... -- -- (406,000) (406,000) -- -- --
Common stock..... -- -- (5,123,022) (5,123,022) -- -- --
Additional paid-
in capital...... (66,593,293) -- 174,532,572 107,939,279 112,562,500 -- --
Partners'
capital......... -- -- (2,904,004) (2,904,004) -- -- --
Retained
earnings
(accumulated
deficit)........ -- -- 18,045,700 18,045,700 -- -- --
----------- -------- ------------ ------------ ------------ ----------- ------------
Total
stockholders'
equity
(deficit)....... (66,593,293) -- 184,145,246 117,551,953 112,562,500 -- --
----------- -------- ------------ ------------ ------------ ----------- ------------
Total liabilities
and stockholders'
equity
(deficit)........ $ -- $151,534 $176,721,440 $176,872,974 $112,562,500 $(7,576,701) $(69,984,325)
=========== ======== ============ ============ ============ =========== ============
<CAPTION>
POST-
TRANSACTIONS
ADJUSTMENTS
-------------
<S> <C>
ASSETS
Cash and cash
equivalents..... $ 35,001,474
Accounts
receivable,
net............. --
Inventory........ --
Prepaid
expenses........ --
Other current
assets.......... --
Deferred
financing
costs........... --
Deferred tax
asset........... --
-------------
Total current
assets.......... 35,001,474
Property and
equipment, net.. --
Goodwill and
intangibles,
net............. --
Deferred tax
asset........... --
Due from
affiliates/stockholders.. --
Other assets..... --
-------------
Total assets..... $ 35,001,474
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts
payable......... $ --
Accrued
expenses........ --
Current portion
of unearned
revenue......... --
Income tax
payable......... --
Line of credit... (173,500)
Current portion
of long-term
debt............ (400,753)
Current portion
of capital lease
obligations..... --
Deferred tax
liability....... --
Other current
liabilities..... --
Due to
affiliates/stockholders.. (69,984,325)
-------------
Total current
liabilities..... (70,558,578)
Long-term portion
of unearned
revenues........ --
Long-term debt,
net of current
portion......... (1,922,136)
Capital lease
obligations, net
of current
portion......... --
Stock
appreciation
rights
liability....... (5,080,312)
-------------
Total
liabilities..... (77,561,026)
Stockholders'
equity (deficit)
Preferred
stock........... --
Common stock..... --
Additional paid-
in capital...... 112,562,500
Partners'
capital......... --
Retained
earnings
(accumulated
deficit)........ --
-------------
Total
stockholders'
equity
(deficit)....... 112,562,500
-------------
Total liabilities
and stockholders'
equity
(deficit)........ $ 35,001,474
=============
</TABLE>
F-16
<PAGE>
ONEMAIN.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
(a) Records the liability for the cash portion of the consideration to be paid
to the owners of the ISPs in connection with the Transactions (See Note 1).
(b) Records the net deferred tax asset attributable to the temporary
differences between the financial reporting and tax basis of assets and
liabilities held in S Corporations or Partnerships, consisting of deferred
tax assets of $402,590 ($24,995, $284,461, $14,183, $36,082, and $42,869 at
SunLink, Netrox, Palm.Net, Midwest, and Lightspeed, respectively) and
deferred tax liabilities of $151,534 ($8,677, $14,065, $37,932, $31,723 and
$59,137 at LebaNet, Horizon, SouthWind, Internet Solutions and Indynet,
respectively).
(c) Records the (i) purchase of the ISPs by the Company, including
consideration of $66,593,293 in cash, 6,087,211 shares of common stock with
an estimated fair value of $18 per share (or $109,569,798) which represents
a discount of 10% from the assumed initial public offering price of $20 per
share due to restrictions on the sale and transferability of the shares
issued, (ii) elimination of unassumed debt of $6,769,619, and (iii)
elimination of unassumed notes to affiliates/stockholders of $654,187. The
excess of the purchase price over the fair value of the net assets acquired
is $176,470,394.
(d) Records the cash proceeds from the issuance of shares of the Company's
Common Stock net of estimated offering costs. IPO costs primarily consist
of underwriting discounts and commissions, accounting fees, legal fees and
printing expenses.
(e) Records the repayments of stock appreciation rights of $5,080,312 and the
repayment of outstanding debt from proceeds of the IPO as follows:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998
------------------
<S> <C>
Line of Credit............................................ $ 173,500
Current portion of long term debt......................... 400,753
Long term debt............................................ 1,922,136
----------
Total..................................................... $2,496,389
==========
</TABLE>
(f) Records the use of the IPO proceeds to pay the cash portion of the
consideration due to the owners of the ISPs in connection with the
Transactions.
F-17
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statement of
operations adjustments for the nine months ended September 30, 1998.
<TABLE>
<CAPTION>
TRANSACTIONS
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
----------- ------------ -------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Other revenues......... -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- ----------- ------------
Total revenues....... -- -- -- -- -- -- --
COST AND EXPENSES:
Cost of access
revenues.............. -- -- -- -- -- -- --
Cost of other
revenues.............. -- -- -- -- -- -- --
Operations and
customer support...... -- -- -- -- -- (3,316,955) (3,316,955)
Sales and marketing.... -- -- -- -- -- -- --
General and
administrative........ 1,768,253 -- -- -- 626,627 -- 2,394,880
Amortization........... -- 13,256,210 -- -- -- -- 13,256,210
Depreciation........... -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- ----------- ------------
Total cost and
expenses............ 1,768,253 13,256,210 -- -- 626,627 (3,316,955) 12,334,135
----------- ------------ -------- --------- ----------- ----------- ------------
Income (loss) from
operations............. (1,768,253) (13,256,210) -- -- (626,627) 3,316,955 (12,334,135)
Other income (expense):
Interest income........ -- -- -- -- -- -- --
Interest expense....... -- -- 748,311 -- -- -- 748,311
Other income
(expense), net........ -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- ----------- ------------
Income before provision
(benefit) for income
taxes.................. (1,786,253) (13,256,210) 748,311 -- (626,627) 3,316,955 (11,585,824)
Provision (benefit) for
income taxes........... -- -- -- 147,910 -- 147,910
----------- ------------ -------- --------- ----------- ----------- ------------
Net income (loss)....... $(1,768,253) $(13,256,210) $748,311 $(147,910) $ (626,627) $ 3,316,955 $(11,733,734)
=========== ============ ======== ========= =========== =========== ============
</TABLE>
F-18
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statement of
operations adjustments for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
MERGER ADJUSTMENTS
--------------------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
----------- ------------ -------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Access revenues........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Other revenues......... -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- --------- ------------
Total net revenues... -- -- -- -- -- -- --
COST AND EXPENSES:
Cost of access
revenues.............. -- -- -- -- -- -- --
Cost of other
revenues.............. -- -- -- -- -- -- --
Operations and
customer support...... -- -- -- -- -- 449,145 449,145
Sales and marketing.... -- -- -- -- -- -- --
General and
administrative........ 2,256,080 -- -- -- 673,750 -- 2,929,850
Amortization........... -- 13,256,210 -- -- -- -- 13,256,210
Depreciation........... -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- --------- ------------
Total cost and
expenses............ 2,256,080 13,256,210 -- -- 673,730 449,145 16,835,185
----------- ------------ -------- --------- ----------- --------- ------------
Income (loss) from
operations............. (2,256,080) (13,256,210) -- -- (673,750) (449,145) (16,835,185)
Other income (expense):
Interest income........ -- -- -- -- -- -- --
Interest expense....... -- -- 603,786 -- -- -- 603,786
Other income
(expense), net........ -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- --------- ------------
Income before provision
(benefit) for income
taxes.................. (2,256,080) (13,256,210) 603,786 -- (673,750) 449,145) (15,031,399)
Provision (benefit) for
income taxes........... -- -- -- 212,296 -- 212,296
----------- ------------ -------- --------- ----------- --------- ------------
Net income (loss)....... $(2,256,080) $(13,256,210) $603,786 $(212,296) $ (673,750) $(449,145) $(16,243,695)
=========== ============ ======== ========= =========== ========= ============
</TABLE>
F-19
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
NOTE 4--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statement of
operations adjustments for the nine months ended December 31, 1997.
<TABLE>
<CAPTION>
MERGER ADJUSTMENTS
--------------------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
----------- ------------ -------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Access revenues........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Other revenues......... -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- --------- ------------
Total net revenues... -- -- -- -- -- -- --
COST AND EXPENSES:
Cost of access
revenues.............. -- -- -- -- -- -- --
Cost of other
revenues.............. -- -- -- -- -- -- --
Operations and
customer support...... -- -- -- -- -- 598,861 598,861
Sales and marketing.... -- -- -- -- -- -- --
General and
administrative........ 2,955,513 -- -- -- 815,000 -- 3,770,613
Amortization........... -- 17,647,946 -- -- -- -- 17,647,946
Depreciation........... -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- --------- ------------
Total cost and
expenses............ 2,955,513 17,647,946 -- -- 815,000 598,861 22,017,320
----------- ------------ -------- --------- ----------- --------- ------------
Income (loss) from
operations............. (2,955,513) (17,647,946) -- -- (815,000) (598,861) (22,017,320)
Other income (expense):
Interest income........ -- -- -- -- -- -- --
Interest expense....... -- -- 857,028 -- -- -- 867,028
Other income
(expense), net........ -- -- -- -- -- -- --
----------- ------------ -------- --------- ----------- --------- ------------
Income before provision
(benefit) for income
taxes.................. (2,955,513) (17,647,946) 857,028 -- (815,000) (588,861) (21,160,292)
Provision (benefit) for
income taxes........... -- -- -- 195,697 -- -- 195,697
----------- ------------ -------- --------- ----------- --------- ------------
Net income (loss)....... $(2,955,513) $(17,647,946) $857,028 $(195,697) $ (815,000) $(588,861) $(21,355,989)
=========== ============ ======== ========= =========== ========= ============
</TABLE>
F-20
<PAGE>
ONEMAIN.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONT'D)
(a) Reflects the increase in salaries to the owners of the ISPs as scheduled
from the employment agreements that each of the owners will enter into with
the Company upon consummation of the offering as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997
------------- ------------- ------------
COMPANY
-------
<S> <C> <C> <C>
SuperNet........................... $ 371,250 $ 378,750 $ 505,000
SunLink............................ 48,052 87,215 115,165
LebaNet............................ 42,600 42,600 56,800
Horizon............................ 84,555 108,387 144,162
SouthWind.......................... 108,536 126,534 162,313
United States Internet............. 163,185 184,584 235,646
IPA................................ 60,542 185,935 234,740
Netrox............................. 115,417 114,482 159,685
ZoomNet............................ 97,500 97,500 130,000
Palm.Net........................... 51,385 55,654 75,654
IAG................................ 58,500 88,500 118,000
Midwest Internet................... 125,638 135,064 178,675
Internet Solutions................. 30,250 56,750 70,000
FGI................................ 171,575 217,875 269,500
Indynet............................ 75,769 87,000 113,923
Lightspeed......................... 52,500 74,000 104,500
JPS................................ 110,999 215,250 281,750
---------- ---------- ----------
Total.............................. $1,768,253 $2,256,080 $2,955,513
========== ========== ==========
</TABLE>
Pursuant to the terms of employment agreements to be entered into upon
consummation of the Transactions, the owners of the ISPs will be eligible
for performance-based bonuses. Bonuses under the employment agreements will
be awarded based upon substantial improvement in the operating performance
of both the ISPs and the Company. Whether the bonuses that may be awarded
under the new employment agreements will be earned cannot be determined at
this time and therefore are not reflected in the pro forma adjustments. If
bonuses are awarded, compensation expense would increase.
(b) Reflects the amortization of goodwill to be recorded as a result of these
Transactions over a 10-year estimated life for goodwill related to the
ISPs.
(c) Reflects the reduction in non-recurring interest expense resulting from the
payment of outstanding debt or debt not assumed by the Company.
(d) Reflects the incremental provision for federal and state income taxes
assuming all entities were subject to federal and state income tax and
relating, to the other statements of operations' adjustments and for income
taxes on S Corporation income, assuming a corporate income tax rate of 40%
and the non-deductibility of goodwill.
(e) Reflects (i) an increase associated with the Company for additional
compensation expense to the Company's new corporate management and (ii) the
estimated costs associated with a public entity.
(f) Reflects an increase/(decrease) of compensation expense related to United
States Internet's stock appreciation rights.
F-21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
OneMain.com, Inc.
We have audited the accompanying balance sheets of OneMain.com, Inc. as of
September 30, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the period from August 19, 1998 (inception) to
September 30, 1998. 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 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 audit provides 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 OneMain.com, Inc. at September
30, 1998 and the results of its operations and its cash flows for the period
from August 19, 1998 (inception) to September 30, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
December 28, 1998
F-22
<PAGE>
ONEMAIN.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Cash............................................................. $ 27,500
Deferred offering costs.......................................... 247,250
--------
Total assets.................................................. $274,750
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued professional fees........................................ $247,250
Other accrued expenses........................................... 76,999
--------
Total liabilities............................................. 324,249
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000 shares
authorized, no shares issued and outstanding................... --
Common stock, $0.001 par value; 100,000,000 shares authorized,
4,750,000 shares issued and outstanding........................ 4,750
Additional paid-in capital...................................... 42,750
Accumulated deficit............................................. (76,999)
Stock subscription receivable................................... (20,000)
--------
Total stockholders' equity.................................... (49,499)
--------
Total liabilities and stockholders' equity.................... $274,750
========
</TABLE>
See accompanying notes.
F-23
<PAGE>
ONEMAIN.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 19, 1998
(INCEPTION)
TO SEPTEMBER 30,
1998
----------------
<S> <C>
Selling, general and administrative expenses................... $ 76,999
--------
Operating loss................................................. (76,999)
--------
Net loss....................................................... $(76,999)
========
</TABLE>
See accompanying notes.
F-24
<PAGE>
ONEMAIN.COM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
ADDITIONAL STOCK TOTAL
PAID-IN ACCUMULATED SUBSCRIPTION STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE EQUITY
--------- ------ ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 19,
1998 (inception)....... -- $ -- $ -- $ -- $ -- $ --
Net loss................ -- -- -- (76,999) -- (76,999)
Issuance of common
stock.................. 4,750,000 4,750 42,750 -- -- 47,500
Stock subscription
receivable............. -- -- -- -- (20,000) (20,000)
--------- ------ ------- -------- -------- --------
Balance at September 30,
1998................... 4,750,000 $4,750 $42,750 $(76,999) $(20,000) $(49,499)
========= ====== ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-25
<PAGE>
ONEMAIN.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 19, 1998
(INCEPTION)
TO SEPTEMBER 30,
1998
----------------
<S> <C>
OPERATING ACTIVITIES:
Net loss..................................................... $ (76,999)
Adjustments to reconcile net loss to net cash used in
operating activities:
Changes in operating assets and liabilities:
Deferred operating costs................................. (247,250)
Accrued expenses......................................... 324,249
---------
Net cash used in operating activities......................... --
INVESTING ACTIVITIES.......................................... --
FINANCING ACTIVITIES:
Issuance of common stock...................................... 27,500
Net increase in cash.......................................... --
Cash at beginning of period................................... --
---------
Cash at end of period......................................... $ 27,500
=========
</TABLE>
See accompanying notes.
F-26
<PAGE>
ONEMAIN.COM, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION
OneMain.com, Inc., a Delaware corporation (the "Company") was founded in
August 1998 for the purpose of acquiring existing Internet service providers
("ISPs") serving the secondary, tertiary and rural markets. The Company intends
to acquire, in separate transactions, either the stock or assets of 17 ISPs
(the "Transactions") simultaneously upon the closing of an initial public
offering (the "IPO") of its common stock and, subsequent to the IPO, continue
to acquire through merger or purchase similar companies to expand its national
operations.
The Company plans to consummate the Transactions in accordance with
acquisition agreements negotiated with the current owners of each of the ISPs.
The Transactions will be financed through the cash proceeds from the IPO or
through a combination of cash and common stock of the ISPs. The combined
purchase price payable by the Company consists of approximately $66.6 million
in cash and 6,087,211 shares of common stock. See Note 4.
The Company has conducted activities to date which have related to the IPO
and the Transactions. Operating expenses subsequent to inception consist
primarily of the salary and related travel costs of the Company's two
employees, which costs have been expensed. As of September 30, 1998,
approximately $251,000 in professional fees had been incurred in connection
with the IPO, and the Company has capitalized these costs as Deferred Offering
Costs. These costs include legal and accounting fees which will be offset
against the proceeds of the IPO at closing. The Company is dependent upon the
IPO to execute the pending Transactions. There is no assurance that the pending
Transactions discussed will be completed or that the Company will be able to
generate future operating revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
Fair Value of Financial Instruments
The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash, deferred charges, and accrued
expenses to approximate the fair value of the respective assets and
liabilities.
F-27
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net income and earnings per share as if the fair value
method of accounting has been applied. The Company will provide pro forma
disclosures of net income and earnings per share, as applicable, in the notes
to future consolidated financial statements.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Financial Standards No. 109, Accounting for Income Taxes
(SFAS 109). Under the assets and liability method of SFAS 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statements carrying amounts
of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect of a change in tax rates on deferred tax
assets and liabilities is recognized in income in the period that includes the
enactment date.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.130, ("SFAS No. 130"), "Reporting
Comprehensive Income" which is required to be adopted in the period ended
December 31, 1998. SFAS No. 130 requires that an enterprise (a) classify items
of other comprehensive income by their nature in the financial statements, and
(b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in-capital in the Statement of
Stockholders' Equity. The adoption of SFAS 130 did not have any effect on the
Company's financial statements as the Company does not have any elements of
comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information", which is required to be
adopted for the period ended December 31, 1998. SFAS No. 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports to stockholders. The disclosure for segment information on
the financial statements is not expected to be material.
F-28
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. STOCKHOLDERS' EQUITY
Common Stock
In connection with the organization and initial capitalization on August 19,
1998, the Company issued 4,750,000 shares of common stock, par value $0.001 per
share ("Common Stock"), at $0.01 per share, which the Company believes
approximated fair market value of the Company's Common Stock at that date.
1999 Stock and Incentive Plan
The Company's Board of Directors has adopted, and the Company's stockholders
have approved, the Company's 1999 Stock and Incentive Plan (the "Plan").
1999 Employee Stock Purchase Plan
The Company's Board of Directors has adopted, and the Company's stockholders
have approved the 1999 Employee Stock Purchase Plan.
4. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of potential deferred tax assets and deferred tax liabilities are
presented below as of September 30, 1998:
<TABLE>
<S> <C>
Net operating losses............................................ $ 30,600
--------
Total deferred tax assets....................................... 30,600
Valuation allowance............................................. (30,600)
--------
Net deferred tax asset.......................................... $ --
========
</TABLE>
The Company is in a net deferred tax asset position at September 30, 1998.
However, as a newly organization, future profits are not certain. As such, the
Company has established a valuation reserve for the entire amount of the net
deferred tax asset.
5. TRANSACTIONS
The Company plans to consummate the Transactions in accordance with
acquisition agreements negotiated with the current owners of each of the ISPs.
The Transactions will be financed through the cash proceeds from the IPO or
through a combination of cash and common stock of the ISPs. The combined
purchase price payable by the Company consists of approximately $66.6 million
in cash and 6,087,211 shares of common stock.
F-29
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table reflects the consideration to be paid in cash and shares
of common stock, the preliminary allocation of the consideration to net assets
acquired and resulting excess of purchase price over net assets acquired as of
September 30, 1998, assuming an initial public offering price per share of
$18.00.
<TABLE>
<CAPTION>
EXCESS OF
PURCHASE
SHARES OF PRICE OVER
COMMON VALUE OF TOTAL NET ASSETS NET ASSETS
CASH STOCK SHARES CONSIDERATION ACQUIRED ACQUIRED
----------- --------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Supernet................ $ 7,100,329 666,438 $ 11,995,884 $ 19,096,213 $ 1,840,708 $17,255,505
SunLink................. 1,047,945 214,240 3,856,320 4,904,265 323,688 4,580,577
LebaNet................. 210,336 21,034 378,612 588,948 62,958 525,990
Southwind............... 2,062,200 207,500 3,735,000 5,797,200 476,840 5,320,360
Horizon................. 1,044,722 136,500 2,457,000 3,501,722 207,208 3,294,514
United States Internet.. 13,285,860 1,226,414 22,075,452 35,361,312 (6,105,662) 41,466,974
IPA..................... 7,818,640 368,136 6,626,448 14,445,088 2,439,906 12,005,182
Netrox.................. 2,512,595 144,200 2,595,600 5,108,195 411,400 4,696,795
ZoomNet................. 2,524,303 200,850 3,615,300 6,139,603 688,432 5,451,171
Palm.Net................ 1,346,289 15,310 275,580 1,621,869 140,960 1,480,909
IAG..................... 1,032,948 156,550 2,817,900 3,850,848 (249,987) 4,100,835
Midwest Internet........ 3,185,833 550,280 9,905,040 13,090,873 (283,424) 13,374,297
Internet Solutions...... 1,450,370 101,320 1,823,760 3,274,130 126,383 3,147,747
FGInet.................. 2,217,169 244,173 4,395,114 6,612,283 304,144 6,308,139
Indynet................. 3,900,076 390,008 7,020,144 10,920,220 869,248 10,050,972
Lightspeed.............. 6,895,098 548,400 9,871,200 16,766,298 1,262,423 15,503,875
JPS.Net................. 8,958,580 895,858 16,125,444 25,084,024 (2,822,517) 27,906,541
----------- --------- ------------ ------------ ----------- ------------
Total................. $66,593,293 6,087,211 $109,569,798 $176,163,091 $ (307,292) $176,470,383
=========== ========= ============ ============ =========== ============
</TABLE>
The purchase price will be preliminary allocated to the Company's historical
assets and liabilities based on their respective carrying values, as these
carrying values are deemed to represent fair market value of the assets
acquired and liabilities assumed. Additionally, adjustments have been made for
the establishment of a deferred income tax liability and related asset
resulting from the transaction. The allocation of the purchase price is
considered preliminary until such time as the closing of the transaction and
consummation of the Transactions. The Company does not expect the final
allocation of the purchase price will differ significantly from that presented
herein. The individual acquisition agreements provide for contingent
consideration payments but the contingent payments have not been reflected
since they cannot be determined at this time.
6. SUBSEQUENT EVENTS
On November 25, 1998, the Company issued a promissory note to one of its
founders in exchange for a loan in the amount of $500,000, the proceeds of
which will be used to pay certain of the costs of the IPO and the Transactions.
The note bears interest at the prime rate and is payable at the earlier of (i)
demand by the note holder, (ii) the completion of an IPO or (iii) the sale of
the Company, as defined.
F-30
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Partners of
D&E SuperNet
We have audited the accompanying balance sheets of D&E SuperNet as of
December 31, 1996 and 1997, and the related statements of operations, partners'
capital, and cash flows for the period from June 22, 1995 (inception) to
December 31, 1995 and for the years ended December 31, 1996 and 1997. These
financial statements are the responsibility of the Partnership'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 D&E SuperNet at December 31,
1996 and 1997 and the results of its operations and its cash flows for the
period from June 22, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Partnership's working
capital deficiency and accumulated losses raise substantial doubt about its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 2. The 1997 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 23, 1998
F-31
<PAGE>
D&E SUPERNET
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................... $ 23,836 $ 31,020 $ 62,958
Accounts receivable....... 54,209 27,536 70,896
Inventory................. 11,177 14,058 17,786
Prepaid expenses.......... 19,015 6,444 54,138
--------- --------- ----------
Total current assets.... 108,237 79,058 205,778
Property and equipment,
net....................... 483,171 677,382 845,136
Intangible assets, net..... 5,080 4,528 1,148,704
Other assets............... -- 6,279 1,186
--------- --------- ----------
Total assets............ $ 596,488 $ 767,247 $2,200,804
========= ========= ==========
LIABILITIES AND PARTNERS'
CAPITAL
Current liabilities:
Accounts payable--trade... $ 60,518 $ 12,937 $ 71,704
Accounts payable--
affiliates............... 102,957 63,308 104,682
Accrued expenses.......... 11,566 60,174 84,210
Unearned revenues......... 1,890 -- 214,856
Line of credit payable to
affiliate................ 420,000 584,698 200,000
Current portion of long-
term debt................ -- -- 43,750
--------- --------- ----------
Total current
liabilities............ 596,931 721,117 719,202
Long-term debt............. -- -- 1,006,250
Partners' capital
(deficit):
Contributed capital....... 244,818 244,818 515,614
Accumulated losses........ (245,261) (198,688) (40,262)
--------- --------- ----------
Total partners' capital
(deficit).............. (443) 46,130 475,352
--------- --------- ----------
Total liabilities and
partners' capital...... $ 596,488 $ 767,247 $2,200,804
========= ========= ==========
</TABLE>
See accompanying notes.
F-32
<PAGE>
D&E SUPERNET
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
PERIOD FROM JUNE 22, DECEMBER 31, SEPTEMBER 30,
1995 (INCEPTION) TO -------------------- ----------------------
DECEMBER 31, 1995 1996 1997 1997 1998
-------------------- -------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 64,661 $617,620 $1,489,596 $1,020,231 $2,401,043
Other revenues......... 54,884 223,917 259,611 197,480 218,258
--------- -------- ---------- ---------- ----------
Total revenues....... 119,545 841,537 1,749,207 1,217,711 2,619,301
COSTS AND EXPENSES:
Costs of access
revenues.............. 135,345 381,571 718,974 516,378 1,041,428
Costs of other
revenues.............. 39,384 61,787 155,505 117,633 107,420
Operations and
customer support...... 45,526 133,828 221,727 153,781 240,468
Sales and marketing.... 46,799 120,112 201,385 150,015 259,642
General and
administrative........ 34,292 106,667 179,377 125,028 468,742
Depreciation........... 7,963 48,121 154,952 86,200 205,204
Amortization........... 303 480 550 412 23,681
--------- -------- ---------- ---------- ----------
Total costs and
expenses............ 309,612 852,566 1,632,470 1,149,447 2,346,585
--------- -------- ---------- ---------- ----------
(Loss) income from
operations............. (190,067) (11,029) 116,737 68,264 272,716
OTHER EXPENSES:
Interest expense....... (6,268) (36,881) (56,941) (42,015) (62,220)
Other expenses, net.... -- (1,016) (13,223) (12,667) (52,070)
--------- -------- ---------- ---------- ----------
(6,268) (37,897) (70,164) (54,682) (114,290)
--------- -------- ---------- ---------- ----------
Net (loss) income....... $(196,335) $(48,926) $ 46,573 $ 13,582 $ 158,426
Pro forma provision for
income taxes........... -- -- -- -- --
--------- -------- ---------- ---------- ----------
Pro forma net income
(See Note 2)........... $(196,335) $(48,926) $ 46,573 $ 13,582 $ 158,426
========= ======== ========== ========== ==========
</TABLE>
See accompanying notes.
F-33
<PAGE>
D&E SUPERNET
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
CONTRIBUTED (LOSSES) PARTNERS'
CAPITAL INCOME CAPITAL
----------- ----------- ---------
<S> <C> <C> <C>
CONTRIBUTED CAPITAL, JUNE 22, 1995
(INCEPTION)................................ $144,818 $ -- $ 144,818
Net loss................................... -- (196,335) (196,335)
-------- --------- ---------
BALANCE AT DECEMBER 31, 1995................ 144,818 (196,335) (51,517)
Contributed capital........................ 100,000 -- 100,000
Net loss................................... -- (48,926) (48,926)
-------- --------- ---------
BALANCE AT DECEMBER 31, 1996................ 244,818 (245,261) (443)
Net income................................. -- 46,573 46,573
-------- --------- ---------
BALANCE AT DECEMBER 31, 1997................ 244,818 (198,688) 46,130
Contributed capital (unaudited)............ 270,796 -- 270,796
Net income (unaudited)..................... -- 158,426 158,426
-------- --------- ---------
BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)... $515,614 $ (40,262) $ 475,352
======== ========= =========
</TABLE>
See accompanying notes.
F-34
<PAGE>
D&E SUPERNET
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
PERIOD FROM JUNE 22, DECEMBER 31, SEPTEMBER 30,
1995 (INCEPTION) TO -------------------- ---------------------
DECEMBER 31, 1995 1996 1997 1997 1998
-------------------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income....... $(196,335) $ (48,926) $ 46,573 $ 13,582 $ 158,426
Adjustments to reconcile
net (loss) income to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization.......... 8,266 48,601 155,502 86,612 228,885
Loss on sale or
disposal of
equipment............. -- 1,016 13,223 12,667 52,070
Changes in operating
assets and
liabilities:
Accounts receivable.. (33,586) (20,623) 26,673 25,328 (43,360)
Inventory............ (4,808) (6,369) (2,881) (6,840) (3,728)
Prepaid expenses..... (5,807) (13,608) 12,571 (52) (47,694)
Other assets......... -- -- (6,279) -- 5,093
Accounts payable
trade and
affiliates.......... 39,233 124,242 (87,230) (35,123) 100,141
Accrued expenses..... -- 11,566 48,608 35,415 24,036
Unearned revenues.... -- 1,890 (1,890) (1,890) (60,618)
--------- --------- --------- --------- ----------
Net cash (used in)
provided by operating
activities............. (193,037) 97,789 204,870 129,699 413,251
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (40,515) (354,538) (407,958) (310,875) (268,617)
Proceeds from sale of
property and
equipment.............. -- -- 45,574 38,215 1,206
Acquisition of
business............... -- -- -- -- (1,050,000)
Other................... (2,635) (3,228) -- -- --
--------- --------- --------- --------- ----------
Net cash used in
investing activities... (43,150) (357,766) (362,384) (272,660) (1,317,411)
FINANCING ACTIVITIES:
Net proceeds (payments)
under line of credit
payable to affiliate... 240,000 180,000 164,698 119,698 (384,698)
Proceeds from issuance
of long-term debt...... -- -- -- -- 1,050,000
Partner capital
contributions.......... -- 100,000 -- -- 270,796
--------- --------- --------- --------- ----------
Net cash provided by
financing activities... 240,000 280,000 164,698 119,698 936,098
--------- --------- --------- --------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 3,813 20,023 7,184 (23,263) 31,938
Cash at beginning of
period................. -- 3,813 23,836 23,836 31,020
--------- --------- --------- --------- ----------
Cash at end of period... $ 3,813 $ 23,836 $ 31,020 $ 573 $ 62,958
========= ========= ========= ========= ==========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Initial contribution of
property and
equipment.............. $ 144,818 $ -- $ -- $ -- $ --
========= ========= ========= ========= ==========
Cash paid for interest.. $ 5,223 $ 34,402 $ 55,746 $ 42,015 $ 62,220
========= ========= ========= ========= ==========
</TABLE>
See accompanying notes.
F-35
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
D&E SuperNet (the "Partnership") is a regional provider of Internet access.
The Partnership was organized on June 22, 1995 by D&E Marketing, Inc. (50%) and
SuperNet Interactive Services, Inc. (50%) as a general partnership and began
marketing services in July of the same year. The partners share equally in
profits and losses. The Partnership's targeted market is Pennsylvania.
The Partnership expects to continue to focus on increasing its subscriber
base and geographic coverage. The online services and Internet markets are
highly competitive. The Partnership believes that existing competitors,
Internet-based services, Internet service providers, Internet directory
services and telecommunication companies are likely to enhance their service
offerings resulting in greater competition for the Partnership. The competitive
conditions could have the following effects: require additional pricing
programs; increase spending on marketing; limit the Partnership's ability to
expand its subscriber base and result in increased attrition in the existing
subscriber base. There can be no assurance that growth in the Partnership's
revenues or subscriber base will continue or that the Partnership will be able
to achieve or sustain profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been presented in conformity with
generally accepted accounting principles, which contemplates continuation of
the Partnership as a going concern. However, the Partnership has a significant
working capital deficiency and accumulated losses. Further, the Partnership
depends on the continuing financial support of an affiliate. Management
believes that the actions recently taken, described below, and the intent of
the partners to fund the operations will provide the Partnership with
sufficient funds to continue as a going concern. Such actions include, but are
not limited to the short-term line of credit and revolving line of credit
agreements entered into in 1998 (see Note 9 - unaudited), continued investment
in its network infrastructure to increase its network efficiencies and capacity
to serve additional subscribers and employing marketing strategies to increase
its subscriber base. Further, management believes that the demand line of
credit from an affiliate will continue to be available throughout the next
year.
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment
Property, equipment, and software are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives
ranging between three to seven years.
F-36
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory
Inventory consists of purchased goods for resale and is stated at the lower
of cost or market on the first-in, first-out (FIFO) method.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Partnership has determined there has been no impairment
to the carrying values of such assets since inception.
Goodwill
Goodwill, which represents the cost in excess of the fair market value of
identifiable net assets acquired, is being amortized using the straight-line
method over 10 years.
Revenue Recognition
The Partnership recognizes Internet access revenue when the services are
provided. The Partnership defers recognizing revenue on advance payments and
amortizes the unearned revenue amounts to revenue on a straight-line basis over
the period in which the services are provided. No revenue is recognized during
a subscriber cancellation period, if applicable.
Other revenues include network installation, maintenance and consulting
services. These services are provided on a time-and-material basis and revenue
is recognized based upon time (at established rates) and other direct costs as
incurred.
Costs of Revenues
Costs of access revenues primarily consists of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also includes
fees paid for lease of the Partnership's network infrastructure, as well as
license fees for Web browser software based on a per-user charge, other license
fees paid to third-party software vendors, product costs, and contractor fees
for operation and support services.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from June 22, 1995 (inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997, advertising costs were $37,943, $69,069, and
$123,940, respectively.
Income Taxes
The Partnership is exempt from taxation under the partnership provisions of
the Internal Revenue Code (the "Code"). Under the partnership provisions of the
Code, the partners of the Partnership include their share of the Partnership's
income on their personal income tax returns. Accordingly, the Partnership is
not subject to federal and state corporate income taxes.
F-37
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited pro forma income tax information included in the statements of
operations and Note 8 is presented in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as if the
Partnership had been subject to federal and certain state income taxes for the
period from June 22, 1995 (inception) to December 31, 1995, the years ended
December 31, 1996 and 1997, and for the nine-month periods ended September 30,
1997 and 1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Partnership to
concentrations of credit risk consist primarily of cash and accounts
receivable. The cash is held by a high credit quality financial institution.
For accounts receivable, the Partnership performs ongoing credit evaluations of
its customers' financial condition and generally does not require collateral.
The concentration of credit risk is mitigated by the large customer base. The
carrying amount of the accounts receivable approximates their fair value.
Sources of Supplies
The Partnership relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Partnership attempts to maintain numerous vendors for required
products, its modems, terminal servers and high-performance routers, which are
important components of its network, are each currently acquired from three
sources. In addition, some of the Partnership's suppliers have limited
resources and production capacity. If the suppliers are unable to meet the
Partnership's needs as its network infrastructure grows, then delays and
increased costs in the expansion of the Partnership's network infrastructure
could result, having an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS No.
130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements, and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the Statement of Stockholders'
Equity (Deficit). The Partnership adopted SFAS No. 130 on January 1, 1998. The
adoption of SFAS No. 130 did not have any effect on the Partnership's financial
statements as the Partnership does not have any elements of comprehensive
income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures about
Segments of an Enterprise
F-38
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and Related Information, which is required to be adopted for the year ended
December 31, 1998. SFAS No. 131 changes the way public companies report segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
stockholders. Because the Company has only one reportable segment, the
additional disclosures for segment information are not expected to be
significant.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software........ $182,069 $ 516,662 $ 860,622
Office equipment....................... 357,142 357,142 357,142
-------- --------- ----------
539,211 873,804 1,217,764
Less accumulated depreciation and amor-
tization.............................. (56,040) (196,422) (372,628)
-------- --------- ----------
$483,171 $ 677,382 $ 845,136
======== ========= ==========
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................... $ -- $ -- $1,116,592
Other intangibles...................... 5,728 5,728 53,520
-------- --------- ----------
5,728 5,728 1,170,112
Less accumulated amortization.......... (648) (1,200) (21,408)
-------- --------- ----------
$ 5,080 $ 4,528 $1,148,704
======== ========= ==========
</TABLE>
F-39
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT PAYABLE TO AN AFFILIATE
The Partnership has a short-term line of credit payable on demand with an
affiliated company allowing for borrowings of up to $650,000. Borrowings
against the line bear interest at the Wall Street Journal published prime rate
of 8.50% at December 31, 1996 and December 31, 1997. Effective June 30, 1998
the line bears a fixed rate of 12%. The line is subordinated to a loan held by
a financial institution. Borrowings outstanding against the line as of December
31, 1996 and 1997 and September 30, 1998 were $420,000, $584,698 and $200,000,
respectively.
6. RELATED PARTY TRANSACTIONS
The Partnership has various transactions with its Partners and affiliates.
These transactions can be generally classified into the following categories:
. Access services--the Partnership pays D&E Telephone Company for telephone
services used to provide Internet access to its customers. During the
period from June 22, 1995 (inception) to December 31, 1995, and the years
ended December 31, 1996 and 1997, telephone charges paid to D&E Telephone
Company were $26,803, $99,003, and $87,276, respectively.
. Operations and customer support services--the Partnership pays D&E
Marketing and SuperNet Interactive Services salaries, wages, and
commissions for providing technical, selling, and marketing services to
the Partnership. During the period from June 22, 1995 (inception) to
December 31, 1995, and the years ended December 31, 1996 and 1997,
selling and marketing expenses paid to these affiliates were $123,934,
$377,608, and $608,852, respectively.
. General and administrative services--D&E TDS and D&E Marketing charge the
Partnership for administrative support, rent and billing services
provided to the Partnership. During the period from June 22, 1995
(inception) to December 31, 1995, and the years ended December 31, 1996
and 1997, total rent and billing services paid to these affiliates were
$5,908, $25,512, and $29,700, respectively.
Management believes that the overall amount of charges to the Partnership are
reasonable and that the accompanying financial statements reflect all of the
Partnership's costs of doing business.
7. COMMITMENTS
Lease Commitments
The Partnership leases office space and various office and computer equipment
under non-cancelable operating lease agreements. The leases generally provide
for renewal terms and the Partnership is required to pay a portion of the
common areas' expenses including maintenance, real estate taxes and other
expense. Rent expense for the period from June 22, 1995 (inception) to December
31, 1995, and the years ended December 31, 1996 and 1997, was $3,783, $17,208,
and $32,025, respectively.
F-40
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS (CONTINUED)
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<S> <C>
1998............................................................... $119,450
1999............................................................... 124,344
2000............................................................... 74,822
2001............................................................... 4,894
--------
Total minimum lease payments....................................... $323,510
========
</TABLE>
8. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding shares of the Partnership and concurrent with the related
initial public offering of OneMain.com (as more fully described in Note 9), D&E
SuperNet's status as a partnership will automatically terminate and normal
federal and state corporate income tax rates will apply. The Partnership does
not have any cumulative temporary differences resulting from a difference
between book and tax basis, and therefore, the Partnership would have
recognized no deferred federal and state income tax benefit and asset as of
December 31, 1997 and September 30, 1998, had the termination of its election
to be treated as a partnership occurred on those respective dates.
No pro forma income tax provision (benefit) is reflected for the period from
June 22, 1995 (inception) to December 31, 1995, and the years ended December
31, 1996 and 1997, and the nine-month periods ended September 30, 1997 and 1998
as the Partnership would have provided a full valuation allowance against the
deferred tax asset had it been a C Corporation.
9. SUBSEQUENT EVENTS (UNAUDITED)
The Partners of the Partnership have entered into an agreement whereby they
will sell their interest in the Partnership to OneMain.com. The Partnership's
Partners will exchange their interest in the Partnership for cash and shares of
common stock of OneMain.com concurrent with the consummation of the initial
public offering ("IPO") of the common stock of OneMain.com. Additionally, the
Partnership's Partners will be given additional consideration, contingent upon
certain operational and earnings margin requirements, which shall be equal to
one-fifth of the difference between total revenue for the Partnership for the
12 months ended June 30, 1999 and the revenues for the Partnership for the
period from April 1, 1998 through June 30, 1998 multiplied by four. The amount
of the additional consideration will be payable in either cash or stock, at the
option of OneMain.com. Upon consummation of the agreement, OneMain.com will
become the sole member of the Partnership. Subsequent to the acquisition, the
Partnership will continue to exist.
F-41
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
The related party transactions as described in Note 6 will be amended upon
consummation of the merger discussed above so that all continuing obligations
will be similar to terms and conditions of agreements / arrangements with
unaffiliated third parties.
On June 10, 1998, the Partnership acquired substantially all of the assets of
Cumberland Valley Network ("CVN"), a general partnership. At the date of the
acquisition, the CVN partnership dissolved and all operations were continued
under the D&E SuperNet name. CVN results of operations since June 10, 1998 are
included within the September 30, 1998 statement of operations of the
Partnership. CVN's results of operation for the periods presented prior to the
period ended June 10, 1998 are not included in the Partnership's results of
operations.
The unaudited pro forma results of operations set forth below assumes the
acquisition of CVN had occurred at the beginning of the periods presented. Pro
forma adjustments include increased amortization for the cost over net assets
acquired and increased interest expense from the acquisition. The unaudited pro
forma information is provided for information purposes only and does not
purport to be indicative of the Partnership's results of operations that should
have been achieved had the acquisition and related financing transaction been
completed for the periods presented, or results that may be obtained in the
future.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Revenues................................ $2,734,564 $3,254,266
---------- ----------
Net income.............................. $ 98,993 $ 273,247
========== ==========
</TABLE>
The acquisition was accounted for under the purchase method of accounting;
accordingly, assets acquired have been recorded at their estimated fair market
values at the date of acquisition. Goodwill is being amortized over its
estimated economic life of 10 years using the straight-line method.
The purchase price of $1,050,000 has been preliminarily allocated as follows:
<TABLE>
<S> <C>
Accounts receivable............................................. $ 85,551
Prepaid expenses................................................ 19,235
Property and equipment.......................................... 53,477
Intangible assets............................................... 50,000
Goodwill........................................................ 1,116,592
Unearned revenues............................................... (274,855)
----------
Total purchase price............................................ $1,050,000
==========
</TABLE>
The Partnership borrowed $1,050,000 from a bank to purchase CVN. The interest
rate on the note is fixed at 7.80% from June 1998 through June 2000. Beginning
in July 2000, the interest rate will convert to a floating rate at the bank's
commercial base rate. The term of
F-42
<PAGE>
D&E SUPERNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
the note is four years with a provision for interest only payments during the
first twelve months. Beginning in the thirteenth month, the Partnership will
pay 35 fixed principal monthly installments plus related interest. The balance
of the note is due in a balloon payment on the closing date.
Principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 131,250
2000.............................................................. 262,500
2001.............................................................. 262,500
2002.............................................................. 393,750
----------
$1,050,000
==========
</TABLE>
The note contains restrictive covenants which require the Partnership,
beginning December 31, 1998, to maintain certain financial ratios the most
restrictive of which is maintaining a cash flow to debt service ratio of at
least 1.2 to 1. The Partnership was in compliance with the restrictive
covenants as of September 30, 1998.
On June 30, 1998, the Partnership obtained a short-term line of credit with a
bank allowing for borrowings of up to $100,000. Borrowings against the line
bear interest at the bank's commercial base rate (8.5% at September 30, 1998).
The line is secured by substantially all of the Partnership's assets. In
addition, the Partnership has a revolver line of credit with the same Bank
which will allow borrowings up to $400,000 for equipment purchases only at the
Bank's commercial base rate. There were no borrowings outstanding against these
lines as of September 30, 1998.
F-43
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
SunLink, Inc.
We have audited the accompanying balance sheets of SunLink, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the period from October 1, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SunLink, Inc. at December 31,
1996 and 1997, and the results of its operations and its cash flows for the
period from October 1, 1995 (inception) to December 31, 1995 and for the years
ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, the Company's working
capital deficiency and losses from operations raise substantial doubt about
it's ability to continue as a going concern. Management's plans as to these
matters are also described in Note 2 to the financial statements. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
October 30, 1998
F-44
<PAGE>
SUNLINK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ........................................ $ 1,546 $ 5,799 $ --
Accounts receivable, net of allowance for
doubtful accounts of $5,316, $5,759 and
$22,897 as of December 31, 1996 and 1997
and September 30, 1998, respectively........ 7,384 22,163 29,646
Inventory.................................... -- -- 7,600
Due from stockholder......................... -- 8,981 --
-------- -------- --------
Total current assets....................... 8,930 36,943 37,246
Property and equipment, net................... 140,219 399,632 598,518
-------- -------- --------
Total assets............................... $149,149 $436,575 $635,764
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 22,598 $ 98,885 $ 23,622
Cash overdraft............................... -- -- 49,493
Accrued expenses............................. 7,140 7,187 12,207
Unearned revenues............................ 18,985 70,235 151,749
Note payable................................. 75,000 90,000 75,000
Current portion of long-term debt............ -- -- 32,829
-------- -------- --------
Total current liabilities.................. 123,723 266,307 344,900
Long-term debt, net of current portion........ -- -- 199,357
Notes payable to stockholders................. 7,500 12,941 --
Stockholders' equity:
Common stock--$10 par value, 1,000 shares
authorized, 200 shares and 205 shares
issued and outstanding as of December 31,
1996 and 1997 and September 30, 1998,
respectively................................ 2,000 2,050 2,050
Additional paid-in capital................... 29,695 30,145 30,145
Retained (deficit) earnings.................. (13,769) 125,132 59,312
-------- -------- --------
Total stockholders' equity................. 17,926 157,327 91,507
-------- -------- --------
Total liabilities and stockholders'
equity.................................... $149,149 $436,575 $635,764
======== ======== ========
</TABLE>
See accompanying notes
F-45
<PAGE>
SUNLINK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ --------------------
1995 1996 1997 1997 1998
--------------- -------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 370 $224,966 $786,324 $532,684 $1,016,954
Other revenues......... 6,250 -- 11,913 5,615 --
------- -------- -------- -------- ----------
Total revenues....... 6,620 224,966 798,237 538,299 1,016,954
COSTS AND EXPENSES:
Costs of access
revenues.............. 610 85,766 230,379 144,693 418,669
Costs of other
revenues.............. 5,807 -- 11,531 5,435 --
Operations and
customer support...... -- 42,106 211,712 133,192 360,859
Sales and marketing.... 1,270 37,720 33,625 24,299 69,068
General and
administrative........ 6,966 40,991 97,100 72,696 128,341
Depreciation........... 1,152 18,303 64,307 48,230 93,854
------- -------- -------- -------- ----------
Total costs and
expenses............ 15,805 224,886 648,654 428,545 1,070,791
------- -------- -------- -------- ----------
(Loss) income from
operations............. (9,185) 80 149,583 109,754 (53,837)
OTHER EXPENSE:
Interest expense....... -- (4,664) (10,682) (8,011) (11,983)
------- -------- -------- -------- ----------
Net (loss) income....... $(9,185) $ (4,584) $138,901 $101,743 $ (65,820)
======= ======== ======== ======== ==========
Pro forma income tax
(expense) benefit...... -- -- (46,369) (31,030) 21,973
------- -------- -------- -------- ----------
Pro forma net income.... $(9,185) $ (4,584) $ 92,523 $ 70,713 $ (43,847)
======= ======== ======== ======== ==========
</TABLE>
See accompanying notes.
F-46
<PAGE>
SUNLINK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN (DEFICIT) STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK (100
SHARES)............................. 1,000 $19,195 $ -- $20,195
RENT CONTRIBUTED BY STOCKHOLDER -- 300 300
Net loss............................ -- -- (9,185) (9,185)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1995......... 1,000 19,495 (9,185) 11,310
Issuance of common stock (100
shares)............................ 1,000 9,000 10,000
Rent contributed by stockholder..... -- 1,200 -- 1,200
Net loss............................ -- -- (4,584) (4,584)
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1996......... 2,000 29,695 (13,769) 17,926
Issuance of common stock (5
shares)............................ 50 450 -- 500
Net income.......................... -- -- 138,901 138,901
----- ------- ------- -------
BALANCE AT DECEMBER 31, 1997......... 2,050 30,145 125,132 157,327
Net loss (unaudited)................ -- -- (65,820) (65,820)
----- ------- ------- -------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)......................... 2,050 $30,145 $59,312 $91,507
===== ======= ======= =======
</TABLE>
See accompanying notes.
F-47
<PAGE>
SUNLINK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED NINE MONTHS ENDED
OCTOBER 1, 1995 DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO -------------------- --------------------
DECEMBER 31, 1995 1996 1997 1997 1998
----------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income....... $ (9,185) $ (4,584) $ 138,901 $ 101,743 $ (65,820)
Adjustments to reconcile
net (loss) income to
net cash (used in)
provided by operating
activities:
Depreciation........... 1,152 18,303 64,307 48,230 93,854
Stock based
compensation.......... -- -- 450 -- --
Rent contributed by
stockholder........... 300 1,200 -- -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. -- (7,384) (14,779) (11,085) (7,483)
Inventory............ -- -- -- -- (7,600)
Accounts payable..... 5,309 17,289 76,287 57,216 (75,263)
Accrued expenses..... -- 7,140 47 -- 5,020
Unearned revenues.... -- 18,985 51,250 38,436 81,514
Other current
liabilities......... 369 (369) -- -- --
-------- --------- --------- --------- ---------
Net cash (used in)
provided by operating
activities............. (2,055) 50,580 316,463 234,540 24,222
INVESTING ACTIVITIES:
(Issuance of) payment
from note receivable
from stockholder....... -- -- (8,981) -- 8,981
Purchases of property
and equipment.......... (23,360) (136,314) (323,720) (241,351) (292,740)
-------- --------- --------- --------- ---------
Net cash used in
investing activities... (23,360) (136,314) (332,701) (241,351) (283,759)
FINANCING ACTIVITIES:
Cash overdraft.......... 220 (220) -- -- 49,493
Proceeds under note
payable................ -- 75,000 15,000 10,000 75,000
Proceeds from issuance
of long-term debt...... -- -- -- -- 250,000
Payments on long-term
debt................... -- -- -- -- (17,814)
Repayments of note
payable................ -- -- -- -- (90,000)
Proceeds from
stockholders' loans.... 5,000 2,500 12,941 -- --
Repayments of
stockholders' loans.... -- -- (7,500) -- (12,941)
Proceeds from issuance
of common stock........ 20,195 10,000 50 -- --
-------- --------- --------- --------- ---------
Net cash provided by
financing activities... 25,415 87,280 20,491 10,000 253,738
-------- --------- --------- --------- ---------
Net increase (decrease)
in cash................ -- 1,546 4,253 3,189 (5,799)
Cash at beginning of
period................. -- -- 1,546 1,546 5,799
-------- --------- --------- --------- ---------
Cash at end of period... $ -- $ 1,546 $ 5,799 $ 4,735 $ --
======== ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ -- $ 4,664 $ 10,682 $ 8,011 $ 11,983
======== ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-48
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SunLink, Inc. (the "Company") is a regional provider of Internet access. The
Company was incorporated in the Commonwealth of Pennsylvania on October 1, 1991
as a Subchapter S Corporation and began providing Internet access services in
Sunbury, Pennsylvania on October 1, 1995. The Company had no operations between
January 1, 1995 and September 30, 1995.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation
The accompanying financial statements have been presented in conformity with
generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. However, the Company has a significant working
capital deficiency and has incurred an operating loss for the nine months ended
September 30, 1998 (unaudited). Management believes that actions presently
being taken, as described below, and the intent of the stockholders to fund the
Company's operations will provide the Company with sufficient funds to continue
as a going concern. Such actions include but are not limited to operating under
a newly signed telephone service agreement with a competitive local exchange
carrier which is expected to reduce the cost of telephone services provided to
a significant portion of its subscriber base, continued investments in its
network infrastructure to increase its network efficiency and capacity to serve
additional subscribers, and employing marketing strategies to increase its
subscriber base. Further, the Company believes that its stockholders will be
able to provide it with any working capital needs during the next year.
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-49
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives ranging between five
to seven years. Leasehold improvements are amortized over their useful life not
to exceed 7 years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Company has determined there has been no impairment to
the carrying values of such assets since inception.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided. The Company records a reserve for the
estimated amount of uncollectable accounts for customers who are provided
credit terms. No revenue is recognized during a subscriber cancellation period,
if applicable.
Other revenues include network installation, maintenance and consulting
services. These services are provided on a time-and-material basis and revenue
is recognized based upon time (at established rates) and other direct costs as
incurred.
Bartered Services
The Company participates in bartered services transactions with certain radio
stations, computer retailers and subscribers. In exchange for free Internet
service from the Company, radio stations provide advertising and computer
retailers demo and refer computer buyers to the Company for Internet access
service. In addition, the Company's subscribers can participate in a referral
program in which they can earn free service up to one year and or cash, for
making valid referrals of the Company's Internet access service. These
transactions are recognized by the Company as Internet access revenues and
selling and administrative expense in equal amounts at the fair value of
Internet access services provided by the Company. From the period October 1,
1995 (inception) to December 31, 1995 and the years ended December 31, 1996 and
1997, the Company recognized bartered services transactions in the amount of
$370, $8,894 and $22,136, respectively.
Stock Compensation
During 1997, the Company issued 5 shares of common stock to a contractor in
exchange for $5 in cash and recorded $450 of stock compensation for services
performed.
F-50
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per- user charge, other license fees paid to third-
party software vendors, product costs and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
periods ended December 31, 1995, 1996 and 1997, advertising and promotion costs
were $900, $28,736, and $11,489, respectively.
Income Taxes
Historically, the Company has elected, by the consent of its stockholders, to
be taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the Subchapter S provisions of the Code, the stockholders
include the Company's corporate income in their personal income tax returns.
Accordingly, the Company was not subject to Federal and state corporate income
tax during the period for which it was an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations and Note 6 is presented in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as if the Company
had been subject to federal and certain state income taxes for the period from
October 1, 1995 (inception) to December 31, 1995, the years ended December 31,
1996 and 1997, and for the nine-month periods ended September 30, 1997 and
1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The concentration of
credit risk is mitigated by the large customer base and small accounts
receivable balances. The carrying amount of the receivables approximates their
fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
F-51
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired from three sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as its
network infrastructure grow, then delays and increased costs in the expansion
of the Company's network infrastructure could potentially result in an adverse
effect on the Company's operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS No. 130), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS No.
130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements, and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the Statement of Stockholders'
Equity. The adoption of SFAS No. 130 did not have any effect on the Company's
financial statements as the Company does not have any elements of comprehensive
income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("Statement No. 131"), Disclosures about
Segments of an Enterprise and Related Information, which is required to be
adopted for the year ended December 31, 1998. Statement No. 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports to stockholders. The disclosure for segment information on
the financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying interim financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
F-52
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment........................... $159,674 $483,196 $ 763,339
Furniture, fixtures, and office equipment.... -- 198 9,995
Leasehold improvements....................... -- -- 2,800
-------- -------- ---------
159,674 483,394 776,134
Less accumulated depreciation................ (19,455) (83,762) (177,616)
-------- -------- ---------
$140,219 $399,632 $ 598,518
======== ======== =========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company engages Amerman & Company, which is owned and operated by the
Company's stockholders, to prepare the Company's Federal and state tax returns.
For the years ended December 31, 1996 and 1997, the amounts paid for tax
services were $536 and $1,460, respectively.
In addition, the Company occupies office space in a building owned by a
stockholder of the Company. During the periods from October 1, 1995 (inception)
to December 31, 1995 and the year ended December 31, 1996, no rent payments
were made to this stockholder, however, rent expense and additional paid in
capital of $300 and $1,200, respectively were recognized. For the year ended
December 31, 1997, the amount paid for rent was $4,000.
5. NOTE PAYABLE
The Company has a short-term line of credit payable on demand with a bank
allowing for borrowings of up to $125,000. Borrowings against the line bear a
fixed rate of 9% until December 23, 1998, when it will be converted to a
floating rate at the prime rate plus .75%. The line is secured by the assets of
the Company and is personally guaranteed by a stockholder of the Company.
Borrowings of $75,000, $90,000, were outstanding against the line at December
31, 1996 and 1997, respectively.
6. INCOME TAX
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com (as more fully described in Note 7) the
Company's status as an S Corporation under the Code will automatically
terminate and normal federal and state corporate income tax rates will apply.
Based upon the cumulative temporary differences, the Company would have
recognized a deferred federal and state income tax expense and
F-53
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAX--(CONTINUED)
liability of $1,573 as of December 31, 1997 and tax benefit and asset of
$24,995 as of September 30, 1998 (unaudited), had the termination of its
election to be treated as an S Corporation occurred on those respective dates.
No pro forma income tax provision (benefit) is reflected for the period from
October 1, 1995 (inception) to December 31, 1995 and the year ended December
31, 1996 as the Company would have provided a full valuation allowance against
the deferred tax asset had it been a C Corporation.
7. SUBSEQUENT EVENTS (UNAUDITED)
On May 7, 1998, the Company issued a $250,000 note payable to a bank in
monthly installments of $5,027, including interest at a rate of 7.65% per
annum. The loan is secured by the Company's assets and personally guaranteed by
the stockholders of the Company. As of September 30, 1998, the outstanding
balance of the note was $232,186. The Company incurred interest related to the
long-term debt of $10,397 for the nine months ended September 30, 1998.
Principal payments on long-term debt are due as follows: 1998--$10,804; 1999--
$44,906; 2000--$48,465; 2001--$52,305; 2002--$56,450; thereafter--$19,256.
The Company's stockholders have entered into an agreement whereby they will
sell their shares of capital stock in the Company to OneMain.com. The Company's
stockholders will exchange their shares in the Company for cash and shares of
common stock of OneMain.com concurrent with the consummation of the initial
public offering ("IPO") of the common stock of OneMain.com. Upon consummation
of the agreement, OneMain.com will become the sole stockholder of the Company.
Subsequent to the acquisition, the Company will continue to exist.
The related party transactions described in Note 4 will be amended upon
consummation of the acquisition discussed above so that all continuing
obligations will be similar to terms and conditions of agreements /
arrangements with unaffiliated third parties.
F-54
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholder of
LebaNet, Inc.
We have audited the accompanying balance sheets of LebaNet, Inc. as of
December 31, 1996 and 1997 and the related statements of operations,
stockholder's equity, and cash flows for the period from March 1, 1996
(inception) to December 31, 1996 and for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LebaNet, Inc. at December 31,
1996 and 1997 and the results of its operations and its cash flows for the
period from March 1, 1996 (inception) to December 31, 1996 and for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
November 17, 1998
F-55
<PAGE>
LEBANET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------
SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $18,523 $ 43,833 $ 9,467
Accounts receivable............................ 5,784 9,495 8,862
Prepaid expenses............................... -- -- 7,727
------- -------- --------
Total current assets......................... 24,307 53,328 26,056
Property and equipment, net..................... 51,033 61,921 78,008
------- -------- --------
Total assets................................. $75,340 $115,249 $104,064
======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable............................... $ 1,088 $ 15,754 $ 18,936
Accrued expenses............................... 1,228 1,520 3,386
Unearned revenues.............................. 7,496 7,959 10,107
Due to stockholder............................. 40,812 40,812 --
------- -------- --------
Total current liabilities.................... 50,624 66,045 32,429
Stockholder's equity:
Common stock -- $1 stated value, 10,000 shares
authorized; 100 shares issued and
outstanding................................... 100 100 100
Additional paid-in capital..................... 600 600 600
Retained earnings.............................. 24,016 48,504 70,935
------- -------- --------
Total stockholder's equity................... 24,716 49,204 71,635
------- -------- --------
Total liabilities and stockholder's equity... $75,340 $115,249 $104,064
======= ======== ========
</TABLE>
See accompanying notes.
F-56
<PAGE>
LEBANET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1996 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------
1996 1997 1997 1998
-------------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Access revenues................ $149,299 $179,764 $126,409 $149,257
Other revenues................. -- 19,807 2,920 66,791
-------- -------- -------- --------
Total revenues............... 149,299 199,571 129,329 216,048
COSTS AND EXPENSES:
Costs of access revenues....... 55,546 105,898 59,442 65,642
Costs of other revenues........ -- 1,888 1,592 28,001
Operations and customer
support....................... 11,222 19,928 14,993 15,084
Sales and marketing............ 623 1,949 853 448
General and administrative..... 16,433 16,310 11,041 16,741
Depreciation................... 12,758 18,670 14,003 17,771
-------- -------- -------- --------
Total costs and expenses..... 96,582 164,643 101,924 143,687
-------- -------- -------- --------
Income from operations.......... 52,717 34,928 27,405 72,361
OTHER EXPENSE:
Interest expense............... -- (15) -- --
-------- -------- -------- --------
Net income...................... $ 52,717 $ 34,913 $ 27,405 $ 72,361
======== ======== ======== ========
Pro forma provision for income
taxes.......................... 21,417 14,184 11,047 27,139
-------- -------- -------- --------
Pro forma net income (See Note
2)............................. $ 31,300 $ 20,729 $ 16,358 $ 45,222
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-57
<PAGE>
LEBANET, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------ ---------- -------- -------------
<S> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK (100
SHARES)............................. 100 $600 $ -- $ 700
Net income.......................... -- -- 52,717 52,717
Distributions....................... -- -- (28,701) (28,701)
--- ---- -------- --------
BALANCE AT DECEMBER 31, 1996......... 100 600 24,016 24,716
Net income.......................... -- -- 34,913 34,913
Distributions....................... -- -- (10,425) (10,425)
--- ---- -------- --------
BALANCE AT DECEMBER 31, 1997......... 100 600 48,504 49,204
Net income (unaudited).............. -- -- 72,361 72,361
Distributions (unaudited)........... -- -- (49,930) (49,930)
--- ---- -------- --------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)......................... 100 $600 $ 70,935 $ 71,635
=== ==== ======== ========
</TABLE>
See accompanying notes.
F-58
<PAGE>
LEBANET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
MARCH 1, 1996 YEAR ENDED SEPTEMBER 30,
(INCEPTION) TO DECEMBER 31, ------------------
DECEMBER 31, 1996 1997 1997 1998
----------------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................. $ 52,717 $ 34,913 $ 27,405 $ 72,361
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation.............. 12,758 18,670 14,003 17,771
Changes in operating
assets and liabilities:
Accounts receivable..... (5,784) (3,711) -- 633
Prepaid expenses........ -- -- -- (7,727)
Accounts payable........ 1,088 14,666 (2) 3,182
Accrued expenses........ 1,228 292 1,824 1,866
Unearned revenues....... 7,496 463 -- 2,148
-------- -------- -------- --------
Net cash provided by
operating activities...... 69,503 65,293 43,230 90,234
INVESTING ACTIVITIES:
Purchases of property and
equipment................. (22,279) (29,558) (29,558) (33,858)
-------- -------- -------- --------
Net cash used in investing
activities................ (22,279) (29,558) (29,558) (33,858)
FINANCING ACTIVITIES:
Distributions to
stockholder............... (28,701) (10,425) (10,425) (49,930)
Repayment of stockholder
advance................... -- -- -- (40,812)
-------- -------- -------- --------
Net cash used in financing
activities................ (28,701) (10,425) (10,425) (90,742)
-------- -------- -------- --------
Net increase (decrease) in
cash...................... 18,523 25,310 3,247 (34,366)
Cash at beginning of
period.................... -- 18,523 18,523 43,833
-------- -------- -------- --------
Cash at end of period...... $ 18,523 $ 43,833 $ 21,770 $ 9,467
======== ======== ======== ========
NON-CASH TRANSACTIONS:
Issuance of common stock
and stockholder advance in
exchange for property and
equipment................. $ 41,512 $ -- $ -- $ --
</TABLE>
See accompanying notes.
F-59
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND SEPTEMBER 30, 1998
1. ORGANIZATION
LebaNet, Inc. (the "Company") is a regional provider of Internet access. The
Company is also a provider of network system set-up and installations and
related equipment and software sales. The Company was incorporated March 1,
1996 in the Commonwealth of Pennsylvania and began marketing services on that
date. The Company's target market is central Pennsylvania.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment
Equipment and software are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of five years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Company has determined there has been no impairment to
the carrying values of such assets since inception.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by
F-60
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customers. The Company has deferred recognizing revenue on these advance
payments and amortize the amounts to revenue on a straight-line basis as the
services are provided.
Other revenues include network installation, maintenance and consulting
services. These services are provided on a time-and-material basis and revenue
is recognized based upon time (at established rates) and other direct costs as
incurred.
Cost of Revenues
Cost of access revenues primarily consists of telecommunication expenses
inherent in the network infrastructure. Cost of access revenues also includes
fees paid for lease of the Company's backbone, other license fees paid to
third-party software vendors, product costs, and contractor fees for
distribution of software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from March 1, 1996 (inception) to December 31, 1996 and the year ended
December 31, 1997, the Company expensed $623 and $1,502, respectively, as
advertising costs.
Income Taxes
Historically, the Company has elected, by the consent of its stockholder, to
be taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the Subchapter S provisions of the Code, the stockholder
includes the Company's corporate income in his personal income tax return.
Accordingly, the Company was not subject to federal and state corporate income
tax during the period for which it was an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations and Note 5 is presented in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as if the Company
had been subject to federal and certain state income taxes for the period from
March 1, 1996 (inception) to December 31, 1996, the year ended December 31,
1997 and for the nine-month periods ended September 30, 1997 and 1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The concentration of
credit risk is mitigated by the large customer base. The carrying amount of the
receivables approximates their fair value.
F-61
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired from three sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS No.
130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements, and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the Statement of Stockholder's
Equity. The Company adopted SFAS No. 130 on January 1, 1998. The adoption of
SFAS No. 130 did not have any effect on the Company's financial statements as
the Company does not have any elements of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), Disclosures about
Segments of an Enterprise and Related Information, which is required to be
adopted for the year ended December 31, 1998. SFAS No. 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports to the stockholders. The impact of adopting SFAS No. 131 on
the financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
F-62
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recurring accruals considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September 30, 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------ SEPTEMBER 30
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and software................ $ 63,791 $ 93,349 $127,207
Less accumulated depreciation.................. (12,758) (31,428) (49,199)
-------- -------- --------
$ 51,033 $ 61,921 $ 78,008
======== ======== ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
On March 1, 1996, the stockholder of the Company contributed property and
equipment with a fair value of $40,812 to the Company in exchange for a non-
interest bearing note payable to the stockholder. During 1998, the Company
repaid the advance to the stockholder.
The Company provides consulting services to another corporation in which the
stockholder of the Company is also an officer and stockholder. During the
period from March 1, 1996 (inception) to December 31, 1996, the Company did not
perform any consulting services for related parties. During the year ended
December 31, 1997, the Company recognized consulting fee revenue of $2,600.
In addition, the Company paid office rent to the stockholder of the Company
for its use of the stockholder's residence on a month to month basis. During
the period from March 1, 1996 (inception) to December 31, 1996 and the year
ended December 31, 1997, the Company recorded $5,000 and $3,000, respectively,
as rent expense.
5. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com (as more fully described in Note 6), the
Company's status as an S Corporation under the Code will automatically
terminate and normal federal and state corporate income tax rates will apply.
Based upon the Company's cumulative temporary differences which arose from the
difference between its book and tax depreciation methods, the Company would
have recognized a deferred federal and state income tax expense and liability
of $7,486 as of December 31, 1997 and $8,677 as of September 30, 1998
(unaudited), had the termination of its election to be treated as an S
Corporation occurred on those respective dates.
F-63
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. SUBSEQUENT EVENTS (UNAUDITED)
The Company's stockholder has entered into an agreement whereby he will sell
his shares in the Company to OneMain.com. The Company's stockholder will
exchange his shares of capital stock of the Company for cash and shares of
common stock of OneMain.com concurrent with the consummation of the initial
public offering ("IPO") of the common stock of OneMain.com. Additionally, the
Company's stockholder will be given additional consideration, contingent upon
certain operational and earnings margin requirements, which shall be equal to
one-tenth of the difference between total revenue for the Company for the 12
months ended June 30, 1999 and the revenues for the Company for the period from
April 1, 1998 through June 30, 1998 multiplied by four. The amount of the
additional consideration will be payable in either cash or stock, at the option
of OneMain.com. Upon consummation of the agreement, OneMain.com will become the
sole stockholder of the Company. Subsequent to the acquisition, the Company
will continue to exist as a corporation.
The related party transactions as described in Note 4 will be amended upon
consummation of the acquisition discussed above so that all continuing
obligations will be similar to terms and conditions of agreements/arrangements
with unaffiliated third parties.
F-64
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
SouthWind Internet Access, Inc.
We have audited the accompanying balance sheets of SouthWind Internet Access,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SouthWind Internet Access,
Inc. as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ Grant Thornton, LLP
Wichita, Kansas
October 23, 1998
F-65
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 47,443 $ 74,720 $ --
Accounts receivable, net of allowance for
doubtful accounts of $0, $12,568 and $6,554
(unaudited) at December 31, 1996, 1997 and
September 30, 1998, respectively............. 35,924 23,346 30,789
Prepaid expenses.............................. -- 6,139 6,989
Other current assets.......................... -- -- 395
-------- -------- --------
Total current assets........................ 83,367 104,205 38,173
Property and equipment, net.................... 343,873 504,552 575,235
Intangible assets, net......................... 672 579 581
-------- -------- --------
Total assets................................ $427,912 $609,336 $613,989
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 10,900 $ 608 $ 11,812
Accrued expenses.............................. 13,781 24,147 12,264
Unearned revenues............................. 28,890 47,458 61,002
Current maturities of long-term debt.......... 37,855 68,590 38,246
Current maturities of capital lease
obligations.................................. 348 260 --
Other current liabilities..................... -- -- 14,139
-------- -------- --------
Total current liabilities................... 91,774 141,063 137,463
Long-term debt, net of current maturities...... 129,023 70,433 44,899
Capital lease obligations, net of current
maturities.................................... 260 -- --
-------- -------- --------
Total long term liabilities................. 129,283 70,433 182,362
Stockholders' equity:
Common stock; no par value, 2,000 shares
authorized, 1,000 shares issued and
outstanding.................................. 45,000 45,000 45,000
Retained earnings............................. 161,855 352,840 386,627
-------- -------- --------
Total stockholders' equity.................. 206,855 397,840 431,627
-------- -------- --------
Total liabilities and stockholders' equity.. $427,912 $609,336 $613,989
======== ======== ========
</TABLE>
See accompanying notes.
F-66
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ---------------------
1995 1996 1997 1997 1998
-------- -------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $168,698 $727,383 $1,317,530 $ 937,937 $1,411,678
Other revenues......... 33,442 109,204 120,318 95,286 92,778
-------- -------- ---------- --------- ----------
Total revenues....... 202,140 836,587 1,437,848 1,033,223 1,504,456
COSTS AND EXPENSES:
Costs of access
revenues.............. 123,517 388,902 641,868 455,422 763,820
Costs of other
revenues.............. 2,281 7,143 12,605 8,777 14,526
Operations and
customer support...... 5,802 41,669 56,536 45,227 72,250
Sales and marketing.... 12,695 33,012 46,598 33,234 50,411
General and
administrative........ 34,276 114,590 199,560 140,427 218,602
Depreciation and
amortization.......... 19,120 64,075 115,495 81,163 114,219
-------- -------- ---------- --------- ----------
Total costs and
expenses............ 197,691 649,391 1,072,662 764,250 1,233,828
-------- -------- ---------- --------- ----------
Income from operations.. 4,449 187,196 365,186 268,973 270,628
OTHER INCOME (EXPENSE):
Interest income........ 200 1,670 5,464 3,843 328
Interest expense....... (3,445) (13,262) (11,665) (8,733) (10,645)
Other.................. (747) (3) -- -- --
-------- -------- ---------- --------- ----------
NET INCOME.............. $ 457 $175,601 $ 358,985 $ 264,083 $ 260,311
======== ======== ========== ========= ==========
UNAUDITED PRO FORMA
INFORMATION:
Net Income............. $ 358,985 $ 260,311
Pro forma tax
provision............. 138,327 101,283
---------- ----------
Pro forma net income... $ 220,658 $ 159,028
========== ==========
</TABLE>
See accompanying notes.
F-67
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
-------------- (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995.......... 1,000 $45,000 $ (14,203) $ 30,797
Net income......................... -- -- 457 457
----- ------- --------- ---------
Balance at December 31, 1995....... 1,000 45,000 (13,746) 31,254
Net income......................... -- -- 175,601 175,601
----- ------- --------- ---------
BALANCE AT DECEMBER 31, 1996........ 1,000 45,000 161,855 206,855
Net income......................... -- -- 358,985 358,985
Distributions to stockholders...... -- -- (168,000) (168,000)
----- ------- --------- ---------
BALANCE AT DECEMBER 31, 1997........ 1,000 45,000 352,840 397,840
Net income (unaudited)............. -- -- 260,311 260,311
Distributions to stockholders
(unaudited)....................... -- -- (226,524) (226,524)
----- ------- --------- ---------
BALANCE AT SEPTEMBER 30, 1998
(unaudited)........................ 1,000 $45,000 $ 386,627 $ 431,627
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-68
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............. $ 457 $ 175,601 $ 358,985 $ 264,083 $ 260,311
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 19,120 64,075 115,495 81,163 114,219
Provision for doubtful
accounts.............. -- -- 12,568 13,010 --
Other.................. 747 (540) -- -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. (15,823) (19,830) 10 (19,424) (7,443)
Prepaid expenses..... -- -- (6,139) (1,206) (850)
Other current
assets.............. -- -- -- -- (397)
Accounts payable..... 18,609 (8,206) (10,292) 33,399 11,204
Accrued expenses..... 8,357 5,220 10,366 15,102 (11,883)
Unearned revenues.... 10,249 18,641 18,568 15,348 13,544
Other current
liabilities......... -- -- -- -- 14,139
--------- --------- --------- --------- ---------
Net cash provided by
operating activities... 41,716 234,961 499,561 401,475 392,844
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (122,451) (271,563) (276,081) (173,657) (184,902)
Proceeds from disposal
of property and
equipment.............. 1,160 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in
investing activities... (121,291) (271,563) (276,081) (173,657) (184,902)
FINANCING ACTIVITIES:
Proceeds from issuance
of long-term debt...... 92,000 110,000 10,000 10,000 --
Principal payments of
long-term debt......... (9,225) (28,897) (37,855) (25,243) (56,138)
Payments on obligations
under capital leases... (903) (3,182) (348) (261) --
Distributions to
stockholders........... -- -- (168,000) (168,000) (226,524)
--------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 81,872 77,921 (196,203) (183,504) (282,662)
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 2,297 41,319 27,277 44,314 (74,720)
Cash and cash
equivalents at
beginning of period.... 3,827 6,124 47,443 47,443 74,720
--------- --------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 6,124 $ 47,443 $ 74,720 $ 91,757 $ --
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ 3,445 $ 10,643 $ 12,406 $ 9,444 $ 10,645
========= ========= ========= ========= =========
Capital lease obligation
incurred............... $ 4,693 $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-69
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SouthWind Internet Access, Inc. (the "Company") is a regional provider of
Internet access, as well as design and hosting services for world wide web
sites. The Company was incorporated in Kansas on July 6, 1994, and began
marketing services in October, 1994. The Company's targeted market is the state
of Kansas.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services, and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to sustain profitability or
positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives ranging between three and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the estimated useful
life, using the straight-line method.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of
F-70
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of. The Company made no
adjustments to the carrying values of assets during the years ended December
31, 1995, 1996, and 1997.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per-user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1997, 1996 and 1995, the Company expensed $4,583,
$9,201 and $5,092, respectively, as advertising costs.
Income Taxes
Historically, the Company has elected, by the consent of its stockholders, to
be taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the provisions of the Code, the stockholders include the
Company's corporate income in their personal income tax returns. Accordingly,
the Company was not subject to federal corporate income tax during the period
for which it was an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations is presented as if the Company had been subject to federal and
certain state income taxes for the year ended December 31, 1997 and the nine
months ended September 30, 1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high-credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' payment
history and generally does not require collateral. The
F-71
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company maintains reserves for credit losses, and such losses have been within
management's expectations. The carrying amount of the receivables approximates
their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income, which is required to be adopted for fiscal
years beginning after December 15, 1997. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in
the financial statements, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the Statement of Stockholders' Equity. The Company adopted SFAS No.
130 on January 1, 1998. The adoption of SFAS No. 30 did not have any effect on
the Company's financial statements as the Company does not have any elements of
comprehensive income.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is required to be adopted for the
year ended December 31, 1998. SFAS No. 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The impact of adopting SFAS No. 131 on the financial
statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
F-72
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment........................................... $426,875 $666,605
Furniture, fixtures, and office equipment.................... 2,377 12,251
Leasehold improvements....................................... -- 26,477
-------- --------
429,252 705,333
Less accumulated depreciation and amortization............... 85,379 200,781
-------- --------
$343,873 $504,552
======== ========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1996 1997 1998
-------- -------- -------------
<S> <C> <C> <C>
Note payable to bank in monthly
installments of $1,150 at the bank's base
rate plus 1.00%, due December, 1999,
collateralized by all assets of the
Company. Repaid subsequent to
September 30, 1998 (unaudited)............ $ 35,499 $ 24,848 $16,126
Note payable to bank in monthly
installments of $516 at the bank's base
rate plus 1.00%, due May, 1999,
collateralized by all assets of the
Company................................... 12,553 7,421 --
Note payable to the City of Halstead,
Kansas in monthly installments of $271 at
6.00%, due August, 2002................... 14,000 12,980 11,090
Note payable to the City of Hesston, Kansas
in monthly installments of $308 at 6.00%,
due November, 2001........................ 15,772 12,705 10,462
Note payable to the City of Marion, Kansas
in monthly installments of $145 at 6.00%,
due April, 2002........................... 7,500 6,513 5,481
Note payable to the City of Hillsboro,
Kansas in monthly installments of $193 at
6.00%, due April, 2003.................... -- 10,000 8,288
Note payable to the City of Peabody, Kansas
in monthly installments of $182 at 6.00%,
due July, 2002............................ 7,500 7,500 7,214
Unsecured notes payable to officers and
members of their families representing
advances of working capital at interest
rates ranging from 7.00% to 10.00%, due
through July 2001......................... 74,054 57,056 24,484
-------- -------- -------
166,878 139,023 83,145
Less current portion....................... 37,855 68,590 38,246
-------- -------- -------
$129,023 $ 70,433 $44,899
======== ======== =======
</TABLE>
The Company received funding from various cities in Kansas, in the form of
notes payable, to establish dial-up internet access service in the respective
calling areas. The loan agreements require the Company to maintain such
internet access for a period of at least 12 months.
F-73
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
As of September 30, 1998, principal payments on long-term debt are due as
follows: 1998--$12,713; 1999--$32,007; 2000--$17,526; 2001--$15,082; 2002--
$5,817 (unaudited).
5. LEASE COMMITMENTS
The Company leases office space under a non-cancelable operating lease
agreement. The lease generally provides for renewal terms and the Company is
required to pay a portion of the common areas' expenses including maintenance,
real estate taxes and other expense. Rent expense for the years ended December
31, 1995, 1996 and 1997 was $4,509, $12,849 and $26,011, respectively.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1998....................................................... $260 $ 58,387
1999....................................................... -- 58,908
2000....................................................... -- 58,908
2001....................................................... -- 58,908
2002....................................................... -- 39,272
---- --------
Total minimum lease payments............................... $260 $274,383
==== ========
</TABLE>
6. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") and
concurrent with the related initial public offering of OneMain.com (as more
fully described in Note 8), the Company's status as an S Corporation under the
Internal Revenue Code will automatically terminate and normal federal and state
corporate income tax rates will apply. Based upon the cumulative temporary
differences, the Company will recognize a deferred federal income tax liability
of $37,932 (unaudited) as of September 30, 1998 upon the termination of its
election to be treated as an S Corporation.
7. DISTRIBUTIONS
The Company makes distributions to its stockholders for the purpose of paying
federal and state income taxes, including required estimated tax payments
associated with the Company's taxable income which must be reported on the
individual stockholder's income tax returns. The Company made distributions of
$68,275 in 1998 associated with the
F-74
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. DISTRIBUTIONS (CONTINUED)
Company's 1997 taxable income. In addition, beginning in 1998, the Company will
make distributions to stockholders on a monthly basis equal to 50% of the
Company's monthly net income.
8. SUBSEQUENT EVENT
The Company's stockholders have entered into an agreement whereby they will
sell their shares in the Company to OneMain.com. The Company's stockholders
will exchange their shares in the Company for cash and shares of common stock
of OneMain.com concurrent with the consummation of the initial public offering
("IPO") of the common stock of OneMain.com. Additionally, the Company's
stockholders will be given additional consideration, contingent upon certain
operational and earnings margin requirements, which shall be equal to one-tenth
of the difference between total revenue for the Company for the 12 months ended
June 30, 1999 and the revenues for the Company for the period from April 1,
1998 through June 30, 1998 multiplied by four. The amount of the additional
consideration will be payable in either cash or stock, at the option of
OneMain.com. Upon consummation of the agreement, OneMain.com will become the
sole stockholder of the Company. Subsequent to the acquisition, the Company
will continue to exist and maintain its status as a corporation.
Notes payable to related parties will be amended upon consummation of the
merger discussed above so that such obligations will be similar to terms and
conditions of notes with unaffiliated third parties.
F-75
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
Horizon Internet Technologies, Inc.
We have audited the accompanying balance sheets of Horizon Internet
Technologies, Inc. as of December 31, 1996 and 1997, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the period
from July 26, 1995 (inception) to December 31, 1995 and each of the two years
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Horizon Internet Technologies,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for the period from July 26, 1995 (inception) to December 31, 1995
and each of the two years ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
November 11, 1998
F-76
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ -- $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts $590 and $1,802 and
$2,818 (unaudited) at December 31, 1996,
1997 and September 30, 1998,
respectively............................... 9,518 9,075 21,403
Other current assets........................ 7,260 928 3,107
Investment in MoCom......................... -- (1,176) (6,459)
-------- -------- --------
Total current assets...................... 16,778 8,827 18,051
Property and equipment, net.................. 58,553 165,262 315,749
Other assets................................. 4,656 3,755 3,375
-------- -------- --------
Total assets.............................. $ 79,987 $177,844 $337,175
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable............................ $ 4,596 $ 35,308 $ 37,534
Accrued expenses............................ 1,188 1,294 1,547
Line of credit.............................. -- -- 41,499
Excess of outstanding checks over bank
balance.................................... 8,075 17,065 24,582
Unearned revenues........................... 500 3,937 7,039
Current portion of long-term debt........... 868 59,380 35,000
Current portion of capital leases payable... -- 8,182 4,177
Short term notes payable.................... 9,375 21,260 37,946
-------- -------- --------
Total current liabilities................. 24,602 146,426 189,324
Long-term debt, net of current portion....... 48,018 65,422 144,026
Capital lease obligations, net of current
portion..................................... -- 15,482 41,023
Stockholders' equity (deficit):
Common stock................................ 3,000 3,000 3,000
Additional Paid-in capital.................. 19,064 19,065 19,065
Accumulated deficit......................... (14,697) (71,551) (59,263)
-------- -------- --------
Total stockholders' equity (deficit)...... 7,367 (49,486) (37,198)
-------- -------- --------
Total liabilities and stockholders'
equity................................... $ 79,987 $177,844 $337,175
======== ======== ========
</TABLE>
See accompanying notes.
F-77
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 26, 1995 NINE MONTHS
(INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ ------------------
1995 1996 1997 1997 1998
------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 1,921 $128,280 $376,357 $251,585 $732,993
Other revenues......... -- 20,406 58,258 50,047 58,330
-------- -------- -------- -------- --------
Total revenues....... 1,921 148,686 434,615 301,632 791,323
COST AND EXPENSES:
Cost of access
revenues.............. 10,087 62,765 189,690 127,154 297,133
Cost of other
revenues.............. -- 16,034 42,564 36,795 42,006
Operations and customer
support............... 233 4,012 31,103 18,508 97,934
Sales and marketing.... 675 1,737 7,531 5,017 14,162
General and
administrative........ 3,820 53,513 188,856 119,431 261,970
Loss on investment in
MoCom................. -- -- 2,176 1,632 5,283
Amortization........... 167 672 671 504 501
Depreciation........... 688 9,602 25,093 16,190 46,045
-------- -------- -------- -------- --------
Total cost and
expenses............ 15,670 148,335 487,684 325,231 765,034
-------- -------- -------- -------- --------
(Loss) income from opera-
tions................... (13,749) 351 (53,069) (23,599) 26,289
OTHER INCOME (EXPENSE):
Interest income........ -- 12 -- -- --
Interest expense....... -- (1,311) (3,785) (2,373) (14,001)
-------- -------- -------- -------- --------
Net (loss) income........ $(13,749) $ (948) $(56,854) $(25,972) $ 12,288
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-78
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS'
------------- ADDITIONAL PAID (ACCUMULATED EQUITY
SHARES AMOUNT IN CAPITAL DEFICIT) (DEFICIT)
------ ------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION.... -- $ -- $ -- $ -- $ --
Net loss............... -- -- -- (13,749) (13,749)
Issuance of common
stock................. 3,000 3,000 19,000 -- 22,000
----- ------ ------- -------- --------
BALANCE AT DECEMBER 31,
1995................... 3,000 3,000 19,000 (13,749) 8,251
Net income (loss)...... -- -- -- (948) (948)
Additional capital..... -- -- 64 -- 64
----- ------ ------- -------- --------
BALANCE AT DECEMBER 31,
1996................... 3,000 3,000 19,064 (14,697) 7,367
Net loss............... -- -- -- (56,854) (56,854)
Additional capital..... -- -- 1 -- 1
----- ------ ------- -------- --------
BALANCE AT DECEMBER 31,
1997................... 3,000 3,000 19,065 (71,551) (49,486)
NET INCOME (UNAUDITED).. -- -- -- 12,288 12,288
----- ------ ------- -------- --------
BALANCE AT SEPTEMBER 30,
1998 (UNAUDITED)....... 3,000 $3,000 $19,065 $(59,263) $(37,198)
===== ====== ======= ======== ========
</TABLE>
See accompanying notes.
F-79
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 26, 1995 NINE MONTHS
(INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ----------------- -------------------
1995 1996 1997 1997 1998
------------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income....... $(13,749) $ (948) $(56,854) $(25,972) $ 12,288
Adjustments to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization.......... 855 10,274 25,764 16,694 46,546
Changes in operating
assets and
liabilities:
Accounts receivable.. (426) (9,092) 443 542 (12,328)
Other current
assets.............. -- (7,260) 6,332 5,047 (2,179)
Equity in loss of
MoCom............... -- -- 2,176 1,632 5,283
Other assets......... (130) (623) 230 (2,350) (121)
Accounts payable..... 12,827 (8,231) 30,712 34,083 2,226
Accrued expenses..... -- 1,188 106 (217) 253
Excess of outstanding
checks over bank
balance............. -- 8,075 8,990 2,699 7,517
Unearned revenues.... 53 447 3,437 (500) 3,102
-------- ------- -------- -------- ---------
Net cash (used in)
provided by operating
activities............. (570) (6,170) 21,336 31,658 62,587
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (27,564) (41,279) (131,802) (102,428) (196,532)
Investment in MoCom..... -- -- (1,000) (1,000) --
Payments for intangible
assets................. (4,742) -- -- -- --
-------- ------- -------- -------- ---------
Net cash used in
investing activities... (32,306) (41,279) (132,802) (103,428) (196,532)
Financing activities
Capital Leases Payable.. -- -- 23,664 24,283 21,536
Proceeds from issuance
of long-term debt...... 15,170 43,091 87,801 47,486 112,409
Proceeds from sale of
stock and capital
contributions.......... 22,000 64 1 1 --
-------- ------- -------- -------- ---------
Net cash provided by
financing activities... 37,170 43,155 111,466 71,770 133,945
-------- ------- -------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 4,294 (4,294) -- -- --
Cash and cash
equivalents at
beginning of period.... -- 4,294 -- -- --
-------- ------- -------- -------- ---------
Cash and cash
equivalents at end of
period................. $ 4,294 $ -- $ -- $ -- $ --
======== ======= ======== ======== =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ -- $ 123 $ 2,861 $ -- $ 14,262
======== ======= ======== ======== =========
</TABLE>
See accompanying notes.
F-80
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Horizon Internet Technologies, Inc. (the "Company") is a regional provider of
Internet access. The Company was incorporated in Kansas on July 26, 1995 and
began marketing services in Kansas. The Company's targeted markets include
Missouri, Oklahoma and Kansas.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives ranging between three
to five years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Company made no adjustments to the carrying values of
the assets during the years ended December 31, 1996 and 1997.
F-81
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company recognizes Internet access revenues when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenues
on these advance payments and amortizes the amounts to revenues on a straight-
line basis as the services are provided.
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per-user charge, other license fees paid to third-
party software vendors, product costs and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1997, 1996 and 1995, the Company expensed $7,531,
$1,737 and $675, respectively, as advertising costs.
Income Taxes
Historically, the Company has elected by the consent of its stockholders, to
be taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the Subchapter S provisions of the Code, the stockholders
include the Company's corporate income in their personal income tax returns.
Accordingly, the Company was not subject to federal and state corporate income
tax during the period for which it was an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations and Note 9 is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the Company
had been subject to federal and certain state income taxes for the period from
July 26, 1995 (inception) to December 31, 1995, the two years ended December
31, 1996 and 1997, and for the nine month unaudited periods ended September 30,
1997 and 1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high-credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' payment
history and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The carrying amount of the receivables approximates their fair
value.
F-82
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management believes alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operations.
In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130, Reporting Comprehensive Income, ("SFAS No. 130") which is
required to be adopted for fiscal years beginning after December 15, 1997. SFAS
No. 130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in the financial statements and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the Statement of Stockholders'
Equity. The Company adopted SFAS No. 130 on January 1, 1998. The adoption of
SFAS No. 130 did not have any effect on the Company's financial statements as
the Company financial statements as the Company does not have any elements of
comprehensive income.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information, ("SFAS No. 131") which is required to
be adopted for the year ended December 31, 1998. SFAS No. 131 changes the way
public companies report segment information in annual financial statements and
also requires those companies to report selected segment information in interim
financial reports to stockholders. The impact of adopting SFAS No. 131 on the
financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
F-83
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Computer equipment........................................... $68,468 $191,749
Furniture, fixtures, and office equipment.................... 376 8,872
------- --------
68,844 200,621
Less accumulated depreciation................................ (10,291) (35,359)
------- --------
$58,553 $165,262
======= ========
</TABLE>
4. LINE OF CREDIT
The Company has a short-term line of credit with a bank allowing for
borrowings of up to $50,000 subject to a borrowing base that is calculated
based upon defined levels of accounts receivable, inventory and equipment.
Borrowings against the line bear interest at 10% at December 31, 1997. The line
is secured by the assets of, and is personally guaranteed by, the President and
the Vice President of the Company. No amounts were outstanding against the line
at December 31, 1997.
5. RELATED PARTY TRANSACTIONS
The Company purchased computer equipment from a related party for the period
ended December 31, 1997, in the amount of $23,741.
The Company also has notes payable to the Chairman of the Board of the
Company in the amount of $44,151, $43,678 at December 31, 1996 and 1997,
respectively. The interest rate is 8%.
F-84
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- --------
<S> <C> <C>
Note payable to a stockholder with interest at
0% until October 1997 and increasing to 8%
thereafter. Monthly installments of $500
commence October 1997 with any unpaid principal
and interest due September 1998...... $44,151 $ 43,678
Non-interest bearing note payable to a
stockholder with no maturity date.............. 4,735 4,735
Note payable to a bank bearing interest at 10%
per annum, monthly principal and interest
payments of $1,291, and maturing October
2000........................................... -- 37,418
Line of credit with a bank bearing interest at
9.75% per annum, with no monthly principal and
interest payments. The line expires February
2000........................................... -- 38,971
Note payable to a bank bearing interest at 9.75%
per annum, monthly principal and interest
payments of $2,891, and maturing May
2001........................................... -- --
------- --------
$48,886 $124,802
======= ========
</TABLE>
Principal payments on long-term debt are due as follows: 1998--$64,152;
1999--$42,332; 2000--$81,422; 2001--$15,878.
7. COMMITMENTS
Lease Commitments
The Company leases office space and various office and computer equipment
under non-cancelable operating lease agreements. The leases generally provide
for renewal terms and the Company is required to pay a portion of the common
areas' expenses including maintenance, real estate taxes and other expense.
Rent expense for the years ended December 31, 1996 and 1997 was $1,562 and
$7,732, respectively.
The Company leases certain computer and office equipment under an agreement
which have been accounted for as a capital lease. The related equipment had a
cost of $26,000 at December 31, 1997, and accumulated amortization of $2,336 at
December 31, 1997. The agreement requires a monthly payment of $880 and expires
during 2000.
F-85
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS (CONTINUED)
Minimum future lease payments under operating leases together with the
present value of the net minimum lease payments under capital leases are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
OPERATING CAPITAL
--------- -------
<S> <C> <C>
1998...................................................... $ 7,674 $10,560
1999...................................................... 11,004 10,560
2000...................................................... 11,004 7,040
2001...................................................... 9,355 --
------- -------
Total minimum lease payments............................ $39,037 28,160
=======
Less amounts representing interest........................ (4,496)
-------
Present value of minimum lease payments................... $23,664
=======
</TABLE>
8. INVESTMENT IN MOCOM
During 1997, the Company purchased 650 shares, or 32.5%, of the stock of
MoCom Corporation ("MoCom"). MoCom is a regional provider of Internet access in
the Missouri area. Any profits and losses will be accounted for under the
equity method of accounting with profits and/or losses shown in a separate line
item on the statements of operations.
9. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com (as described more fully in Note 10),
the Company's status as an S Corporation under the Code will automatically
terminate and normal federal and state corporate income tax rates will apply.
Based upon the cumulative temporary differences, the Company would have
recognized a deferred federal and state income tax expense and liability of
$2,977 as of December 31, 1997 and $14,065 as of September 30, 1998
(unaudited), had the termination of its election to be treated as an S
Corporation occurred on those respective dates.
No pro forma income tax provision is reflected for the period from July 26,
1995 (inception) through December 31, 1995, two years ended December 31, 1996
and 1997, and for the nine month unaudited periods ended September 30, 1997 and
1998, as the Company would have provided a full valuation allowance against the
deferred tax asset had it been a C Corporation.
10. SUBSEQUENT EVENTS (UNAUDITED)
On August 21, 1998, the Company renewed the line of credit and increased the
line from $50,000 to $75,000, maturing on February 21, 1999, with an interest
rate of 9.75%.
F-86
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
On November 3, 1998, the Company purchased the remaining outstanding stock of
MoCom for $135,500.
The Company's stockholders have entered into an agreement whereby they will
sell their shares in the Company to OneMain.com. The Company's stockholders
will exchange their shares in the Company for cash and shares of common stock
of OneMain.com concurrent with the consummation of the initial public offering
("IPO") of the common stock of OneMain.com. Additionally, the Company's
stockholders will be given additional consideration, contingent upon certain
operational and earnings margin requirements, which shall be equal to one-tenth
of the difference between total revenue for the Company for the 12 months ended
June 30, 1999 and the revenues for the Company for the period from April 1,
1998 through June 30, 1998 multiplied by four. The amount of the additional
consideration will be payable in either cash or stock, at the option of
OneMain.com. Upon consummation of the agreement, OneMain.com will become the
sole stockholder of the Company. Subsequent to the acquisition, the Company
will continue to exist.
The affiliate arrangements as described in Note 6 will be amended upon
consummation of the acquisition discussed above so that all continuing
obligations will be similar to terms and conditions of agreements/arrangements
with unaffiliated third parties.
F-87
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
United States Internet, Inc.
We have audited the accompanying balance sheets of United States Internet,
Inc. as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' deficiency and cash flows for each of the years in
the three year period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United States Internet, Inc.
at December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
Coulter & Justus, P.C.
Knoxville, Tennessee
November 4, 1998
F-88
<PAGE>
UNITED STATES INTERNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------ SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents............. $ 164,207 $ 198,159 $ 360,262
Accounts receivable, net of allowance
for doubtful accounts of $272,604,
$323,940 and $400,873 at December
31, 1996, 1997 and September 30,
1998 (unaudited), respectively....... 201,576 200,410 259,763
Inventories........................... 33,628 19,460 103,636
Prepaid expenses...................... 50,247 67,021 42,890
Other current assets.................. 1,078 -- --
----------- ----------- -----------
Total current assets................... 450,736 485,050 766,551
Property and equipment, net............ 1,213,360 1,425,840 2,124,809
Acquired customer base, net............ 227,473 307,023 660,000
Other assets........................... 10,589 10,424 297,378
----------- ----------- -----------
Total assets........................... $ 1,902,158 $ 2,228,337 $ 3,848,738
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................... $ 530,241 $ 610,322 $ 716,044
Accrued expenses...................... 115,618 132,758 128,200
Unearned revenues..................... 239,365 442,192 617,006
Line of credit........................ 200,000 -- --
Current portion of long-term debt..... -- 42,116 616,898
Current portion of capital lease
obligations.......................... 146,674 364,808 423,645
Current portion of stockholder notes
payable.............................. 32,394 881,708 151,337
----------- ----------- -----------
Total current liabilities........... 1,264,292 2,473,904 2,653,130
Stock appreciation rights liability.... 2,362,218 1,763,357 5,080,312
Long-term debt, net of current
portion............................... -- 327,184 1,426,994
Capital lease obligations, net of
current portion....................... 325,221 370,185 288,496
Stockholder notes payable, net of
current portion....................... 1,258,349 76,441 213,831
Other liabilities...................... -- 16,500 3,040
----------- ----------- -----------
Total liablities.................... 5,210,080 5,027,571 9,665,803
Stockholders' deficit:
Common stock, no par value,
authorized 5,000,000 shares, issued
1,265,523, 1,449,375 and 1,591,849
shares, at December 31, 1996, 1997
and September 30, 1998 (unaudited),
respectively......................... 1,635,368 2,600,351 4,020,734
Accumulated deficit................... (4,943,290) (5,399,585) (9,837,799)
----------- ----------- -----------
Total stockholders' deficit......... (3,307,922) (2,799,234) (5,817,065)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................ $ 1,902,158 $ 2,228,337 $ 3,848,738
=========== =========== ===========
</TABLE>
See accompanying notes.
F-89
<PAGE>
UNITED STATES INTERNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------ -----------------------
1995 1996 1997 1997 1998
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
NET REVENUES: (UNAUDITED)
Access revenues........ $ 508,655 $ 2,140,140 $3,818,961 $2,716,608 $ 4,051,518
Other revenues......... 381,247 366,592 354,842 276,144 177,027
----------- ----------- ---------- ---------- -----------
Total net revenues... 889,902 2,506,732 4,173,803 2,992,752 4,228,545
COST AND EXPENSES:
Cost of access
revenues.............. 365,448 771,143 1,612,430 1,180,189 2,275,709
Cost of other
revenues.............. 147,079 160,517 386,798 254,367 75,520
Operations and
customer support...... 124,774 786,378 886,285 655,774 481,585
Sales and marketing.... 370,303 743,880 548,011 440,522 610,236
General and
administrative........ 741,349 1,090,916 1,106,803 877,851 991,160
Stock compensation
expense (benefit)..... 1,680,840 581,378 (598,861) (449,145) 3,316,955
Amortization........... -- 23,492 132,612 93,534 167,256
Depreciation........... 52,834 199,943 326,131 166,191 395,300
----------- ----------- ---------- ---------- -----------
Total cost and
expenses............ 3,482,627 4,357,647 4,400,209 3,219,283 8,313,721
----------- ----------- ---------- ---------- -----------
Loss from operations.... (2,592,725) (1,850,915) (226,406) (226,531) (4,085,176)
OTHER INCOME (EXPENSE):
Interest income........ 2,339 6,681 5,983 1,240 24,616
Interest expense....... (20,765) (146,148) (268,869) (202,221) (187,527)
Miscellaneous.......... -- 15,239 32,997 18,423 (190,127)
----------- ----------- ---------- ---------- -----------
Net other expense....... (18,426) (124,228) (229,889) (182,558) (353,038)
----------- ----------- ---------- ---------- -----------
Net loss................ $(2,611,151) $(1,975,143) $ (456,295) $ (409,089) $(4,438,214)
=========== =========== ========== ========== ===========
</TABLE>
See accompanying notes.
F-90
<PAGE>
UNITED STATES INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
---------- ----------- -------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995............... $ 183,000 $ (356,996) $ (173,996)
Net loss................................ -- (2,611,151) (2,611,151)
Issuance of common stock................ 915,006 -- 915,006
Stock warrants issued................... 16,399 -- 16,399
---------- ----------- -----------
BALANCE AT DECEMBER 31, 1995............. 1,114,405 (2,968,147) (1,853,742)
Net loss................................ -- (1,975,143) (1,975,143)
Issuance of common stock................ 503,456 -- 503,456
Stock warrants issued................... 17,507 -- 17,507
---------- ----------- -----------
BALANCE AT DECEMBER 31, 1996............. 1,635,368 (4,943,290) (3,307,922)
Net loss................................ -- (456,295) (456,295)
Issuance of common stock................ 951,827 -- 951,827
Stock warrants issued................... 13,156 -- 13,156
---------- ----------- -----------
BALANCE AT DECEMBER 31, 1997............. 2,600,351 (5,399,585) (2,799,234)
Net loss (unaudited).................... -- (4,438,214) (4,438,214)
Issuance of common stock (unaudited).... 1,196,813 -- 1,196,813
Stock warrants issued (unaudited)....... 223,570 -- 223,570
---------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998 (UNAU-
DITED).................................. $4,020,734 $(9,837,799) $(5,817,065)
========== =========== ===========
</TABLE>
See accompanying notes.
F-91
<PAGE>
UNITED STATES INTERNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................ $(2,611,151) $(1,975,143) $ (456,295) $(409,089) $(4,438,214)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 55,922 277,448 549,315 340,890 587,014
Stock appreciation
expense (benefit)..... 1,680,840 581,378 (598,861) (449,145) 3,316,955
(Gain) loss on sale or
disposal of
equipment............. -- (6,971) (26,158) (26,158) 74,253
Changes in operating
assets and
liabilities:
Accounts receivable
(net)............... (98,722) (65,974) 1,166 (166,888) (59,353)
Inventory............ (9,615) (21,019) 14,168 (115,798) (84,176)
Prepaid expenses..... (33,953) (14,694) (16,774) (58,692) 24,131
Other assets......... 6,059 (10,995) 908 8,274 (7,454)
Accounts payable..... 419,536 77,588 80,081 95,523 105,722
Accrued expenses and
other liabilities... 18,151 95,039 33,640 137,612 (18,018)
Unearned revenues.... 101,785 137,580 202,827 132,209 174,816
Other current
liabilities......... -- -- -- 43,643 --
----------- ----------- ----------- --------- -----------
Net cash used in
operating activities... (471,148) (925,763) (215,983) (467,619) (324,324)
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (434,543) (883,193) (184,636) (37,565) (881,428)
Purchase of subsidiary.. -- -- -- -- (140,016)
Proceeds from sale of
property and
equipment.............. -- 463,273 142,697 142,697 --
Purchase of customer
base................... -- (116,992) (43,259) (20,605) (101,685)
----------- ----------- ----------- --------- -----------
Net cash used in
investing activities... (434,543) (536,912) (85,198) 84,527 (1,123,129)
FINANCING ACTIVITIES:
Net proceeds under line
of credit.............. 65,000 135,000 -- -- --
Proceeds from issuance
of long-term debt...... 147,469 1,199,018 66,700 66,700 1,895,168
Principal payments on
long-term debt......... (6,000) (14,986) (33,307) (33,307) (20,297)
Payments on obligations
under capital leases... -- (42,675) (232,033) (89,193) (309,946)
Net payment of
stockholder notes...... -- -- -- -- (197,561)
Net proceeds from
issuance of common
stock.................. 745,006 259,685 533,773 471,179 242,192
----------- ----------- ----------- --------- -----------
Net cash provided by
financing activities... 951,475 1,536,042 335,133 415,379 1,609,556
----------- ----------- ----------- --------- -----------
Net increase in cash and
cash equivalents....... 45,784 73,367 33,952 32,287 162,103
Cash and cash
equivalents at
beginning of year...... 45,056 90,840 164,207 164,207 198,159
----------- ----------- ----------- --------- -----------
Cash and cash
equivalents at end of
year................... $ 90,840 $ 164,207 $ 198,159 $ 196,494 $ 360,262
=========== =========== =========== ========= ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ 17,877 $ 62,731 $ 210,795 $ 202,221 $ 117,000
=========== =========== =========== ========= ===========
Capital lease
obligations incurred... $ 4,877 $ 509,893 $ 405,131 $ 417,818 $ 287,094
=========== =========== =========== ========= ===========
Stock issued for
customer base.......... $ -- $ 140,774 $ -- $ $ --
=========== =========== =========== ========= ===========
Conversion of long-term
debt to stock.......... $ 170,000 $ -- $ 418,054 $ -- $ 405,430
=========== =========== =========== ========= ===========
Stock purchase warrants
issued................. $ 13,311 $ 88,179 $ 13,156 $ -- $ --
=========== =========== =========== ========= ===========
Stock issued for accrued
interest............... $ -- $ 32,325 $ -- $ -- $ --
=========== =========== =========== ========= ===========
Debt issued for customer
base................... $ -- $ -- $ 169,300 $ 169,300 $ --
=========== =========== =========== ========= ===========
</TABLE>
See accompanying notes.
F-92
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
United States Internet, Inc. (the "Company") was incorporated in 1994 and has
points of presence in Tennessee, Virginia, Kentucky and Alabama. The Company's
principal business is to provide access to the Internet, design and host web
pages on the Internet and resell Internet hardware and software.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve profitability or
positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain amounts reported in the financial statements and
accompanying notes. Actual results may differ from these estimates and such
differences could be material.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over estimated useful
lives ranging between three and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Inventories
Inventories consist of purchased goods for resale and are stated at the lower
of cost or market using the first-in, first-out ("FIFO") method.
Impairment of Long-Lived Assets
In the event fact and circumstances indicate the cost on any long-lived
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required,
F-93
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the estimated future undiscounted cash flows associated with the assets would
be compared to the carrying amount of the assets to determine if a write-down
to fair value may be required.
Acquired Customer Base
The Company capitalizes the purchase price paid to acquire customer bases
from other Internet service providers ("ISPs"). Amortization is provided using
the straight-line method over three years commencing when the customer base is
received. Accumulated amortization was $30,293 and $163,637 at December 31,
1996 and 1997, respectively.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. SFAS 123 allows companies to account for stock-based compensation
under either the new provisions of SFAS 123 or the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS 123 had been adopted. The
Company has chosen to continue accounting for its stock-based compensation in
accordance with the provisions of APB 25.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
Cost of Revenues
Cost of access revenues primarily consists of telecommunication expenses
inherent in the network infrastructure. Cost of access revenues also includes
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per user charge, other license fees paid to third-
party software vendors, product costs and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1995, 1996 and 1997, the Company expensed $60,577,
$62,366 and $17,582, respectively, as advertising costs.
F-94
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Computer Software Development Costs
In March 1998, AcSEC issued Statement of Position 98-1 ("SOP 98-1"),
Accounting for the Costs of Computer Software Developed For or Obtained for
Internal Use. SOP 98-1 is effective for the Company beginning after January 1,
1998. SOP 98-1 will require the capitalization of certain costs incurred after
the date of adoption in connection with developing or obtaining software for
internal-use. The Company currently expenses such costs as incurred. The impact
of adopting SOP 98-1 on the Company's financial statements is not expected to
be material.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and accounts
receivable.
At December 31, 1997, approximately $261,000 of cash is deposited in one
financial institution. Credit risk is subject to the financial security of this
institution.
Accounts receivable are unsecured and due under stated terms. Credit risk
with respect to accounts receivable is subject to the financial security of
each customer. The Company does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments classified as current
assets or liabilities, including cash and cash equivalents, accounts receivable
and accounts payable, approximated carrying value, principally because of the
short maturity of these items.
The carrying amounts of the long-term debt payable approximate fair value due
to the interest rates on these agreements approximating the Company's
incremental borrowing rates, and the fair values of capitalized lease
obligations approximate carrying value based on their effective rates compared
to current market rates.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
F-95
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired primarily from one
source. In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Income Taxes
The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are recorded
based on the difference between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes, referred to as
"temporary differences." Temporary differences result from the use of different
accounting methods for financial statement and income tax reporting purposes.
Unaudited Financial Statements
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Computer equipment...................................... $1,329,656 $1,838,870
Furniture, fixtures, and office equipment............... 62,685 87,591
Leasehold improvements.................................. 10,235 11,182
---------- ----------
1,402,576 1,937,643
Less accumulated depreciation and amortization.......... 189,216 511,803
---------- ----------
Property and equipment, net............................. $1,213,360 $1,425,840
========== ==========
</TABLE>
F-96
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
4. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
National Bank of Blacksburg note payable due
October 31, 2002, bearing interest at prime
rate (8.5% at December 31, 1997), with
monthly payments of interest only through
October 1, 1998, and then in monthly
principal and interest payments of $4,154.... $169,300
Line of credit................................ 200,000
--------
369,300
Less current portion.......................... 42,116
--------
Long-term portion............................. $327,184
========
</TABLE>
The National Bank of Blacksburg note is collateralized by accounts receivable
from customers serviced by the related financed internet equipment located in
Blacksburg, Virginia.
In March 1998, the Company entered into a working capital and equipment
purchase facility of up to $5,878,000 to be provided in scheduled draws through
December 1999. The note is secured by equipment, inventories and accounts
receivable. The note is due February 28, 2001, and bears interest at the prime
rate and requires monthly payments of principal and interest, with monthly
payments of interest only through February 28, 1999. In connection with this
note, the Company issued a warrant to purchase 28,299 shares of common stock at
an exercise price of $0.01 per share. The warrants are immediately exercisable
and expire on March 31, 2001. Under the conditions of this agreement, any
unexercised warrants at the date of expiration will be automatically converted
to common stock based upon the difference between the fair market value of the
common stock, at such date, and the warrant exercise price, divided by the fair
value of the common stock, at such date. Of the approximately $3,145,000
borrowed under this facility during 1998, approximately $200,000 has been
allocated to the value of the warrants, thereby providing a discount on the
note.
In May 1998, the Company signed a note payable to a bank for $200,000 due May
31, 2001, bearing interest at 8.5%, with monthly principal and interest
payments of $6,314, resulting from the maturity of the $200,000 line of credit
facility. The note is collateralized by various operating equipment and
requires the Company to maintain two financial statement covenants; the debt
service coverage covenant required at December 31, 1998, and the minimum
tangible net worth covenant required at December 31, 1999.
Maturities of long-term debt as of December 31, 1997, are as follows:
<TABLE>
<S> <C>
1999................................ $ 42,116
2000................................ 101,702
2001................................ 110,691
2002................................ 75,306
2003................................ 39,485
--------
$369,300
========
</TABLE>
F-97
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
5. STOCKHOLDER NOTES PAYABLE
Stockholder notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
---------- --------
<S> <C> <C>
Unsecured notes payable................................. $ 250,000 $316,700
Convertible notes due in May 1998 bearing interest at
6%, payable annually. The notes are convertible to
shares of the Company's common stock at the option of
the holder on or before the scheduled maturity date at
a rate of one share per $7.50 of note payable.......... 894,740 527,753
Secured notes payable................................... 146,003 113,696
---------- --------
1,290,743 958,149
Less current portion.................................... 32,394 881,708
---------- --------
Long-term portion....................................... $1,258,349 $ 76,441
========== ========
</TABLE>
Maturities of stockholder note payables as of December 31, 1997, are as
follows:
<TABLE>
<S> <C>
1999................................ $881,708
2000................................ 38,331
2001................................ 38,110
--------
$958,149
========
</TABLE>
During 1998 the Company offered an inducement to the convertible noteholders
to convert their notes to common stock at $5.50 per share, and issued an
additional $35,000 in convertible stockholder notes payable. Approximately
$395,000 of convertible notes were converted into common stock at $5.50 per
share, resulting in issuance of 68,184 shares of common stock. Approximately
$30,000 of these notes were converted at $7.50 per share, the original
conversion rate for the notes, resulting in an issuance of 4,058 shares of
common stock and the remaining notes, approximately $130,000, were repaid in
cash. In connection with these notes, accrued interest in the amount of
approximately $21,900 was converted into common stock at $5.50 per share,
resulting in an issuance of 3,982 shares of common stock. Warrants to purchase
common stock, granted in connection with the note issuances, were exercised at
an exercise price of $0.50 per share, resulting in an issuance of 3,989 shares
of common stock. In connection with these notes converted to common stock, the
Company granted conversions at a price per share of Company stock less than
fair value at the time of such conversion, recognizing approximately $110,000
of debt conversion expense during 1998. The Company recognized interest expense
of $22,270 and $42,197 during the years ended December 31, 1996 and 1997,
respectively, in connection with the amortization of a debt discount on the
stockholder notes.
F-98
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS:
Net operating loss carryforwards................... $ 878,458 $1,230,238
Amortization of customer lists..................... 11,499 52,049
Bad debt reserves.................................. 103,480 122,968
Stock appreciation rights.......................... 896,698 669,370
Valuation allowance................................ (1,861,659) (2,011,632)
---------- ----------
Net deferred tax assets.............................. 28,476 62,993
LIABILITIES:
Depreciation....................................... 28,476 62,993
---------- ----------
Net deferred tax assets............................ $ -- $ --
========== ==========
</TABLE>
The Company has net operating loss carryforwards aggregating approximately
$3,241,000. The carryforwards expire in various years through 2016.
7. STOCKHOLDERS' DEFICIENCY
Stock Options
The Company adopted a nonqualified and qualified stock option plan (the
"Plan"), effective June 1, 1995, for granting of options to key employees and
for granting of options to nonemployee directors. The aggregate number of
shares reserve for issuance under this plan is 600,000 shares. The option
price, number of shares and grant date under these plans are determined at the
discretion of the Stock Option Committee ("the Committee") of the Company's
board of directors.
The Committee may also include stock appreciation rights in any option
granted under the Plan. Such rights shall entitle the holder, upon exercising
the right, to receive in cash or property up to 100% of the excess of the fair
market value, on the date of such exercise, over the option price of the stock.
Exercise of the rights precludes the holder from exercising the options. The
holder is not required to make a payment in order to exercise the rights.
F-99
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
7. STOCKHOLDERS' DEFICIENCY (CONTINUED)
Stock Options (continued)
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED-
RANGE OF NUMBER AVERAGE REMAINING AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
--------------- ----------- ------------------- --------------
<S> <C> <C> <C>
$0.00-$2.20 369,585 5.46 $1.20
$3.32-$5.72 65,500 7.46 $3.67
$6.00-$7.50 21,000 7.82 $6.60
-------
456,085
=======
</TABLE>
Had compensation expense related to the stock option plan been determined
based on fair value at the grant date for options granted during the years
ended December 31, 1995, 1996 and 1997, consistent with the provisions of SFAS
123, rather than as stock appreciation rights in accordance with APB 25, the
Company's net loss would have been $1,918,766, $1,408,760 and $1,248,461,
respectively.
The effect of applying SFAS 123 pro forma net income as stated above is not
necessarily representative of the effects on reported net income for future
periods due to, among other things, the vesting period of the stock options and
the fair value of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing fair value model with the following weighted-
average assumptions used for grants in 1997: dividend yield of 0%, risk-free
interest rate of 6.62%, no weighted average volatility factor and expected life
of the option term of 7 years. The weighted average fair values of the options
granted in 1997 with a stock price equal to the exercise price and with a stock
price greater than the exercise price are $3.99 and $8.99, respectively.
As of December 31, 1997, the Company had reserved 143,915 shares of common
stock for future issuances under the Plan.
A summary of the Company's option activity and related information follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at January 1, 1996..................... 371,585 $ 1.21
Granted.......................................... 25,000 $ 6.48
Exercised........................................ (1,000) $(6.00)
-------
Outstanding at December 31, 1996................... 395,585 $ 1.53
Granted.......................................... 68,500 $ 4.41
Stock appreciation rights exercised.............. (2,340) $(3.49)
Canceled......................................... (5,460) $(5.72)
Exercised........................................ (200) $(5.47)
-------
Outstanding at December 31, 1997................... 456,085 $ 1.90
=======
</TABLE>
F-100
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
7. SHAREHOLDERS' DEFICIENCY (CONTINUED)
Stock Options (continued)
Exercise prices for options outstanding as of December 31, 1997, range from
$0 to $7.50 per share, all of which approximate the Company's estimate of fair
value of common stock on the grant date. Options outstanding at December 31,
1997, had a weighted average remaining contractual life of 5.27 years. There
were 395,585 and 438,085 options exercisable at December 31, 1996 and 1997,
respectively.
Stock Warrants
As discussed in notes 4, Long-Term Debt, and 5, Stockholder Notes Payable,
the Company has issued warrants to purchase common stock of the Company in
connection with various debt agreements. At December 31, 1997, the Company had
outstanding warrants as follows:
<TABLE>
<CAPTION>
PER
SHARE EXPIRATION
WARRANTS EXERCISE OF EXERCISE
OUTSTANDING PRICE TERM
----------- -------- ------------
<S> <C> <C>
5,053 $0.50 2001
8,074 $6.00 2001 to 2002
10,667 $0.01 2004 to 2007
</TABLE>
8. LEASE COMMITMENTS
The Company leases real estate from a stockholder and is responsible for
repairs, taxes and other expenses. The original lease term was for one year,
and has been amended to extend through March 31, 1998. As of December 31, 1997,
monthly rental for the leased space is $4,000. The Company also leases various
office and computer equipment under non-cancelable operating lease agreements
which generally provide for renewal terms. Rent expense for the years ended
December 31, 1995, 1996 and 1997, was $32,691, $63,780 and $99,118,
respectively, including rent to the stockholder of $19,200, $49,072 and
$49,072, respectively.
The Company leases certain computer equipment under agreements which have
been accounted for as capital leases. The related computer equipment had a cost
of $1,019,461 and accumulated amortization of $186,853 at December 31, 1997.
In 1997, the Company entered into a sale-leaseback transaction for $86,067 of
computer equipment. Under terms of the agreement, the Company will make
scheduled payments of principal and interest through December 1999, at which
time the Company intends to purchase the equipment for 5% of the original
purchase price. As of December 31, 1997, a deferred loss of $6,258 is included
in other assets related to this transaction. The deferred loss is being
amortized using the straight-line method over the life of the lease.
F-101
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
8. LEASE COMMITMENTS (CONTINUED)
Minimum future lease payments under operating leases together with the
present value of the net minimum lease payments under capital leases including
amounts due under the sale-leaseback transaction, as of December 31, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
1998.................................................. $455,232 $36,260
1999.................................................. 350,969 3,900
2000.................................................. 60,639 3,575
-------- -------
Total minimum lease payments.......................... 866,840 $43,735
=======
Less amounts representing interest.................... 131,847
--------
Present value of minimum lease payments (including
$364,808 classified as current)...................... $734,993
========
</TABLE>
In connection with the Company's operations, United States Internet, Inc. has
certain line usage commitments with numerous communications companies
aggregating $1,592,008, $886,383 and $219,437 in 1999, 2000 and 2001,
respectively.
9. SUBSEQUENT EVENTS
During 1998, the Company has purchased the listings of customers of three
internet providers for $92,841. The purchase price was paid in cash and Company
common stock.
The Company entered into agreements to merge with CoCoCo.Net, Inc., on
September 30, 1998, South Carolina Supernet, Inc., on October 28, 1998, and
Magibox, Inc., on October 31, 1998. United States Internet, Inc. ("United
States Internet") will be the surviving company in the mergers.
The Company will provide 47,664 shares of United States Internet common stock
and $146,016 in consideration for the merger with CoCoCo.Net, Inc.; 119,217
shares of United States Internet common stock and $20,000 in consideration for
the merger with South Carolina Supernet, Inc.; and 173,448 shares of United
States Internet common stock in consideration for the merger with Magibox, Inc.
The Company's shareholders have entered into an agreement whereby they will
exchange 100% of their outstanding shares in the Company for cash and shares in
OneMain.com, Inc. Upon consummation of the agreement, the Company will become a
wholly owned subsidiary of OneMain.com, Inc.
F-102
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
The Board of Directors and Members
Internet Partners of America, LC
We have audited the accompanying balance sheets of Internet Partners of
America, LC, as of December 31, 1996 and 1997, and the related statements of
operations, members' equity (deficit), and cash flows for the period from May
12, 1995 (inception) to December 31, 1995 and for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Internet Partners of America,
LC at December 31, 1996 and 1997, and the results of its operations and its
cash flows for the period from May 12, 1995 (inception) to December 31, 1995
and for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
October 22, 1998
F-103
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------- SEPTEMBER 30
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for
doubtful accounts of $186,079, $183,120
and $132,433 at December 31, 1996 and
1997 and September 30, 1998,
respectively)........................... $ 74,167 $ 35,132 $ 88,381
---------- ---------- -----------
Total current assets...................... 74,167 35,132 88,381
Property and equipment, net............... 1,249,778 1,769,892 2,174,126
Intangible assets, net.................... 176,633 554,670 1,370,304
Deposits.................................. -- 339 589
---------- ---------- -----------
Total assets.............................. $1,500,578 $2,360,033 $ 3,633,400
========== ========== ===========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit........................... $ -- $ 221,000 $ 375,000
Cash overdraft........................... 35,191 162,587 213,819
Accounts payable......................... 68,329 132,604 231,220
Accrued expenses......................... 51,604 50,424 85,242
Unearned revenues........................ -- 25,475 33,732
Current maturities of long-term debt..... 518,227 1,625,351 475,108
Due to seller............................ -- 94,096 629,481
Due to members........................... -- 30,000 27,500
---------- ---------- -----------
Total current liabilities................. 673,351 2,341,537 2,071,102
Long-term debt............................ 254,007 337,307 2,630,188
Members' equity (deficit)................. 573,220 (318,811) (1,067,890)
---------- ---------- -----------
Total liabilities and members' equity
(deficit)................................ $1,500,578 $2,360,033 $ 3,633,400
========== ========== ===========
</TABLE>
See accompanying notes.
F-104
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 12, 1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31 SEPTEMBER 30
DECEMBER 31 ------------------------ ----------------------
1995 1996 1997 1997 1998
-------------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 28,155 $ 930,989 $ 1,856,801 $1,231,776 $3,005,105
--------- ----------- ----------- ---------- ----------
Total revenues....... 28,155 930,989 1,856,801 1,231,776 3,005,105
COST AND EXPENSES:
Cost of revenues....... 61,850 685,508 1,087,980 721,820 1,803,634
Operations and
customer support...... 30,575 696,273 773,336 561,470 853,956
Sales and marketing.... 22,235 172,273 173,015 120,934 132,339
General and
administrative........ 39,229 364,566 271,416 95,578 347,519
Amortization........... -- 27,614 77,986 52,797 92,335
Depreciation........... 24,531 147,151 452,170 384,196 345,407
--------- ----------- ----------- ---------- ----------
Total cost and
expenses............ 178,420 2,093,385 2,835,903 1,936,795 3,575,190
--------- ----------- ----------- ---------- ----------
Loss from operations.... (150,265) (1,162,396) (979,102) (705,019) (570,085)
OTHER INCOME AND
(EXPENSE):
Other income........... -- 18,629 24,750 24,750 --
Interest expense....... -- (47,418) (218,936) (153,863) (178,994)
--------- ----------- ----------- ---------- ----------
Net loss................ $(150,265) $(1,191,185) $(1,173,288) $ (834,132) $ (749,079)
========= =========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-105
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
MEMBERS ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE AT MAY 12, 1995 (INCEPTION)....... $ -- $ -- $ --
Capital contributions.................... 300,000 -- 300,000
Net loss................................. -- (150,265) (150,265)
---------- ----------- -----------
BALANCE AT DECEMBER 31, 1995.............. 300,000 (150,265) 149,735
Conversion of debt to equity............. 1,614,670 -- 1,614,670
Net loss................................. -- (1,191,185) (1,191,185)
---------- ----------- -----------
BALANCE AT DECEMBER 31, 1996.............. 1,914,670 (1,341,450) 573,220
Capital contributions.................... 281,257 -- 281,257
Net loss................................. -- (1,173,288) (1,173,288)
---------- ----------- -----------
BALANCE AT DECEMBER 31, 1997.............. 2,195,927 (2,514,738) (318,811)
Net loss (unaudited)..................... -- (749,079) (749,079)
---------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED).............................. $2,195,927 $(3,263,817) $(1,067,890)
========== =========== ===========
</TABLE>
See accompanying notes.
F-106
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 12, 1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31 SEPTEMBER 30
DECEMBER 31 ------------------------ ------------------------
1995 1996 1997 1997 1998
-------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................ $(150,265) $(1,191,185) $(1,173,288) $ (834,132) $ (749,079)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 24,531 174,765 530,156 436,993 437,742
Provision for doubtful
accounts.............. 7,347 180,061 79,250 53,550 --
Changes in operating
assets and
liabilities:
Accounts receivable.. (8,477) (253,098) (40,215) (14,515) (53,249)
Other current
assets.............. -- -- (339) -- (250)
Cash overdraft....... -- 35,191 127,396 256,931 51,232
Accounts payable..... 6,316 62,013 64,275 38,039 98,616
Accrued expenses..... 23,707 27,897 (1,180) (35,380) 34,818
Unearned revenues.... -- -- 25,475 45,567 8,257
--------- ----------- ----------- ----------- -----------
Net cash used in
operating activities... (96,841) (964,356) (388,470) (52,947) (171,913)
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (297,348) (1,124,112) (878,188) (835,044) (749,641)
Purchase of customer
lists.................. (1,348) (202,899) (456,023) (248,126) (77,317)
--------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (298,696) (1,327,011) (1,334,211) (1,083,170) (826,958)
FINANCING ACTIVITIES:
Net proceeds under line
of credit.............. -- -- 221,000 200,000 154,000
Proceeds from issuance
of long-term debt...... -- 785,000 1,468,150 1,313,824 2,756,456
Principal payments of
long-term debt......... -- (12,766) (277,726) (377,707) (1,909,085)
Net borrowings from
members................ 100,000 -- 30,000 -- (2,500)
Proceeds from members'
capital contributions.. 300,000 1,514,670 281,257 -- --
--------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... 400,000 2,286,904 1,722,681 1,136,117 998,871
--------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash................ 4,463 (4,463) -- -- --
Cash at beginning of
period................. -- 4,463 -- -- --
--------- ----------- ----------- ----------- -----------
Cash at end of period... $ 4,463 $ -- $ -- $ -- $ --
========= =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Debt incurred to
purchase assets........ $ -- $ -- $ 94,096 $ -- $ 830,652
========= =========== =========== =========== ===========
Cash paid for interest.. $ -- $ 43,138 $ 213,792 $ 109,536 $ 74,732
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-107
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Internet Partners of America, LC (the "Company") is a regional provider of
Internet access. The Company was formed in Arkansas on May 12, 1995 and began
marketing services in June 1995. The Company's targeted markets include
Arkansas, Missouri and Oklahoma.
The Company will terminate on December 31, 2025, unless dissolved earlier in
accordance with the Company agreement.
The Company expects to continue focusing on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services, and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base will
continue or that the Company will be able to sustain profitability or positive
cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives ranging between three
to seven years. Leasehold improvements are amortized over the lesser of the
related lease term or the useful life.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Company made no adjustments to the carrying values of
the assets during the period from May 12, 1995 (inception) to December 31,
1995, and the years ended December 31, 1996 and 1997.
F-108
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets
The Company capitalizes specific costs incurred for the purchase of customer
bases from other Internet service providers ("ISPs"). The customer acquisition
costs include the actual fee paid to the selling ISP as well as legal expenses
specifically related to the transactions. Amortization is provided using the
straight-line method over five years commencing when the customer base is
received.
Revenue Recognition
The Company recognizes Internet access revenues when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenues on a straight-
line basis as the services are provided.
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also includes
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per- user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from May 12, 1995 (inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997, the Company expensed approximately $14,000,
$63,000, and $89,000, respectively, as advertising costs.
Income Taxes
The Company is organized as a limited liability company under the laws of the
state of Arkansas. The Company is taxed under the partnership provisions of the
Internal Revenue Code (the "Code"). Under the partnership provisions of the
Code, the members of the limited liability company include the Company's income
on their personal income tax returns. Accordingly, the Company is not subject
to federal and state corporate income taxes.
The unaudited pro forma income tax information included in Note 9 is
presented in accordance with Statement of Financial Accounting Financial
Standards No. 109, Accounting for Income Taxes, as if the Company had been
subject to federal and certain state income taxes for the period from May 12,
1995 (inception) to December 31, 1995 and for each of the two years in the
period ended December 31, 1997.
F-109
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral.
The Company maintains reserves for credit losses, and such losses have been
within management's expectations. The concentration of credit risk is mitigated
by the large customer base. The carrying amount of the receivables approximates
their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired from three sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income ("SFAS No. 130"), which is required to be
adopted for fiscal years beginning after December 15, 997. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statement of Stockholders' Equity. The
Company adopted SFAS No. 130 on January 1, 1998. The adoption of SFAS No. 130
did not have any effect on the Company's financial statements as the Company
does not have any elements of comprehensive income.
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS No. 131"), which is required to
be adopted for the
F-110
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year ended December 31, 1998. SFAS No. 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The impact of adopting SFAS No. 131 on the financial
statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Land and building....................................... $ 327,791 $ 328,434
Computer equipment...................................... 765,185 1,489,698
Furniture, fixtures, and office equipment............... 328,484 437,836
---------- ----------
1,421,460 2,255,968
Less accumulated depreciation........................... (171,682) (486,076)
---------- ----------
$1,249,778 $1,769,892
========== ==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
-------- ---------
<S> <C> <C>
Intangible Assets.......................................... $204,247 $ 660,270
Less accumulated amortization.............................. (27,614) (105,600)
-------- ---------
$176,633 $ 554,670
======== =========
</TABLE>
5. LINE OF CREDIT
In 1997, the Company had a line of credit with a bank allowing for borrowings
of up to $350,000. Borrowings against this line bore interest at 10%. This line
was secured by and personally guaranteed by the members. Borrowings of $221,000
were outstanding against the line at December 31, 1997. An additional line of
credit was obtained in 1998 for $150,000.
F-111
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
Note payable to a bank in monthly installments of
$3,500, including interest at 8.25%, until March,
1999, when all outstanding principal and interest are
due, secured by a mortgage........................... $ 272,234 $ 252,542
Note payable to a firm in monthly installments of
$4,686, including interest at 9%, until July, 1998,
when all outstanding principal and interest are due,
secured by equipment................................. -- 49,495
Note payable to an individual in monthly installments
of $875, including interest at 9%, until October,
1998, when all outstanding principal and interest are
due, secured by equipment............................ -- 9,200
Note payable to a bank due in May, 1997, with interest
at prime, as defined, plus 1% payable quarterly until
May, 1997............................................ 350,000 348,846
Note payable to a bank in monthly installments of
$2,498, including interest at 9.75%, until April,
1999, when all outstanding principal and interest are
due, secured by a mortgage........................... 150,000 150,000
Note payable to a bank due on demand, or if no demand
is made, in monthly installments of $8,877, including
interest at 10%, until May, 1998, when all
outstanding principal and interest are due, secured
by equipment......................................... -- 327,961
Note payable to a bank in July, 1998, with interest at
9.25% payable monthly until July, 1998, secured by
equipment............................................ -- 250,000
Unsecured note payable to a bank due on demand, or if
no demand is made, in monthly installments of $2,588,
including interest at 9.5%, until December, 1999,
when all outstanding principal and interest are due.. -- 204,685
Note payable to a bank on demand, or if no demand is
made, in monthly installments of $4,977, including
interest at 9%, until May, 1998, when all outstanding
principal and interest are due, secured by
equipment............................................ -- 180,306
Note payable to a bank in monthly installments of
$5,000, including interest at 9.25%, until February,
2000, when all outstanding principal and interest are
due.................................................. -- 121,163
Note payable to a bank in monthly installments of
$4,611, including interest at 9.5%, until April,
1999, when all outstanding principal and interest are
due, secured by equipment............................ -- 68,460
--------- -----------
Total long-term debt.................................. 772,234 1,962,658
Less: current maturities.............................. (518,227) (1,625,351)
--------- -----------
Long-term debt, net of current maturities............. $ 254,007 $ 337,307
========= ===========
</TABLE>
F-112
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
The prime rate, as defined, was 8.5% at December 31, 1997. The Company
incurred interest related to the long-term debt of $47,418 and $218,936, for
the years ended December 31, 1996 and 1997, respectively.
Principal payments on long-term debt are as follows:
<TABLE>
<S> <C>
1999.............................. $1,625,351
2000.............................. 337,307
----------
Total long-term debt.............. $1,962,658
==========
</TABLE>
The notes generally contain restrictive covenants addressing certain
activities of the Company and its members. The Company and its members were in
compliance with the restrictive covenants at December 31, 1997.
7. LEASE COMMITMENTS
The Company leases storage space and various dedicated phone lines under non-
cancelable operating lease agreements. The leases generally provide for renewal
terms for one to three years. Rent expense for the period from May 12, 1995
(inception) to December 31, 1995 and for the years ended December 31, 1996 and
1997 was $4,670, $32,133 and $49,350, respectively.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997
-----------
<S> <C>
1998............................. $ 888,991
1999............................. 948,848
2000............................. 930,811
2001............................. 867,698
2002............................. 680,028
----------
Total minimum lease payments..... $4,316,376
==========
</TABLE>
8. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com (as more fully described in Note 10),
the Company's status as an LLC under the Code will automatically terminate and
normal federal and state corporate income tax rates will apply. Based upon the
cumulative temporary differences, the Company would have recognized a deferred
federal and state income tax expense (benefit) and liability (or asset, as
appropriate) of $-0- as of December 31, 1997 and $-0- as of September 30, 1998
(unaudited), had the termination of its election to be treated as an LLC
occurred on those respective dates.
F-113
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES (CONTINUED)
No pro forma income tax provision (benefit) is reflected for the period from
May 12, 1995 (inception) to December 31, 1995 and for each of the two years in
the period ended December 31, 1997 and for the nine-month periods ended
September 30, 1997 and 1998 as the Company would have provided a full valuation
allowance against the deferred tax asset had it been a C Corporation.
9. CONTINGENCIES
The Company is involved in various litigation matters on an ongoing basis as
a result of its day-to-day operations. However, management does not believe
that any of these matters will have a material adverse effect on the Company's
financial condition.
10. SUBSEQUENT EVENTS (UNAUDITED)
The Company's members have entered into an agreement whereby they will sell
their interests in the Company to OneMain.com. The Company's members will
exchange their interests in the Company for cash and shares of common stock of
OneMain.com concurrent with the consummation of the initial public offering
("IPO") of the common stock of OneMain.com. Additionally, the Company's members
will be given additional consideration, contingent upon certain operational and
earnings margin requirements, which shall be equal to one-fifth of the
difference between total revenue for the Company for the 12 months ended June
30, 1999 and the revenues for the Company for the period from April 1, 1998
through June 30, 1998 multiplied by four. The amount of the additional
consideration will be payable in either cash or stock, at the option of
OneMain.com. Upon consummation of the acquisition, OneMain.com will become the
sole member of the Company. Subsequent to the acquisition, the Company will
continue to exist.
On April 6, 1998 the Company completed the acquisition of substantially all
of the assets of On The Net of Boliver, Missouri for approximately $880,000.
Only a portion of this amount has been paid to the seller and the remaining
amount expected to be paid is included in Due to Seller in the balance sheet.
This purchase price is to be finalized by January 6, 1999 based upon the number
of On The Net customers that switch their service to the Company. The
acquisition has been accounted for under the purchase method and, accordingly,
the operating results of On The Net have been included in the operating results
since the date of acquisition. On The Net is a provider of dial-up Internet
access services. The acquisition resulted in $770,000 being allocated to
purchased customer lists. The cost of the customer list is being amortized over
a 5 year period.
F-114
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members of
Netrox, LLC
We have audited the accompanying balance sheets of Netrox, LLC (a limited
liability company) as of December 31, 1995, 1996 and 1997 and the related
statements of operations, changes in members' deficit and cash flows for the
years then ended. 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 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 audit provides 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 Netrox, LLC as of December 31,
1995, 1996, and 1997, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring operating losses, has
a net capital deficiency and is dependent on advances on lines of credit to
continually fund its operational losses. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters are also described in Note B. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
Lopez Levi & Associates, P.A.
Miami, Florida
October 28, 1998
(except for the last two paragraphs
of Note I, as to which the date is
November 3, 1998)
F-115
<PAGE>
NETROX, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
--------- --------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash........................... $ 875 $ 720 $ 869 $ 493
Accounts receivable............ 10,122 -- -- --
--------- --------- --------- -----------
Total current assets......... 10,997 720 869 493
Property and equipment.......... 126,312 286,163 371,966 314,900
Prepaid expenses and other
assets......................... 3,652 3,579 5,728 33,250
--------- --------- --------- -----------
$ 140,961 $ 290,462 $ 378,563 $ 348,643
========= ========= ========= ===========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Due to members................. $ 310,000 $ 572,757 $ 846,757 $ 1,198,618
Accounts payable............... 35,891 61,433 201,258 87,568
Accrued interest payable....... 4,373 13,337 17,072 21,164
Accrued expenses............... 13,510 26,300 48,113 57,272
Unearned revenues.............. 5,879 28,995 27,021 34,642
Current portion of capital
lease obligation.............. -- -- 6,224 10,119
--------- --------- --------- -----------
Total current liabilities.... 369,653 702,822 1,146,445 1,409,383
Capital lease obligations, net
of current portion............ -- -- -- 10,939
--------- --------- --------- -----------
Total liabilities............ 369,653 702,822 1,146,445 1,420,322
Members' deficit:
Managing members' accumulated
deficit....................... (76,231) (137,453) (255,960) (357,225)
Nonmanaging members'
accumulated deficit........... (152,461) (274,907) (511,922) (714,454)
--------- --------- --------- -----------
(228,692) (412,360) (767,882) (1,071,679)
--------- --------- --------- -----------
$ 140,961 $ 290,462 $ 378,563 $ 348,643
========= ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
NETROX, LLC
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
------------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Access revenues........ $ 56,919 $ 554,145 $ 976,912 $681,344 $ 888,361
Other revenues......... 17,963 69,648 220,065 187,582 174,240
--------- --------- --------- -------- ---------
74,882 623,793 1,196,977 868,926 1,062,601
COST AND EXPENSES:
Cost of access
revenues.............. 60,751 212,912 371,743 204,143 306,439
Cost of other
revenues.............. 10,592 13,536 49,327 18,890 76,952
Operations and customer
support............... 81,423 176,436 274,089 190,567 240,492
Sales and marketing.... 66,768 174,143 451,138 274,764 361,547
General and
administrative........ 73,057 186,207 347,021 237,048 316,675
--------- --------- --------- -------- ---------
292,591 763,234 1,493,318 925,412 1,302,105
--------- --------- --------- -------- ---------
Loss from operations.... (217,709) (139,441) (296,341) (56,486) (239,504)
Interest expense........ 11,083 44,227 59,181 32,352 64,293
--------- --------- --------- -------- ---------
Net loss................ $(228,792) $(183,668) $(355,522) $(88,838) $(303,797)
========= ========= ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
NETROX, LLC
STATEMENT OF CHANGES IN MEMBERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
NON-
MANAGING MANAGING
MEMBER MEMBERS TOTAL
--------- --------- -----------
<S> <C> <C> <C>
Original Contribution February 15, 1995..... $ 33 $ 67 $ 100
Net Loss for the period February 15, 1995
to December 31, 1995...................... (76,264) (152,528) (228,792)
--------- --------- -----------
Members' deficit, December 31, 1995......... (76,231) (152,461) (228,692)
Net Loss for the year ended December 31,
1996...................................... (61,222) (122,446) (183,668)
--------- --------- -----------
Members' deficit, December 31, 1996......... (137,453) (274,907) (412,360)
Net Loss for the year ended December 31,
1997...................................... (118,507) (237,015) (355,522)
--------- --------- -----------
Members' deficit, December 31, 1997......... (255,960) (511,922) (767,882)
Net Loss for the nine-month period ended
September 30, 1998 (Unaudited)............ (101,265) (202,532) (303,797)
--------- --------- -----------
Members' deficit, September 30, 1998
(Unaudited)................................ $(357,225) $(714,454) $(1,071,679)
========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE>
NETROX, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(228,792) $(183,668) $(355,522) $ (88,838) $(303,797)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation........... 10,622 52,218 89,272 64,067 91,163
Loss on sale of
property and
equipment............. -- -- 7,744 5,225 33,676
Increase/Decrease in
assets and
liabilities:
Accounts receivable.. (10,122) 10,122 -- -- --
Prepaid expenses and
other assets........ (3,652) 73 (2,149) -- (27,522)
Accounts payable..... 35,891 25,542 139,825 39,129 (113,690)
Accrued interest
payable............. 4,373 8,964 3,735 835 4,092
Accrued expenses..... 13,510 12,790 21,813 15,520 9,159
Unearned revenues.... 5,879 23,116 (1,974) (2,674) 7,621
--------- --------- --------- --------- ---------
Total adjustments.. 56,501 132,825 258,266 122,101 4,499
--------- --------- --------- --------- ---------
Net cash used in
operating activities... (172,291) (50,843) (97,256) 33,264 (299,298)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment......... (136,934) (212,069) (216,025) (179,483) (42,670)
Proceeds from disposal
of property and
equipment............. -- -- 39,430 27,000 --
--------- --------- --------- --------- ---------
Net cash used by
investing activities... (136,934) (212,069) (176,595) (152,483) (42,670)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowing from
Members............... 310,000 262,757 274,000 119,000 351,861
Capital lease
obligations........... -- -- -- -- (10,269)
Capital
contributions......... 100 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
financing activities... 310,100 262,757 274,000 119,000 341,592
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash................ 875 (155) 149 (219) (376)
Cash, beginning of
year................... -- 875 720 720 869
--------- --------- --------- --------- ---------
Cash, end of year....... $ 875 $ 720 $ 869 $ 501 $ 493
========= ========= ========= ========= =========
SUPPLEMENTAL
DISCLOSURES:
Interest Paid.......... $ 6,710 $ 35,263 $ 55,446 $ 31,517 $ 68,385
========= ========= ========= ========= =========
Equipment purchased
under capital lease
agreement............. $ -- $ -- $ 6,224 $ -- $ 25,103
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE>
NETROX, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Bridgenet L.C. (the "Company") was organized as a limited
liability company in the State of Florida on February 24, 1995. On September
27, 1997 the Company changed its name to Netrox, LLC The Company is a local
provider of Internet access and a global provider of web hosting and web
development.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online and Internet services market is highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could require the implementation of additional pricing programs and increased
spending on marketing and updating existing equipment. Such conditions may
limit the Company's ability to expand its subscriber base and result in
increased attrition in the existing subscriber base. There can be no assurance
that growth in the Company's revenues or subscriber base will continue or that
the Company will be able to achieve or sustain profitability or positive cash
flow.
Property and equipment: Furniture and equipment are carried at cost, less
accumulated depreciation. Depreciation is provided on a straight-line method
over an estimated useful life of five years.
Income taxes: The Company was organized as a limited liability company;
accordingly, the Company is taxed under the partnership provisions of the
Internal Revenue Code (the "Code"). Under the partnership provisions of the
Code, the limited liability company members include the Company's income or
loss on the individuals' tax returns. As a result, the Company was not subject
to federal corporate income tax during the period for which it was a limited
liability company. Certain states in which the Company does business have not
adopted the Code treatment of partnership for limited liability companies, and
as a result, state income taxes in these states are a direct responsibility of
the Company.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to Federal and state income taxes for all periods presented.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
F-120
<PAGE>
NETROX, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expenses during the reporting period. The Company uses estimates principally
with respects to the economic useful lives of property and equipment and the
liability for loss on discontinued operations. Accordingly, actual results
could differ from those estimates.
Impairment of Long-Lived Assets: At each balance sheet date, management
determines whether any property or equipment or any other assets have been
impaired based on the criteria established in Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of. The Company made no adjustments
to the carrying values of the assets during the periods ended December 31,
1995, 1996 or 1997.
Cost of Revenues: Cost of access revenues primarily consists of
telecommunication expenses inherent in the network infrastructure. Cost of
access revenues also includes fees paid for lease of the Company's backbone and
product costs.
Advertising Costs: All advertising and promotion costs are expensed as
incurred. During the years ended December 31, 1995, 1996 and 1997, advertising
costs totaled $32,483, $87,486 and $172,958, respectively.
Unaudited Interim Financial Information: The accompanying unaudited financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and in compliance with Article 10
of Regulation S-X. Accordingly, they do not include all information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month periods ended September 30,
1997 and 1998, are not necessarily indicative of the results that may be
expected for an entire year.
NOTE B--BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, as of December 31, 1997, the Company has accumulated net losses of
$767,882 and, as of that date, the Company's current liabilities exceed its
current assets by $1,145,576. Additionally, the Company continues to suffer
operating losses, and is dependent on its members to continually fund its
operations. These factors, among others, raise substantial doubt regarding the
Company's ability to continue as a going concern for a reasonable period of
time.
F-121
<PAGE>
NETROX, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE B--BASIS OF PRESENTATION (CONTINUED)
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flow to meet
its obligations on a timely basis, to obtain additional financing or make
capital infusions as may be required, increase its subscriber base and
ultimately to attain successful operations. Management is continuing its
efforts to obtain additional funds so that the Company can meet its obligations
and sustain operations.
NOTE C--CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The Company
maintains cash balances at several financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company's balances may at times exceed this limit. The carrying
amount of the accounts receivable approximates fair value.
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired from various sources.
NOTE D--FURNITURE AND EQUIPMENT
Furniture and equipment at December 31, 1995, 1996 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Computer equipment............................. $136,934 $348,687 $473,396
Equipment under capital lease.................. -- -- 6,224
Furniture, fixtures and office equipment....... -- 316 28,642
-------- -------- --------
136,934 349,003 508,262
Less: accumulated depreciation................. (10,622) (62,840) (136,296)
-------- -------- --------
$126,312 $286,163 $371,966
======== ======== ========
</TABLE>
Depreciation expense for 1995, 1996 and 1997 was $10,622, $52,218 and
$89,272, respectively.
F-122
<PAGE>
NETROX, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE E--DUE TO MEMBERS
The Company maintains lines of credit with the members which are funded
directly to the Company by a third party financial institution. These lines
bear interest at the financial institution's prime rate (8.5% at December 31,
1995, 8.25% at December 31, 1996 and 8.5% at December 31, 1997). The Company
remits quarterly interest payments directly to the financial institution.
These lines mature annually on the date of the note and have been renewed
regularly since the origination date. Amounts outstanding consisted of the
following at December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Unsecured line of credit in the amount of
$190,000, dated 4/14/95 with a limited guarantee
from a related party............................ $190,000 $189,757 $189,757
Secured line of credit in the amount of $190,000,
dated 9/29/95, collateralized by common stock of
a publicly traded corporation................... 120,000 -- 182,000
Secured line of credit in the amount of $200,000,
dated 2/28/96, collateralized by common stock of
a publicly traded corporation................... -- 200,000 200,000
Secured line of credit in the amount of $200,000,
dated 4/16/96, collateralized by common stock of
a publicly traded corporation................... -- 200,000 200,000
Secured line of credit in the amount of $68,000,
dated 11/3/97, collateralized by common stock of
a publicly traded corporation................... -- -- 68,000
Secured line of credit in the amount of
$66,000,dated 11/3/97, collateralized by common
stock of a publicly traded corporation.......... -- -- 14,000
Secured line of credit in the amount of $66,000,
dated 11/3/97, collateralized by common stock of
a publicly traded corporation................... -- -- 10,000
Due from member.................................. -- (17,000) (17,000)
-------- -------- --------
$310,000 $572,757 $846,757
======== ======== ========
</TABLE>
NOTE F--INCOME TAXES
If the proposed letter of intent is completed (See Note I), the Company's
income tax status as a partnership will terminate and normal federal and state
corporate income tax rates will apply. Had the Company been a corporation
throughout 1995, 1996 and 1997, based
F-123
<PAGE>
NETROX, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE F--INCOME TAXES (CONTINUED)
upon the cumulative temporary differences, the Company would have recognized a
deferred federal income tax benefit of $86,044 as of December 31, 1995,
$150,892 as of December 31, 1996 and $284,461 as of December 31, 1997. The
Company's lack of profitability since formation causes a full valuation
allowance to be provided, and therefore all deferred tax accounts would have
been reduced to zero.
NOTE G--COMMITMENTS
Operating Leases: The Company has two operating leases for office space which
expire through March, 2001. The future minimum lease payments required under
these operating leases as of December 31, 1997 are as follows for the years
ending December 31,
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998................................ $ 65,028
1999................................ 65,028
2000................................ 65,028
2001................................ 16,257
--------
$211,341
========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $15,400, $33,600, and $62,400, respectively.
Capital lease: The Company purchased computer equipment in December, 1997
under a capital lease payable in monthly installments of $554 inclusive of
interest at 12.3%. The lease expires in December, 1998 and is collateralized by
equipment with an approximate cost of $6,200. Future minimum lease payments are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1998.................................. $6,648
------
Total minimum lease payments.......... 6,648
Less amount representing interest..... 424
------
Present value of future minimum lease
payments............................. 6,224
Less current portion.................. 6,224
------
Long term portion..................... $ --
======
</TABLE>
F-124
<PAGE>
NETROX, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
NOTE H -- YEAR 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the availability
and integrity of financial systems and the reliability of operational systems.
The Company has evaluated the risk associated with this problem and expects to
be fully compliant by June 30, 1999. As of the date of the financial
statements, management has not been able to reasonably estimate the future cost
associated with Year 2000 compliance.
NOTE I -- SUBSEQUENT EVENTS
As of October 30, 1998, the Company is considering adopting a formal plan to
discontinue its Cyberchefs operations. Research and development costs related
to Cyberchefs for the year ended December 31, 1997 were approximately $261,000.
On August 28, 1998, the Company entered into a letter of intent with
OneMain.com, Inc. ("OneMain.com"). OneMain.com has agreed to acquire all of the
issued and outstanding membership units of the Company in exchange for an
aggregate purchase price equal to $3,605,000. This sale is contemplated to
close by March 31, 1999. There can be no assurances that the Company will be
successful in completing this transaction. In addition, the Company entered
into a three year employment agreement with two of its officers. Under the
agreement, each officer receives an initial base annual salary of $85,000 with
annual performance bonuses as defined. The agreement also provides for stock
options to be issuable if certain defined revenue benchmarks are achieved. Upon
consummation of the acquisition, OneMain.com will become the sole member of the
Company. Subsequent to the acquisition, the Company will continue to exist.
During 1998, the Company has increased its borrowings on the lines of credit
from members. As of the date of the financial statements, the total of all the
credit lines is $980,000, amounts drawn on these lines total $979,757.
On March 1, 1998, an unsecured line of credit was established by a member on
behalf of the Company in the amount of $250,000, with interest paid quarterly
at a rate of 8 percent per annum. The note matures on March 1, 1999, but will
be renewed on a yearly basis unless proper notice is given by either party
prior to the end of the term. The outstanding balance owed on this note as of
November 3, 1998 is $218,500.
F-125
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
ZoomNet, Inc.
We have audited the accompanying balance sheets of ZoomNet, Inc. (the
"Company") as of December 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period June 19, 1995
(inception) to December 31, 1995 and for each of the two years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ZoomNet, Inc. at December 31,
1996 and 1997, and the results of its operations and its cash flows for the
period June 19, 1995 (inception) to December 31, 1995 and for each of the two
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
November 13, 1998
F-126
<PAGE>
ZOOMNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 2,518 $ 32,212 $ 35,721
Accounts receivable (less allowance for
doubtful accounts of $200, $2,700 and
$32,200 at December 31, 1996, 1997 and
September 30, 1998, respectively)........... 10,703 32,854 32,638
Deferred income taxes........................ 15,822 18,261 69,030
Prepaid expenses............................. -- 205 650
-------- -------- ----------
Total current assets....................... 29,043 83,532 138,039
Property and equipment, net................... 139,530 588,983 814,132
Intangible asset.............................. -- -- 232,800
Other assets.................................. 1,586 8,766 8,766
-------- -------- ----------
Total assets.................................. $170,159 $681,281 $1,193,737
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 32,336 $ 46,824 $ 142,196
Due to related party......................... -- -- 284,301
Accrued expenses............................. 7,069 10,852 18,146
Income tax payable........................... 892 39,624 98,664
Unearned revenues............................ 10,979 21,180 46,066
Line of credit............................... 25,000 23,000 --
Short-term debt.............................. -- -- 100,000
Current portion of long-term debt............ -- 73,954 82,035
Current portion of capital lease
obligations................................. 8,607 69,202 36,625
-------- -------- ----------
Total current liabilities.................. 84,883 284,636 808,033
Long-term debt, net of current portion........ -- 196,243 131,448
Capital lease obligations, net of current
portion...................................... 15,701 23,714 4,880
Deferred income taxes......................... 8,807 29,855 53,522
Other liabilities............................. -- -- 1,260
Stockholders' equity:
Common stock, no par value; 850 shares
authorized, 100 shares issued and
outstanding................................. 15,000 15,000 15,000
Additional paid-in capital................... 55,000 55,000 55,000
Retained (deficit) earnings.................. ( 9,232) 76,833 124,594
-------- -------- ----------
Total stockholders' equity................. 60,768 146,833 194,594
-------- -------- ----------
Total liabilities and stockholders'
equity.................................... $170,159 $681,281 $1,193,737
======== ======== ==========
</TABLE>
See accompanying notes.
F-127
<PAGE>
ZOOMNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 19,
1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ --------------------
1995 1996 1997 1997 1998
------------ -------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $18,701 $272,692 $854,779 $571,406 $1,311,615
Other revenues......... -- -- 2,840 -- 5,164
------- -------- -------- -------- ----------
Total revenues....... 18,701 272,692 857,619 571,406 1,316,779
COSTS AND EXPENSES:
Costs of access
revenues.............. 6,519 139,409 262,710 187,030 547,501
Operations and
customer support...... 7,224 71,092 178,210 120,778 223,949
Sales and marketing.... 2,215 21,904 68,460 41,229 172,025
General and
administrative........ 2,690 34,506 84,087 52,387 114,810
Depreciation........... 1,471 18,314 102,602 68,988 144,519
------- -------- -------- -------- ----------
Total costs and
expenses............ 20,119 285,225 696,069 470,412 1,202,804
------- -------- -------- -------- ----------
(Loss) income from
operations............. (1,418) (12,533) 161,550 100,994 113,975
Interest expense........ -- (1,404) (18,144) (10,154) (34,275)
------- -------- -------- -------- ----------
(Loss) income before
provision for (benefit
from) income taxes..... (1,418) (13,937) 143,406 90,840 79,700
Provision for (benefit
from) income taxes..... -- (6,123) 57,341 36,322 31,939
------- -------- -------- -------- ----------
Net (loss) income....... $(1,418) $ (7,814) $ 86,065 $ 54,518 $ 47,761
======= ======== ======== ======== ==========
</TABLE>
See accompanying notes.
F-128
<PAGE>
ZOOMNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------- PAID-IN (DEFICIT) STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 19, 1995
(INCEPTION)................. -- $ -- $ -- $ -- $ --
Issuance of common stock.... 100 15,000 -- -- 15,000
Capital Contributions....... -- -- 5,000 -- 5,000
Net loss.................... -- -- -- (1,418) (1,418)
--- ------- ------- -------- --------
BALANCE AT DECEMBER 31,
1995........................ 100 15,000 5,000 (1,418) 18,582
Capital Contributions....... -- -- 50,000 -- 50,000
Net loss.................... -- -- -- (7,814) (7,814)
--- ------- ------- -------- --------
BALANCE AT DECEMBER 31,
1996........................ 100 15,000 55,000 (9,232) 60,768
Net income.................. -- -- -- 86,065 86,065
--- ------- ------- -------- --------
BALANCE AT DECEMBER 31,
1997........................ 100 15,000 55,000 76,833 146,833
Net income (unaudited)...... -- -- -- 47,761 47,761
--- ------- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)................. 100 $15,000 $55,000 $124,594 $194,594
=== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-129
<PAGE>
ZOOMNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE
19, 1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------- --------------------
1995 1996 1997 1997 1998
------------ --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income....... $ (1,418) $ (7,814) $ 86,065 $ 54,518 $ 47,761
Adjustments to reconcile
net (loss) income to
net cash provided by
operating activities:
Depreciation........... 1,471 18,314 102,602 68,988 144,519
Allowance for doubtful
accounts.............. 200 2,500 14,200 10,100 15,300
Provision for deferred
income taxes.......... -- (7,015) 18,609 2,442 (27,102)
Changes in operating
assets and
liabilities:
Accounts receivable.. (882) (12,521) (36,351) (24,453) (15,084)
Prepaid expenses..... -- -- (205) -- (445)
Other assets......... (677) (909) (7,180) (7,400) --
Accounts payable..... 2,833 29,503 14,488 21,966 95,372
Accrued expenses..... 1,235 5,834 3,783 523 7,294
Unearned revenues.... 305 10,674 10,201 5,446 24,886
Income tax payable... -- 892 38,732 33,880 59,040
Other liabilities.... -- -- -- -- 1,260
-------- --------- --------- --------- ---------
Net cash provided by
operating activities... 3,067 39,458 244,944 166,010 352,801
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (23,067) (108,776) (423,857) (238,145) (369,668)
Acquisition of Internet
service provider....... -- -- -- -- (232,800)
-------- --------- --------- --------- ---------
Net cash used in
investing activities... (23,067) (108,776) (423,857) (238,145) (602,468)
FINANCING ACTIVITIES:
Net proceeds under line
of credit.............. -- 25,000 (2,000) (2,000) (23,000)
Proceeds from issuance
of short-term debt..... -- -- -- -- 100,000
Proceeds from issuance
of long-term debt...... -- -- 287,255 137,561 --
Principal payments of
long-term debt......... -- -- (17,058) (4,116) (56,714)
Payments on obligations
under capital leases... -- (3,164) (59,590) (55,150) (51,411)
Proceeds from related
party.................. -- -- -- -- 284,301
Contributions from
stockholders........... 5,000 50,000 -- -- --
Proceeds from issuance
of common stock........ 15,000 -- -- -- --
-------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 20,000 71,836 208,607 76,295 253,176
-------- --------- --------- --------- ---------
Net increase in cash and
cash equivalents....... -- 2,518 29,694 4,160 3,509
Cash and cash
equivalents at
beginning of period.... -- -- 2,518 2,518 32,212
-------- --------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ -- $ 2,518 $ 32,212 $ 6,678 $ 35,721
======== ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ -- $ 1,404 $ 18,144 $ 10,154 $ 32,025
======== ========= ========= ========= =========
Capital lease
obligations incurred... $ 8,630 $ 18,842 $ 131,011 $ 128,198 $ --
======== ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-130
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
ZoomNet, Inc. (the "Company") is a regional provider of Internet access. The
Company was incorporated in Ohio on June 19, 1995 and began marketing services
in September 1995. The Company's target markets include Ohio, Kentucky and West
Virginia.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives ranging between five and seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Company made no adjustments to
F-131
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the carrying values of the assets during the periods ended December 31, 1995,
1996, and 1997.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No.130, Reporting Comprehensive Income, which is required to be adopted for
fiscal years beginning after December 15, 1997. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in
the financial statements, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the Statement of Stockholders' Equity. The Company adopted SFAS No.
130 on January 1, 1998. The adoption of SFAS No. 130 did not have any effect on
the financial statements as the Company does not have any elements of
comprehensive income.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is required to be adopted for the
year ended December 31, 1998. SFAS No. 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The impact of adopting SFAS No. 131 on the financial
statements is not expected to be material.
Revenue Recognition
The Company recognizes internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
The Company provides internet access services to certain organizations in
exchange for advertising, hardware storage and other services. Revenue and
corresponding expenses in the amount of $9,500 was recorded during the year
ended December 31, 1997 relating to these non-monetary transactions. Similar
non-monetary transactions were not significant in 1995 and 1996. The Company
values these non-monetary transactions based upon the fair values of the
Internet access services provided.
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, product costs and contractor
fees for distribution of software to new subscribers.
F-132
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
periods ended December 31, 1995, 1996, and 1997, the Company expensed $2,215,
$16,159 and $52,827, respectively, as advertising costs.
Income Taxes
The Company accounts for income taxes using the liability method. The
liability method provides that deferred tax assets and liabilities are recorded
based on the differences between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes, referred to as
"temporary differences." Temporary differences result from the use of
difference accounting methods for financial statement and income tax reporting
purposes.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base. The carrying amount of the receivables approximates their fair
value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired from two sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
Donated Services
A stockholder of the Company works part-time for the Company at no charge. As
no records are maintained of the hours of service provided, estimating the fair
value of these services is not practicable. No amount has been recorded in the
accompanying financial statements to reflect the costs of these services.
F-133
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment........................................ $142,466 $638,291
Furniture, fixtures, and office equipment................. 2,017 2,563
Leasehold improvements.................................... 14,832 70,517
-------- --------
159,315 711,371
Less accumulated depreciation............................. 19,785 122,388
-------- --------
$139,530 $588,983
======== ========
</TABLE>
4. LINE OF CREDIT
The Company had a short-term line of credit with a bank allowing for
borrowings of up to $25,000 which expired in August 1998 and was repaid.
Borrowings against the line bore interest at the bank's prime rate plus 1%
(8.5% at December 31, 1997). Borrowings of $25,000 and $23,000 were outstanding
against the line at December 31, 1996 and 1997, respectively.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
---- --------
<S> <C> <C>
Note payable to a bank, due in monthly installments of
$3,687 through November 2001, including interest at the
bank's cost of funds rate plus 2.4%........................ $ -- $147,082
Note payable to a bank, due in monthly installments of $500
through May 2000, including interest at 8.93%.............. -- 13,375
Note payable to a bank, due in monthly installments of
$3,819 through August 2000, including interest at 7.875%... -- 109,740
Less current portion........................................ -- (73,954)
---- --------
$ -- $196,243
==== ========
</TABLE>
F-134
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
The long-term debt is secured by specific equipment of the Company and is
personally guaranteed by the Company's stockholders.
The bank's cost of funds rate was 5.94% at December 31, 1997. The Company
incurred interest related to the long-term debt of approximately $4,000, for
the year ended December 31, 1997. The carrying value of long-term debt
approximates fair value.
Principal payments on long-term debt are due as follows: 1998--$73,954;
1999--$83,040; 2000--$71,333; 2001--$41,870.
6. COMMITMENTS
Lease Commitments
The Company leases office space under non-cancelable operating lease
agreements. Rent expense for the periods ended December 31, 1995, 1996, and
1997 was $0, $3,000, and $7,740, respectively.
The Company leases certain computer equipment under agreements which have
been accounted for as capital leases. All leases contain purchase options
either at fair value or at nominal amounts. The related computer equipment has
a cost of $155,670 at December 31, 1997 and accumulated amortization of $56,036
at December 31, 1997.
Minimum future lease payments under operating leases together with the
present value of the net minimum lease payments under capital leases are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
1998............................... $ 78,276 $6,000
1999............................... 24,120 --
2000............................... 1,031 --
2001............................... -- --
2002............................... -- --
Thereafter......................... -- --
-------- ------
Total minimum lease payments....... 103,427 $6,000
======
Less amounts representing
interest.......................... (10,511)
--------
Present value of minimum lease
payments.......................... $ 92,916
========
</TABLE>
Termination Penalties
The Company enters into long-term telephone contracts which provide for early
termination penalties. If all such contracts had been terminated at December
31, 1997, the Company would have incurred termination penalties of
approximately $92,000. The Company has no present plan to terminate these
contracts.
F-135
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
Income tax provision (benefit) was comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, ----------------
1995 1996 1997
------------ ------- -------
<S> <C> <C> <C>
Current
Federal...................................... $ -- $ 693 $30,087
State........................................ -- 199 8,645
---- ------- -------
-- 892 38,732
---- ------- -------
Deferred
Federal...................................... -- (5,982) 13,957
State........................................ -- (1,033) 4,652
---- ------- -------
-- (7,015) 18,609
---- ------- -------
$ -- $(6,123) $57,341
==== ======= =======
</TABLE>
The Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustment.............................. $14,745 $ 11,522
Reserve for bad debts................................... 1,077 6,739
------- --------
Total deferred tax assets................................. $15,822 $ 18,261
Deferred tax liabilities--depreciation.................... 8,807 29,855
------- --------
Net deferred tax assets (liabilities)..................... $ 7,015 $(11,594)
======= ========
</TABLE>
A reconciliation between the amount of reported income taxes and the amount
computed by multiplying the applicable statutory Federal income tax rate was as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, ----------------
1995 1996 1997
------------ ------- -------
<S> <C> <C> <C>
Federal income tax expense (benefit) at
statutory rates............................. $(482) $(4,739) $48,758
State income tax expense (benefit), net of
federal taxes............................... (83) (819) 8,424
Other........................................ -- -- 159
Valuation allowance.......................... 565 (565) --
----- ------- -------
Income tax provision (benefit)............... $ -- $(6,123) $57,341
===== ======= =======
</TABLE>
8. SUBSEQUENT EVENTS (UNAUDITED)
In June 1998, the Company obtained a $100,000 short-term note with a bank.
The note requires a lump sum payment of principal and interest at the bank's
prime rate plus 0.5% in
F-136
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
December 1998. The loan is secured by all the Company's assets that have not
been individually collateralized under separate loan agreements (see note 5)
and is personally guaranteed by the Company's stockholders.
In September 1998, the Company purchased the customer base of another
Internet service provider ("ISP") which had approximately 1,164 customers.
Also, the Company acquired all names, trade names, servicemarks, trademarks,
domain names, customer lists, web pages, licenses, marketing materials and
other intellectual property of the ISP. In addition, the purchase agreement
included a non-compete provision. The cost of the acquisition was $232,800.
In September 1998, the Company purchased the customer base of another ISP
which had approximately 63 customers. The Company acquired all names, trade
names, servicemarks, trademarks, domain names, customer lists, web pages,
licenses, marketing materials and other intellectual property of the ISP. In
addition, the purchase agreement included a non-compete provision. The purchase
price is determined by the number of subscribers who remain with the Company
through November 1998. The exact purchase price of the ISP has not been
computed, however the estimated purchase price is approximately $3,800.
The Company's stockholders have entered into an agreement whereby they will
sell their shares in the Company to OneMain.com, Inc. ("OneMain.com"). The
Company's stockholders will exchange their shares in the Company for cash and
shares of common stock of OneMain.com concurrent with the consummation of the
initial public offering ("IPO") of the common stock of OneMain.com.
Additionally, the Company's stockholders will be given additional
consideration, contingent upon certain operational and earnings margin
requirements, which shall be equal to one-fifth of the difference between total
revenue for the Company for the 12 months ended June 30, 1999 and the revenues
for the Company for the period from April 1, 1998 through June 30, 1998
multiplied by four. The amount of the additional consideration will be payable
in either cash or stock, at the option of OneMain.com. Upon consummation of the
agreement, OneMain.com will become the sole stockholder of the Company.
Subsequent to the acquisition, the Company will continue to exist.
In September 1998, a shareholder lent to the Company $34,301 which was
repayable on demand. Also, a relative of a shareholder lent the Company
$250,000 which was also payable on demand. The related party obligations were
repaid in November 1998 primarily through a $265,000 loan from a bank. The loan
requires monthly interest payments through May 1999, and monthly principal and
interest payments of $4,418 from June 1999 through November 2006.
F-137
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
Palm.Net, USA, Inc.
We have audited the accompanying balance sheets of Palm.Net, USA, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the period from January 3,
1996 (inception) to December 31, 1996 and the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Palm.Net, USA, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from January 3, 1996 (inception) to December 31, 1996 and
the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Jacksonville, Florida
November 25, 1998
F-138
<PAGE>
PALM.NET, USA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER
1996 1997 30, 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 4,550 $ 15,476 $ 47,298
Accounts receivable............................. 953 4,451 5,796
Prepaid expenses................................ 1,583 1,705 2,535
Other current assets............................ -- -- 2,216
Due from stockholders........................... -- -- 17,651
------- -------- --------
Total current assets.......................... 7,086 21,632 75,496
Property and equipment, net...................... 67,218 107,130 134,385
------- -------- --------
Total assets..................................... $74,304 $128,762 $209,881
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........... $25,803 $ 21,267 $ 24,468
Deferred revenues............................... 13,424 35,764 58,636
Due to stockholders............................. 85,490 57,811 --
------- -------- --------
Total current liabilities..................... 124,717 114,842 83,104
Stockholders' equity (deficit):
Common stock, $1 par value; 7,500 shares
authorized, 100 shares issued and
outstanding.................................... 100 100 100
Additional paid-in capital...................... 400 400 400
Retained earnings (deficit)..................... (50,913) 13,420 126,277
------- -------- --------
Total stockholders' equity (deficit).......... (50,413) 13,920 126,777
------- -------- --------
Total liabilities and stockholders' equity.... $74,304 $128,762 $209,881
======= ======== ========
</TABLE>
See accompanying notes.
F-139
<PAGE>
PALM.NET, USA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 3,
1996
(INCEPTION) NINE MONTHS ENDED
TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------
1996 1997 1997 1998
------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Access revenues................. $ 93,291 $406,811 $294,319 $431,704
Other revenues.................. 2,627 25,600 18,656 23,911
-------- -------- -------- --------
Total revenues................ 95,918 432,411 312,975 455,615
COSTS AND EXPENSES:
Costs of access revenues........ 43,173 138,535 92,780 108,770
Operations and customer
support........................ 32,968 100,690 72,714 101,189
Selling, general, and
administrative................. 65,608 90,153 64,741 103,695
Depreciation--nonoperating and
operating equipment............ 6,279 23,202 16,703 24,980
-------- -------- -------- --------
Total costs and expenses...... 148,028 352,580 246,938 338,634
-------- -------- -------- --------
(Loss) income from operations.... (52,110) 79,831 66,037 116,981
OTHER INCOME (EXPENSE):
Interest income................. 3 170 116 2,075
Interest expense................ (617) (11,541) (8,053) (6,199)
Miscellaneous income (expense),
net............................ 1,811 (4,127) (132) --
-------- -------- -------- --------
1,197 (15,498) (8,069) (4,124)
-------- -------- -------- --------
Net (loss) income................ $(50,913) $ 64,333 $ 57,968 $112,857
======== ======== ======== ========
UNAUDITED PRO FORMA INFORMATION:
Net (loss) income............... $(50,913) $ 64,333 $ 57,968 $112,857
Pro forma income tax
provision...................... -- 5,281 2,828 42,581
-------- -------- -------- --------
Pro forma net (loss) income (See
Note 2)......................... $(50,913) $ 59,052 $ 55,140 $ 70,276
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-140
<PAGE>
PALM.NET, USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT COMPENSATION (DEFICIT) (DEFICIT)
------ ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 3, 1996.. 100 $100 $400 $ -- $ 500
Net loss................... -- -- -- (50,913) (50,913)
--- ---- ---- -------- --------
BALANCE AT DECEMBER 31,
1996....................... 100 100 400 (50,913) (50,413)
Net income................. -- -- -- 64,333 64,333
--- ---- ---- -------- --------
BALANCE AT DECEMBER 31,
1997....................... 100 100 400 13,420 13,920
Net income (unaudited)..... -- -- -- 112,857 112,857
--- ---- ---- -------- --------
BALANCE AT SEPTEMBER 30,
1998 (UNAUDITED)........... 100 $100 $400 $126,277 $126,777
=== ==== ==== ======== ========
</TABLE>
See accompanying notes.
F-141
<PAGE>
PALM.NET, USA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 31,
1996
(INCEPTION) NINE MONTHS ENDED
TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------
1996 1997 1997 1998
------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income............... $(50,913) $ 64,333 $ 57,968 $112,857
Adjustments to reconcile net
(loss) income to net cash (used
in) provided by operating
activities:
Depreciation................... 6,279 23,202 16,703 24,980
Changes in operating assets
and liabilities:
Accounts receivable.......... (953) (3,498) (3,361) (1,345)
Prepaid expenses............. (1,583) (122) -- (830)
Other current assets......... -- -- -- (2,216)
Accounts payable and accrued
expenses.................... 25,803 (4,536) 90 3,201
Deferred revenues............ 13,424 22,340 13,399 22,872
-------- -------- -------- --------
Net cash (used in) provided by
operating activities........... (7,943) 101,719 84,799 159,519
INVESTING ACTIVITIES:
Purchases of property and
equipment...................... (73,497) (63,114) (59,732) (52,235)
-------- -------- -------- --------
Net cash used in investing
activities..................... (73,497) (63,114) (59,732) (52,235)
FINANCING ACTIVITIES:
Proceeds from participants'
capital contributions.......... 400 -- -- --
Net proceeds from issuance of
common stock................... 100 -- -- --
Increase (decrease) in due
to/from stockholders........... 85,490 (27,679) (8,786) (75,462)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities........... 85,990 (27,679) (8,786) (75,462)
-------- -------- -------- --------
Net increase in cash and cash
equivalents.................... 4,550 10,926 16,281 31,822
Cash and cash equivalents at
beginning of period............ -- 4,550 4,550 15,476
-------- -------- -------- --------
Cash and cash equivalents at end
of period...................... $ 4,550 $ 15,476 $ 20,831 $ 47,298
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-142
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Palm.Net, USA, Inc. (the "Company") is a regional provider of Internet
access. The Company was incorporated in Florida on January 3, 1996 and began
marketing services on April 1, 1996. The Company's targeted markets include
Florida.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The on-line services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services, and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives ranging between five to seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
F-143
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per-user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from January 3, 1996 (inception) to December 31, 1996 and the year ended
December 31, 1997 the Company expensed $20,469 and $18,079, respectively, as
advertising costs.
Income Taxes
Historically, the Company has elected by the consent of its stockholders, to
be taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the Subchapter S provisions of the Code, the stockholders
include the Company's corporate income in their personal income tax returns.
Accordingly, the Company was not subject to federal and state corporate income
tax during the period for which it was an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations and Note 6 is presented in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as if the Company
had been subject to Federal and certain state income taxes for the period from
January 3, 1996 (inception) to December 31, 1996, the year ended December 31,
1997, and for the nine month unaudited periods ended September 30, 1997 and
1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base. The carrying amount of the receivables approximates their fair
value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
F-144
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers, and high-performance routers, which are important
components of its network, each are currently acquired from Computer Max. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements, and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statement of Stockholders' Equity (Deficit).
The adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the
financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
F-145
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Computer equipment.......................................... $58,594 $123,453
Furniture, fixtures, and office equipment................... 11,918 10,173
Leasehold improvements...................................... 2,985 2,985
Less accumulated depreciation and amortization.............. (6,279) (29,481)
------- --------
$67,218 $107,130
======= ========
</TABLE>
4. LEASE COMMITMENTS
The Company leases office space under noncancelable operating lease
agreements. The leases generally provide for renewal terms and the Company is
required to pay a portion of the common areas' expenses including maintenance,
real estate taxes, and other expenses. Rent expense for the period from January
3, 1996 (inception) to December 31, 1996 and the year ended December 31, 1997
was $7,573 and $10,338, respectively. The Company has no material lease
commitments for future periods.
5. RELATED PARTY TRANSACTIONS
Loan agreements exist between the Company and the stockholders for an amount
equal to the amount of business operating expenses advanced on the
stockholder's personal lines of credit. Payments are due in coordination with
the timing of payments due to the lenders. In addition, certain Company funds
were used by the stockholders to fund personal expenses. The net amount due to
the stockholders at December 31, 1996 and 1997 was $85,490 and $57,811,
respectively. Interest expense incurred with the loan agreements during the
period from January 3, 1996 (inception) to December 31, 1996 and year ended
December 31, 1997 was $617 and $11,541, respectively.
6. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com, the Company's status as an S
Corporation under the Code will automatically terminate and normal federal and
state corporate income tax rates will apply. Based upon the cumulative
temporary differences, the Company would have recognized a deferred federal and
state income tax benefit and asset of $9,044 as of December 31, 1997 and
$14,183 as of September 30, 1998 (unaudited), had the termination of its
election to be treated as an S Corporation occurred on those respective dates.
No pro forma income tax provision is reflected for the period from January 3,
1996 (inception) to December 31, 1996 as the Company would have provided a full
valuation allowance against the deferred tax asset had it been a C Corporation.
F-146
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. SUBSEQUENT EVENT (UNAUDITED)
The Company's stockholders have entered into an agreement whereby they will
sell their shares in the Company to OneMain.com. The Company's stockholders
will exchange their shares in the Company for cash and shares of common stock
of OneMain.com concurrent with the consummation of the initial public offering
("IPO") of the common stock of OneMain.com. Additionally, the Company's
stockholders will be given additional consideration, contingent upon certain
operational and earnings margin requirements, which shall be equal to one-fifth
of the difference between total revenue for the Company for the 12 months ended
June 30, 1999 and the revenues for the Company for the period from April 1,
1998 through June 30, 1998 multiplied by four. The amount of the additional
consideration will be payable in either cash or stock, at the option of
OneMain.com. Upon consummation of the agreement, OneMain.com will become the
sole stockholder of the Company. Subsequent to the acquisition, the Company
will continue to exist.
F-147
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
Internet Access Group, Inc.
We have audited the accompanying combined balance sheets of Internet Access
Group, Inc. as of December 31, 1996 and 1997, and the related combined
statements of operations, stockholders' equity (deficit), and cash flows for
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Internet Access
Group, Inc. at December 31, 1996 and 1997 and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Internet Access Group, Inc. will continue as a going concern. As discussed in
Note 2, the Company has net losses accumulated since its inception and has a
working capital deficiency. (Management's plans as to these matters are also
described in Note 2.) These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Jacksonville, Florida
December 2, 1998
F-148
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1996 1997 1998
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 34,644 $ 23,802 $ 33,109
Accounts receivable -- trade.............. 110,183 58,885 68,405
Receivable from stockholder............... 54,931 95,151 100,151
Other current assets...................... 3,670 3,670 9,490
--------- --------- ---------
Total current assets....................... 203,428 181,508 211,155
Property and equipment, net................ 89,440 108,267 235,996
--------- --------- ---------
Total assets............................... $ 292,868 $ 289,775 $ 447,151
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..... $ 170,129 $ 47,945 $ 158,859
Deferred revenues......................... 90,072 144,226 186,459
Notes payable -- current portion.......... 2,904 9,720 28,354
Capital lease obligations -- current
portion.................................. -- 840 67,107
--------- --------- ---------
Total current liabilities............... 263,105 202,731 440,779
Notes payable, net of current portion...... 153,521 172,572 160,778
Capital lease obligations, net of current
portion................................... -- 26,108 95,581
Stockholders' (deficit) equity:
Common stock.............................. 100 100 100
Additional paid-in capital................ 17,570 17,570 17,570
Retained earnings (deficit)............... (141,428) (129,306) (267,657)
--------- --------- ---------
Total stockholders' (deficit) equity.... (123,758) (111,636) (249,987)
--------- --------- ---------
Total liabilities and stockholders'
(deficit) equity....................... $ 292,868 $ 289,775 $ 447,151
========= ========= =========
</TABLE>
See accompanying notes.
F-149
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- -------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 393,165 $701,633 $ 947,952 $682,525 $1,005,402
Other revenues......... -- 249,712 231,482 166,667 84,368
--------- -------- ---------- -------- ----------
Total revenues....... 393,165 951,345 1,179,434 849,192 1,089,770
COSTS AND EXPENSES:
Cost of access
revenues.............. 55,923 182,574 331,901 238,326 407,014
Cost of other
revenues.............. 125,519 134,599 100,953 72,686 20,980
Operations and
customer support...... 187,005 258,751 476,910 343,375 517,803
Sales and marketing.... 2,059 25,228 38,055 27,400 27,898
General and
administrative........ 158,427 305,408 169,671 122,162 187,003
Depreciation --
operating and
nonoperating
equipment............. 2,268 11,831 25,807 19,224 41,527
--------- -------- ---------- -------- ----------
Total costs and
expenses............ 531,201 918,391 1,143,297 823,173 1,202,225
--------- -------- ---------- -------- ----------
Loss (income) from
operations............. (138,036) 32,954 36,137 26,019 (112,455)
OTHER INCOME (EXPENSE):
Interest income........ -- 211 121 87 932
Interest expense....... (2,327) (10,700) (24,136) (17,378) (26,828)
--------- -------- ---------- -------- ----------
Net (loss) income....... $(140,363) $ 22,465 $ 12,122 $ 8,728 $ (138,351)
========= ======== ========== ======== ==========
</TABLE>
See accompanying notes.
F-150
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------- PAID-IN EARNINGS (DEFICIT)
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994........................ 100 $100 $17,570 $ (23,530) $ (5,860)
Net loss.................... -- -- -- (140,363) (140,363)
--- ---- ------- --------- ---------
BALANCE AT DECEMBER 31,
1995........................ 100 100 17,570 (163,893) (146,223)
Net income.................. -- -- -- 22,465 22,465
--- ---- ------- --------- ---------
BALANCE AT DECEMBER 31,
1996........................ 100 100 17,570 (141,428) (123,758)
Net income.................. -- -- -- 12,122 12,122
--- ---- ------- --------- ---------
BALANCE AT DECEMBER 31,
1997........................ 100 100 17,570 (129,306) (111,636)
Net loss (unaudited)........ -- -- -- (138,351) (138,351)
--- ---- ------- --------- ---------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)................. 100 $100 $17,570 $(267,657) $(249,987)
=== ==== ======= ========= =========
</TABLE>
See accompanying notes.
F-151
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1995 1996 1997 1997 1998
--------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income....... $(140,363) $ 22,465 $ 12,122 $ 8,728 $(138,351)
Adjustments to reconcile
net (loss) income to
net cash provided by
operating activities:
Depreciation and
amortization.......... 2,268 11,831 25,807 19,224 41,527
Accrued interest....... -- 8,120 18,583 12,897 17,384
Changes in operating
assets and
liabilities:
Accounts receivable
-- trade............ (32,363) (73,162) 51,298 25,649 (9,520)
Other current
assets.............. (1,070) (1,400) -- -- (5,820)
Accounts payable and
accrued expenses.... 163,082 3,780 (122,184) (82,384) 110,914
Deferred revenues.... 9,406 79,628 54,154 27,077 42,233
--------- --------- --------- -------- ---------
Net cash provided by
operating activities... 960 51,262 39,780 11,191 58,367
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (18,775) (65,827) (22,128) (10,745) (19,444)
Increase in receivable
from stockholder...... (12,795) (42,136) (40,220) (20,110) (5,000)
--------- --------- --------- -------- ---------
Net cash used in
investing activities... (31,570) (107,963) (62,348) (30,855) (24,444)
FINANCING ACTIVITIES:
Proceeds from borrowing
on notes payable, net
of payments............ 43,735 77,412 11,726 14,243 (2,697)
Payments on obligations
under capital leases... -- -- -- -- (21,919)
--------- --------- --------- -------- ---------
Net cash provided by
(used in) financing
activities............. 43,735 77,412 11,726 14,243 (24,616)
--------- --------- --------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 13,125 20,711 (10,842) (5,421) 9,307
Cash and cash
equivalents at
beginning of period.... 808 13,933 34,644 34,644 23,802
--------- --------- --------- -------- ---------
Cash and cash
equivalents at end of
period................. $ 13,933 $ 34,644 $ 23,802 $ 29,223 $ 33,109
========= ========= ========= ======== =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ -- $ 2,400 $ 5,752 $ 4,237 $ 9,374
========= ========= ========= ======== =========
Capital lease
obligations incurred... $ -- $ -- $ 26,948 $ 25,044 $ 182,312
========= ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-152
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Internet Access Group, Inc. ("IAG" or the "Company") is a regional provider
of Internet access which began marketing services in January 1995 with a
targeted customer base primarily in Florida.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The on-line services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services, and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the following operating companies
owned by the same individual. The companies included in Internet Access Group,
Inc. are:
Peiman and Associates, Inc. -- specializes in software development and
computer consulting services; became inactive as of January 1, 1997.
Internet Access Group, Inc. -- provides internet services; formed as an
S Corporation on December 12, 1994. The Company revoked its S Corporation
status and became a C Corporation effective January 1, 1998.
Significant intercompany transactions and balances have been eliminated.
The financial statements of the Company have been prepared on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Accordingly, the financial
statements do not include any adjustments relating to the recoverability of
recorded assets, or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
The Company has accumulated net losses of $129,306 since its inception and,
as a result, has a stockholders' deficit of $111,636 and negative working
capital of $21,223 at December 31, 1997.
The results to date reflect significant investments made by management in its
infrastructure and its efforts to enhance the Company's ability to provide
internet access services to subscribers in its service area. The Company has
allocated substantial resources to
F-153
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
enhance its customer service department and implemented a new billing system in
1998 to meet the needs of its subscribers. During 1998, the Company also
decided to eliminate its web development department which had been generating
operating losses during 1997 and the first half of 1998. The Company believes
operating results achieved in the third and fourth quarters of 1998 reflect an
operating profitability that demonstrates the Company will be able to meet its
working capital obligations and enable the Company to continue as a going
concern.
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of five years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of." The Company made no adjustments to the carrying
values of the assets during the years ended December 31, 1995, 1996, and 1997.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue as the services
are provided.
F-154
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cost of Revenues
Cost of access revenues primarily consists of telecommunication expenses
inherent in the network infrastructure.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1995, 1996 and 1997, the Company expensed $2,059,
$25,228 and $38,055, respectively, as advertising costs.
Income Taxes
For tax years prior to 1998, the Company elected tax treatment as an S
Corporation; accordingly, the Company was taxed under the provisions of
Subchapter S of the Internal Revenue Code (the "Code"). Under the Subchapter S
provisions of the Code, the stockholders included the Company's corporate
income in their personal income tax returns. Accordingly, the Company was not
subject to federal and state corporate income tax during the period for which
it was an S Corporation.
The Company revoked its S Corporation election on March 1, 1998. Therefore,
the Company was subject to normal federal and state corporate income taxes
effective January 1, 1998.
For periods prior to the revocation of its S Corporation status, the
unaudited pro forma income tax information included in Note 7 is presented in
accordance with Statement of Financial Accounting Financial Standards No. 109,
"Accounting for Income Taxes," as if the Company had been subject to federal
and certain state income taxes for the years ended December 31, 1995, 1996, and
1997 and for the nine-month period ended September 30, 1997.
For periods after the revocation of its S corporation status, the Company
accounts for income taxes using the liability method. The liability method
provides that deferred tax assets and liabilities are recorded based on the
differences between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes, referred to as "temporary
differences." Temporary differences result from the use of different accounting
methods for financial statement and income tax reporting purposes.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by high credit quality financial institutions. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within
F-155
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
management's expectations. The concentration of credit risk is mitigated by the
large customer base. The carrying amount of the receivables approximates their
fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, each are currently acquired from nine sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements, and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statement of Stockholders' Equity (Deficit).
The adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the
financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited combined financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in compliance with Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete
F-156
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month periods ended September 30,
1997 and 1998, are not necessarily indicative of the results that may be
expected for an entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment....................................... $ 81,502 $126,136
Other fixed assets....................................... 22,037 22,037
-------- --------
103,539 148,173
Less accumulated depreciation and amortization........... (14,099) (39,906)
-------- --------
$ 89,440 $108,267
======== ========
</TABLE>
4. NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Promissory notes payable, interest at 12%................ $137,848 $166,619
Secured automobile loan.................................. 18,577 15,673
-------- --------
Total notes payable.................................... 156,425 182,292
Less: current portion.................................. (2,904) (9,720)
-------- --------
Notes payable, noncurrent................................ $153,521 $172,572
======== ========
</TABLE>
F-157
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE (CONTINUED)
The promissory notes are payable to a minority stockholder. The terms of the
promissory notes allow for either party, giving six months written notice, the
option of converting principal and accumulated interest into a maximum 48-
month, 12% amortized payoff schedule. Subsequent to December 31, 1997, the
creditor converted two of the notes which had amounts outstanding of $131,989
as of December 31, 1997, into 48-month notes as defined above.
Principal payments on notes payable as adjusted for the conversion of two of
the notes payable into 48-month notes, for each of the years from 1998 to 2002
are as follows:
<TABLE>
<S> <C>
1998................................. $ 9,720
1999................................. 31,814
2000................................. 33,874
2001................................. 38,170
2002................................. 43,011
</TABLE>
6. COMMITMENTS
Lease Commitments
The Company leases office space under noncancelable operating lease
agreements. The leases generally provide for renewal terms and the Company is
required to pay a portion of the common areas' expenses including maintenance,
real estate taxes, and other expenses. Rent expense for the years ended
December 31, 1995, 1996, and 1997 was $18,233, $32,805, and $38,990,
respectively. The Company also leases certain computer equipment under
agreements which have been accounted for as capital leases.
At December 31, 1997, future minimum lease payments under operating leases
together with the present value of the net minimum lease payments under capital
leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
1998..................................................... $ 1,395 $37,288
1999..................................................... 16,740 15,895
2000..................................................... 16,740 --
2001..................................................... 6,920 --
2002..................................................... -- --
Thereafter............................................... -- --
-------- -------
Total minimum lease payments............................. 41,795 $53,183
=======
Less amounts representing interest....................... (14,847)
--------
Present value of minimum lease payments.................. $ 26,948
========
</TABLE>
F-158
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMON STOCK
At December 31, 1997, the common stock of Internet Access Group, Inc.
consists of 100 shares ($1 par value) authorized issued and outstanding.
8. INCOME TAXES
As discussed in Note 2, the Company revoked its S Corporation status and
became a C Corporation effective January 1, 1998. Based upon the cumulative
temporary differences, the Company's deferred federal and state income tax
asset as of September 30, 1998 (unaudited) was $43,198. A full valuation
allowance of $43,198 was provided resulting in a net deferred asset of $0. No
pro forma income tax provision (benefit) is reflected for the years ended
December 31, 1995, 1996, 1997, and the nine-month period ended September 30,
1997 as the Company would have provided a full valuation allowance against the
deferred tax asset had it been a C Corporation.
9. RELATED PARTY TRANSACTIONS
At December 31, 1996 and 1997, the Company reported amounts receivable from
stockholder of $54,931 and $95,151, respectively which relate to Company funds
used by the stockholder to fund personal expenses. No formal note exists
related to these advances.
10. SUBSEQUENT EVENT (UNAUDITED)
The Company's stockholders have entered into an agreement whereby they will
sell their shares in the Company to OneMain.com, Inc. ("OneMain.com"). The
Company's stockholders will exchange their shares in the Company for cash and
shares of common stock of OneMain.com concurrent with the consummation of the
initial public offering ("IPO") of the common stock of OneMain.com.
Additionally, the Company's stockholders will be given additional
consideration, contingent upon certain operational and earnings margin
requirements, which shall be equal to one-fifth of the difference between total
revenue for the Company for the 12 months ended June 30, 1999 and the revenues
for the Company for the period from April 1, 1998 through June 30, 1998
multiplied by four. The amount of the additional consideration will be payable
in either cash or stock, at the option of OneMain.com. Upon consummation of the
agreement, OneMain.com will become the sole stockholder of the Company.
Subsequent to the acquisition, the Company will continue to exist.
F-159
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
To the Members of
Midwest Internet, L.L.C.
We have audited the accompanying balance sheets of Midwest Internet, L.L.C.
(the Company) as of December 31, 1996 and 1997 and the related statements of
operations, changes in members' deficit, and cash flows for the period from
February 24, 1995 (inception) to December 31, 1995 and for the years ended
December 31, 1996 and 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Midwest Internet, L.L.C. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from February 24, 1995 (Inception) to December 31, 1995
and for the years ended December 31, 1996 and 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
October 22, 1998
F-160
<PAGE>
MIDWEST INTERNET, L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 13,290 $ 40,962 $ 97,579
Accounts receivable net of allowance
for doubtful accounts of $0 and $0 and
$20,000 (unaudited) at December 31,
1996, 1997 and September 30, 1998,
respectively........................... 248,121 206,807 201,159
Other current assets.................... -- 1,341 1,687
---------- ---------- ---------
Total current assets.................. 261,411 249,110 300,425
Property and equipment, net.............. 498,582 498,139 398,486
Other assets............................. -- -- 2,586
---------- ---------- ---------
Total assets.......................... $ 759,993 $ 747,249 $ 701,497
========== ========== =========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Accounts payable........................ $ 341,003 $ 210,124 $ 178,703
Accrued expenses........................ 30,197 22,785 28,784
Unearned revenues....................... 28,406 39,580 45,394
Notes payable........................... 897,490 770,873 634,088
Advances from related parties........... 6,967 90,778 7,485
Current portion of capital lease
obligations............................ -- 74,475 104,960
---------- ---------- ---------
Total current liabilities............. 1,304,063 1,208,615 999,414
Notes payable, less current portion...... 38,822 8,910 --
Capital lease obligations, less current
portion................................. -- 118,781 79,682
Members' deficit......................... (582,892) (589,057) (377,599)
---------- ---------- ---------
Total liabilities and members'
deficit.............................. $ 759,993 $ 747,249 $ 701,497
========== ========== =========
</TABLE>
See accompanying notes.
F-161
<PAGE>
MIDWEST INTERNET, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 24,
1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
-------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 153,502 $1,555,668 $2,302,702 $1,650,507 $2,623,990
Other revenues......... 32,641 234,708 220,426 153,342 133,998
--------- ---------- ---------- ---------- ----------
Total revenues....... 186,143 1,790,376 2,523,128 1,803,849 2,757,988
COSTS AND EXPENSES:
Costs of access
revenues.............. 98,300 666,731 937,102 759,232 997,255
Operations and
customer support...... 69,082 537,060 454,675 380,154 395,854
Sales and marketing.... 86,270 353,763 198,937 135,243 372,897
General and
administrative........ 71,841 536,420 572,598 310,570 460,873
Depreciation........... 57,450 178,770 301,246 225,935 238,405
--------- ---------- ---------- ---------- ----------
Total costs and
expenses............ 382,943 2,272,744 2,464,558 1,811,134 2,465,284
--------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. (196,800) (482,368) 58,570 (7,285) 292,704
OTHER INCOME (EXPENSE):
Interest expense....... (5,913) (59,066) (102,004) (80,751) (76,205)
Other income
(expense), net........ 4,690 (3,060) 37,269 (448) 420
--------- ---------- ---------- ---------- ----------
Net income (loss)....... $(198,023) $ (544,494) $ (6,165) $ (88,484) $ 216,919
========= ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-162
<PAGE>
MIDWEST INTERNET, L.L.C.
STATEMENTS OF CHANGES IN MEMBERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
CAPITAL ACCUMULATED MEMBERS'
CONTRIBUTIONS DEFICIT DEFICIT
------------- ----------- ---------
<S> <C> <C> <C>
BALANCE AT FEBRUARY 24, 1995
(INCEPTION)............................. $ -- $ -- $ --
Net loss................................ -- (198,023) (198,023)
Members' contributions.................. 75,000 -- 75,000
-------- --------- ---------
BALANCE AT DECEMBER 31, 1995............. 75,000 (198,023) (123,023)
Net loss................................ -- (544,494) (544,494)
Members' contributions.................. 84,625 -- 84,625
-------- --------- ---------
BALANCE AT DECEMBER 31, 1996............. 159,625 (742,517) (582,892)
Net loss................................ -- (6,165) (6,165)
-------- --------- ---------
BALANCE AT DECEMBER 31, 1997............. 159,625 (748,682) (589,057)
Net income (unaudited).................. -- 216,919 216,919
Other (unaudited)....................... (5,461) -- (5,461)
-------- --------- ---------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)............................. $154,164 $(531,763) $(377,599)
======== ========= =========
</TABLE>
See accompanying notes.
F-163
<PAGE>
MIDWEST INTERNET, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
FEBRUARY 24, 1995 YEAR ENDED ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------- --------------------
1995 1996 1997 1997 1998
----------------- ----------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....... $(198,023) $ (544,494) $ (6,165) $ (88,484) $ 216,919
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation........... 57,450 178,770 301,246 225,935 238,405
(Gain) loss on sale or
disposal of
equipment............. -- 3,060 (37,269) (448) --
Changes in operating
assets and
liabilities:
Accounts receivable,
net................. (20,292) (227,829) 41,314 (22,351) 5,648
Other assets......... (1,687) 1,687 (1,341) (1,687) (2,932)
Accounts payable..... 139,099 201,904 (130,879) (39,952) (31,421)
Accrued expenses..... 11,577 18,620 (7,412) (16,253) 5,999
Unearned revenues.... 10,575 17,831 11,174 19,196 5,814
--------- ----------- --------- --------- ---------
Net cash provided by
(used in) operating
activities............. (1,301) (350,451) 170,668 75,956 438,432
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (307,343) (455,136) (120,322) (35,039) (74,059)
Proceeds from disposal
of property and
equipment.............. -- 24,616 100,383 66,505 --
--------- ----------- --------- --------- ---------
Net cash used in
investing activities... (307,343) (430,520) (19,939) 31,466 (74,059)
FINANCING ACTIVITIES:
Proceeds from issuance
of notes payable....... 520,023 2,130,275 1,130 300 30,130
Principal payments of
notes payable.......... (130,143) (1,583,842) (157,658) (103,855) (175,825)
Payments on obligations
under capital leases... -- -- (50,340) (46,311) (73,307)
Proceeds from members'
capital contributions.. 75,000 84,625 -- -- --
Net advances from (to)
related parties........ 6,733 234 83,811 54,970 (88,754)
--------- ----------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 471,613 631,292 (123,057) (94,896) (307,756)
--------- ----------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 162,969 (149,679) 27,672 12,526 56,617
Cash and cash
equivalents at
beginning of period.... -- 162,969 13,290 13,290 40,962
--------- ----------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 162,969 $ 13,290 $ 40,962 $ 25,816 $ 97,579
========= =========== ========= ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ 5,913 $ 59,066 $ 102,004 $ 80,751 $ 76,205
========= =========== ========= ========= =========
Capital lease
obligations incurred... $ -- $ -- $ 243,597 $ 200,107 $ 64,693
========= =========== ========= ========= =========
</TABLE>
See accompanying notes.
F-164
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Midwest Internet, L.L.C. (the "Company") is a regional provider of Internet
access. The Company was organized in the State of Illinois on February 24, 1995
(inception) and began marketing services in November 1995. The Company's
targeted markets include residential and business customers in Illinois,
Tennessee, Kentucky and Missouri.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services, and
telecommunication companies are likely to enhance their service offerings,
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs, increase
spending on marketing, limit the Company's ability to expand its subscriber
base, and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives ranging from three to
five years. All computer equipment is being depreciated using a three-year
useful life.
Impairment of Long-lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of
F-165
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. The
Company made no adjustments to the carrying values of the assets during the
years ended December 31, 1995, 1996, and 1997.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
Costs of Access Revenues
Costs of access revenues primarily consist of telecommunications expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per- user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from February 24, 1995 (Inception) to December 31, 1995, and for the
years ended December 31, 1996 and 1997, the Company expensed $51,043, $165,984,
$27,554, respectively, as advertising costs.
Income Taxes
The Company was organized as a limited liability company under the laws of
the state of Illinois. The Company is taxed under the partnership provisions of
the Internal Revenue Code (the "Code"). Under the partnership provisions of the
Code, the limited liability company members include the Company's income on
their personal income tax returns. Accordingly, the Company is not subject to
federal and state corporate income taxes.
The unaudited pro forma income tax information included in the statements of
operations and Note 8 is presented in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as if the Company
had been subject to federal and certain state income taxes for the years ended
December 31, 1995, 1996 and 1997 and for the nine-month periods ended September
30, 1997 and 1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit
F-166
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
quality financial institution. For accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for credit losses,
and such losses have been within management's expectations. The concentration
of credit risk is mitigated by the large customer base. Other financial
instruments consist of accounts payable and notes payable. The carrying values
of such amounts reported at the applicable balance sheet dates approximate
their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management believes alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
The Company maintains various vendors for required products, such as modems,
terminal servers and high-performance routers, which are important components
of its network. Some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (SFAS 130), Comprehensive Income, which
is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the statements of changes in members' deficit.
SFAS 130 will not have an effect on the Company's financial statements because
the Company does not have any elements of other comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. Because the Company has only one reportable segment,
the additional disclosures for segment information are not expected to be
significant.
F-167
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3.PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment........................................ $709,955 $968,581
Furniture, fixtures, and office equipment................. 17,485 20,584
Vehicles.................................................. -- --
-------- --------
727,440 989,165
Less accumulated depreciation and amortization............ 228,858 491,026
-------- --------
$498,582 $498,139
======== ========
</TABLE>
4.NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
Demand note payable to bank, monthly installments of
$9,771 through April 1997 and $9,879 thereafter until
maturity in October 2003, including interest at prime
plus 1%................................................ $591,428 $524,029
Demand note payable to bank, semi-annual installments of
$25,518 through maturity in October 2001, including in-
terest at prime plus 1%................................ 200,050 167,007
Notes payable to bank, monthly installments ranging from
$2,199 to $3,003 through maturity in September 1998,
including interest at prime plus 1%.................... 94,834 38,822
Line of credit, due on demand, available borrowings up
to $50,000 subject to a borrowing base, interest at
prime plus 1%, expires in June 1999.................... 50,000 49,925
-------- --------
936,312 779,783
Less current portion.................................... 897,490 770,873
-------- --------
$ 38,822 $ 8,910
======== ========
</TABLE>
F-168
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. NOTES PAYABLE (CONTINUED)
The prime rate used by all of the banks above was 8.5 percent at December 31,
1997. The Company incurred interest related to the notes of $5,913, $59,066,
and $84,847 for the period from February 24, 1995 (inception) to December 31,
1995 and for the years ended December 31, 1996 and 1997, respectively.
The notes payable are secured by substantially all of the Company's assets
and personal guarantees of its members. In addition, most of the above notes
are due on demand; accordingly, such notes have been classified as a current
liability.
In March and April 1998, the Company issued approximately $15,000 in demand
notes payable to a bank that provide for monthly installments ranging from $176
to $317 through maturity in April 2001, including interest at rates ranging
from 8.125% to 9%. In addition, in August 1998, the Company obtained an
additional $50,000 unsecured line of credit from a bank. The line of credit
expires in August 1999 and is personally guaranteed by the Company's members.
5.COMMITMENTS
Lease Commitments
The Company leases certain sites for its servers, office space, and various
office and computer equipment under noncancelable operating lease agreements.
The site leases generally provide for renewal terms, and for certain sites the
Company is required to pay a portion of the common areas' expenses including
maintenance, real estate taxes, and other expense. Rent expense for the period
from February 24, 1995 (inception) to December 31, 1995 and for the years ended
December 31, 1996 and 1997 was $11,825, $64,584, and $53,370, respectively.
The Company leases certain computer equipment under agreements which have
been accounted for as capital leases. The related computer equipment had a cost
and accumulated amortization of $243,597 and $45,270, respectively, at December
31, 1997. Amortization of leased equipment is included in depreciation and
amortization. The computer equipment lease agreements require aggregate monthly
payments ranging from $191 to $1,300 and expire at various dates through
November 2000.
F-169
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS (CONTINUED)
Future minimum lease payments for both capital and operating leases at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
-------- ---------
<S> <C> <C>
1998...................................................... $100,260 $ 56,465
1999...................................................... 100,260 47,215
2000...................................................... 32,763 40,497
-------- --------
Total minimum lease payments.............................. 233,283 $144,177
========
Less amounts representing interest........................ 40,027
--------
Present value of minimum lease payments................... $193,256
========
</TABLE>
From January 1, 1998 through October 22, 1998, the Company has entered into
several additional lease commitments related to computer and office equipment
and site leases. These leases expire at various dates through February 2003.
The aggregate future minimum lease payments under leases entered into
subsequent to year end total approximately $375,000, of which approximately
$56,000 is due in 1998.
Purchase Commitment
In February 1998, the Company entered into a three-year noncancelable
agreement for the supply of bandwidth for use as the Company backbone. Under
the terms of the agreement, the monthly service fee is $12,000.
6. RELATED PARTY TRANSACTIONS
Members have affiliated enterprises that provide a variety of services to the
Company including Internet consulting and Web page development. During the
years ended December 31, 1996 and 1997, the Company expensed payments for
services provided from these related parties of $25,700 and $31,600,
respectively.
The Company has borrowed certain amounts from its members. No formal written
terms exist for these advances; however, because such amounts are considered
payable within the next year, the Company has classified these advances as
current liabilities in the accompanying balance sheets.
7. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding members' interest of the Company and concurrent with the
related initial public offering of OneMain.com (as more fully described in Note
9), the Company's tax status as a partnership will terminate and, accordingly,
the Company will be subject to federal and state corporate income tax. Based
upon the cumulative temporary differences, the
F-170
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES (CONTINUED)
Company would have recognized a deferred federal and state income tax benefit
and asset of $3,502 as of December 31, 1997 and $36,082 as of September 30,
1998 (unaudited), had the termination of its election to be treated as a
partnership occurred on those respective dates.
No proforma income tax provision is reflected for the period from February
24, 1995 (inception) to December 31, 1995, and for the years ended December 31,
1996 and 1997, and the nine months ended September 30, 1997 and 1998 because
the Company would have provided a full valuation allowance against the deferred
tax asset had it been a C Corporation.
8. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT
AUDITORS
On December 8, 1998, the Company consummated a transaction to purchase the
subscriber base of a local ISP, and certain other assets (including equipment,
software used in the provisioning of customers and accounts receivable) and
assume certain equipment leases. In addition, the seller agreed to a noncompete
period of two years after closing. The
final purchase price was $550,000 of which $14,960 was paid at closing. The
remainder of the purchase price will be paid in 20 equal monthly installments
of $26,752 beginning December 15, 1998. To ensure payment of the purchase
price, a $250,000 irrevocable letter of credit has been issued by a bank.
The unaudited pro forma results of operations set forth below assumes the
acquisition of the local ISP had occurred at the beginning of the periods
presented:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Revenues................................ $2,801,144 $3,081,775
Net income (loss)....................... $ 217,884 $ 615,311
</TABLE>
9. SUBSEQUENT EVENTS (UNAUDITED)
The Company's members have entered into an agreement whereby they will sell
their membership shares in the Company to OneMain.com. The Company's members
will exchange their membership shares in the Company for cash and shares of
common stock of OneMain.com concurrent with the consummation of the initial
public offering ("IPO") of the common stock of OneMain.com. Additionally, the
Company's members will be given additional consideration, contingent upon
certain operational and earnings margin requirements, which shall be equal to
one-fifth of the difference between total revenue for the Company for the 12
months ended June 30, 1999 and the revenues for the Company for the period from
April 1, 1998 through June 30, 1998 multiplied by four. The amount of the
additional consideration will be payable in either cash or stock, at the option
of the
F-171
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Company. Upon consummation of the agreement, OneMain.com will become the sole
member of the Company. Subsequent to the acquisition, the Company will continue
to exist and maintain its status as an LLC.
On December 16, 1998, the Company entered into two additional lease
commitments related to computer equipment. The leases expire in November 2002
and the aggregate future minimum lease payments under these leases totals
approximately $125,000.
F-172
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To The Members of
Internet Solutions, LLC
I have audited the accompanying balance sheet of Internet Solutions, LLC as
of December 31, 1995, 1996 and 1997, and the related statements of operations,
members' equity, and cash flows for each of the years in the three-year period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits 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. I believe that my audits provide a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Internet Solutions, LLC at
December 31, 1995, 1996 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
Kevin J. Tochtrop
Certified Public Accountant
Washington, Missouri
December 3, 1998
F-173
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
--------------------------- 30,
1995 1996 1997 1998
------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $37,114 $ 14,839 $ 15,977 $ 52,134
Accounts receivable, net of
allowance for doubtful accounts of
$0 and $0 and $2,000 (unaudited )
at December 31, 1996, 1997 and
September 30, 1998, respectively.... -- 491 15,807 21,275
Other current assets................. -- -- 2,975 7,877
------- -------- -------- --------
Total current assets............... 37,114 15,330 34,759 81,286
Property and equipment, net........... 24,714 92,132 212,603 252,771
Intangible assets, net................ -- -- 59,714 268,318
------- -------- -------- --------
Total assets....................... $61,828 $107,462 $307,076 $602,375
======= ======== ======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Line of credit to related party...... $ -- $ -- $150,000 $150,000
Notes payable........................ -- -- -- 134,736
Accounts payable..................... 18,964 24,716 19,042 8,275
Accrued expenses..................... -- 1,666 7,164 59,413
Unearned revenues.................... -- -- 28,167 87,671
Other current liabilities............ -- -- -- 4,175
------- -------- -------- --------
Total current liabilities.......... 18,964 26,382 204,373 444,270
Commitments........................... -- -- -- --
Members' equity:
Members' capital..................... 90,000 202,400 224,800 191,863
Accumulated deficit.................. (47,136) (121,320) (122,097) (33,758)
------- -------- -------- --------
Total members' equity.............. 42,864 81,080 102,703 158,105
------- -------- -------- --------
Total liabilities and members'
equity............................ $61,828 $107,462 $307,076 $602,375
======= ======== ======== ========
</TABLE>
See accompanying notes.
F-174
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 30,
1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ ------------------
1995 1996 1997 1997 1998
-------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 7,044 $137,225 $443,424 $287,581 $667,856
Other revenues......... -- 3,476 2,633 -- 4,695
-------- -------- -------- -------- --------
Total revenues....... 7,044 140,701 446,057 287,581 672,551
COSTS AND EXPENSES:
Costs of access and
other revenues........ 17,160 84,355 162,731 107,429 229,221
Operations and
customer support...... -- -- 53,105 22,100 129,395
Sales and marketing.... 3,159 12,857 19,961 7,259 33,700
General and
administrative........ 33,018 102,711 157,507 122,777 118,485
Amortization........... -- -- 8,313 -- 19,703
Depreciation........... 843 14,880 32,700 22,056 42,089
-------- -------- -------- -------- --------
Total costs and
expenses............ 54,180 214,803 434,317 281,621 572,593
-------- -------- -------- -------- --------
(Loss) Income from
operations............. (47,136) (74,102) 11,740 5,960 99,958
OTHER INCOME (EXPENSE):
Interest income........ -- 429 277 56 208
Interest expense....... -- (511) (12,794) (5,988) (11,827)
-------- -------- -------- -------- --------
Net (loss) income....... $(47,136) $(74,184) $ (777) $ 28 $ 88,339
======== ======== ======== ======== ========
PRO FORMA INFORMATION
(UNAUDITED):
Historical (loss)
income before income
taxes................. $(47,136) $(74,184) $ (777) $ 28 $ 88,339
Pro forma income tax
provision............. -- -- -- -- (25,655)
-------- -------- -------- -------- --------
Pro forma net (loss)
income.............. $(47,136) $(74,184) $ (777) $ 28 $ 62,684
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-175
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
MEMBER'S ACCUMULATED MEMBERS'
CAPITAL DEFICIT EQUITY
-------- ----------- --------
<S> <C> <C> <C>
BALANCE AT AUGUST 30, 1995 (INCEPTION)......... $ -- $ -- $ --
-------- --------- --------
Contributed Capital........................... 60,000 -- 60,000
Compensation expense for member's equity...... 30,000 -- 30,000
Net loss...................................... -- (47,136) (47,136)
-------- --------- --------
BALANCE AT DECEMBER 31, 1995................... 90,000 (47,136) 42,864
-------- --------- --------
Contributed Capital........................... 60,000 -- 60,000
Compensation expense for member's equity...... 52,400 -- 52,400
Net loss...................................... -- (74,184) (74,184)
-------- --------- --------
BALANCE AT DECEMBER 31, 1996................... 202,400 (121,320) 81,080
-------- --------- --------
Compensation expense for member's equity...... 22,400 -- 22,400
Net loss...................................... -- (777) (777)
-------- --------- --------
BALANCE AT DECEMBER 31, 1997................... 224,800 (122,097) 102,703
-------- --------- --------
Net income (unaudited)........................ -- 88,339 88,339
Distribution of Capital (unaudited)........... (32,937) -- (32,937)
-------- --------- --------
BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED)...... $191,863 $ (33,758) $158,105
======== ========= ========
</TABLE>
See accompanying notes.
F-176
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 30,
1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION), TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------ ------------------
1995 1996 1997 1997 1998
--------------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....... $(47,136) $(74,184) $ (777) $ 28 $ 88,339
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and
amortization.......... 843 14,880 41,013 22,056 61,792
Compensation expense
for member's equity... 30,000 52,400 22,400 22,400 --
Changes in operating
assets and
liabilities:
Accounts receivable.. -- (491) (15,316) (5,725) (5,468)
Other current
assets.............. -- -- (2,975) (1,628) (4,902)
Accounts payable..... 18,964 5,752 (5,674) (35,372) (10,767)
Accrued expenses..... -- 1,666 5,498 8,117 19,313
Unearned revenues.... -- -- 28,167 16,247 7,158
Other current
liabilities......... -- -- -- -- 4,175
-------- -------- -------- -------- --------
Net cash provided by
operating activities... 2,671 23 72,336 26,123 159,640
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (25,557) (82,298) (154,849) (85,369) (94,483)
Subscriber list
acquisition............ -- -- (66,349) (50,998) (120,000)
-------- -------- -------- -------- --------
Net cash used in
investing activities... (25,557) (82,298) (221,198) (136,367) (214,483)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Net proceeds under line
of credit.............. -- -- 150,000 110,000 --
Proceeds from note
payable................ -- -- -- -- 91,000
Proceeds from
participants' capital
contributions.......... 60,000 60,000 -- -- --
-------- -------- -------- -------- --------
Net cash provided by
financing activities... 60,000 60,000 150,000 110,000 91,000
-------- -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 37,114 (22,275) 1,138 (244) 36,157
Cash and cash
equivalents at
beginning of period.... -- 37,114 14,839 14,389 15,977
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $ 37,114 $ 14,839 $ 15,977 $ 14,145 $ 52,134
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ -- $ -- $ 5,533 $ 4,492 $ 10,229
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-177
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Internet Solutions, LLC (the "Company") is a regional provider of Internet
access. The Company was organized in Missouri on August 30, 1995, as a limited
liability company and began providing services on October 1, 1996. The
Company's targeted markets include rural areas in Missouri.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives, ranging between three
to seven years. Leasehold improvements are amortized over the lesser of the
related lease term or the useful life.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of
F-178
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of. The
Company made no adjustments to the carrying values of the assets during the
period from August 30 (inception), to December 31, 1995, the years ended
December 31, 1996, and 1997.
Acquisition Customer Base
The Company capitalizes specific costs incurred for the purchase of customer
bases from other Internet Service Providers ("ISPs"). The customer acquisition
costs are based on the value of retained customers. Amortization is provided
using the straight-line method over six years commencing when the customer base
is received.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per-user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
three years ended period from August 30, 1995 (inception) to December 31, 1995,
and for the years ended December 31, 1996, and 1997, the Company expensed
$3,159, $12,857, and $19,961, respectively, as advertising costs. During the
nine months ended September 30, 1997 and 1998, the Company expensed $7,064
(unaudited), and $16,802 (unaudited), respectively, as advertising costs.
Income Taxes
The Company is organized as a limited liability company under the laws of the
state of Missouri. Accordingly, the Company is taxed under the partnership
provisions of the Internal Revenue Code ("the Code"). Under the partnership
provisions of the Code, the members of the limited liability company include
the Company's income on their individual tax returns. As a result, the Company
is not subject to federal and state corporate income tax.
F-179
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited pro forma income tax information included in the statements of
operations and Note 7 is presented in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes, as if the Company
had been subject to federal and state income taxes for all periods presented.
Financial Instruments
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base. The carrying amount of the accounts receivable approximates
their fair value.
Compensation Expense for Member's Capital
During the period from August 30, 1995 (inception) to July 1, 1997, certain
officer's of the Company performed work for the Company without drawing a
salary from the Company. The member's of the Company agreed to recognize the
fair value of the work performed by the officers as a contribution to Member's
capital and adjusted the ownership percentages of the Company, as stipulated in
the Company's Operating Agreement, accordingly. The cumulative amount
contributed by the officers as of December 31, 1997 was $104,800.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers, and high-performance routers, which are important
components of its network, are each currently acquired from varied sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Comprehensive Income,
which is required to be
F-180
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adopted in the year ended December 31, 1998. SFAS 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature in
the financial statements, and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the Statement of Members' Equity. The adoption of SFAS 130 did not
have any effect on the Company's financial statements as the Company does not
have any elements of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the
financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Computer equipment...... $25,557 $107,182 $231,908
Capitalized line
installation........... -- -- 27,446
Furniture, fixtures, and
office equipment....... -- 672 2,553
------- -------- --------
25,557 107,854 261,907
Less accumulated
depreciation and
amortization........... (843) (15,722) (49,304)
------- -------- --------
$24,714 $ 92,132 $212,603
======= ======== ========
</TABLE>
F-181
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1996 1997
---- ---- -------
<S> <C> <C> <C>
Acquired customer base..................................... -- -- 66,349
Less accumulated amortization.............................. -- -- (6,635)
--- --- -------
-- -- $59,714
=== === =======
</TABLE>
5. LINE OF CREDIT
The Company has a short-term line of credit with a related party, a company
owned by certain members of the Company, allowing for borrowings of up to
$200,000 based upon a borrowing base determined by predefined levels of
accounts receivable and inventory. The balance of the line of credit is payable
on demand. Borrowings against the line bear interest at the bank's prime rate
plus 2% (10% at September 30, 1998). The line is secured by certain assets.
Borrowings of $150,000 were outstanding against the line at December 31, 1997
and September 30, 1998, respectively.
6. COMMITMENTS
Lease Commitments
The Company leases office space from a related party and various office and
computer equipment under non-cancelable operating lease agreements. The leases
generally provide for renewal terms. Rent expense for the years ended December
31, 1995, 1996 and 1997 was $0, $0 and $7,571, respectively. The fair value of
rent expense for the period from August 30, 1995 (inception) to December 31,
1995 and for the year ended December 31, 1996 are immaterial to the financial
statements.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
1998....................... $104,863
1999....................... 171,344
2000....................... 128,662
2001....................... 50,554
--------
Total minimum lease
payments.................. $455,423
========
</TABLE>
7. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering
F-182
<PAGE>
INTERNET SOLUTIONS, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES (CONTINUED)
of OneMain.com (as more fully described in Note 8), the Company's status as a
partnership will automatically terminate and normal federal and state
corporate income tax rates will apply. Based upon the cumulative temporary
differences, the Company would have recognized a deferred federal and state
income tax expense and liability of $0 as of December 31, 1997 and $31,723 as
of September 30, 1998 (unaudited), had the termination of its election to be
treated as a partnership occurred on those respective dates.
No pro forma income tax provision (benefit) is reflected for the period from
August 30, 1995 (Inception) through December 31, 1995, and for the two years
ended December 31, 1996 and 1997, and for the nine month unaudited periods
ended September 30, 1997 and 1998 as the Company would have provided a full
valuation allowance.
8. SUBSEQUENT EVENT (UNAUDITED)
On September 1, 1998, the Company entered into an agreement with K4 Cyber
Tech Ltd. ("K4"), to acquire its list of dial-up Internet access customers for
approximately $163,000, of which approximately $43,000 represented a note
payable to K4. In addition to acquiring the list, the Company assumed a
liability to provide services to certain of the newly acquired customers who
had already paid in advance for their services. This liability is estimated at
$43,000 as of September 30, 1998. To finance this transaction, the Company
entered into an agreement with a financial institution to borrow approximately
$91,000, in the form of a line of credit, bearing variable interest rate of
prime plus 2% and payable upon demand.
The Company's members have entered into an agreement whereby they will sell
their membership shares in the Company to OneMain.com ("OneMain.com"). The
Company's members will exchange their membership shares in the Company for
cash and shares of common stock of OneMain.com concurrent with the
consummation of the initial public offering ("IPO") of the common stock of
OneMain.com. Additionally, the Company's members will be given additional
consideration, contingent upon certain operational and earnings margin
requirements, which shall be equal to one-fifth of the difference between
total revenue for the Company for the 12 months ended June 30, 1999 and the
revenues for the Company for the period from April 1, 1998 through June 30,
1998 multiplied by four. The amount of the additional consideration will be
payable in either cash or stock, at the option of OneMain.com. Upon
consummation of the agreement, OneMain.com will become the sole member of the
Company. Subsequent to the acquisition, the Company will continue to exist and
maintain its status as an LLC.
F-183
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
FGInet, Inc.
We have audited the accompanying balance sheets of FGInet, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FGInet, Inc. at December 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
November 13, 1998
F-184
<PAGE>
FGINET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 39,586 $ 74,698 $ 61,709
Accounts receivable......................... 4,902 21,222 13,675
Inventory................................... 4,756 6,618 1,945
Prepaid expenses............................ 1,492 2,390 2,870
Other current assets........................ 4,197 5,574 5,378
-------- -------- ----------
Total current assets...................... 54,933 110,502 85,577
Property and equipment, net.................. 160,290 241,126 495,518
Intangible assets, net....................... 28,098 23,760 585,204
Deferred tax asset........................... -- -- 405
-------- -------- ----------
Total assets.............................. $243,321 $375,388 $1,166,704
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 17,179 $ 62,868 $ 30,237
Accrued expenses............................ 4,408 13,706 9,950
Unearned revenues........................... 62,398 68,905 143,658
Notes payable to stockholders............... -- 9,079 678,715
-------- -------- ----------
Total current liabilities................. 83,985 154,558 862,560
Deferred tax liability....................... -- 9,603 --
Stockholders' equity:
Voting common stock; no par value;
9,000,000 shares authorized; 2,960,000,
2,960,000 and 3,110,000 shares issued and
outstanding, respectively.................. 295,000 295,000 406,000
Non-voting common stock; no par value;
1,000,000 shares authorized; 0, 41,250 and
41,500 shares issued and outstanding,
respectively............................... -- 52,589 53,089
Accumulated deficit......................... (135,664) (136,362) (154,945)
-------- -------- ----------
Total stockholders' equity................ 159,336 211,227 304,144
-------- -------- ----------
Total liabilities and stockholders'
equity................................... $243,321 $375,388 $1,166,704
======== ======== ==========
</TABLE>
See accompanying notes.
F-185
<PAGE>
FGINET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1995 1996 1997 1997 1998
------- --------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........... $34,161 $ 214,909 $712,427 $516,253 $ 852,892
Other revenues............ -- 60,056 106,018 66,030 131,942
------- --------- -------- -------- ----------
Total revenues.......... 34,161 274,965 818,445 582,283 984,834
COSTS AND EXPENSES:
Costs of access
revenues................. 16,000 147,785 316,054 219,501 446,686
Costs of other revenues... -- 46,694 70,064 35,283 104,942
Operations and customer
support.................. 90 47,954 71,455 49,601 72,119
Sales and marketing....... 1,890 42,235 142,587 94,290 168,760
General and
administrative........... 17,744 89,296 156,309 110,422 155,748
Amortization.............. -- 5,619 12,618 9,465 13,936
Depreciation.............. 2,227 20,475 49,239 36,929 56,350
------- --------- -------- -------- ----------
Total costs and
expenses............... 37,951 400,058 818,326 555,491 1,018,541
------- --------- -------- -------- ----------
(Loss) income from
operations................ (3,790) (125,093) 119 26,792 (33,707)
OTHER INCOME:
Interest income........... -- 2,680 2,335 1,625 1,185
Other income.............. -- 1,249 6,451 5,835 3,931
------- --------- -------- -------- ----------
(Loss) income before
provision (benefit) for
income taxes.............. (3,790) (121,164) 8,905 34,252 (28,591)
Provision (benefit) for
income taxes.............. -- -- 9,603 16,239 9,603
------- --------- -------- -------- ----------
Net (loss) income.......... $(3,790) $(121,164) $ (698) $ 18,013 $ (38,194)
======= ========= ======== ======== ==========
</TABLE>
See accompanying notes.
F-186
<PAGE>
FGINET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
VOTING NON-VOTING
COMMON STOCK COMMON STOCK
------------------ --------------
TOTAL
TREASURY ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK DEFICIT EQUITY
--------- -------- ------ ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 1,600,000 $ 25,000 -- $ -- $ -- $ (10,710) $ 14,290
Net loss............... -- -- -- -- -- (3,790) (3,790)
Issuance of common
stock................. 80,000 5,000 -- -- -- -- 5,000
320,000 treasury shares
purchased............. -- -- -- -- (2,500) -- (2,500)
--------- -------- ------ ------- ------- --------- ---------
BALANCE AT DECEMBER 31,
1995................... 1,680,000 30,000 -- -- (2,500) (14,500) 13,000
Net loss............... -- -- -- -- -- (121,164) (121,164)
640,000 treasury shares
purchased............. -- -- -- -- (7,500) -- (7,500)
960,000 treasury shares
reissued.............. -- 48,750 -- -- 10,000 -- 58,750
Issuance of common
stock................. 1,280,000 216,250 -- -- -- -- 216,250
--------- -------- ------ ------- ------- --------- ---------
BALANCE AT DECEMBER 31,
1996................... 2,960,000 295,000 -- -- -- (135,664) 159,336
Net loss............... -- -- -- -- -- (698) (698)
Issuance of common
stock................. -- -- 41,250 52,589 -- -- 52,589
--------- -------- ------ ------- ------- --------- ---------
BALANCE AT DECEMBER 31,
1997................... 2,960,000 295,000 41,250 52,589 -- (136,362) 211,227
Net loss (Unaudited)... -- -- -- -- -- (18,583) (18,583)
Issuance of common
stock (Unaudited)..... 150,000 111,000 250 500 -- -- 111,500
--------- -------- ------ ------- ------- --------- ---------
BALANCE AT SEPTEMBER 30,
1998 (UNAUDITED)....... 3,110,000 $406,000 41,500 $53,089 $ -- $(154,945) $ 304,144
========= ======== ====== ======= ======= ========= =========
</TABLE>
See accompanying notes.
F-187
<PAGE>
FGINET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income......... $(3,790) $(121,164) $ (698) $ 14,414 $ (18,583)
Adjustments to reconcile
net (loss) income to net
cash
provided by (used in)
operating activities:
Depreciation and
amortization............ 2,227 26,094 61,857 46,394 70,286
Deferred taxes........... -- -- 9,603 19,838 (10,008)
Changes in operating
assets and liabilities:
Accounts receivable.... 120 (4,852) (16,320) (13,702) 7,547
Prepaid expenses....... (77) (1,415) (898) (4,001) (480)
Inventory.............. -- (4,756) (1,862) 8,637 4,673
Other current assets... 1,700 (4,042) (1,377) (2,986) 196
Accounts payable....... (2,769) 13,718 45,689 34,076 (32,361)
Accrued expenses....... (535) 4,408 9,298 27,110 (3,756)
Unearned revenues...... 11,095 51,303 6,507 (29,013) 74,753
------- --------- --------- -------- ---------
Net cash provided by (used
in) operating
activities............... 7,971 (40,706) 111,799 100,767 92,267
INVESTING ACTIVITIES:
Purchases of property and
equipment................ (7,667) (164,747) (130,075) (80,527) (311,012)
Acquisition of customer
base..................... -- (23,332) (5,280) -- (541,960)
Acquisition of non-compete
agreements............... -- (10,385) (3,000) -- (33,420)
------- --------- --------- -------- ---------
Net cash used in investing
activities............... (7,667) (198,464) (138,355) (80,527) (886,392)
FINANCING ACTIVITIES:
Proceeds from issuance of
notes payable............ -- -- 9,079 9,079 673,807
Principal payments of
notes payable............ -- -- -- -- (4,171)
Purchase of treasury
stock.................... (2,500) (7,500) -- -- --
Net proceeds from issuance
of common stock.......... 5,000 275,000 52,589 30,589 111,500
------- --------- --------- -------- ---------
Net cash provided by
financing activities..... 2,500 267,500 61,668 39,668 781,136
------- --------- --------- -------- ---------
Net increase (decrease) in
cash and cash
equivalents.............. 2,804 28,330 35,112 59,908 (12,989)
Cash and cash equivalents
at beginning of period... 8,452 11,256 39,586 39,586 74,698
------- --------- --------- -------- ---------
Cash and cash equivalents
at end of period......... $11,256 $ 39,586 $ 74,698 $ 99,494 $ 61,709
======= ========= ========= ======== =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for income
taxes.................... $ -- $ -- $ 5,003 $ 1,900 $ 430
======= ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-188
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
1. ORGANIZATION
FGInet, Inc. (the "Company") is a regional provider of Internet access. The
Company was incorporated in Illinois on September 16, 1994 and began marketing
services in 1994. The Company's targeted market is the State of Illinois.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base; and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives ranging between three to seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
F-189
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventory
Inventory consists of purchased goods held for resale and is stated at the
lower of cost or market on a first-in, first-out (FIFO) method.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of. The Company made no adjustments to the carrying values of
the assets during the years ended December 31, 1995, 1996, and 1997.
Intangible Assets
The Company has recorded the value of acquired customer bases purchased from
existing companies at the estimated fair market value. These customer bases are
being amortized using the straight-line method over three years.
The Company has recorded the value of non-competition agreements entered into
with other companies purchased by the Company. These non-compete agreements are
amortized using the straight-line method over the term of the specific
agreement, generally two to three years.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. SFAS 123 allows companies to account for stock-based compensation
under either the new provisions of SFAS 123 or the provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS 123 had been adopted. The
Company has chosen to continue accounting for its stock-based compensation in
accordance with the provisions of APB 25.
Revenue Recognition
The Company recognizes Internet access revenues when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenues
on these advance payments and amortizes the amounts to revenues on a straight-
line basis as the services are provided.
F-190
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company does not refund advance payments in instances of contract
cancellation. The Company continues service to the customer until the contract
term expires.
Costs of Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1995, 1996, and 1997, the Company expensed $1,890,
$26,251, and $118,769, respectively, as advertising costs.
Income Taxes
For tax years prior to 1997, the Company elected tax treatment as an S
corporation; accordingly, the Company was taxed under the Subchapter S
provisions of the Internal Revenue Code (the "Code"). Under the Subchapter S
provisions of the Code, the stockholders included the Company's income on their
personal income tax returns. As a result, the Company was not subject to
federal and state corporate income tax during the period for which it was an S
corporation.
Beginning in 1997, the Company revoked its S corporation election. Therefore,
beginning in 1997, the Company was subject to normal federal and state
corporate income taxes.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base. The carrying amount of the receivables approximates their fair
value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management believes alternative
telecommunication facilities could
F-191
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
be found in a timely manner, any disruption of these services could have an
adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers, and high-performance routers, which are important
components of its network, are each currently acquired from two sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are unable to meet the Company's needs as it is
building out its network infrastructure, then delays and increased costs in the
expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements, and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statement of Stockholders' Equity. The
adoption of SFAS 130 did not have any effect on the Company's financial
statements as the Company does not have any elements of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the
financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
F-192
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.......................... $175,900 $297,033 $603,041
Furniture, fixtures, and office equipment... 7,649 16,590 21,324
-------- -------- --------
183,549 313,623 624,365
Less accumulated depreciation............... 23,259 72,497 128,847
-------- -------- --------
$160,290 $241,126 $495,518
======== ======== ========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Acquired customer base......................... $23,332 $28,612 $570,572
Non-compete agreements......................... 10,385 13,385 46,805
------- ------- --------
33,717 41,997 617,377
Less accumulated amortization.................. 5,619 18,237 32,173
------- ------- --------
$28,098 $23,760 $585,204
======= ======= ========
</TABLE>
5. NOTES PAYABLE TO STOCKHOLDERS
At December 31, 1997, the Company has a non-interest bearing note payable due
to a stockholder in one payment in December, 1998. The fair value of the note
payable approximated the carrying value.
F-193
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
6. COMMITMENTS
The Company leases office space under non-cancelable operating lease
agreements. Minimum future lease payments under non-cancelable operating leases
is summarized as follows:
<TABLE>
<S> <C>
1999................................ $ 39,054
2000................................ 40,132
2001................................ 38,463
2002................................ 150
--------
Total minimum lease payments........ $117,799
========
</TABLE>
The Company also has purchase commitments with various telecommunications
providers for internet access. These non-cancelable agreements have varying
terms and rates. No minimum purchase provisions apply to these agreements.
Rent expense for the years ended December 31, 1995, 1996, and 1997 was $688,
$10,485, and $26,560, respectively.
7. STOCK COMPENSATION
In 1996, the Company recorded compensation expense of $75,000 for voting
common stock issued to employed stockholders at less than fair value. Fair
value for purposes of calculating compensation expense was the most recent sale
price for voting common stock sold to outside investors. The difference between
this amount and the amount paid by the employed shareholders was recorded as
compensation expense.
8. STOCK OPTIONS
The Board of Directors may grant voting and nonvoting common stock options to
employees, board members, and others who contribute materially to the success
of the Company. Stock options have been granted at prices which the Company's
Board of Directors believe approximate the fair market value of its common
stock at the date of grant, taking into consideration the stock's voting
rights, transferability and liquidity. Individual grants generally become
exercisable immediately. The contractual term of the options granted are five
years from the date of grant.
F-194
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
8. STOCK OPTIONS (CONTINUED)
Common stock option activity was as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
NUMBER OF NON- AVERAGE
VOTING VOTING EXERCISE
SHARES SHARES PRICE
--------- --------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1995............... -- -- $ --
Options granted.............................. 160,000 -- .125
Options exercised............................ (160,000) -- .125
-------- --- -----
Outstanding at December 31, 1996............... -- -- $ --
======== === =====
</TABLE>
There were no options granted during 1997 or outstanding at December 31,
1997.
Had compensation expense related to stock options been determined based on
fair value at the grant date for options granted during the year ended December
31, 1996, consistent with the provisions of SFAS 123, the Company's net loss
would have been $124,364.
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing fair value model with the following
assumptions used for grants in 1996: no dividend yield, a risk-free interest
rate of 5.25%, and expected life of the option term of 4 years.
9. INCOME TAXES
Based upon cumulative temporary differences, the Company recognized a
deferred income tax liability of $9,603 as of December 31, 1997. This liability
is mainly due to the book and tax timing differences for depreciation, and for
the utilization of a net operating loss for the period subsequent to the
revocation of the Company's S corporation election. The income tax provision of
$9,603 for 1997 differs from the anticipated statutory expense of $3,000
principally because of the Company's change in tax status from an S corporation
to a C corporation effective January 1, 1997.
No pro forma provision for income taxes is reflected for the years ended
December 31, 1995 and 1996 as the Company would have provided a full valuation
allowance against the deferred tax asset had it been a C corporation.
10. ACQUISITIONS
On August 16, 1996, the Company completed the acquisition of substantially
all of the assets of NetJax, a company in the same line of business as the
Company, in exchange for $64,000 in cash. The acquisition of NetJax has been
accounted for using the purchase method and, accordingly, the acquired assets
have been recorded at their estimated fair values as of August 16, 1996.
F-195
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
10. ACQUISITIONS (CONTINUED)
The estimated fair value of the assets acquired on August 16, 1996 are as
follows:
<TABLE>
<S> <C>
Property and equipment............................................ $27,430
Other current assets.............................................. 2,855
Three year non-compete agreement.................................. 10,385
Customer base of 375 customers.................................... 23,330
-------
Total purchase price............................................ $64,000
=======
</TABLE>
On October 20, 1997, the Company completed the acquisition of substantially
all of the assets of Decatur Communications ("Decatur"), a company in the same
line of business as the Company, in exchange for $8,280 in cash. The
acquisition of Decatur has been accounted for using the purchase method and,
accordingly, the acquired assets have been recorded at their estimated fair
values as of October 20, 1997.
The estimated fair value of the assets acquired on October 20, 1997 are as
follows:
<TABLE>
<S> <C>
Three year non-compete agreement................................... $3,000
Customer base of 46 customers...................................... 5,280
------
Total purchase price............................................. $8,280
======
</TABLE>
On May 30, 1998, the Company completed the acquisition of substantially all
of the assets of FGInet of Highland, a company in the same line of business as
the Company, for $15,000 in cash and 20,000 shares of FGInet common voting
stock valued at $1 per share. The acquisition of FGInet of Highland has been
accounted for using the purchase method and, accordingly, the acquired assets
have been recorded at their estimated fair values as of May 30, 1998.
The estimated fair value of the assets acquired on May 30, 1998 are as
follows:
<TABLE>
<S> <C>
Property and equipment............................................ $ 8,000
Two year non-compete agreement.................................... 1,000
Customer base of 200 customers.................................... 26,000
-------
Total purchase price............................................ $35,000
=======
</TABLE>
11. SUBSEQUENT EVENTS
On September 15, 1998, the Company entered into an agreement to acquire
substantially all of the assets of Great Plains Group, Inc., a company in the
same line of business as the Company, including an estimated customer base of
330 for an estimated purchase price of $81,000, contingent upon the final
number of customers acquired to be determined on November 15,
F-196
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997 AND NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998 (UNAUDITED)
11. SUBSEQUENT EVENTS (CONTINUED)
1998. A portion of the purchase price relates to a non-compete agreement
entered into by the Company and Great Plains Group, Inc. owners.
On September 21, 1998, the Company entered into an agreement to acquire
substantially all of the assets of Interactive Communications and Explorations,
a partnership in the same line of business as the Company, including an
estimated customer base of 1,340 for an estimated purchase price of $480,000,
contingent upon the final number of customers acquired to be determined on
November 15, 1998. A portion of the purchase price relates to a non-compete
agreement entered into by the Company and Interactive Communications and
Explorations owners.
On September 28, 1998, the Company entered into an agreement to acquire a
customer base estimated at 220 from FGInet of Mt. Zion, a company in the same
line of business as the Company in exchange for 44,285 shares of FGInet common
voting stock.
On September 30, 1998, the Company entered into an agreement to acquire
substantially all of the assets of Wyman Computer Services, a company in the
same line of business as the Company, including an estimated customer base of
200, in exchange for $9,000 in cash.
On September 30, 1998, the Company obtained a $100,000 bank line of credit
guaranteed by a stockholder of the Company. Terms of the agreement require the
Company to pay interest monthly at prime plus one and repay any unpaid
principal on September 30, 1999.
On October 2, 1998, the Company obtained an $80,000 bank line of credit
collateralized by all accounts receivable, inventory, and equipment. Terms of
the agreement require the Company to pay interest monthly at prime plus one and
repay any unpaid principal on October 2, 1999.
12. SUBSEQUENT EVENT (UNAUDITED)
The Company's stockholders have entered into an agreement whereby they will
sell their shares in the Company to OneMain.com, Inc. ("OneMain.com"). The
Company's stockholders will exchange their shares in the Company for cash and
shares of common stock of OneMain.com concurrent with the consummation of the
initial public offering ("IPO") of the common stock of OneMain.com.
Additionally, the Company's stockholders will be given additional
consideration, contingent upon certain operational and earnings margin
requirements, which shall be equal to one-fifth of the difference between total
revenue for the Company for the 12 months ended June 30, 1999 and the revenues
for the Company for the period from April 1, 1998 through June 30, 1998
multiplied by four. The amount of the additional consideration will be payable
in either cash or stock, at the option of OneMain.com. Upon consummation of the
agreement, OneMain.com will become the sole stockholder of the Company.
Subsequent to the acquisition, the Company will continue to exist and
maintain its status as a corporation.
F-197
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholder of
Superhighway, Inc. d/b/a Indynet
We have audited the accompanying balance sheets of Superhighway, Inc. d/b/a
Indynet (the "Company") as of December 31, 1996 and 1997, and the related
statements of operations, stockholder's equity, and cash flows for the seven-
month period from June 1, 1995 (inception) to December 31, 1995 and the two
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Superhighway, Inc. d/b/a
Indynet at December 31, 1996 and 1997, and the results of its operations and
cash flows for the seven month period from June 1, 1995 (inception) to December
31, 1995 and the two years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Indianapolis, Indiana
October 23, 1998
F-198
<PAGE>
SUPERHIGHWAY, INC. D/B/A INDYNET
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 19,877 $ 9,623 $ 30,606
Accounts receivable, net of allowance for
uncollectible accounts (1996-$18,500; 1997-
$40,000; 1998-$40,000)....................... 105,996 227,196 356,806
-------- -------- ----------
Total current assets....................... 125,873 236,819 387,412
Property and equipment, net of accumulated
depreciation.................................. 309,091 671,724 787,096
Other assets................................... 435 10,135 37,250
-------- -------- ----------
Total assets............................... $435,399 $918,678 $1,211,758
======== ======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Line of credit................................ $ -- $ 50,000 $ 98,500
Accounts payable.............................. 95,884 81,472 115,244
Accrued expenses.............................. 14,395 19,417 22,753
Current portion of long-term debt............. -- 20,719 22,230
Other current liabilities..................... 8,354 14,849 12,625
-------- -------- ----------
Total current liabilities................... 118,633 186,457 271,352
Long-term debt, net of current portion......... -- 28,889 12,021
Stockholder's equity:
Common stock, no par value:
Authorized--1,000 shares issued and
outstanding--500 shares...................... 87,503 87,503 87,503
Retained earnings............................. 229,263 615,829 840,882
-------- -------- ----------
Total stockholder's equity.................. 316,766 703,332 928,385
-------- -------- ----------
Total liabilities and stockholder's equity.. $435,399 $918,678 $1,211,758
======== ======== ==========
</TABLE>
See accompanying notes.
F-199
<PAGE>
SUPERHIGHWAY, INC. D/B/A INDYNET
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1995
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------- ----------------------
1995 1996 1997 1997 1998
------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUES:
Access revenues........ $235,025 $1,179,755 $2,004,474 $1,501,049 $2,176,760
Other revenues......... 13,454 68,996 101,816 40,748 65,346
-------- ---------- ---------- ---------- ----------
Total revenues....... 248,479 1,248,751 2,106,290 1,541,797 2,242,106
COSTS AND EXPENSES:
Cost of access
revenues.............. 70,886 419,858 725,579 320,620 898,970
Cost of other
revenues.............. 3,090 16,215 27,064 20,057 36,546
Operations and
customer support...... 40,176 211,609 357,454 263,357 384,696
Sales and marketing.... 19,845 120,079 197,944 143,847 232,104
General and
administrative........ 39,177 164,003 200,806 147,946 257,687
Depreciation and
amortization.......... 46,878 78,408 137,431 154,602 117,265
-------- ---------- ---------- ---------- ----------
Total cost and
expenses............ 220,052 1,010,172 1,646,278 1,050,429 1,927,268
Income from operations.. 28,427 238,579 460,012 491,368 314,838
OTHER INCOME (EXPENSE):
Interest income........ -- -- -- -- 100
Interest expense....... -- (19,442) (4,045) (2,220) (11,298)
Other income
(expense), net........ -- (13,501) (49,233) (9,319) (10,061)
-------- ---------- ---------- ---------- ----------
Total other income
(expense)........... -- (32,943) (53,278) (11,539) (21,259)
Net income.............. $ 28,427 $ 205,636 $ 406,734 $ 479,829 $ 293,579
======== ========== ========== ========== ==========
UNAUDITED PRO FORMA
INFORMATION:
Net income.............. $ 28,427 $ 205,636 $ 406,734 $ 479,829 $ 293,579
Pro forma income tax
provision.............. 11,161 83,177 162,148 190,148 118,296
-------- ---------- ---------- ---------- ----------
Pro forma net income
(See Note 2)........... $ 17,266 $ 122,459 $ 244,586 $ 289,681 $ 175,283
======== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-200
<PAGE>
SUPERHIGHWAY, INC. D/B/A INDYNET
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 1, 1995 (DATE OF
INCEPTION)............................. -- $ -- $ -- $ --
Issuance of common stock............... 500 87,503 -- 87,503
Net income............................. -- -- 28,427 28,427
Stockholder distributions.............. -- -- (3,000) (3,000)
--- ------- -------- --------
BALANCE AT DECEMBER 31, 1995............ 500 87,503 25,427 112,930
Net income............................. -- -- 205,636 205,636
Stockholder distributions.............. -- -- (1,800) (1,800)
--- ------- -------- --------
BALANCE AT DECEMBER 31, 1996............ 500 87,503 229,263 316,766
Net income............................. -- -- 406,734 406,734
Stockholder distributions.............. -- -- (20,168) (20,168)
--- ------- -------- --------
BALANCE AT DECEMBER 31, 1997............ 500 87,503 615,829 703,332
Net income(unaudited).................. -- -- 293,579 293,579
Stockholder distributions(unaudited)... -- -- (68,526) (68,526)
--- ------- -------- --------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)............................ 500 $87,503 $840,882 $928,385
=== ======= ======== ========
</TABLE>
See accompanying notes.
F-201
<PAGE>
SUPERHIGHWAY, INC. D/B/A INDYNET
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 1, 1995
(INCEPTION) TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
-------------- -------------------- --------------------
1995 1996 1997 1997 1998
-------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............. $ 28,427 $ 205,636 $ 406,734 $ 479,829 $ 293,579
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 46,878 78,408 137,431 154,602 117,265
Allowance for doubtful
accounts.............. 2,000 16,500 21,500 18,500 --
Loss on write-off of
equipment............. -- 13,501 49,233 -- 100,061
Changes in operating
assets and
liabilities:
Accounts receivable.. (12,500) (111,996) (142,700) (266,471) (129,610)
Other current
assets.............. (35) (400) (9,700) (8,500) (36,115)
Accounts payable and
accrued expenses.... 47,902 62,378 (9,390) 100,414 37,108
Other current
liabilities......... 10,457 (2,103) 6,495 858 (2,224)
--------- --------- --------- --------- ---------
Net cash provided by
operating activities... 123,129 261,924 459,603 479,232 380,064
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (214,086) (233,793) (549,297) (525,418) (260,196)
Proceeds from disposal
of property and
equipment.............. -- -- -- -- 12,996
--------- --------- --------- --------- ---------
Net cash used in
investing activities... (214,086) (233,793) (549,297) (525,418) (247,200)
FINANCING ACTIVITIES:
Net proceeds under line
of credit.............. -- -- 50,000 -- 48,500
Proceeds from issuance
of long-term debt...... -- -- 63,820 63,820 --
Principal payments of
long-term debt......... -- -- (14,212) (9,407) (35,354)
Distributions made to
stockholder............ (3,000) (1,800) (20,168) (20,168) (125,027)
Proceeds from issuance
of common stock........ 87,503 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 84,503 (1,800) 79,440 34,245 (111,881)
--------- --------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ (6,454) 26,331 (10,254) (11,941) 20,983
Cash and cash
equivalents at
beginning of period.... -- (6,454) 19,877 19,877 9,623
--------- --------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ (6,454) $ 19,877 $ 9,623 $ 7,936 $ 30,606
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.. $ -- $ 19,442 $ 4,045 $ 2,220 $ 11,298
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-202
<PAGE>
SUPERHIGHWAY, INC. d/b/a/ INDYNET
NOTES TO FINANCIAL STATEMENTS
1.ORGANIZATION
Superhighway, Inc. d/b/a Indynet (the "Company") was incorporated as a
Subchapter S Corporation under the laws of Indiana on June 1, 1995. The Company
is a regional provider of Internet access. The Company's targeted markets
include central Indiana and surrounding communities.
The Company expects to continue to focus on increasing its subscriber base
and geographic coverage. The online services and Internet markets are highly
competitive. The Company believes that existing competitors, Internet-based
services, Internet service providers, Internet directory services and
telecommunication companies are likely to enhance their service offerings
resulting in greater competition for the Company. The competitive conditions
could have the following effects: require additional pricing programs; increase
spending on marketing; limit the Company's ability to expand its subscriber
base and result in increased attrition in the existing subscriber base. There
can be no assurance that growth in the Company's revenues or subscriber base
will continue or that the Company will be able to achieve or sustain
profitability or positive cash flow.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at the
time of purchase are classified as cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives ranging between three to seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards No. 121 ("SFAS
121"), Accounting for the Impairment of Long-
F-203
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Lived Assets and Long-Lived Assets to be Disposed of. The Company made no
adjustments to the carrying values of the assets during the seven-month period
from June 1, 1995 (inception) to December 31, 1995, and the years ended
December 31, 1996 and 1997.
Revenue Recognition
The Company offers monthly contracts for Internet access that are generally
billed for on the first day of the month. The Company recognizes access revenue
as services are provided.
The Company has entered into agreements to provide internet access and other
internet services to various non-profit organizations in exchange for non-
monetary goods and services. These agreements have been accounted for as non-
monetary transactions and are recorded at the fair value of the services
provided by the Company. During the seven-month period from June 1, 1995
(inception) to December 31, 1995 and the years ended December 31, 1996 and
1997, access revenues and cost of access revenues include $24,245, $98,811 and
$197,578, respectively, of such non-monetary transactions.
Costs of Revenues
Cost of access revenues primarily consists of telecommunication expenses
inherent in the network infrastructure. Cost of access revenues also include
fees paid for lease of the Company's backbone, as well as license fees for Web
browser software based on a per- user charge, other license fees paid to third-
party software vendors, product costs, and contractor fees for distribution of
software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
seven-month period from June 1, 1995 (inception) to December 31, 1995 and the
years ended December 31, 1996, and 1997, the Company expensed $1,301, $22,788
and $35,562, respectively, as advertising costs.
Income Taxes
Historically, the Company has elected by the consent of its stockholder, to
be taxed under the provisions of Subchapter S of the Internal Revenue Code (the
"Code"). Under the Subchapter S provisions of the Code, the stockholder
includes the Company's corporate income in his personal income tax return.
Accordingly, the Company was not subject to federal and state corporate income
tax during the period for which it was an S Corporation.
The unaudited pro forma income tax information included in the statements of
operations and Note 7 is presented in accordance with Statement of Financial
Accounting Financial Standards No. 109, Accounting for Income Taxes, as if the
Company had been subject to federal and certain state income taxes for the
seven month period from June 1, 1995 (inception to) December 31,
F-204
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1995, the years ended December 31, 1996 and 1997 and for the nine-month periods
ended September 30, 1997 and 1998.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base. The carrying amount of the receivables approximates fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers, and high-performance routers, which are important
components of its network, are each currently acquired from numerous sources.
In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Comprehensive Income,
which is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in the financial statements, and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the Statement of Stockholders' Equity. The
Company adopted SFAS 130 on January 1, 1998. The adoption of SFAS 130 did not
have any effect on the Company's financial statements as the Company does not
have any elements of comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial
F-205
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. The disclosure for
segment information on the financial statements is not expected to be material.
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3.PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment........................................ $405,678 $784,188
Furniture, fixtures, and office equipment................. -- 11,122
Leasehold improvements.................................... 7,200 12,699
-------- --------
412,878 808,009
Less accumulated depreciation and amortization............ 103,787 136,285
-------- --------
$309,091 $671,724
======== ========
</TABLE>
4.LINE OF CREDIT
The Company has a short-term line of credit with a bank. Borrowings against
the line bear interest at the bank's prime rate (9.5% at December 31, 1997)
plus 0.5%. The line is secured by and is personally guaranteed by the sole
stockholder. Borrowings of $50,000 were outstanding against the line at
December 31, 1997.
5.LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Note payable to a bank, monthly installments of $2,041, including
interest at 9.25 %. The note is collateralized by all assets of the
Company and personally guaranteed by the sole stockholder.......... $49,608
Less current portion................................................ 20,719
-------
$28,889
=======
</TABLE>
F-206
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Principal payments on long-term debt are due as follows: 1998--$20,719;
1999--$22,756 and 2000--$6,052.
6.LEASE COMMITMENTS
The Company leases office space on a month to month basis from the sole
stockholder and is required to pay the common areas' expenses including
maintenance, real estate taxes and other expense. Rent expense for seven-month
period from June 1, 1995 (inception) to December 31, 1995 and the years ended
December 31, 1996 and 1997 was $251, $7,713, and $37,264, respectively.
7.INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com (as more fully described in Note 8), the
Company's status as an S Corporation under the Code will automatically
terminate and normal federal and state corporate income tax rates will apply.
Based upon the cumulative temporary differences, the Company would have
recognized a deferred federal and state income tax expense and liability and of
$26,910 as of December 31, 1997 and $59,137 as of September 30, 1998
(unaudited), had the termination of its election to be treated as an S
Corporation occurred on those respective dates.
8.SUBSEQUENT EVENTS (UNAUDITED)
The Company's stockholder has entered into an agreement whereby he will sell
his shares in the Company to OneMain.com. The Company's stockholder will
exchange his shares in the Company for cash and shares of common stock of
OneMain.com concurrent with the consummation of the initial public offering
("IPO") of the common stock of OneMain.com. Additionally, the Company's
stockholder will be given additional consideration, contingent upon certain
operational and earnings margin requirements, which shall be equal to one-fifth
of the difference between total revenue for the Company for the 12 months ended
June 30, 1999 and the revenues for the Company for the period from April 1,
1998 through June 30, 1998 multiplied by four. The amount of the additional
consideration will be payable in either cash or stock, at the option of
OneMain.com. Upon consummation of the agreement, OneMain.com will become the
sole stockholder of the Company. Subsequent to the acquisition, the Company
will continue to exist and maintain its status.
The Company has entered into an agreement to purchase the computer equipment
and customer lists of another Internet service provider. The final purchase
price of approximately $23,800 is contingent upon customer retention as of
September 30, 1998. The terms of the purchase agreement state that the
remaining amount will be paid in the form of access services provided.
F-207
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Director and Stockholder of
Lightspeed Net, Inc.
We have audited the accompanying balance sheets of Lightspeed Net, Inc. as of
December 31, 1996 and 1997, and the related statements of operations,
stockholder's equity, and cash flows for period from March 27, 1995 (inception)
to December 31, 1995 and the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lightspeed Net, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for period from March 27, 1995 (inception) to December 31, 1995 and the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Los Angeles, California
December 15, 1998
F-208
<PAGE>
LIGHTSPEED NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................. $ -- $ 55,863 $ 63,546
Accounts receivable................... 103,353 266,691 218,549
Prepaid expenses...................... 12,160 13,279 2,029
Other current assets.................. -- 17,758 23,184
----------- ----------- -----------
Total current assets................... 115,513 353,591 307,308
Property and equipment, net............ 964,838 1,111,776 1,223,437
Other assets........................... 1,600 18,594 15,262
----------- ----------- -----------
Total assets........................... $ 1,081,951 $ 1,483,961 $ 1,546,007
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable...................... $ 43,414 $ 114,861 $ 32,088
Accounts payable, related party....... 5,447 78,913 69,194
Accrued expenses...................... 63,939 134,220 48,949
Customer advances..................... 12,512 40,352 97,786
Unearned revenues..................... 81,888 267,367 338,319
----------- ----------- -----------
Total liabilities................... 207,200 635,713 586,336
Stockholder's equity:
Common stock (no par value, 100,000
shares authorized, 100 shares issued
and outstanding)..................... -- 874,751 874,751
Additional paid-in capital............ -- 1,240,273 1,430,962
Proprietor's capital.................. 2,325,540 -- --
Accumulated deficit................... (1,450,789) (1,266,776) (1,346,042)
----------- ----------- -----------
Total stockholder's equity.......... 874,751 848,248 959,671
----------- ----------- -----------
Total liabilities and stockholder's
equity............................. $ 1,081,951 $ 1,483,961 $ 1,546,007
=========== =========== ===========
</TABLE>
See accompanying notes.
F-209
<PAGE>
LIGHTSPEED NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27,
1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ ----------------------
1995 1996 1997 1997 1998
-------------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Access revenues........ $ 84,771 $ 1,124,474 $ 3,070,875 $2,071,459 $3,479,935
Other revenues......... -- -- 15,026 14,641 41,695
--------- ----------- ----------- ---------- ----------
Total revenues....... 84,771 1,124,474 3,085,901 2,086,100 3,521,630
COST AND EXPENSES:
Cost of access
revenues.............. 125,462 820,854 1,528,309 998,384 1,326,932
Cost of other
revenues.............. -- -- 8,741 4,584 20,881
Operations and
customer support...... 89,635 254,212 611,673 424,611 488,987
Sales and marketing.... 59,159 487,891 818,782 626,939 560,572
General and
administrative........ 161,822 414,418 860,563 623,788 719,031
Depreciation and
amortization.......... 33,922 212,659 500,692 298,114 485,999
--------- ----------- ----------- ---------- ----------
Total cost and
expenses............ 470,000 2,190,034 4,328,760 2,976,420 3,602,402
--------- ----------- ----------- ---------- ----------
Loss from operations.... (385,229) (1,065,560) (1,242,859) (890,320) (80,772)
OTHER INCOME (EXPENSE):
Interest income........ -- -- 1,510 1,062 1,506
Other expense.......... -- -- (25,427) -- --
--------- ----------- ----------- ---------- ----------
Total other income
(expense).............. -- -- (23,917) 1,062 1,506
--------- ----------- ----------- ---------- ----------
Net loss................ $(385,229) $(1,065,560) $(1,266,776) $ (889,258) $ (79,266)
========= =========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-210
<PAGE>
LIGHTSPEED NET, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN PROPRIETOR'S ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL CAPITAL DEFICIT EQUITY
------ -------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 27,
1997 (DATE OF
INCEPTION)............. -- $ -- $ -- $ -- $ -- $ --
Contribution........... -- -- -- 681,934 -- 681,934
Net loss............... -- -- -- -- (385,229) (385,229)
--- -------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,
1995................... -- -- -- 681,934 (385,229) 296,705
Contribution........... -- -- -- 1,643,606 -- 1,643,606
Net loss............... -- -- -- -- (1,065,560) (1,065,560)
--- -------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,
1996................... -- -- -- 2,325,540 (1,450,789) 874,751
Incorporation.......... 100 874,751 -- (2,325,540) 1,450,789 --
Contribution........... -- -- 1,240,273 -- -- 1,240,273
Net loss............... -- -- -- -- (1,266,776) (1,266,776)
--- -------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,
1997................... 100 874,751 1,240,273 -- (1,266,776) 848,248
Contribution
(unaudited)........... -- -- 190,689 -- -- 190,689
Net loss (unaudited)... -- -- -- -- (79,266) (79,266)
--- -------- ---------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30,
1998 (UNAUDITED)....... 100 $874,751 $1,430,962 $ -- $(1,346,042) $ 959,671
=== ======== ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-211
<PAGE>
LIGHTSPEED NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27, 1995 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ ---------------------
1995 1996 1997 1997 1998
-------------- ----------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................ $(385,229) $(1,065,560) $(1,266,776) $ (889,258) $ (79,266)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 33,922 212,659 500,692 298,114 485,999
Provision for doubtful
accounts.............. 848 11,244 99,944 72,254 59,932
Loss on sale or
disposal of
equipment............. -- -- 25,427 -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. (12,488) (102,957) (263,282) (156,917) (11,790)
Prepaid expenses..... -- (12,160) (1,119) 793 11,250
Other current
assets.............. (23,400) 23,400 (17,758) (22,204) (5,426)
Other assets......... (700) (900) (18,490) (535) (3,400)
Accounts payable..... 920 47,941 144,913 32,281 (92,492)
Customer advances.... -- 12,512 27,840 21,144 57,434
Accrued expenses..... 9,528 54,411 70,281 62,579 (85,271)
Unearned revenues.... 2,135 79,753 185,479 119,942 70,952
--------- ----------- ----------- ---------- ---------
Net cash provided by
(used in) operating
activities............. (374,464) (739,657) (512,849) (461,807) 407,922
INVESTING ACTIVITIES:
Purchases of property
and equipment.......... (307,470) (903,948) (696,561) (525,329) (590,928)
Proceeds from disposal
of property and
equipment.............. -- -- 25,000 -- --
--------- ----------- ----------- ---------- ---------
Net cash used in
investing activities... (307,470) (903,948) (671,561) (525,329) (590,928)
FINANCING ACTIVITIES:
Owner's capital
contributions.......... 681,934 1,643,605 -- -- --
Shareholder's capital
contributions.......... -- -- 1,240,273 1,023,123 190,689
--------- ----------- ----------- ---------- ---------
Net cash provided by
financing activities... 681,934 1,643,605 1,240,273 1,023,123 190,689
--------- ----------- ----------- ---------- ---------
Net increase in cash.... -- -- 55,863 35,987 7,683
Cash at beginning of
period................. -- -- -- -- 55,863
--------- ----------- ----------- ---------- ---------
Cash at end of period... $ -- $ -- $ 55,863 $ 35,987 $ 63,546
========= =========== =========== ========== =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for income
taxes.................. $ -- $ -- $ 800 $ -- $ 800
========= =========== =========== ========== =========
</TABLE>
See accompanying notes.
F-212
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND SEPTEMBER 30, 1998
1. ORGANIZATION AND MANAGEMENT'S PLAN TO ADDRESS OPERATIONAL ISSUES AND
LIQUIDITY
Lightspeed Net, Inc. (the "Company") is a regional provider of internet
access with targeted markets in central California. The internet business
operated as a line of business of Lightspeed Software, an affiliated company
which is wholly owned by the sole stockholder of the Company, from March 27,
1995 (inception) to December 31, 1996. On June 28, 1996 the Company was
incorporated and became a separate company beginning January 1, 1997. The
assets and liabilities carved out were carried over at historical cost which
approximated fair value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the accounts of the Company for the year
ended December 31, 1997 and the nine-months ended September 30, 1998
(unaudited). For the period March 27, 1995 (inception) to December 31, 1995 and
the year ended December 31, 1996, the financial statements include revenues and
cost of revenues directly attributable to internet services and expenses which
have been allocated from Lightspeed Software on a specific identification
basis. Further the Company shared certain employees and other resources with
Lightspeed Software. Allocations from Lightspeed Software for indirect expenses
for such shared resources have been made primarily on a proportional cost
allocation method. Management believes these allocations are reasonable and
that such expenses would not differ materially had the Company operated on a
stand-alone basis for the period from March 27, 1995 (inception) to December
31, 1995 and the year ended December 31, 1996. The financial statements of the
Company do not necessarily reflect the results of operations or financial
position that would have existed had the Company been an independent company.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has incurred losses since inception
and has had negative cash flows from operations in all periods except the
interim nine months ended September 30, 1998 (unaudited). In addition,
management anticipates that its cash and working capital requirements in the
short term cannot be met entirely from funds generated internally from
operations.
Management's operational and financing plans to address the above issues
include continued focus on increasing its subscriber base and geographic
coverage and obtaining equity and debt financing. The online services and
internet markets are highly competitive. The Company believes that existing
competitors, internet-based services, internet service providers, internet
directory services and telecommunication companies are likely to enhance their
service offerings resulting in greater competition for the Company. The
competitive conditions could have the following effects: require additional
pricing programs; increase
F-213
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
marketing spending; limit the Company's ability to expand its subscriber base
and result in increased attrition in the existing subscriber base. There can be
no assurance that growth in the Company's revenues or subscriber base will
continue or that the Company will be able to achieve or sustain profitability
or positive cash flow. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives ranging between three
to seven years.
Impairment of Long-Lived Assets
Management periodically determines whether any property or equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of. When indicators of
impairment of long-lived assets to be disposed of are present and the
discounted future cash flows estimated to be generated by those assets is less
than the carrying value of such assets, an impairment loss would be recorded by
the Company. No such impairment losses have been identified by the Company.
Stock Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123). SFAS 123 allows companies to account for stock-based compensation
under either the new provisions of SFAS 123 or the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), but requires pro forma disclosure in the footnotes to the financial
statements as if the measurement provisions of SFAS 123 had been adopted. The
Company has chosen to continue accounting for its stock-based compensation in
accordance with the provisions of APB 25.
Revenue Recognition
The Company recognizes internet access revenue when the services are
provided. The Company offers contracts for internet access which are billed in
the month prior to the
F-214
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
month of service. The Company has deferred recognizing revenue on these advance
billings until earned.
In June 1995, the Company entered into a strategic alliance with ACN
Communications ("ACN") which provides for ACN to sell internet services
provided by the Company as part of a telecommunications bundle of services. ACN
markets, invoices and collects for these internet services provided by the
Company. In return, ACN retains approximately 30% of the revenues received for
these services, or a minimum of $22,000 per month. The remainder of the
revenues are paid to the Company. Revenues from this alliance are included in
access revenues in the statement of operations.
Cost of Revenues
Cost of access revenues primarily consists of telecommunication expenses
inherent in the network infrastructure. Cost of access revenues also includes
fees paid to lease the Company's backbone, other license fees paid to third-
party software vendors, and product costs.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1997, 1996, and the period from March 27, 1995
(inception) to December 31, 1995, and the nine-month periods ended September
30, 1998 and 1997, the Company expensed $254,510, $274,284, $37,991, $101,130
(unaudited), and $207,606 (unaudited), respectively, as advertising costs.
Income Taxes
Historically, the Company has elected, by consent of its sole stockholder, to
be taxed as a subchapter S Corporation, as provided by the Internal Revenue
Code and the California Revenue and Taxation Code. Under the Subchapter S
provisions, the Company's results of operations are reported in the individual
income tax return of the sole stockholder. Accordingly, the Company was not
subject to Federal and State corporate income tax during the period for which
it was an S Corporation. The Company recorded California franchise tax
provisions of $800 for the year ended December 31, 1997 and the nine months
ended September 30, 1998.
The unaudited pro forma income tax information included in the Statement of
Operations and Note 7 is presented in accordance with Statement of Financial
Accounting Standards No. 109, [Accounting for Income Taxes], as if the Company
had been subject to federal and certain state income taxes for the years ended
December 31, 1995, 1996 and 1997 and for the nine-month periods ended September
30, 1997 and 1998.
F-215
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. The cash is
held by a high credit quality financial institution. For accounts receivable,
the Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations. The concentration of credit risk is mitigated by the large
customer base. The carrying amount of the receivables approximates their fair
value.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Disruption of these services could have an adverse
effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers and high-performance routers, which are important
components of its network, are each currently acquired from primarily one
source. In addition, some of the Company's suppliers have limited resources and
production capacity. If the suppliers are unable to meet the Company's needs as
it is building out its network infrastructure, then delays and increased costs
in the expansion of the Company's network infrastructure could result, having
an adverse effect on operating results.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 Comprehensive Income (SFAS 130), which
is required to be adopted in the year ended December 31, 1998. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in the financial statements, and display the accumulated balance
of other comprehensive income separately from retained earnings and additional
paid-in capital in the statement of stockholders' equity. The Company will be
required to restate earlier periods provided for comparative purposes, and it
is anticipated that the effect will be insignificant.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which is required to be adopted for
the year ended December 31, 1998. SFAS 131 changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to stockholders. The disclosure for segment information on the
financial statements is not expected to be material.
F-216
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Unaudited Interim Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in compliance with Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998,
are not necessarily indicative of the results that may be expected for an
entire year.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment...................... $1,181,406 $1,714,934 $ 2,284,351
Furniture, fixtures, and office equip-
ment................................... -- 36,774 58,285
Automobiles............................. 30,013 30,013 30,013
---------- ---------- -----------
1,211,419 1,781,721 2,372,649
Less accumulated depreciation........... (246,581) (669,945) (1,149,212)
---------- ---------- -----------
$ 964,838 $1,111,776 $ 1,223,437
========== ========== ===========
</TABLE>
4. COMMITMENTS
The Company leases office space under non-cancelable operating lease
agreements. The leases generally provide for renewal terms and the Company is
required to pay a portion of the common areas' expenses including maintenance,
real estate taxes and other expense. Rent expense for the years ended December
31, 1997, 1996, and the period from March 27, 1995 (inception) to December 31,
1995 was $74,719, $37,221, and $5,450, respectively. Rent expense for the nine
months ended September 30, 1998 and 1997 was $113,813 (unaudited) and $45,161
(unaudited), respectively.
Minimum future lease payments under operating leases with initial terms of
one year or more consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
1998.............................................. $101,636 $134,617
1999.............................................. 123,562 165,187
2000.............................................. 113,064 151,970
2001.............................................. 103,642 139,231
2002.............................................. -- 37,041
Thereafter........................................ -- 18,884
-------- --------
Total minimum lease payments...................... $441,904 $646,930
======== ========
</TABLE>
F-217
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTION PLAN
On July 24, 1998, the Company adopted the Lightspeed Net, Inc. Grant of
Incentive Stock Option (the "Option Plan") which permits the Company to grant
stock options to the Company's President. Under the Option Plan, the Company's
President may purchase up to eleven shares of the Company's common stock at a
price of $33,333.63 per share, the fair market value of the common stock on
the grant date as determined by the Company's Board of Directors. The options
granted under the Option Plan are fully vested and shall expire five years
from the date of grant. Refer to Note 9 for a possible settlement of these
options.
Stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
NUMBER OF EXERCISE PRICE PER
SHARES PRICE SHARE
--------- ---------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1997.............. -- $ -- $ --
Options granted............................. 11 33,333.63 33,333.63
Options exercised........................... -- -- --
Options canceled or expired................. -- -- --
--- ---------- ----------
Outstanding at September 30, 1998 (Unau-
dited)....................................... 11 $33,333.63 $33,333.63
=== ========== ==========
Exercisable at September 30, 1998............. 11 $33,333.63 $33,333.63
</TABLE>
Had compensation expense related to the Option Plan been determined based on
fair value at the grant date for options granted during the nine months ended
September 30, 1998 under the provisions of SFAS 123, the Company's net loss
would have been increased by $10,017 (unaudited). The effect of applying SFAS
123 for purposes of recognizing compensation expense is not necessarily
representative of the effects on reported net income for future periods.
The fair value of the option grant was estimated on the date of grant using
the minimum value option pricing fair value model as provided for under SFAS
123, with the following weighted-average assumptions used for grants in 1998:
dividend yield of 0%, a risk-free interest rate of 5.54%, and expected life of
the option term of six months. The weighted average fair values of the options
granted in 1998 with a stock price equal to the exercise price is $10,017
(unaudited).
As of September 30, 1998, the Company had no shares of common stock reserved
for future issuance under the Option Plan.
6. PROFIT SHARING PLAN
On December 28, 1989, Lightspeed Software, formerly known as MacSoft,
entered into the MacSoft Profit Sharing Plan and Trust (the "Profit Plan"). As
the stockholder has started additional companies, the Profit Plan has covered
the employees of each of those companies. Under the terms of the Profit Plan,
the sole stockholder of the Company historically
F-218
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. PROFIT SHARING PLAN (CONTINUED)
contributed 15% of the base salaries for all eligible employees to the Profit
Plan. An employee becomes eligible for the Profit Plan after reaching the age
of 21 and completing one year of service with the Company. Benefits under the
Profit Plan vest at a rate of 20% per year after three to seven years of
service. The Profit Plan for the Company and the affiliated companies is
administered by a third party. Voluntary contributions to the Profit Plan in
the amounts of $90,689, $49,434, and $8,351 were made by the Company for the
years ended December 31, 1997, 1996, and the period from March 27, 1995
(inception) to December 31, 1995. The Company elected not to have a profit
sharing contribution for 1998.
7. INCOME TAXES
Upon consummation of an agreement with OneMain.com, Inc. ("OneMain.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of OneMain.com as more fully described in Note 11, the
Company's status as an S Corporation under the Code will automatically
terminate and normal Federal and state corporate income tax rates will apply.
Based upon the cumulative temporary differences, the Company would have
recognized a deferred Federal and state income tax benefit and asset of
$109,008 as of December 31, 1997 and $42,869 as of September 30, 1998
(unaudited), with a full valuation allowance had the termination of its
election to be treated as an S Corporation occurred on those respective dates.
No pro forma income tax benefit is reflected for the period from March 27,
1995 (inception) to December 31, 1995 and the years ended December 31, 1996 and
1997 and the nine months ended September 30, 1997 (unaudited) and 1998
(unaudited) as the Company would have provided a full valuation allowance
against the deferred tax asset had it been a C Corporation.
8. RELATED PARTY TRANSACTIONS
The Company provides loans to its employees which are payable monthly and
bear an interest rate of 10%. Amounts receivable from employee loans at
December 31, 1996, 1997, and September 30, 1998 (unaudited) were $0, $17,758,
and $23,184, respectively and are included in other assets on the balance
sheet.
The Company purchases most of its computer equipment from Lightspeed
Technologies, Inc, an affiliated company which is wholly owned by the sole
stockholder of the Company. Purchases from Lightspeed Technologies, Inc. for
the years ended December 31, 1997, 1996, and the period from March 27, 1995
(inception) to December 31, 1995 were $877,373, $1,042,327, and $327,502,
respectively. Purchases for the nine months ended September 30, 1998 and 1997
were $531,082 (unaudited) and $274,547 (unaudited), respectively. The Company
believes that such purchases were made at the fair market value of the assets
acquired.
F-219
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases a customer service center from the sole shareholder of the
Company. Total rental expense paid for the years ended December 31, 1997, 1996,
and the period from March 27, 1995 (inception) to December 31, 1995 was
$60,000, $9,300 and $4,700 respectively. Rental expense for the nine months
ended September 30, 1998 and 1997 was $45,000 (unaudited) and $45,000
(unaudited), respectively. On November 10, 1998, the Company entered a new
agreement effective December 1, 1998 for three years increasing the monthly
rent to $5,280 per month.
On November 11, 1998, the Company entered into a lease agreement for a 36
strand fiber optic connection between two of its facilities from Lightspeed
Software. The lease agreement is effective December 1, 1998 for three years at
$900 per month.
9. SUBSEQUENT EVENT (UNAUDITED)
The Company's stockholder has entered into an agreement whereby he will sell
his shares in the Company to OneMain.com. The Company's sole stockholder will
exchange his shares in the Company for cash and shares of common stock of
OneMain.com concurrent with the consummation of the initial public offering
("IPO") of the common stock of OneMain.com. Additionally, the Company's
stockholder will be given additional consideration, contingent upon certain
operational and earnings margin requirements, which shall be equal to one-fifth
of the difference between total revenue for the Company for the 12 months ended
June 30, 1999 and the revenues for the Company for the period from April 1,
1998 through June 30, 1998 multiplied by four. The amount of the additional
consideration will be payable in either cash or stock, at the option of
OneMain.com. Upon consummation of the agreement, OneMain.com. will become the
sole stockholder of the Company and the Company will continue to exist.
In connection with this agreement, the outstanding stock options will be
canceled by a payment to the holder. As a result, in the period of cancellation
the Company will recognize compensation expense equal to the amount payable for
the cancellation.
F-220
<PAGE>
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
To the Stockholders of
JPS.Net Corporation
We have audited the accompanying balance sheets of JPS.Net Corporation as of
December 31, 1997 and September 30, 1998, and the related statements of
operations, stockholders' equity, and cash flows for the period January 31,
1997 (inception) to December 31, 1997 and the nine months ended September 30,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of JPS.Net
Corporation at December 31, 1997 and September 30, 1998, and the results of its
operations and its cash flows for the period January 31, 1997 (inception) to
December 31, 1997 and the nine-month period ended September 30, 1998, in
conformity with generally accepted accounting principles.
As discussed in Note 8 to the financial statements, the Company's recurring
losses from operations and working capital deficiency raise substantial doubt
about its ability to continue as a going concern. (Management's plans as to
these matters are also described in Note 8.) These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Vienna, Virginia
December 18, 1998
F-221
<PAGE>
JPS.NET CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 767,890 $ 1,076,893
Restricted cash.................................... -- 339,867
Accounts receivable................................ 79,186 135,859
Short-term investments............................. -- 300,000
Notes receivable from related parties.............. 91,661 264,325
Other current assets............................... 17,975 180,328
---------- -----------
Total current assets............................. 956,712 2,297,272
Property and equipment, net......................... 284,227 787,437
Other assets........................................ 7,302 42,303
---------- -----------
Total assets..................................... $1,248,241 $ 3,127,012
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, related parties..................... $ 59,217 $ 32,572
Note payable to former stockholder, current........ -- 244,048
Accounts payable................................... 354,328 191,263
Accrued expenses................................... 83,354 381,944
Unearned revenues.................................. 1,730,649 4,268,750
---------- -----------
Total current liabilities........................ 2,227,548 5,118,577
Note payable to former stockholder, net of current
portion........................................... -- 830,952
---------- -----------
Total liabilities................................ 2,227,548 5,949,529
Stockholders' equity:
Capital stock, no par value (10 million shares
authorized; 5,000,000 and 4,708,947 shares issued
and outstanding at December 31, 1997 and
September 30, 1998, respectively)................. 13,360 12,582
Accumulated deficit................................ (992,667) (2,835,099)
---------- -----------
Total stockholder's equity....................... (979,307) (2,822,517)
---------- -----------
Total liabilities and stockholders' equity....... $1,248,241 $ 3,127,012
========== ===========
</TABLE>
See accompanying notes.
F-222
<PAGE>
JPS.NET CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 31, 1997 NINE MONTHS ENDED
(INCEPTION) TO SEPTEMBER 30,
DECEMBER 31, 1997 ----------------------
1997 1997 1998
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
NET REVENUES:
Access revenues..................... $2,060,390 $1,043,197 $5,913,748
Other revenues...................... 14,008 14,008 28,986
---------- ---------- ----------
Total net revenues................ 2,074,398 1,057,205 5,942,734
COSTS AND EXPENSES:
Costs of access and other
revenues........................... 1,121,368 513,496 2,400,345
Operations, customer support, and
general and administrative......... 1,573,726 729,551 3,354,956
Sales and marketing................. 294,841 129,344 809,743
Amortization........................ 24,681 13,568 85,466
Depreciation........................ 52,428 32,855 88,729
---------- ---------- ----------
Total costs and expenses.......... 3,067,044 1,418,814 6,739,239
Loss from operations................. (992,646) (361,609) (796,505)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income..................... 8,911 4,080 32,339
Interest expense.................... (8,932) (989) (4,175)
---------- ---------- ----------
Loss before taxes.................... $ (992,667) $ (358,518) $ (768,341)
---------- ---------- ----------
Income tax provision................ -- -- --
---------- ---------- ----------
Net loss............................. $ (992,667) $ (358,518) $ (768,341)
========== ========== ==========
</TABLE>
See accompanying notes.
F-223
<PAGE>
JPS.NET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
NUMBER OF CAPITAL ACCUMULATED STOCKHOLDERS'
SHARES STOCK DEFICIT EQUITY
--------- ------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 31, 1997
(INCEPTION).................... -- $ -- $ -- $ --
Issuance of capital stock...... 5,000,000 13,360 -- 13,360
Net loss....................... -- -- (992,667) (992,667)
--------- ------- ----------- -----------
BALANCE AT DECEMBER 31, 1997.... 5,000,000 $13,360 $ (992,667) $ (979,307)
Repurchase of capital stock.... (340,190) (909) (1,074,091) (1,075,000)
Issuance of capital stock...... 49,137 131 -- 131
Net loss....................... -- (768,341) (768,341)
--------- ------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1998... 4,708,947 $12,582 $(2,835,099) $(2,822,517)
========= ======= =========== ===========
</TABLE>
See accompanying notes.
F-224
<PAGE>
JPS.NET CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD NINE MONTHS ENDED
JANUARY 31, 1997 SEPTEMBER 30,
(INCEPTION) TO ---------------------
DECEMBER 31, 1997 1997 1998
----------------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................. $(992,667) $(358,518) $ (768,341)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization....... 77,109 46,423 174,195
Loss on disposal of fixed assets.... 84,900 -- --
Changes in operating assets and
liabilities:
Prepaid expenses and other........ (25,277) -- (161,179)
Accounts receivable............... (79,186) -- (56,673)
Other current assets.............. (91,661) (51,891) (173,838)
Accounts payable.................. 354,328 67,699 (163,065)
Accrued expenses.................. 83,354 3,392 94,978
Unearned revenues................. 1,730,649 1,035,932 2,538,101
Other current liabilities......... -- -- 203,613
--------- --------- ----------
Net cash provided by operating
activities.......................... 1,141,549 743,037 1,687,791
--------- --------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment.. (446,236) (242,201) (712,407)
Increase in investments and
restricted cash..................... -- (13,568) (639,867)
--------- --------- ----------
Net cash used in investing
activities.......................... (446,236) (255,769) (1,352,274)
--------- --------- ----------
FINANCING ACTIVITIES:
Net proceeds from issuance of common
stock............................... 13,360 13,360
Net proceeds from notes payable,
related parties..................... 59,217 5,902 (26,514)
--------- --------- ----------
Net cash (used in) provided by
financing activities................ 72,577 19,262 (26,514)
--------- --------- ----------
Net increase in cash and cash
equivalents......................... 767,890 506,530 309,003
Cash and cash equivalents at
beginning of period................. -- -- 767,890
--------- --------- ----------
Cash and cash equivalents at end of
period.............................. $ 767,890 $ 506,530 $1,076,893
========= ========= ==========
</TABLE>
See accompanying notes.
F-225
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
JPS.Net Corporation (the "Company") is a regional provider of Internet
access. The Company was incorporated on January 31, 1997 under the laws of the
State of California. All of the Company's stock was issued to two individuals
for cash. These individuals had computer sales and consulting experience and in
the months preceeding the Company's incorporation, had begun to provide
Internet access services to subscribers.
The Company was formed with the intention of building an Internet access
subscriber base and geographic coverage. The online services and Internet
markets are highly competitive. The Company believes that existing competitors,
Internet-based services, Internet service providers, Internet directory
services and telecommunication companies are likely to enhance their service
offerings resulting in greater competition for the Company. The competitive
conditions could have the following effects: require additional pricing
programs; increase spending on marketing; limit the Company's ability to expand
its subscriber base; and result in increased attrition in the existing
subscriber base. There can be no assurance that growth in the Company's
revenues or subscriber base will continue or that the Company will be able to
achieve or sustain profitability or positive cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has incurred losses of $992,667 and $768,341 for the period from
January 31, 1997 (date of inception) to December 31, 1997 and the nine-month
period ended September 30, 1998, respectively. These losses have significantly
weakened the Company's financial position and its ability to purchase equipment
and meet current operating expenses, and, at September 30, 1998, the Company's
current liabilities exceeded its current assets by $2,821,353.
The Company is in the process of increasing the prices it charges for its
services by approximately 40%. The satisfactory completion of these
negotiations and increase in prices charged is essential as the Company has no
other immediate plans that will provide sufficient cash flows to meet current
operating requirements. Because the negotiations are still in progress, there
can be no assurance that the Company will have sufficient funds to finance its
future operations. All of these matters raise substantial doubt about the
Company's ability to continue as a going concern and, in the event the
negotiations for continued financing are unsuccessful and the increase in
prices reduces the number of customers substantially, the Company has plans to
substantially reduce the staffing at the Company. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts or classifications
of liabilities that may result from the outcome of this uncertainty.
F-226
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time
of purchase to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight- line method over the estimated useful lives, ranging between
three to seven years. Leasehold improvements are amortized over the lesser of
the related lease term or the useful life.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid for in advance by customers. The Company has deferred recognizing revenue
on these advance payments and amortizes the amounts to revenue on a straight-
line basis as the services are provided.
Costs of Access Revenues
Costs of access revenues primarily consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
reproduction fees for Web browser software based on a per-user charge, other
license fees paid to third-party software vendors, product costs, and
contractor fees for distribution of software to new subscribers.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the
period from January 31, 1997 (inception) to December 31, 1997, and the nine-
month periods ended September 30, 1997 and 1998, the Company expensed $292,631,
$127,314 (unaudited), and $332,406, respectively, as advertising costs.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Financial Standards No. 109, Accounting for Income Taxes
(SFAS 109). Under the
F-227
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
of a change in tax rates on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about Segments
of an Enterprise and Related Information, which, if the Company participates in
the proposed IPO (see Note 10), is required to be adopted for the year ended
December 31, 1998. SFAS 131 changes the way public companies report segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial reports to
stockholders. The disclosure for segment information on the financial
statements is not expected to be material.
Financial Instruments
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. Management believes that the credit risk related to its deposits
with financial institutions is minimal.
The Company grants credit without collateral to its customers, however
ongoing credit evaluations of customers' financial condition are performed. The
Company maintains reserves for credit losses, and such losses have been within
management's expectations. The concentration of credit risk is mitigated by the
Company's large customer base.
Sources of Supplies
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
Although the Company attempts to maintain vendors for required products, its
modems, terminal servers, and high-performance routers, which are important
components of its network, are each currently acquired from varied sources. In
addition, some of the Company's suppliers have limited resources and production
capacity. If the suppliers are
F-228
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unable to meet the Company's needs as it is building out its network
infrastructure, then delays and increased costs in the expansion of the
Company's network infrastructure could result, having an adverse effect on
operating results.
Unaudited Interim Financial Information
The accompanying unaudited statements of operations and cash flows for the
nine months ended September 30, 1997 together with the related notes have been
prepared in accordance with generally accepted accounting principles for the
interim financial reporting and in compliance with Article 10 of Regulation S-
X. Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
materials) considered necessary for a fair presentation have been included.
Operating results for the nine-month periods ended September 30, 1997 and 1998
are not necessarily indicative of results that may be expected for an entire
year.
3. RESTRICTED CASH
In 1998, the Company entered into an agreement with a financial institution
(the "Institution") whereby the Institution provided credit card processing and
payment services to the Company. As a requirement of performing the services,
the Institution required that the Company pay for such services and maintain an
amount on deposit with the Institution equal to 10% of the total dollar amount
of credit card receipts processed by the Institution on behalf of the Company
over the course of the immediately preceding six months. Any
amounts exceeding the 10% threshold described above were deposited in the
Company's operating bank account. The Institution reserves the right to use the
deposit as its first recourse to offset any losses it may incur due to the
inability of the Company to perform services where payment was received in
advance from customers, and where the Institution might be held liable by the
customer or another financial institution under the terms of the credit card
agreements with such customers or financial institutions. As of September 30,
1998 the total amounts held on reserve by the Institution were approximately
$340,000.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Computer equipment.................................. $141,590 $ 532,106
Capitalized line installation....................... 176,528 397,033
Furniture, fixtures, and office equipment........... 15,659 21,366
-------- ---------
333,777 950,505
Less accumulated depreciation and amortization...... (49,550) (163,068)
-------- ---------
$284,227 $ 787,437
======== =========
</TABLE>
F-229
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. NOTE PAYABLE TO FORMER STOCKHOLDER
In September 1998, the Company entered into an agreement with a stockholder
whereby the Company agreed to repurchase all of the outstanding shares held by
the stockholder for $1,075,000. A note payable to the stockholder, in the
amount of $1,075,000, bearing an annual interest rate of 7%, was issued by the
Company at September 30, 1998, in exchange for the 340,190 shares held by the
stockholder. The fair value of the shares repurchased was established based on
an bona fide offer to purchase all the outstanding shares of the Company by
another entity for approximately $15,800,000. This offer was rejected by the
Company. In accordance with Accounting Research Bulletin 43, the Company chose
to allocate the purchase price of the stock between common stock and retained
deficit. As a result, as of September 30, 1998, common stock was reduced by
$909 or $0.0027 per share, based on the price paid by the stockholder at time
of purchase. The remainder, or $1,074,091, was allocated to retained deficit.
Scheduled payments of principal on the note payable for the next five years
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1998.............................. $ 47,597
1999.............................. 297,506
2000.............................. 319,013
2001.............................. 342,075
2002.............................. 68,809
----------
$1,075,000
==========
</TABLE>
6. LEASE COMMITMENTS
The Company leases office space and various office and computer equipment
under non-cancelable operating lease agreements. The leases generally provide
for renewal terms. Rent expense for the period January 31, 1997 (inception) to
December 31, 1997 and for the nine-month periods ended September 30, 1997 and
1998 was approximately $78,000, $42,000 (unaudited), and 137,000 respectively.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998.............................. $ 619,731
1999.............................. 2,047,906
2000.............................. 914,896
----------
Total minimum lease payments...... $3,582,533
==========
</TABLE>
F-230
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of potential deferred tax assets and deferred tax liabilities are
presented below:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Net operating losses............................ $ 328,441 $ 563,487
Accrued expenses................................ -- 81,108
--------- ---------
Total deferred tax assets....................... 328,441 644,595
Depreciation and amortization................... (18,314) (32,912)
--------- ---------
Net deferred tax asset.......................... 310,127 611,683
--------- ---------
Valuation allowance............................. (310,127) (611,683)
--------- ---------
Net deferred tax asset.......................... $ -- $ --
========= =========
</TABLE>
The Company is in a net deferred tax asset position at September 30, 1998 and
December 31, 1997 (before the consideration of a valuation allowance). However,
in light of the Company's history of operating losses, the Company has
established a valuation reserve for the entire amount of the net deferred tax
assets.
The income tax provisions for Federal and state income taxes for both the
period from January 31, 1997 (inception) to December 31, 1997 and the nine
months ended September 30, 1997 are zero.
The Company did not recognize an income tax benefit for the period from
January 31, 1997 (inception) through December 31, 1997 nor for the nine months
ended September 30, 1998 of approximately $310,000 and $300,000, respectively
due to aforementioned uncertainties concerning the Company's ability to realize
deferred tax assets.
8. RELATED PARTY TRANSACTIONS
The Company had two notes receivable from related parties which totaled
$91,661 and $264,325 as of December 31, 1997 and September 30, 1998,
respectively. The first note receivable amounted to $46,702 and $154,449 as of
December 31, 1997 and September 30, 1998, respectively, and relates to a line
of credit to a stockholder approved by the Company. The line of credit may not
exceed $374,000. The note is payable on demand and accrues interest at a rate
of 5% annually on unpaid balances. The second note receivable amounted to
$44,959 and $109,876 as of December 31, 1997 and September 30, 1998,
respectively, and relates to a loan made by the Company to a former
stockholder. The note is payable on demand and accrues interest at a rate of 7%
annually on unpaid balances.
F-231
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company had four notes payable which it assumed on behalf of a related
party and which amounted to $59,217 and $32,572 at December 31, 1997 and
September 30, 1998, respectively. The first note payable amounted to $8,396 and
$0 as of December 31, 1997 and September 30, 1998, respectively, and relates to
a loan by an acquaintance of a stockholder of the Company, which was assumed by
the Company upon its incorporation.
The note is payable on demand and accrues interest at a rate of 36.8%
annually on unpaid balances. The note was paid off in full in 1998. The second
note payable which amounted to $16,164 and $2,926 at December 31, 1997, and
September 30, 1998, respectively, relates to a loan by an relative of a
stockholder of the Company, which was assumed by the Company upon its
incorporation. The note is payable on demand and accrues interest at a rate of
15% annually on unpaid balances. The third and fourth note payable which
amounted to $34,657 and $29,646 as of December 31, 1997, and September 30,
1998, respectively, relate to loans assumed by the Company on behalf a
stockholder of the Company. The notes accrue interest at a rate of 16% annually
on unpaid balances. The notes will be assumed by one of the Company's
stockholders on October 1, 1998, and thus are treated as current liabilities at
December 31, 1997 and September 30, 1998.
10. LITIGATION
The Company is involved in litigation arising in the ordinary course of
business. After consultation with legal counsel, management anticipates that
these matters will be resolved without material adverse effect on the Company's
financial position.
11. SUBSEQUENT EVENT (UNAUDITED)
The Company and its stockholders have entered into an agreement whereby the
stockholders will sell their stock in the Company to OneMain.com, Inc.
("OneMain.com"). The Company's stockholders will exchange their stock in the
Company for cash and shares of common stock of OneMain.com concurrent with the
consummation of the initial public offering ("IPO") of the common stock of
OneMain.com. Additionally, the Company's members will be given additional
consideration, contingent upon certain operational and earnings margin
requirements, which shall be equal to one-half of the difference between total
revenue for the Company for the 12 months ended September 30, 1999 and the
revenues for the Company for the period from June 1, 1998 through September 30,
1998 multiplied by four. The amount of the additional consideration will be
payable in either cash or stock, at the option of OneMain.com. Upon
consummation of the agreement, OneMain.com will become the sole stockholder of
the Company.
F-232
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER WE NOR
THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. WHEN YOU MAKE A DECISION ABOUT WHETHER TO
INVEST IN OUR COMMON STOCK, YOU SHOULD NOT RELY UPON ANY INFORMATION OTHER
THAN THE INFORMATION IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR SALE OF COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPEC-
TUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE SHARES OF THE COMMON
STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 8
The Company.............................................................. 20
The Transactions......................................................... 20
Use of Proceeds.......................................................... 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Dilution................................................................. 25
Selected Combined Pro Forma Financial Data............................... 27
Selected Historical Financial Data for Our ISPs.......................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 65
Management............................................................... 76
Certain Transactions..................................................... 83
Principal Stockholders................................................... 86
Description of Capital Stock............................................. 87
Shares Available for Future Sale......................................... 91
Underwriting............................................................. 94
Experts.................................................................. 97
Legal Matters............................................................ 100
Additional Information................................................... 100
Glossary of Technical Terms.............................................. G-1
Index to Financial Statements............................................ F-1
</TABLE>
----------
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE DEALERS OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO]
ONEMAIN.COM, INC.
Common Stock
-----------
PROSPECTUS
-----------
BT ALEX. BROWN
SOUNDVIEW TECHNOLOGY GROUP
WIT CAPITAL CORPORATION
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all fees and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered. All amounts shown are
estimates except for the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Securities and Exchange Commission registration fee................. $39,963
NASD filing fee..................................................... 14,875
Nasdaq National Market listing fee.................................. 95,000
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Printing and engraving expenses..................................... *
Transfer agent and registrar fees................................... *
Miscellaneous expenses.............................................. *
-------
Total............................................................. $ *
=======
</TABLE>
--------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and Bylaws of the Registrant provide for the
indemnification of the Registrant's directors and officers to the fullest
extent authorized by, and subject to the conditions set forth in the General
Corporation Law of the State of Delaware (the "DGCL"), except that the
Registrant will indemnify a director or officer in connection with a proceeding
(or part thereof) initiated by the person only if the proceeding (or part
thereof) was authorized by the Registrant's Board of Directors. The
indemnification provided under the Certificate of Incorporation and Bylaws
includes the right to be paid by the Registrant the expenses (including
attorneys' fees) in advance of any proceeding for which indemnification may be
had in advance of its final disposition, provided that the payment of such
expenses (including attorneys' fees) incurred by a director or officer in
advance of the final disposition of a proceeding may be made only upon delivery
to the Registrant of an undertaking by or on behalf of the director or officer
to repay all amounts so paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. Pursuant to the Bylaws,
if a claim for indemnification is not paid by the Registrant within 60 days
after a written claim has been received by the Registrant, the claimant may at
any time thereafter bring an action against the Registrant to recover the
unpaid amount of the claim and, if successful in whole or in part, the claimant
will be entitled to be paid also the expense of prosecuting the action.
As permitted by the DGCL, the Registrant's Certificate of Incorporation
provides that directors of the Registrant shall not be liable to the Registrant
or its stockholders for
II-1
<PAGE>
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the
Registrant or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to unlawful payment of dividends or unlawful
stock purchase or redemption or (iv) for any transaction from which the
director derived an improper personal benefit. As a result of this provision,
the Registrant and its stockholders may be unable to obtain monetary damages
from a director for breach of his or her duty of care.
Under the Bylaws, the Registrant has the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Registrant, or is or was serving at the request of the
Registrant as a director, officer, employee, partner (limited or general) or
agent of another corporation or of a partnership, joint venture, limited
liability company, trust or other enterprise, against any liability asserted
against the person or incurred by the person in any such capacity, or arising
out of the person's status as such, and related expenses, whether or not the
Registrant would have the power to indemnify the person against such liability
under the provisions of the DGCL. The Registrant intends to purchase director
and officer liability insurance on behalf of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) On August 19, 1998, in connection with its formation, the Registrant sold
(i) 2,000,000 shares of its common stock, $.001 par value per share ("Common
Stock"), to Jonathan J. Ledecky, (ii) 1,500,000 shares of its Common Stock to
Stephen E. Smith and (iii) 1,052,500 shares of its Common Stock to Dewey K.
Shay, in each case for cash at a price per share of $0.01 for an aggregate
consideration of $45,525. These sales were effected without registration under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon
the exemption from registration contained in Section 4(2) of the Securities
Act.
(b) On October 19, 1998, in connection with entering into a Senior Management
Agreement, Martin R. Lyons purchased 200,000 shares of Common Stock at a price
per share of $0.05 for an aggregate consideration of $10,000, paid $200 in cash
and a note in the amount of $9,800. This sale was effected without registration
under the Securities Act in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act.
(c) On November 10, 1998, in connection with entering into a Senior
Management Agreement, Merrill L. Stout purchased 25,000 shares of Common Stock
at a purchase price per share of $0.05 for an aggregate consideration of
$1,250, paid in cash. This sale was effected without registration under the
Securities Act in reliance upon the exemption for registration contained in
Section 4(2) of the Securities Act.
Prior to filing this Registration Statement, the Registrant agreed to issue
approximately 6,087,211 shares of its Common Stock to 117 persons in exchange
for all the stock or limited liability company interests held by these persons
in the 17 companies the Registrant will acquire upon completion of its initial
public offering. If the Registrant does not complete its initial public
offering prior to March 31, 1998, the number of shares of Common Stock issued
II-2
<PAGE>
to these persons will increase by 3% to a total of 6,269,826 shares of Common
Stock. The stock and limited liability company interests to be acquired by the
Registrant in exchange for these shares have been valued at a total of
approximately $60.9 million by the Registrant. The Transactions were effected
without registration under the Securities Act in reliance upon the exemption
from registration contained in Rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act.
Each of the foregoing transactions was effected without the use of an
underwriter.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Amended and Restated Bylaws of the Registrant
5.1* Opinion of Hogan & Hartson L.L.P.
10.1* Stock Purchase Agreement among the Registrant, United States
Internet, Inc. and certain shareholders of United States Internet,
Inc.
10.2* Form of Stock Purchase Agreement among the Registrant and certain
individual shareholders of United States Internet, Inc.
10.3* Stock Purchase Agreement among the Registrant, JPS.Net Corporation
and the shareholders of JPS.Net Corporation.
10.4* Stock Purchase Agreement among the Registrant, D&E SuperNet, Inc. and
the shareholder of D&E SuperNet, Inc.
Senior Management Agreement between the Registrant and Stephen E.
10.5* Smith
10.6* Senior Management Agreement between the Registrant and Dewey K. Shay
Senior Management Agreement between the Registrant and Martin R.
10.7* Lyons
Senior Management Agreement between the Registrant and Allon H.
10.8* Lefever
10.9* Employment Agreement between the Registrant and Michael C. Crabtree
10.10* Registration Rights Agreement among the Registrant and certain
stockholders of the Registrant
10.11* OneMain.com, Inc. 1999 Stock Option and Incentive Plan
10.12* OneMain.com, Inc. 1999 Employee Stock Purchase Plan
11.1* Computation of Per Share Earnings
21.1* Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (OneMain.com)
23.2 Consent of Ernst & Young LLP, Independent Auditors (D&E Supernet)
23.3 Consent of Ernst & Young LLP, Independent Auditors (SunLink, Inc.)
23.4 Consent of Ernst & Young LLP, Independent Auditors (LebaNet, Inc.)
Consent of Grant Thornton LLP, Independent Auditors (Southwind
23.5 Internet Access, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Horizon Internet
23.6 Technologies, Inc.)
Consent of Coulter & Justus, P.C., Independent Auditors (United
23.7 States Internet, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Internet Partners
23.8 of America, LC)
Consent of Lopez, Levi & Associates, P.A., Independent Auditors
23.9 (Netrox, LLC)
23.10 Consent of Ernst & Young LLP, Independent Auditors (ZoomNet, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Palm.Net, USA,
23.11 Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Internet Access
23.12 Group, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Midwest Internet,
23.13 L.L.C.)
23.14 Consent of Kevin J. Tochtrop, Certified Public Accountant,
Independent Auditors (Internet Solutions, LLC)
23.15 Consent of Ernst & Young LLP, Independent Auditors (FGInet, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Superhighway,
23.16 Inc.)
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
23.17 Consent of Ernst & Young LLP, Independent Auditors (Lightspeed Net, Inc.)
23.18 Consent of Ernst & Young LLP, Independent Auditors (JPS.Net Corporation)
23.19* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.20 Consent of Allon H. Lefever (Director Nominee)
23.21 Consent of Michael C. Crabtree (Director Nominee)
23.22 Consent of Thomas R. Eisenmann (Director Nominee)
27.1 Financial Data Schedule
99.1* Form of Rule 134 e-mail Notice to Wit Capital Corporation Members
99.2* Form of Rule 134 e-mail Notice to e-Dealer Customers
99.3* Form of Rule 134 e-mail Notice to Subscribers of Companies to be Acquired by Registrant
99.4* Text of Wit Capital Corporation Website Established for this Offering
</TABLE>
--------
* To be filed by amendment.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because the information required to be set forth
therein is not applicable or is included elsewhere in the Financial Statements
or the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the underwriter at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as may be required by the
underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SOUTHAMPTON, NEW YORK,
ON THE 28TH DAY OF DECEMBER, 1998.
ONEMAIN.COM, INC.
By /s/ Stephen E. Smith
----------------------------------
STEPHEN E. SMITH
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATE INDICATED.
NAME TITLE DATE
/s/ Stephen E. Smith Chairman, President December 28, 1998
- ------------------------------------- and Chief Executive
STEPHEN E. SMITH Officer and
Director (Principal
Executive Officer)
/s/ Dewey K. Shay Vice President and December 28, 1998
- ------------------------------------- Chief Financial
DEWEY K. SHAY Officer (Principal
Financial and
Accounting Officer)
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
------- -------- ------
<C> <S> <C>
1.1* Form of Underwriting Agreement
Amended and Restated Certificate of Incorporation of the
3.1* Registrant
3.2* Amended and Restated Bylaws of the Registrant
5.1* Opinion of Hogan & Hartson L.L.P.
10.1* Stock Purchase Agreement among the Registrant, United States
Internet, Inc. and certain shareholders of United States
Internet, Inc.
10.2* Form of Stock Purchase Agreement among the Registrant and
certain individual shareholders of United States Internet,
Inc.
10.3* Stock Purchase Agreement among the Registrant, JPS.Net
Corporation and the shareholders of JPS.Net Corporation
10.4* Stock Purchase Agreement among the Registrant, D&E SuperNet,
Inc. and the shareholder of D&E SuperNet, Inc.
Senior Management Agreement between the Registrant and
10.5* Stephen E. Smith
Senior Management Agreement between the Registrant and Dewey
10.6* K. Shay
Senior Management Agreement between the Registrant and Martin
10.7* R. Lyons
Senior Management Agreement between the Registrant and Allon
10.8* H. Lefever
Employment Agreement between the Registrant and Michael C.
10.9* Crabtree
10.10* Registration Rights Agreement among the Registrant and
certain stockholders of the Registrant
10.11* OneMain.com, Inc. 1999 Stock Option and Incentive Plan
10.12* OneMain.com, Inc. 1999 Employee Stock Purchase Plan
11.1* Computation of Per Share Earnings
21.1* Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent Auditors
23.1 (OneMain.com)
Consent of Ernst & Young LLP, Independent Auditors (D&E
23.2 Supernet)
Consent of Ernst & Young LLP, Independent Auditors (SunLink,
23.3 Inc.)
Consent of Ernst & Young LLP, Independent Auditors (LebaNet,
23.4 Inc.)
Consent of Grant Thornton LLP, Independent Auditors
23.5 (Southwind Internet Access, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Horizon
23.6 Internet Technologies, Inc.)
Consent of Coulter & Justus, P.C., Independent Auditors
23.7 (United States Internet, Inc.)
23.8 Consent of Ernst & Young LLP, Independent Auditors (Internet
Partners of America, LC)
Consent of Lopez, Levi & Associates, P.A., Independent
23.9 Auditors (Netrox, LLC)
Consent of Ernst & Young LLP, Independent Auditors (ZoomNet,
23.10 Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Palm.Net,
23.11 USA, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Internet
23.12 Access Group, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (Midwest
23.13 Internet, L.L.C.)
23.14 Consent of Kevin J. Tochtrop, Certified Public Accountant,
Independent Auditors (Internet Solutions, LLC)
Consent of Ernst & Young LLP, Independent Auditors (FGInet,
23.15 Inc.)
Consent of Ernst & Young LLP, Independent Auditors
23.16 (Superhighway, Inc.)
Consent of Ernst & Young LLP, Independent Auditors
23.17 (Lightspeed Net, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (JPS.Net
23.18 Corporation)
23.19* Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.20 Consent of Allon H. Lefever (Director Nominee)
23.21 Consent of Michael C. Crabtree (Director Nominee)
23.22 Consent of Thomas R. Eisenmann (Director Nominee)
27.1 Financial Data Schedule
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.1* Form of Rule 134 e-mail Notice to Wit Capital Corporation Members
99.2* Form of Rule 134 e-mail Notice to e-Dealer Customers
99.3* Form of Rule 134 e-mail Notice to Subscribers of Companies to be Acquired by Registrant
99.4* Text of Wit Capital Corporation Website Established for this Offering
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 28, 1998 with respect to the financial
statements of OneMain.com, Inc. included in the Registration Statement (Form S-
1 No. 333-00000) and related Prospectus of OneMain.com, Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
December 29, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 23, 1998 with respect to the financial
statements of D&E SuperNet included in the Registration Statement (Form S-1 No.
333-00000) and related Prospectus of OneMain.com, Inc. for the registration of
its Common Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 24, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 30, 1998 with respect to the financial
statements of SunLink, Inc. included in the Registration Statement (Form S-1
No. 333-00000) and related Prospectus of OneMain.com, Inc. for the registration
of its Common Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 24, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 17, 1998 with respect to the financial
statements of LebaNet, Inc. included in the Registration Statement (Form S-1
No. 333-00000) and related Prospectus of OneMain.com, Inc. for the registration
of its Common Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 24, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated October 23, 1998, accompanying the financial
statements of SouthWind Internet Access, Inc. contained in the Registration
Statement (Form S-1 No. 333-00000) and Prospectus of OneMain.com, Inc. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
Wichita, Kansas
December 29, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 11, 1998 with respect to the financial
statements of Horizon Internet Technologies, Inc. in the Registration Statement
(Form S-1 No. 333-00000) and related Prospectus of OneMain.com, Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
Birmingham, Alabama
December 24, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 4, 1998 with respect to United States
Internet, Inc. in the Registration Statement (Form S-1 No. 333-00000) and
related Prospectus of OneMain.com, Inc. for the registration of its Common
Stock.
/s/ Coulter & Justus, P.C.
Knoxville, Tennessee
December 29, 1998
<PAGE>
EXHIBIT 23.8
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 22, 1998 with respect to the financial
statements of Internet Partners of America, LC in the Registration Statement
(Form S-1 No. 333-00000) and related Prospectus of OneMain.com, Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
Little Rock, Arkansas
December 24, 1998
<PAGE>
EXHIBIT 23.9
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 28, 1998 (except for the last two
paragraphs of Note I, as to which the date is November 3, 1998) with respect to
Netrox, LLC in the Registration Statement (Form S-1 No. 333-00000) and related
Prospectus of OneMain.com, Inc. for the registration of its Common Stock.
/s/ Lopez Levi & Associates, P.A.
Miami, Florida
December 29, 1998
<PAGE>
EXHIBIT 23.10
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 13, 1998 with respect to the financial
statements of ZoomNet, Inc. in the Registration Statement (Form S-1 No. 333-
00000) and related Prospectus of OneMain.com, Inc. for the registration of its
Common Stock.
/s/ Ernst & Young LLP
Columbus, Ohio
December 24, 1998
<PAGE>
EXHIBIT 23.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 25, 1998 with respect to the financial
statements of Palm.Net, USA, Inc. included in the Registration Statement (Form
S-1 No. 333-00000) and related Prospectus of OneMain.com, Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
Jacksonville, Florida
December 24, 1998
<PAGE>
EXHIBIT 23.12
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 2, 1998 with respect to the financial
statements of Internet Access Group, Inc. included in the Registration
Statement (Form S-1 No. 333-00000) and related Prospectus of OneMain.com, Inc.
for the registration of its Common Stock.
/s/ Ernst & Young LLP
Jacksonville, Florida
December 24, 1998
<PAGE>
EXHIBIT 23.13
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 22, 1998 with respect to the financial
statements of Midwest Internet, L.L.C. in the Registration Statement (Form S-1
No. 333-00000) and related Prospectus of OneMain.com, Inc. for the registration
of its Common Stock.
/s/ Ernst & Young LLP
St. Louis, Missouri
December 24, 1998
<PAGE>
EXHIBIT 23.14
CONSENT OF INDEPENDENT AUDITORS
I consent to the reference to my name under the caption "Experts" and to the
use of my report dated December 3, 1998 with respect to Internet Solutions, LLC
in the Registration Statement (Form S-1 No. 333-00000) and related Prospectus
of OneMain.com, Inc. for the registration of its Common Stock.
/s/ Kevin J. Tochtrop,
Certified Public Accountant
Washington, Missouri
December 28, 1998
<PAGE>
EXHIBIT 23.15
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 13, 1998 with respect to the financial
statements of FGInet, Inc. in the Registration Statement (Form S-1 No. 333-
00000) and related Prospectus of OneMain.com, Inc. for the registration of its
Common Stock.
/s/ Ernst & Young LLP
St. Louis, Missouri
December 24, 1998
<PAGE>
EXHIBIT 23.16
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 23, 1998 with respect to the financial
statements of Superhighway, Inc. d/b/a Indynet in the Registration Statement
(Form S-1 No. 333-00000) and related Prospectus of OneMain.com, Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
Indianapolis, Indiana
December 24, 1998
<PAGE>
EXHIBIT 23.17
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 15, 1998 with respect to the financial
statements of Lightspeed Net, Inc. in the Registration Statement (Form S-1 No.
333-00000) and related Prospectus of OneMain.com, Inc. for the registration of
its Common Stock.
/s/ Ernst & Young LLP
Los Angeles, California
December 24, 1998
<PAGE>
EXHIBIT 23.18
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated December 18, 1998 with respect to the financial
statements of JPS.Net Corporation included in the Registration Statement (Form
S-1 No. 333-00000) and related Prospectus of OneMain.com, Inc. for the
registration of its Common Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
December 24, 1998
<PAGE>
Exhibit 23.20
CONSENT OF DIRECTOR NOMINEE
---------------------------
To U.S. Internet Providers, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
U.S. Internet Providers, Inc. (the "Company") on Form S-1, and any amendments
thereto, which indicate that I have accepted a nomination to become a director
of the Company following the closing of the Company's initial public offering.
/s/ Allon H. Lefever
------------------------------
Allon H. Lefever
Dated: December 21, 1998
<PAGE>
Exhibit 23.21
CONSENT OF DIRECTOR NOMINEE
---------------------------
To U.S. Internet Providers, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
U.S. Internet Providers, Inc. (the "Company") on Form S-1, and any amendments
thereto, which indicate that I have accepted a nomination to become a director
of the Company following the closing of the Company's initial public offering.
/s/ Michael C. Crabtree
------------------------------
Michael C. Crabtree
Dated: December 21, 1998
<PAGE>
Exhibit 23.22
CONSENT OF DIRECTOR NOMINEE
---------------------------
To U.S. Internet Providers, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
U.S. Internet Providers, Inc. (the "Company") on Form S-1, and any amendments
thereto, which indicate that I have accepted a nomination to become a director
of the Company following the closing of the Company's initial public offering.
/s/ Thomas R. Eisenmann
------------------------------
Thomas R. Eisenmann
Dated: December 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> AUG-19-1998
<PERIOD-END> SEP-30-1998
<CASH> 27,500
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 274,750
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 274,750
<CURRENT-LIABILITIES> 324,249
<BONDS> 0
0
0
<COMMON> 4,750
<OTHER-SE> (44,749)
<TOTAL-LIABILITY-AND-EQUITY> 274,750
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 76,999
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (76,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (76,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,999)
<EPS-PRIMARY> (.016)
<EPS-DILUTED> (.016)
</TABLE>
