<PAGE>
As filed with the Securities and Exchange Commission on March 3, 1999
Registration No. 333-69925
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
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>
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Unit Offering Price Registration Fee
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value $.001
per share..... 9,200,000 $20.00 $184,000,000 $51,152(1)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
(1) The Registrant previously paid $39,963 of the registration fee and has paid
the balance of $11,189 with the filing of this Amendment No. 2.
--------------
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
March 3, 1999
8,000,000 Shares
Common Stock
OneMain.com, Inc. provides Internet access and related services throughout the
United States to individuals and businesses located predominantly outside of
large metropolitan areas.
This is the initial public offering of our common stock. We expect the initial
public offering price will be between $18.00 and $20.00 per share. The price
per share in this offering may not reflect the price of our shares in the
public market after this offering. We intend to have our common stock trade on
the Nasdaq National Market under the symbol "ONEM."
Investing in our common stock involves risk. Please read the Risk Factors
beginning on page 8 before making a decision to invest in our common stock.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discounts and commissions..................... $ $
Proceeds, before expenses, to OneMain.com ................. $ $
</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 has granted the underwriters the right, at any time until 30 days
after the date of this prospectus, to purchase up to an additional 1,200,000
shares to cover any over-allotments of shares the underwriters may make in this
offering.
----------
We expect to issue these shares on , 1999.
BT Alex. Brown
First Union Capital Markets Corp.
ING Baring Furman Selz LLC
SoundView Technology Group
Wit Capital Corporation
as e-Manager(TM)
, 1999
<PAGE>
[LOGO OF ONEMAIN.COM]
A map of the continental United States appears here, with a dot at each location
where OneMain.com has a point of presence.
Points of Presence
. We have 663 points of presence in 25 states with 331,800
subscribers at December 31, 1998
. Approximately 12% of the U.S. population can access one
of our points of presence through a local phone call
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 8
About OneMain.com........................................................ 17
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Combined Pro Forma Financial Data............................... 24
Selected Historical Financial Data for Our ISPs.......................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 52
Management............................................................... 63
Transactions with Related Parties........................................ 70
Principal Stockholders................................................... 72
Description of Capital Stock............................................. 74
Shares Available for Future Sale......................................... 78
Underwriting............................................................. 81
Experts.................................................................. 84
Validity of the Shares................................................... 87
Additional Information................................................... 87
Index to Financial Statements............................................ F-1
</TABLE>
ii
<PAGE>
SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all the information that is important to you.
Simultaneously with the completion of this offering, we will acquire 17
Internet service providers in exchange for cash and shares of our common stock.
In many places in this prospectus, we speak as if we have already acquired
these companies. 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.
ONEMAIN.COM, INC.
Our Business
We provide Internet access and related services throughout the United States
to individuals and businesses located predominantly outside of large
metropolitan areas. We believe individuals in these markets have traditionally
been under-served by national on-line service providers and present a
significant growth opportunity for us. According to information published by
Analysys Publications, following this offering, we will immediately become one
of the ten largest independent Internet service providers in the United States
with approximately 331,800 subscribers at December 31, 1998. We serve these
subscribers through 663 points of presence in 25 states.
The 15 largest metropolitan areas in the United States comprise only 38% of
the U.S. population, leaving approximately 166 million individuals in hundreds
of smaller markets as potential subscribers. Currently, approximately 31
million people, or 12% of the U.S. population, can access one of our 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 Internet
service providers in the United States.
On a pro forma combined basis, our Internet service providers generated $16.9
million in total revenues for the three months ended December 31, 1998 and
$56.7 million in total revenues for the year ended December 31, 1998. On a
sequential quarter basis for the two-year period ended December 31, 1998, our
revenue growth averaged 18%, and our subscriber growth averaged 20%. Our
average pro forma combined subscriber turnover level, or "churn rate," of 2.1%
per month for the quarter ended December 31, 1998 illustrates the stability of
our subscriber base. We define "churn rate" as the percentage obtained by
dividing the number of subscribers that cancel or do not renew their
subscriptions during a quarter by the average number of subscribers during that
quarter. Average churn rate is calculated as the quarter's churn rate divided
by three.
1
<PAGE>
Our Strategy
Our strategy is to meet the customer service and content requirements of
Internet users in 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 Internet service providers through operating groups. We intend to
organize our Internet service providers into operating groups. These operating
groups will manage our Internet service providers on a day-to-day basis,
integrate acquired subscribers and support growth initiatives at the local
level.
Grow our subscriber base. We expect to continue to attract new and retain
existing subscribers primarily by enhancing our subscribers' on-line experience
and developing a national brand. We also intend to grow by acquiring additional
Internet service providers to increase our density in our markets and to
increase our scale and geographic scope.
Integrate our Internet service providers. We plan to integrate our Internet
service providers by eliminating redundant network costs and consolidating many
of their operations, including back office functions.
Achieve benefits from our scale. The primary role of our executive management
team will be to build and leverage our combined scale to increase revenues
through strategic relationships and reduce costs through increased purchasing
power and consolidation of business functions.
Offer more profitable products and services. We intend to capitalize on
opportunities to sell more profitable value-added products and services to our
subscribers.
Our Structure
We will conduct our operations through our Internet service providers, which
we will initially organize into eight operating groups. Our executive offices
are currently located at 50 Hawthorne Road, Southampton, New York 11968, and
our telephone number is (516) 287-4084. We are currently negotiating to lease
new space for our executive offices in Northern Virginia. We have established a
Web site at www.onemain.com. The information on our Web site is not a part of
this prospectus.
2
<PAGE>
THE OFFERING
The following table presents a summary of this offering. The amount of shares
we will issue in this offering includes 480,000 shares reserved for purchase by
our directors, officers and employees and their business associates and related
persons. Following this offering, we also will have outstanding options to
purchase 3,755,265 shares of common stock at the initial public offering price,
including options to purchase 1,118,050 shares that will be exercisable
immediately following this offering.
Stock offered by OneMain.com.......
8,000,000 shares of common stock.
Stock outstanding after this offering... 18,916,503 shares of common stock,
assuming the underwriters do not
exercise their over-allotment option;
or
20,416,502 shares, assuming the
underwriters exercise their over-
allotment option in full.
Use of proceeds.................... We will use the proceeds of this
offering to pay the cash portion of
the purchase prices payable in the
acquisitions of 17 Internet service
providers, repay certain indebtedness
of these Internet service providers
and for general corporate purposes,
including future acquisitions and
working capital.
Proposed Nasdaq symbol............. "ONEM"
Dividend policy.................... We do not anticipate paying cash
dividends on our common stock.
We originally issued 4,882,500 shares to our founders and employees. Holders
of 4,827,500 of these shares have agreed to forfeit a portion of these shares
so that the total number of shares that were owned by our founders and
employees immediately before this offering will not exceed 20% of the total
number of shares of common stock outstanding following this offering. See
"Principal Stockholders" on page 72 below.
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 Internet service providers we will acquire
simultaneously with the closing of this offering, preparing this prospectus and
the related documents for this offering and developing our management team and
corporate structure. We present below our summary pro forma combined financial
data based on historical data for the year ended December 31, 1998, considering
our combined historical results and those of the 17 Internet service providers
we will acquire. We present the pro forma combined balance sheet data as of
December 31, 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, 1998 assume that the 17 acquisitions and this offering were consummated on
January 1, 1998. The pro forma combined balance sheet data assume that the 17
acquisitions were consummated on December 31, 1998.
The summary pro forma financial data include, under the line item labeled
"EBITDA," our earnings or losses before interest, taxes, depreciation and
amortization on a pro forma combined basis for the year ended December 31,
1998. We have included EBITDA in these data 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 our operating performance, financial
position or cash flows. Not all companies define EBITDA in the same way, and
our EBITDA is not necessarily comparable to EBITDA reported by other companies.
The summary pro forma financial data do not necessarily indicate the
operating results or financial position which would have resulted from our
operation on a combined basis during the period presented, nor do these pro
forma data necessarily represent any future operating results or financial
position. In addition to these summary financial data, you should also refer to
the more complete financial information included elsewhere in this prospectus,
including more complete historical results for the 17 Internet service
providers that we will acquire and our unaudited pro forma combined financial
statements and the accompanying notes.
4
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Pro Forma Statement of Operations Data:
Revenues:
Access revenues............................................... $ 51,814,062
Other revenues................................................ 4,872,788
------------
Total revenues.............................................. 56,686,850
Costs and expenses:
Cost of access revenues....................................... 21,572,845
Cost of other revenues........................................ 1,214,071
Operations and customer support............................... 8,833,585
Sales and marketing........................................... 7,114,867
General and administrative.................................... 18,438,971
Amortization.................................................. 72,684,875
Depreciation.................................................. 4,281,478
------------
Total costs and expenses.................................... 134,140,692
------------
Loss from operations............................................ (77,453,842)
Interest income................................................. 92,702
Interest expense................................................ (221,256)
Other expense, net.............................................. (319,011)
------------
Loss before provision for income taxes.......................... (77,901,407)
Provision for income taxes...................................... (10,292,365)
------------
Net loss........................................................ $(67,609,042)
============
Pro forma basic and diluted net loss per share.................. $ (3.57)
============
Shares used in the calculation of pro forma basic and diluted
net loss per share............................................. $ 18,916,503
============
Other Operating Data:
Approximate number of subscribers, end of period................ 331,849
Cash flow from operating activities............................. 3,443,201
Cash flow used in investing activities.......................... (10,889,857)
Cash flow from financing activities............................. 6,371,192
EBITDA.......................................................... $ (806,500)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Pro Forma As
Combined Adjusted
------------ ------------
<S> <C> <C>
Pro Forma Balance Sheet Data:
Working capital..................................... $(94,242,961) $ 34,380,510
Total assets........................................ 254,044,957 306,635,415
Total long-term debt and other liabilities.......... 24,852,103 21,635,423
Stockholders' equity................................ 121,259,372 252,999,372
</TABLE>
5
<PAGE>
SUMMARY HISTORICAL INDIVIDUAL INTERNET SERVICE PROVIDER FINANCIAL DATA
The following table presents summary historical statement of operations data
for the 17 Internet service providers that we will acquire for each of their
four most recent fiscal years. The historical statement of operations data
presented below have 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 26 below. The revenues reported below do not necessarily
correspond to revenues reflected in the pro forma combined statement of
operations as a result of acquisitions which our Internet service providers
completed that are included in the pro forma combined statement of operations
but not reflected in the historical data shown below. Subscriber information
for December 31, 1995 is not available.
<TABLE>
<CAPTION>
For or at the years ended December 31,
Operations -----------------------------------------
Commenced 1995 1996 1997 1998
-------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Northeast Operating
Group
D&E SuperNet, Inc.
Revenues............. July 1995 $119,545 $ 841,537 $1,749,207 $3,946,804
Subscribers.......... 3,499 7,395 23,150
SunLink, Inc.
Revenues............. October 1995 $ 6,620 $ 224,966 $ 798,237 $1,411,164
Subscribers.......... 1,390 3,914 8,497
LebaNet, Inc.
Revenues............. March 1996 $ 149,299 $ 199,571 $ 298,109
Subscribers.......... 289 253 233
Plains States Operating
Group
SouthWind Internet
Access, Inc.
Revenues............. October 1994 $202,140 $ 836,587 $1,437,848 $2,170,404
Subscribers.......... 5,185 8,116 11,287
Horizon Internet
Technologies, Inc.
Revenues............. July 1995 $ 1,921 $ 148,686 $ 434,615 $1,161,187
Subscribers.......... 807 3,126 7,261
Southeast Operating
Group
United States
Internet, Inc.
Revenues............. April 1994 $889,902 $2,506,732 $4,173,803 $6,514,652
Subscribers.......... 10,927 16,219 35,289
Internet Partners of
America, LC
Revenues............. June 1995 $ 28,155 $ 930,989 $1,856,801 $4,425,577
Subscribers.......... 6,789 13,060 24,183
ZoomNet, Inc.
Revenues............. September 1995 $ 18,701 $ 272,692 $ 857,619 $1,967,680
Subscribers.......... 1,997 5,309 12,921
Palm.Net, USA, Inc.
Revenues............. April 1996 $ 95,918 $ 432,411 $ 625,922
Subscribers.......... 1,600 2,824 5,337
Internet Access Group,
Inc.
Revenues............. January 1995 $393,165 $ 951,345 $1,179,434 $1,534,377
Subscribers.......... 2,574 3,887 4,931
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For or at the Years Ended December 31,
Operations ----------------------------------------------
Commenced 1995 1996 1997 1998
------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Midwest South Operating
Group
Midwest Internet,
L.L.C.
Revenues............. March 1995 $ 186,143 $ 1,790,376 $ 2,523,128 $ 4,091,066
Subscribers.......... 11,529 11,474 21,581
Internet Solutions,
LLC
Revenues............. October 1995 $ 7,004 $ 140,701 $ 446,057 $ 1,002,535
Subscribers.......... 1,010 2,667 5,437
Midwest North Operating
Group
FGInet, Inc.
Revenues............. November 1994 $ 34,161 $ 274,965 $ 818,445 $ 1,493,790
Subscribers.......... 2,919 4,601 10,031
North Central Operating
Group
Superhighway, Inc.
d/b/a Indynet
Revenues............. June 1995 $ 248,479 $ 1,248,751 $ 2,106,290 $ 3,013,383
Subscribers.......... 6,556 12,468 18,114
California Operating
Group
Lightspeed Net, Inc.
Revenues............. March 1995 $ 84,771 $ 1,124,474 $ 3,085,901 $ 4,652,991
Subscribers.......... 4,059 15,533 15,672
JPS.Net Corporation
Revenues............. January 1997 $ 2,074,398 $ 9,001,578
Subscribers.......... 32,119 100,736
New England Operating
Group
TGF Technologies, Inc.
Revenues............. November 1994 $ 603,394 $1,145,174 $2,512,081 $4,954,572
Subscribers.......... 5,858 15,239 27,189
Total
Revenues............... $2,824,101 $12,683,192 $26,685,846 $52,265,791
Subscribers............ 66,988 158,204 331,849
</TABLE>
7
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. The risks and uncertainties described below are not the only
ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer. In addition,
the trading price of our common stock could decline, and you may lose all or
part of the money you paid to buy our common stock.
Our lack of combined operating history and our untested business model may
result in continued losses or reduced profits
We will combine 17 independent Internet service providers into a new company,
and we may not be able to achieve or maintain profitability of any of our
individual Internet service providers or overall. We will be applying a
business model that has not yet been tested in our industry, and the success of
this business model depends on our ability to build on the strengths of our 17
Internet service providers and to centralize many 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. As a result,
our business may not produce the level of profitability we hope to achieve.
If we fail to integrate our acquisitions successfully, our results of
operations will suffer
Our success as a new national Internet service provider will depend in large
part on our ability to integrate the operations and management of the 17
independent Internet service providers we will acquire and our ability to
integrate additional Internet service providers we may acquire in the future.
Failure to integrate our Internet service providers successfully may result in
significant operating inefficiencies, which may hurt our operating results. 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 Internet service providers
successfully, we must install and standardize adequate operational and control
systems, deploy 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 to expand our managerial, operational, technical and
financial resources.
Future growth will strain our resources
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, our customer support
resources may not be sufficient to manage the growth in our business, and we
may not successfully implement our expansion program in whole or in part.
8
<PAGE>
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 the Internet. Current and prospective competitors include:
. other national, regional and local Internet service providers;
. long-distance and local telecommunications companies;
. cable television companies;
. direct broadcast satellite companies; and
. wireless communications providers and national 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 competition, including pressure to reduce prices.
Our current primary competitors include Internet service providers and on-
line service providers with a significant national presence that focus on
individual and small business subscribers, including 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 the ability to provide better service quality. We also compete
with independent regional and local Internet service providers in many of our
markets. We expect increased competition over time in our markets as national
on-line service providers and other Internet service providers enter and
increase their focus on these markets.
All of the major long-distance companies, including AT&T, MCI WorldCom and
Sprint, offer Internet access services and compete with us. Local exchange
carriers, including regional Bell operating companies and competitive local
exchange carriers, also have entered the Internet service provider market. We
believe long-distance and local carriers are moving toward horizontal
integration through acquisitions of, and joint ventures with, Internet service
providers. 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.
Telecommunications providers also 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
telecommunications providers and may cause us to lower our prices, which will
result in reduced revenues.
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 At Home Corporation. Other alternative service companies are
approaching the Internet access market with
9
<PAGE>
various newer wireless terrestrial- and satellite-based service technologies.
See "Business --Competition" on page 60 below.
Several of our Internet service providers have a history of operating losses
which could result in our failure to become profitable
On a pro forma combined basis, we had operating losses of $77.5 million for
the year ended December 31, 1998. In addition, for the year ended December 31,
1998, eight of our Internet service providers reported operating losses. The
extent to which we experience operating losses 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 we incur and any potential adverse regulatory developments. We may
not generate or sustain operating income at our Internet service providers on
an individual or combined basis in the future.
We will incur substantial non-cash compensation charges in the first quarter of
1999 that will reduce our net income
We will recognize non-cash compensation expense of approximately $1.3 million
in the first quarter of 1999 resulting from our issuance of common stock to one
of our executives. This one-time charge is non-cash in nature. This charge will
have a material negative effect on our reported earnings for the quarter ending
March 31, 1999 and for the year ending December 31, 1999.
If we fail to use existing and new technology properly, we may fall behind
technology trends and evolving industry standards and lose subscribers to our
competitors
If we fail 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 may not be able to retain our existing subscribers or attract new
ones. 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, industry standards may not be established or, if they
become established, we may not be able to conform to these new standards in a
timely fashion and maintain a competitive position in the market. In addition,
services or technologies developed by others may render our services or
technology noncompetitive or obsolete.
The purchase prices for the 17 Internet service providers reflected in this
prospectus may change on the closing date, and we may be required to pay
additional consideration to the former owners of these Internet service
providers
As required by the acquisition agreements for our 17 Internet service
providers, the cash portion of the purchase price for each company we will
acquire simultaneously with the closing of this offering will be adjusted
upward or downward based on its financial condition at the closing date. We
have not reflected any provision for these adjustments in our
10
<PAGE>
December 31, 1998 financial statements. For purposes of this prospectus, we
have estimated the amount of cash we will pay in these acquisitions based on
the financial condition of our Internet service providers at December 31, 1998
and our estimate of changes in their financial conditions between December 31,
1998 and the closing date. However, we cannot predict the actual cash
consideration that we will have to pay to the former owners of our Internet
service providers based on these adjustments, and we may be required to pay
substantial additional cash consideration after the closing.
In addition, if we do not close this offering before March 31, 1999, we will
increase the amount of the consideration by 3% for seven of the Internet
service providers we will acquire. We have not reflected this additional
consideration in this prospectus. If we are required to pay this additional
consideration, you will suffer additional dilution as a result of the issuance
of additional shares of common stock, and we will use additional proceeds of
this offering to pay the cash portion of the purchase prices.
Your investment in OneMain.com may be diluted if we pay additional earn-out
consideration to the former owners of the Internet service providers we will
acquire
We have agreed to pay the owners of the Internet service providers we will
acquire additional consideration in the following circumstances:
. By December 31, 1999, we must pay the former owners of 15 of our
Internet service providers additional consideration, payable in cash or
stock, based, in all except one case, on an agreed upon percentage of
the amount by which their revenues for the 12 months ended June 30, 1999
exceed their annualized revenues for the three months ended June 30,
1998; and
. On June 30, 1999, we will grant a number of additional stock options to
the former owners of each of our Internet service providers based on
their operating performance.
We cannot predict the amount of additional consideration that we will have to
pay to the former owners of our Internet service providers, and no provision
for these obligations has been reflected in our December 31, 1998 financial
statements.
Payment of these obligations in cash may substantially deplete our cash
reserves. Payment of these obligations in our common stock, including upon
exercise of options, may dilute the value of your investment in OneMain.com.
Regardless of the form of payment, the additional consideration will result in
additional goodwill and an increase in the related amortization expense.
For a more detailed discussion of the obligations described above, including
the formulas that will be used to determine the amount of any additional
consideration, see "About OneMain.com" on page 17 below.
11
<PAGE>
We may acquire contingent or undisclosed liabilities that will increase our
expenses and deplete our cash reserves
When we acquire our 17 Internet service providers, we may acquire liabilities
which we did not know about at the time we negotiated these acquisitions or
which are contingent and are realized or prove to be larger than anticipated.
If any of these liabilities arise, we have only limited recourse against the
former owners of our Internet service providers. If any substantial contingent
obligations are realized or if we discover any substantial unknown liabilities,
our expenses may increase and cash reserves may decline.
A drop in demand for Internet access may cause our share price to decline
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 recently introduced Internet-related products and services
may not be accepted in the market. Commerce and communication over the Internet
may not continue to develop and expand, and even if they do, the Internet
access and communications services we offer may not become widely adopted for
these purposes.
Our business will not grow as we expect and our stock price may decline if:
. the market for Internet access services fails to continue to develop;
. the Internet market develops more slowly than expected;
. the Internet market becomes saturated with competitors; or
. the Internet access and related products and services we offer are not
widely accepted.
Telecommunications carriers may not provide us with adequate communications
capacity to deliver our services
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;
. 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 rapidly enough to
respond to increased subscriber demand; and
. we may not be able to negotiate favorable interconnectivity agreements
with other Internet service providers.
12
<PAGE>
Our telecommunications carriers also sell or lease their services to our
competitors and may be, or in the future may become, competitors themselves.
Our telecommunications carriers may enter into exclusive arrangements with our
competitors or stop selling or leasing their 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 result in a loss of subscribers
We face capacity constraints both at the level of particular points of
presence, affecting subscribers attempting to use that point of presence, and
in connection with system-wide services like e-mail. From time to time, we have
experienced delayed delivery from suppliers of new telephone lines, modems,
routers, 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. If we do not maintain sufficient capacity
in our network connections, subscribers will experience a general slowdown of
all Internet services. 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 reduced revenues
and profitability.
The occurrence of a natural disaster or other unanticipated problems at one
of our points of presence 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 limit our ability to
provide Internet services to our subscribers.
If our security measures fail, we may lose subscribers or be sued
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 cause them to seek Internet access from other
providers. 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. Our subscribers or others may sue
us as a result of a failure.
13
<PAGE>
Problems related to the Year 2000 issue could adversely affect our ability to
provide services to our subscribers
The Year 2000 issue 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 business
activities. For information on our efforts to handle the Year 2000 issue, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure Statement," on page 50 below.
Implementation of new regulations may increase our costs of doing business
Although we are not currently directly regulated by the Federal
Communications Commission or any other federal or state agency, changes in the
regulatory environment relating to the Internet access market, including
regulatory changes which directly or indirectly affect telecommunications costs
or increase the likelihood or scope of competition from regional Bell operating
companies or other telecommunications companies, could affect the prices at
which we may sell our services. For example, the imposition of interstate
access charges to local telephone companies or the elimination of reciprocal
compensation for local telephone companies may increase our costs of serving
dial-up customers.
The FCC may, in the future, reconsider its past ruling that Internet access
service is not "telecommunications" and that Internet service providers are not
subject to the requirement to pay a percentage of their gross revenues as a
"universal service contribution." 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 we may not be
able to recover these costs from our customers. For more information on
regulation of our business, see "Business--Government Regulation," on page 60
below.
We may be liable for information disseminated over our network
We may be liable for information carried on or disseminated through our
network. A number of lawsuits have sought to impose liability on Internet
service providers or on-line service providers for defamatory speech and
infringement of copyrighted materials. The imposition upon Internet service
providers 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 some product or service offerings.
If we do not complete all of the 17 acquisitions, our results of operations may
differ from those we currently anticipate
The closing under each of the acquisition agreements for our Internet service
providers is conditioned upon the completion of this offering as well as other
normal and customary closing conditions. All of the conditions to these
acquisitions may not be satisfied prior to the closing of this offering, and we
may not be able to consummate the acquisition of one or more of the Internet
service providers at the time of this offering or at all. In this event, we
14
<PAGE>
will use the proceeds of this offering that otherwise would have been used to
complete that acquisition in the same manner as the other proceeds of this
offering remaining after funding the acquisitions. Our results of operations
may differ from those we anticipate if one or more of the acquisitions does not
close. See "Use of Proceeds" on page 20 below.
The book value of your common stock will be substantially diluted in this
offering
The price you will pay for our common stock will be substantially higher than
the pro forma tangible book value per share of outstanding common stock. As a
result, you will experience immediate and substantial dilution in tangible book
value per share, and the founders and executive officers of our company will
receive a material increase in the tangible book value per share of their
shares of common stock. The dilution to you in this offering will be
approximately $17.45 per share.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings
Upon completion of this offering, we will have 18,916,503 shares of common
stock outstanding, of which 10,916,503 shares will be "restricted shares." If
the underwriters exercise their over-allotment option in full, we will have
20,416,502 shares of common stock outstanding, of which 11,216,502 shares will
be "restricted shares." In addition, we may issue additional shares of common
stock that will be restricted shares as consideration in the acquisitions of
our Internet service providers. See "About OneMain.com" on page 17 below for a
discussion of how this additional consideration will be determined. 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 our common
stock prevailing from time to time in the public market and could impair our
ability to raise funds in additional stock offerings.
The shares 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 of ours, sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under 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
up to 5,500,000 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 3,755,265 shares at the
initial public offering price will be outstanding under our equity compensation
plans.
In addition, upon completion of this offering, the holders of 10,916,503
shares of common stock, or 11,216,502 shares if the underwriters exercise their
over-allotment option in full, will be entitled to piggy-back registration
rights, which will allow these stockholders to sell these shares in the market
simultaneously with any further public offerings by us of our equity
securities.
15
<PAGE>
This prospectus contains forward-looking statements which may not prove to be
accurate
This prospectus contains forward-looking statements and information relating
to OneMain.com. We generally identify forward-looking statements in this
prospectus using words like "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
risks, uncertainties and assumptions. Actual future results may differ
significantly from the results discussed in these forward-looking statements.
16
<PAGE>
ABOUT ONEMAIN.COM
We formed OneMain.com for the purpose of acquiring existing Internet service
providers, or ISPs, serving subscribers in markets outside of large
metropolitan areas. Simultaneously with the closing of this offering, we will
close 17 acquisitions, and our ISPs will be organized into eight operating
groups. Our ISPs had approximately 331,800 subscribers at December 31, 1998. We
serve these subscribers through 663 points of presence in 25 states.
We will consummate the 17 acquisitions in accordance with acquisition
agreements negotiated with the current owners of each ISP. 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 the owners of each ISP cash or
a combination of common stock and cash in exchange for all of their equity
interests in the ISP. We will adjust the purchase prices for most of the ISPs
based on the net worth and the debt level of these ISPs as of the closing date
of this offering. In this prospectus, the amount of cash payable upon the
closing of the acquisitions reflects adjustments to the purchase prices for the
ISPs based on their financial condition at December 31, 1998 and our estimate
of changes in their financial conditions between December 31, 1998 and the
closing date.
We will pay a combined purchase price for our ISPs of approximately $71.8
million in cash and 7,133,200 shares of our common stock. We will pay the
purchase price using cash from this offering and newly issued common stock. If
this offering is not completed prior to March 31, 1999, we will increase the
purchase price for seven of our ISPs by 3%.
At the closing of the acquisitions, we will grant to the former owners,
employees and affiliates of our ISPs:
. fully vested options to purchase 898,050 shares of common stock at the
initial public offering price; and
. options to purchase 1,336,215 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 this offering, and may vest earlier
based on the performance of each ISP.
In addition to the purchase price paid at closing, we have agreed to pay to
the former owners of each of our ISPs, other than SunLink, Inc. and TGF
Technologies, Inc., an amount based on a percentage generally equal to 10% to
20% of the amount, if any, by which the total revenues for that ISP for the 12
months ending June 30, 1999 exceed its annualized revenues for the three months
ended June 30, 1998. In the case of JPS.Net Corporation, this amount equals 50%
of the amount by which its total revenues for the 12 months ending September
30, 1999 exceed its annualized revenues for the three months ended September
30, 1998. In most cases, the ISP must have at least a 5% EBITDA margin for the
12 months ending June 30, 1999 to be entitled to this additional consideration.
"EBITDA" means earnings or losses before interest, taxes, depreciation and
amortization. We must pay any amounts owing to these former ISP owners based on
this calculation prior to December 31, 1999 and may make payments in cash or in
stock, at our option or, in one case, at the option of the former owners of
that ISP.
17
<PAGE>
In addition, on June 30, 1999, we will grant additional options to former
owners, employees and affiliates of our ISPs. For each of our ISPs, other than
TGF Technologies, we will grant options to purchase a number of shares of
common stock equal to the greater of:
. 20 times the incremental revenues for the ISP for the 12 months ending
June 30, 1999 in excess of the annualized revenues for the ISP for the
three months ended December 31, 1998, divided by $1,000; or
. five times the incremental increase in the number of subscribers for the
ISP at June 30, 1999 compared to June 30, 1998.
For TGF Technologies, we will grant options to purchase a number of shares of
common stock equal to the greater of:
. 20 times its incremental revenues for the six months ending June 30,
1999 in excess of its annualized revenues for the three months ended
December 31, 1998 divided by $1,000; or
. Five times the incremental increase in its number of subscribers at
June 30, 1999 compared to December 31, 1998.
The exercise price of these options will equal the fair market value of our
common stock at June 30, 1999, and the options will vest one-third on each of
June 30, 2005, 2006 and 2007, and may vest earlier based on the performance of
each ISP.
We will account for the acquisition of our ISPs 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 primarily to goodwill
and subscriber lists. The aggregate excess purchase price over fair value
equals approximately $214.5 million. We will amortize amounts allocated to
these intangibles over three years from the closing. As a result, we will
record annual amortization expenses for the intangible assets acquired in these
17 acquisitions of approximately $71.5 million each year during the next three
years. To the extent we become obligated to pay additional consideration in
these 17 acquisitions, 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.
18
<PAGE>
We have shown below information about the ISPs we will acquire when we close
this offering.
<TABLE>
<CAPTION>
Number of Total Revenues for the
Subscribers at Three Months Ended
Name Headquarters December 31, 1998 December 31, 1998
- ---- --------------------- ----------------- ----------------------
<S> <C> <C> <C>
Northeast Operating
Group
D&E SuperNet, Inc...... Lancaster, PA 23,150 $ 1,327,503
SunLink, Inc. ......... Lebanon, PA 8,497 394,210
LebaNet, Inc. ......... Cornwall, PA 233 82,061
Plains States Operating
Group
SouthWind Internet
Access, Inc. ......... Wichita, KS 11,287 634,922
Horizon Internet
Technologies, Inc. ... Winfield, KS 7,261 369,864
Southeast Operating
Group
United States Internet,
Inc. ................. Knoxville, TN 35,289 2,286,106
Internet Partners of
America, LC .......... Fort Smith, AR 24,183 1,420,471
ZoomNet, Inc. ......... Portsmouth, OH 12,921 649,608
Palm.Net, USA, Inc. ... Merritt Island, FL 5,337 170,964
Internet Access Group,
Inc. ................. Altamonte Springs, FL 4,931 444,607
Midwest South Operating
Group
Midwest Internet,
L.L.C. ............... Carbondale, IL 21,581 1,333,078
Internet Solutions,
LLC................... Sullivan, MO 5,437 332,089
Midwest North Operating
Group
FGInet, Inc. .......... Springfield, IL 10,031 508,956
North Central Operating
Group
SuperHighway, Inc.
d/b/a IndyNet......... Indianapolis, IN 18,114 869,136
California Operating
Group
Lightspeed Net, Inc. .. Bakersfield, CA 15,672 1,190,328
JPS.Net Corporation ... Sacramento, CA 100,736 3,058,840
New England Operating
Group
TGF Technologies,
Inc. ................. Burlington, VT 27,189 1,455,921
------- -----------
Totals...................................... 331,849 $16,528,664
======= ===========
</TABLE>
19
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $130.7 million in net proceeds
from this offering based upon an assumed initial public offering price equal to
$19.00 per share. This amount reflects deductions from the gross proceeds of
the offering of:
. approximately $10.3 million, which will be retained by the underwriters
as discounts and commissions;
. $10.0 million, representing our estimated expenses for this offering and
the acquisitions of the 17 ISPs; and
. $1,017,000 including accrued interest at a weighted average rate of
7.75%, as repayment of two loans made to us to fund pre-offering
expenses.
We will use approximately $71.8 million of the net proceeds to pay the cash
portion of the purchase prices payable in the acquisitions of our 17 ISPs. We
will use an additional $6.4 million of the net proceeds to pay off indebtedness
and liabilities of the ISPs, including amounts due to affiliates. This
indebtedness bears interest at a weighted average rate of 8.4% and matures over
four years.
We will use the remainder of the net proceeds, approximately $52.5 million,
for general corporate purposes, which may include future acquisitions, working
capital and the payment of any additional amounts payable to former owners of
our ISPs under the earn-out provisions of the acquisition agreements. This use
of proceeds does not reflect the exercise of the underwriters' over-allotment
option. We estimate that we will receive $21.3 million in additional net
proceeds 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 that there are funds available for the payment of dividends.
20
<PAGE>
CAPITALIZATION
The following table shows our capitalization at December 31, 1998 on an
actual basis, a pro forma combined basis and on a pro forma as adjusted basis.
. The pro forma combined presentation considers the combined historical
balance sheets for OneMain.com and the 17 ISPs we will acquire upon the
closing of this offering, and applies pro forma adjustments to the
historical information.
. The pro forma as adjusted presentation reflects the pro forma
adjustments and the consummation of this offering at an assumed initial
public offering price of $19.00 per share and the application of the
estimated net proceeds we will receive in this offering. See "Use of
Proceeds" on page 20 above and "Selected Combined Pro Forma Financial
Data" on page 24 below. For a description of the pro forma adjustments,
you should refer to our unaudited pro forma combined financial
statements and notes included elsewhere in this prospectus.
The pro forma as adjusted column below assumes that we will issue 7,133,200
shares of common stock in the acquisitions of our ISPs, based on their
financial conditions as of December 31, 1998 and our estimate of changes in
their financial conditions between December 31, 1998 and the closing date. The
as adjusted column does not include:
. 1,200,000 shares to be issued if the underwriters exercise their over-
allotment option in full;
. shares of common stock which may be issued to the former owners of our
ISPs, other than SunLink, Inc. and TGF Technologies, Inc., based on each
ISP's total revenues for the 12 months ending June 30, 1999, or, in the
case of JPS.Net Corporation, September 30, 1999;
. 5,500,000 shares of common stock reserved for issuance under our 1999
Employee Stock Purchase Plan and 1999 Stock Option and Incentive Plan,
including shares to be issued upon exercise of options to be granted to
the former owners of our ISPs under their acquisition agreements as
described under "About OneMain.com" on page 17 above. See "Shares
Available for Future Sale" on page 78 below.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------
Pro Forma Pro Forma
Actual Combined As Adjusted
--------- ------------ ------------
<S> <C> <C> <C>
Short-term debt and current portion of
long-term debt and capital lease
obligations.............................. $ 500,000 $ 4,752,423 $ 1,533,488
--------- ------------ ------------
Due to affiliates/stockholders............ 72,769,956 --
Long-term debt and capital lease
obligations, less current portion........ 4,532,171 1,371,520
Stockholders' equity:
Preferred stock, $.001 par value per
share:
10,000,000 shares authorized;
No shares issued and outstanding on an
actual basis; 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;
4,782,500 shares issued and outstanding
on an actual basis; 10,916,503 shares
issued and outstanding on a pro forma
combined basis; 18,916,503 shares
issued and outstanding on a pro forma
as adjusted basis...................... 4,783 11,916 18,917
Additional paid-in capital.............. 53,042 122,023,629 253,756,628
Accumulated deficit..................... (764,673) (764,673) (764,673)
Stock subscription receivable........... (11,500) (11,500) (11,500)
--------- ------------ ------------
Total stockholders' equity............ (718,348) 121,259,372 252,999,372
--------- ------------ ------------
Total capitalization...................... $(218,348) $203,313,922 $255,904,380
========= ============ ============
</TABLE>
21
<PAGE>
DILUTION
OneMain.com's pro forma net tangible book value at December 31, 1998 was
$(108,533,617), or $(9.94) per share of common stock. Pro forma net tangible
book value per share is determined by dividing the pro forma net tangible book
value of our company by the number of shares of common stock outstanding on a
pro forma basis after giving effect to the acquisitions of our 17 ISPs.
OneMain.com's pro forma as adjusted net tangible book value at December 31,
1998 would have been $29,365,060, or $1.55 per share of common stock, assuming:
. no exercise of the underwriters' over-allotment option;
. no change in the net worths and debt levels of our ISPs from our
estimates of these values as of the closing date of this offering; and
. no changes in the pro forma net tangible book value of our company,
other than to give effect to the sale of the shares of common stock
offered by this prospectus at an assumed initial public offering price
of $19.00 per share, and the application of the net offering proceeds as
described under "Use of Proceeds."
This pro forma as adjusted net tangible book value represents an immediate
increase in net tangible book value of $11.49 per share to existing
stockholders, including the former owners of our ISPs who will receive shares
of our 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 $17.45 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............. $19.00
Pro forma net tangible book value per share at December 31,
1998....................................................... $(9.94)
Pro forma increase per share attributable to investors who
buy shares in this offering................................ 11.49
Pro forma as adjusted net tangible book value per share
after the offering......................................... 1.55
------
Pro forma dilution per share to investors who buy shares in
this offering.............................................. $17.45
======
</TABLE>
The following table summarizes, as of December 31, 1998, on a pro forma as
adjusted basis after giving effect to the 17 ISP acquisitions and this
offering:
. the number of shares of our 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,
and the average price per share paid to us for these shares, valuing
these shares at the initial public offering price;
. the number of shares of common stock purchased by investors who buy
shares in this offering and the total consideration and the price per
share paid by them for these shares, before deduction of underwriting
discounts and commissions and estimated offering expenses payable by us;
and
22
<PAGE>
. the percentage of shares purchased by the existing stockholders and
investors who buy shares in this offering and the percentages of
consideration paid to us for these shares by existing stockholders.
This table assumes:
. no change in the net worths and debt levels of our ISPs from our
estimates of these values as of the closing date of this offering;
. no exercise of the underwriters' over-allotment option; and
. no exercise of any stock options to be outstanding upon the closing of
this offering.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
------------------ -------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 10,916,503 57.7% $122,035,545 44.5% $11.18
Investors who buy shares
in this offering........ 8,000,000 42.3 152,000,000 55.5 19.00
---------- ----- ------------ ----- ------
Total.................. 18,916,503 100.0% $274,035,545 100.0% $14.49
========== ===== ============ ===== ======
</TABLE>
23
<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, preparing this prospectus and the
related documents for this offering and developing our management team and
corporate structure. We present below summary pro forma combined financial data
for OneMain.com based on historical data for the year ended December 31, 1998,
considering the combined historical results for OneMain.com and the 17 ISPs we
will acquire. We present the pro forma combined balance sheet data as of
December 31, 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, 1998 assume that the 17 acquisitions and this offering were consummated on
January 1, 1998. The pro forma combined balance sheet data assume that the 17
acquisitions were consummated on December 31, 1998. The summary pro forma
financial data do not necessarily indicate the operating results or financial
position which would have resulted from our operation on a combined basis
during the period presented, nor do these pro forma data necessarily represent
any future operating results or financial position of OneMain.com. In addition
to these summary financial data, you should also refer to the more complete
financial information included elsewhere in this prospectus, including more
complete historical results for our ISPs and our unaudited proforma combined
results.
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
------------
<S> <C>
Pro Forma Statement of Operations Data:
Revenues:
Access revenues................................................ $ 51,814,062
Other revenues................................................. 4,872,788
------------
Total net revenues........................................... 56,686,850
Costs and expenses:
Cost of access revenues........................................ 21,572,845
Cost of other revenues......................................... 1,214,071
Operations and customer support................................ 8,833,585
Sales and marketing............................................ 7,114,867
General and administrative(1).................................. 18,438,971
Amortization(2)................................................ 72,684,875
Depreciation................................................... 4,281,478
------------
Total costs and expenses..................................... 134,140,692
------------
Loss from operations............................................ (77,453,842)
Interest income................................................. 92,702
Interest expense................................................ (221,256)
Other expense, net.............................................. (319,011)
------------
Loss before provision for income taxes.......................... (77,901,407)
Provision for income taxes...................................... (10,292,365)
------------
Net loss........................................................ $(67,609,042)
============
Pro forma basic and diluted loss per share...................... $ (3.57)
============
Shares used in the calculation of pro forma basic and diluted
loss per share................................................. 18,916,503
============
Other Operating Data:
Approximate number of subscribers, end of period................ 331,849
Cash flow from operating activities............................. 3,443,201
Cash flow used in investing activities.......................... (10,889,857)
Cash flow from financing activities............................. 6,371,192
EBITDA(3)....................................................... $ (806,500)
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------
Pro Forma As
Combined(4) Adjusted
------------ ------------
<S> <C> <C>
Pro Forma Balance Sheet Data:
Working capital(4).................................. $(94,242,961) $ 34,380,510
Total assets........................................ 254,044,957 306,635,415
Total long-term debt and other liabilities.......... 24,852,103 21,635,423
Stockholders' equity(5)............................. 121,259,372 252,999,372
</TABLE>
- --------
(1) Reflects an aggregate change in compensation, increases in expenses
associated with corporate management and costs associated with being a
public company of $3,703,736.
(2) Consists of amortization expense of $71,489,803 to be recorded as a result
of the 17 ISP acquisitions. These amortization charges are attributable
primarily to goodwill, subscriber lists and employee base and will be
amortized over three years 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.
We have included EBITDA in these data 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 our operating performance, financial
position or cash flows. Not all companies define EBITDA in the same way,
and our EBITDA is not necessarily comparable with similarly titled measures
for other companies.
(4) Includes the effect of recording as a current liability $71,816,293
representing the cash portion of the purchase price payable in the 17 ISP
acquisitions. This amount may be adjusted based on the financial conditions
of the ISPs as of the closing date of this offering. See "About
OneMain.com," "Use of Proceeds" and notes to the unaudited pro forma
combined financial statements.
(5) Adjusted to reflect the sale of the 8,000,000 shares of common stock in
this offering and the application of the estimated net proceeds. See "Use
of Proceeds" on page 20 above.
25
<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 of our ISPs included
elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the years ended December 31, 1996, 1997 and 1998 for D&E
SuperNet, Inc.; SunLink, Inc.; SouthWind Internet Access, Inc.; Horizon
Internet Technologies, Inc.; United States Internet, Inc.; Internet Partners of
America, LC; ZoomNet, Inc.; Internet Access Group, Inc.; Midwest Internet, LLC;
Internet Solutions, LLC; FGInet, Inc.; Superhighway, Inc.; Lightspeed Net,
Inc.; and TGF Technologies, Inc.; have been derived from the audited financial
statements included elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on March 1, 1996 to
December 31, 1996 and the years ended December 31, 1997 and 1998 for LebaNet,
Inc. have been derived from the audited financial statements included elsewhere
in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on January 3, 1996 to
December 31, 1996 and the years ended December 31, 1997 and 1998 for Palm.Net,
USA, Inc. have been derived from the audited financial statements included
elsewhere in this prospectus.
The balance sheet data as of December 31, 1997 and 1998 and the statement of
operations data for the period from its inception on January 31, 1997 to
December 31, 1997 and the year ended December 31, 1998 for JPS.Net Corporation
have been derived from the audited financial statements included elsewhere in
this prospectus.
The following selected historical financial data of our ISPs should be read
together with the historical financial statements and notes 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.
26
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS (cont'd)
The following table shows selected historical financial data for our ISPs for
the stated periods. The revenues reported below 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. Subscriber information for December 31, 1995 is not available.
<TABLE>
<CAPTION>
For or at the years ended December 31,
Commenced -------------------------------------------------
Operations 1995 1996 1997 1998
-------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Northeast Operating
Group
D&E SuperNet, Inc.
Revenues............. July 1995 $ 119,545 $ 841,537 $1,749,207 $ 3,946,804
Operating (loss)
income ............. $ (190,067) $ (11,029) $ 116,737 $ 456,550
Subscribers.......... 3,499 7,395 23,150
SunLink, Inc.
Revenues............. October 1995 $ 6,620 $ 224,966 $ 798,237 $ 1,411,164
Operating (loss)
income ............. $ (9,185) $ 80 $ 149,583 $ (61,171)
Subscribers.......... 1,390 3,914 8,497
LebaNet, Inc.
Revenues............. March 1996 $ 149,299 $ 199,571 $ 298,109
Operating income..... $ 52,717 $ 34,928 $ 116,401
Subscribers.......... 289 253 233
Plains States Operating
Group
SouthWind Internet
Access, Inc.
Revenues............. October 1994 $ 202,140 $ 836,587 $1,437,848 $ 2,170,404
Operating income..... $ 4,449 $ 187,196 $ 365,186 $ 329,797
Subscribers.......... 5,185 8,116 11,287
Horizon Internet
Technologies, Inc.
Revenues............. July 1995 $ 1,921 $ 148,686 $ 434,615 $ 1,161,187
Operating (loss)
income ............. $ (13,749) $ 351 $ (53,069) $ 58,404
Subscribers.......... 807 3,126 7,261
Southeast Operating
Group
United States
Internet, Inc.
Revenues............. April 1994 $ 889,902 $ 2,506,732 $4,173,803 $ 6,514,652
Operating loss(1).... $(2,592,725) $(1,850,915) $ (226,406) $(4,649,781)
Subscribers.......... 10,927 16,219 35,289
Internet Partners of
America, LC
Revenues............. June 1995 $ 28,155 $ 930,989 $1,856,801 $ 4,425,577
Operating loss....... $ (150,265) $(1,162,396) $ (979,102) $ (519,181)
Subscribers.......... 6,789 13,060 24,183
ZoomNet, Inc.
Revenues............. September 1995 $ 18,701 $ 272,692 $ 857,619 $ 1,967,680
Operating (loss)
income ............. $ (1,418) $ (12,533) $ 161,550 $ 201,884
Subscribers.......... 1,997 5,309 12,921
Palm.Net, USA, Inc.
Revenues............. April 1996 $ 95,918 $ 432,411 $ 625,922
Operating (loss)
income ............. $ (52,110) $ 79,831 $ 119,307
Subscribers.......... 1,600 2,824 5,337
Internet Access Group,
Inc.
Revenues............. January 1995 $ 393,165 $ 951,345 $1,179,434 $ 1,534,377
Operating (loss)
income ............. $ (138,036) $ 32,954 $ 36,137 $ (58,911)
Subscribers.......... 2,574 3,887 4,931
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
For or at the years Ended December 31,
Commenced --------------------------------------------------
Operations 1995 1996 1997 1998
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Midwest South Operating
Group
Midwest Internet,
L.L.C.
Revenues............. March 1995 $ 186,143 $ 1,790,376 $ 2,523,128 $ 4,091,066
Operating (loss)
income.............. $ (196,800) $ (482,368) $ 58,570 $ 500,196
Subscribers.......... 11,529 11,474 21,581
Internet Solutions,
LLC
Revenues............. October 1995 $ 7,004 $ 140,701 $ 446,057 $ 1,002,535
Operating (loss)
income.............. $ (47,136) $ (74,613) $ 5,753 $ 113,297
Subscribers.......... 1,010 2,667 5,437
Midwest North Operating
Group
FGInet, Inc.
Revenues............. November 1994 $ 34,161 $ 274,965 $ 818,445 $ 1,493,790
Operating (loss)
income.............. $ (3,790) $ (125,093) $ 119 $ (104,309)
Subscribers.......... 2,919 4,601 10,031
North Central Operating
Group
Superhighway, Inc.
d/b/a Indynet
Revenues............. June 1995 $ 248,479 $ 1,248,751 $ 2,106,290 $ 3,013,383
Operating income..... $ 28,427 $ 238,579 $ 460,012 $ 149,951
Subscribers.......... 6,556 12,468 18,114
California Operating
Group
Lightspeed Net, Inc.
Revenues............. March 1995 $ 84,771 $ 1,124,474 $ 3,085,901 $ 4,652,991
Operating loss....... $ (385,229) $(1,065,560) $(1,242,859) $ (519,383)
Subscribers.......... 4,059 15,533 15,672
JPS.Net Corporation
Revenues............. January 1997 $ 2,074,398 $ 9,001,578
Operating loss....... $ (992,646) $ (852,620)
Subscribers.......... 32,119 100,736
New England Operating
Group
TGF Technologies, Inc.
Revenues............. November 1994 $603,394 $ 1,145,174 $ 2,512,081 $ 4,954,572
Operating loss....... $(649,891) $ (509,041) $ (915,914) $ (126,281)
Subscribers.......... 5,858 15,239 27,189
Total
Revenues .............. $ 2,824,101 $12,683,192 $26,685,846 $52,265,791
Operating loss (1)..... $(4,345,415) $(4,833,781) $(2,941,590) $(4,845,850)
Subscribers............ -- 66,988 158,204 331,849
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1995 1996 1997 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Northeast Operating Group
D&E SuperNet, Inc.
Total assets............. $ 227,716 $ 596,488 $ 767,247 $3,560,265
Long-term debt........... -- -- -- 2,180,000
Total stockholders'
(deficit) equity........ (51,517) (443) 46,130 596,574
SunLink, Inc.
Total assets............. 21,988 149,149 436,575 698,204
Long-term debt........... 5,000 7,500 12,941 344,586
Total stockholders'
equity.................. 11,310 17,926 157,327 75,793
LebaNet, Inc.
Total assets............. 75,340 115,249 108,948
Long-term debt........... -- -- --
Total stockholders'
equity.................. 24,716 49,204 102,875
Plains States Operating
Group
SouthWind Internet Access,
Inc.
Total assets............. 158,735 427,912 609,336 619,659
Long-term debt........... 59,050 167,486 139,283 36,764
Total stockholders'
equity.................. 31,254 206,855 397,840 464,494
Horizon Internet
Technologies, Inc.
Total assets............. 36,301 79,987 177,844 558,126
Long-term debt........... 12,791 48,886 100,053 151,799
Total stockholders'
equity (deficit)........ 8,251 7,367 (49,486) (16,258)
Southeast Operating Group
United States Internet,
Inc.
Total assets............. 751,795 1,902,158 2,228,337 8,855,270
Long-term debt........... 137,632 1,762,638 2,062,442 4,983,113
Stock appreciation rights
liability............... 1,780,840 2,362,218 1,763,357 5,104,035
Total stockholders'
deficit................. (1,853,742) (3,307,922) (2,799,234) (3,026,084)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1995 1996 1997 1998
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Internet Partners of America,
LC
Total assets.................. $297,758 $1,500,578 $2,360,033 $3,642,322
Long-term debt................ 100,000 772,234 1,962,658 3,879,590
Total stockholders' equity
(deficit).................... 149,735 573,220 (318,811) (1,163,546)
ZoomNet, Inc.
Total assets.................. 31,585 170,159 681,281 1,402,130
Long-term debt................ 5,397 24,308 363,113 699,278
Total stockholders' equity.... 18,582 60,768 146,833 243,921
Palm.Net, USA, Inc.
Total assets.................. 74,304 128,762 165,875
Long-term debt................ -- -- --
Total stockholders' (deficit)
equity....................... (50,413) 13,920 85,262
Internet Access Group, Inc.
Total assets.................. 82,526 292,868 289,775 492,551
Long-term debt................ 51,956 153,521 209,240 342,675
Total stockholders' deficit... (146,223) (123,758) (111,636) (203,790)
Midwest South Operating Group
Midwest Internet L.L.C.
Total assets.................. 434,841 759,993 747,249 1,867,362
Long-term debt................ 86,212 38,822 973,039 1,689,018
Total stockholders' deficit... (123,023) (582,892) (589,057) (185,639)
Internet Solutions, LLC
Total assets.................. 61,828 107,462 307,076 721,063
Long-term debt................ -- -- -- 234,743
Total stockholders' equity.... 42,864 81,080 102,703 155,294
Midwest North Operating Group
FGInet, Inc.
Total assets.................. 27,556 243,321 375,388 1.011,586
Long-term debt................ -- -- -- --
Total stockholders' equity.... 13,000 159,336 211,227 217,987
North Central Operating Group
Superhighway, Inc. d/b/a
IndyNet
Total assets.................. 171,289 435,399 918,678 915,718
Long-term debt................ -- -- 49,608 29,013
Total stockholders' equity.... 112,930 316,766 703,332 659,242
California Operating Group
Lightspeed Net, Inc.
Total assets.................. 310,136 1,081,951 1,483,961 1,528,218
Long-term debt................ -- -- -- --
Total stockholders' equity.... 296,705 874,751 848,248 761,526
JPS.Net Corporation
Total assets.................. 1,257,665 4,321,912
Long-term debt................ -- 990,087
Total stockholders' deficit... (979,307) (2,966,036)
New England Operating Group
TGF Technologies, Inc.
Total assets.................. 316,774 722,963 1,277,092 1,639,678
Long-term debt................ 39,611 355,218 757,542 573,997
Total stockholders' equity
(deficit).................... 155,460 54,244 (387,556) (49,322)
</TABLE>
- --------
(1) Operating loss for the years ended December 31, 1995, 1996, 1997 and 1998
includes compensation expense (benefit) of $1,680,840, $581,378, ($598,861)
and $3,340,678. This expense (benefit) is attributable to compensation
expense related to United States Internet's stock appreciation rights.
29
<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 OneMain.com and the historical results for each of our ISPs for
which separate data have been included in this prospectus. See "Selected
Combined Pro Forma Financial Data" on page 24 above for the basis of the pro
forma presentation for OneMain.com.
Overview
We derive Internet access revenues primarily from subscriptions from
individuals and small businesses for dial-up access to the Internet.
Subscription fees vary among our ISPs and by billing plan within the subscriber
base for a particular ISP. We also earn access revenues by providing dedicated
Internet access and Web hosting services.
We earn non-access revenues by charging set-up and installation fees,
providing Web page design and 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.
Our costs and expenses include:
. cost of access revenues;
. cost of other revenues;
. operations and customer support;
. sales and marketing;
. general and administrative;
. amortization; and
. depreciation.
Cost of access revenues consists primarily of the costs of maintaining
sufficient capacity to provide service to our subscribers. For an ISP, capacity
is a measurement of the ISP's ability to connect subscribers to the Internet,
and capacity costs include:
. the cost of leased routers and access servers and recurring
telecommunications costs, including the cost of local telephone lines to
carry subscriber calls to our points of presence, or POPs;
. the costs associated with leased lines connecting our POPs directly to
the Internet or to our operations centers and connecting our operations
centers to the Internet; and
. Internet backbone costs, which are the amounts we pay to Internet
backbone providers for bandwidth which allows us to transmit data from
the Internet to our subscribers.
Cost of access revenues will increase over time to support our growing
subscriber base. We will seek to leverage the combined scale of our ISPs to
lower telecommunications costs as a percentage of revenues by:
. negotiating one or more relationships with national backbone providers
to connect our ISPs to the Internet;
. negotiating favorable local loop contracts and establishing co-location
arrangements with local exchange carriers;
30
<PAGE>
. establishing private peering relationships to reduce our costs and
improve access and reliability for our subscribers; and
. negotiating discounts with equipment vendors.
Increases in individual subscriber usage will tend to offset the per subscriber
cost savings we may be able to achieve.
Cost of other revenues consists primarily of:
. the salaries and benefits of the personnel providing installation;
. Web development and technical services; and
. the cost of purchasing the equipment to provide these services. In the
case of equipment and software sales, the cost 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. We expect
operations and customer support expenses to increase over time to support new
and existing subscribers. New subscribers tend to have particularly heavy
customer service and technical support requirements. Because we anticipate
rapid growth in our subscriber base to continue, we expect these costs to
comprise an increasing percentage of expenses in the near term. In addition,
implementing customer service and technical support 24 hours a day, seven days
a week in our markets will increase these expenses on an absolute basis. In the
longer term, as a percentage of revenues, we believe operations and customer
support expenses should decline as the existing subscriber base becomes 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. We expect sales and marketing expense to increase over time
with the growth in our subscriber base. On a percentage of revenue basis, sales
and marketing expense is a relatively variable cost and may increase with our
development of a national brand supported by a community-based marketing
program.
General and administrative expenses consist primarily of:
. the salaries of our employees and associated benefits; and
.the cost of travel, entertainment, rent and utilities.
We expect general and administrative costs to increase to support our growth,
particularly as we establish a network operations center and implement common
billing and financial reporting systems in the near term. Over time, we expect
these relatively fixed expenses to decrease as a percentage of revenues. We do
not anticipate any meaningful layoffs as a result of combining operations and
customer support, sales or general and administrative functions of the
individual ISPs. In addition, we do not anticipate incurring any significant
restructuring cost.
Amortization expense primarily relates, on a pro forma basis, to the
amortization of goodwill, subscriber lists, employee base and other intangibles
acquired in the acquisitions of
31
<PAGE>
our 17 ISPs and is provided over three years. We expect amortization expense to
increase as additional acquisitions are closed and to vary according to
purchase price and tangible assets. Our policy in future acquisitions will be
to amortize the portion of the acquisition purchase price attributable to
subscriber lists, goodwill and other intangible assets over an average three-
year period.
Depreciation primarily relates to our hardware infrastructure and is provided
over the estimated useful lives of the assets ranging from three to five years
using the straight-line method. We expect depreciation expense to increase as
we grow our networks to support new and acquired subscribers and we build a
network operations center and implement common billing and reporting systems.
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. Additional
factors that may cause our operating results to vary include:
. the pricing and mix of our services;
. subscriber retention rates;
. changes in pricing policies and product offerings by our competitors;
. demand for 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 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. Based on 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 and losses, net income and losses and cash flows. We expect to
continue to experience quarterly fluctuations in operating results, including
possible net losses, due to the factors discussed above. We may also experience
quarterly fluctuations as a result of other factors including additional sales
and marketing and general and administrative expenses incurred to acquire and
support new subscribers and the timing and magnitude of required capital
expenditures.
32
<PAGE>
The following table shows our pro forma statement of operations data for the
eight quarters in the period ended December 31, 1998. This information, in our
opinion, reflects all the adjustments that we consider necessary for fair
presentation of this information under 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 Dec 31
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $ 6,119.2 $ 6,836.4 $ 7,909.6 $ 9,573.5 $ 11,471.0 $ 13,206.3 $ 15,082.4 $ 16,927.1
Cost of access and other
revenues............... 2,796.8 3,014.3 3,115.2 4,477.7 4,320.9 5,413.6 6,110.0 6,942.4
Operations and customer
support................ 1,067.0 1,230.5 1,790.8 998.9 1,631.2 2,175.9 2,460.8 2,565.7
Sales and marketing..... 795.2 830.0 898.5 1,072.2 1,358.9 1,626.5 1,847.6 2,281.9
General and
administrative......... 2,509.0 2,864.7 2,492.3 4,242.4 3,497.0 3,866.7 4,709.0 6,366.3
Amortization............ 17,897.2 17,915.9 17,992.7 17,967.2 18,069.8 18,097.9 18,100.6 18,416.6
Depreciation............ 600.0 642.4 958.2 926.1 1,035.5 1,037.2 1,081.9 1,126.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating loss.......... $(19,546.0) $(19,661.4) $(19,338.1) $(20,111.0) $(18,442.3) $(19,011.5) $(19,227.5) $(20,772.6)
========== ========== ========== ========== ========== ========== ========== ==========
Subscribers at period
end.................... 91,413 105,364 129,029 158,204 198,495 235,742 278,995 331,849
</TABLE>
Results Of Operations -- D&E SuperNet, Inc.
SuperNet commenced operations as a partnership in July 1995 and was
incorporated on September 4, 1998. SuperNet's target market is the Commonwealth
of Pennsylvania. The following table shows historical data and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1996 1997 1998
------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $841.5 100.0% $1,749.2 100.0% $3,946.8 100.0%
Cost of access and other
revenues............... 443.4 52.7 647.1 37.0 1,465.8 37.1%
Operating expenses...... 409.2 48.6 985.4 56.3 2,024.5 51.3
------ ----- -------- ----- -------- -----
(Loss) income from
operations............. $(11.1) (1.3)% $ 116.7 6.7% $ 456.5 11.6%
====== ===== ======== ===== ======== =====
Approximate total
subscribers at period
end.................... 3,499 7,395 23,150
</TABLE>
SuperNet. 1998 Compared to 1997
Revenues. Revenues increased 125.6% from 1997 to 1998. 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 126.5% from 1997 to 1998, primarily as a result of the increased
costs associated with adding capacity to service new subscribers. Cost of
access and other revenues as a percentage of revenues remained relatively
constant at 37.0% in 1997 and 37.1% in 1998.
Operating expenses. Operating expenses increased 105.4% from 1997 to 1998,
primarily as a result of hiring customer support and administrative personnel.
Operating expenses as a percentage of revenues decreased from 56.3% in 1997 to
51.3% in 1998, primarily as a result of spreading the cost of existing
personnel over a growing subscriber base.
33
<PAGE>
SuperNet. 1997 Compared to 1996
Revenues. Revenues increased 107.9% 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 45.9% from 1996 to 1997, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of services as
a percentage of revenues decreased from 52.7% in 1996 to 37.0% in 1997,
primarily as a result of existing excess capacity being used to satisfy new
subscriber growth.
Operating expenses. Operating expenses increased 140.8% from 1996 to 1997.
Operating expenses as a percentage of revenues increased from 48.6% in 1996 to
56.3% in 1997, primarily as a result of increases in customer support
personnel.
Results Of Operations -- SunLink, Inc.
SunLink was incorporated on October 1, 1991 and commenced operations on
October 1, 1995. SunLink's target market is Sunbury, Pennsylvania and its
surrounding areas. The following table shows historical data and those data as
a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1997 1998
------------ ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $225.0 100.0% $798.2 100.0% $1,411.2 100.0%
Cost of access and other
revenue................ 85.8 38.1 236.1 29.6 566.1 40.1
Operating expenses...... 139.1 61.8 412.5 51.7 906.3 64.2
------ ----- ------ ----- -------- -----
Income (loss) from
operations............. $ 0.1 0.1% $149.6 18.7% $ (61.2) (4.3)%
====== ===== ====== ===== ======== =====
Approximate total
subscribers at period
end.................... 1,390 3,914 8,497
</TABLE>
SunLink. 1998 Compared to 1997
Revenues. Revenues increased 76.8% from 1997 to 1998. 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 139.8% from 1997 to 1998, primarily as a result of the increased
costs associated with adding capacity to service new subscribers. Cost of
access and other revenues as a percentage of revenues increased from 29.6% in
1997 to 40.1% in 1998, primarily as a result of telephone lines and Internet
backbone capacity additions in advance of subscriber growth.
Operating expenses. Operating expenses increased 119.7% from 1997 to 1998,
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 1997 to 64.2% in 1998, primarily as a result of increases in customer
support personnel and increases in general and administrative costs.
34
<PAGE>
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 175.2% from 1996 to 1997, primarily as a result of the increased
costs associated with adding capacity to service new subscribers. Cost of
access and other revenues as a percentage of revenues decreased from 38.1% in
1996 to 29.6% in 1997, primarily as a result of existing excess capacity being
used to service new subscribers.
Operating expenses. Operating expenses increased 196.5% 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 51.7% in 1997, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
Results Of Operations -- LebaNet, Inc.
LebaNet commenced operations as a sole proprietorship in December 1994 and
was incorporated on February 21, 1996. LebaNet's target market is central
Pennsylvania. The following table shows historical data and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $149.3 100.0% $199.6 100.0% $298.1 100.0%
Cost of access and other
revenues................... 55.5 37.2 107.8 54.0 109.7 36.8
Operating expenses.......... 41.0 27.5 56.9 28.5 72.0 24.2
------ ----- ------ ----- ------ -----
Income from operations...... $ 52.8 35.3% $ 34.9 17.5% $116.4 39.0%
====== ===== ====== ===== ====== =====
Approximate total
subscribers at period end.. 289 253 233
</TABLE>
LebaNet. 1998 Compared to 1997
Revenues. Revenues increased 49.3% from 1997 to 1998. The increase was
primarily attributable to consulting services performed for SunLink, unrelated
manufacturing services and equipment resale.
Cost of access and other revenues. Cost of access and other revenues
increased 1.8% from 1997 to 1998, primarily as a result of deploying digital
technology and the increased costs associated with adding capacity to service
new subscribers. Cost of access and other revenues as a percentage of revenues
decreased from 54.0% in 1997 to 36.8% in 1998, primarily as a result of
existing excess capacity being used to service new subscribers.
Operating expenses. Operating expenses increased 26.5% from 1997 to 1998,
primarily as a result of increased marketing and advertising costs. Operating
expenses as a percentage of revenues decreased from 28.5% in 1997 to 24.2% in
1998.
35
<PAGE>
LebaNet. 1997 Compared to 1996
Revenues. Revenues increased 33.7% from 1996 to 1997. The increase was
attributable in part to a shift from residential accounts to higher priced
business accounts.
Cost of access and other revenues. Cost of access and other revenues
increased 94.2% from 1996 to 1997, primarily as a result of adding capacity to
service new subscribers. Cost of access and other revenues as a percentage of
revenues increased from 37.2% in 1996 to 54.0% in 1997, primarily as a result
of adding capacity in advance of subscriber growth.
Operating expenses. Operating expenses increased 38.8% from 1996 to 1997.
Operating expenses as a percentage of revenues remained relatively constant at
27.5% in 1996 and 28.5% in 1997.
Results Of Operations -- SouthWind Internet Access, Inc.
SouthWind Internet Access was incorporated on July 6, 1994, and commenced
operations in October 1994. SouthWind's target market is the state of Kansas.
The following table shows historical data and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1997 1998
------------ -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $836.6 100.0% $1,437.8 100.0% $2,170.4 100.0%
Cost of access and other
revenues....................... 241.9 28.9 364.8 25.4 708.6 32.6
Operating expenses.............. 407.5 48.7 707.9 49.2 1,132.0 52.2
------ ----- -------- ----- -------- -----
Income from operations.......... $187.2 22.4% $ 365.1 25.4% $ 329.8 15.2%
====== ===== ======== ===== ======== =====
Approximate total subscribers at
period end..................... 5,185 8,116 11,287
</TABLE>
SouthWind. 1998 Compared to 1997
Revenues. Revenues increased 51.0% from 1997 to 1998. 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 94.2% from 1997 to 1998, primarily as a result of adding capacity to
service new subscribers. Cost of access and other revenues as a percentage of
revenues increased from 25.4% in 1997 to 32.6% in 1998, primarily as a result
of adding capacity in advance of subscriber growth.
Operating expenses. Operating expenses increased 59.9% from 1997 to 1998,
primarily as a result of increased costs relating to the hiring of additional
customer and technical support personnel. Operating expenses as a percentage of
revenues increased from 49.2% in 1997 to 52.2% in 1998, primarily as a result
of increases in customer and technical support personnel.
SouthWind. 1997 Compared to 1996
Revenues. Revenues increased 71.9% from 1996 to 1997. The increase was
primarily attributable to an increase in the total number of subscribers.
36
<PAGE>
Cost of access and other revenues. Cost of access and other revenues
increased 50.8% from 1996 to 1997, primarily as a result of adding capacity to
service new subscribers. Cost of access and other revenues as a percentage of
revenues decreased from 28.9% in 1996 to 25.4% in 1997, primarily as a result
of existing capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 73.7% 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 48.7% in 1996 and 49.2% in 1997.
Results Of Operations -- Horizon Internet Technologies, Inc.
Horizon was incorporated on July 26, 1995 and commenced operations on that
date. Horizon's target markets include Missouri, Oklahoma and Kansas. The
following table shows historical data and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1997 1998
------------ ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $148.7 100.0% $434.6 100.0% $1,161.2 100.0%
Cost of access and other
revenues............... 76.5 51.4 202.8 46.7 420.6 36.2
Operating expenses...... 71.8 48.3 284.9 65.6 682.2 58.7
------ ----- ------ ----- -------- -----
Income (loss) from
operations............. $ 0.4 0.3% $(53.1) (12.3)% $ 58.4 5.1%
====== ===== ====== ===== ======== =====
Approximate total
subscribers at period
end.................... 807 3,126 7,261
</TABLE>
Horizon. 1998 Compared to 1997
Revenues. Revenues increased 167.2% from 1997 to 1998. The increase was
primarily attributable to the increase in the total number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 107.4% from 1997 to 1998, primarily as a result of adding capacity to
service the growing subscriber base. Cost of access and other revenues as a
percentage of revenues decreased from 46.7% in 1997 to 36.2% in 1998, primarily
as a result of excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 139.5% from 1997 to 1998,
primarily as a result of relocating to a larger facility and hiring additional
customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 65.6% in 1997 to 58.7% in 1998, primarily
as a result of spreading the cost of existing personnel over a growing
subscriber base.
Horizon. 1997 Compared to 1996
Revenues. Revenues increased 192.3% 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 165.1% from 1996 to 1997, primarily as a result of deploying digital
technology and the increased
37
<PAGE>
costs associated with adding capacity to service the growing subscriber base.
Cost of access and other revenues as a percentage of revenues decreased from
51.4% in 1996 to 46.7% in 1997, primarily as a result of excess capacity being
used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 296.8% 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 48.3% in 1996 to 65.6% in 1997, primarily as a result
of the increased number of employees.
Results Of Operations -- United States Internet, Inc.
United States Internet was incorporated on March 24, 1994 and commenced
operations in April, 1994. United States Internet has points of presence in
Tennessee, Virginia, Kentucky and Alabama. The following table shows historical
data and those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1996 1997 1998
---------------- --------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 2,506.7 100.0% $4,173.8 100.0% $ 6,514.6 100.0%
Cost of access and other
revenues............... 931.7 37.2 1,999.2 47.9 3,174.8 48.7
Operating expenses(1)... 3,425.9 136.7 2,401.0 57.5 7,989.6 122.6
--------- ----- -------- ----- --------- -----
Income (loss) from
operations............. $(1,850.9) (73.9)% $ (226.4) (5.4)% $(4,649.8) (71.3)%
========= ===== ======== ===== ========= =====
Approximate total
subscribers at period
end.................... 10,927 16,219 35,289
</TABLE>
- --------
(1) As part of operating expense, United States Internet has included stock
compensation expense (benefit). For the years ended December 31, 1996, 1997
and 1998, United States Internet incurred an expense of approximately
$581.4, a benefit of approximately ($598.9) and an expense of approximately
$3,340.7.
United States Internet. 1998 Compared to 1997
Revenues. Revenues increased 56.1% from 1997 to 1998. The increase was
primarily attributable to an increase in the total number of subscribers
including the integration of 1,400 subscribers acquired during the quarter
ended March 31, 1998.
Cost of access and other revenues. Cost of access and other revenues
increased 58.8% from 1997 to 1998, primarily as a result of the increased costs
associated with adding capacity to service the growing subscriber base. Cost of
access and other revenues as a percentage of revenues increased from 47.9% in
1997 to 48.7% in 1998, primarily as a result of adding capacity in advance of
subscriber growth.
Operating expenses. Operating expenses increased 232.8% from 1997 to 1998,
primarily as a result of increased costs relating to the hiring of additional
sales and customer support personnel. Included within this increase is a
$3,340,678 stock compensation expense attributable to stock appreciation
rights. Operating expenses as a percentage of revenues increased from 57.5% in
1997 to 122.6% in 1998, primarily as a result of the increase in stock
compensation expense.
38
<PAGE>
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 total number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 114.6% from 1996 to 1997, primarily as a result of increased costs
associated with adding capacity and leased remote access equipment required by
the change from metered dial-up access accounts to unlimited access accounts
and the change to digital remote access servers. Cost of services as a
percentage of revenues increased from 37.2% in 1996 to 47.9% in 1997, primarily
as a result of adding capacity in advance of subscriber growth.
Operating expenses. Operating expenses decreased 29.9% from 1996 to 1997
primarily as a result of $598,861 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 $598,861 stock compensation benefit recorded
in 1997.
Results Of Operations -- Internet Partners of America, LC
Internet Partners of America was formed on May 12, 1995 and commenced
operations in June 1995. Internet Partners of America's target markets include
Arkansas, Missouri and Oklahoma. The following table shows historical data and
those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1996 1997 1998
----------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 931.0 100.0% $1,856.8 100.0% $4,425.6 100.0%
Cost of access and other
revenues............... 685.5 73.6 1,013.5 54.6 1,900.8 43.0
Operating expenses...... 1,407.9 151.2 1,822.4 98.1 3,044.0 68.8
--------- ------ -------- ----- -------- -----
Loss from operations.... $(1,162.4) (124.9)% $ (979.1) (52.7)% $ (519.2) (11.8)%
========= ====== ======== ===== ======== =====
Approximate total
subscribers at period
end.................... 6,789 13,060 24,183
</TABLE>
Internet Partners of America. 1998 Compared to 1997
Revenues. Revenues increased 138.3% from 1997 to 1998. The increase was
primarily attributable to an increase in the total number of 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 87.5% from 1997 to 1998, primarily as a result of the increased costs
associated with the elimination of favorable rate programs and adding capacity
to service the growing subscriber base. Cost of access and other revenues as a
percentage of revenues decreased from 54.6% in 1997 to 43.0% in 1998, primarily
as a result of excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 67.0% from 1997 to 1998,
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 98.1% in 1997 to 68.8% in 1998, primarily as a result
of spreading the cost of existing personnel over a growing subscriber base.
39
<PAGE>
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 total number of subscribers
including the integration of subscribers acquired during 1997.
Cost of access and other revenues. Cost of access and other revenues
increased 47.8% from 1996 to 1997, primarily as a result of the increased costs
associated with adding 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 54.6% in 1997 primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 29.4% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 151.2% in 1996 to
98.1% in 1997, primarily as a result of the closing of the Little Rock,
Arkansas office and the elimination of eight employees associated with that
office, resulting in an annual cost savings of approximately $300,000, as well
as spreading the cost of existing personnel over a growing subscriber base.
Results Of Operations -- ZoomNet, Inc.
ZoomNet was incorporated on June 19, 1995 and commenced operations in
September 1995. ZoomNet's target markets include Ohio, Kentucky and West
Virginia. The following table shows historical data and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1997 1998
------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $272.7 100.0 % $857.6 100.0% $1,967.7 100.0%
Cost of access and other
revenues....................... 133.3 48.9 262.7 30.6 772.5 39.3
Operating expenses.............. 151.9 55.7 433.3 50.5 993.3 50.5
------ ----- ------ ----- -------- -----
(Loss) income from operations... $(12.5) (4.6)% $161.6 18.9% $ 201.9 10.2%
====== ===== ====== ===== ======== =====
Approximate total subscribers at
period end..................... 1,997 5,309 12,921
</TABLE>
ZoomNet. 1998 Compared to 1997
Revenues. Revenues increased 129.4% from 1997 to 1998. The increase was
primarily attributable to an increase in the total number of subscribers
including the integration of 1,300 subscribers acquired during the quarter
ended September 30, 1998.
Cost of access and other revenues. Cost of access and other revenues
increased 194.1% from 1997 to 1998, primarily as a result of the increased
costs associated with adding capacity to service the growing subscriber base.
Cost of services as a percentage of revenues increased from 30.6% in 1997 to
39.3% in 1998, primarily as a result of the addition of two new access
locations.
Operating expenses. Operating expenses increased 129.2% from 1997 to 1998,
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 constant at 50.5% in 1997 and
1998.
40
<PAGE>
ZoomNet. 1997 Compared to 1996
Revenues. Revenues increased 214.5% 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 97.1% from 1996 to 1997, primarily as a result of the increased costs
associated with adding capacity to service the growing subscriber base. Cost of
services as a percentage of revenues decreased from 48.9% in 1996 to 30.6% in
1997, primarily as a result of excess capacity being used to satisfy new
subscriber growth.
Operating expenses. Operating expenses increased 185.3% from 1996 to 1997,
primarily as a result of hiring additional technical and customer support
personnel. Operating expenses as a percentage of revenues decreased from 55.7%
in 1996 to 50.5% in 1997, primarily as a result of spreading the cost of
existing personnel over a growing subscriber base.
Results Of Operations -- Palm.Net, USA, Inc.
Palm.Net was incorporated on January 3, 1996 and commenced operations in
April 1996. Palm.Net operates in Brevard County, Florida. The following table
shows historical data and those data as a percentage of revenues for the
periods indicated:
<TABLE>
<CAPTION>
Jan. 3
through
Dec. 31, Years Ended December 31,
1996 --------------------------
Period 1997 1998
------------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ 95.9 100.0% $432.4 100.0% $625.9 100.0%
Cost of access and other
revenues......................... 43.8 45.7 136.3 31.5 162.5 26.0
Operating expenses................ 104.2 108.7 216.3 50.0 344.1 55.0
------ ----- ------ ----- ------ -----
(Loss) income from operations..... $(52.1) (54.4)% $ 79.8 18.5% $119.3 19.0%
====== ===== ====== ===== ====== =====
Approximate total subscribers at
period end....................... 1,600 2,824 5,337
</TABLE>
Palm.Net. 1998 Compared to 1997
Revenues. Revenues increased 44.8% from 1997 to 1998. 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 19.2% from 1997 to 1998, primarily as a result of the increased costs
associated with adding capacity to service the growing subscriber base. Cost of
access and other revenues as a percentage of revenues decreased from 31.5% in
1997 to 26.0% in 1998, primarily as a result of a reduction in access line
costs realized by a switch from a regional Bell operating company to a
competitive local exchange carrier.
Operating expenses. Operating expenses increased 59.1% from 1997 to 1998,
primarily as a result of an increase in personnel. Operating expenses as a
percentage of revenues increased from 50.0% in 1997 to 55.0% in 1998, primarily
as a result of hiring new personnel to serve a growing subscriber base.
41
<PAGE>
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 total number of
subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 211.2%, from the 1996 period to 1997, primarily as a result of the
increased costs associated with adding capacity to service new subscribers.
Cost of access and other revenues as a percentage of revenues decreased from
45.7% for the 1996 period to 31.5% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 107.6% from the 1996 period
to 1997. Operating expenses as a percentage of revenues decreased from 108.7%
for the 1996 period to 50.0% in 1997, primarily as a result of spreading the
cost of existing personnel over a growing subscriber base.
Results Of Operations -- Internet Access Group, Inc.
Internet Access Group was incorporated on December 2, 1994 and commenced
operations in January 1995. Internet Access Group's target markets include
Orlando, Florida and its six surrounding communities. The following table shows
historical data and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1996 1997 1998
------------ -------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $951.3 100.0% $1,179.4 100.0% $1,534.4 100.0%
Cost of access and other
revenues............... 418.2 44.0 506.4 42.9 657.4 42.8
Operating expenses...... 500.2 52.6 636.9 54.0 935.9 61.0
------ ----- -------- ----- -------- -----
Income (loss) from
operations............. $ 32.9 3.4% $ 36.1 3.1% $ (58.9) (3.8)%
====== ===== ======== ===== ======== =====
Approximate total
subscribers at period
end.................... 2,574 3,887 4,931
</TABLE>
Internet Access Group. 1998 Compared to 1997
Revenues. Revenues increased 30.1% from 1997 to 1998. 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 29.8% from 1997 to 1998, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of access and
other revenues remained relatively constant at 42.9% in 1997 and 42.8% in 1998.
Operating expenses. Operating expenses increased 46.9% from 1997 to 1998,
primarily as a result of hiring additional administrative, technical and
customer support personnel. Operating expenses as a percentage of revenues
increased from 54.0% in 1997 to 61.0% in 1998, 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 total number of subscribers.
42
<PAGE>
Cost of access and other revenues. Cost of access and other revenues
increased 21.1% from 1996 to 1997, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of access and
other revenues as a percentage of revenues remained relatively constant at
44.0% in 1996 compared to 42.9% in 1997.
Operating expenses. Operating expenses increased 27.3% from 1996 to 1997,
primarily as a result of hiring additional administrative, technical and
customer support personnel. Operating expenses as a percentage of revenues
remained relatively constant at 52.6% in 1996 and 54.0% in 1997.
Results Of Operations -- Midwest Internet, L.L.C.
Midwest Internet was formed on February 2, 1995 and commenced operations in
March 1995. Midwest Internet's target markets include Illinois, Tennessee,
Kentucky and Missouri. The following table shows historical data and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1996 1997 1998
--------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,790.4 100.0% $2,523.1 100.0% $4,091.1 100.0%
Cost of access and other
revenues............... 666.7 37.2 922.5 36.6 1,364.9 33.4
Operating expenses...... 1,606.0 89.7 1,542.0 61.1 2,226.0 54.4
-------- ----- -------- ----- -------- -----
(Loss) income from
operations............. $ (482.3) (26.9)% $ 58.6 2.3% $ 500.2 12.2%
======== ===== ======== ===== ======== =====
Approximate total
subscribers at period
end.................... 11,529 11,474 21,581
</TABLE>
Midwest Internet. 1998 Compared to 1997
Revenues. Revenues increased 62.1% from 1997 to 1998. The increase was
primarily attributable to the increase in the total number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 48.0% from 1997 to 1998, primarily as a result of deploying digital
technology and the increased costs associated with adding capacity to service
the growing subscriber base. Cost of services as a percentage of revenues
decreased from 36.6% in 1997 to 33.4% in 1998, primarily as a result of
existing access capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 44.4% from 1997 to 1998,
primarily as a result of hiring additional technical and customer support
personnel. Operating expenses as a percentage of revenues decreased from 61.1%
in 1997 to 54.4% in 1998, primarily as a result of spreading the cost of
existing personnel over a growing subscriber base.
Midwest Internet. 1997 Compared to 1996
Revenues. Revenues increased 40.9% from 1996 to 1997. The increase was
primarily attributable to two events. First, Midwest terminated an agreement to
provide Internet service on behalf of a competitive local exchange carrier
under which Midwest received approximately 50% of subscriber revenues. Second,
Midwest's own dial-up subscribers, from which it derives 100% of subscriber
revenues, increased.
43
<PAGE>
Cost of access and other revenues. Cost of access and other revenues
increased 38.4% from 1996 to 1997, primarily as a result of the increased costs
associated with adding capacity to service the growing subscriber base. Cost of
services as a percentage of revenues remained relatively constant at 37.2% in
1996 and 36.6% in 1997.
Operating expenses. Operating expenses decreased 4.0% from 1996 to 1997,
primarily as a result of reductions in sales and marketing personnel. Operating
expenses as a percentage of revenues decreased from 89.7% in 1996 to 61.1% in
1997, primarily as a result of the personnel reductions highlighted above.
Results Of Operations -- Internet Solutions, LLC
Internet Solutions was formed on August 30, 1995 and commenced operations in
October, 1995. Internet Solutions' target market includes rural areas of
Missouri. The following table shows historical data and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1997 1998
------------- ------------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $140.7 100.0% $446.1 100.0% $1,002.5 100.0%
Cost of access and other
revenues....................... 84.4 60.0 165.7 37.1 371.9 37.1
Operating expenses.............. 130.9 93.0 274.6 61.6 517.3 51.6
------ ----- ------ ----- -------- -----
(Loss) income from operations... $(74.6) (53.0)% $ 5.8 1.3% $ 113.3 11.3%
====== ===== ====== ===== ======== =====
Approximate total subscribers at
period end..................... 1,010 2,667 5,437
</TABLE>
Internet Solutions. 1998 Compared to 1997
Revenues. Revenues increased 124.7% from 1997 to 1998. 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 124.4% from 1997 to 1998, primarily as a result of the increased
costs associated with adding capacity to service the growing subscriber base.
Cost of access and other revenues as a percentage of revenues remained constant
at 37.1% in 1997 and 1998.
Operating expenses. Operating expenses increased 88.4%, from 1997 to 1998,
primarily as a result of hiring additional customer support personnel.
Operating expenses as a percentage of revenues decreased from 61.6% in 1997 to
51.6% in 1998, primarily as a result of spreading the cost of existing
personnel over a growing subscriber base.
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 total number of subscribers.
Cost of access and other revenues. Cost of access and other revenues
increased 96.3% from 1996 to 1997, primarily as a result of the increased costs
associated with adding 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 37.1% in 1997, primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
44
<PAGE>
Operating expenses. Operating expenses increased 109.8% 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 93.0%
in 1996 to 61.6% in 1997, primarily as a result of spreading the cost of
existing personnel over a growing subscriber base.
Results Of Operations -- FGInet, Inc.
FGInet was incorporated on September 16, 1994 and commenced operations in
November 1994. FGInet's targeted market is the state of Illinois. The following
table shows historical data and those data as a percentage of revenues for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1996 1997 1998
-------------- ------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 275.0 100.0% $818.4 100.0% $1,493.8 100.0 %
Cost of access and other
revenues.................... 106.8 38.8 260.6 31.8 624.2 41.8
Operating expenses........... 293.3 106.7 557.7 68.1 973.9 65.2
------- ----- ------ ----- -------- -----
(Loss) income from
operations.................. $(125.1) (45.5)% $ 0.1 0.1% $(104.3) (7.0)%
======= ===== ====== ===== ======== =====
Approximate total subscribers
at period end............... 2,919 4,601 10,031
</TABLE>
FGInet. 1998 Compared to 1997
Revenues. Revenues increased 82.5% from 1997 to 1998. The increase was
primarily attributable to an increase in the total number of subscribers
including the integration of 1,400 subscribers required during the quarter
ended September 30, 1998.
Cost of access and other revenues. Cost of access and other revenues
increased 139.5% from 1997 to 1998, primarily as a result of deploying digital
technology and the increased costs associated with adding capacity to service
the growing subscriber base. Cost of access and other revenues as a percentage
of revenues increased from 31.8% in 1997 to 41.8% in 1998, primarily as a
result of redundant access line costs incurred in 1998 while digital access
servers were being installed.
Operating expenses. Operating expenses increased 74.6% from 1997 to 1998,
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 68.1% in 1997 to 65.2% in 1998, primarily as a result
of spreading the cost of existing personnel over a larger subscriber base.
FGInet. 1997 Compared to 1996
Revenues. Revenues increased 197.6% 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 144.0% from 1996 to 1997, primarily as a result of deploying digital
technology and the increased costs associated with adding capacity to service
new subscribers. Cost of access and other revenues as a percentage of revenues
decreased from 38.8% in 1996 to 31.8% in 1997, primarily as a result of excess
capacity being used to satisfy new subscriber growth.
45
<PAGE>
Operating expenses. Operating expenses increased 90.1% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 106.7% in 1996 to
68.1% in 1997, primarily as a result of existing personnel servicing a larger
subscriber base.
Results Of Operations -- Superhighway, Inc. d/b/a Indynet
Superhighway was incorporated on June 1, 1995 and commenced operations on
that date. Superhighway's target market includes central Indiana and
surrounding communities. The following table shows historical data and those
data as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $1,248.8 100.0% $2,106.3 100.0% $3,013.4 100.0%
Cost of access and other
revenues..................... 337.3 27.0 555.1 26.4 947.0 31.4
Operating expenses............ 672.9 53.9 1,091.2 51.8 1,916.4 63.6
-------- ----- -------- ----- -------- -----
Income from operations........ $ 238.6 19.1% $ 460.0 21.8% $ 150.0 5.0%
======== ===== ======== ===== ======== =====
Approximate total subscribers
at period end................ 6,556 12,468 18,114
</TABLE>
Superhighway. 1998 Compared to 1997
Revenues. Revenues increased 43.1% from 1997 to 1998. 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 70.6% from 1997 to 1998, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of access and
other revenues as a percentage of revenues increased from 26.4% in 1997 to
31.4% in 1998, primarily as a result of increases in telecommunications-related
costs in advance of subscriber growth.
Operating expenses. Operating expenses increased 75.6% from 1997 to 1998,
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 increased from 51.8% in 1997 to 63.6% in
1998.
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 64.6% from 1996 to 1997, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of access and
other revenues as a percentage of revenues remained relatively constant at
27.0% in 1996 and 26.4% in 1997.
Operating expenses. Operating expenses increased 62.2% from 1996 to 1997,
primarily as a result of hiring administrative and technical support personnel.
Operating expenses as a percentage of revenues decreased from 53.9% in 1996 to
51.8% in 1997, primarily as a result of better pricing from suppliers and
tighter controls on spending, as well as spreading the cost of existing
personnel over a growing subscriber base.
46
<PAGE>
Results Of Operations -- Lightspeed Net, Inc.
Lightspeed Net operated as a division of Lightspeed Software, Inc. until its
incorporation as a separate company on June 28, 1996. Lightspeed Net's target
market is central California and surrounding communities. The following table
shows historical data and those data as a percentage of revenues for the
periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1996 1997 1998
---------------- ---------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 1,124.5 100.0% $ 3,085.9 100.0% $4,653.0 100.0 %
Cost of access and other
revenues............... 820.9 73.0 1,574.1 51.0 1,974.6 42.4
Operating expenses...... 1,369.2 121.8 2,754.6 89.3 3,197.8 68.7
--------- ----- --------- ----- -------- -----
Loss from operations.... $(1,065.6) (94.8)% $(1,242.8) (40.3)% $ (519.4) (11.1)%
========= ===== ========= ===== ======== =====
Approximate total
subscribers at period
end.................... 4,059 15,533 15,672
</TABLE>
Lightspeed Net. 1998 Compared to 1997
Revenues. Revenues increased 50.8% from 1997 to 1998. The increase was
primarily attributable to a shift from residential accounts to higher priced
business accounts and an increase in service pricing.
Cost of access and other revenues. Cost of access and other revenues
increased 25.4% from 1997 to 1998, primarily as a result of the increased costs
associated with adding local telephone lines and additional Internet backbone
capacity. Cost of access and other revenues as a percentage of revenues
decreased from 51.0% in 1997 to 42.4% in 1998, primarily as a result of
existing excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 16.1% from 1997 to 1998,
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 89.3% in 1997 to 68.7% in
1998, primarily as a result of spreading the cost of 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 91.8% from 1996 to 1997, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of access and
other revenues as a percentage of revenues decreased from 73.0% in 1996 to
51.0% in 1997, primarily as a result of excess capacity being used to service
new subscribers.
Operating expenses. Operating expenses increased 101.2% from 1996 to 1997,
primarily as a result of hiring new customer support and network personnel.
Operating expenses as a percentage of revenues decreased from 121.8% in 1996 to
89.3% in 1997, primarily as a result of spreading the cost of existing
personnel over a growing subscriber base.
47
<PAGE>
Results Of Operations -- JPS.Net Corporation
JPS.Net was incorporated on January 31, 1997 and commenced operations on that
date. JPS.Net's target markets include northern California with a primary focus
on Sacramento and surrounding communities. The following table shows historical
data and those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1998
--------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenues................................... $2,074.4 100.0% $9,001.6 100.0%
Cost of access and other revenues.......... 1,119.6 54.0 3,828.8 42.5
Operating expenses......................... 1,947.5 93.9 6,025.4 67.0
-------- ----- -------- -----
Loss from operations....................... $ (992.7) (47.9)% $ (852.6) (9.5)%
======== ===== ======== =====
Approximate total subscribers at period
end....................................... 32,119 100,736
</TABLE>
JPS.Net. 1998 Compared to 1997
Revenues. Revenues increased 333.9% from 1997 to 1998. 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 242.0% from 1997 to 1998, primarily as a result of the increased
costs associated with adding capacity and equipment leases to service new
subscribers. Cost of access and other revenues as a percentage of revenues
decreased from 54.0% in 1997 to 42.5% in 1998, primarily as a result of
existing excess capacity being used to satisfy new subscriber growth.
Operating expenses. Operating expenses increased 209.4% from 1997 to 1998,
primarily as a result of hiring of operating and technical support personnel.
Operating expenses as a percentage of revenues decreased from 93.9% in 1997 to
67.0% in 1998, primarily as a result of spreading the cost of existing
personnel over a growing subscriber base.
Results Of Operations -- TGF Technologies, Inc.
TGF was incorporated on May 9, 1994 and commenced operations in November
1994. TGF's target markets are Vermont, central New Hampshire, eastern New York
and southeastern Quebec. The following table shows historical data and those
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $1,145.2 100.0% $2,512.1 100.0% $4,954.6 100.0%
Cost of access and other
revenues............... 448.2 39.1 1,053.1 41.9 1,757.5 35.5
Operating expenses...... 1,206.0 105.3 2,374.9 94.5 3,323.4 67.1
-------- ----- -------- ----- -------- -----
Loss from operations.... $ (509.0) (44.4)% $ (915.9) (36.4)% $ (126.3) (2.6)%
======== ===== ======== ===== ======== =====
Approximate total
subscribers at period
end.................... 5,858 15,239 27,189
</TABLE>
TGF Technologies. 1998 Compared to 1997
Revenues. Revenues increased 97.2% from 1997 to 1998. The increase was
primarily attributable to an increase in the total number of subscribers.
48
<PAGE>
Cost of access and other revenues. Cost of access and other revenues
increased 66.9% from 1997 to 1998, primarily as a result of the increased costs
associated with adding capacity to service new subscribers. Cost of access and
other revenues decreased as a percentage of revenues from 41.9% in 1997 to
35.5% in 1998, primarily as a result of excess capacity being used to service
new subscribers.
Operating expenses. Operating expenses increased 39.9% from 1997 to 1998,
primarily as a result of hiring technical support and administrative personnel.
Operating expenses as a percentage of revenues decreased from 94.5% in 1997 to
67.1% in 1998, primarily as a result of spreading the cost of existing
personnel and resources over a growing subscriber base.
TGF Technologies. 1997 Compared to 1996
Revenues. Revenues increased 119.4% 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 135.0% from 1996 to 1997, primarily as a result of the increased
costs associated with adding capacity to service new subscribers. Cost of
services as a percentage of revenues remained relatively constant at 39.1% in
1996 and 41.9%.
Operating expenses. Operating expenses increased 96.9% from 1996 to 1997.
Operating expenses as a percentage of revenues decreased from 105.3% in 1996 to
94.5% in 1997, primarily as a result of spreading the cost of existing
personnel and resources over a growing subscriber base.
Liquidity and Capital Resources
We formed OneMain.com to acquire existing companies which provide Internet
access and related services to subscribers in markets outside of major
metropolitan areas. We anticipated accessing the capital markets in conjunction
with consummation of the acquisition of our 17 ISPs, and, as a result, we were
not concerned with the liquidity of any of these ISPs. Several of these ISPs
are very thinly capitalized, with little initial capital invested, and the
growth of these ISPs 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, five 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. Because of the benefits of consolidation and
anticipated reductions in cost, however, as well as the net proceeds from this
offering, our liquidity is very different than that of the individual ISPs, and
we believe 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 OneMain.com 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
49
<PAGE>
subscribers and fund their operations. Upon completion of the offering and
applying the proceeds as set forth under "Use of Proceeds," we will have
approximately $56.1 million of cash on hand and $2.9 million of debt in the
form of capitalized lease obligations outstanding. If the underwriters' over-
allotment option is exercised, we will have approximately $81.8 million of cash
on hand.
On a pro forma combined basis, we generated cash flow from operations of
$3.4 million, utilized cash flow in investing activities of $10.9 million, and
generated $6.4 million from financing activities during 1998. The cash flow
utilized in investing activities was primarily for capital expenditures for
equipment used to service our growing subscriber base and for acquisitions.
Equipment purchases consist mainly of computer related equipment being utilized
to expand our operations. The cash flow generated from financing activities was
primarily from the issuance of debt and capital contributions. We believe that
our cash flow from operations and proceeds from this offering will provide the
cash required to execute our business plan, including acquiring additional
ISPs, purchasing and leasing additional equipment, implementing new marketing
efforts, making lease payments on office and POP space and hiring additional
personnel during the 12 months following this offering. We do not believe that
we will need to raise additional funds during this time to execute our business
plan. We intend to pursue an acquisition program that we will fund through the
issuance of additional common stock to the owners of target companies, cash
flow from operations and the remaining proceeds from this offering.
Year 2000 Readiness Disclosure Statement
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. As a result, 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 business activities.
In connection with the acquisitions of our 17 ISPs, we have received a
representation from the former owners of each ISP that it does not face
material, unresolved Year 2000 issues. To the extent these representations are
breached and we suffer damages, our operating results and financial condition
may be adversely affected.
We have also contacted each of our ISPs to determine its Year 2000 readiness.
None of our ISPs expects significant Year 2000 problems in its network, and all
of our ISPs are in the process of, or have completed, testing their software
systems and computer systems to assure they are Year 2000 compliant.
Additionally, many of our ISPs have contacted their major vendors to assess
their Year 2000 readiness. To the extent that we rely on external vendors or
third-party network service providers with Year 2000 exposure, any failure by
these vendors or service providers to resolve any Year 2000 issues on a timely
basis or in a manner that is compatible with our systems could adversely affect
our ability to provide services to our subscribers. The inability to provide
Internet access could have an adverse impact on one or more of our ISPs or
OneMain.com as a whole. Although some of our ISPs have investigated the
readiness of their electrical, heating and telephone providers, most of them
have not contacted these providers to determine Year 2000 readiness. We do not
have any contingency plans for handling Year 2000 problems that are not
detected and corrected prior to their occurrence.
Based upon current information, we do not anticipate costs associated with
the Year 2000 issue to have a material financial impact on us. There may,
however, be interruptions
50
<PAGE>
or other limitations of financial and operating systems' functionality, and we
may incur additional costs to avoid these interruptions or limitations. Our
expectations about future costs associated with the Year 2000 issue are limited
by uncertainties that could cause actual results to have a greater financial
impact than currently anticipated. Factors that could influence the amount and
timing of future costs include:
.our success in identifying systems and programs that contain two-digit
year codes;
. the nature and amount of programming required to upgrade or replace each
of the affected programs;
.the rate and magnitude of related labor and consulting costs; and
. our success in addressing Year 2000 issues with third-parties with which
we do business.
51
<PAGE>
BUSINESS
OneMain.com provides Internet access and related services throughout the
United States to individuals and businesses located predominantly outside large
metropolitan markets. We believe individuals in these markets have
traditionally been under-served by national on-line service providers and
present a significant growth opportunity for us. According to information
published by Analysys Publications, following this offering, based on the
number of our subscribers, we will immediately become one of the ten largest
independent Internet service providers in the United States with approximately
331,800 subscribers at December 31, 1998. We serve these subscribers through
663 points of presence in 25 states.
We target markets in metropolitan areas with populations that are not in the
top 15 in the United States. Our ISPs benefit from the relatively low fixed
costs for personnel and facilities in their 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, as a result, tend to reward ISPs which exhibit
these characteristics with strong loyalty; and
. are driven primarily by local customer service, placing a lower emphasis
on price and technology.
We believe most national ISPs have focused on the 35 largest metropolitan
areas in the United States and have not addressed to any significant degree the
demand for Internet services in other markets. The 15 largest metropolitan
areas comprise only 38% of the U.S. population, leaving approximately 166
million individuals in hundreds of other markets in the United States as
potential subscribers. Currently, approximately 31 million people, or 12% of
the U.S. population, can 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 many of 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 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 $16.9 million in total
revenues for the three months ended December 31, 1998, representing an increase
of 76.8% over the same three-month period in 1997. On a pro forma combined
basis, our ISPs generated $56.7 million in total revenues for the year ended
December 31, 1998, representing an increase of 86.5% over 1997. The number of
our subscribers grew 109.8% to 331,849 at
52
<PAGE>
December 31, 1998 from 158,204 at December 31, 1997. On a sequential quarter
basis for the two-year period ended December 31, 1998, our revenue growth
averaged 18% and our subscriber growth averaged 20%. Our average churn rate of
2.1% per month for the quarter ended December 31, 1998, calculated as this
quarter's churn rate divided by three, 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 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. projects that revenues from Internet
access services in the United States will grow from $6.5 billion in 1998 to
$21.8 billion in 2002. Additionally, a 1997 Jupiter Communications Research
report projected that independent ISPs would serve approximately 25.3 million
of the 34.9 million on-line households in 1999, a market share of approximately
72.5%. In addition, Forrester projects dial-up access technology during 1999
will be utilized by approximately 92% of on-line accounts.
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.
53
<PAGE>
The OneMain.com Opportunity. We believe subscribers in markets outside large
metropolitan areas generally are under-served 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. 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, 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 eight operating
groups, each focused on increasing subscriber density, reducing local loop
costs, managing regional accounting and billing systems, and maintaining
customer support and network management functions. Our operating group
leaders will be the individuals who managed our largest ISPs prior to this
offering. Our operating groups will be:
.Northeast Operating Group;
.Plains States Operating Group;
.Southeast Operating Group;
.Midwest South Operating Group;
.Midwest North Operating Group;
.North Central Operating Group;
.California Operating Group; and
.New England Operating Group.
54
<PAGE>
. Grow Our Subscriber Base.
Our ISPs have been successful both in attracting and acquiring new
subscribers and retaining existing subscribers. The table below shows the
scale we have achieved through the growth in our subscriber base on a
combined basis over the last eight quarters:
<TABLE>
<CAPTION>
Percentage
Number of Growth from
Date Subscribers Previous Quarter
---- ----------- ----------------
<S> <C> <C>
March 31, 1997................................ 91,413 36.5%
June 30, 1997................................. 105,364 15.3
September 30, 1997............................ 129,029 22.5
December 31, 1997............................. 158,204 22.6
March 31, 1998................................ 198,495 25.5
June 30, 1998................................. 235,742 18.8
September 30, 1998............................ 278,995 18.3
December 31, 1998............................. 331,849 18.9
</TABLE>
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
developing a national brand.
Enhance Subscribers' On-line Experience. We intend to maintain our high
subscriber retention rates and add new subscribers by enhancing our
services in the following ways:
. Ease of Use. Develop and implement a common, easy-to-use CD-ROM-
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, like name, user name and
password, 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 Internet 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.
Develop a National Brand. We will also seek to support organic growth by
converting to a national brand supported by community-based marketing
programs. This strategy includes two components:
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<PAGE>
. National Brand. Change our strong regional brands to our national
brand, OneMain.com--"Your Hometown Internet." We will begin to
change 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 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:
. empowering local ISP owners to use their local market knowledge to
build market share and density by providing them with 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.
We used the criteria and opportunities discussed above when we sought out
the 17 ISPs we will acquire simultaneously with the closing of this
offering. We initially contacted over 100 ISPs to determine whether they
would meet our criteria and whether their owners were interested in our
plan to consolidate their ISPs into a public company. We eventually
narrowed the list down to the 17 ISPs we will acquire when this offering
closes.
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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 operations, including back office functions; and
.retention of sales staff and key managers.
. Achieve Benefits from our Scale. The primary role of our executive
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 through strategic
relationships including:
. relationships with sponsors and advertisers;
. relationships with Internet portals and content providers; and
. co-branded affiliate marketing programs.
. Reduce Costs. We intend to take advantage of our national scale to
increase purchasing power and consolidate business functions,
reducing our costs and improving 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 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;
. implement a standardized billing system;
. negotiate discounts with equipment vendors; and
. manage financial information through a central, common
accounting system.
. Offer More Profitable Products and Services. We intend to capitalize on
opportunities to sell more profitable, value-added products and services to
our subscribers. We intend to monitor our subscribers' usage habits and
market our designated 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 making them likely candidates for enhanced access capability
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.
The majority of our customers have month-to-month subscriptions, though a few
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, file transfer protocol 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, like Netscape Navigator or Microsoft
Internet Explorer, client programs for other services such as Internet relay
chat 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, most of our ISPs
offer our business customers dedicated ISDN access and full and partial T-1
Internet access. 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.
Sixteen of our ISPs offer Web hosting for businesses and other organizations
that wish to create their own 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, like secure transactions and site usage
reports.
Ten of our ISPs also offer Web design services. These services 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
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 often 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 who 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 convert 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
service 24 hours a day, seven days a week, in markets where this service is
economically feasible. This service will be provided initially through our ISPs
and eventually 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. Our plans include establishment of our own national
backbone network, insistence on common technology, reduction of redundant POPs,
operation of a national network operations center 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. Our
ISPs will utilize this national
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backbone for Internet connectivity. As part of our national network, we intend
to establish private peering relationships, and a central and a standby network
operations center.
One of our acquisition criteria is that each ISP use a common technology
infrastructure. At this time, all of our ISPs are using 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 663 POPs
covering approximately 12% 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 network operations center. This network
operations center will be designed to survive fiber optic or power failure, and
will be backed-up by a remote standby facility. Network management will be
coordinated through the network operations center, with individual operating
groups responsible for installation and maintenance of equipment within their
regions. The network operations center 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:
. national commercial Internet access providers, like America Online,
Prodigy, MindSpring and EarthLink;
. numerous regional and local commercial Internet access providers that
vary widely in quality, service offerings and pricing;
. cable operaters;
. national long-distance carriers, like AT&T, MCI WorldCom and Sprint;
. regional Bell operating companies and competitive local exchange
carriers;
. computer hardware and software and other technology companies, like IBM
and Microsoft; and
. 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 markets we serve are local presence, knowledgeable
salespeople, responsive customer support 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.
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
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communications. As an Internet access provider, we are not currently directly
regulated by the FCC or any other agency, other than regulations applicable to
businesses generally. We could, however, become subject in the future to
regulation by the FCC and/or other regulatory agencies 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.
To the extent that an end user's call to an Internet access provider is local
rather than long distance, the local telephone company that serves the ISP may
be entitled to reciprocal compensation from the end user's local telephone
company. Reciprocal compensation is a reimbursement from one local telephone
company to a second one for handling calls that originate with the first local
telephone company and terminate with the second one. To the extent that a call
from an end user to an ISP is considered intrastate, the local telephone
company serving an ISP would be entitled to reciprocal compensation. This
payment of reciprocal compensation reduces the local telephone company's costs
and ultimately reduces the ISP's cost. The FCC recently determined that most,
but not all, traffic to an Internet access provider is interstate in nature
rather than local. This determination could potentially eliminate the payment
of reciprocal compensation to the local telephone company, which ultimately may
affect our costs. The FCC has yet to rule on the specific issue of reciprocal
compensation and ISP traffic; however, the FCC has stated that state
commissions may determine whether, in some circumstances, reciprocal
compensation should be paid. These state decisions may affect our costs.
The FCC also has 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 health care
providers. As a result, unlike telecommunications carriers and other
telecommunications providers, Internet access providers do not have to
contribute a percentage of their revenues to the federal universal service fund
and are not expected to be required to contribute to similar funds being
established at the state level. Both the access charge and universal service
treatment of Internet access providers, however, are the subjects of further
FCC 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 or our local telephone companies no longer receive
reciprocal compensation for our traffic.
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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 this type of
liability have been asserted against our ISPs 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 us for information carried on and disseminated
through our network could require us to implement measures to reduce our
exposure to this liability, which may require the expenditure of substantial
resources or the discontinuation of some of our products or service offerings.
Any costs that are incurred as a result of contesting any asserted claims or
the consequent imposition of liability could materially adversely affect our
profitability.
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. 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.
Personnel
As of December 31, 1998, on a pro forma basis, we employed approximately 604
individuals full time and 92 part time:
. 116 sales and marketing personnel;
. 317 subscriber and technical support representatives;
. 81 network operations employees;
. 150 administrative personnel; and
. 32 Web page development and design.
None of these employees are represented by a labor union. Neither we nor any
of our 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 do not believe the locations of the properties in which we lease
office or POP space or the terms of any of our leases, individually, are
material. 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.
Additionally, we are currently negotiating to lease new space for our executive
offices in Northern Virginia.
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 show below information regarding our executive officers, key employees,
director and director nominees:
<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
Michael C. Crabtree....... 49 Director Nominee and Chief Operating Officer and
President of the Southeast Operating Group
Designee
Dewey K. Shay............. 40 Executive Vice President, Chief Financial
Officer and Director Nominee
Martin R. Lyons........... 34 Vice President and Chief Technology Officer
M. Cristina Dolan......... 38 Vice President and Chief Content and Strategic
Alliances Officer
Allon H. Lefever.......... 52 Director Nominee and Vice Chairman and President
of the Northeast and Plains States Operating
Groups Designee
Thomas R. Eisenmann....... 41 Director Nominee
Donald R. Kaufmann........ 56 Director Nominee
Ella Fontanals de 54 Director Nominee
Cisneros.................
</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.
Michael C. Crabtree will become one of our directors as well as our Chief
Operating Officer and President of our Southeast operating group following 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 compound distribution center
sites, from June 1993 to July 1994.
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.
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M. Cristina Dolan has served as our Vice President and Chief Content and
Strategic Alliances Officer since January 1999. Ms. Dolan was the director of
e-Commerce Sales Strategy for Oracle Corporation for the Americas from October
1997 until she joined us. Ms. Dolan was the director of operations and
technology for the ABC Multimedia Group, the interactive media unit of ABC,
Inc. (a Walt Disney Company), from March 1996 to August 1997. From February
1995 to March 1996, Ms. Dolan served as director of operations for Hearst New
Media & Technology's HomeArts, the flagship Web site of the Hearst Corporation,
and from June 1994 to February 1995, Ms. Dolan was multimedia general manager
for I-Cube (International Integration, Inc.), a system integration company.
Prior to June 1994, Ms. Dolan spent ten years with IBM in various marketing and
systems engineering positions.
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
following 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.
Thomas R. Eisenmann will become one of our directors following 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.
Donald R. Kaufmann will become one of our directors following this offering.
Mr. Kaufmann is vice president of D&E Communications, Inc., a
telecommunications company and one of the shareholders of SuperNet, one of our
ISPs. From July 1995 to June 1996, Mr. Kaufmann served as Managing Director of
New Business Ventures for D&E Communications. From 1965 to 1995, Mr. Kaufmann
was employed by Bell Atlantic Corp. When Mr. Kaufmann left Bell Atlantic, he
was Director of Network Investment Management.
Ella Fontanals de Cisneros will become one of our directors following this
offering. Mrs. Cisneros, an investor in a variety of public and private
companies, has been the Board Chair and Chief Executive Officer of TGF
Technologies, one of our ISPs, since May 1994. Mrs. Cisneros is also the
founder and has been President of the Together Foundation, a nonprofit
foundation whose purpose is to provide assistance to nonprofit organizations,
United Nations agencies and other intergovernmental bodies in connection with
their computer, information, networking, database and telecommunications needs,
since the foundation's formation in November 1992. Mrs. Cisneros also serves as
a director of SuRed, the content and information provider for TelCel, one of
Venezuela's leading providers of cellular telephone and Internet services.
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Our board of directors will consist of between three and 15 directors and
will be divided into three classes, as nearly equal in number as possible. 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.
Committees of the Board of Directors
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. Our board of
directors also 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 conduct the annual audit of our books and records;
.reviewing the proposed scope of the audit;
.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.
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 they attend in person. In addition, each
non-employee director will receive grants of options to acquire shares of
common stock under our 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 after becoming a
director.
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> <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 this offering, see "--Employment
Agreements" below.
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Employment Agreements
We have entered into Senior Management Agreements with each of our executive
officers and with Mr. Lefever. Each agreement has an initial term of three
years and will be extended for two additional years unless we or the employee
elects to terminate the agreement within 60 days of the third anniversary of
the date of employment. Under these agreements, these employees will receive an
initial annual base salary that may be increased by our board of directors
based on performance objectives they establish, and an annual bonus based upon
our performance. We have also agreed to pay Mr. Lyons a one-time bonus of
$50,000 after the closing of this offering. These employees also will receive
options to acquire shares of common stock at the initial public offering price.
100,000 of the options we will issue to each of Messrs. Smith and Shay will
vest immediately. With respect to the other options shown below, one-fourth
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, provided that all these options will vest in full upon a change in
control. The following table shows information about the Senior Management
Agreements we have entered into with our executive officers.
<TABLE>
<CAPTION>
Initial Annual
Executive Officer Base Salary Maximum Annual Bonus Options
----------------- -------------- --------------------------- -------
<S> <C> <C> <C>
Stephen E. Smith.......... $150,000 $50,000 200,000
Michael C. Crabtree....... $200,000 $50,000 50,000
Dewey K. Shay............. $150,000 $50,000 200,000
Martin R. Lyons........... $150,000 10% of Annual Base Salary 300,000
M. Cristina Dolan......... $150,000 33.3% of Annual Base Salary 200,000
Allon H. Lefever.......... $200,000 $50,000 200,000
</TABLE>
If, during the term of one of these agreements, we terminate the employee's
employment without cause or the employee terminates his or her employment for
good reason, the employee will be entitled to receive his or her base salary
and all employee benefits for a period of one year from the date of the
termination of employment.
Under the terms of these agreements, these employees have agreed to preserve
the confidentiality and the proprietary nature of all information relating to
OneMain.com, our ISPs and our business during the term of the agreement and for
five years after the term of the agreement ends. In addition, each of these
employees has agreed to non-competition and non-solicitation provisions that
will be in effect during the term of his or her agreement and for two years
after the term of the agreement ends.
1999 Stock Option and Incentive Plan
The OneMain.com stock option plan authorizes the grant of:
.stock options;
.stock appreciation rights;
.restricted stock;
.deferred stock;
.unrestricted stock;
.dividend equivalents;
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.other stock-based awards;
.performance awards; and
. annual incentive awards to provide incentives to attract and retain
executive officers, directors, employees and other key personnel.
A committee of our board of directors will administer the stock option plan.
The maximum number of shares available for issuance under the stock option plan
will be 5,000,000.
In each fiscal year, any person who is eligible to participate may not be
granted awards relating to more than 1,000,000 shares. 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 Section
162(m) of the Internal Revenue Code, 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 OneMain.com, on a consolidated basis, and/or its specified
subsidiaries or business units, 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 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. Our stock option plan permits the granting of options to
purchase shares of common stock intended to qualify as incentive options under
the Internal Revenue Code and options that do not qualify as incentive options.
The exercise price of each option will be determined by the committee but may
not be less than 100% of the fair market value of our common stock on the date
of grant.
The term of each option will be fixed by the committee and may not exceed 10
years from the date of grant. The committee will determine at what time or
times each option may be exercised and the period of time, if any, after
retirement, death, disability or termination
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of employment during which options may be exercised. Options may be made
exercisable in installments. The exercisability of options may be accelerated
by the committee.
To exercise an option, the optionee must pay the exercise price 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 under irrevocable instructions to the broker from the optionee.
Restricted Stock. The committee may also award shares of common stock to
participants. These stock awards may be conditioned on the achievement of
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 will 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. A
deferred stock award may be conditioned or restricted in whatever manner the
committee may determine. These conditions and restrictions may include the
achievement of 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, the deferred stock units may be credited with
dividend equivalent rights.
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 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 participants.
Performance Stock Awards. The committee may also grant performance stock
awards to participants entitling the participants to receive shares of common
stock upon the achievement of performance goals and other conditions determined
by the committee.
Dividend Equivalent Rights. The committee may grant dividend equivalent
rights entitling the recipient to receive credits for dividends 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 plan may be paid currently or be deemed to be reinvested in additional
shares of common stock, and may accrue additional dividend equivalent rights
after reinvestment at fair market value at the time of deemed reinvestment.
Dividend equivalent rights may be settled in cash, common stock or a
combination of cash and shares, 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 grant 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 underlying the right
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<PAGE>
during a stated period specified by the committee. The committee may approve
the grant of these stock appreciation rights related or unrelated to stock
options. Upon exercise of a stock appreciation right that is related to a stock
option granted, the holder of the related option will surrender the option for
the number of shares as to which the stock appreciation right is exercised and
will receive payment of an amount computed as provided in the stock
appreciation right award.
Generally, a stock appreciation right granted in connection with a stock
option will be exercisable at the time or times, and only to the extent that,
the related stock option is exercisable, and will not be transferable except to
the extent that the related option may be transferable.
Performance and Annual Incentive Awards. Our stock option plan authorizes the
committee to grant multiyear and annual incentive awards based upon achievement
of pre-established performance goals, including awards that qualify as
"performance-based compensation" for purposes of the Internal Revenue Code. The
grant, exercise and/or settlement of a performance award may be made contingent
upon achievement of pre-established performance goals. Achievement of
performance goals will be measured over a performance period of up to 10 years,
as specified by the committee.
The amount of an 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 incentive award as a percentage of
these business criteria, a percentage in excess of a threshold amount or as
another amount which need not bear a strictly mathematical relationship to
these business criteria.
Other Stock-Based Awards. The committee is authorized to grant to
participants other awards that may be based on or related to our common stock,
including:
. 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; and
. incentive awards valued by reference to the performance of specified
subsidiaries or business units.
1999 Employee Stock Purchase Plan
The OneMain.com 1999 Employee Stock Purchase Plan will permit eligible
employees to purchase shares of common stock at a discount. During purchase
periods, we will withhold amounts through payroll deductions 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 500,000 shares of common stock for
issuance under this plan.
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TRANSACTIONS WITH RELATED PARTIES
On August 19, 1998, in connection with the formation of OneMain.com, our
founders, Stephen E. Smith, Dewey K. Shay and Jonathan J. Ledecky, purchased
shares of common stock at a purchase price of $0.01 per share in the following
amounts:
. Mr. Smith purchased 1,500,000 shares of common stock for $15,000. Mr.
Smith subsequently transferred 140,000 of these shares to other persons.
. Mr. Shay purchased 1,052,500 shares of common stock for $10,525. Mr.
Shay subsequently transferred 52,500 of these shares to other persons.
. Jonathan J. Ledecky purchased 2,000,000 shares of common stock for
$20,000.
Messrs. Smith, Shay and Ledecky have agreed that they will not, without our
prior written consent, transfer any of the shares of common stock they own,
except for transfers made as part of a pledge, hedging or similar transaction:
.with respect to 50% of their shares, for a period of one year following
this offering;
. with respect to an additional 25% of their shares, for a period of 18
months following the offering; and
. with respect to their remaining shares, for a period of two years
following this offering.
On October 19, 1998, Martin R. Lyons, our Vice President and Chief Technology
Officer, purchased 200,000 shares of common stock for $10,000, or $0.05 per
share. On January 1, 1999, M. Cristina Dolan, our Vice President and Chief
Content and Strategic Alliances Officer purchased 100,000 shares of common
stock for $5,000, or $0.05 per share.
Under a stockholders agreement, Messrs. Smith, Lyons, Shay and Ledecky and
Ms. Dolan have agreed to forfeit a portion of their shares in connection with
this offering. See "Principal Stockholders" on page 72 below.
On November 25, 1998 and February 4, 1999, we issued promissory notes to
Mr. Ledecky for two loans of $500,000 each. We have used the proceeds of these
loans to pay pre-offering costs. We will pay off both of these loans using some
of the proceeds of this offering. See "Use of Proceeds" on page 20 above.
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On December 21, 1998, we entered into an agreement with United States
Internet and its shareholders to acquire all the shares of United States
Internet simultaneously with the closing of this offering. Michael C. Crabtree,
who will become one of our directors, our Chief Operating Officer and President
of our Southeast operating group following this offering, is one of the
shareholders of United States Internet. Also on December 21, 1998, we entered
into an agreement with SuperNet and its shareholders to acquire all the shares
of SuperNet simultaneously with the closing of this offering. Mr. Lefever has
an 18.3% interest in SuperNet. On February 18, 1999, we entered into an
agreement with TGF Technologies and its shareholders to acquire all of the
shares of TGF Technologies simultaneously with the closing of this offering.
Ella Fontanals de Cisneros, who will become one of our directors following this
offering, controls the corporations that own approximately 98% of TGF
Technologies. In exchange for their interests in these ISPs, we will pay
Messrs. Crabtree and Lefever and Mrs. Cisneros, directly or indirectly through
entities they control, the following consideration:
<TABLE>
<CAPTION>
Common
Cash Stock Options
---------- --------- --------
($) (Shares) (Shares)
<S> <C> <C> <C>
Michael C. Crabtree......................... $ 900,000 154,963 40,000
Allon H. Lefever............................ $ 900,000 125,603 33,000
Ella Fontanals de Cisneros ................. $7,270,000 1,010,000 135,945
</TABLE>
The options will vest one-third on each of the sixth, seventh and eighth
anniversaries of the closing date of this offering, but may vest sooner based
on the performance of the ISP. Messrs. Crabtree and Lefever may receive
additional consideration in the form of cash or stock, at our election, and may
also receive additional stock options. For a discussion of how this additional
consideration, and the number of additional options to be granted to Messrs.
Crabtree and Lefever, if any, will be determined, see "About OneMain.com" on
page 17 above.
Donald R. Kaufmann, who will become one of our directors following this
offering, is an executive officer of D&E Communications, which indirectly owns
50% of SuperNet. Mr. Kaufmann will not receive any consideration, other than as
a shareholder of D&E Communications, in connection with our acquisition of
SuperNet.
We have entered into Senior Management Agreements with each of our executive
officers and with Mr. Lefever. For the details of these agreements, please
refer to "Management--Employment Agreements" on page 66 above.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following shows forth the number and percentage of outstanding shares of
our common stock that were owned as of March 1, 1999 and that will be owned
following this offering assuming no exercise and full exercise by the
underwriters of their over-allotment option by:
. all persons known by us to own beneficially more than 5% of the common
stock;
. each director, director nominee and executive officer; and
. all directors, director nominees and executive officers as a group.
An asterisk indicates ownership of less than 1%.
As of January 31, 1999, there were 4,882,500 shares of common stock
outstanding. Following this offering, we will have outstanding 18,916,503
shares of common stock, assuming the underwriters do not exercise their over-
allotment option, or 20,416,502 shares, assuming the underwriters exercise
their over-allotment option in full. These amounts include, in each case,
7,133,200 shares of common stock we will issue as consideration for the
acquisitions of our ISPs. At the time of the closing of this offering we will
also have outstanding options to purchase 3,755,265 shares of common stock at
the initial public offering price, including 1,118,050 options which will be
exercisable immediately following this offering. The number of shares owned by
each of Messrs. Smith and Shay after the offering includes 100,000 shares
issuable upon exercise of options granted to each of them that are exercisable
within 60 days of the closing date of this offering.
We originally issued 4,882,500 shares of common stock to our founders and
employees. The number of shares outstanding after the offering may be reduced
under the terms of a stockholders agreement among 15 of these stockholders.
These 15 stockholders have agreed to forfeit a portion of their shares so that
the total number of shares that were owned by our founders and employees
immediately before this offering will not exceed 20% of the total number of
shares of common stock outstanding following this offering.
Mr. Jenkins is the founder and controlling stockholder of JPS.Net. Mrs.
Cisneros owns 100% of SWIFT Company (B.V.I.) Limited, and, therefore,
beneficial ownership of the shares of our common stock owned by SWIFT is
attributed to her.
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<TABLE>
<CAPTION>
After Offering After Offering
(no exercise of (full exercise of
Before Offering over-allotment option) over-allotment option)
----------------------- ----------------------- -----------------------
Number of Number of Number of
Shares Shares Shares
Beneficially Percentage Beneficially Percentage Beneficially Percentage
Name and Address Owned Ownership Owned Ownership Owned Ownership
- ---------------- ------------ ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen E. Smith......... 1,360,000 27.9% 1,150,334 6.0% 1,234,850 6.0%
50 Hawthorne Road
Southhampton,
New York 11968
Michael C. Crabtree...... -- -- 154,963 * 154,963 *
1127 North Broadway
Knoxville,
Tennessee 37919
Dewey K. Shay............ 1,000,000 20.5 872,305 4.6 934,448 4.6
50 Hawthorne Road
Southhampton,
New York 11968
Martin R. Lyons.......... 200,000 4.1 154,461 * 166,890 *
50 Hawthorne Road
Southhampton,
New York 11968
M. Cristina Dolan........ 100,000 2.0 77,230 * 83,445 *
50 Hawthorne Road
Southhampton,
New York 11968
Allon H. Lefever......... 40,000 * 165,603 * 165,603 *
212 Spottswood Lane
Lancaster,
Pennsylvania 17601
Thomas R. Eisenmann...... -- -- -- -- -- --
Harvard Business School
Baker West 188
Soldiers Field
Boston, MA 02163
Donald R. Kaufmann....... -- -- -- -- -- --
4139 Oregon Pike
Ephrata,
Pennsylvania 17522
Ella Fontanals de
Cisneros ............... -- -- 1,010,000 5.3 1,010,000 4.9
Calle Caribay
Qta. Los Cisnes
Caracas, Venezuela
SWIFT Company (B.V.I.)
Limited................. -- -- 1,010,000 5.3 1,010,000 4.9
c/o Trident Trust
Company (B.V.I.)
Limited
P.O. Box 146, Road Town
Tortola, British Virgin
Islands
Bradley L. Jenkins....... -- -- 981,493 5.2 981,493 4.8
770 L Street, Suite
960,
Sacramento, CA 95814
Jonathan J. Ledecky...... 2,000,000 41.0 1,544,609 8.2 1,668,897 8.2
1400 34th Street, N.W.
Washington, D.C. 20007
All directors, director
nominees and executive
officers as a group
(9 persons)............. 2,700,000 55.3% 3,584,896 18.8% 3,750,199 18.2%
</TABLE>
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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 January 31, 1999, there were 4,882,500 shares of our
common stock outstanding, held by 18 holders of record. Fifteen of these
stockholders have agreed to forfeit a portion of the shares they will own
immediately before this offering so that the total number of shares owned by
these 18 stockholders following this offering will not exceed 20% of the total
number of shares of common stock outstanding following this offering. See
"Principal Stockholders" on page 72 above. We do not have any outstanding
shares of preferred stock.
Following this offering, we will have outstanding 18,916,503 shares of common
stock, assuming the underwriters do not exercise their over-allotment option,
or 20,416,502 shares of common stock, assuming the underwriters exercise their
over-allotment option 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. After satisfaction of 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 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 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. 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 of any series of preferred stock, 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.
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Our issuance of preferred stock may have the effect of delaying or preventing
a change in control. Our 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 common stock. The issuance of preferred stock could also have
the effect of decreasing the market price of the common stock. We currently
have no plans to issue any shares of preferred stock.
Limitation of Liability of Directors and Officers
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:
.for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful dividends or unlawful stock purchases or redemptions, or
. 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 the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our board of directors. The indemnification provided under our
certificate of incorporation and the bylaws includes the right to be paid
expenses in advance of any proceeding for which indemnification may be had,
provided that the payment of these expenses 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 paid in advance if it is ultimately determined that the
director or officer is not entitled to be indemnified. Under our bylaws, if we
do not pay a claim for indemnification within 60 days after we have received a
written claim, the director or officer may bring an action to recover the
unpaid amount of the claim and, if successful, the director or officer also
will be entitled to be paid the expense of prosecuting the action to recover
these unpaid amounts.
Under our 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 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 of these
capacities, or arising out of the person's fulfilling one of these capacities,
and related expenses, whether or not we would have the power to indemnify the
person against the claim under the provisions of the Delaware General
Corporation Law. We intend to purchase director and officer liability insurance
on behalf of our directors and officers.
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Anti-Takeover Provisions
Our certificate of incorporation and bylaws contain 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 provisions of Delaware law may hinder or delay
an attempted takeover of OneMain.com other than through negotiation with our
board of directors. These provisions could have the effect of discouraging
attempts to acquire us or remove incumbent management even if some or a
majority of our stockholders believe this action 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 board of directors is
divided into three classes of directors serving staggered three-year terms. The
classification of directors has 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 provides 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, even if they do not constitute a quorum, or by a sole
remaining director. These 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 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 matters to be brought
before an annual meeting of our stockholders by a stockholder. 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 background information
regarding any director nominee, together with that 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
10 days following the day on which public announcement of the special meeting
is made, a notice that complies with the above requirements. Although our
bylaws do 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:
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. may have the effect of precluding a nomination for the election of
directors or precluding the conduct of business at a particular annual
meeting if the proper procedures are not followed; or
. 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 OneMain.com, even if the conduct of this solicitation
or the attempt to obtain control might be beneficial to OneMain.com and
our stockholders.
Special Stockholders' Meetings. Under our certificate of incorporation and
bylaws, special meetings of stockholders, unless otherwise prescribed by
statute, may be called only:
. by the board of directors or by our Chairman or President; or
. by the holders of at least a majority of the securities of OneMain.com
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 our
certificate of incorporation and bylaws, we will be subject to the provisions
of Section 203 of the Delaware General Corporation 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. Generally, 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 OneMain.com or reducing the price that 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 our common stock is American Stock
Transfer & Trust Company.
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SHARES AVAILABLE FOR FUTURE SALE
Following this offering, we will have 18,916,503 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option,
or 20,416,502 shares, assuming the underwriters' over-allotment option is
exercised in full. All the shares we sell 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.
The remaining 10,916,503 shares of common stock outstanding following this
offering, assuming the underwriters do not exercise their over-allotment
option, or 11,216,502 shares, assuming the underwriters exercise their over-
allotment option in full, and any shares of common stock we issue to 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, will be restricted shares under the terms of the Securities Act. Sales
of the restricted shares to be outstanding upon completion of this offering
will be limited by lock-up agreements with the underwriters and with us as
described below.
Rule 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding 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:
. one percent of the then outstanding shares of common stock, or
approximately 204,000 shares immediately after this offering; or
. the average weekly trading volume in the common stock on the Nasdaq
Stock Market during the four calendar weeks preceding the sale.
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. An
exception to these requirements will allow Ms. Dolan to sell the shares issued
to her under Rule 701 under the Securities Act beginning 90 days after the
offering rather than one year.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours and who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The
one- and two-year holding periods described above do not begin to run until the
full purchase price is paid by the person acquiring the restricted shares from
us or an affiliate of ours.
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Registration Rights
We have entered into a registration rights agreement with all of our
stockholders, who will own restricted shares following this offering. 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
the proposed offering will have the right to limit the number of shares
included in the registration.
Common Stock and Options Issuable under our Equity Compensation Plans
Simultaneously with the completion of this offering, we will issue options to
acquire 3,755,265 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:
. fully vested options to purchase 898,050 shares of common stock to be
granted to former owners, employees and affiliates of our ISPs;
. options to purchase 1,336,215 shares of common stock to be granted to
former owners, employees and affiliates of our ISPs, which will vest one
third on each of the sixth, seventh and eighth anniversaries of the
closing date of this offering, and may vest early based on the
performance of our ISPs; and
. options to purchase 1,501,000 shares of common stock to be granted to
our management team and other key employees, which generally will vest
over four years from the date of this offering, except for 100,000
options granted to each of Messrs. Smith and Shay that will be fully
vested when granted.
We will grant additional options on June 30, 1999 to former owners of our
ISPs based on the performance of our ISPs. See "About OneMain.com" on page 17
above for a discussion of how many options will be granted and the terms of
those options.
We intend to file one or more registration statements under the Securities
Act within 180 days after the date of this prospectus to register up to
5,500,000 shares of common stock underlying outstanding stock options or
reserved for issuance under our 1999 Stock Option and Incentive Plan or 1999
Employee Stock Purchase 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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Lock-up Agreements
Our officers and directors and some of our other stockholders, who will hold
an aggregate of 10,578,581 shares of common stock upon completion of this
offering, assuming the underwriters do not exercise their over-allotment
option, or 10,878,580 shares, assuming the underwriters exercise their over-
allotment option in full, 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 of these transactions, for a period of 180 days after the date of
the Underwriting Agreement, other than shares of common stock transferred in
connection with a pledge agreement or disposed of as bona fide gifts approved
by BT Alex. Brown Incorporated. BT Alex. Brown will permit transfers of shares
between the former equity holders of each ISP, provided that any transferees
are a party to a lock-up agreement with BT Alex. Brown. BT Alex. Brown
Incorporated has no current intention to consent to any other disposition of
any shares covered by these lock-up agreements but will consider each request
for its consent at the time and under the circumstances of the request.
In addition, some of our stockholders who following this offering will hold
an aggregate of 7,133,200 shares, have agreed with us 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 of these transactions:
. with respect to 50% of their shares, for a period of one year following
this offering;
. with respect to an additional 25% of their shares, for a period of 18
months following this offering; and
. with respect to their remaining shares, for a period of two years
following this offering.
Messrs. Shay, Smith and Ledecky also have agreed not to transfer the shares
they own except under the circumstances described under "Transactions with
Related Parties" on page 70 above.
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<PAGE>
UNDERWRITING
The underwriters named below, through their representatives BT Alex. Brown
Incorporated, First Union Capital Markets Corp., ING Baring Furman Selz LLC,
SoundView Technology Group, Inc. and Wit Capital Corporation, have severally
agreed to purchase from OneMain.com the following numbers of shares of common
stock at the public offering price less the underwriting discounts and
commissions shown on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
BT Alex. Brown Incorporated........................................
First Union Capital Markets Corp...................................
ING Baring Furman Selz LLC.........................................
SoundView Technology Group, Inc. ..................................
Wit Capital Corporation (as e-Manager(TM)).........................
---------
Total............................................................ 8,000,000
=========
</TABLE>
We have entered into an underwriting agreement with the underwriters which
provides that the underwriters are obligated to purchase all of the shares of
common stock we are offering to sell in this offering, other than shares
covered by the over-allotment option described below, if any of the 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
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and dealers may
re-allow, a concession not in excess of $ per share to other dealers. After
the initial offering, the offering price and other selling terms may be changed
by the representatives of the underwriters.
Until , 1999, or 25 days after this offering begins, 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.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 1,200,000 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 this option only to cover over-allotments made in
connection with the sale of the common stock offered in this offering. To the
extent that the underwriters exercise this option, each of the underwriters
will become obligated 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
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<PAGE>
bears to 8,000,000, and we will be obligated to sell these shares to the
underwriters to the extent they exercise the option. If any additional shares
of common stock are purchased, the underwriters will offer these additional
shares on the same terms as those on which the initial 8,000,000 shares are
being offered.
We have asked the underwriters to reserve for sale at the initial public
offering price shares of common stock for subscribers and visitors to one of
the Web sites maintained by our ISPs who express an interest in purchasing
these shares. The sales of these shares will be made by Wit Capital Corporation
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 Web sites will
be offered by the underwriters on the same basis as the other shares.
A prospectus in electronic format is being made available on an Internet Web
site maintained by Wit Capital. In addition, all dealers purchasing shares from
Wit Capital in this offering have agreed to make a prospectus in electronic
format available on Web sites maintained by each of them. The information on
these Web sites 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 Web sites.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 480,000 shares of the common stock for purchase by
our directors, officers and employees and 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 these reserved shares. The
underwriters will offer to the public on the same basis as the other shares any
reserved shares that are not purchased by these persons.
We have agreed to indemnify the underwriters against liabilities in
connection with this offering, including liabilities under the Securities Act.
We have agreed with the underwriters that we will not issue any additional
shares of common stock for 180 days following the date of this offering, 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, upon 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 us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
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
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<PAGE>
this offering by creating a short position in the common stock for their own
accounts. Additionally, to cover these over-allotments or to stabilize the
market price of the common stock, the underwriters may bid for, and purchase,
shares of 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 between us 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 our business and the industry in which we
compete;
. an assessment of our management and the present state of our development;
. prevailing market conditions in the U.S. economy and the industry in which
we compete;
. our 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 our business potential.
83
<PAGE>
EXPERTS
The financial statements of OneMain.com, Inc. as of December 31, 1998, and
for the period from its inception on August 19, 1998 to December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus, and are included in reliance
upon this report given upon the authority of Ernst & Young as experts in
auditing and accounting.
The financial statements of D&E SuperNet, Inc. as of December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus 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, and are included in reliance upon this report given
upon the authority of Ernst & Young as experts in auditing and accounting.
The financial statements of SunLink, Inc. as of December 31, 1997 and 1998,
and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus 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, and are included in reliance upon this report given upon
the authority of Ernst & Young as experts in auditing and accounting.
The financial statements of LebaNet, Inc. as of December 31, 1997 and 1998,
and for the period from its inception on March 1, 1996 to December 31, 1996 and
for the two years in the period ended December 31, 1998, appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report on these financial
statements appearing in this prospectus, and are included in reliance upon this
report given upon the authority of Ernst & Young as experts in auditing and
accounting.
The financial statements of SouthWind Internet Access, Inc. as of December
31, 1997 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
Grant Thornton LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus, and are included in reliance
upon this report given upon the authority of Grant Thornton as experts in
auditing and accounting.
The financial statements of SouthWind Internet Access, Inc. as of December
31, 1998, and for the year there ended, appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report on these financial statements appearing
in this prospectus, and are included in reliance upon this report given the
authority of Ernst & Young as experts in auditing and accounting.
The financial statements of Horizon Internet Technologies, Inc. as of
December 31, 1997 and 1998, and for each of the three years in the period ended
December 31, 1998, appearing
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<PAGE>
in this prospectus and registration statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus, and are included in reliance
upon this report given upon the authority of Ernst & Young as experts in
auditing and accounting.
The financial statements of United States Internet, Inc. as of December 31,
1997 and for each of the two years in the period ended December 31, 1997,
appearing in this prospectus and registration statements have been audited by
Coulter & Justus, P.C., independent auditors, as set forth in their report on
these financial statements appearing in this prospectus, and are included in
reliance upon this report given upon the authority of Coulter & Justus as
experts in auditing and accounting.
The financial statements of United States Internet, Inc. as of December 31,
1998 and for the year then ended, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in this report on these financial statements appearing in this prospectus
which contains an explanatory paragraph describing conditions that raise
substantial doubt about the ability of United States Internet, Inc. to continue
as a going concern as described in Note 2 to the financial statements, and are
included in reliance upon this report given upon the authority of Ernst & Young
as experts in accounting and auditing.
The financial statements of Internet Partners of America, LC as of December
31, 1997 and 1998, and for each of the three years in the period ended December
31, 1998, appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report on these financial statements appearing in this prospectus, and are
included in reliance upon this report given upon the authority of Ernst & Young
as experts in auditing and accounting.
The financial statements of ZoomNet, Inc. as of December 31, 1997 and 1998,
and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus and are included in reliance
upon this report given upon the authority of Ernst & Young as experts in
auditing and accounting.
The financial statements of Palm.Net, Inc. as of December 31, 1997 and 1998,
and for the period from its inception on January 3, 1996 to December 31, 1996
and for each of the two years in the period ended December 31, 1998, appearing
in this prospectus and registration statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus, and are included in reliance
upon this report given upon the authority of Ernst & Young as experts in
auditing and accounting.
The financial statements of Internet Access Group, Inc. as of December 31,
1997 and 1998, and for each of the three years in the period ended December 31,
1998, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report on
these financial statements appearing in this prospectus which contains an
explanatory paragraph describing conditions that raise substantial doubt about
the ability of Internet Access Group, Inc. to continue as a going
85
<PAGE>
concern as described in Note 2 to the financial statements, and are included in
reliance upon this report given upon the authority of Ernst & Young as experts
in auditing and accounting.
The financial statements of Midwest Internet, L.L.C. as of December 31, 1997
and 1998, and for each of the three years in the period ended December 31,
1998, appearing in this prospectus and registration statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report on
these financial statements appearing in this prospectus, and are included in
reliance upon this report given upon the authority of Ernst & Young as experts
in auditing and accounting.
The financial statements of Internet Solutions, LLC as of December 31, 1997
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 Kevin J.
Tochtrop, independent auditor, as set forth in his report on these financial
statements appearing in this prospectus, and are included in reliance upon this
report given upon the authority of Mr. Tochtrop as an expert in auditing and
accounting.
The financial statements of Internet Solutions, LLC as of December 31, 1998
and for the year then ended, appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report on these financial statements appearing in this
prospectus, and are included in reliance upon this report given upon the
authority of Ernst & Young as experts in auditing and accounting.
The financial statements of FGInet, Inc. as of December 31, 1997 and 1998,
and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus, and are included in reliance
upon this report given upon the authority of Ernst & Young as experts in
auditing and accounting.
The financial statements of Superhighway, Inc. d/b/a Indynet as of December
31, 1997 and 1998, and for each of the three years in the period ended December
31, 1998, appearing in this prospectus and registration statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report on these financial statements appearing in this prospectus, and are
included in reliance upon this report given upon the authority of Ernst & Young
as experts in auditing and accounting.
The financial statements of Lightspeed Net, Inc. as of December 31, 1997 and
1998, and for each of the three years in the period ended December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report on these
financial statements appearing in this prospectus 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, and are included in reliance upon this report
given upon the authority of Ernst & Young as experts in auditing and
accounting.
The financial statements of JPS.Net Corporation as of December 31, 1997 and
1998, and for the period from its inception on January 31, 1997 to December 31,
1997 and for the year ended December 31, 1998, appearing in this prospectus and
registration statement have been
86
<PAGE>
audited by Ernst & Young LLP, independent auditors, as set forth in their
report on these financial statements appearing in this prospectus 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, and are included in
reliance upon this report given upon the authority of Ernst & Young as experts
in auditing and accounting.
The financial statements of TGF Technologies, Inc. as of December 31, 1997
and 1998, and for each of the three years in the period ended December 31,
1998, appearing in this prospectus and registration statement have been audited
by KPMG Peat Marwick LLP, independent auditors, as set forth in their report on
these financial statements appearing in this prospectus, and are included in
reliance upon this report given upon the authority of KPMG as experts in
auditing and accounting.
VALIDITY OF THE SHARES
The validity of shares of common stock will be passed upon on our behalf by
Hogan & Hartson L.L.P., Washington, D.C. Legal matters will be passed upon for
the underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
ADDITIONAL INFORMATION
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 prospectus nor
sale of common stock means that information contained in this prospectus 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 our common stock in any
circumstances under which the offer or solicitation is unlawful.
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information which we believe is material to
an investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about
OneMain.com, our common stock and this offering, including the full texts of
the exhibits, some of which have been summarized in this prospectus. The
registration statement 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 registration statement. The address of the
SEC's Internet site is "http://www.sec.gov." We have established a Web site at
"www.onemain.com." The information on our Web site is not a part of this
prospectus.
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
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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 Statement of Operations..................... F-7
Unaudited Pro Forma Combined Statement of Cash Flows..................... F-8
Notes to Unaudited Pro Forma Combined Financial Statements............... F-10
ONEMAIN.COM, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-26
Balance Sheet ........................................................... F-27
Statement of Operations.................................................. F 28
Statement of Stockholders' Equity........................................ F-29
Statement of Cash Flows.................................................. F-30
Notes to Financial Statements............................................ F-31
D&E SUPERNET, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-37
Balance Sheets........................................................... F-38
Statements of Operations................................................. F-39
Statements of Stockholders' Equity....................................... F-40
Statements of Cash Flows................................................. F-41
Notes to Financial Statements............................................ F-42
SUNLINK, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-51
Balance Sheets........................................................... F-52
Statements of Operations................................................. F-53
Statements of Stockholders' Equity....................................... F-54
Statements of Cash Flows................................................. F-55
Notes to Financial Statements............................................ F-56
LEBANET, INC.
Report of Ernst & Young LLP, Independent Auditors........................ F-62
Balance Sheets........................................................... F-63
Statements of Operations................................................. F-64
Statements of Stockholder's Equity....................................... F-65
Statements of Cash Flows................................................. F-66
Notes to Financial Statements............................................ F-67
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
SOUTHWIND INTERNET ACCESS, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-71
Report of Grant Thornton LLP, Independent Auditors...................... F-72
Balance Sheets.......................................................... F-73
Statements of Operations................................................ F-74
Statements of Stockholders' Equity...................................... F-75
Statements of Cash Flows................................................ F-76
Notes to Financial Statements........................................... F-77
HORIZON INTERNET TECHNOLOGIES, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-83
Consolidated Balance Sheets............................................. F-84
Consolidated Statements of Operations................................... F-85
Consolidated Statements of Stockholders' Equity (Deficit)............... F-86
Consolidated Statements of Cash Flows................................... F-87
Notes to Financial Statements........................................... F-88
UNITED STATES INTERNET, INC.
Report of Coulter & Justus, P.C., Independent Auditors.................. F-94
Report of Ernst & Young LLP, Independent Auditors....................... F-95
Balance Sheets.......................................................... F-96
Statements of Operations................................................ F-97
Statements of Stockholders' Deficit..................................... F-98
Statements of Cash Flows................................................ F-99
Notes to Financial Statements........................................... F-100
INTERNET PARTNERS OF AMERICA, LC
Report of Ernst & Young LLP, Independent Auditors....................... F-113
Balance Sheets.......................................................... F-114
Statements of Operations................................................ F-115
Statements of Members' Deficit.......................................... F-116
Statements of Cash Flows................................................ F-117
Notes to Financial Statements........................................... F-118
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-139
Balance Sheets.......................................................... F-140
Statements of Operations................................................ F-141
Statements of Stockholders' Equity (Deficit)............................ F-142
Statements of Cash Flows................................................ F-143
Notes to Financial Statements........................................... F-144
</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 Ernst & Young LLP, Independent Auditors....................... F-173
Report of Kevin J. Tochtrop, Independent Auditor........................ F-174
Balance Sheets.......................................................... F-175
Statements of Operations................................................ F-176
Statements of Members' Equity........................................... F-177
Statements of Cash Flows................................................ F-178
Notes to Financial Statements........................................... F-179
FGINET, INC.
Report of Ernst & Young LLP, Independent Auditors....................... F-185
Balance Sheets.......................................................... F-186
Statements of Operations................................................ F-187
Statements of Stockholders' Equity...................................... F-188
Statements of Cash Flows................................................ F-189
Notes to Financial Statements........................................... F-190
SUPERHIGHWAY, INC. d/b/a Indynet
Report of Ernst & Young LLP, Independent Auditors....................... F-199
Balance Sheets.......................................................... F-200
Statements of Income.................................................... F-201
Statements of Stockholder's Equity...................................... F-202
Statements of Cash Flows................................................ F-203
Notes to Financial Statements........................................... F-204
LIGHTSPEED NET, INC.
2eport of Ernst & Young LLP, Independent Auditors....................... F-209
Balance Sheets.......................................................... F-210
Statements of Operations................................................ F-211
Statements of Stockholder's Equity...................................... F-212
Statements of Cash Flows................................................ F-213
Notes to Financial Statements........................................... F-214
</TABLE>
F-3
<PAGE>
<TABLE>
<S> <C>
JPS.NET CORPORATION
Report of Ernst & 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
TGF TECHNOLOGIES, INC
2eport of KPMG Peat Marwick LLP, Independent Auditors'.................. F-233
Balance Sheets.......................................................... F-234
Statements of Operations................................................ F-235
Statements of Changes in Stockholders' Equity (Deficit)................. F-236
Statements of Cash Flows................................................ F-237
Notes to Financial Statements........................................... F-238
</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"), 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"), JPS.Net Corporation ("JPS"), and TGF Technologies, Inc. ("TGF")
(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 December 31, 1998. The
unaudited pro forma combined statements of operations cash flows reflect the
operating results and cash flows of the ISPs for the year ended December 31,
1998, and gives effect to these transactions as if they had occurred on
January 1, 1998. The Company, which was incorporated on August 19, 1998,
conducted limited operations during the period prior to December 31, 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 these 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. Because the ISPs were not under common
control or management, historical combined results may not be comparable to, or
indicative of, future performance. The pro forma financial statements do not
include adjustments to conform the accounting policies of the individual ISPs
as the impact of conforming is not expected to be material. The unaudited pro
forma combined financial statements should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.
F-5
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Merger Offering
Acquisitions Adjustments Pro Forma Adjustments As
OneMain (See Note 3) Combined (See Note 4) Combined (See Note 4) Adjusted
---------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents.............. $ 171,516 $ 2,977,728 $ 3,149,244 $ -- $ 3,149,244 $ 52,982,710 $ 56,131,954
Accounts receivable, net.. -- 2,668,160 2,668,160 -- 2,668,160 -- 2,668,160
Inventory................. -- 155,551 155,551 -- 155,551 -- 155,551
Prepaid expenses.......... -- 301,589 301,589 -- 301,589 -- 301,589
Other current assets...... -- 1,205,205 1,205,205 -- 1,205,205 (292,101) 913,104
Deferred financing costs.. 6,158,677 -- 6,158,677 -- 6,158,677 -- 6,158,677
Deferred tax asset........ -- 52,095 52,095 -- 52,095 -- 52,095
---------- ------------ ------------ ------------ ------------ ------------ ------------
Total current assets..... 6,330,193 7,360,328 13,690,521 -- 13,690,521 52,690,609 66,381,130
Property and equipment,
net...................... -- 15,169,710 15,169,710 -- 15,169,710 -- 15,169,710
Goodwill and Intangibles,
net...................... 9,164,904 9,164,904 131,507,158 140,672,062 -- 140,672,062
Customer list, net........ -- 82,962,250 82,962,250 82,962,250
Deferred tax asset........ -- 50,158 50,158 50,158 -- 50,158
Due from
affiliates/stockholders.. -- 100,151 100,151 -- 100,151 (100,151) --
Other assets.............. -- 263,636 263,636 1,136,469 1,400,105 -- 1,400,105
---------- ------------ ------------ ------------ ------------ ------------ ------------
Total assets............. $6,330,193 $ 32,108,887 $ 38,439,080 $215,605,877 $254,044,957 $ 52,590,458 $306,635,415
========== ============ ============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable.......... -- 3,064,094 3,064,094 $ -- $ 3,064,094 $ -- $ 3,064,094
Accrued expenses.......... 6,276,503 1,500,379 7,776,882 -- 7,776,882 -- 7,776,882
Current portion of
unearned revenue......... -- 8,304,152 8,304,152 -- 8,304,152 -- 8,304,152
Income tax payable........ -- 58,423 58,423 -- 58,423 -- 58,423
Line of credit............ -- 560,000 560,000 (225,119) 334,881 (334,881) --
Current portion of long-
term debt................ 500,000 3,627,828 4,127,828 (1,243,774) 2,884,054 (2,884,054) --
Current portion of capital
lease obligations........ -- 1,533,488 1,533,488 -- 1,533,488 -- 1,533,488
Deferred tax liability.... -- -- -- 10,078,931 10,078,931 -- 10,078,931
Other current
liabilities.............. 272,038 912,612 1,184,650 -- 1,184,650 -- 1,184,650
Due to
affiliates/stockholders.. -- 1,372,364 1,372,364 71,341,563 72,713,927 (72,713,927) --
---------- ------------ ------------ ------------ ------------ ------------ ------------
Total current liabili-
ties.................... 7,048,541 20,933,340 27,981,881 79,951,601 107,933,482 (75,932,862) 32,000,620
Long-term debt, net of
current portion.......... -- 7,762,084 7,762,084 (4,601,433) 3,160,651 (3,160,651) --
Capital lease obligations,
net of current portion... -- 1,371,520 1,371,520 -- 1,371,520 -- 1,371,520
Due to
affiliates/stockholders.. -- 1,079,573 1,079,573 (1,023,544) 56,029 (56,029) --
Deferred income taxes..... -- 106,042 106,042 20,157,861 20,263,903 -- 20,263,903
Stock appreciation rights
liability................ -- 5,104,035 5,104,035 (5,104,035) -- -- --
---------- ------------ ------------ ------------ ------------ ------------ ------------
Total liabilities........ 7,048,541 36,356,594 43,405,135 89,380,450 132,785,585 (79,149,542) 53,636,043
Stockholders' equity
(deficit)................
Preferred stock........... -- 406,000 406,000 (406,000) -- -- --
Common stock.............. 4,783 9,525,395 9,530,178 (9,518,262) 11,916 7,001 18,917
Additional paid-in
capital.................. 53,042 3,828,220 3,881,262 118,142,367 122,023,629 131,732,999 253,756,628
Partners' capital......... -- 600 600 (600) -- -- --
Accumulated deficit....... (764,673) (18,007,922) (18,772,595) 18,007,922 (764,673) -- (764,673)
Stock subscription
receivable............... (11,500) -- (11,500) -- (11,500) -- (11,500)
---------- ------------ ------------ ------------ ------------ ------------ ------------
Total stockholders'
(deficit) equity........ (718,348) (4,247,707) (4,966,055) 126,225,427 121,259,372 131,740,000 252,999,372
---------- ------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity..... $6,330,193 $ 32,108,887 $ 38,439,080 $215,605,877 $254,044,957 $ 52,590,458 $306,635,415
========== ============ ============ ============ ============ ============ ============
</TABLE>
F-6
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Aquisitions Transaction
(See Note Adjustments Pro Forma
One Main 5) Combined (See Note 6) Adjusted
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Access revenues....... $ -- $51,814,062 $51,814,062 $ -- $ 51,814,062
Other revenues........ -- 4,872,788 4,872,788 -- 4,872,788
--------- ----------- ----------- ------------ ------------
Total revenues...... -- 56,686,850 56,686,850 -- 56,686,850
Cost and expenses:
Cost of access
revenues............. -- 21,572,845 21,572,845 -- 21,572,845
Cost of other
revenues............. -- 1,214,071 1,214,071 -- 1,214,071
Operations and cus-
tomer
support.............. -- 8,833,585 8,833,585 -- 8,833,585
Sales and marketing... -- 7,114,867 7,114,867 -- 7,114,867
General and
administrative....... 761,074 17,314,839 18,075,913 363,058 18,438,971
Amortization.......... -- 1,195,072 1,195,072 71,489,803 72,684,875
Depreciation.......... -- 4,281,478 4,281,478 -- 4,281,478
--------- ----------- ----------- ------------ ------------
Total cost and
expenses........... 761,074 61,526,757 62,287,831 71,852,861 134,140,692
--------- ----------- ----------- ------------ ------------
Income (loss) from
operations............. (761,074) (4,839,907) (5,600,981) (71,852,861) (77,453,842)
Other income (expense)
Interest income....... 329 92,373 92,702 -- 92,702
Interest expense...... (3,928) (1,097,721) (1,101,649) 880,393 (221,256)
Other income
(expense), net....... -- (319,011) (319,011) -- (319,011)
--------- ----------- ----------- ------------ ------------
Income before provision
(benefit) for income
taxes.................. (764,673) (6,164,266) (6,928,939) (70,972,468) (77,901,407)
Provision (benefit) for
income
taxes.................. -- 108,535 108,535 (10,400,900) (10,292,365)
--------- ----------- ----------- ------------ ------------
Net income (loss)....... $(764,673) $(6,272,801) $(7,037,474) $(60,571,568) $(67,609,042)
========= =========== =========== ============ ============
Basic and diluted net
loss per share......... $ (16.38)
=========
Shares used in computing
basic and diluted net
loss per share......... 4,668,396
=========
Pro forma basic and
diluted net loss per
share.................. $ (3.57)
============
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 18,916,503
============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-7
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Transaction Excel
Aquisitions Adjustments Pro Forma
OneMain.com (See Note 7) Combined (See Note 8) Adjusted
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss................ $ (764,673) $ (6,272,801) $ (7,037,474) $(60,571,568) $(67,609,042)
Adjustments to reconcile
net loss to net cash
(used in)
provided by operating
activities:
Depreciation and amor-
tization.............. -- 5,476,550 5,476,550 71,489,803 76,966,353
Gain on sale or dis-
posal of equipment.... -- 118,423 118,423 -- 118,423
Deferred operating
costs................. (6,158,677) -- (6,158,677) -- (6,158,677)
Deferred taxes provi-
sion.................. -- (22,276) (22,276) (10,400,900) (10,423,176)
Accretion of interest
expense............... -- 7,750 7,750 -- 7,750
Accrued interest....... -- 21,864 21,864 -- 21,864
Amortization of debt
discount.............. -- 86,133 86,133 -- 86,133
Accounts receivable
direct write-off...... -- 322,384 322,384 -- 322,384
Provision for doubtful
accounts.............. -- 591,873 591,873 -- 591,873
Stock appreciation ex-
pense (benefit)....... -- 3,340,678 3,340,678 (3,340,678) --
Debt conversion ex-
pense................. -- 108,915 108,915 -- 108,915
Employee stock compen-
sation expense........ -- 60,000 60,000 -- 60,000
Changes in operating
assets and liabili-
ties:
Accounts receivable.. -- (2,295,978) (2,295,978) -- (2,295,978)
Inventory............ -- (115,415) (115,415) -- (115,415)
Prepaid expenses..... -- (358,226) (358,226) -- (358,226)
Equity in loss of
MoCom............... -- (5,501) (5,501) -- (5,501)
Other assets......... -- (934) (934) -- (934)
Accounts payable..... -- 263,587 263,587 -- 263,587
Lease and other de-
posits.............. -- (172,180) (172,180) -- (172,180)
Deferred operating
costs............... -- -- -- -- --
Accrued expenses..... 6,549,341 751,975 7,301,316 -- 7,301,316
Cash overdraft....... -- 59,969 59,969 -- 59,969
Customer advances.... -- 110,639 110,639 -- 110,639
Unearned / deferred
revenues............ -- 4,513,817 4,513,817 -- 4,513,817
Income tax payable... -- 53,950 53,950 -- 53,950
Other liabilities.... -- (4,643) (4,643) -- (4,643)
----------- ------------ ------------ ------------ ------------
Net cash (used in) pro-
vided by operating ac-
tivities............... (374,009) 6,640,553 6,266,544 (2,823,343) 3,443,201
----------- ------------ ------------ ------------ ------------
Investing activities:
Payment from note re-
ceivable from stock-
holder................. -- 8,981 8,981 -- 8,981
Increase in investments
and restricted cash.... -- (627,282) (627,282) -- (627,282)
Increase in accounts re-
ceivable--stockholder.. -- (5,000) (5,000) -- (5,000)
Proceeds from sale on
property and equip-
ment................... -- (622,011) (622,011) -- (622,011)
Purchases of property
and equipment.......... -- (6,211,724) (6,211,724) -- (6,211,724)
Acquisition of intangi-
ble assets............. -- (1,129,116) (1,129,116) -- (1,129,116)
Acquisition of business,
net of cash............ -- (2,303,705) (2,303,705) -- (2,303,705)
----------- ------------ ------------ ------------ ------------
Net cash used in invest-
ing activities......... -- (10,889,857) (10,889,857) -- (10,889,857)
----------- ------------ ------------ ------------ ------------
Financing activities:
Principal payments on
capital lease.......... -- (1,262,140) (1,262,140) -- (1,262,140)
Deferred financing
fees................... -- (12,715) (12,715) -- (12,715)
Distributions of capi-
tal.................... -- (40,000) (40,000) -- (40,000)
Distributions to stock-
holder................. -- (488,057) (488,057) -- (488,057)
Net proceeds from
borrowings............. 500,000 6,715,534 7,215,534 -- 7,215,534
Proceeds from sale of
stock and capital con-
tributions............. 45,525 1,438,242 1,483,767 -- 1,483,767
Increase in due to /
from stockholders...... -- 192,189 192,189 -- 192,189
Net advances to related
parties................ -- (717,386) (717,386) -- (717,386)
----------- ------------ ------------ ------------ ------------
Net cash provided by fi-
nancing activities..... 545,525 5,825,667 6,371,192 -- 6,371,192
----------- ------------ ------------ ------------ ------------
Net increase / decrease
in cash and cash equiv-
alents................. 171,516 1,576,363 1,747,879 (2,823,343) (1,075,464)
Cash and cash equiva-
lents at beginning of
year................... -- 1,401,365 1,401,365 -- 1,401,365
----------- ------------ ------------ ------------ ------------
Cash and cash equiva-
lents at end of year... 171,516 2,977,728 3,149,244 (2,823,343) 325,901
=========== ============ ============ ============ ============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-8
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-9
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1--GENERAL
OneMain.com, Inc. was founded in August 1998 to create a national
consolidator and integrator of Internet service providers located outside of
large metropolitan areas. 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's and the 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 year ended December 31, 1998.
NOTE 2--ACQUISITION OF ISPs
Concurrent with this IPO, the Company will acquire all of the outstanding
equity interests in 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 $17.10 per share, which represents
a discount of 10% from the assumed IPO price of $19 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 most ISPs.
These arrangements provide for the Company to pay additional consideration,
contingent upon certain operational and earnings margin requirements, which
will 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, except in the case of Midwest Internet, which holds
the option to receive cash or common stock. In addition, on June 30, 1999, the
Company will grant additional options to employees and affiliates of the ISPs
based upon certain incremental operating results. The number of options to be
granted under this provision cannot be determined at this time. Any contingent
payments will be treated as additional purchase price when paid and are
anticipated to be allocated to goodwill.
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 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-10
<PAGE>
ONEMAIN.COM, INC.
NOTES TO 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 intangible assets and goodwill as of December 31, 1998, assuming
using an estimated fair value price per share of $17.10, which represents a 10%
restricted stock discount from the assumed initial public offering price of
$19.00 per share.
<TABLE>
<CAPTION>
Shares of Value of Total Net Assets Intangible
Cash Common Stock Shares Consideration Acquired Assets Goodwill
----------- ------------ ------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SuperNet................ $ 6,882,352 688,236 $ 11,768,836 $ 18,651,188 $ 304,875 $ 7,096,823 $ 11,249,490
SunLink................. 1,084,257 214,240 3,663,504 4,747,761 (635,923) 2,082,547 3,301,137
LebaNet................. 210,336 21,034 359,681 570,017 20,421 212,598 336,998
SouthWind............... 2,062,200 207,500 3,548,250 5,610,450 (660,130) 2,425,621 3,844,959
Horizon................. 1,052,228 136,500 2,334,150 3,386,378 (729,575) 1,592,156 2,523,797
United States Internet.. 7,500,000 400,000 6,840,000 14,340,000 1,163,233 5,097,110 8,079,657
IPA..................... 12,599,081 1,226,414 20,971,679 33,570,760 (947,358) 13,352,491 21,165,628
ZoomNet................. 2,693,032 200,850 3,434,535 6,127,567 (552,298) 2,583,943 4,095,922
Palm.Net................ 1,478,324 15,310 261,801 1,740,125 (307,847) 792,208 1,255,764
IAG..................... 1,084,580 156,550 2,677,005 3,761,585 (696,890) 1,724,652 2,733,823
Midwest Internet........ 3,455,370 577,234 9,870,701 13,326,071 (940,277) 5,518,588 8,747,760
Internet Solutions...... 1,539,912 101,322 1,732,606 3,272,518 456,000 1,089,501 1,727,017
FGI..................... 2,441,725 244,173 4,175,358 6,617,083 (690,155) 2,826,627 4,480,612
Indynet................. 3,732,885 390,008 6,669,137 10,402,022 (1,108,950) 4,452,738 7,058,234
Lightspeed.............. 6,712,957 548,400 9,377,640 16,090,597 (699,710) 6,494,920 10,295,387
JPS..................... 9,987,054 995,429 17,021,836 27,008,890 (11,912,589) 15,055,823 23,865,656
TGF..................... 7,300,000 1,010,000 17,271,000 24,571,000 (2,738,222) 10,563,905 16,745,317
----------- --------- ------------ ------------ ------------ ----------- ------------
Total................ $71,816,293 7,133,200 $121,977,720 $193,794,013 $(20,675,395) $82,962,250 $131,507,158
=========== ========= ============ ============ ============ =========== ============
</TABLE>
F-11
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
NOTE 3--UNAUDITED PRO FORMA COMBINED BALANCE SHEET DETAIL OF ACQUISITIONS
<TABLE>
<CAPTION>
United
States
Supernet SunLink LebaNet SouthWind Horizon Internet IPA ZoomNet
---------- -------- -------- --------- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents.............. $ 124,988 $100,736 $ 31,170 $ 20,070 $ -- $ 274,271 $ -- $36,900
Accounts receivable, net.. 92,059 18,865 4,758 40,600 62,572 706,342 20,142 61,341
Inventory................. 18,484 7,600 -- -- -- 60,069 -- --
Prepaid expenses.......... 45,615 -- 6,260 10,524 -- 172,066 -- 2,475
Other current assets...... -- -- -- 395 2,088 -- 232,990 --
Deferred tax asset........ -- -- -- -- -- -- -- 52,095
---------- -------- -------- -------- -------- ------------ ----------- ----------
Total current assets..... 281,146 127,201 42,188 71,589 64,660 1,212,748 253,132 152,811
Property and equipment,
net...................... 1,263,830 571,003 66,760 545,289 335,290 3,311,853 1,946,186 1,016,797
Goodwill and Intangibles,
net...................... 1,981,922 -- -- 2,781 150,614 4,316,530 1,443,004 224,186
Deferred tax asset........ 19,875 -- -- -- -- -- -- --
Due from
affiliates/stockholders.. -- -- -- -- -- -- -- --
Other assets.............. 13,492 -- -- -- 7,562 14,139 -- 8,336
---------- -------- -------- -------- -------- ------------ ----------- ----------
Total assets............. $3,560,265 $698,204 $108,948 $619,659 $558,126 $ 8,855,270 $ 3,642,322 $1,402,130
========== ======== ======== ======== ======== ============ =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable.......... 249,517 87,122 2,047 16,427 15,273 870,583 426,204 100,636
Accrued expenses.......... 142,338 18,367 643 36,055 16,781 337,173 95,586 34,475
Current portion of
unearned revenue......... 391,836 172,336 3,383 65,919 12,594 586,450 69,582 59,355
Income tax payable........ -- -- -- -- -- -- -- 58,423
Line of credit............ -- -- -- -- -- -- 150,000 100,000
Current portion of long-
term debt................ 288,080 44,906 -- 13,091 320,120 976,583 802,236 101,512
Current portion of capital
lease obligations........ -- -- -- -- 24,094 682,654 -- 100,714
Deferred tax liability.... -- -- -- -- -- -- -- --
Other current
liabilities.............. -- -- -- -- 50,871 -- 639,615 --
Due to
affiliates/stockholders.. -- 123,000 -- -- 52,066 145,418 22,500 --
---------- -------- -------- -------- -------- ------------ ----------- ----------
Total current
liabilities............. 1,071,771 445,731 6,073 131,492 491,799 3,598,861 2,205,723 555,115
Long-term debt, net of
current portion.......... 1,691,920 176,680 -- 23,673 58,901 2,520,186 2,600,145 352,262
Capital lease obligations,
net of current portion... -- -- -- -- 23,684 479,243 -- 144,790
Due to
affiliates/stockholders.. 200,000 -- -- -- -- 179,029 -- --
Deferred income taxes..... -- -- -- -- -- -- -- 106,042
Stock appreciation rights
liability................ -- -- -- -- -- 5,104,035 -- --
---------- -------- -------- -------- -------- ------------ ----------- ----------
Total liabilities........ 2,963,691 622,411 6,073 155,165 574,384 11,881,354 4,805,868 1,158,209
Stockholders' equity
(deficit)
Preferred stock........... -- -- -- -- -- -- -- --
Common stock.............. 484,115 2,050 -- 45,000 3,000 7,448,105 -- 15,000
Additional paid-in
capital.................. -- 30,145 100 -- 19,065 -- -- 55,000
Partners' capital......... -- -- 600 -- -- -- -- --
Retained earnings
(accumulated deficit).... 112,459 43,598 102,175 419,494 (38,323) (10,474,189) (1,163,546) 173,921
---------- -------- -------- -------- -------- ------------ ----------- ----------
Total
stockholders'equity
(deficit)............... 596,574 75,793 102,875 464,494 (16,258) (3,026,084) (1,163,546) 243,921
---------- -------- -------- -------- -------- ------------ ----------- ----------
Total liabilities and
stockholders' equity
(deficit)................ $3,560,265 $698,204 $108,948 $619,659 $558,126 $ 8,855,270 $ 3,642,322 $1,402,130
========== ======== ======== ======== ======== ============ =========== ==========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-12
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
<TABLE>
<CAPTION>
Midwest Internet
Palm Net IAG Internet Solutions FGI Indynet Lightspeed JPS TGF Acquisitions
- --- -------- -------- ---------- --------- ---------- -------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 15,622 $ 23,354 $ 80,350 $ 30,871 $ 66,941 $ 22,439 $ 60,481 $ 1,879,658 $ 209,877 $ 2,977,728
1,911 118,399 353,887 21,443 21,645 117,012 268,042 348,742 410,400 2,668,160
-- -- -- -- 55,898 -- -- 13,500 -- 155,551
4,145 -- -- 1,576 12,377 -- 15,424 31,127 -- 301,589
-- 11,927 1,687 -- 8,692 -- 15,204 925,383 6,839 1,205,205
-- -- -- -- -- -- -- -- -- 52,095
-------- -------- ---------- -------- ---------- -------- ----------- ----------- ---------- ------------
21,678 153,680 435,924 53,890 165,553 139,451 359,151 3,198,410 627,116 7,360,328
144,197 238,720 991,605 419,053 474,433 749,132 1,154,950 944,020 996,592 15,169,710
-- -- 433,539 248,120 341,317 15,409 7,482 -- -- 9,164,904
-- -- -- -- 30,283 -- -- -- -- 50,158
-- 100,151 -- -- -- -- -- -- -- 100,151
-- -- 6,294 -- -- 11,726 6,635 179,482 15,970 263,636
- --- -------- -------- ---------- -------- ---------- -------- ----------- ----------- ---------- ------------
$165,875 $492,551 $1,867,362 $721,063 $1,011,586 $915,718 $ 1,528,218 $ 4,321,912 $1,639,678 $ 32,108,887
=== ======== ======== ========== ======== ========== ======== =========== =========== ========== ============
16,875 186,182 $ 259,446 42,879 $ 123,532 $ 82,060 117,277 193,847 274,187 $ 3,064,094
5,153 -- 6,589 44,222 11,112 64,328 69,899 520,608 97,050 1,500,379
58,585 167,484 97,948 68,294 221,803 -- 346,445 5,583,406 398,732 8,304,152
-- -- -- -- -- -- -- -- -- 58,423
-- -- -- 150,000 80,000 80,000 -- -- -- 560,000
-- 41,195 889,256 127,893 -- 22,956 -- -- -- 3,627,828
-- 65,222 289,978 58,948 -- -- -- -- 311,878 1,533,488
-- -- -- -- -- -- -- -- -- --
-- -- -- 25,631 -- 1,075 100,386 -- 95,034 912,612
-- -- -- -- 357,152 -- 132,685 289,543 250,000 1,372,364
- --- -------- -------- ---------- -------- ---------- -------- ----------- ----------- ---------- ------------
80,613 460,083 1,543,217 517,867 793,599 250,419 766,692 6,587,404 1,426,881 20,933,340
-- 151,178 181,082 -- -- 6,057 -- -- -- 7,762,084
-- 85,080 328,702 47,902 -- -- -- -- 262,119 1,371,520
-- -- -- -- -- -- -- 700,544 -- 1,079.573
-- -- -- -- -- -- -- -- -- 106,042
-- -- -- -- -- -- -- -- -- 5,104,035
- --- -------- -------- ---------- -------- ---------- -------- ----------- ----------- ---------- ------------
80,613 696,341 2,053,001 565,769 793,599 256,476 766,692 7,287,948 1,689,000 36,356,594
-- -- -- -- 406,000 -- -- -- -- 406,000
100 100 -- -- 53,089 87,503 874,751 12,582 500,000 9,525,395
400 17,570 -- 184,800 -- -- 1,670,962 -- 1,850,178 3,828,220
-- -- -- -- -- -- -- -- -- 600
84,762 (221,460) (185,639) (29,506) (241,102) 571,739 (1,784,187) (2,978,618) (2,399,500) (18,007,922)
- --- -------- -------- ---------- -------- ---------- -------- ----------- ----------- ---------- ------------
85,262 (203,790) (185,639) 155,294 217,987 659,242 761,526 (2,966,036) (49,322) (4,247,707)
- --- -------- -------- ---------- -------- ---------- -------- ----------- ----------- ---------- ------------
$165,875 $492,551 $1,867,362 $721,063 $1,011,586 $915,718 $ 1,528,218 $ 4,321,912 $1,639,678 $ 32,108,887
=== ======== ======== ========== ======== ========== ======== =========== =========== ========== ============
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-13
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
NOTE 4--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.... $ -- $ -- $ -- $ -- $131,740,000 $(6,379,586) $(72,377,704)
Accounts
receivable,
net............ -- -- -- -- -- -- --
Inventory....... -- -- -- -- -- -- --
Prepaid
expenses....... -- -- -- -- -- -- --
Other current
assets......... -- -- -- -- -- -- (292,101)
Deferred
financing
costs.......... -- -- -- -- -- -- --
Deferred tax
asset.......... -- -- -- -- -- -- --
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total current
assets......... -- -- -- -- 131,740,000 (6,379,586) (72,669,805)
Property and
equipment,
net............ -- -- -- -- -- -- --
Goodwill and
intangibles,
net............ -- 30,236,792 101,270,366 131,507,158 -- -- --
Customer Lists,
net............ -- -- 82,962,250 82,962,250 -- -- --
Deferred tax
asset.......... -- -- -- -- -- -- --
Due from
affiliates/stockholders.. -- -- -- -- -- -- (100,151)
Other assets.... -- -- 1,136,469 1,136,469 -- -- --
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total assets.... $ -- $30,236,792 $185,369,085 $215,605,877 $131,740,000 $(6,379,586) $(72,769,956)
=========== =========== ============ ============ ============ =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts
payable........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accrued
expenses....... -- -- -- -- -- -- --
Current portion
of unearned
revenue........ -- -- -- -- -- -- --
Income tax
payable........ -- -- -- -- -- -- --
Line of credit.. -- -- (225,119) (225,119) -- (334,881) --
Current portion
of long-term
debt........... -- -- (1,243,774) (1,243,774) -- (2,884,054) --
Current portion
of capital
lease
obligations.... -- -- -- -- -- -- --
Deferred tax
liability...... -- 10,078,931 -- 10,078,931 -- -- --
Other current
liabilities.... -- -- -- -- -- -- --
Due to
affiliates/stockholders.. 71,816,291 -- (474,728) 71,341,563 -- -- (72,713,927)
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total current
liabilities.... 71,816,291 10,078,931 (1,943,621) 79,951,601 -- (3,218,935) (72,713,927)
Deferred income
tax liabilty... -- 20,157,861 -- 20,157,861 -- -- --
Long-term debt,
net of current
portion........ -- -- (4,601,433) (4,601,433) -- (3,160,651) --
Capital lease
obligations,
net of current
portion........ -- -- -- -- -- -- --
Due to
affiliates/stockholders.. -- -- (1,023,544) (1,023,544) -- -- (56,029)
Stock
appreciation
rights
liability...... -- -- (5,104,035) (5,104,035) -- -- --
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total
liabilities.... 71,816,291 30,236,792 (12,672,633) 89,380,450 -- (6,379,586) (72,769,956)
Stockholders'
equity (deficit)
Preferred
stock.......... -- -- (406,000) (406,000) -- -- --
Common stock.... -- -- (9,518,262) (9,518,262) 7,001 -- --
Additional
paid-in
capital........ (71,816,291) -- 189,958,658 118,142,367 131,732,999 -- --
Partners'
capital........ -- -- (600) (600) -- -- --
Retained
earnings
(accumulated
deficit)....... -- -- 18,007,922 18,007,922 -- -- --
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total
stockholders'
equity
(deficit)...... (71,816,291) -- 198,041,718 126,225,427 131,740,000 -- --
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total liabilities
and
stockholders'
equity
(deficit)....... $ -- $30,236,792 $185,369,085 $215,605,877 $131,740,000 $(6,379,586) $(72,769,956)
=========== =========== ============ ============ ============ =========== ============
<CAPTION>
Post-
Transactions
Adjustments
-------------
<S> <C>
ASSETS
Cash and cash
equivalents.... $ 52,982,710
Accounts
receivable,
net............ --
Inventory....... --
Prepaid
expenses....... --
Other current
assets......... (292,101)
Deferred
financing
costs.......... --
Deferred tax
asset.......... --
-------------
Total current
assets......... 52,690,609
Property and
equipment,
net............ --
Goodwill and
intangibles,
net............ --
Customer Lists,
net............ --
Deferred tax
asset.......... --
Due from
affiliates/stockholders.. (100,151)
Other assets.... --
-------------
Total assets.... $ 52,590,458
=============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts
payable........ $ --
Accrued
expenses....... --
Current portion
of unearned
revenue........ --
Income tax
payable........ --
Line of credit.. (334,881)
Current portion
of long-term
debt........... (2,884,054)
Current portion
of capital
lease
obligations.... --
Deferred tax
liability...... --
Other current
liabilities.... --
Due to
affiliates/stockholders.. (72,713,927)
-------------
Total current
liabilities.... (75,932,862)
Deferred income
tax liabilty... --
Long-term debt,
net of current
portion........ (3,160,651)
Capital lease
obligations,
net of current
portion........ --
Due to
affiliates/stockholders.. (56,029)
Stock
appreciation
rights
liability...... --
-------------
Total
liabilities.... (79,149,542)
Stockholders'
equity (deficit)
Preferred
stock.......... --
Common stock.... 7,001
Additional
paid-in
capital........ 131,732,999
Partners'
capital........ --
Retained
earnings
(accumulated
deficit)....... --
-------------
Total
stockholders'
equity
(deficit)...... 131,740,000
-------------
Total liabilities
and
stockholders'
equity
(deficit)....... $ 52,590,458
=============
</TABLE>
F-14
<PAGE>
ONEMAIN.COM, INC.
NOTES TO 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 $8,525, $35,929, $18,412, $125,000, and 59,748 at Horizon,
IPA, Palm.Net, Midwest, and Lightspeed.Net, respectively and deferred tax
liabilities of $11,223, $26,279, $21,430, $954, and $40,000 at Sunlink,
Lebanet, Southwind, Internet Solutions and Indy.Net, respectively, net of a
valuation allowance of $147,728. Further, includes the establishment of a
$30,236,792 deferred tax liability associated with the portion of purchase
price allocated to identifiable intangibles.
(c) Records the (i) purchase of the ISPs by the Company, including
consideration of $71,816,293 in cash, 7,133,200 shares of common stock with
an estimated fair value of $17.10 per share (or $121,977,220) which
represents a discount of 10% from the assumed initial public offering price
of $19 per share due to restrictions on the sale and transferability of the
shares issued, (ii) elimination of unassumed debt of $10,551,870, and (iii)
elimination of unassumed notes to affiliates/stockholders of $1,498,272.
The excess of the purchase price over the fair value of the net assets
acquired is $214,469,408 and was allocated to goodwill ($131,507,158) and
customer list ($82,962,250).
(d) Records the cash proceeds from the issuance of shares of the Company's
Common Stock net of estimated offering costs and the contribution of shares
to the Company by its existing shareholders. IPO costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses.
(e) Records the repayment of outstanding debt from proceeds of the IPO as
follows:
<TABLE>
<CAPTION>
As of
December 31, 1998
-----------------
<S> <C>
Line of Credit............................................. $ 334,881
Current portion of long term debt.......................... 2,884,050
Long term debt............................................. 3,160,653
----------
Total...................................................... $6,379,584
==========
</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-15
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (cont'd)
NOTE 5--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
DETAIL OF ACQUISITIONS
<TABLE>
<CAPTION>
U.S.
D & EA Sunlink Lebanet Southwind Horizon InternetA IPA
---------- ---------- -------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Access revenues........ $4,875,241 $1,411,164 $217,679 $2,032,310 $1,099,777 $ 7,989,381 $4,274,630
Other revenues......... 393,689 -- 80,430 138,094 61,410 737,716 150,947
---------- ---------- -------- ---------- ---------- ------------ ----------
Total net revenues... 5,268,930 1,411,164 298,109 2,170,404 1,161,187 8,727,097 4,425,577
Cost and expenses:
Cost of access reve-
nues.................. 1,807,519 566,102 78,417 637,071 370,567 3,874,830 1,859,301
Cost of other reve-
nues.................. 225,091 -- 31,250 71,523 50,017 261,232 41,506
Operations and cus-
tomer support......... 625,469 374,213 18,596 437,890 48,916 1,857,097 583,987
Sales and marketing.... 716,985 102,507 448 83,200 166,582 1,182,341 349,409
General and adminis-
trative............... 1,009,287 303,948 30,254 450,652 395,745 5,069,737 1,471,226
Amortization........... 205,390 -- -- -- 4,345 477,952 127,405
Depreciation--non
operating equipment... 214,077 125,565 22,743 160,271 66,611 788,031 511,924
---------- ---------- -------- ---------- ---------- ------------ ----------
Total cost and ex-
penses 4,803,818 1,472,335 181,708 1,840,607 1,102,783 13,511,220 4,944,758
---------- ---------- -------- ---------- ---------- ------------ ----------
Income (loss) from oper-
ations................. 465,112 (61,171) 116,401 329,797 58,404 (4,784,123) (519,181)
Other income (expense)
Interest income........ 449 -- -- 623 -- 34,580 --
Interest expense....... (118,031) (20,363) -- (10,523) (32,634) (346,387) (250,054)
Other income (ex-
pense), net........... (52,070) -- -- 5,556 7,458 (141,674) --
---------- ---------- -------- ---------- ---------- ------------ ----------
Income (loss) before
provision (benefit) for
income taxes........... 295,460 (81,534) 116,401 325,453 33,228 (5,237,604) (769,235)
Provision (benefit) for
income taxes........... 54,985 -- -- -- -- -- --
---------- ---------- -------- ---------- ---------- ------------ ----------
Net income (loss)....... $ 240,475 $ (81,534) $116,401 $ 325,453 $ 33,228 $(5,237,604) $(769,235)
========== ========== ======== ========== ========== ============ ==========
</TABLE>
A. The pro forma results of operations assumes that the acquisitions
consummated during the year ended December 31, 1998 had been consummated at
the beginning of the year. See the notes to the financial statements of the
individual ISPs included elsewhere herein for a more detailed analysis of
these acquisitions.
F-16
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
<TABLE>
<CAPTION>
Midwest Int.
Zoomnet Palm Net IAG Int. Solutions FGI Net Indy Net Lightspeed JPSNet TGF Acquisitions
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$1,853,373 $583,930 $1,402,635 $4,485,383 $ 996,590 $1,647,388 $2,904,989 $4,463,663 $6,711,797 $4,864,132 $51,814,062
114,307 41,992 131,742 165,198 5,945 173,375 108,394 189,328 2,289,781 90,440 4,872,788
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
1,967,680 625,922 1,534,377 4,650,581 1,002,535 1,820,763 3,013,383 4,652,991 9,001,578 4,954,572 56,686,850
752,059 148,787 558,046 1,702,972 371,893 608,909 900,834 1,864,723 3,723,345 1,747,470 21,572,845
20,428 13,750 99,365 -- -- 128,387 46,127 109,903 105,447 10,045 1,214,071
175,424 63,358 214,746 423,200 174,202 164,848 514,745 731,833 1,723,719 701,342 8,833,585
259,851 63,171 161,627 490,132 38,957 255,070 550,339 561,253 1,483,192 649,803 7,114,867
339,459 182,249 498,836 987,954 204,092 491,859 642,302 1,238,536 2,595,107 1,403,596 17,314,839
11,799 -- -- 108,000 27,675 90,267 795 8,977 132,467 -- 1,195,072
206,776 35,300 60,668 397,302 72,419 94,834 208,290 657,149 90,921 568,597 4,281,478
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
1,765,796 506,615 1,593,288 4,109,560 889,238 1,834,174 2,863,432 5,172,374 9,854,198 5,080,853 61,526,757
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
201,884 119,307 (58,911) 541,021 113,297 (13,411) 149,951 (519,383) (852,620) (126,281) (4,839,907)
-- 300 1,207 -- 369 1,443 -- 1,972 50,700 730 92,373
(40,895) (7,880) (34,450) (106,066) (21,075) (11,481) (13,861) -- (22,327) (61,694) (1,097,721)
(748) (40,385) -- 9,288 -- (650) (13,652) -- (87,613) (4,521) (319,011)
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
160,241 71,342 (92,154) 444,243 92,591 (24,099) 122,438 (517,411) (911,860) (191,766) (6,164,266)
63,153 -- -- -- -- (9,603) -- -- -- -- 108,535
- ---------- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
$ 97,088 $ 71,342 $ (92,154) $ 444,243 $ 92,591 $ (14,496) $ 122,438 $ (517,411) $ (911,860) $(191,766) $(6,272,801)
========== ======== ========== ========== ========= ========== ========== ========== ========== ========== ===========
</TABLE>
A. The pro forma results of operations assumes that the acquisitions
consummated during the year ended December 31, 1998 had been consummated at
the beginning of the year. See the notes to the financial statements of the
individual ISPs included elsewhere herein for a more detailed analysis of
these acquisitions.
F-17
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
NOTE 6--UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes unaudited pro forma combined statement of
operations adjustments for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Transactions
(a) (b) (c) (d) (e) (f) Adjustments
----------- ------------ -------- ------------- ------------ ----------- ------------ ---
<S> <C> <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...... -- -- -- -- -- -- --
Sales and marketing.... -- -- -- -- -- -- --
General and
administrative........ 2,376,859 -- -- -- 1,326,877 (3,340,678) 363,058
Amortization........... -- 71,489,803 -- -- -- -- 71,489,803
Depreciation........... -- -- -- -- -- -- --
----------- ------------ -------- ------------- ------------ ----------- ------------
Total cost and
expenses............ 2,376,859 71,489,803 -- -- 1,326,877 (3,340,678) 71,852,861
----------- ------------ -------- ------------- ------------ ----------- ------------
Income (loss) from
operations............. (2,376,859) (71,489,803) -- -- (1,326,877) 3,340,678 (71,852,861)
Other income (expense):
Interest income........ -- -- -- -- -- -- --
Interest expense....... -- -- 880,393 -- -- -- 880,393
Other income
(expense), net........ -- -- -- -- -- -- --
----------- ------------ -------- ------------- ------------ ----------- ------------
Income before provision
(benefit) for income
taxes.................. (2,376,859) (71,489,803) 880,393 -- (1,326,877) 3,340,678 (70,972,468)
Provision (benefit) for
income taxes........... -- -- -- (10,400,900) -- -- (10,400,900)
----------- ------------ -------- ------------- ------------ ----------- ------------
Net income (loss)....... $(2,376,859) $(71,489,803) $880,393 $ 10,400,900 $(1,326,877) $ 3,340,678 $(60,571,568)
=========== ============ ======== ============= ============ =========== ============
</TABLE>
F-18
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
(a) Reflects the increase in salaries to the owners and other employees of the
ISPs as scheduled from the employment agreements that each of the
individuals will enter into with the Company upon consummation of the
offering. The pro forma adjustment for compensation is shown solely as a
result of changed circumstances that will exist following the consummation
of the transactions. The information is considered necessary for the reader
to realistically assess the impact of the transaction. The changes in
compensation by entity are as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
Company
-------
<S> <C>
SuperNet....................................................... $ 495,000
SunLink........................................................ 47,519
LebaNet........................................................ 56,800
Horizon........................................................ 135,245
SouthWind...................................................... 142,074
United States Internet......................................... 526,468
IPA............................................................ (164,036)
ZoomNet........................................................ 130,000
Palm.Net....................................................... 71,000
IAG............................................................ 51,507
Midwest Internet............................................... 165,717
Internet Solutions............................................. 22,192
FGI............................................................ 194,331
Indynet........................................................ 207,355
Lightspeed..................................................... 70,000
JPS............................................................ 70,000
TGF............................................................ 155,687
----------
Total.......................................................... $2,376,859
==========
</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 and customer list to be recorded as a
result of these Transactions over a 3-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. The pro forma
F-19
<PAGE>
adjusted benefit for income taxes of 13% differs from the expected federal
benefit based upon statutory rates of 35% principally because of the
amortization of goodwill (24%) and the state tax benefit recorded of 2%.
(e) Reflects (i) an increase associated with additional compensation expense
to the Company's new corporate management ($752,877) and (ii) the
estimated incremental costs associated with being a public entity
($574,000). See discussion regarding the members of management at page 63.
(f) Reflects an increase/(decrease) of compensation expense related to United
States Internet's stock appreciation rights which terminate under the
terms of the agreement upon a change of control. Such information is
considered necessary to realistically assess the impact of the
transaction.
F-20
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-21
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (cont'd)
NOTE 7 - UNAUDITED PRO FORMA COMBINED STATEMENT OF CASH FLOWS DETAIL OF
ACQUISITIONS.
<TABLE>
<CAPTION>
United
D&E States
SuperNet SunLink LebaNet SouthWind Horizon Internet IPA Zoom Net
---------- -------- -------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income....... $ 240,475 (81,534) 116,401 325,453 33,228 (5,237,604) (769,235) 97,088
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 419,467 125,565 22,743 160,271 70,956 1,265,983 639,329 218,575
Loss (gain) on sale or
disposal of
equipment............. 52,070 -- -- (3,385) (7,458) 39,117 -- 748
Deferred operating
costs................. -- -- -- -- -- -- -- --
Deferred taxes
provision............. (19,875) -- -- -- -- -- -- 7,202
Accretion of interest
expense............... -- -- -- -- -- -- -- --
Accrued interest....... -- -- -- -- -- -- -- --
Amortization of debt
discount.............. -- -- -- -- -- 64,033 -- 22,100
Accounts receivable
direct write-off...... -- -- -- -- -- -- -- --
Provision for doubtful
accounts.............. -- -- 3,337 17,828 25,964 334,455 63,000 --
Stock appreciation
expense (benefit)..... -- -- -- -- -- 3,340,678 -- --
Debt conversion
expense............... -- -- -- -- -- 108,915 -- --
Employee stock
compensation
expense............... -- -- -- -- -- 60,000 -- --
Changes in operating
assets and
liabilities:
Accounts receivable.. (112,722) 3,298 1,400 (35,082) (75,596) (646,679) (48,010) (50,587)
Inventory............ (4,426) (7,600) -- -- -- (40,609) -- --
Prepaid expenses..... (19,936) -- (6,260) (4,385) -- (91,211) -- (2,270)
Equity in loss of
MoCom................ -- -- -- -- (5,501) -- -- --
Other assets......... 5,632 -- -- (395) (4,373) 2,828 339 430
Accounts payable..... 144,636 (11,763) (13,707) 15,819 (20,035) (94,952) 293,600 53,812
Lease and other
deposits............. -- -- -- -- -- -- -- --
Deferred operating
costs................ -- -- -- -- -- -- -- --
Accrued expenses..... 82,164 11,180 (877) 11,908 (24,121) 151,208 45,162 23,623
Cash overdraft....... -- -- -- -- 37,650 -- 22,319 --
Customer advances.... -- -- -- -- -- -- -- --
Unearned / deferred
revenues............. (19,165) 102,101 (4,576) 18,461 8,657 102,445 44,107 38,175
Income tax payable... -- -- -- -- -- -- -- 53,950
Other liabilities.... -- -- -- -- -- (16,500) -- --
---------- -------- -------- -------- -------- ---------- ---------- --------
Net cash provided by
(used in) operating
activities............. 768,320 141,247 118,461 506,493 39,371 (657,893) 290,611 462,846
Investing activities:
(Issuance of) payment
from note receivable
from stockholder....... -- 8,981 -- -- -- -- -- --
Increase in investments
and restricted cash.... -- -- -- -- -- -- -- --
Increase in accounts
receivable--
stockholder............ -- -- -- -- -- -- -- --
Proceeds from sale on
property and
equipment.............. 1,206 -- -- 7,234 10,750 -- -- 500
Purchases of property
and equipment.......... (586,784) (296,936) (27,582) (204,857) (163,107) (1,521,202) (932,208) (418,083)
Acquisition of
intangible assets...... -- -- -- (2,202) -- (90,002) (625,530) (235,985)
Acquisition of business,
net of cash............ (1,971,356) -- -- -- (124,557) (168,988) -- --
---------- -------- -------- -------- -------- ---------- ---------- --------
Net cash used in
investing activities... (2,556,934) (287,955) (27,582) (199,825) (276,914) (1,780,192) (1,557,738) (653,568)
Financing activities:
Principal payments on
capital lease.......... -- -- -- (260) (23,030) (464,275) -- (65,167)
Deferred financing
fees................... (12,715) -- -- -- -- -- -- --
Distributions of
capital................ -- -- -- -- -- -- -- --
Distributions to
stockholder............ -- -- (62,730) (258,799) -- -- -- --
Net proceeds
(repayments) from
borrowings............. 1,980,000 131,586 -- (102,259) 260,573 3,056,730 1,274,627 260,577
Proceeds from sale of
stock and capital
contributions.......... 299,995 -- -- -- -- 116,927 -- --
Increase (decrease) in
due to / from
stockholders........... -- -- -- -- -- -- -- --
Net advances from (to)
related parties........ (384,698) 110,059 (40,812) -- -- (195,185) (7,500) --
---------- -------- -------- -------- -------- ---------- ---------- --------
Net cash provided by
(used in) financing
activities............. 1,882,582 241,645 (103,542) (361,318) 237,543 2,514,197 1,267,127 195,410
---------- -------- -------- -------- -------- ---------- ---------- --------
Net increase / decrease
in cash and cash
equivalents............ 93,968 94,937 (12,663) (54,650) -- 76,112 -- 4,688
Cash and cash
equivalents at
beginning of year...... 31,020 5,799 43,833 74,720 -- 198,159 -- 32,212
---------- -------- -------- -------- -------- ---------- ---------- --------
Cash and cash
equivalents at end of
year................... 124,988 100,736 31,170 20,070 -- 274,271 -- 36,900
========== ======== ======== ======== ======== ========== ========== ========
</TABLE>
F-22
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (cont'd)
<TABLE>
<CAPTION>
Midwest Internet Aquisition
Palm.Net IAG Internet Soutions FGI Indynet Lightspeed JPS TGF Total
-------- ------- -------- -------- -------- -------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
71,342 (92,154) 444,243 92,591 (14,496) 122,438 (517,411) (911,860) (191,766) (6,272,801)
35,300 60,668 505,302 100,094 185,101 209,085 666,126 223,388 568,597 5,476,550
-- -- (8,868) -- -- 3,649 -- 38,271 4,279 118,423
-- -- -- -- -- -- -- -- --
-- -- -- -- (9,603) -- -- -- -- (22,276)
-- -- -- -- 7,750 -- -- -- -- 7,750
-- 21,864 -- -- -- -- -- -- -- 21,864
-- -- -- -- -- -- -- -- -- 86,133
-- -- -- -- -- 195,000 -- -- 127,384 322,384
-- -- -- -- -- 65,000 82,289 -- -- 591,873
-- -- -- -- -- -- -- -- -- 3,340,678
-- -- -- -- -- -- -- -- -- 108,915
-- -- -- -- -- -- -- -- -- 60,000
2,540 (59,514) (355,122) (5,636) (90,667) (149,816) (83,640) (269,556) (320,589) (2,295,978)
-- -- -- -- (49,280) -- -- (13,500) -- (115,415)
(2,440) -- -- -- (9,987) -- (2,145) (219,592) -- (358,226)
-- -- -- -- -- -- -- -- -- (5,501)
-- (8,257) (6,640) 1,399 (3,118) (1,591) (1,946) -- 14,758 (934)
761 138,237 49,322 23,837 60,664 45,499 56,188 (160,481) (317,850) 263,587
-- -- -- -- -- -- -- (172,180) -- (172,180)
-- -- -- -- -- -- -- -- --
-- -- (16,196) 37,058 (2,594) -- (64,321) 392,182 105,599 751,975
-- -- -- -- -- -- -- -- -- 59,969
-- -- -- -- -- -- 60,034 -- 50,605 110,639
22,821 23,258 (14,525) (12,218) 152,898 -- 79,078 3,852,757 119,543 4,513,817
-- -- -- -- -- -- -- -- -- 53,950
-- -- -- 25,631 -- (13,774) -- -- -- (4,643)
------- ------- -------- -------- -------- -------- -------- ---------- -------- -----------
130,324 84,102 597,516 262,756 226,668 475,490 274,252 2,759,429 160,560 6,640,553
-- -- -- -- -- -- -- -- -- 8,981
-- -- -- -- -- -- -- (627,282) -- (627,282)
-- (5,000) -- -- -- -- -- -- -- (5,000)
-- -- 9,504 2,630 41,596 (700,323) -- 4,892 (622,011)
(72,367) (38,649) (84,444) (152,916) (216,931) (323,303) -- (912,038) (260,317) (6,211,724)
-- -- -- (120,000) (55,397) -- -- -- -- (1,129,116)
-- -- (14,960) -- -- (23,844) -- -- -- (2,303,705)
------- ------- -------- -------- -------- -------- -------- ---------- -------- -----------
(72,367) (43,649) (89,900) (272,916) (269,698) (305,551) (700,323) (1,539,320) (255,425) (10,889,857)
-- (34,670) (169,046) (19,103) -- -- -- -- (486,589) (1,262,140)
-- -- -- -- -- -- -- -- -- (12,715)
-- -- -- (40,000) -- -- -- -- -- (40,000)
-- -- -- -- -- (166,528) -- -- -- (488,057)
-- (6,231) (208,404) 84,157 (25,227) 9,405 -- -- -- 6,715,534
-- -- -- -- 60,500 -- 430,689 131 530,000 1,438,242
(57,811) -- -- -- -- -- -- -- 250,000 192,189
-- -- (90,778) -- -- -- -- (108,472) -- (717,386)
------- ------- -------- -------- -------- -------- -------- ---------- -------- -----------
(57,811) (40,901) (468,228) 25,054 35,273 (157,123) 430,689 (108,341) 293,411 5,825,667
------- ------- -------- -------- -------- -------- -------- ---------- -------- -----------
146 (448) 39,388 14,894 (7,757) 12,816 4,618 1,111,768 198,546 1,576,363
15,476 23,802 40,962 15,977 74,698 9,623 55,863 767,890 11,331 1,401,365
------- ------- -------- -------- -------- -------- -------- ---------- -------- -----------
15,622 23,354 80,350 30,871 66,941 22,439 60,481 1,879,658 209,877 2,977,728
======= ======= ======== ======== ======== ======== ======== ========== ======== ===========
</TABLE>
F-23
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (cont'd)
NOTE 8 - UNAUDITED PRO FORMA COMBINED STATEMENT OF CASH FLOWS MERGER
ADJUSTMENTS.
The following table summarizes unaudited pro forma combined statement of cash
flows merger adjustments for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Merger
(a) (b) (c) (d) (e) (f) Adjustments
------------ ------------ ------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income....... $ (2,376,859) (71,489,803) 880,393 10,400,900 (1,326,877) 3,340,678 (60,571,568)
Adjustments to reconcile
net (loss) income to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization.......... -- 71,489,803 -- -- -- -- 71,489,803
(Gain) loss on sale or
disposal of
equipment............. -- -- -- -- -- -- --
Deferred operating
costs................. -- -- -- -- -- -- --
Deferred taxes
provision (benefit)... -- -- -- (10,400,900) -- -- (10,400,900)
Accretion of interest
expense............... -- -- -- -- -- --
Accrued interest....... -- -- -- -- -- -- --
Amortization of debt
discount.............. -- -- -- -- -- -- --
Accounts receivable
direct write-off...... -- -- -- -- -- -- --
Provision for doubtful
accounts.............. -- -- -- -- -- -- --
Stock appreciation
expense (benefit)..... -- -- -- -- -- (3,340,678) (3,340,678)
Debt conversion
expense............... -- -- -- -- -- -- --
Employee stock
compensation
expense............... -- -- -- -- -- -- --
Changes in operating
assets and
liabilities:
Account receivable... -- -- -- -- -- -- --
Inventory............ -- -- -- -- -- -- --
Prepaid expenses..... -- -- -- -- -- -- --
Equity in loss of
MoCom................ -- -- -- -- -- -- --
Other assets......... -- -- -- -- -- -- --
Accounts payable..... -- -- -- -- -- -- --
Lease and other
deposits............. -- -- -- -- -- -- --
Deferred operating
costs................ -- -- -- -- -- -- --
Accrued expenses..... -- -- -- -- -- -- --
Cash overdraft....... -- -- -- -- -- -- --
Customer advances.... -- -- -- -- -- -- --
Unearned / deferred
revenues............. -- -- -- -- -- -- --
Income tax payable... -- -- -- -- -- -- --
Other liabilities.... -- -- -- -- -- -- --
------------ ------------ ------- ----------- ---------- ---------- -----------
Net cash (used in)
provided by operating
activities............. (2,376,859) -- 880,393 -- (1,326,877) -- (2,823,343)
Investing activities:
(Issuance of) payment
from note receivable
from stockholder....... -- -- -- -- -- -- --
Increase in investments
and restricted cash.... -- -- -- -- -- -- --
Increase in accounts
receivable--
stockholder............ -- -- -- -- -- -- --
Proceeds from sale on
property and
equipment.............. -- -- -- -- -- -- --
Purchases of property
and equipment.......... -- -- -- -- -- -- --
Acquisition of
intangible assets...... -- -- -- -- -- -- --
Acquisition of business,
net of cash............ -- -- -- -- -- -- --
------------ ------------ ------- ----------- ---------- ---------- -----------
Net cash used in
investing activities... -- -- -- -- -- -- --
Financing activities:
Principal payments on
capital lease.......... -- -- -- -- -- -- --
Deferred financing
fees................... -- -- -- -- -- -- --
Distributions of
capital................ -- -- -- -- -- -- --
Distributions to
stockholder............ -- -- -- -- -- -- --
Net proceeds
(repayments) from
borrowings............. -- -- -- -- -- -- --
Proceeds from sale of
stock and capital
contributions.......... -- -- -- -- -- -- --
Increase (decrease) in
due to / from
stockholders........... -- -- -- -- -- -- --
Net advances from (to)
related parties........ -- -- -- -- -- -- --
Net cash provided by
financing activities... -- -- -- -- -- -- --
------------ ------------ ------- ----------- ---------- ---------- -----------
Net increase / decrease
in cash and cash
equivalents............ (2,376,859) -- 880,393 -- (1,326,877) -- (2,823,343)
------------ ------------ ------- ----------- ---------- ---------- -----------
Cash and cash
equivalents at
beginning of year...... -- -- -- -- -- -- --
------------ ------------ ------- ----------- ---------- ---------- -----------
Cash and cash
equivalents at end of
year................... (2,376,859) -- 880,393 -- (1,326,877) -- (2,823,343)
============ ============ ======= =========== ========== ========== ===========
</TABLE>
F-24
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
(a) Reflects the increase in salaries to the owners of the ISPs as per the
employment agreements that each of the owners will enter into with the
Company upon consummation of the offering.
(b) Reflects the amortization of goodwill and customer list to be recorded as a
result of these Transactions over a 3-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 which terminate under the terms
of the agreement upon a change in control. Such information is considered
necessary to realistically assess the impact of the combination.
F-25
<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 sheet of OneMain.com, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the period from August 19, 1998 (inception) to
December 31, 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 December
31, 1998 and the results of its operations and its cash flows for the period
from August 19, 1998 (inception) to December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Vienna, Virginia
February 25, 1999
F-26
<PAGE>
ONEMAIN.COM, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Assets
Cash.............................................................. $ 171,516
Deferred offering costs........................................... 6,158,677
----------
Total current assets........................................... $6,330,193
==========
Liabilities and Stockholders' Equity
Accrued professional fees......................................... $6,276,503
Other accrued expenses............................................ 272,038
Note payable -- stockholder....................................... 500,000
----------
Total current liabilities...................................... 7,048,541
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,
4,782,500 shares issued and outstanding......................... 4,783
Additional paid-in capital....................................... 53,042
Accumulated deficit.............................................. (764,673)
Stock subscription receivable.................................... (11,500)
----------
Total stockholders' equity..................................... (718,348)
----------
Total liabilities and stockholders' equity..................... $6,330,193
==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
ONEMAIN.COM, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the period
August 19, 1998
(inception)
to December 31,
1998
---------------
<S> <C>
Cost and Expenses:
Selling, general and administrative expenses.................. $ 761,074
----------
Loss from operations.......................................... (761,074)
Other income (expense):
Interest income............................................... 329
Interest expense.............................................. (3,928)
----------
Net other expense............................................. (3,599)
----------
Net loss...................................................... $ (764,673)
==========
Basic and diluted net loss per share.......................... $ (16.38)
==========
Shares used in the calculation of basic and diluted net loss
per share.................................................... $4,668,396
==========
</TABLE>
See accompanying notes.
F-28
<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................ -- -- -- (764,673) -- (764,673)
Issuance of common
stock.................. 4,782,500 4,783 52,242 -- -- 46,325
Issuance of common stock
for services........... -- -- 800 -- (11,500)
--------- ------ ------- --------- -------- ---------
Balance at December 31,
1998................... 4,782,500 $4,783 $54,042 $(764,673) $(11,500) $(718,348)
========= ====== ======= ========= ======== =========
</TABLE>
See accompanying notes.
F-29
<PAGE>
ONEMAIN.COM, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the period
August 19, 1998
(inception)
to December 31,
1998
---------------
<S> <C>
Operating activities:
Net loss...................................................... $ (764,673)
Adjustments to reconcile net loss to net cash used in
operating activities:
Changes in operating assets and liabilities:
Deferred operating costs.................................. (6,158,677)
Accrued expenses.......................................... 6,549,341
-----------
Net cash used in operating activities.......................... (374,009)
Investing activities........................................... --
Financing activities:
Proceeds from note payable -- stockholder...................... 500,000
Issuance of common stock....................................... 45,525
-----------
Net cash provided by financing activities...................... 545,525
Net increase in cash........................................... 171,516
Cash at beginning of period.................................... --
-----------
Cash at end of period.......................................... $ 171,516
===========
</TABLE>
See accompanying notes.
F-30
<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 $71.8 million
in cash and 7,133,200 shares of common stock. See Note 5.
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 employees and
certain professional services. Such costs have been expensed. As of December
31, 1998, approximately $6,277,000 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-31
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Equipment and software are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of three to five
years.
Customer List
The cost of customer list acquired is being amortized over three years.
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 three 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 Impairment of Long-Lived Assets to 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.
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.
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
F-32
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Company's backbone, other license fees paid to third-party software vendors,
product costs, and contractor fees for distribution of software to new
subscribers.
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.
Earnings per Share
Basic earnings per share excludes dilution and is determined by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflect
the potential dilution that could occur if outstanding stock options were
exercised. Diluted earning per share is determined by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period plus the incremental shares that would have been
outstanding upon the assumed exercise of dilutive stock options.
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
F-33
<PAGE>
financial statements as the Company does not have any elements of comprehensive
income other than net 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.
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 January 1, 1999.
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 capitalizes costs related to software
developed for internal use. The Company has not evaluated whether the
pronouncement will have an impact on the Company's existing capitalization
policy for internal-use software.
3. Stockholders' Equity
Common Stock
In connection with the organization and initial capitalization on August 19,
1998, the Company issued 4,552,500 shares of common stock, par value $0.001 per
share.
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 December 31, 1998:
<TABLE>
<S> <C>
Net operating losses........................................... $ 305,900
---------
Total deferred tax assets...................................... 305,900
Valuation allowance............................................ (305,900)
---------
Net deferred tax asset......................................... $ --
=========
</TABLE>
The Company is in a net deferred tax asset position at December 31, 1998.
However, as a newly formed 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 $71.8 million
in cash and 7,133,200 shares of common stock.
F-34
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Stock"), at $0.01 per share. The Company has subsequently issued 230,000 shares
at $0.05 per share to members of senior management. The Company believes the
consideration received for each of the issuances 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 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 December 31, 1998, using an estimated fair value of $17.10 per share
which represents a discount of 10% from the assumed IPO price of $19 per share.
<TABLE>
<CAPTION>
Shares of Value of Total Net Assets Intangible
Cash Common Stock Shares Consideration Acquired Assets Goodwill
----------- ------------ ------------ ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
SuperNet................ $ 6,882,352 688,236 $ 11,768,836 $ 18,651,188 $ 304,875 $ 7,096,823 $ 11,249,490
SunLink................. 1,084,257 214,240 3,663,504 4,747,761 (635,923) 2,082,547 3,301,137
LebaNet................. 210,336 21,034 359,681 570,017 20,421 212,598 336,998
SouthWind............... 2,062,200 207,500 3,548,250 5,610,450 (660,130) 2,425,621 3,844,959
Horizon................. 1,052,228 136,500 2,334,150 3,386,378 (729,575) 1,592,156 2,523,797
United States Internet.. 7,500,000 400,000 6,840,000 14,340,000 1,163,233 5,097,110 8,079,657
IPA..................... 12,599,081 1,226,414 20,971,679 33,570,760 (947,358) 13,352,491 21,165,628
ZoomNet................. 2,693,032 200,850 3,434,535 6,127,567 (552,298) 2,583,943 4,095,922
Palm.Net................ 1,478,324 15,310 261,801 1,740,125 (307,847) 792,208 1,255,764
IAG..................... 1,084,580 156,550 2,677,005 3,761,585 (696,890) 1,724,652 2,733,823
Midwest Internet........ 3,455,370 577,234 9,870,701 13,326,071 (940,277) 5,518,588 8,747,760
Internet Solutions...... 1,539,912 101,322 1,732,606 3,272,518 456,000 1,089,501 1,727,017
FGI..................... 2,441,725 244,173 4,175,358 6,617,083 (690,155) 2,826,627 4,480,612
Indynet................. 3,732,885 390,008 6,669,137 10,402,022 (1,108,950) 4,452,738 7,058,234
Lightspeed.............. 6,712,957 548,400 9,377,640 16,090,597 (699,710) 6,494,920 10,295,387
JPS..................... 9,987,054 995,429 17,021,836 27,008,890 (11,912,589) 15,055,823 23,865,656
TGF..................... 7,300,000 1,010,000 17,271,000 24,571,000 (2,738,222) 10,563,905 16,745,317
----------- --------- ------------ ------------ ------------ ----------- ------------
Total................... $71,816,293 7,133,200 $121,977,720 $193,794,013 $(20,675,395) $82,962,250 $131,507,158
=========== ========= ============ ============ ============ =========== ============
</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
assets not acquired, debt and other liabilities not assumed and for the
establishment of a deferred income tax liability and related asset resulting
from
F-35
<PAGE>
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
ONEMAIN.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
the transaction for purposes of determining the excess of the purchase price
over the full 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
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. Related Party Transactions
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 (7.75% at December 31, 1998) 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.
On February 4, 1999, the Company issued another promissory note to the same
individual above 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
Acquisitions. The note bears interest at the prime rate (7.75% at December 31,
1998) 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-36
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
D&E SuperNet, Inc.
We have audited the accompanying balance sheets of D&E SuperNet, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the three years in the period ended
December 31, 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 financial position of D&E SuperNet, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's working
capital deficiency and compliance with debt covenants 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 1998 financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 21, 1999
F-37
<PAGE>
D&E SUPERNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Assets
Current assets:
Cash.................................................... $ 31,020 $ 124,988
Accounts receivable..................................... 27,536 92,059
Inventory............................................... 14,058 18,484
Prepaid expenses........................................ 6,444 45,615
--------- ----------
Total current assets.................................. 79,058 281,146
Property and equipment, net.............................. 677,382 1,263,830
Deferred taxes........................................... -- 19,875
Intangible assets, net................................... 4,528 1,981,922
Other assets............................................. 6,279 13,492
--------- ----------
Total assets.......................................... $ 767,247 $3,560,265
========= ==========
Liabilities and Equity
Current liabilities:
Accounts payable--trade................................. $ 12,937 $ 76,997
Accounts payable--affiliates............................ 63,308 172,520
Accrued expenses........................................ 60,174 142,338
Unearned revenues....................................... -- 391,836
Line of credit payable to affiliate..................... 584,698 --
Current portion of long-term debt....................... -- 288,080
--------- ----------
Total current liabilities............................. 721,117 1,071,771
Long term debt........................................... -- 1,691,920
Note payable to affiliate................................ -- 200,000
Equity:
Partners' capital:
Contributed capital..................................... 244,818 --
Accumulated losses...................................... (198,688) --
--------- ----------
Total partners' capital............................... 46,130 --
--------- ----------
Stockholders' equity:
Common stock, 1,000 no par value shares authorized, 200
shares issued and outstanding.......................... -- 484,115
Retained earnings....................................... -- 112,459
--------- ----------
Total stockholders' equity............................ -- 596,574
--------- ----------
Total equity.......................................... 46,130 596,574
--------- ----------
Total liabilities and equity.......................... $ 767,247 $3,560,265
========= ==========
</TABLE>
See accompanying notes.
F-38
<PAGE>
D&E SUPERNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues............................ $617,620 $1,489,596 $3,623,740
Other revenues............................. 223,917 259,611 323,064
-------- ---------- ----------
Total revenues........................... 841,537 1,749,207 3,946,804
Costs and expenses:
Costs of access revenues................... 381,571 491,577 1,296,020
Costs of other revenues.................... 61,787 155,505 169,774
Operations and customer support............ 85,028 322,324 541,786
Sales and marketing........................ 168,912 328,185 612,753
General and administrative................. 106,667 179,377 604,457
Depreciation............................... 48,121 154,952 191,720
Amortization............................... 480 550 73,744
-------- ---------- ----------
Total costs and expenses................. 852,566 1,632,470 3,490,254
-------- ---------- ----------
(Loss) income from operations............... (11,029) 116,737 456,550
Other expenses:
Interest expense........................... (36,881) (56,941) (99,046)
Other expenses, net........................ (1,016) (13,223) (52,070)
-------- ---------- ----------
(37,897) (70,164) (151,116)
-------- ---------- ----------
(Loss) income before taxes.................. (48,926) 46,573 305,434
Income tax provision........................ 54,985
-------- ---------- ----------
Net (loss) income........................... $(48,926) $ 46,573 $ 250,449
======== ========== ==========
Pro forma income taxes (Note 2)............. -- -- 70,057
-------- ---------- ----------
Pro forma net income........................ $(48,926) $ 46,573 $ 180,392
======== ========== ==========
Net (loss) income allocated to partners'
capital.................................... $(48,926) $ 46,573 $ 137,990
======== ========== ==========
Net income allocated to stockholders'
equity..................................... $ -- $ -- $ 112,459
======== ========== ==========
</TABLE>
See accompanying notes.
F-39
<PAGE>
D&E SUPERNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Contributed (Losses) Common Retained Total
Capital Income Stock Earnings Equity
----------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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...... 299,995 -- -- -- 299,995
Net income from January
1, 1998 to September 3,
1998.................... -- 137,990 -- -- 137,990
--------- --------- -------- -------- --------
Balance at September 3,
1998..................... 544,813 (60,698) -- -- 484,115
Conversion to
corporation............. (544,813) 60,698 484,115 -- --
Net income from September
4, 1998 to December 31,
1998.................... -- -- -- 112,459 112,459
--------- --------- -------- -------- --------
Balance at December 31,
1998..................... $ -- $ -- $484,115 $112,459 $596,574
========= ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-40
<PAGE>
D&E SUPERNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
Operating activities
Net (loss) income.......................... $ (48,926) $ 46,573 $ 250,449
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities:
Depreciation and amortization............. 48,201 155,502 265,464
Loss on sale or disposal of equipment..... 1,016 13,223 52,070
Deferred taxes provision.................. -- -- (19,875)
Changes in operating assets and
liabilities after impact of acquired
businesses:
Accounts receivable..................... (20,623) 26,673 31,307
Inventory............................... (6,369) (2,881) (4,426)
Prepaid expenses........................ (13,608) 12,571 (19,936)
Other assets............................ -- (6,279) 5,632
Accounts payable--trade and affiliates.. 124,242 (87,230) 144,636
Accrued expenses........................ 11,566 48,608 82,164
Unearned revenues....................... 1,890 (1,890) (19,165)
--------- --------- -----------
Net cash provided by operating activities.. 97,389 204,870 768,320
Investing activities
Purchases of property and equipment........ (354,538) (407,958) (586,784)
Proceeds from sale of property and
equipment................................. -- 45,574 1,206
Acquisition of business.................... -- -- (1,971,356)
Other...................................... (2,828) -- --
--------- --------- -----------
Net cash used in investing activities...... (357,366) (362,384) (2,556,934)
Financing activities
Net proceeds (payments) under line of
credit payable to affiliate............... 180,000 164,698 (384,698)
Proceeds from issuance of long-term debt... -- -- 1,980,000
Deferred financing fees.................... -- -- (12,715)
Capital contributions...................... 100,000 -- 299,995
--------- --------- -----------
Net cash provided by financing activities.. 280,000 164,698 1,882,582
--------- --------- -----------
Net increase in cash....................... 20,023 7,184 93,968
Cash at beginning of year.................. 3,813 23,836 31,020
--------- --------- -----------
Cash at end of year........................ $ 23,836 $ 31,020 $ 124,988
========= ========= ===========
Supplemental cash flow information
Cash paid for interest..................... $ 34,402 $ 55,746 $ 79,146
========= ========= ===========
</TABLE>
See accompanying notes.
F-41
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
1. Organization
D&E SuperNet, Inc. (the "Company") is a regional provider of Internet access.
The Company was originally organized as general partnership (the "Partnership")
on June 22, 1995 by D&E Marketing, Inc. (50%) and SuperNet Interactive
Services, Inc. (50%) and began marketing services in July of the same year. The
partners shared equally in profits and losses.
On September 4, 1998, D&E SuperNet converted from a partnership to a
corporation. The holders of partnership interests were issued shares of common
stock, having no par value, of the Company, representing the same percentage of
equity interest in the Company as they had in the Partnership. For financial
accounting purposes, the conversion to corporate form has been treated as a
reorganization, with the assets and liabilities recorded at their historical
costs. In addition, the Company recognized a net deferred income tax liability
for temporary differences in accordance with Statement of Financial Accounting
Standard No. 109 ("Statement No. 109"), Accounting for Income Taxes, which
resulted in a one-time charge to earnings of $13,250 in 1998 (see Note 10).
The Company's targeted market is 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
Going Concern
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 is not in compliance with the Term Notes financial
covenants. Further, the Company depends on the continuing financial support of
an affiliate. Management believes that the actions presently being taken, as
described below, and the intent of the Stockholders to fund the operations will
provide the Company 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
F-42
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
agreements entered into in 1998 (see Note 7), 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 has obtained a waiver of the debt to net
worth financial covenant for the year ended December 31, 1998, which it did not
meet and has obtained an amendment revising this ratio from 3.0 to 1 to 4.0 to
1 for the three month periods ending March 31, 1999, June 30, 1999, September
30, 1999, and December 31, 1999. In addition, management believes that the
demand line of credit from an affiliate will continue to be available
throughout the next year.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
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.
Reclassifications
Certain prior year balances have been reclassified to conform to current year
presentation.
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.
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 Company 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.
F-43
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company 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.
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 consist of telecommunication expenses
inherent in the network infrastructure. Costs of access revenues also include
fees paid for lease of the Company'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. For the years
ended December 31, 1996, 1997, and 1998, advertising costs were $69,069,
$123,940, and $267,938, respectively.
Income Taxes
For tax years prior to September 4, 1998, D&E Supernet operated as a
partnership, and therefore was 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 was not subject to Federal and state corporate income taxes during
the period in which it was a partnership. The Company converted to a
corporation on September 4, 1998, and became subject to Federal and state
corporate income taxes.
For periods prior to the revocation of its partnership status, the unaudited
pro forma income tax information included in the statements of operations and
Note 10 is presented in accordance with Statement of Financial Accounting
Financial Standards No. 109 (Statement No. 109), Accounting for Income Taxes,
as if the Company had been subject to Federal and state income taxes for the
years ended December 31, 1996 and 1997 and for the period from January 1, 1998
to September 3, 1998.
F-44
<PAGE>
D&E SUPERNET, 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 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 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 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 Company's suppliers have limited resources
and production capacity. If the suppliers are unable to meet the Company's
needs as its network infrastructure grows, then delays and increased costs in
the expansion of the Company's network infrastructure could result, having an
adverse effect on operating results.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Computer equipment and software....................... $ 516,662 $1,265,832
Office equipment...................................... 357,142 357,142
--------- ----------
873,804 1,622,974
Less accumulated depreciation and amortization........ (196,422) (359,144)
--------- ----------
$ 677,382 $1,263,830
========= ==========
</TABLE>
F-45
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
4. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
------- ----------
<S> <C> <C>
Goodwill................................................ $ -- $1,991,268
Other intangibles....................................... 5,728 63,620
------- ----------
5,728 2,054,888
Less accumulated amortization........................... (1,200) (72,966)
------- ----------
$ 4,528 $1,981,922
======= ==========
</TABLE>
5. Acquisitions
On June 10, 1998, the Company 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's results of operations since June 10, 1998
are included within the December 31, 1998 statement of operations of the
Company. CVN's results of operation for the periods presented prior to the
period ended June 10, 1998 are not included in the Company's results of
operations.
The Company, on December 1, 1998, acquired substantially all of the operating
assets of Cyberia Communications, Inc. ("Cyberia"), a corporation. Cyberia's
results of operations since December 1, 1998 are included within the December
31, 1998 statement of operations of the Company. Cyberia's results of operation
for the periods presented prior to the period ended December 1, 1998 are not
included in the Company's results of operations.
The unaudited pro forma results of operations set forth below assumes the
acquisition of CVN and Cyberia 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 debt incurred for
the acquisitions. The unaudited pro forma information is provided for
information purposes only and does not purport to be indicative of the
Company's results of operations that would 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 December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues............................................ $ 3,295,347 $ 5,268,930
=========== ===========
Net (loss) income................................... $ (68,418) $ 240,475
=========== ===========
</TABLE>
The acquisitions were accounted for under the purchase method of accounting;
accordingly, assets acquired have been recorded at their estimated fair market
values at the
F-46
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
5. Acquisitions (continued)
date of acquisition. Goodwill is being amortized over its estimated economic
life of 10 years using the straight-line method.
The CVN and Cyberia purchase prices of $1,050,000 and $921,356, respectively,
have been preliminary allocated as follows:
<TABLE>
<CAPTION>
CVN Cyberia
---------- ---------
<S> <C> <C>
Accounts receivable.................................. $ 73,594 $ 22,236
Prepaid expenses..................................... 19,235 --
Property and equipment............................... 53,477 191,183
Intangible assets.................................... 50,000 10,000
Goodwill............................................. 1,128,549 862,719
Accounts payable..................................... -- (28,636)
Unearned revenues.................................... (274,855) (136,146)
---------- ---------
Total purchase price................................. $1,050,000 $ 921,356
========== =========
</TABLE>
6. Debt with Affiliated Parties
At December 31, 1997, the Company had 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 had an interest at the Wall Street Journal
published prime rate of 8.50% at December 31, 1997. Borrowings outstanding
against the line as of December 31, 1997 was $584,698.
In conjunction with the Term Note dated June 30, 1998 discussed below, the
Company retired the line of credit and created a note payable to an affiliate
in the amount of $200,000. Principal payments on the note payable to an
affiliate cannot be made until the earlier of full payment of the Term Note
dated June 30, 1998 or June 29, 2002. The note payable to an affiliate bears a
fixed interest rate of 12.5% and is subordinated to the Term Notes discussed
below.
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
---- ----------
<S> <C> <C>
Term Note dated June 30, 1998, monthly installments of
interest only through June 30, 1999 at a rate of 7.80%..... $-- $1,050,000
Term Note dated December 31, 1998, monthly installments of
interest only through June 30, 1999 at a rate of 7.80%..... -- 930,000
Note payable to an affiliate (see Note 6), monthly
installments of interest only payments at a rate of 12.5%.. -- 200,000
--- ----------
Total outstanding debt...................................... $-- $2,180,000
Less: current maturities.................................... -- 288,080
--- ----------
Total outstanding debt...................................... $-- $1,891,920
=== ==========
</TABLE>
F-47
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
7. Long-Term Debt (continued)
The interest rate on the Term Note dated June 30, 1998 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 the
note is four years with a provision for interest only payments during the first
twelve months. Beginning in the thirteenth month, the Company will pay 35 fixed
principal monthly installments of $21,875 plus related interest. The balance of
the note is due in a balloon payment on July 1, 2002.
The interest rate on the Term Note dated December 31, 1998 is fixed at 7.80%
from December 1998 through June 2000. Beginning in July 2000, the interest rate
will convert to a floating rate at the bank's commercial base rate plus 1%. The
term of the note is three and one half years with a provision for interest only
payments during the first seven months. Beginning in the eighth month, the
Company will pay 35 equal, monthly installments, with each such installment in
an amount sufficient to amortize the outstanding principal balance based on the
interest rate in effect on the Term Note on July 1, 1999. The balance of the
note is due in a balloon payment on July 1, 2002.
Principal payments on long-term debt are due as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 288,080
2000.............................................................. 593,610
2001.............................................................. 618,440
2002.............................................................. 679,870
----------
$2,180,000
==========
</TABLE>
The notes contain restrictive covenants and a cross default clause which
require the Company, 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 at the end of each fiscal quarter and a
maximum debt to net worth ratio, as defined, of 3.0 to 1. The Company has
obtained a waiver of the debt to net worth financial covenant for the year
ended December 31, 1998, which it did not meet and has obtained an amendment
revising this ratio from 3.0 to 1 to 4.0 to 1 for the three month periods ended
March 31, 1999, June 30, 1999, September 30, 1999 and December 31, 1999.
Thereafter, the Company must maintain a maximum debt to net worth ratio of 3.0
to 1.
8. Related Party Transaction
The Company has various transactions with its Partners and affiliates. These
transactions can be generally classified into the following categories:
. Access services--the Company pays D&E Telephone Company for telephone
services used to provide Internet access to its customers. During the
years ended December 31, 1996, 1997, and 1998, telephone charges paid to
D&E Telephone Company were $99,003, $87,276, and $124,184, respectively.
F-48
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
8. Related Party Transactions (continued)
. Operations and customer support services--the Company pays D&E Marketing
and SuperNet Interactive Services salaries, wages, and commissions for
providing technical, selling, and marketing services to the Company.
During the years ended December 31, 1996, 1997, and 1998, selling and
marketing expenses paid to these affiliates were $377,608, $608,852, and
$1,130,862, respectively.
. General and administrative services--D&E TDS and D&E Marketing charge the
Company for administrative support, rent, and billing services provided
to the Company. During the years ended December 31, 1996, 1997, and 1998,
total rent and billing services paid to these affiliates were $25,512,
$29,700, and $72,745, respectively.
Management believes that the overall amount of charges to the Company are
reasonable and that the accompanying financial statements reflect all of the
Company's costs of doing business.
9. Commitments
Lease Commitments
The Company leases office space and various office and computer equipment
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 expense.
Rent expense for the years ended December 31, 1996, 1997, and 1998 was $17,208,
$32,025, and $61,279, respectively.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
1999....................................................... $147,501
2000....................................................... 74,820
2001....................................................... 4,893
--------
Total minimum lease payments............................... $227,214
========
</TABLE>
10. Income Taxes
In connection with the conversion to corporate form, the Company recognized a
net deferred income tax liability for temporary differences in accordance with
Statement No. 109, which resulted in a one-time charge to earnings of $13,250
in 1998. Deferred income taxes reflect the net tax effects of temporary
differences between the amount of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
The Company's deferred tax asset as of December 31, 1998 was $19,875 related
to differences resulting from the use of different methods of depreciation and
amortization of property and equipment for financial statement and income tax
reporting purposes.
F-49
<PAGE>
D&E SUPERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
10. Income Taxes (continued)
Income tax provision for the period September 4, 1998 to December 31, 1998
was comprised of the following:
<TABLE>
<S> <C>
Current expense.................................................... $ 74,860
Deferred tax benefit............................................... (19,875)
--------
Income tax provision............................................... $ 54,985
========
</TABLE>
A reconciliation between the amount of reported income taxes and the amount
computed by multiplying the applicable statutory Federal income tax rate times
the pre-tax income for the period September 4, 1998 to December 31, 1998 was as
follows:
<TABLE>
<S> <C>
Federal income taxes at statutory rates........................... $ 56,931
State taxes....................................................... 11,080
Deferred tax benefit recognized on conversion from partnership.... (13,250)
Other............................................................. 224
--------
Income tax provision.............................................. $ 54,985
========
</TABLE>
No pro forma income tax provision or benefit is reflected for the years ended
December 31, 1996 and 1997, as the Company would have provided a full valuation
allowance against the deferred tax asset had it been a C Corporation in 1996
and then taken the benefit in 1997. The pro forma income tax provision for the
period from January 1, 1998 to September 3, 1998 has been recorded in an amount
to reflect the Company's effective tax rate for the year of 41%.
11. Pending Transaction
During 1998, the Company's stockholders entered into an agreement to 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 concurrently with the consummation of the initial public offering
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.
The related party transactions as described in Note 8 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.
F-50
<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, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the three years in the period ended
December 31, 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 financial position of SunLink, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for the
three years in the period ended December 31, 1998, 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 its
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
January 20, 1999
F-51
<PAGE>
SUNLINK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash........................................................ $ 5,799 $100,736
Accounts receivable, net of allowance for doubtful accounts
of $5,759 and $26,545 as of December 31, 1997, and 1998,
respectively............................................... 22,163 18,865
Inventory................................................... -- 7,600
Due from stockholder........................................ 8,981 --
-------- --------
Total current assets...................................... 36,943 127,201
Property and equipment, net................................. 399,632 571,003
-------- --------
Total assets.............................................. $436,575 $698,204
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................ $ 98,885 $ 87,122
Accrued expenses............................................ 7,187 18,367
Unearned revenues........................................... 70,235 172,336
Note payable................................................ 90,000 --
Note payable to stockholder................................. 12,941 123,000
Current portion of long-term debt........................... -- 44,906
-------- --------
Total current liabilities................................. 279,248 445,731
Long-term debt, net of current portion....................... -- 176,680
Stockholders' equity:
Common stock--$10 par value, 1,000 shares authorized, 205
shares issued and outstanding.............................. 2,050 2,050
Additional paid-in capital.................................. 30,145 30,145
Retained earnings........................................... 125,132 43,598
-------- --------
Total stockholders' equity................................ 157,327 75,793
-------- --------
Total liabilities and stockholders' equity................ $436,575 $698,204
======== ========
</TABLE>
See accompanying notes
F-52
<PAGE>
SUNLINK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues............................... $224,966 $786,324 $1,411,164
Other revenues................................ -- 11,913 --
-------- -------- ----------
Total revenues.............................. 224,966 798,237 1,411,164
Costs and expenses:
Costs of access revenues...................... 85,766 224,579 566,102
Costs of other revenues....................... -- 11,531 --
Operations and customer support............... 42,106 183,557 374,213
Sales and marketing........................... 37,720 50,460 102,507
General and administrative.................... 40,991 114,220 303,948
Depreciation.................................. 18,303 64,307 125,565
-------- -------- ----------
Total costs and expenses.................... 224,886 648,654 1,472,335
-------- -------- ----------
Income (loss) from operations.................. 80 149,583 (61,171)
Other expense:
Interest expense.............................. (4,664) (10,682) (20,363)
-------- -------- ----------
Net (loss) income.............................. $ (4,584) $138,901 $ (81,534)
======== ======== ==========
Unaudited Pro Forma Information:
Net (loss) income............................. $ (4,584) $138,901 $ (81,534)
Pro forma income tax expense.................. -- (46,369) 27,218
-------- -------- ----------
Pro forma net (loss) income................... $ (4,584) $ 92,532 $ (54,316)
======== ======== ==========
</TABLE>
See accompanying notes.
F-53
<PAGE>
SUNLINK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (Deficit) Equity
------ ---------- --------- -------------
<S> <C> <C> <C> <C>
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.......................... -- -- (81,534) (81,534)
------ ------- -------- --------
Balance at December 31, 1998....... $2,050 $30,145 $ 43,598 $ 75,793
====== ======= ======== ========
</TABLE>
See accompanying notes.
F-54
<PAGE>
SUNLINK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net (loss) income............................ $ (4,584) $ 138,901 $ (81,534)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation................................ 18,303 64,307 125,565
Stock based compensation.................... -- 450 --
Rent contributed by stockholder............. 1,200 -- --
Changes in operating assets and
liabilities:
Accounts receivable....................... (7,384) (14,779) 3,298
Inventory................................. -- -- (7,600)
Accounts payable.......................... 17,289 76,287 (11,763)
Accrued expenses.......................... 7,140 47 11,180
Unearned revenues......................... 18,985 51,250 102,101
Other current liabilities................. (369) -- --
--------- --------- ---------
Net cash provided by operating activities.... 50,580 316,463 141,247
Investing activities
(Issuance of) payment from note receivable
from stockholder............................ (8,981) 8,981
Purchases of property and equipment.......... (136,314) (323,720) (296,936)
--------- --------- ---------
Net cash used in investing activities........ (136,314) (332,701) (287,955)
Financing activities
Cash overdraft............................... (220) -- --
Proceeds under line of credit................ 75,000 15,000 --
Proceeds from issuance of long-term debt..... -- -- 250,000
Payments on long-term debt................... -- -- (28,414)
Repayments of line of credit................. -- -- (90,000)
Proceeds from stockholders' loans............ 2,500 12,941 123,000
Repayments of stockholders' loans............ -- (7,500) (12,941)
Proceeds from issuance of common stock....... 10,000 50 --
--------- --------- ---------
Net cash provided by financing activities.... 87,280 20,491 241,645
--------- --------- ---------
Net increase in cash......................... 1,546 4,253 94,937
Cash at beginning of year.................... -- 1,546 5,799
--------- --------- ---------
Cash at end of year.......................... $ 1,546 $ 5,799 $ 100,736
========= ========= =========
Supplemental cash flow information
Cash paid for interest....................... $ 4,664 $ 10,682 $ 20,363
========= ========= =========
</TABLE>
See accompanying notes.
F-55
<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 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 year ended
December 31, 1998. 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.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
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-56
<PAGE>
SUNLINK, INC.
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.
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 ("Statement
No. 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.
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
F-57
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies--(continued)
expense in equal amounts at the fair value of Internet access services provided
by the Company. For the years ended December 31, 1996, 1997, and 1998, the
Company recognized bartered services transactions in the amount of $8,894,
$22,136, and $30,755, respectively.
Stock Compensation
During 1997, the Company issued 5 shares of common stock to a contractor in
exchange for $50 in cash and recorded $450 of stock compensation for services
performed.
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, 1996, 1997, and 1998 advertising and promotion costs
were $28,736, $11,489, and $41,165, 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 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 certain state income taxes for each of the years ended
December 31, 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
F-58
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies--(continued)
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.
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 grows, 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.
Reclassifications
Certain prior year balances have been reclassified to conform to current year
presentation.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Computer equipment........................................... $483,196 $767,534
Furniture, fixtures, and office equipment.................... 198 9,995
Leasehold improvements....................................... -- 2,800
-------- --------
483,394 780,329
Less accumulated depreciation................................ 83,762 209,326
-------- --------
$399,632 $571,003
======== ========
</TABLE>
4. Related Party Transactions
The Company engages Amerman & Company, which is owned and operated by Company
stockholders, to perform accounting services and prepare the Company's Federal
and state tax returns. For the years ended December 31, 1996, 1997, and 1998
the amounts paid to the stockholders for accounting services were $536, $1,460,
and $24,695, respectively.
For the years ended December 31, 1997 and 1998, the Company paid a
stockholder $2,600 and $40,000, respectively, to provide technical support and
consulting services to the Company. No technical support and consulting
services were provided by the stockholder for such services for the year ended
December 31, 1996.
F-59
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
4. Related Party Transactions--(continued)
In addition, the Company occupies office space in a building owned by a
Company stockholder. For the year ended December 31, 1996, no rent payments
were made to this stockholder, however, rent expense and additional paid-in
capital of $1,200 was recognized. For the years ended December 31, 1997 and
1998, the amounts paid for rent were $4,000 and $22,500, respectively.
In December 1998, a stockholder made an unsecured $123,000 loan to the
Company. The loan is due in December 28, 1999 and bears an interest rate of
8.5%.
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
interest at the bank's prime rate plus .75% at December 31, 1997. The line is
secured by and is personally guaranteed by a stockholder of the Company.
Borrowings of $90,000 were outstanding against the line at December 31, 1997.
The line of credit was paid off and terminated by the stockholders during
December, 1998.
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
---- --------
<S> <C> <C>
Note payable to a bank, monthly installments of $5,027, including
interest at 7.65%. The loan is secured by Company assets and
personally guaranteed by the stockholders of the Company........ $ -- $221,586
Less current portion............................................. -- 44,906
---- --------
$ -- $176,680
==== ========
</TABLE>
The Company incurred interest related to the long-term debt of $15,422 for
the year ended December 31, 1998.
Principal payments on long-term debt are due as follows: 1999--$44,906;
2000--$48,465; 2001--$52,305; 2002--$56,450; 2003--$19,460.
7. 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 8) the
Company's status as an S Corporation under the Code will automatically
terminate and Federal and state
F-60
<PAGE>
SUNLINK, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
7. Income Tax--(continued)
corporate income tax rates will apply. Based upon the cumulative temporary
differences, the Company would have recognized a deferred Federal and state
income tax liability of $11,223 as of December 31, 1998, had the termination of
its election to be treated as an S Corporation occurred on that date.
The pro forma provision for income taxes is reflected on the statement of
operations for each of the three years in the period ended December 31, 1998,
as if the Company had been a C Corporation. No pro forma income tax provision
or benefit is reflected for 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.
8. Pending Transaction
During 1998, the Company's stockholders 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 concurrently with the consummation of the initial
public offering 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. 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 as described in Note 4 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.
F-61
<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, 1997 and 1998 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 years ended December 31, 1997 and
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 financial position of LebaNet, Inc. at December 31,
1997 and 1998 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 years
ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
January 15, 1999
F-62
<PAGE>
LEBANET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
Assets
<S> <C> <C>
Current assets:
Cash........................................................ $ 43,833 $ 31,170
Accounts receivable, net of allowance for doubtful accounts
of $0 in 1997 and $3,337 in 1998........................... 9,495 4,758
Prepaid expenses............................................ -- 6,260
-------- --------
Total current assets...................................... 53,328 42,188
Property and equipment, net.................................. 61,921 66,760
-------- --------
Total assets.............................................. $115,249 $108,948
======== ========
<CAPTION>
Liabilities and Stockholder's Equity
<S> <C> <C>
Current liabilities:
Accounts payable............................................ $ 15,754 $ 2,047
Accrued expenses............................................ 1,520 643
Current portion of unearned revenues........................ 7,959 3,383
Due to stockholder.......................................... 40,812 --
-------- --------
Total current liabilities................................. 66,045 6,073
Stockholder's equity:
Common stock -- $1 stated value, 10,000 shares authorized;
100 shares issued and outstanding.......................... 100 100
Additional paid-in capital.................................. 600 600
Retained earnings........................................... 48,504 102,175
-------- --------
Total stockholder's equity................................ 49,204 102,875
-------- --------
Total liabilities and stockholder's equity................ $115,249 $108,948
======== ========
</TABLE>
See accompanying notes.
F-63
<PAGE>
LEBANET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
March 1,
1996 Year ended
(inception) to December 31,
December 31, ------------------
1996 1997 1998
-------------- -------- --------
<S> <C> <C> <C>
Revenues:
Access revenues............................. $149,299 $179,764 $217,679
Other revenues.............................. -- 19,807 80,430
-------- -------- --------
Total Revenues............................ 149,299 199,571 298,109
Costs and expenses:
Costs of access revenues.................... 55,546 100,588 78,417
Costs of other revenues..................... -- 7,198 31,250
Operations and customer support............. 11,222 19,928 18,596
Sales and marketing......................... 623 1,949 448
General and administrative.................. 16,433 16,310 30,254
Depreciation................................ 12,758 18,670 22,743
-------- -------- --------
Total costs and expenses.................. 96,582 164,643 181,708
-------- -------- --------
Income from operations....................... 52,717 34,928 116,401
Other expense:
Interest expense............................ -- (15) --
-------- -------- --------
Net income................................... $ 52,717 $ 34,913 $116,401
======== ======== ========
Unaudited Pro Forma Information:
Net income.................................. $ 52,717 $ 34,913 $116,401
Pro forma provision for income taxes........ 21,417 14,184 47,264
-------- -------- --------
Pro forma net income (See Note 2)........... $ 31,300 $ 20,729 $ 69,137
======== ======== ========
</TABLE>
See accompanying notes.
F-64
<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.......................... -- -- 116,401 116,401
Distributions....................... -- -- (62,730) (62,730)
---- ---- -------- --------
Balance at December 31, 1998......... $100 $600 $102,175 $102,875
==== ==== ======== ========
</TABLE>
See accompanying notes.
F-65
<PAGE>
LEBANET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Year ended
March1, 1996 December 31,
(inception) to -------------------
December 31, 1996 1997 1998
----------------- -------- ---------
<S> <C> <C> <C>
Operating activities
Net income.............................. $ 52,717 $ 34,913 $ 116,401
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 12,758 18,670 22,743
Bad debt provision..................... -- -- 3,337
Changes in operating assets and
liabilities:
Accounts receivable.................. (5,784) (3,711) 1,400
Prepaid expenses..................... -- -- (6,260)
Accounts payable..................... 1,088 14,666 (13,707)
Accrued expenses..................... 1,228 292 (877)
Unearned revenues.................... 7,496 463 (4,576)
-------- -------- ---------
Net cash provided by operating
activities............................. 69,503 65,293 118,461
Investing activities
Purchases of property and equipment..... (22,279) (29,558) (27,582)
-------- -------- ---------
Net cash used in investing activities... (22,279) (29,558) (27,582)
Financing activities
Distributions to stockholder............ (28,701) (10,425) (62,730)
Repayment of stockholder loan........... -- -- (40,812)
-------- -------- ---------
Net cash used in financing activities... (28,701) (10,425) (103,542)
-------- -------- ---------
Net increase (decrease) in cash......... 18,523 25,310 (12,663)
Cash at beginning of period............. -- 18,523 43,833
-------- -------- ---------
Cash at end of period................... $ 18,523 $ 43,833 $ 31,170
======== ======== =========
Non-cash transactions:
Issuance of common stock and stockholder
loan in exchange for property,
equipment and software................. $ 40,812 $ -- $ --
======== ======== =========
</TABLE>
See accompanying notes.
F-66
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS
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 on
February 21, 1996 and began marketing services on 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.
F-67
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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.
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 years ended
December 31, 1997 and 1998, the Company expensed $623, $1,502, and $448
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 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 and for each of the two years ended
December 31, 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
F-68
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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 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.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- --------
<S> <C> <C>
Computer equipment and software............................... $93,349 $120,931
Less accumulated depreciation................................. 31,428 54,171
------- --------
$61,921 $ 66,760
======= ========
</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 years ended
December 31, 1997 and 1998, the Company recognized consulting fee revenue of
$2,600 and $40,000, respectively.
F-69
<PAGE>
LEBANET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
4. Related Party Transactions (continued)
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 years
ended December 31, 1997 and 1998, the Company recorded $5,000, $3,000, and
$7,200, 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 mainly
from the difference between its book and tax depreciation methods, the Company
would have recognized a deferred Federal and state income tax liability of
26,279 as of December 31, 1998, had the termination of its election to be
treated as an S Corporation occurred on that date.
The pro forma provision for income taxes is reflected on the statement of
operations for the period from March 1, 1996 (inception) to December 31, 1996
and for each of the two years in the period ended December 31, 1998, as if the
Company had been a C corporation.
6. Pending Transaction
During 1998, the Company's stockholder 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 concurrently with the consummation of the initial public offering
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.
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-70
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SouthWind Internet Access, Inc.
We have audited the accompanying balance sheet of SouthWind Internet Access,
Inc. as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year 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 SouthWind Internet Access,
Inc. at December 31, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Wichita, Kansas
January 25, 1999,
except for Note 10, as to which the date is
February 11, 1999
F-71
<PAGE>
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
SouthWind Internet Access, Inc.
We have audited the accompanying balance sheet of SouthWind Internet Access,
Inc. as of December 31, 1997, and the related statements of operations, changes
in stockholders' equity and cash flows 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 SouthWind Internet Access,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1997, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton, LLP
Wichita, Kansas
October 23, 1998
F-72
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 74,720 $ 20,070
Accounts receivable, net of allowance for doubtful accounts
of $12,568 and $6,020 at December 31, 1997 and 1998,
respectively............................................... 23,346 40,600
Prepaid expenses............................................ 6,139 10,524
Other current assets........................................ -- 395
-------- --------
Total current assets...................................... 104,205 71,589
Property and equipment, net.................................. 504,552 545,289
Intangible assets, net....................................... 579 2,781
-------- --------
Total assets.............................................. $609,336 $619,659
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 608 $ 16,427
Accrued expenses............................................ 24,147 36,055
Unearned revenues........................................... 47,458 65,919
Current maturities of long-term debt........................ 68,590 13,091
Current maturities of capital lease obligations............. 260 --
-------- --------
Total current liabilities................................. 141,063 131,492
Long-term debt, net of current maturities.................... 70,433 23,673
Stockholders' equity:
Common stock, no par value, 2,000 shares authorized, 1,000
shares issued and outstanding.............................. 45,000 45,000
Retained earnings........................................... 352,840 419,494
-------- --------
Total stockholders' equity................................ 397,840 464,494
-------- --------
Total liabilities and stockholders' equity................ $609,336 $619,659
======== ========
</TABLE>
See accompanying notes.
F-73
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues.............................. $727,383 $1,317,530 $2,032,310
Other revenues............................... 109,204 120,318 138,094
-------- ---------- ----------
Total revenues............................. 836,587 1,437,848 2,170,404
Costs and expenses:
Costs of access revenues..................... 234,746 352,193 637,071
Costs of other revenues...................... 7,143 12,605 71,523
Operations and customer support.............. 169,251 302,674 437,890
Sales and marketing.......................... 36,499 59,630 83,200
General and administrative................... 137,677 230,065 450,652
Depreciation and amortization................ 64,075 115,495 160,271
-------- ---------- ----------
Total costs and expenses................... 649,391 1,072,662 1,840,607
-------- ---------- ----------
Income from operations........................ 187,196 365,186 329,797
Other income (expense):
Interest income.............................. 1,670 5,464 623
Interest expense............................. (13,262) (11,665) (10,523)
Other........................................ (3) -- 5,556
-------- ---------- ----------
Net income.................................... $175,601 $ 358,985 $ 325,453
======== ========== ==========
Unaudited pro forma information:
Net income................................... $175,601 $ 358,985 $ 325,453
Pro forma income tax provision............... 58,586 138,327 126,750
-------- ---------- ----------
Pro forma net income......................... $117,015 $ 220,658 $ 198,703
======== ========== ==========
</TABLE>
See accompanying notes.
F-74
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------
Retained
Earnings Total
(Accumulated Stockholders'
Shares Amount Deficit) Equity
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
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.......................... -- -- 325,453 325,453
Distributions to stockholders....... -- -- (258,799) (258,799)
----- ------- --------- ---------
Balance at December 31, 1998......... 1,000 $45,000 $ 419,494 $ 464,494
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-75
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income................................... $ 175,601 $ 358,985 $ 325,453
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 64,075 115,495 160,271
Provision for doubtful accounts............. -- 12,568 17,828
Gain on disposal of property and equip-
ment....................................... -- -- (3,385)
Other....................................... (540) -- --
Changes in operating assets and liabili-
ties:
Accounts receivable....................... (19,830) 10 (35,082)
Prepaid expenses.......................... -- (6,139) (4,385)
Other current assets...................... -- -- (395)
Accounts payable.......................... (8,206) (10,292) 15,819
Accrued expenses.......................... 5,220 10,366 11,908
Unearned revenues......................... 18,641 18,568 18,461
--------- --------- ---------
Net cash provided by operating activities.... 234,961 499,561 506,493
Investing activities:
Purchases of property and equipment.......... (271,563) (276,081) (204,857)
Proceeds from disposal of property and
equipment................................... -- -- 7,234
Purchase of intangible assets................ -- -- (2,202)
--------- --------- ---------
Net cash used in investing activities........ (271,563) (276,081) (199,825)
Financing activities:
Proceeds from issuance of long-term debt..... 110,000 10,000 --
Principal payments of long-term debt......... (28,897) (37,855) (102,259)
Payments on obligations under capital
leases...................................... (3,182) (348) (260)
Distributions to stockholders................ -- (168,000) (258,799)
--------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 77,921 (196,203) (361,318)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 41,319 27,277 (54,650)
Cash and cash equivalents at beginning of
period...................................... 6,124 47,443 74,720
--------- --------- ---------
Cash and cash equivalents at end of period... $ 47,443 $ 74,720 $ 20,070
========= ========= =========
Supplemental cash flow information:
Cash paid for interest....................... $ 10,643 $ 12,406 $ 10,523
========= ========= =========
</TABLE>
See accompanying notes.
F-76
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
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 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. 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.
Reclassifications
Certain balances in the 1996 and 1997 financial statements have been
reclassified to conform to the 1998 presentation.
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.
F-77
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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 (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, 1996, 1997, and 1998.
Revenue Recognition
The Company recognizes Internet access revenue when the services are
provided. The Company offers contracts for Internet access that are generally
paid 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. Revenue and corresponding advertising expense in the
amount of $62,053 was recorded during the year ended December 31, 1998 relating
to these non-monetary transactions. Similar non-monetary transactions were not
significant in 1997 and 1996. The Company values these non-monetary
transactions based upon the fair value of the internet access services
provided.
Cost 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, 1996, 1997, and 1998, the Company expensed $9,201,
$4,583 and $67,128, respectively, as advertising costs. As noted above, $62,053
of costs recorded in 1998 related to non-monetary transactions.
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 and state corporate income tax during
the period for which it was an S Corporation.
F-78
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
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 6 is presented in accordance with Statement of Financial
Accounting Standards (SFAS) 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, 1996, 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.
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.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
<S> <C> <C>
Computer equipment........................................... $666,605 $795,190
Furniture, fixtures, and office equipment.................... 12,251 68,240
Leasehold improvements....................................... 26,477 35,098
-------- --------
705,333 898,528
Less accumulated depreciation and amortization............... 200,781 353,239
-------- --------
$504,552 $545,289
======== ========
</TABLE>
F-79
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
4. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
-------- -------
<S> <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.............. $ 24,848 $ --
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.............. 7,421 --
Note payable to the City of Halstead, Kansas in monthly
installments of $271 at 6.00%, due August 2002........... 12,980 --
Note payable to the City of Hesston, Kansas in monthly
installments of $308 at 6.00%, due November 2001......... 12,705 --
Note payable to the City of Marion, Kansas in monthly
installments of $145 at 6.00%, due April 2002,
collateralized by computer and communications
equipment................................................ 6,513 5,245
Note payable to the City of Hillsboro, Kansas in monthly
installments of $193 at 6.00% due October 2002,
collateralized by computer and communications
equipment................................................ 10,000 7,927
Note payable to the City of Peabody, Kansas in monthly
installments of $182 at 6.00%, due July 2002,
collateralized by computer and communications
equipment................................................ 7,500 7,023
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................................................ 57,056 16,569
-------- -------
139,023 36,764
Less current portion...................................... 68,590 13,091
-------- -------
$ 70,433 $23,673
======== =======
</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.
As of December 31, 1998, principal payments on long-term debt are due as
follows: 1999--$13,091; 2000--$11,303; 2001--$8,674; 2002--$3,696.
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 expenses. Rent expense for the years ended
December 1996, 1997, and 1998, was $12,849,
F-80
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
5. Lease Commitments (continued)
$26,011, and $58,437, respectively. In December 1998, the Company entered into
another lease agreement for additional office space.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
1999............................................................ $ 72,688
2000............................................................ 75,443
2001............................................................ 75,443
2002............................................................ 50,296
--------
Total minimum lease payments.................................... $273,870
========
</TABLE>
In December 1998, the Company entered into another lease agreement for
additional office space. This agreement provides that costs of remodeling the
space up to $25,500 will be paid by the lessor and billed to the Company as
additional rent, including interest at 9%, over the lease term.
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 9), 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 and state income tax
liability of $21,430 as of December 31, 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 Company's 1997 taxable income. In addition,
beginning in 1998, the Company began making distributions to stockholders on a
monthly basis equal to approximately 50% of the Company's monthly net income or
$190,524 for the year ended December 31, 1998.
8. Retirement Plan
Effective July 1, 1998, the Company established a Simple Individual
Retirement Account (IRA) Plan. Full-time and part-time employees are eligible
to participate after 90 days of employment and one year of employment,
respectively. Each year, participants may contribute up to $6,000 of their
annual pre-tax compensation, subject to annual changes
F-81
<PAGE>
SOUTHWIND INTERNET ACCESS, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
8. Retirement Plan (Continued)
based on the Internal Revenue Code. The Company makes a matching contribution
from 1% to 3% of each participant's salary. Total employer contributions during
1998 were $10,862.
9. Pending Transaction
During 1998, the Company's stockholders 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 concurrently with the consummation of the initial
public offering 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.
10. Line of Credit--Subsequent Event
Effective February 11, 1999, the Company entered into a short-term line of
credit agreement which provides for borrowings up to $67,000. In addition, the
Company has entered into commitments to purchase computer equipment of
approximately $65,000.
F-82
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Horizon Internet Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Horizon
Internet Technologies, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 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 Horizon Internet
Technologies, Inc. at December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
January 29, 1999
F-83
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts $1,802 and $27,766 at December 31, 1997 and
1998, respectively....................................... 9,075 62,572
Other current assets...................................... 928 2,088
Investment in MoCom....................................... (1,176) --
-------- --------
Total current assets.................................... 8,827 64,660
Property and equipment, net................................ 165,262 335,290
Intangibles, net........................................... -- 150,614
Other assets............................................... 3,755 7,562
-------- --------
Total assets............................................ $177,844 $558,126
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Notes payable............................................. $ 21,260 $275,000
Notes payable to stockholder.............................. 48,413 52,066
Accounts payable.......................................... 35,308 15,273
Accrued expenses.......................................... 1,294 16,781
Excess of outstanding checks over bank balance............ 17,065 50,871
Unearned revenues......................................... 3,937 12,594
Current portion of long-term debt......................... 51,204 45,120
Current portion of capital leases payable................. 8,182 24,094
-------- --------
Total current liabilities............................... 186,663 491,799
Long-term debt, net of current portion..................... 25,185 58,901
Capital lease obligations, net of current portion.......... 15,482 23,684
Stockholders' equity (deficit):
Common stock; $1 par value, 100,000 authorized, 3000
shares issued and outstanding............................ 3,000 3,000
Additional paid-in capital................................ 19,065 19,065
Accumulated deficit....................................... (71,551) (38,323)
-------- --------
Total stockholders' equity (deficit).................... (49,486) (16,258)
-------- --------
Total liabilities and stockholders' equity.............. $177,844 $558,126
======== ========
</TABLE>
See accompanying notes.
F-84
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues................................ $128,280 $376,357 $1,099,777
Other revenues................................. 20,406 58,258 61,410
-------- -------- ----------
Total revenues............................... 148,686 434,615 1,161,187
Cost and expenses:
Cost of access revenues........................ 60,423 160,225 370,567
Cost of other revenues......................... 16,034 42,564 50,017
Operations and customer support................ 2,563 7,782 48,916
Sales and marketing............................ 1,737 44,684 166,582
General and administrative..................... 57,304 204,489 390,244
Equity in losses of MoCom...................... -- 2,176 5,501
Amortization................................... 672 671 4,345
Depreciation................................... 9,602 25,093 66,611
-------- -------- ----------
Total cost and expenses...................... 148,335 487,684 1,102,783
-------- -------- ----------
Income (loss) from operations................... 351 (53,069) 58,404
Other income (expense):
Gain on disposal of property and equipment..... -- -- 7,458
Interest expense............................... (1,299) (3,785) (32,634)
-------- -------- ----------
Net (loss) income............................... $ (948) $(56,854) $ 33,228
======== ======== ==========
</TABLE>
See accompanying notes.
F-85
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
------------- Paid In (Accumulated Equity
Shares Amount Capital Deficit) (Deficit)
------ ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995...................... 3,000 $3,000 $19,000 $(13,749) $ 8,251
Net 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................ -- -- -- 33,228 33,228
----- ------ ------- -------- --------
Balance at December 31,
1998...................... 3,000 $3,000 $19,065 $(38,323) $(16,258)
===== ====== ======= ======== ========
</TABLE>
See accompanying notes.
F-86
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net (loss) income............................. $ (948) $ (56,854) $ 33,228
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Gain on disposal............................. -- -- (7,458)
Depreciation and amortization................ 10,274 25,764 70,956
Provision for doubtful accounts.............. -- -- 25,964
Changes in operating assets and liabilities:
Accounts receivable........................ (9,092) 443 (75,596)
Other current assets....................... (7,260) 6,332 (395)
Equity in loss of MoCom.................... -- 2,176 (5,501)
Other assets............................... (623) 230 (3,978)
Accounts payable........................... (8,231) 30,712 (20,035)
Accrued expenses........................... 1,188 106 (24,121)
Excess of outstanding checks over bank
balance................................... 8,075 8,990 37,650
Unearned revenues.......................... 447 3,437 8,657
-------- --------- ---------
Net cash (used in) provided by operating
activities................................... (6,170) 21,336 39,371
Investing activities
Proceeds from sale on property and equipment.. -- -- 10,750
Purchases of property and equipment........... (41,279) (108,138) (163,107)
Acquisition of business, net of cash.......... -- (1,000) (124,557)
-------- --------- ---------
Net cash used in investing activities......... (41,279) (109,138) (276,914)
Financing activities
Principal payments on capital lease........... -- -- (23,030)
Proceeds from issuance debt................... 43,091 87,801 304,120
Principal payments on debt.................... -- -- (43,547)
Proceeds from sale of stock and capital
contributions................................ 64 1 --
-------- --------- ---------
Net cash provided by financing activities..... 43,155 87,802 237,543
-------- --------- ---------
Net decrease in cash and cash equivalents..... (4,294) -- --
Cash and cash equivalents at beginning of
year......................................... 4,294 -- --
-------- --------- ---------
Cash and cash equivalents at end of year...... $ -- $ -- $ --
======== ========= =========
Supplemental cash flow information
Cash paid for interest........................ $ 123 $ 2,861 $ 27,090
======== ========= =========
Capital lease obligation incurred............. $ -- $ 23,664 $ 47,144
======== ========= =========
</TABLE>
See accompanying notes.
F-87
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997 and 1998
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
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, MoCom Corporation (see Note 3.). All significant
intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation.
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.
F-88
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED 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 three
to five years.
Intangibles
The company capitalizes a portion of the purchase price paid to acquire
customer bases from Internet service providers ("ISPs"). Amortization is
provided using straight line method over five years commencing when the
customer base is received. Accumulated amortization of intangible cost was
$1,490 and $5,835 at December 31, 1997 and 1998, respectively.
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, 1997 and 1998.
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, 1996, 1997 and 1998, the Company expensed $1,737,
$7,531 and $21,144, respectively, as advertising costs.
Income Taxes
Historically, the Company had 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
F-89
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Subchapter S provisions of the Code, the stockholders include the Company's
corporate income or loss 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.
If the Company had been subject to federal and certain state income taxes for
each of the three years and the period ended December 31, 1998, the Company
would have been in a net deferred tax asset position which would have been
fully offset by a valuation allowance. Any tax benefit or provision for those
years also would have been fully offset by changes in the deferred tax asset
valuation allowance. Therefore, unaudited pro-forma income tax information is
not 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.
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.
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.
3. Acquisition of MoCom
During 1997, the Company purchased 650 shares, or 32.5%, of the stock of
MoCom. On November 2, 1998, the Company acquired the remaining interest from
four shareholders for $124,557, net of cash. MoCom, which began operations in
October 1997, is a regional provider of Internet access in the Missouri area.
MoCom was accounted for using the equity
F-90
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
3. Acquisition of MoCom (continued)
method of accounting through November 2, 1998. Subsequently, the financial
statements of MoCom have been accounted for on a consolidated basis with the
Company. The acquisition has been accounted for using the purchase method and,
accordingly, assets acquired and liabilities assumed have been recorded at
their estimated fair values as of November 2, 1998.
The unaudited proforma results of operations set forth below assumes the
acquisition of MoCom had occurred at the beginning of the years presented.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1997 1998
----------- ------------
<S> <C> <C>
Revenues............................................. $ 437,472 $ 1,241,425
========== ============
Net loss............................................. $ (98,759) $ (9,427)
========== ============
4. Property and Equipment
Property and equipment consisted of the following:
<CAPTION>
December 31,
------------------------
1997 1998
----------- ------------
<S> <C> <C>
Computer equipment................................... $ 191,749 $ 398,859
Furniture, fixtures, and office equipment............ 8,872 25,905
---------- ------------
200,621 424,764
Less accumulated depreciation........................ (35,359) (89,474)
---------- ------------
$ 165,262 $ 335,290
========== ============
</TABLE>
5. Notes Payable
The Company has a short-term line of credit with a bank allowing for
borrowings of up to $75,000 subject to a borrowing base that is calculated
based upon defined levels of accounts receivable and equipment. Borrowings
against the line of credit bear interest at 9.75% at December 31, 1998. The
line is secured by the assets of, and is personally guaranteed by, the
President and the Vice President of the Company. At December 31, 1998,
borrowings under this line of credit were $75,000. Notes payable also includes
$200,000 of unsecured notes payable to the bank with interest rates at 8.5% to
9.25%.
6. Related Party Transactions
The Company purchased computer equipment from, and paid sales commissions to,
a related party for the years ended December 31, 1997 and 1998, in the amounts
of $23,741 and $37,505, respectively.
The Company had a dealer incentive agreement with a related party for the
years ended December 31, 1997 and 1998. A twenty-five percent commission was
paid on access revenues generated by the related party. Commissions paid under
this agreement for the years ended December 31, 1997 and 1998 totaled $20,914
and $53,559, respectively.
F-91
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
7. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
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 $ 27,025
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......................... -- 76,996
-------- --------
76,389 104,021
Less current portion................................... (51,204) (45,120)
-------- --------
$ 25,185 $ 58,901
======== ========
</TABLE>
Principal payments on long-term debt are due as follows: 1999--$45,120;
2000--$43,873; and 2001--$15,028.
8. 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, 1997 and 1998 was $1,562,
$7,732 and $36,627, respectively.
The Company leases certain computer and office equipment under an agreement
which has been accounted for as a capital lease. The related equipment had a
cost of $26,000 and $73,143 as of December 31, 1997 and 1998, and accumulated
amortization of $2,336 and $16,579 as of December 31, 1997 and 1998. The
agreements require monthly payments of $2,537 and expire during 2001.
F-92
<PAGE>
HORIZON INTERNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
8. 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, 1998
-----------------
Operating Capital
--------- -------
<S> <C> <C>
1999...................................................... $15,892 $30,448
2000...................................................... 9,773 25,168
2001...................................................... -- 287
------- -------
Total minimum lease payments............................ $25,665 55,903
=======
Less amounts representing interest........................ (8,125)
-------
Present value of minimum lease payments................... $47,778
=======
</TABLE>
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 benefit and asset of $8,525
as of December 31, 1998.
10. Pending Transaction
During 1998, the Company's stockholders 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 concurrently with the consummation of the initial
public offering 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 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.
F-93
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of
United States Internet, Inc.
We have audited the accompanying balance sheet of United States Internet,
Inc. as of December 31, 1997, and the related statements of operations,
stockholders' deficiency and cash flows for each of the years in the two 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, 1997, and the results of its operations and its cash flows for
each of the years in the two year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Coulter & Justus, P.C.
Knoxville, Tennessee
November 4, 1998
F-94
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
United States Internet, Inc.
We have audited the accompanying balance sheet of United States Internet,
Inc. as of December 31, 1998, and the related statements of operations,
stockholders' deficit and cash flows for the year 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 audits.
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 United States Internet, Inc.
at December 31, 1998, and the results of its operations and its cash flows for
the year then ended 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 its
ability to continue as a going concern. Management's plans as to these matters
are also described in Note 2. The 1998 financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 26, 1999
F-95
<PAGE>
UNITED STATES INTERNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------
1997 1998
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 198,159 $ 274,271
Accounts receivable, net of allowance for doubtful
accounts of $323,940, and $520,497 at December 31,
1997 and 1998, respectively........................ 200,410 706,342
Inventories......................................... 19,460 60,069
Prepaid expenses.................................... 67,021 172,066
---------- ------------
Total current assets.............................. 485,050 1,212,748
Property and equipment, net.......................... 1,425,840 3,311,853
Intangible assets, net............................... 307,023 4,316,530
Other assets......................................... 10,424 14,139
---------- ------------
Total assets......................................... $2,228,337 $ 8,855,270
========== ============
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable.................................... $ 610,322 $ 870,583
Accrued expenses.................................... 132,758 337,173
Unearned revenues................................... 442,192 586,450
Current portion of long-term debt................... 42,116 976,583
Current portion of capital lease obligations........ 364,808 682,654
Current portion of stockholder notes payable........ 881,708 145,418
---------- ------------
Total current liabilities......................... 2,473,904 3,598,861
Stock appreciation rights liability.................. 1,763,357 5,104,035
Long-term debt, net of current portion............... 327,184 2,520,186
Capital lease obligations, net of current portion.... 370,185 479,243
Stockholder notes payable, net of current portion.... 76,441 179,029
Other liabilities.................................... 16,500 --
---------- ------------
Total liabilities................................. 5,027,571 11,881,354
Stockholders' deficit:
Common stock, no par value, authorized 5,000,000
shares, issued
1,449,375 and 1,898,137 shares, at December 31,
1997 and 1998, respectively........................ 2,600,351 7,448,105
Accumulated deficit................................. (5,399,585) (10,474,189)
---------- ------------
Total stockholders' deficit....................... (2,799,234) (3,026,084)
---------- ------------
Total liabilities and stockholders' deficit....... $2,228,337 $ 8,855,270
========== ============
</TABLE>
See accompanying notes.
F-96
<PAGE>
UNITED STATES INTERNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Access revenues......................... $ 2,140,140 $3,818,961 $ 6,011,020
Other revenues.......................... 366,592 354,842 503,632
----------- ---------- -----------
Total revenues........................ 2,506,732 4,173,803 6,514,652
Costs and expenses:
Cost of access revenues................. 771,143 1,612,430 3,051,699
Cost of other revenues.................. 160,517 386,798 123,110
Operations and customer support......... 786,378 886,285 1,174,588
Sales and marketing..................... 743,880 548,011 951,393
General and administrative.............. 1,090,916 1,106,803 1,457,462
Stock appreciation expense (benefit).... 581,378 (598,861) 3,340,678
Amortization............................ 23,492 132,612 477,952
Depreciation, including depreciation on
assets held under capital leases....... 199,943 326,131 587,551
----------- ---------- -----------
Total costs and expenses.............. 4,357,647 4,400,209 11,164,433
----------- ---------- -----------
Loss from operations..................... (1,850,915) (226,406) (4,649,781)
Other income (expense):
Interest income......................... 6,681 5,983 28,797
Interest expense........................ (146,148) (268,869) (311,946)
Miscellaneous........................... 15,239 32,997 (141,674)
----------- ---------- -----------
Net other expense........................ (124,228) (229,889) (424,823)
----------- ---------- -----------
Net loss................................. $(1,975,143) $ (456,295) $(5,074,604)
=========== ========== ===========
</TABLE>
See accompanying notes.
F-97
<PAGE>
UNITED STATES INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Total
Common Accumulated Stockholders'
Stock Deficit Deficit
---------- ------------ -------------
<S> <C> <C> <C>
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............................... -- (5,074,604) (5,074,604)
Issuance of common stock............... 4,607,049 -- 4,607,049
Stock warrants issued.................. 240,705 -- 240,705
---------- ------------ -----------
Balance at December 31, 1998............ $7,448,105 $(10,474,189) $(3,026,084)
========== ============ ===========
</TABLE>
See accompanying notes.
F-98
<PAGE>
UNITED STATES INTERNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1996 1997 1998
----------- --------- -----------
<S> <C> <C> <C>
Operating activities
Net loss................................. $(1,975,143) $(456,295) $(5,074,604)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 277,448 549,315 1,065,503
Provision for doubtful accounts.......... 106,762 280,810 334,455
Amortization of debt discount............ -- -- 64,033
Stock appreciation expense (benefit)..... 581,378 (598,861) 3,340,678
Debt conversion expense.................. -- -- 108,915
Employee stock compensation expense...... -- -- 60,000
(Gain) loss on sale or disposal of
equipment............................... (6,971) (26,158) 39,117
Changes in operating assets and
liabilities, net of effects from
purchase of businesses:
Accounts receivable................... (172,736) (279,644) (609,199)
Inventory............................. (21,019) 14,168 (40,609)
Prepaid expenses...................... (14,694) (16,774) (91,211)
Other assets.......................... (10,995) 908 2,828
Accounts payable...................... 77,588 80,081 (94,952)
Accrued expenses and other
liabilities.......................... 95,039 33,640 151,208
Unearned revenues..................... 137,580 202,827 102,445
Other liabilities..................... -- -- (16,500)
----------- --------- -----------
Net cash used in operating activities.... (925,763) (215,983) (657,893)
Investing activities
Purchases of property and equipment...... (883,193) (184,636) (1,521,202)
Proceeds from sale of property and
equipment............................... 463,273 142,697 --
Business acquisitions, net of cash
acquired................................ -- -- (168,988)
Purchase of customer lists............... (116,992) (43,259) (90,002)
----------- --------- -----------
Net cash used in investing activities.... (536,912) (85,198) (1,780,192)
Financing activities
Net proceeds under line of credit........ 135,000 -- --
Proceeds from issuance of long-term
debt.................................... 1,199,018 66,700 3,132,760
Principal payments on long-term debt..... (14,986) (33,307) (76,030)
Payments on obligations under capital
leases.................................. (42,675) (232,033) (464,275)
Proceeds from issuance of stockholder
notes................................... -- -- 35,000
Principal payments of stockholder notes.. -- -- (230,185)
Net proceeds from issuance of common
stock................................... 259,685 533,773 116,927
----------- --------- -----------
Net cash provided by financing
activities.............................. 1,536,042 335,133 2,514,197
----------- --------- -----------
Net increase in cash and cash
equivalents............................. 73,367 33,952 76,112
Cash and cash equivalents at beginning of
year.................................... 90,840 164,207 198,159
----------- --------- -----------
Cash and cash equivalents at end of
year.................................... $ 164,207 $ 198,159 $ 274,271
=========== ========= ===========
Supplemental cash flow information
Cash paid for interest................... $ 62,731 $ 210,795 $ 247,913
=========== ========= ===========
Capital lease obligations incurred....... $ 509,893 $ 405,131 $ 739,688
=========== ========= ===========
Stock issued for customer base........... $ 140,774 $ -- $ 61,435
=========== ========= ===========
Stock issued in business acquisition..... $ -- $ -- $ 3,832,473
=========== ========= ===========
Conversion of long-term debt to stock.... $ 32,325 $ 418,054 $ 430,140
=========== ========= ===========
Stock purchase warrants issued........... $ 88,179 $ 13,156 $ 240,705
=========== ========= ===========
Debt issued for customer base............ $ -- $ 169,300 $ --
=========== ========= ===========
</TABLE>
See accompanying notes.
F-99
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
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 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 operating losses for the years ended
December 31, 1996, 1997 and 1998. Management believes that actions presently
being taken, as described below, and the remaining facility with Ascend
Communications 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
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.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
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 may differ from these estimates and such differences
could be material.
F-100
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
2. Summary of Significant Accounting Policies (continued)
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.
Inventories
Inventories consists of purchased goods 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, 1996, 1997 and 1998.
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 $163,637, and $641,589 at December 31, 1997 and
1998, 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
F-101
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
2. Summary of Significant Accounting Policies (continued)
("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, 1996, 1997 and 1998, the Company expensed $62,366,
$60,577 and $107,608, respectively, as advertising costs.
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, 1998, approximately $225,691 of cash is deposited in one
financial institution. Credit risk is subject to the financial security of
these institutions.
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.
F-102
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
2. Summary of Significant Accounting Policies (continued)
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.
The Company attempts to maintain alternative vendors for required products.
Its modems, terminal servers and high-performance routers, which are important
components of its network, are currently acquired from four sources. 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.
F-103
<PAGE>
UNITED STATES INTERNET, INC
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------
1997 1998
---------- ----------
<S> <C> <C>
Computer equipment....................................... $1,838,870 $4,161,898
Furniture, fixtures, and office equipment................ 87,591 134,597
Leasehold improvements................................... 11,182 40,104
---------- ----------
1,937,643 4,336,599
Less accumulated depreciation and amortization........... 511,803 1,024,746
---------- ----------
$1,425,840 $3,311,853
========== ==========
</TABLE>
4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1997 1998
-------- -----------
<S> <C> <C>
Ascend Communications promissory note due through
2001, bearing interest at prime rate (7.75% at
December 31, 1998), with monthly payments of
interest only through February 1999 and then in
monthly principal and interest payments of $86,146
which increase to $145,112 in December 1999......... $ -- $ 2,968,484
First American National Bank promissory note due May
31, 2001, bearing interest at 8.5%, with monthly
principal and interest payments of $6,314........... -- 164,985
National Bank of Blacksburg note payable due October
31, 2002, bearing interest at prime rate (7.75% at
December 31, 1998), with monthly payments of
interest only through October 1, 1998, and then in
monthly principal and interest payments of $4,154... 169,300 163,300
Unsecured notes with interest at prime rate (7.75% at
December 31, 1998) plus 1%.......................... -- 200,000
Line of credit....................................... 200,000 --
-------- -----------
369,300 3,496,769
Less current portion................................. 42,116 976,583
-------- -----------
Long-term portion.................................... $327,184 $ 2,520,186
======== ===========
</TABLE>
F-104
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
4. Long-Term Debt (continued)
In March 1998, the Company entered into a working capital and equipment
purchase facility with Ascend Communications allowing up to $5,878,000 to be
provided in scheduled draws through December 1999. These notes are secured by
equipment, inventories and accounts receivable. In connection with this
facility, 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 automatically
be converted to common stock based on 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 approximate
$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. During the year ended December 31, 1998, the Company recognized
interest expense of $54,759 in connection with the amortization of the debt
discount on the Ascend Communications note.
The First American National Bank note was entered into on May 31, 1998,
resulting from the maturity of a $200,000 revolving credit facility. The note
is collateralized by various operating equipment and requires the Company to
maintain two financial statement covenants; a debt service coverage covenant
required at December 31, 1998 and a minimum tangible net worth covenant
required at December 31, 1999. At December 31, 1998 the Company was in
violation of the debt service covenant and therefore, the entire outstanding
balance of $163,300 has been included in the current portion of long-term debt.
The National Bank of Blacksburg note is collateralized by accounts receivable
from customers serviced by the related financed Internet equipment located in
Blacksburg, Virginia.
Maturities of long-term debt as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999.............................. $ 976,583
2000.............................. 1,544,463
2001.............................. 735,745
2002.............................. 39,978
2003.............................. --
Thereafter........................ 200,000
----------
$3,496,769
==========
</TABLE>
F-105
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
5. Stockholder Notes Payable
Stockholder notes payable consist of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1997 1998
---------- --------
<S> <C> <C>
Unsecured notes payable............................... $ 316,700 $324,447
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 527,753 --
Secured notes payable................................. 113,696 --
---------- --------
958,149 324,447
Less current portion.................................. 881,708 145,418
---------- --------
Long-term portion..................................... $ 76,441 $179,029
========== ========
</TABLE>
Maturities of stockholder notes payable as of December 31, 1998, are as
follows:
<TABLE>
<S> <C>
1999................................ $145,418
2000................................ 152,058
2001................................ 26,971
--------
$324,447
========
</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, $42,197 and $45,533 during the years ended December 31, 1996, 1997
and 1998, respectively, in connection with the amortization of a debt discount
on the stockholder notes.
F-106
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
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
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Assets:
Net operating loss carryforwards........................ $1,228,034 $3,035,456
Amortization of customer lists.......................... 52,049 92,598
Bad debt reserves....................................... 122,968 197,581
Stock appreciation rights............................... 669,235 441,854
Other................................................... 50 --
Valuation allowance..................................... (2,009,342) (3,669,980)
---------- ----------
Net deferred tax assets................................. 62,994 97,509
Liabilities:
Depreciation............................................ 62,994 97,509
---------- ----------
Net deferred tax assets................................. $ -- $ --
========== ==========
</TABLE>
The Company has net operating loss carryforwards aggregating approximately
$7,996,460. The carryforwards expire in various years through 2017.
Effective Rate Reconciliation
<TABLE>
<CAPTION>
December 31
---------------------------------
1996 1997 1998
--------- --------- -----------
<S> <C> <C> <C>
U.S. statutory rate........................ 34% 34% 34%
--------- --------- -----------
Income tax provision at U.S. statutory
rate...................................... $(660,205) $(166,484) $(1,517,540)
State taxes................................ (76,760) (15,641) (173,000)
Change in valuation allowance.............. 735,807 149,934 1,660,638
Other...................................... 1,158 32,191 29,902
--------- --------- -----------
Income tax provision....................... $ -- $ -- $ --
========= ========= ===========
</TABLE>
7. Stockholders' Deficit
Stock Options
The Company adopted a nonqualified and qualified stock option plan, effective
June 1, 1995, for granting of options to key employees and for granting of
options to nonemployee directors. The aggregate number of common shares
reserved for issuance under these plans 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.
F-107
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
7. Stockholders' Deficit (continued)
Stock Options (continued)
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 common
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 right.
Stock appreciation rights are included in all 532,046 stock options. The
stock appreciation rights liability reflects the excess of the fair market
value of $12.08 per share of common stock at December 31, 1998, over the option
price of the common stock. The rights terminate upon a change in control as
defined in the agreement and are required to be settled in cash or options to
purchase common stock of the acquiror.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Range of Number Options Outstanding Weighted-
Exercise Outstanding at Average Remaining Average
Prices December 31, 1998 Contractual Life Exercise Price
-------- ----------------- ------------------- --------------
<S> <C> <C> <C>
$0.00--$2.20 362,585 5.80 $1.22
$6.00--$7.50 18,000 7.33 $7.33
$3.32--$5.72 59,500 7.22 $4.78
$1.00--$10.00 91,961 8.52 $6.90
</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, 1996, 1997 and 1998 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 $1,408,760, $1,248,461 and $1,966,065,
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 1996, 1997 and 1998 respectively: divided yield of
0%, risk-free interest rates of 6.33%, 6.24% and 6.48%, no weighted average
volatility factors and expected life of the option terms of 7 years. The
weighted average fair values of options granted during the years ended December
31, 1996, 1997 and 1998 were $2.45, $2.63 and $2.91 respectively.
F-108
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
7. Stockholders' Deficit (continued)
Stock Options (continued)
As of December 31, 1998, the Company had reserved 54,414 shares of common
stock for future issuances under the Option 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
Granted.......................................... 93,961 $ 6.56
Stock appreciation rights exercised.............. (1,962) $ 6.86
Canceled......................................... (8,000) $ 1.25
Exercised........................................ (8,038) $ 2.74
-------
Outstanding at December 31, 1998................... 532,046 $ 2.70
=======
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 range from $0
to $10.00 per share. Options outstanding at December 31, 1998 had a weighted
average remaining contractual life of 5.93 years. There were 395,585, 438,085
and 498,546 options exercisable at December 31, 1996, 1997 and 1998,
respectively.
Stock Warrants
As discussed in Note 4, Long-Term Debt, and Note 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, 1998, the
Company had outstanding warrants as follows:
<TABLE>
<CAPTION>
Per Share Expiration
Warrants Exercise of Exercise
Outstanding Price Term
----------- --------- ------------
<S> <C> <C> <C>
Related parties........................ 12,752 $0.01 1999 to 2003
Other.................................. 28,299 0.01 1999 to 2003
</TABLE>
The related parties are certain officers of the company.
F-109
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
7. Stockholders' Deficit (continued)
Employee Stock Grant
In addition to the stock options discussed above, the Company granted 6,000
shares of restricted common stock, with a market value at the date of issuance
of $10.00, to two employees during 1998. The ability to sell this common stock
was restricted to the earlier of 12 months after issue or the date of an
initial public offering.
8. Commitments and Contingencies
Lease Commitments
The Company leases real estate from stockholders and is responsible for
repairs, taxes and other expenses. The Company also leases various office and
computer equipment under noncancelable operating lease agreements which
generally provide for renewal terms. Rent expense for the years ended December
31, 1996, 1997 and 1998, was $63,780, $99,118 and $145,770 respectively,
including rent to the stockholders of $49,072, $49,072 and $76,896,
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 $1,822,168 and accumulated amortization of $438,241 at December 31, 1998.
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-110
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 19976 and 1998
8. Commitments and Contingencies (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, 1998, are
summarized as follows:
<TABLE>
<CAPTION>
Operating
Stockholders Other Capital
------------ -------- ----------
<S> <C> <C> <C>
1999................................... $107,472 $113,203 $ 796,526
2000................................... 28,324 39,875 366,323
2001................................... 13,360 135,863
2002................................... 662 37,828
-------- -------- ----------
Total minimum lease payments........... $135,796 $167,100 1,336,540
======== ======== ==========
Less amounts representing interest..... 174,643
----------
Present value of minimum lease payments
(including $682,654 classified as
current).............................. $1,161,897
==========
</TABLE>
The Company has certain line usage commitments with numerous communications
companies aggregating $1,980,893, $513,122 and $30,844 in 1999, 2000 and 2001,
respectively.
9. Acquisitions
During 1998, the Company purchased the listings of customers of four internet
service providers totaling approximately 2,008 customers for $174,260. In
addition, the purchase agreements included non-compete provisions. The purchase
price was settled in Company common stock and cash with a portion of the cash
payment made over a six month period. The cost of these purchases have been
allocated to customer base, which is being amortized over three years.
In September and October 1998, the Company acquired all of the outstanding
stock of three internet service providers. The aggregate purchase price was
$4,052,493 consisting of 336,988 shares of the Company's common stock valued at
either $11.36 or $11.45 a share and cash of $220,020. The acquired companies
were merged into the Company. The acquisitions were accounted for under the
purchase method of accounting. Accordingly, net assets acquired have been
recorded based on their estimated fair market values at the date of
acquisition.
F-111
<PAGE>
UNITED STATES INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
December 31, 1996, 1997 and 1998
9. Acquisitions (continued)
The unaudited pro forma results of operations set forth below assumes the
acquisitions had occurred at the beginning of the periods presented.
<TABLE>
<CAPTION>
Year ended December
31
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues.......................................... $6,233,551 $8,547,422
========== ==========
Net income........................................ (481,184) (4,625,183)
========== ==========
</TABLE>
In connection with one of the acquisitions the Company issued a promissory
note in favor of the previous owner for $500,000. The promissory note is held
in escrow and will only be released contingent on the Company, or any successor
entity, failing to file an effective registration statement in connection with
an initial public offering of its capital stock by June 30, 1999. No liability
has been recorded in respect of this note as its release is not considered
probable.
10. Pending Transaction
During 1998, the Company's stockholders 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-112
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Members
Internet Partners of America, LC
We have audited the accompanying balance sheets of Internet Partners of
America, LC, as of December 31, 1997 and 1998, and the related statements of
operations, members' deficit, and cash flows for each of the three years in the
period ended December 31, 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 financial position of Internet Partners of America,
LC at December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Little Rock, Arkansas
January 29, 1999
F-113
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1998
---------- -----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $183,120 and $93,310 at December 31,
1997 and 1998, respectively......................... $ 35,132 $ 20,142
Due from members..................................... -- 232,990
---------- -----------
Total current assets.................................. 35,132 253,132
Property and equipment, net........................... 1,769,892 1,946,186
Intangible assets, net................................ 554,670 1,443,004
Deposits.............................................. 339 --
---------- -----------
Total assets.......................................... $2,360,033 $ 3,642,322
========== ===========
Liabilities and Members' Deficit
Current liabilities:
Line of credit....................................... $ 221,000 $ 150,000
Cash overdraft....................................... 162,587 184,906
Accounts payable..................................... 132,604 426,204
Accrued expenses..................................... 50,424 95,586
Unearned revenues.................................... 25,475 69,582
Current maturities of long-term debt................. 1,625,351 802,236
Due to seller........................................ 94,096 454,709
Due to members....................................... 30,000 22,500
---------- -----------
Total current liabilities............................. 2,341,537 2,205,723
Long-term debt........................................ 337,307 2,600,145
Members' deficit...................................... (318,811) (1,163,546)
---------- -----------
Total liabilities and members' deficit................ $2,360,033 $ 3,642,322
========== ===========
</TABLE>
See accompanying notes.
F-114
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues......................... $ 898,316 $ 1,745,445 $4,274,630
Other revenues.......................... 32,673 111,356 150,947
----------- ----------- ----------
Total revenues........................ 930,989 1,856,801 4,425,577
Cost and expenses:
Cost of access revenues................. 671,113 976,397 1,859,301
Cost of other revenues.................. 14,395 37,116 41,506
Operations and customer support......... 696,273 402,133 583,987
Sales and marketing..................... 172,273 263,654 349,409
General and administrative.............. 364,566 626,447 1,471,226
Amortization............................ 27,614 77,986 127,405
Depreciation............................ 147,151 452,170 511,924
----------- ----------- ----------
Total cost and expenses............... 2,093,385 2,835,903 4,944,758
----------- ----------- ----------
Loss from operations..................... (1,162,396) (979,102) (519,181)
Other income and (expense):
Other income............................ 18,629 24,750 --
Interest expense........................ (47,418) (218,936) (250,054)
----------- ----------- ----------
Net loss................................. $(1,191,185) $(1,173,288) $ (769,235)
=========== =========== ==========
</TABLE>
See accompanying notes.
F-115
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
STATEMENTS OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
Members Accumulated
Capital Deficit Total
---------- ----------- -----------
<S> <C> <C> <C>
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)
Capital distributions................... (75,500) -- (75,500)
Net loss................................ -- (769,235) (769,235)
---------- ----------- -----------
Balance at December 31, 1998............. $2,120,427 $(3,283,973) $(1,163,546)
========== =========== ===========
</TABLE>
See accompanying notes.
F-116
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss................................ $(1,191,185) $(1,173,288) $ (769,235)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization.......... 174,765 530,156 639,329
Provision for doubtful accounts........ 180,061 79,250 63,000
Changes in operating assets and
liabilities:
Accounts receivable.................... (253,098) (40,215) (48,010)
Other current assets................... -- (339) 339
Cash overdraft......................... 35,191 127,396 22,319
Accounts payable....................... 62,013 64,275 293,600
Accrued expenses....................... 27,897 (1,180) 45,162
Unearned revenues...................... -- 25,475 44,107
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. (964,356) (388,470) 290,611
Investing activities:
Purchases of property and equipment..... (1,124,112) (878,188) (932,208)
Purchases of customer lists............. (202,899) (456,023) (625,530)
----------- ----------- -----------
Net cash used in investing activities... (1,327,011) (1,334,211) (1,557,738)
Financing activities:
Net proceeds under line of credit....... -- 221,000 (71,000)
Proceeds from issuance of long-term
debt................................... 785,000 1,468,150 3,274,290
Principal payments of long-term debt.... (12,766) (277,726) (1,928,663)
Net borrowings from members............. -- 30,000 (7,500)
Proceeds from members' capital
contributions.......................... 1,514,670 281,257 --
----------- ----------- -----------
Net cash provided by financing
activities............................. 2,286,904 1,722,681 1,267,127
----------- ----------- -----------
Net increase (decrease) in cash......... (4,463) -- --
Cash at beginning of year............... 4,463 -- --
----------- ----------- -----------
Cash at end of year..................... $ -- $ -- $ --
=========== =========== ===========
Supplemental cash flow information:
Liability incurred for acquisition of
ISP (Note 11).......................... $ -- $ 94,096 $ 454,709
=========== =========== ===========
Due from members--sale of land and
building (Note 10)..................... $ -- $ -- $ 232,990
=========== =========== ===========
Non-Cash distribution to members........ $ -- $ -- $ 75,500
=========== =========== ===========
Cash paid for interest.................. $ 43,138 $ 213,792 $ 247,243
=========== =========== ===========
</TABLE>
See accompanying notes.
F-117
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
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. 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
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
F-118
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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, 1997 and 1998.
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 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, 1996, 1997 and 1998, the Company incurred
approximately $63,000, $89,000 and $134,000, respectively, in 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.
F-119
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
The unaudited pro forma income tax information included in 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 each of the three years in the period ended
December 31, 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 believes 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.
Reclassification
Certain reclassifications have been made in prior years' financial statements
to conform to the current year's presentation.
F-120
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Land and building....................................... $ 328,434 $ --
Computer equipment...................................... 1,489,698 2,254,571
Furniture, fixtures, and office equipment............... 437,836 668,976
---------- ----------
2,255,968 2,923,547
Less accumulated depreciation........................... (486,076) (977,361)
---------- ----------
$1,769,892 $1,946,186
========== ==========
</TABLE>
4. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Intangible Assets......................................... $660,270 $1,676,009
Less accumulated amortization............................. (105,600) (233,005)
-------- ----------
$554,670 $1,443,004
======== ==========
</TABLE>
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 12),
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 asset before valuation allowance of $35,929 as of
December 31, 1998, had the termination of its election to be treated as an LLC
occurred on this date.
No pro forma income tax provision (benefit) is reflected for each of the
three years in the period ended December 31, 1998 as the Company would have
provided a full valuation allowance against the deferred tax asset had it been
a C Corporation.
6. Line of Credit
In 1997 and 1998, the Company had a line of credit with a bank allowing for
borrowings of up to $350,000. Borrowings against this line bear interest at
10%. This line was secured by and personally guaranteed by the members.
Borrowings of $221,000 were outstanding against this line at December 31, 1997.
No borrowings were outstanding against this line at December 31, 1998.
F-121
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
6. Line of Credit (continued)
In 1998, the Company had a line of credit with a bank allowing for borrowings
of up to $150,000. Borrowings against this line bear interest at the prime rate
(8.25% as of December 31, 1998), as defined in the agreement, and were
personally guaranteed by the members. Borrowings of $150,000 were outstanding
against this line at December 31, 1998.
7. Long-term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
-------- ---------
<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.................................................. $252,542 $ 234,705
Note payable to a bank in monthly installments of $34,956,
including interest at 8.25%, until May, 2003, when all
outstanding principal and interest are due, secured by a
mortgage and a security agreement......................... -- 2,743,171
Note payable to a firm in monthly installments of $415,
including interest at 2.9%, until January, 2002, when all
outstanding principal and interest are due, secured by a
vehicle................................................... -- 15,054
Unsecured note payable to an individual in monthly
installments of $2,702, including interest at 8.5%, until
August, 1999, when all outstanding principal and interest
are due................................................... -- 23,421
Unsecured note payable to an individual in monthly
installments of $3,538, including interest at 8.5%, until
April, 2002............................................... -- 53,335
Unsecured note payable to a firm in monthly installments of
$3,941, including interest at 8.5%, until January, 2002... -- 66,376
Unsecured note payable to a bank, with interest at 9.25%
payable monthly until July, 1999.......................... -- 225,000
Note payable to a firm in monthly installments of $2,686,
including interest at 8.5%, until June 2000, when all
outstanding principal and interest are due, secured by a
purchase agreement........................................ -- 41,319
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, with interest at prime, as defined,
plus 1% payable quarterly until May, 1997................. 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 --
</TABLE>
F-122
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
7. Long-term Debt (continued)
<TABLE>
<CAPTION>
December 31
----------------------
1997 1998
---------- ----------
<S> <C> <C>
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.................................. 1,962,658 3,402,381
Less: current maturities.............................. (1,625,351) (802,236)
---------- ----------
Long-term debt, net of current maturities............. $ 337,307 $2,600,145
========== ==========
</TABLE>
The Company incurred interest related to the long-term debt of $47,418,
$218,936 and $250,074, for the years ended December 31, 1996, 1997 and 1998,
respectively.
Principal payments on long-term debt are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 802,236
2000............................................................ 275,231
2001............................................................ 241,901
2002............................................................ 258,104
2003............................................................ 1,824,909
----------
Total long-term debt............................................ $3,402,381
==========
</TABLE>
The notes generally contain restrictive covenants addressing certain
activities of the Company and its members. The Company and its members were in
violation of a covenant on a note that totaled $234,705 at December 31, 1998.
The balance of this debt is classified as current at December 31, 1998.
F-123
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
8. Lease Commitments
The Company leases storage space under non-cancelable operating lease
agreements. The leases generally provide for renewal terms of one to three
years. Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$32,133, $49,350 and $71,622, respectively.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<S> <C>
1999............................................................. $119,729
2000............................................................. 114,027
2001............................................................. 91,109
2002............................................................. 78,138
2003............................................................. 68,975
--------
Total minimum lease payments..................................... $471,978
========
</TABLE>
In connection with its operations, the Company has certain line usage
commitments with numerous communications companies. Minimum payments under
these commitments will be approximately $1,200,000, $1,200,000, $1,000,000,
$700,000 and $50,000 in 1999, 2000, 2001, 2002 and 2003, respectively.
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. Related Party Transactions
On December 14, 1998, the Company transferred certain real estate, consisting
of land and a building, to its members. On that date, the land and building had
a book value of $307,796 and was encumbered by a bank note with a carrying
value of $232,990. According to the agreement, the Company will pay the note
after the members have obtained other financing. At December 31, 1998, the
Company has recorded $232,990 due from members. The $75,500 difference between
the carrying value of the real estate and the amount due from the members has
been recognized as a distribution to members.
The agreement referred to above also provides that the Company lease the land
and building from the members beginning January, 1999, for 60 months at the
rate of $5,500 per month. The Company will account for this lease as an
operating lease and this lease commitment is included in the summary of minimum
future lease payments in note 7.
F-124
<PAGE>
INTERNET PARTNERS OF AMERICA, LC
NOTES TO FINANCIAL STATEMENTS--(continued)
11. Acquisition
On April 6, 1998, the Company completed the acquisition of substantially all
of the assets of On The Net of Boliver, Missouri for approximately $867,000.
Only a portion of this amount has been paid to the seller at closing 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 in February, 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 $803,000 being
allocated to purchased customer lists. The cost of the customer list is being
amortized over a 5 year period.
12. Pending Transaction
During 1998, the Company's members entered into an agreement whereby they
will sell their interest in the Company to OneMain.com. The Company's members
will exchange their interest in the Company for cash and shares of common stock
of OneMain.com concurrently with the consummation of the initial public
offering 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 stockholder of the Company. Subsequent to the acquisition, the Company
will continue to exist.
The related party transactions as described in Note 10 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-125
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZoomNet, Inc.
We have audited the accompanying balance sheets of ZoomNet, Inc. (the
"Company") as of December 31, 1997 and 1998 and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 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 financial position of ZoomNet, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Columbus, Ohio
January 23, 1999
F-126
<PAGE>
ZOOMNET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 32,212 $ 36,900
Accounts receivable (less allowance for doubtful accounts
of $16,900 and
$39,000 at December 31, 1997 and 1998, respectively)..... 32,854 61,341
Deferred income taxes..................................... 18,261 52,095
Prepaid expenses.......................................... 205 2,475
-------- ----------
Total current assets.................................... 83,532 152,811
Property and equipment, net................................ 588,983 1,016,797
Intangible assets, net of accumulated amortization of $0
and $11,799 at
December 31, 1997 and 1998, respectively.................. -- 224,186
Other assets............................................... 8,766 8,336
-------- ----------
Total assets............................................... $681,281 $1,402,130
======== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 46,824 $ 100,636
Accrued expenses.......................................... 10,852 34,475
Income tax payable........................................ 4,473 58,423
Unearned revenues......................................... 21,180 59,355
Line of credit............................................ 23,000 --
Short-term debt........................................... -- 100,000
Current portion of long term debt......................... 73,954 101,512
Current portion of capital lease obligations.............. 69,202 100,714
-------- ----------
Total current liabilities............................... 249,485 555,115
Long-term debt, net of current portion..................... 196,243 352,262
Capital lease obligations, net of current portion.......... 23,714 144,790
Deferred income taxes...................................... 65,006 106,042
Stockholders' equity:
Common stock, no par value; 850 shares authorized,
100 shares issued and outstanding........................ 15,000 15,000
Additional paid-in capital................................ 55,000 55,000
Retained earnings......................................... 76,833 173,921
-------- ----------
Total stockholders' equity.............................. 146,833 243,921
-------- ----------
Total liabilities and stockholders' equity.............. $681,281 $1,402,130
======== ==========
</TABLE>
See accompanying notes.
F-127
<PAGE>
ZOOMNET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
------------------------------
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues.............................. $241,415 $769,851 $1,853,373
Other revenues............................... 31,277 87,768 114,307
-------- -------- ----------
Total revenues............................. 272,692 857,619 1,967,680
Costs and expenses:
Costs of access revenues..................... 133,311 262,710 752,059
Costs of other revenues...................... -- -- 20,428
Operations and customer support.............. 52,797 109,292 175,424
Sales and marketing.......................... 20,663 67,300 259,851
General and administrative................... 60,140 154,165 339,459
Depreciation................................. 18,314 102,602 206,776
Amortization................................. -- -- 11,799
-------- -------- ----------
Total costs and expenses................... 285,225 696,069 1,765,796
-------- -------- ----------
(Loss) income from operations................. (12,533) 161,550 201,884
Other Income (expense):
Interest expense.............................. (1,404) (18,144) (40,895)
Other income (expense), net................... -- -- (748)
-------- -------- ----------
(Loss) income before provision for (benefit
from) income taxes........................... (13,937) 143,406 160,241
Provision for (benefit from) income taxes..... (6,123) 57,341 63,153
-------- -------- ----------
Net (loss) income............................. $ (7,814) $ 86,065 $ 97,088
======== ======== ==========
</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 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.................. -- -- -- 97,088 97,088
--- ------- ------- -------- --------
Balance at December 31,
1998........................ 100 $15,000 $55,000 $173,921 $243,921
=== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-129
<PAGE>
ZOOMNET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net (loss) income............................... $ (7,814) $ 86,065 $ 97,088
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation................................... 18,314 102,602 206,776
Amortization................................... -- -- 11,799
Allowance for doubtful accounts................ 2,500 14,200 22,100
Provision for deferred income taxes............ (7,015) 53,760 7,202
Loss on sale of assets......................... -- -- 748
Changes in operating assets and liabilities:
Accounts receivable.......................... (12,521) (36,351) (50,587)
Prepaid expenses............................. -- (205) (2,270)
Other assets................................. (909) (7,180) 430
Accounts payable............................. 29,503 14,488 53,812
Accrued expenses............................. 5,834 3,783 23,623
Unearned revenues............................ 10,674 10,201 38,175
Income tax payable........................... 892 3,581 53,950
-------- -------- --------
Net cash provided by operating activities....... 39,458 244,944 462,846
Investing activities:
Purchases of property and equipment............. (108,776) (423,857) (418,083)
Proceeds from sale of assets.................... -- -- 500
Acquisition of intangible assets................ -- -- (235,985)
-------- -------- --------
Net cash used in investing activities........... (108,776) (423,857) (653,568)
Financing activities:
Net proceeds (repayments) under line of credit.. 25,000 (2,000) (23,000)
Proceeds from issuance of short-term debt....... -- -- 100,000
Proceeds from issuance of long-term debt........ -- 287,255 265,000
Principal payments of long-term debt............ -- (17,058) (81,423)
Payments on obligations under capital leases.... (3,164) (59,590) (65,167)
Contributions from stockholders................. 50,000 -- --
-------- -------- --------
Net cash provided by financing activities....... 71,836 208,607 195,410
-------- -------- --------
Net increase in cash and cash equivalents....... 2,518 29,694 4,688
Cash and cash equivalents at beginning of year.. -- 2,518 32,212
-------- -------- --------
Cash and cash equivalents at end of year........ $ 2,518 $ 32,212 $ 36,900
======== ======== ========
Supplemental cash flow information
Cash paid for interest.......................... $ 1,404 $ 18,144 $ 38,555
======== ======== ========
Cash paid for income taxes...................... $ -- $ -- $ 2,001
======== ======== ========
Capital lease obligations incurred.............. $ 18,842 $128,198 $217,755
======== ======== ========
</TABLE>
See accompanying notes.
F-130
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, and 1998
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 equipment under capital lease and 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
F-131
<PAGE>
ZOOMNET, INC.
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
periods ended December 31, 1996, 1997, and 1998.
Intangible Assets
The Company capitalizes specific costs incurred for the purchase of customer
bases and non-compete agreements from other Internet service providers
("ISPs"). Amortization is provided using the straight-line method over five
years commencing at the date of acquisition of the intangible assets.
Recent Accounting Pronouncements
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 January 1, 1999.
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 capitalizes costs related to software
developed for internal use. The Company has not evaluated whether the
pronouncement will have an impact on the Company's existing capitalization
policy for internal-use software.
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 and $53,036 was recorded during
the years ended December 31, 1997 and 1998, respectively, relating to these
non-monetary transactions. Similar non-monetary transactions were not
significant in 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
years ended December 31, 1996, 1997, and 1998, the Company expensed $16,159,
$52,827, and $186,873, 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 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 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.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the 1998
presentation.
F-133
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
3. Related Party Transactions
In September 1998, a shareholder loaned $34,301 to the Company which was
repayable on demand. Also, a relative of a shareholder loaned $250,000 to the
Company which was also payable on demand. The related party obligations were
repaid in November 1998 primarily through a $265,000 loan from a bank. (See
Note 6.) Interest expense associated with these loans paid to related parties
totaled $3,233.
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
value of these services is not practicable. No amount has been recorded in the
accompanying financial statements to reflect the costs of these services.
4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment...................................... $597,699 $1,099,174
Furniture, fixtures, and office equipment............... 43,155 90,967
Leasehold improvements.................................. 70,517 155,820
-------- ----------
711,371 1,345,961
Less accumulated depreciation........................... 122,388 329,164
-------- ----------
$588,983 $1,016,797
======== ==========
</TABLE>
5. Short-Term Debt
In June 1998, the Company obtained a $100,000 short-term note with a bank,
due December 1998. In December 1998, the note was refinanced with the bank such
that the Company is required to make monthly interest payments at the bank's
prime rate (8.25% at December 31, 1998) plus 0.5% through June 1999 and a lump
sum principal payment in June 1999. The loan is secured by all the Company's
assets that have not been individually collateralized under separate loan
agreements (See Note 6) and is personally guaranteed by the Company's
stockholders.
F-134
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
6. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
-------- --------
<S> <C> <C>
Note payable to a bank, monthly interest payments at
8.25% per annum are due through May 1998. Monthly
installments of $4,418, including interest at 8.25%,
due from June 1998 through November 2005.............. $ -- $260,334
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 (4.8% at December 31,
1998) plus 2.4%....................................... 147,082 113,691
Note payable to a bank, due in monthly installments of
$500 through May 2000, including interest at 8.93%.... 13,375 8,390
Note payable to a bank, due in monthly installments of
$3,819 through August 2000, including interest at
7.875%................................................ 109,740 71,359
Less current portion................................... (73,954) (101,512)
-------- --------
$196,243 $352,262
======== ========
</TABLE>
The long-term debt is secured by specific equipment of the Company and is
personally guaranteed by the Company's stockholders.
The Company incurred interest related to the long-term debt of approximately
$22,000 for the year ended December 31, 1998. The carrying value of long-term
debt approximates fair value.
Principal payments on long-term debt are due as follows: 1999--$101,512;
2000--$105,559; 2001--$75,721, 2002--$40,013, 2003 and thereafter--$130,969.
7. Commitments
Lease Commitments
The Company leases office space under noncancelable operating lease
agreements. Rent expense for the years ended December 31, 1996, 1997, and 1998
was $3,000, $7,740, and $17,381, 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 $367,945 and accumulated amortization of $117,795 at December 31,
1998.
F-135
<PAGE>
ZOOMNET, 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, 1998
-------------------
Capital Operating
-------- ---------
<S> <C> <C>
1999............................. $116,160 $12,000
2000............................. 81,775 13,800
2001............................. 74,015 15,000
2002............................. -- 15,600
2003............................. -- --
Thereafter....................... -- --
-------- -------
Total minimum lease payments..... 271,950 $56,400
=======
Less amounts representing
interest........................ (26,446)
--------
Present value of minimum lease
payments........................ $245,504
========
</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, 1998, the Company would have incurred termination penalties of
approximately $345,000. The Company has no present plan to terminate these
contracts.
8. Income Taxes
Income tax provision (benefit) was comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31
------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................... $ 693 $ 2,782 $44,861
State............................................. 199 799 11,090
------- ------- -------
892 3,581 55,951
Deferred:
Federal........................................... (5,982) 41,761 5,594
State............................................. (1,033) 11,999 1,608
------- ------- -------
(7,015) 53,760 7,202
------- ------- -------
$(6,123) $57,341 $63,153
======= ======= =======
</TABLE>
The Company's deferred tax assets and liabilities were as follows:
F-136
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
8. Income Taxes (continued)
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustment............................ $ 11,522 $ 36,545
Reserve for bad debts................................. 6,739 15,550
-------- --------
Total deferred tax assets............................... 18,261 52,095
Deferred tax liabilities--depreciation.................. 65,006 106,042
-------- --------
Net deferred tax liabilities............................ $(46,745) $(53,947)
======== ========
</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>
Year ended December 31
------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Federal income tax expense (benefit) at statutory
rates............................................ $(4,739) $48,758 $54,482
State income tax expense (benefit), net of federal
taxes............................................ (819) 8,447 8,380
Other............................................. -- 136 291
Valuation allowance............................... (565) -- --
------- ------- -------
Income tax provision (benefit).................... $(6,123) $57,341 $63,153
======= ======= =======
</TABLE>
9. Acquisitions
In September 1998, the Company purchased the customer base of another 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 cost of
the acquisition was $3,185.
The cost of these acquisitions have been allocated to the customer bases and
non-compete agreements, which are being amortized over five years.
F-137
<PAGE>
ZOOMNET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
10. Pending Transaction
During 1998 the Company's stockholders 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 concurrently with the consummation of the initial
public offering 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.
The related party transactions as described in Note 3 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-138
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Palm.Net, USA, Inc.
We have audited the accompanying balance sheets of Palm.Net, USA, Inc. as of
December 31, 1997 and 1998, 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 years ended December 31, 1997 and
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 financial position of Palm.Net, USA, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from January 3, 1996 (inception) to December 31, 1996 and
the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Jacksonville, Florida
January 19, 1999
F-139
<PAGE>
PALM.NET, USA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................... $ 15,476 $ 15,622
Accounts receivable......................................... 4,451 1,911
Prepaid expenses............................................ 1,705 4,145
Due from stockholders....................................... -- --
-------- --------
Total current assets...................................... 21,632 21,678
Property and equipment, net.................................. 107,130 144,197
-------- --------
Total assets................................................. $128,762 $165,875
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses....................... $ 21,267 $ 22,028
Deferred revenues........................................... 35,764 58,585
Due to stockholders......................................... 57,811 --
-------- --------
Total current liabilities................................. 114,842 80,613
Stockholders' equity:
Common stock, $1 par value; 7,500 shares authorized, 100
shares issued and outstanding.............................. 100 100
Additional paid-in capital.................................. 400 400
Retained earnings........................................... 13,420 84,762
-------- --------
Total stockholders' equity................................ 13,920 85,262
-------- --------
Total liabilities and stockholders' equity................ $128,762 $165,875
======== ========
</TABLE>
See accompanying notes.
F-140
<PAGE>
PALM.NET, USA, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
January 3,
1996
(inception) Year ended
to December 31
December 31, ------------------
1996 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Revenues:
Access revenues.............................. $ 93,291 $399,390 $583,930
Other revenues............................... 2,627 33,021 41,992
-------- -------- --------
Total revenues............................. 95,918 432,411 625,922
Costs and expenses:
Costs of access revenues..................... 43,173 130,292 148,787
Costs of other revenues...................... 651 6,000 13,750
Operations and customer support.............. 32,968 55,549 63,358
Sales and marketing.......................... 25,662 45,732 63,171
General and administrative................... 39,295 91,805 182,249
Depreciation--nonoperating and operating
equipment................................... 6,279 23,202 35,300
-------- -------- --------
Total costs and expenses................... 148,028 352,580 506,615
-------- -------- --------
(Loss) income from operations................. (52,110) 79,831 119,307
Other income (expense):
Interest income.............................. 3 170 300
Interest expense............................. (617) (11,541) (7,880)
Miscellaneous income (expense), net.......... 1,811 (4,127) (40,385)
-------- -------- --------
1,197 (15,498) (47,965)
-------- -------- --------
Net (loss) income............................. $(50,913) $ 64,333 $ 71,342
======== ======== ========
Unaudited pro forma information:
Net (loss) income............................ $(50,913) $ 64,333 $ 71,342
Pro forma income tax provision............... -- 5,281 27,015
-------- -------- --------
Pro forma net (loss) income (See Note 2)..... $(50,913) $ 59,052 $ 44,327
======== ======== ========
</TABLE>
See accompanying notes.
F-141
<PAGE>
PALM.NET, USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Additional Retained Stockholders'
------------- Paid-in Earnings Equity
Shares Amount Capital (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................... -- -- -- 71,342 71,342
--- ---- ---- -------- --------
Balance at December 31, 1998.. 100 $100 $400 $ 84,762 $ 85,262
=== ==== ==== ======== ========
</TABLE>
See accompanying notes.
F-142
<PAGE>
PALM.NET, USA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 3,
1996
(inception) Year ended
to December 31
December 31, ------------------
1996 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Operating activities
Net (loss) income............................ $(50,913) $ 64,333 $ 71,342
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating
activities:
Depreciation................................ 6,279 23,202 35,300
Changes in operating assets and
liabilities:
Accounts receivable....................... (953) (3,498) 2,540
Prepaid expenses.......................... (1,583) (122) (2,440)
Other current assets...................... -- -- --
Accounts payable and accrued expenses..... 25,803 (4,536) 761
Deferred revenues......................... 13,424 22,340 22,821
-------- -------- --------
Net cash (used in) provided by operating
activities.................................. (7,943) 101,719 130,324
Investing activities
Purchases of property and equipment.......... (73,497) (63,114) (72,367)
-------- -------- --------
Net cash used in investing activities........ (73,497) (63,114) (72,367)
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) (57,811)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................. 85,990 (27,679) (57,811)
-------- -------- --------
Net increase in cash and cash equivalents.... 4,550 10,926 146
Cash and cash equivalents at beginning of
period...................................... -- 4,550 15,476
-------- -------- --------
Cash and cash equivalents at end of period... $ 4,550 $ 15,476 $ 15,622
======== ======== ========
</TABLE>
See accompanying notes.
F-143
<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-144
<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 years
ended December 31, 1997 and 1998, the Company expensed $18,079, $20,469 and
$28,349, 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, and for the years ended
December 31, 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
F-145
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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 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.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the 1998
presentation.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------
1997 1998
-------- --------
<S> <C> <C>
Computer equipment....................................... $123,453 $194,649
Furniture, fixtures, and office equipment................ 10,173 11,344
Leasehold improvements................................... 2,985 2,985
Less accumulated depreciation and amortization........... (29,481) (64,781)
-------- --------
$107,130 $144,197
======== ========
</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 years ended December 31, 1997
and 1998 was $7,573, $10,338, and $10,438, 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
F-146
<PAGE>
PALM.NET, USA, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
5. Related Party Transactions (continued)
expenses. The net amount due to (from) the stockholders at December 31, 1997
and 1998 was $57,811. The net amount due from stockholders at December 31, 1998
in the amount of $40,385 was written off by the Compnay. Interest expense
incurred with the loan agreements during the period from January 3, 1996
(inception) to December 31, 1996 and years ended December 31, 1997 and 1998 was
$617, $11,541, and $7,880, respectively.
6. Income Taxes
Upon consummation of an agreement with One Main.com, Inc. ("One Main.com") to
sell the outstanding stock of the Company and concurrent with the related
initial public offering of One Main.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 $18,412 as of December 31, 1998, had the
termination of its election to be treated as an S Corporation occurred on that
date.
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.
7. Pending Transaction
During 1998, the Company's stockholders 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 concurrently with the consummation of the initial
public offering 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.
The related party transactions as described in Note 5 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-147
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Internet Access Group, Inc.
We have audited the accompanying combined balance sheets of Internet Access
Group, Inc. as of December 31, 1997 and 1998, and the related combined
statements of operations, stockholders' deficit, and cash flows for the three
years in the period ended December 31, 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Internet Access
Group, Inc. at December 31, 1997 and 1998, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company's working
capital deficiency and net losses accumulated since inception raise substantial
doubt about its ability to continue as a going concern. The 1998 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
Jacksonville, Florida
January 14, 1999
F-148
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 23,802 $ 23,354
Accounts receivable -- trade............................... 58,885 118,399
Other current assets....................................... 3,670 11,927
-------- --------
Total current assets..................................... 86,357 153,680
Receivable from stockholder................................. 95,151 100,151
Property and equipment, net................................. 108,267 238,720
-------- --------
Total assets............................................. $289,775 $492,551
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses...................... $ 47,945 $186,182
Deferred revenues.......................................... 144,226 167,484
Notes payable -- current portion........................... 9,720 41,195
Capital lease obligations -- current portion............... 840 65,222
-------- --------
Total current liabilities................................ 202,731 460,083
Notes payable, net of current portion....................... 172,572 151,178
Capital lease obligations, net of current portion........... 26,108 85,080
Stockholders' deficit:
Common stock............................................... 100 100
Additional paid-in capital................................. 17,570 17,570
Accumulated deficit........................................ (129,306) (221,460)
-------- --------
Total stockholders' deficit.............................. (111,636) (203,790)
-------- --------
Total liabilities and stockholders' deficit.............. $289,775 $492,551
======== ========
</TABLE>
See accompanying notes.
F-149
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997 1998
-------- --------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues.............................. $701,633 $ 947,952 $1,402,635
Other revenues............................... 249,712 231,482 131,742
-------- --------- ----------
Total revenues............................. 951,345 1,179,434 1,534,377
Costs and expenses:
Cost of access revenues...................... 269,254 331,901 558,046
Cost of other revenues....................... 148,992 174,509 99,365
Operations and customer support.............. 124,299 147,854 214,746
Sales and marketing.......................... 60,859 122,885 161,627
General and administrative................... 303,156 340,341 498,836
Depreciation -- operating and nonoperating
equipment................................... 11,831 25,807 60,668
-------- --------- ----------
Total costs and expenses................... 918,391 1,143,297 1,593,288
-------- --------- ----------
Income (loss) from operations................. 32,954 36,137 (58,911)
Other income (expense):
Interest income.............................. 211 121 1,207
Interest expense............................. (10,700) (24,136) (34,450)
-------- --------- ----------
Net income (loss)............................. $ 22,465 $ 12,122 $ (92,154)
======== ========= ==========
</TABLE>
See accompanying notes.
F-150
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Total
------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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................... -- -- -- (92,154) (92,154)
--- ---- ------- --------- ---------
Balance at December 31,
1998....................... 100 $100 $17,570 $(221,460) $(203,790)
=== ==== ======= ========= =========
</TABLE>
See accompanying notes.
F-151
<PAGE>
INTERNET ACCESS GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................... $ 22,465 $ 12,122 $(92,154)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 11,831 25,807 60,668
Accrued interest.............................. 8,120 18,583 21,864
Changes in operating assets and liabilities:
Accounts receivable -- trade................. (73,162) 51,298 (59,514)
Other current assets......................... (1,400) -- (8,257)
Accounts payable and accrued expenses........ 3,780 (122,184) 138,237
Deferred revenues............................ 79,628 54,154 23,258
-------- -------- --------
Net cash provided by operating activities....... 51,262 39,780 84,102
Investing activities:
Purchases of property and equipment............. (65,827) (22,128) (38,649)
Increase in accounts receivable -- stockholder.. (42,136) (40,220) (5,000)
-------- -------- --------
Net cash used in investing activities........... (107,963) (62,348) (43,649)
Financing activities:
Net proceeds (repayments) from borrowing on
notes payable.................................. 77,412 11,726 (6,231)
Payments on obligations under capital leases.... -- -- (34,670)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... 77,412 11,726 (40,901)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... 20,711 (10,842) (448)
Cash and cash equivalents at beginning of year.. 13,933 34,644 23,802
-------- -------- --------
Cash and cash equivalents at end of year........ $ 34,644 $ 23,802 $ 23,354
======== ======== ========
Supplemental cash flow information
Cash paid for interest.......................... $ 2,400 $ 5,752 $ 17,028
======== ======== ========
Capital lease obligations incurred.............. $ -- $ 26,948 $152,472
======== ======== ========
</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 was incorporated on December 2, 1994 and 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 2, 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.
Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates the continuation
of the Company as a going concern. However, the Company has accumulated net
losses of $221,460 since its inception and, as a result, has a stockholders'
deficit of $203,790 and negative working capital of $306,403 at December 31,
1998. Management believes that actions presently being taken, as described
below, will provide the Company with sufficient funds to continue as a going
concern. The results to date reflect significant investments made by management
in its infrastructure and its efforts in order to enhance its ability to
provide internet access services to subscribers in its service area. The
Company has allocated substantial resources to 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
F-153
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
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.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
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, 1996, 1997 and 1998.
F-154
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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.
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, 1996, 1997, and 1998 the Company expensed $25,228,
$38,055, and $38,637 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 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, 1996 and 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.
F-155
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED 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 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 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.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with the 1998
presentation.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $126,136 $314,257
Other fixed assets.......................................... 22,037 22,037
-------- --------
148,173 336,294
Less accumulated depreciation and amortization.............. (39,906) (97,574)
-------- --------
$108,267 $238,720
======== ========
</TABLE>
F-156
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
4. Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Promissory notes payable, interest at 12%................ $166,619 $180,899
Secured automobile loan.................................. 15,673 11,474
-------- --------
Total notes payable.................................... 182,292 192,373
Less: current portion.................................. (9,720) (41,195)
-------- --------
Notes payable, noncurrent................................ $172,572 $151,178
======== ========
</TABLE>
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 formally made demand on two of the notes which had amounts outstanding
of $148,301 as of December 31, 1998.
Principal payments on notes payable for each of the years from 1999 to 2003
are as follows:
<TABLE>
<S> <C>
1999................................ $ 41,195
2000................................ 46,104
2001................................ 46,709
2002................................ 47,999
2003................................ 10,366
--------
$192,373
========
</TABLE>
5. 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, 1996, 1997, and 1998 was $32,805, $38,990, and $34,288,
respectively. The Company also leases certain computer equipment under
agreements which have been accounted for as capital leases.
F-157
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
5. Commitments (continued)
At December 31, 1998, 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, 1998
-------------------
Capital Operating
-------- ---------
<S> <C> <C>
1999........................................................ $ 85,238 $15,895
2000........................................................ 77,251 --
2001........................................................ 6,919 --
2002........................................................ -- --
2003........................................................ -- --
Thereafter.................................................. -- --
-------- -------
Total minimum lease payments................................ 169,408 $15,895
=======
Less amounts representing interest.......................... (19,106)
--------
Present value of minimum lease payments..................... $150,302
========
</TABLE>
6. Common Stock
At December 31, 1998, the common stock of Internet Access Group, Inc.
consists of 100 shares ($1 par value) authorized, issued and outstanding.
7. 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 December 31, 1998 was $25,815. A full valuation allowance of
$25,815 was provided resulting in a deferred asset of $0. No pro forma income
tax provision (benefit) is reflected for the years ended December 31, 1996 and
1997, 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
At December 31, 1997 and 1998 the Company reported amounts receivable from
stockholder of $95,151, and $100,151, respectively, which relate to Company
funds used by the stockholder to fund personal expenses. No formal note exists
related to these advances.
9. Pending Transaction
During 1998, the Company's stockholders 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 concurrently with the consummation of the initial
public offering of the common stock of OneMain.com. Additionally, the Company's
stockholders will be given
F-158
<PAGE>
INTERNET ACCESS GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(continued)
9. Pending Transaction (continued)
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.
The related party transactions as described in Note 8 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-159
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Members
Midwest Internet, L.L.C.
We have audited the accompanying balance sheets of Midwest Internet, L.L.C.
(the Company) as of December 31, 1997 and 1998, and the related statements of
operations, changes in members' deficit, and cash flows for each of the three
years in the period ended December 31, 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 financial position of Midwest Internet, L.L.C. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
January 26, 1999, except for Note 10, as to which the date is February 3, 1999.
F-160
<PAGE>
MIDWEST INTERNET, L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 40,962 $ 80,350
Accounts receivable, less allowance of $45,049 as of
December 31, 1998..................................... 206,807 353,887
Other current assets................................... 1,341 1,687
--------- ----------
Total current assets................................. 249,110 435,924
Property and equipment, net............................. 498,139 991,605
Intangibles assets...................................... -- 433,539
Other assets............................................ -- 6,294
--------- ----------
Total assets......................................... $ 747,249 $1,867,362
========= ==========
Liabilities and members' deficit
Current liabilities:
Accounts payable....................................... $ 210,124 $ 259,446
Accrued expenses....................................... 22,785 6,589
Unearned revenues...................................... 39,580 97,948
Notes payable.......................................... 770,873 889,256
Advances from related parties.......................... 90,778 --
Current portion of capital lease obligations........... 74,475 289,978
--------- ----------
Total current liabilities............................ 1,208,615 1,543,217
Notes payable, less current portion..................... 8,910 181,082
Capital lease obligations, less current portion......... 118,781 328,702
Members' deficit........................................ (589,057) (185,639)
--------- ----------
Total liabilities and members' deficit............... $ 747,249 $1,867,362
========= ==========
</TABLE>
See accompanying notes.
F-161
<PAGE>
MIDWEST INTERNET, L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues............................ $1,555,668 $2,302,702 $3,925,868
Other revenues............................. 234,708 220,426 165,198
---------- ---------- ----------
Total revenues........................... 1,790,376 2,523,128 4,091,066
Costs and expenses:
Costs of access and other revenues......... 666,731 922,467 1,364,873
Operations and customer support............ 458,013 337,608 423,200
Sales and marketing........................ 338,740 186,993 490,132
General and administrative................. 630,489 716,246 987,954
Depreciation and amortization.............. 178,771 301,244 324,711
---------- ---------- ----------
Total costs and expenses................. 2,272,744 2,464,558 3,590,870
---------- ---------- ----------
Income (loss) from operations............... (482,368) 58,570 500,196
Other income (expense):
Interest expense........................... (59,066) (102,004) (106,066)
Other income (expense), net................ (3,060) 37,269 9,288
---------- ---------- ----------
Net income (loss)........................... $ (544,494) $ (6,165) $ 403,418
========== ========== ==========
</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 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............................... 403,418 403,418
-------- --------- ---------
Balance at December 31, 1998.............. $159,625 $(345,264) $(185,639)
======== ========= =========
</TABLE>
See accompanying notes.
F-163
<PAGE>
MIDWEST INTERNET, L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------
1996 1997 1998
----------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss).......................... $ (544,494) $ (6,165) $ 403,418
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 178,770 301,244 324,711
(Gain) loss on sale or disposal of
equipment................................ 3,060 (37,269) (8,868)
Changes in operating assets and
liabilities:
Accounts receivable, net................ (227,829) 41,314 (133,706)
Other assets............................ 1,687 (1,341) (6,640)
Accounts payable........................ 201,904 (130,879) 49,322
Accrued expenses........................ 18,620 (7,412) (16,196)
Unearned revenues....................... 17,831 11,174 (14,525)
----------- --------- ---------
Net cash provided by (used in) operating
activities................................ (350,451) 170,666 597,516
Investing activities
Acquisition of MyChoice Internet........... -- -- (14,960)
Purchases of property and equipment........ (455,136) (120,322) (84,444)
Proceeds from disposal of property and
equipment................................. 24,616 100,385 9,504
----------- --------- ---------
Net cash used in investing activities...... (430,520) (19,937) (89,900)
Financing activities
Proceeds from issuance of notes payable.... 2,130,275 1,130 --
Principal payments of notes payable........ (1,583,842) (157,658) (208,404)
Payments on obligations under capital
leases.................................... -- (50,340) (169,046)
Proceeds from members' capital
contributions............................. 84,625 -- --
Net advances from (to) related parties..... 234 83,811 (90,778)
----------- --------- ---------
Net cash provided by (used in) financing
activities................................ 631,292 (123,057) (468,228)
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................... (149,679) 27,672 39,388
Cash and cash equivalents at beginning of
year...................................... 162,969 13,290 40,962
----------- --------- ---------
Cash and cash equivalents at end of year... $ 13,290 $ 40,962 $ 80,350
=========== ========= =========
Supplemental cash flow information:
Cash paid for interest..................... $ 59,066 $ 102,004 $ 106,066
=========== ========= =========
Capital lease obligations incurred......... $ -- $ 243,595 $ 594,470
=========== ========= =========
</TABLE>
See accompanying notes.
F-164
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 2, 1995
(inception) and began marketing services in March 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
seven years. All computer equipment is being depreciated using a three-year
useful life.
F-165
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Intangibles Assets
Intangibles assets consist of goodwill and costs incurred for the purchase of
a non-compete agreement from another Internet service provider. 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 five
years. The non-compete agreement is being amortized using the straight line
method over its term of two 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, 1997, and 1998.
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
years ended December 31, 1996, 1997, and 1998, the Company expensed $165,984,
$27,554, and $82,156, respectively, as advertising costs.
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 on their personal income tax
returns. Accordingly, the Company is not subject to federal corporate income
tax.
F-166
<PAGE>
MIDWEST INTERNET, L.L.C.
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. 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.
Reclassifications
Reclassifications were made to the prior period financial statements to
conform with the current period's presentation.
F-167
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ----------
<S> <C> <C>
Computer equipment...................................... $968,581 $1,746,412
Furniture, fixtures, and office equipment............... 20,584 23,263
Vehicles................................................ -- 25,780
-------- ----------
989,165 1,795,455
Less accumulated depreciation and amortization.......... 491,026 803,850
-------- ----------
$498,139 $ 991,605
======== ==========
</TABLE>
4. Notes Payable
Notes payable consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ----------
<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%............................................... $524,029 $ 455,520
Demand note payable to bank, semi-annual installments
of $25,518 through maturity in October 2001, including
interest at prime plus 1%............................. 167,007 130,751
Notes payable to bank, monthly installments ranging
from $2,199 to $3,003 through maturity in September
1998, including interest at prime plus 1%............. 38,822 --
Note payable to individual, monthly installments of
$26,752 through maturity in October 2000, non-interest
bearing, unamortized discount of $36,082 at December
31, 1998 on imputed rate of 8.75%..................... -- 472,206
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................... 49,925 --
Demand notes payable to bank, monthly installments
ranging from $176 to $317 through maturity in April
2001, including interest at rates ranging from 8.125%
to 9%................................................. -- 11,861
-------- ----------
779,783 1,070,338
Less current portion................................... 770,873 889,256
-------- ----------
$ 8,910 $ 181,082
======== ==========
</TABLE>
The prime rate used by all of the banks above was 7.75% at December 31, 1998.
The Company incurred interest related to the notes of $59,066, $84,847, and
$66,257 for the years ended December 31, 1996, 1997, and 1998, respectively.
F-168
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
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 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. There were no borrowings on this line in
1998.
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 years
ended December 31, 1996, 1997, and 1998 was $64,584, $53,370, and $97,024,
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 and $740,604 and $163,467, respectively, at December 31, 1998.
Amortization of leased equipment is included in depreciation. The computer
equipment lease agreements require aggregate monthly payments ranging from $191
to $1,300 and expire at various dates through November 2000.
Future minimum lease payments for both capital and operating leases at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Capital Operating
-------- ---------
<S> <C> <C>
1999...................................................... $346,556 $ 77,295
2000...................................................... 235,559 42,577
2001...................................................... 120,175 --
-------- --------
Total minimum lease payments.............................. 702,290 $119,872
========
Less amounts representing interest........................ 83,610
--------
Present value of minimum lease payments................... $618,680
========
</TABLE>
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.
F-169
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
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, 1997 and 1998, the Company expensed payments for
services provided from these related parties of $25,700, $31,600, and $66,696,
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.
F-170
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
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. Because
of the Company's lack of profitability since formation, deferred tax assets
that would have existed had the Company been a C Corporation of approximately
$125,000 as of December 31, 1998, would have been offset in the entirety by a
valuation allowance. Accordingly, no deferred tax assets would have been
recorded at that date.
No pro forma income tax provision (benefit) is reflected for the years ended
December 31, 1996 and 1997 because the Company would have provided a full
valuation allowance against the deferred tax asset had it been a C Corporation.
For the year ended December 31, 1998, no pro forma income tax provision is
reflected because the Company would have used net operating loss carryforwards
to offset current year taxable income.
8. Acquisitions
On December 8, 1998, the Company consummated a transaction to purchase the
subscriber base of MyChoice Internet, a local ISP, and certain other assets
(including equipment, software used in the provisioning of customers, and
accounts receivable) and assume certain capital leases and customer support
obligations. In addition, the seller agreed to a noncompete period of two years
after closing. The purchase agreement required an initial payment of $14,960,
with future payments totaling $535,040 to be paid in 20 equal monthly
installments of $26,752 beginning December 15, 1998. To ensure payments of the
purchase price, a $250,000 irrevocable letter of credit has been issued by a
bank. The acquisition has been accounted for as a purchase transaction and the
results of operations of the acquired company have been included in the
accompanying statements of operations since the date of acquisition.
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 Year Ended
12/31/97 12/31/98
---------- ----------
<S> <C> <C>
Revenues.............................................. $2,801,144 $4,737,551
Net income............................................ (138,227) 444,243
</TABLE>
9. Pending Transaction
On December 14, 1998, the Company's members entered into an agreement whereby
they will sell their membership shares in the Company to OneMain.com. The
Company's
F-171
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
9. Pending Transaction (continued)
members will exchange their membership shares in the Company for cash and
shares of common stock of OneMain.com concurrently with the consummation of the
initial public offering 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 September 30, 1999 and the revenues for the Company for the period
from April 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 shareholder of the Company. Subsequent to the acquisition, the
Company will continue to exist and maintain its status as an LLC.
The related party transactions 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.
10. Events Subsequent to the Date of the Report of Independent Auditors
On February 3, 1999, the Company entered into an additional lease commitment
related to computer equipment. The lease expires in July 2001 and the aggregate
future minimum lease payments under this lease totals approximately $283,000.
F-172
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Members,
Internet Solutions, LLC
We have audited the accompanying balance sheet of Internet Solutions, LLC as
of December 31, 1998, and the related statements of operations, members'
equity, and cash flows for the year ended December 31, 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 Internet Solutions, LLC at
December 31, 1998, and the results of its operations and its cash flows for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
January 26, 1999
F-173
<PAGE>
REPORT OF KEVIN J. TOCHTROP, INDEPENDENT AUDITOR
To the Members,
Internet Solutions, LLC
I have audited the accompanying balance sheet of Internet Solutions, LLC as
of December 31, 1997, and the related statements of operations, members'
equity, and cash flows for the years ended December 31, 1996 and 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, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ Kevin J. Tochtrop
Kevin J. Tochtrop
Certified Public Accountant
Washington, Missouri
December 3, 1998
F-174
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 15,977 $ 30,871
Accounts receivable, net of allowance of $0 and $4,500 at
December 31, 1997 and 1998, respectively................. 15,807 21,443
Other current assets...................................... 2,975 1,576
-------- --------
Total current assets.................................... 34,759 53,890
Property and equipment, net................................ 212,603 419,053
Intangible assets, net..................................... 59,714 248,120
-------- --------
Total assets............................................ $307,076 $721,063
======== ========
Liabilities and members' equity
Current liabilities:
Line of credit, related party............................. $150,000 $150,000
Notes payable............................................. -- 127,893
Accounts payable.......................................... 19,042 42,879
Accrued expenses.......................................... 7,164 44,222
Unearned revenues......................................... 28,167 68,294
Current portion of capital lease obligations.............. -- 58,948
Other current liabilities................................. -- 25,631
-------- --------
Total current liabilities............................... 204,373 517,867
-------- --------
Capital lease obligations, net of current portion ......... -- 47,902
Commitments................................................ -- --
Members' equity:
Members' capital.......................................... 224,800 184,800
Accumulated deficit....................................... (122,097) (29,506)
-------- --------
Total members' equity................................... 102,703 155,294
-------- --------
Total liabilities and members' equity................... $307,076 $721,063
======== ========
</TABLE>
See accompanying notes.
F-175
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
Access revenues................................. $137,225 $443,424 $ 996,590
Other revenues.................................. 3,476 2,633 5,945
-------- -------- ---------
Total revenues................................ 140,701 446,057 1,002,535
-------- -------- ---------
Costs and expenses:
Cost of access revenues and other revenues...... 84,355 165,741 371,893
Operations and customer support................. -- 58,423 174,202
Sales and marketing............................. 12,857 15,760 38,957
General and administrative...................... 103,222 160,163 204,092
Amortization.................................... -- 6,635 27,675
Depreciation.................................... 14,880 33,582 72,419
-------- -------- ---------
Total costs and expenses...................... 215,314 440,304 889,238
-------- -------- ---------
(Loss) Income from operations.................... (74,613) 5,753 113,297
Other income (expense):
Interest income................................. 429 277 369
Interest expense................................ -- (6,807) (21,075)
-------- -------- ---------
Net income (loss)................................ $(74,184) $ (777) $ 92,591
======== ======== =========
Unaudited pro forma information:
Net (loss) income .............................. $(74,184) $ (777) $ 92,591
Pro forma income tax provision.................. -- -- 12,517
-------- -------- ---------
Pro forma net (loss) income................... $(74,184) $ (777) $ 80,074
======== ======== =========
</TABLE>
See accompanying notes.
F-176
<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 December 31, 1995................... $ 90,000 $ (47,136) $ 42,864
Contributed capital........................... 60,000 -- 60,000
Compensation expense for members' 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.................................... -- 92,591 92,591
Distribution of capital....................... (40,000) -- (40,000)
-------- --------- --------
Balance at December 31, 1998................... $184,800 $ (29,506) $155,294
======== ========= ========
</TABLE>
See accompanying notes.
F-177
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net (loss) income............................... $(74,184) $ (777) $ 92,591
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization.................. 14,880 40,217 100,094
Compensation expense for member's equity....... 52,400 22,400 --
Changes in operating assets and liabilities:
Accounts receivable.......................... (491) (15,316) (5,636)
Other current assets......................... -- (2,975) 1,399
Accounts payable............................. 5,752 (5,674) 23,837
Accrued expenses............................. 1,666 5,498 37,058
Unearned revenues............................ -- 28,167 (12,218)
Other current liabilities.................... -- -- 25,631
-------- -------- --------
Net cash provided by operating activities....... 23 71,540 262,756
-------- -------- --------
Investing activities:
Purchases of property and equipment............. (82,298) (154,053) (152,916)
Subscriber list acquisition..................... -- (66,349) (120,000)
-------- -------- --------
Net cash used in investing activities........... (82,298) (220,402) (272,916)
-------- -------- --------
Financing activities:
Net proceeds under line of credit............... -- 150,000 --
Proceeds from note payable...................... -- -- 91,000
Principal payments of notes payable............. -- -- (6,843)
Payments on obligations under capital leases.... -- -- (19,103)
Distributions of capital........................ -- -- (40,000)
Proceeds from participants' capital
contributions.................................. 60,000 -- --
-------- -------- --------
Net cash provided by financing activities....... 60,000 150,000 25,054
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (22,275) 1,138 14,894
Cash and cash equivalents at beginning of
period......................................... 37,114 14,839 15,977
-------- -------- --------
Cash and cash equivalents at end of period...... $ 14,839 $ 15,977 $ 30,871
======== ======== ========
Supplemental cash flow information
Cash paid for interest.......................... $ -- $ 5,533 $ 18,609
======== ======== ========
Capital lease obligation incurred............... $ -- $ -- $125,953
======== ======== ========
</TABLE>
See accompanying notes.
F-178
<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, 1995. 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 five 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-179
<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
years ended December 31, 1996, 1997, and 1998.
Intangible Assets
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 five 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.
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, 1996, 1997, and 1998 the Company expensed $12,857,
$19,961, and $29,993 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 limited liability company members 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.
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 state income taxes for all periods presented.
F-180
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
If the Company had been subject to federal and certain state income taxes for
each of the two years ended December 31, 1996 and 1997, the Company would have
been in a net deferred tax asset position, which would have been fully offset
by a valuation allowance. Any tax benefit or provision for those years also
would have been fully offset by changes in the deferred tax asset valuation
allowance. Therefore, no pro-forma income tax information is reflected for the
years ended December 31, 1996 and 1997.
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 receivables 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 amount contributed by the
officers 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.
F-181
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS--(continued)
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $231,908 $456,678
Capitalized line installation............................... 27,446 72,558
Leasehold improvements...................................... -- 2,469
Furniture, fixtures, and office equipment................... 2,553 9,071
-------- --------
261,907 540,776
Less accumulated depreciation and amortization.............. (49,304) (121,723)
-------- --------
$212,603 $419,053
======== ========
</TABLE>
4. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Acquired customer base....................................... $66,349 $282,430
Less accumulated amortization................................ (6,635) (34,310)
------- --------
$59,714 $248,120
======= ========
</TABLE>
5. Acquisition
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 $167,000, of which approximately $43,000 represented a note
payable to K4. In addition to acquiring the list, the Company assumed a
liability of approximately $52,000 to provide services to certain of the newly
acquired customers who had already paid in advance for their services. The non-
cash portion of this transaction related to the issuance of the note payable
and the assumption of the liability have been excluded from the statement of
cash flows. To finance this transaction, the Company entered into an agreement
with a financial institution to borrow up to a maximum of $150,000, in the form
of a line of credit, bearing variable interest rate of prime plus 1% (8.75% at
December 31, 1998) and payable at December 30, 1998. At December 30, 1998, the
line of credit was amended by a reduction in the borrowing line to $91,000 and
an extension of the maturity date to April 30, 1999.
6. Line of Credit, Related Party
The Company has a short-term line of credit with a related party allowing for
borrowings of up to $200,000 based upon defined levels of accounts receivable
and
F-182
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS--(continued)
6. Line of Credit, Related Party (continued)
inventory, which is payable on demand. Borrowings against the line bear
interest at the bank's prime rate plus 2% (9.75% at December 31, 1998). The
line is secured by certain assets.
7. Commitments
Lease Commitments
The Company leases office space from a related party and various office and
computer equipment under noncancelable operating lease agreements. The leases
generally provide for renewal terms. Rent expense for the years ended December
31, 1996, 1997, and 1998 was $0, $7,571, and $12,485, respectively. The fair
value of rent expense for the year ended December 31, 1996, associated with the
related party, is immaterial to the financial statements.
The Company leases certain equipment under capital leases. The cost of assets
under capital leases and the related accumulated amortization is $125,953 and
$4,667, respectively, at December 31, 1998. Amortization expense related to
these leases is included with depreciation and amortization expense in the
statement of cash flows.
The aggregate liability for future rentals as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999......................................................... $ 71,033 $ 74,394
2000......................................................... 50,825 53,142
2001......................................................... -- 38,467
2002......................................................... -- 17,496
2003......................................................... -- 13,122
-------- --------
121,858 $196,621
========
Less amounts representing interest........................... 15,008
--------
Present value of minimum lease payments...................... 106,850
Less current portion......................................... 58,948
--------
$ 47,902
========
</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 9), the
Company's status as a partnership will automatically terminate and normal
federal and state corporate income tax rates will
F-183
<PAGE>
INTERNET SOLUTIONS, LLC
(A Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS--(continued)
8. Income Taxes (continued)
apply. Based upon the cumulative temporary differences, the Company would have
recognized a deferred federal and state income tax expense and liability of
$954 as of December 31, 1998.
9. Pending Transaction
During 1998, the Company's members entered into an agreement whereby they
will sell their membership shares in the Company to OneMain.com. The Company's
members will exchange their shares in the Company for cash and shares of common
stock of OneMain.com concurrently with the consummation of the initial public
offering 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.
F-184
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of
FGInet, Inc.
We have audited the accompanying balance sheets of FGInet, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 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 financial position of FGInet, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
St. Louis, Missouri
January 29, 1999
F-185
<PAGE>
FGINET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
--------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 74,698 $ 66,941
Accounts receivable.................................... 21,222 21,645
Inventory.............................................. 6,618 55,898
Prepaid expenses....................................... 2,390 12,377
Other current assets................................... 5,574 8,692
--------- ----------
Total current assets................................. 110,502 165,553
Property and equipment, net............................. 241,126 474,433
Intangible assets, net.................................. 23,760 371,600
--------- ----------
Total assets......................................... $ 375,388 $1,011,586
========= ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable....................................... $ 62,868 $ 123,532
Accrued expenses....................................... 13,706 11,112
Unearned revenues...................................... 68,905 221,803
Line of credit......................................... -- 80,000
Notes payable.......................................... 9,079 357,152
--------- ----------
Total current liabilities............................ 154,558 793,599
Deferred tax liability.................................. 9,603 --
Stockholders' equity:
Voting common stock; no par value; 9,000,000 shares
authorized; 2,960,000, and 3,110,000 shares issued
and outstanding, respectively......................... 295,000 406,000
Non-voting common stock; no par value; 1,000,000
shares authorized; 41,250 and 41,500 shares issued
and outstanding, respectively......................... 52,589 53,089
Accumulated deficit.................................... (136,362) (241,102)
--------- ----------
Total stockholders' equity........................... 211,227 217,987
--------- ----------
Total liabilities and stockholders' equity........... $ 375,388 $1,011,586
========= ==========
</TABLE>
See accompanying notes.
F-186
<PAGE>
FGINET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997 1998
--------- -------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues............................. $ 214,909 $712,427 $1,330,059
Other revenues.............................. 60,056 106,018 163,731
--------- -------- ----------
Total revenues........................... 274,965 818,445 1,493,790
Costs and expenses:
Costs of access revenues.................... 60,139 187,988 495,776
Costs of other revenues..................... 46,694 72,575 128,387
Operations and customer support............. 76,725 123,629 164,848
Sales and marketing......................... 41,641 146,168 247,877
General and administrative.................. 148,765 226,109 376,110
Amortization................................ 5,619 12,618 90,267
Depreciation................................ 20,475 49,239 94,834
--------- -------- ----------
Total costs and expenses................. 400,058 818,326 1,598,099
--------- -------- ----------
(Loss) income from operations................ (125,093) 119 (104,309)
Other income:
Interest income............................. 2,680 2,335 1,443
Interest expense............................ -- -- (10,827)
Other income (expense)....................... 1,249 6,451 (650)
--------- -------- ----------
(Loss) income before provision (benefit) for
income taxes................................ (121,164) 8,905 (114,343)
Provision (benefit) for income taxes......... -- 9,603 (9,603)
--------- -------- ----------
Net loss..................................... $(121,164) $ (698) $ (104,740)
========= ======== ==========
</TABLE>
See accompanying notes.
F-187
<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,
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............... -- -- -- -- -- (104,740) (104,740)
Issuance of common
stock................. 150,000 111,000 250 500 -- -- 111,500
--------- -------- ------ ------- ------- --------- ---------
Balance at December 31,
1998................... 3,110,000 $406,000 41,500 $53,089 $ -- $(241,102) $ 217,987
========= ======== ====== ======= ======= ========= =========
</TABLE>
See accompanying notes.
F-188
<PAGE>
FGINET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net loss..................................... $(121,164) $ (698) $(104,740)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 26,094 61,857 185,101
Accretion of interest expense............... -- -- 7,750
Deferred taxes.............................. -- 9,603 (9,603)
Changes in operating assets and
liabilities:
Accounts receivable....................... (4,852) (16,320) (423)
Prepaid expenses.......................... (1,415) (898) (9,987)
Inventory................................. (4,756) (1,862) (49,280)
Other current assets...................... (4,042) (1,377) (3,118)
Accounts payable.......................... 13,718 45,689 60,664
Accrued expenses.......................... 4,408 9,298 (2,594)
Unearned revenues......................... 51,303 6,507 152,898
--------- --------- ---------
Net cash provided by (used in) operating
activities.................................. (40,706) 111,799 226,668
Investing activities
Purchases of property and equipment.......... (164,747) (130,075) (216,931)
Proceeds from sale of equipment.............. -- -- 2,630
Acquisition of customer base and non-compete
agreements.................................. (33,717) (8,280) (55,397)
--------- --------- ---------
Net cash used in investing activities........ (198,464) (138,355) (269,698)
Financing activities
Proceeds (repayments) of notes payable....... -- 9,079 (105,227)
Proceeds from line of credit................. -- -- 80,000
Purchase of treasury stock................... (7,500) -- --
Net proceeds from issuance of common stock... 275,000 52,589 60,500
--------- --------- ---------
Net cash provided by financing activities.... 267,500 61,668 35,273
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 28,330 35,112 (7,757)
Cash and cash equivalents at beginning of
period...................................... 11,256 39,586 74,698
--------- --------- ---------
Cash and cash equivalents at end of period... $ 39,586 $ 74,698 $ 66,941
========= ========= =========
Supplemental cash flow information
Cash paid for income taxes................... $ -- $ 5,003 $ --
========= ========= =========
Cash paid for interest....................... $ -- $ -- $ 3,077
========= ========= =========
</TABLE>
Non cash transactions
In 1998, the Company acquired $113,840 of property and equipment and $382,710
of intangible assets in exchange for 64,285 shares of FGInet common stock and
notes payable of $461,050.
See accompanying notes.
F-189
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1996, 1997, and 1998
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 November 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.
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.
F-190
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
2. Summary of Significant Accounting Policies (continued)
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, 1997, and 1998.
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.
The Company does not refund advance payments in instances of contract
cancellation. The Company continues service to the customer until the contract
term expires.
F-191
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
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
years ended December 31, 1996, 1997, and 1998, the Company expensed $26,251,
$118,769, and $204,159 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 be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
F-192
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
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 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.
Reclassifications
Reclassifications were made to the prior period financial statements to
conform with the current period's presentation.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Computer equipment.................................. $175,900 $297,033 $612,509
Furniture, fixtures, and office equipment........... 7,649 16,590 29,255
-------- -------- --------
183,549 313,623 641,764
Less accumulated depreciation....................... 23,259 72,497 167,331
-------- -------- --------
$160,290 $241,126 $474,433
======== ======== ========
</TABLE>
F-193
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
4. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Acquired customer base................................ $23,332 $28,612 $433,299
Non-compete agreements................................ 10,385 13,385 46,805
------- ------- --------
33,717 41,997 480,104
Less accumulated amortization......................... 5,619 18,237 108,504
------- ------- --------
$28,098 $23,760 $371,600
======= ======= ========
</TABLE>
5. Financing Arrangements
The Company has a noninterest bearing note payable due to a stockholder in
1999. The outstanding balance was $3,852 at December 31, 1998. The Company has
a non-interest bearing note payable due to ICEnet no later than March 30, 1999.
The amount due at maturity is $361,050.
The Company has a revolving line of credit with a financial institution. The
line of credit has a maximum borrowing amount of $80,000, provides for interest
at the institution's prime rate plus 1%, and matures on October 2, 1999.
Interest is payable monthly with principal due at maturity. The line of credit
is collateralized by substantially all of the assets of the Company. The
outstanding balance was $80,000 at December 31, 1998.
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, 1996, 1997, and 1998 was
$10,485, $26,560, and $13,855, respectively.
F-194
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
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.
Common stock option activity was as follows:
<TABLE>
<CAPTION>
Number Number of Weighted
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................... -- -- $ --
Options granted.................................. -- -- --
Options exercised................................ -- -- --
-------- ------ -----
Outstanding at December 31, 1997................... -- -- $ --
Options granted.................................. -- 80,000 2.00
Options exercised................................ -- -- --
-------- ------ -----
Outstanding at December 31, 1998................... -- 80,000 $2.00
======== ====== =====
</TABLE>
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 and 1998, consistent with the provisions of SFAS 123, the Company's
net loss would have been $124,364 and $131,800, respectively. All of the
options granted in 1998 are exercisable at December 31, 1998.
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 and 1998: no dividend yield, a risk-free
interest rate of 5.25%, and expected life of the option term of 4 years.
F-195
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
9. Income Taxes
Based upon cumulative temporary differences, the Company recognized a
deferred income tax liability of $9,603 as of December 31, 1997 and a deferred
tax asset (before valuation allowance) of $20,680 as of December 31, 1998. This
liability incurred in 1997 is mainly due to the book and tax timing differences
for depreciation. In addition, 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. For 1998, the deferred tax asset is mainly related
to the carryforward of net operating losses.
No pro forma provision for income taxes is reflected for 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.
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, 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.
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, 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>
F-196
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
10. Acquisitions (continued)
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,
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 330 customers.................................... 26,000
-------
Total purchase price............................................ $35,000
=======
</TABLE>
On September 15, 1998, the Company completed the acquisition of substantially
all of the assets of Great Plains Group, Inc., a company in the same line of
business, for $74,709 in cash. The acquisition of Great Plains Group, Inc. has
been accounted for using the purchase method and, accordingly, the acquired
assets have been recorded at their estimated fair values as of September 15,
1998.
The estimated fair value of the assets acquired September 15, 1998, are as
follows:
<TABLE>
<S> <C>
Property and equipment............................................ $33,390
Two year non-compete agreement.................................... 7,250
Customer base of 330 customers.................................... 34,069
-------
$74,709
=======
</TABLE>
On September 21, 1998, the Company completed the acquisition of substantially
all of the assets of Interactive Communications and Explorations, a partnership
in the same line of business, for $461,050; $100,000 in cash and $361,050 short
term note payable due in March 1999. Because the short term note payable is non
interest bearing, the imputed interest of $15,500 will be recognized over the
note term. The aggregate purchase price will be reduced by a like amount.
The acquisition of Interactive Communications and Explorations has been
accounted for using the purchase method and, accordingly, the acquired assets
have been recorded at their estimated fair value as of September 21, 1998.
The estimated fair value of the assets acquired September 21, 1998, are as
follows:
<TABLE>
<S> <C>
Property and equipment........................................... $113,840
Two year non-compete agreement................................... 24,170
Customer base of 1,100 customers................................. 307,540
--------
$445,550
========
</TABLE>
F-197
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
10. Acquisitions (continued)
On September 28, 1998, the Company completed the acquisition of a customer
base estimated at 220 from FGInet of Mt. Zion, a company in the same line of
business, in exchange for 44,285 shares of FGInet common voting stock valued at
$31,000. The acquisition of FGInet of Mt. Zion has been accounted for using the
purchase method and, accordingly, the acquired assets have been recorded at
their estimated fair value as of September 28, 1998.
The estimated fair value of the assets acquired September 28, 1998, are as
follows:
<TABLE>
<S> <C>
Property and equipment............................................ $ 7,000
Customer base of 220 customers.................................... 24,000
-------
$31,000
=======
</TABLE>
On September 30, 1998, the Company completed the acquisition of substantially
all of the assets of Wyman Computer Services, a company in the same line of
business, for $10,000 short-term note payable, $4,700 of which is outstanding
as of December 31, 1998. The acquisition of Wyman Computer Services has been
accounted for using the purchase method and, accordingly, the acquired assets
have been recorded at their estimated fair value as of September 30, 1998.
The estimated fair value of the assets acquired on September 30, 1998, are as
follows:
<TABLE>
<S> <C>
Property and equipment............................................ $ 4,000
Two year non-compete agreement.................................... 1,000
Customer base of 200 customers.................................... 5,000
-------
$10,000
=======
</TABLE>
11. Pending Trasaction
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 concurrently with the consummation of the
initial public offering 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 September 30, 1999 and the revenues for the Company for the period
from April 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 member of the Company. Subsequent to the acquisition, the
Company will continue to exist and maintain its status as an LLC.
F-198
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholder
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, 1997, and 1998, and the related
statements of income, stockholder's equity, and cash flows for the years ended
December 31, 1996, 1997 and 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 financial position of Superhighway, Inc. d/b/a
Indynet at December 31, 1996, 1997, and 1998, and the results of its
operations, stockholder's equity and cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Indianapolis, Indiana
January 22, 1999
F-199
<PAGE>
SUPERHIGHWAY, INC. D/B/A INDYNET
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Cash and cash equivalents................................... $ 9,623 $ 22,439
Accounts receivable, net of allowance for uncollectible
accounts (1997--$40,000; 1998--$105,000)................... 227,196 117,012
Loan from stockholder....................................... 135 --
-------- --------
236,954 139,451
Property and equipment, net of accumulated depreciation..... 671,724 749,132
Other assets................................................ 10,000 27,135
-------- --------
Total assets............................................. $918,678 $915,718
======== ========
Liabilities
Line of credit.............................................. $ 50,000 $ 80,000
Accounts payable............................................ 81,472 82,060
Accrued expenses............................................ 19,417 64,328
Current portion of long-term debt........................... 20,719 22,956
Other current liabilities................................... 14,849 1,075
-------- --------
Total current liabilities................................... 186,457 250,419
Long-term debt.............................................. 28,889 6,057
Common stock, no par value:
Authorized--1,000 shares; issued and outstanding--500
shares.................................................... 87,503 87,503
Retained earnings.......................................... 615,829 571,739
-------- --------
Total stockholder's equity............................... 703,332 659,242
-------- --------
$918,678 $915,718
======== ========
</TABLE>
See accompanying notes.
F-200
<PAGE>
SUPERHIGHWAY, INC. D/B/A INDYNET
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues.............................. $1,179,755 $2,004,474 $2,904,989
Other revenues............................... 68,996 101,816 108,394
---------- ---------- ----------
Total revenues............................. 1,248,751 2,106,290 3,013,383
Costs and expenses:
Cost of access revenues...................... 321,047 528,000 900,834
Cost of other revenues....................... 16,215 27,064 46,127
Operations and customer support.............. 211,609 357,454 514,745
Sales and marketing.......................... 218,890 395,523 550,339
General and administrative................... 164,003 200,806 642,302
Depreciation................................. 78,408 137,431 208,290
Amortization................................. -- -- 795
---------- ---------- ----------
Total cost and expenses.................... 1,010,172 1,646,278 2,863,432
---------- ---------- ----------
Income from operations........................ 238,579 460,012 149,951
Other expense:
Interest expense............................. 19,442 4,045 13,861
Other expense, net........................... 13,501 49,233 13,652
---------- ---------- ----------
Total other expense........................ 32,943 53,278 27,513
---------- ---------- ----------
Net income.................................... $ 205,636 $ 406,734 $ 122,438
========== ========== ==========
Unaudited pro forma information:
Net income................................... $ 205,636 $ 406,734 $ 122,438
Pro forma income tax provision............... 83,177 162,148 52,748
---------- ---------- ----------
Pro forma net income (See Note 2)............ $ 122,459 $ 244,586 $ 69,690
========== ========== ==========
</TABLE>
See accompanying notes.
F-201
<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 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............................. -- -- 122,438 122,438
Stockholder distributions.............. -- -- (166,528) (166,528)
--- ------- -------- --------
Balance at December 31, 1998............ 500 $87,503 $571,739 $659,242
=== ======= ======== ========
</TABLE>
See accompanying notes.
F-202
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income....................................... $205,636 $406,734 $122,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 78,408 137,431 209,085
Allowance for doubtful accounts................. 16,500 21,500 65,000
Accounts receivable direct write-off............ -- -- 195,000
Loss on disposal of equipment................... 13,501 49,233 3,649
Changes in operating assets and liabilities:
Accounts receivable............................. (111,996) (142,700) (149,816)
Other assets.................................... (400) (9,700) (1,591)
Accounts payable and accrued expenses........... 62,378 (9,390) 45,499
Other current liabilities....................... (2,103) 6,495 (13,774)
-------- -------- --------
Net cash provided by operating activities ....... 261,924 459,603 475,490
Investing activities
Purchases of property and equipment.............. (233,793) (549,297) (323,303)
Proceeds from disposal of property and
equipment....................................... -- -- 41,596
Acquisition of business.......................... -- -- (23,844)
-------- -------- --------
Net cash used in investing activities............ (233,793) (549,297) (305,551)
Financing activities
Net proceeds under line of credit................ -- 50,000 30,000
Proceeds from issuance of long-term debt......... -- 63,820 --
Principal payments of long-term debt............. -- (14,212) (20,595)
Distributions made to stockholder................ (1,800) (20,168) (166,528)
-------- -------- --------
Net cash (used in) provided by financing
activities...................................... (1,800) 79,440 (157,123)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 26,331 (10,254) 12,816
Cash and cash equivalents (overdraft) at
beginning of year............................... (6,454) 19,877 9,623
-------- -------- --------
Cash and cash equivalents at end of year......... $ 19,877 $ 9,623 $ 22,439
======== ======== ========
Supplemental cash flow information
Cash paid for interest........................... $ 19,442 $ 4,045 $ 13,861
======== ======== ========
</TABLE>
See accompanying notes.
F-203
<PAGE>
SUPERHIGHWAY, INC. d/b/a/ INDYNET
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, and 1998
1. Organization
Superhighway, Inc. d/b/a Indynet (the "Company"), incorporated as a
Subchapter S Corporation under the laws of Indiana on June 1, 1995, is a
regional provider of internet access. The Company's target market is central
Indiana.
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.
Other Assets
Other assets include intangibles which have been recorded as a result of the
purchase of a competitor and will be amortized over 3 years on a straight line
basis. Other assets are net of $795 of accumulated amortization at December 31,
1998.
F-204
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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.
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 value of the service provided by
the Company. During 1996, 1997 and 1998, access revenues and sales and
marketing expense include approximately $99,000, $198,000 and $297,000,
respectively, of such non-monetary transactions.
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 1996,
1997 and 1998, the Company expensed approximately $122,000, $233,000 and
$367,000, respectively, as advertising costs.
Income Taxes
Historically, the Company has elected, by the consent of its stockholder, to
be taxed using 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
F-205
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
Standards No. 109, Accounting for Income Taxes, as if the Company had been
subject to federal and certain state 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 generally 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.
Reclassification
Certain amounts in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 financial statement presentation.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- ---------
<S> <C> <C>
Computer equipment....................................... $784,188 $ 851,068
Furniture, fixtures, and office equipment................ 11,122 20,602
Leasehold improvements................................... 12,699 201,836
-------- ---------
808,009 1,073,506
Less accumulated depreciation............................ 136,285 324,374
-------- ---------
$671,724 $ 749,132
======== =========
</TABLE>
F-206
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(continued)
4. Line of Credit
The Company has a $300,000 short-term line of credit with a bank. Borrowings
against the line bear interest at the bank's prime rate plus 1% (8.75% at
December 31, 1998). The line is secured by all business assets and is
personally guaranteed by the sole stockholder. Borrowings of $50,000 and
$80,000 were outstanding against the line at December 31, 1997 and 1998,
respectively.
5. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
---------------
1997 1998
------- -------
<S> <C> <C>
Note payable to a bank, monthly installments of $2,041,
including interest at 8.75%, due March 2000; the note is
collateralized by all business assets and personally
guaranteed by the sole stockholder......................... $49,608 $29,013
Less current portion........................................ 20,719 22,956
------- -------
$28,889 $ 6,057
======= =======
</TABLE>
6. Lease Commitment--Related Party
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 1996, 1997
and 1998 was approximately $8,000, $37,000 and $60,000, 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 9), 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 tax liability of $40,000 as of December 31, 1998, had the
termination of its election to be treated as an S Corporation occurred on that
date.
8. Acquisition
During 1998, the Company purchased the computer equipment and customer lists
of another Internet service provider for $23,844. The purchase price was
allocated to the net assets acquired based upon their estimated fair values at
the date of acquisition. The estimated fair value of the computer equipment was
$7,640 at the acquisition date and the remaining $16,204 was recorded as an
intangible.
F-207
<PAGE>
SUPERHIGHWAY, INC. d/b/a INDYNET
NOTES TO FINANCIAL STATEMENTS--(continued)
9. Pending Transaction
During 1998, the Company's stockholder 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 concurrently with the consummation of the initial public offering
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.
The related party transactions 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-208
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Lightspeed Net, Inc.
We have audited the accompanying balance sheets of Lightspeed Net, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholder's equity, and cash flows for the three years in the period ended
December 31, 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 financial position of Lightspeed Net, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
As discussed in Note 2 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 2. The 1998 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
Los Angeles, California
January 29, 1999
F-209
<PAGE>
LIGHTSPEED NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash.................................................. $ 55,863 $ 60,481
Accounts receivable, net.............................. 266,691 268,042
Prepaid expenses...................................... 13,279 15,424
Other current assets.................................. 17,758 15,204
---------- ----------
Total current assets................................ 353,591 359,151
Property and equipment, net............................ 1,111,776 1,154,950
Other assets........................................... 18,594 14,117
---------- ----------
Total assets........................................ $1,483,961 $1,528,218
========== ==========
Liabilities and Stockholder's Equity
Liabilities:
Accounts payable...................................... $ 114,861 $ 117,277
Accounts payable, related party....................... 78,913 132,685
Accrued expenses...................................... 134,220 69,899
Customer advances..................................... 40,352 100,386
Unearned revenues..................................... 267,367 346,445
---------- ----------
Total liabilities................................... 635,713 766,692
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 1,670,962
Accumulated deficit................................... (1,266,776) (1,784,187)
---------- ----------
Total stockholder's equity.......................... 848,248 761,526
---------- ----------
Total liabilities and stockholder's equity.......... $1,483,961 $1,528,218
========== ==========
</TABLE>
See accompanying notes.
F-210
<PAGE>
LIGHTSPEED NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues......................... $ 1,124,474 $ 2,941,423 $4,463,663
Other revenues.......................... -- 144,478 189,328
----------- ----------- ----------
Total revenues........................ 1,124,474 3,085,901 4,652,991
Cost and expenses:
Cost of access revenues................. 820,854 1,465,959 1,864,723
Cost of other revenues.................. -- 108,127 109,903
Operations and customer support......... 254,212 619,346 731,833
Sales and marketing..................... 487,891 644,865 561,253
General and administrative.............. 414,418 989,771 1,238,536
Depreciation and amortization........... 212,659 500,692 666,126
----------- ----------- ----------
Total cost and expenses............... 2,190,034 4,328,760 5,172,374
----------- ----------- ----------
Loss from operations..................... (1,065,560) (1,242,859) (519,383)
Other income (expense):
Interest income......................... -- 1,510 1,972
Other expense........................... -- (25,427) --
----------- ----------- ----------
Total other income (expense).......... -- (23,917) 1,972
----------- ----------- ----------
Net loss................................. $(1,065,560) $(1,266,776) $ (517,411)
=========== =========== ==========
</TABLE>
See accompanying notes.
F-211
<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 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........... -- -- 430,689 -- -- 430,689
Net loss............... -- -- -- -- (517,411) (517,411)
--- -------- ---------- ---------- ----------- ----------
Balance at December 31,
1998................... 100 $874,751 $1,670,962 $ -- $(1,784,187) $ 761,526
=== ======== ========== ========== =========== ==========
</TABLE>
See accompanying notes.
F-212
<PAGE>
LIGHTSPEED NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- ---------
<S> <C> <C> <C>
Operating activities
Net loss................................. $(1,065,560) $(1,266,776) $(517,411)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 212,660 500,692 666,126
Provision for doubtful accounts......... 11,244 99,944 82,289
Loss on sale or disposal of equipment... -- 25,427 --
Changes in operating assets and
liabilities:
Accounts receivable................... (102,957) (263,282) (83,640)
Prepaid expenses...................... (12,160) (1,119) (2,145)
Other current assets.................. 23,400 (17,758) 2,554
Other assets.......................... (900) (18,490) (4,500)
Accounts payable...................... 47,941 144,913 56,188
Customer advances..................... 12,512 27,840 60,034
Accrued expenses...................... 54,411 70,281 (64,321)
Unearned revenues..................... 79,753 185,479 79,078
----------- ----------- ---------
Net cash provided by (used in) operating
activities.............................. (739,656) (512,849) 274,252
Investing activities
Purchases of property and equipment...... (903,949) (696,561) (700,323)
Proceeds from disposal of property and
equipment............................... -- 25,000 --
----------- ----------- ---------
Net cash used in investing activities.... (903,949) (671,561) (700,323)
Financing activities
Owner's capital contributions............ 1,643,605 -- --
Shareholder's capital contributions...... -- 1,240,273 430,689
----------- ----------- ---------
Net cash provided by financing
activities.............................. 1,643,605 1,240,273 430,689
----------- ----------- ---------
Net increase in cash..................... -- 55,863 4,618
Cash at beginning of period.............. -- -- 55,863
----------- ----------- ---------
Cash at end of period.................... $ -- $ 55,863 $ 60,481
=========== =========== =========
Supplemental cash flow information
Cash paid for income taxes............... $ -- $ 800 $ 800
=========== =========== =========
</TABLE>
See accompanying notes.
F-213
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 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 shareholder of the Company, from March 27,
1995 through December 31, 1996. On June 28, 1996 the Company was incorporated
and became a separate company beginning January 1, 1997.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
2. Summary of Significant Accounting Policies
Basis of Presentation
The financial statements include the accounts of the Company for the years
ended December 31, 1997 and 1998. For 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 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
period ended December 31, 1998. 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 marketing spending; limit the Company's ability to
expand its subscriber base and result in
F-214
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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 month of service. The Company has deferred recognizing
revenue on these advance billings until earned.
F-215
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
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, 1998, 1997, and 1996, the Company expensed $201,276,
$254,510 and $274,284, 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. Accordingly, the Company's
results of operations are reported in the individual income tax return of the
sole shareholder. The Company recorded California franchise tax provisions of
$800 for each of the years ended December 31, 1998 and 1997.
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.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current year presentation.
F-216
<PAGE>
LIGHTSPEED NET, 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. 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 for each product. 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.
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Computer equipment................................... $1,714,934 $2,387,639
Furniture, fixtures, and office equipment............ 36,774 64,392
Automobiles.......................................... 30,013 30,013
---------- ----------
1,781,721 2,482,044
Less accumulated depreciation........................ (669,945) (1,327,094)
---------- ----------
$1,111,776 $1,154,950
========== ==========
</TABLE>
F-217
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
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, 1998, 1997, and 1996, was $133,618, $74,719, and $37,221, respectively.
Minimum future lease payments under operating leases with initial terms of
one year or more consist of the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
1999...................................... $164,460
2000...................................... 150,518
2001...................................... 137,052
2002...................................... 33,410
2003...................................... 16,705
Thereafter................................ --
--------
Total minimum lease payments.............. $502,145
========
</TABLE>
5. Stock Option Plan
On July 24, 1998, the Company adopted the Lightspeed Net, Inc. Grant of
Incentive Stock Option (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. Subsequent to year end this award was modified. Refer to
Note 10 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 December 31, 1998............ 11 $33,333.63 $33,333.63
======= ========== ==========
Exercisable at December 31, 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 year ended December
31, 1998 under
F-218
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
5. Stock Option Plan (continued)
the provisions of SFAS 123, the Company's net loss would have been increased
by $10,017. 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.
As of December 31, 1998, the Company had no reserved shares of common stock
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 shareholder has started additional companies, the Profit Plan has covered
the employees of those companies. Under the terms of the Profit Plan, the sole
shareholder of the Company historically contributed 15% of the base salaries
for all eligible employees to the 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, and $49,434 were
made by the Company for the years ended December 31, 1997 and 1996,
respectively. In January 1999, the Company decided to make a voluntary
contribution for the year ended December 31, 1998 in the amount of $168,175,
which has been accrued as of December 31, 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 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 asset of $59,748 as of
December 31, 1998, with a full valuation allowance had the termination of its
election to be treated as an S Corporation occurred on that date.
No pro forma income tax benefit is reflected for years ended December 31,
1998, 1997, and 1996 as the Company would have provided a full valuation
allowance against the deferred tax asset had it been a C Corporation.
F-219
<PAGE>
LIGHTSPEED NET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
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, 1998, 1997, and 1996 were $15,204, $17,758, and $0, 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
shareholder of the Company. Purchases from Lightspeed Technologies, Inc. for
the years ended December 31, 1998, 1997, and 1996, were $871,192, $877,373, and
$1,042,327, respectively. The Company believes that such purchases were made at
the fair market value of the assets acquired.
The Company leases a customer service center from the sole shareholder of the
Company. Total rental expense for the years ended December 31, 1998, 1997, and
1996, were $60,280, $60,000, and $9,300, 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. Pending Transaction
The Company's stockholder has entered into an agreement whereby he will sell
his shares in the Company to OneMain.com, Inc. The Company's sole stockholder
will exchange the shares in the Company for cash and shares of common stock of
OneMain.com, Inc. concurrently with the consummation of the initial public
offering 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 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, and subsequent to the acquisition, 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.
The related party transactions as described in Note 8 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-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 ("the
Company"), as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the period January 31,
1997 (inception) to December 31, 1997 and for the year ended December 31, 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, 1998 and 1997, and the results of its operations
and its cash flows for the period January 31, 1997 (inception) to December 31,
1997 and for the year ended December 31, 1998, in conformity with generally
accepted accounting principles.
As discussed in Note 2 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 2. The 1998 financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Vienna, Virginia
January 15, 1999
F-221
<PAGE>
JPS.Net Corporation
Balance Sheets
<TABLE>
<CAPTION>
December 31
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $ 767,890 $1,879,658
Restricted cash....................................... -- 327,282
Accounts receivable, net of allowance for doubtful
accounts of $31,795 and $0 at December 31, 1998 and
1997, respectively................................... 79,186 348,742
Short-term investments................................ -- 300,000
Inventory............................................. -- 13,500
Notes receivable from related parties................. 91,661 292,101
Prepaid expenses...................................... 17,975 31,127
Other current assets.................................. -- 6,000
---------- ----------
Total current assets................................ 956,712 3,198,410
Property and equipment, net............................ 293,641 944,020
Lease and other deposits............................... 7,302 179,482
---------- ----------
Total assets........................................ $1,257,655 $4,321,912
========== ==========
Liability and stockholders' equity
Current liabilities:
Notes payable, related parties........................ $ 19,139 $ --
Note payable to former stockholder, current........... -- 289,543
Accounts payable...................................... 354,328 193,847
Accrued expenses...................................... 132,846 520,608
Unearned revenues..................................... 1,730,649 5,583,406
---------- ----------
Total current liabilities........................... 2,236,962 6,587,404
Note payable to former stockholder, net of current
portion.............................................. -- 700,544
---------- ----------
Total liabilities................................... 2,236,962 7,287,948
Stockholders' equity:
Capital stock, no par value (10 million shares
authorized; 4,708,947 and 5,000,000 shares issued
and outstanding at December 31, 1998 and 1997,
respectively)........................................ 13,360 12,582
Accumulated deficit................................... (992,667) (2,978,618)
---------- ----------
Total stockholders' equity.......................... (979,307) (2,966,036)
---------- ----------
Total liabilities and stockholders' equity.......... $1,257,655 $4,321,912
========== ==========
</TABLE>
See accompanying notes.
F-222
<PAGE>
JPS.Net Corporation
Statements of Operations
<TABLE>
<CAPTION>
For the period
January 31 Year ended
(inception) to December 31
December 31 ---------------
1997 1998
-------------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues................................ $2,060,390 $6,711,797
Other revenues................................. 14,008 2,289,781
---------- ----------
Total revenues............................... 2,074,398 9,001,578
Costs and expenses:
Costs of access revenues....................... 1,096,207 3,723,345
Costs of other revenues........................ 23,395 105,447
Operations and customer support................ 483,344 1,723,719
Sales and marketing............................ 547,637 1,483,192
General and administrative..................... 889,137 2,595,107
Amortization................................... 24,681 132,467
Depreciation................................... 2,643 90,921
---------- ----------
Total costs and expenses..................... 3,067,044 9,854,198
Loss from operations............................ (992,646) (852,620)
Other income (expense):
Interest income................................ 8,911 50,700
Interest expense............................... (8,932) (22,327)
Other.......................................... -- (87,613)
---------- ----------
Net loss........................................ $ (992,667) $ (911,860)
========== ==========
</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....................... -- -- (911,860) (911,860)
--------- ------- ----------- -----------
Balance at December 31, 1998.... 4,708,947 $12,582 $(2,978,618) $(2,966,036)
========= ======= =========== ===========
</TABLE>
See accompanying notes.
F-224
<PAGE>
JPS.Net Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
January 31
(inception) to Year ended
December 31 December 31
1997 1998
-------------- -----------
<S> <C> <C>
Operating activities:
Net loss.......................................... $ (992,667) $ (911,860)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................... 27,324 223,388
Provision for doubtful accounts.................. -- 31,795
Loss on disposal of fixed assets................. 50,613 38,271
Changes in operating assets and liabilities:
Accounts receivable............................ (79,186) (301,351)
Inventory...................................... -- (13,500)
Prepaid expenses and other current assets...... (109,636) (219,592)
Lease and other deposits....................... (7,302) (172,180)
Accounts payable............................... 354,328 (160,481)
Accrued expenses............................... 132,846 392,182
Unearned revenues.............................. 1,730,649 3,852,757
---------- -----------
Net cash provided by operating activities......... 1,106,969 2,759,429
Investing activities:
Purchases of property and equipment............... (371,578) (912,038)
Increase in investments and restricted cash....... -- (627,282)
---------- -----------
Net cash used in investing activities............. (371,578) (1,539,320)
Financing activities:
Net proceeds from issuance of common stock........ 13,360 131
Net proceeds from notes payable, related parties.. 19,139 (108,472)
---------- -----------
Net cash provided by (used in) financing
activities ...................................... 32,499 (108,341)
---------- -----------
Net increase in cash and cash equivalents......... 767,890 1,111,768
Cash and cash equivalents at beginning of period.. -- 767,890
---------- -----------
Cash and cash equivalents at end of period........ $ 767,890 $ 1,879,658
========== ===========
</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 preceding 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 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 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 incurred losses of
$992,667 and $911,860 for the period from January 31, 1997 (date of inception)
to December 31, 1997 and for the year ended December 31, 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
December 31, 1998, the Company's current liabilities exceeded its current
assets by $3,388,994. Management believes that actions presently being taken,
as described below, will provide the Company with sufficient funds to continue
as a going concern.
Effective November 1, 1998, the Company increased the prices it charges for
its services by approximately 40%. The 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. In the event the increase in
prices reduces the number of customers substantially, the Company has plans to
substantially reduce its staffing.
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.
Reclassification
Certain prior year balances have been reclassified to conform with current
year presentation.
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.
At December 31, 1998, approximately $1,376,000 and $504,000 of the Company's
cash and cash equivalents were held by Westamerica and National Bank of the
Redwoods, respectively.
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
F-227
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(continued)
2. Summary of Significant Accounting Policies (continued)
browser software, 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
period from January 31, 1997 (inception) to December 31, 1997 and for the year
ended December 31, 1998, the Company expensed $292,631 and $546,729,
respectively, as advertising costs.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), Accounting for Income
Taxes. Under the 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.
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.
F-228
<PAGE>
JPS.NET CORPORATION
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 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.
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 December 31, 1998 the
total amounts held on reserve by the Institution were approximately $327,000.
4. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1997 1998
-------- ---------
<S> <C> <C>
Computer equipment......................................... $141,590 $ 507,090
Capitalized line installation.............................. 176,528 541,515
Furniture, fixtures, and office equipment.................. 15,659 136,534
-------- ---------
333,777 1,185,139
Less: accumulated depreciation and amortization............ (40,136) (241,119)
-------- ---------
$293,641 $ 944,020
======== =========
</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>
1999................................ $289,543
2000................................ 321,135
2001................................ 344,350
2002................................ 35,059
--------
$990,087
========
</TABLE>
6. Lease Commitments
The Company leases office space and various office and computer equipment
under noncancelable 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 year ended December 31, 1998 was approximately
$78,000 and $233,000, respectively.
Minimum future lease payments under operating leases are summarized as
follows:
<TABLE>
<CAPTION>
Year ending December 31 Amount
----------------------- ----------
<S> <C>
1999.............................. $1,650,030
2000.............................. 1,088,557
2001.............................. 207,284
2002.............................. 6,483
2003.............................. 4,750
----------
Total minimum lease payments...... $2,957,104
==========
</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
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Net operating losses................................. $ 328,441 $ 739,940
Accrued expenses..................................... -- 12,665
--------- ---------
Total deferred tax assets............................ 328,441 752,605
Depreciation and amortization........................ (18,314) (37,779)
--------- ---------
Net deferred tax asset............................... 310,127 714,826
Valuation allowance.................................. (310,127) (714,826)
--------- ---------
Net deferred tax asset............................... $ -- $ --
========= =========
</TABLE>
The Company is in a net deferred tax asset position at December 31, 1997 and
1998 (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 year
ended December 31, 1998 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 year ended
December 31, 1998 of approximately $310,000 and $405,000, respectively, due to
aforementioned uncertainties concerning the Company's ability to realize
deferred tax assets.
8. Related Party Transactions
The Company had notes receivable from related parties which totaled $91,661
and $292,101 as of December 31, 1997 and 1998, respectively. The first note
receivable amounted to $46,702 and $163,438 as of December 31, 1997 and 1998,
respectively, and relates to a line of credit to a stockholder approved by the
Company. The line of credit may not exceed $300,000. 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 $116,112 as of December 31, 1997
and 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. A third note receivable amounted to $12,551 as of
December 31, 1998 and reflects to a loan made by the Company to a related
company. The note is payable on demand and accrues interest at a rate of 5%
annually on unpaid balances.
The Company had two notes payable which it assumed on behalf of a related
party and which amounted to $19,139 at December 31, 1997. The first note
payable amounted to $8,396 as of December 31, 1997, and related to a loan by an
acquaintance of a stockholder of the Company, which was assumed by the Company
upon its incorporation. The note was paid off in full in 1998. The second note
payable, which amounted to $10,743 at December
F-231
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(continued)
31, 1997, related to a loan by a relative of a stockholder of the Company,
which was assumed by the Company upon its incorporation. The note was paid off
in full in 1998.
9. 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.
10. Pending Transaction
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 concurrently with
the consummation of the initial public offering 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-half of the difference between total
revenue for the Company for the 12 months ended September 30, 1998 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 acquisition, OneMain.com will become the sole stockholder
of the Company.
The related party transactions as described in Note 8 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-232
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
TGF Technologies, Inc.:
We have audited the accompanying balance sheets of TGF Technologies, Inc. as
of December 31, 1997 and 1998, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 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 financial position of TGF Technologies, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Burlington, Vermont
February 6, 1999
F-233
<PAGE>
TGF TECHNOLOGIES, INC.
BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 11,331 $ 209,877
Accounts receivable--trade, net of allowances of
$45,000 and $85,000 in 1997 and 1998, respectively.. 211,655 395,284
Other receivables.................................... 4,924 9,178
Deposits and prepaid lease expense................... 19,541 6,839
Related party receivables (note 4)................... 614 5,938
Other current assets................................. 2,056 --
---------- ----------
Total current assets............................... 250,121 627,116
---------- ----------
Property and equipment (note 3):
Computer, telecommunications and office equipment.... 1,900,928 2,334,396
Furniture and fixtures............................... 75,923 78,920
Software............................................. 40,414 122,611
---------- ----------
2,017,265 2,535,927
Less accumulated depreciation........................ (1,006,264) (1,539,335)
---------- ----------
Net property and equipment......................... 1,011,001 996,592
---------- ----------
Deposits and prepaid lease expense..................... 15,970 15,970
---------- ----------
Total assets....................................... $1,277,092 $1,639,678
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current installments of obligations under capital
leases (note 3)..................................... $ 405,370 $ 311,878
Trade accounts payable (note 4)...................... 592,037 274,187
Note payable-related party (note 4).................. -- 250,000
Accrued telecommunications charges................... 65,000 97,050
Other accrued expenses and current liabilities....... 45,192 118,741
Customer deposits.................................... 44,429 95,034
Deferred revenue..................................... 160,448 279,991
---------- ----------
Total current liabilities.......................... 1,312,476 1,426,881
Long-term liabilities:
Obligations under capital leases, excluding current
installments (note 3)............................... 352,172 262,119
---------- ----------
Total liabilities.................................. 1,664,648 1,689,000
---------- ----------
Stockholders' equity (deficit):
Common stock, no par value;
100 shares authorized, issued and outstanding...... 500,000 500,000
Additional paid-in capital........................... 1,320,178 1,850,178
Accumulated deficit.................................. (2,207,734) (2,399,500)
---------- ----------
Total stockholders' equity (deficit)............... (387,556) (49,322)
---------- ----------
Total liabilities and stockholders' equity (defi-
cit).............................................. $1,277,092 $1,639,678
========== ==========
</TABLE>
See accompanying notes.
F-234
<PAGE>
TGF TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Access revenues........................... $ 913,768 $2,460,523 $4,864,132
Other revenues............................ 231,406 51,558 90,440
--------- ---------- ----------
Total revenues.......................... 1,145,174 2,512,081 4,954,572
--------- ---------- ----------
Costs and expenses:
Costs of access revenues.................. 375,859 995,551 1,747,470
Costs of other revenues................... 72,327 57,511 10,045
Operations and customer support........... 222,320 467,766 701,342
Sales and marketing....................... 237,934 523,765 649,803
General and administrative................ 524,220 905,108 1,403,596
Depreciation and amortization............. 221,555 478,294 568,597
--------- ---------- ----------
Total costs and expenses................ 1,654,215 3,427,995 5,080,853
--------- ---------- ----------
Loss from operations.................... (509,041) (915,914) (126,281)
--------- ---------- ----------
Other income (expense):
Interest income........................... 1,411 1,168 730
Interest expense.......................... (33,916) (70,549) (61,694)
Other..................................... -- -- (4,521)
--------- ---------- ----------
Total other expense, net................ (32,505) (69,381) (65,485)
--------- ---------- ----------
Net loss................................ $(541,546) $ (985,295) $ (191,766)
========= ========== ==========
</TABLE>
See accompanying notes.
F-235
<PAGE>
TGF TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Additional Total
Common Paid-In (Accumulated Stockholders'
Stock Capital Deficit) Equity
-------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995... $500,000 $ 336,353 $ (680,893) $155,460
Capital contributions........ -- 440,330 -- 440,330
Net loss..................... -- -- (541,546) (541,546)
-------- ---------- ----------- --------
Balance at December 31, 1996... 500,000 776,683 (1,222,439) 54,244
Capital contributions........ -- 543,495 -- 543,495
Net loss..................... -- -- (985,295) (985,295)
-------- ---------- ----------- --------
Balance at December 31, 1997... 500,000 1,320,178 (2,207,734) (387,556)
Capital contributions........ -- 530,000 -- 530,000
Net loss..................... -- -- (191,766) (191,766)
-------- ---------- ----------- --------
Balance at December 31, 1998... $500,000 $1,850,178 $(2,399,500) $(49,322)
======== ========== =========== ========
</TABLE>
See accompanying notes.
F-236
<PAGE>
TGF TECHNOLOGIES, INC.
Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(541,546) $(985,295) $(191,766)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 221,555 478,294 568,597
Loss on sale of property and equipment...... -- -- 4,279
Bad debt expense............................ 11,269 11,345 127,384
Changes in net assets and liabilities:
Increase in accounts receivable trade...... (34,006) (137,047) (311,011)
Decrease (increase) in other receivables... (13,699) 19,436 (4,254)
Decrease (increase) in other current
assets.................................... (5,763) 5,394 14,758
Increase in related party receivables...... -- -- (5,324)
Increase (decrease) in trade accounts
payable................................... 131,708 374,584 (317,850)
Increase in other accrued expenses and
current liabilities....................... 16,918 57,316 105,599
Increase in customer deposits.............. 11,447 32,982 50,605
Increase in deferred revenue............... 31,725 128,723 119,543
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ (170,392) (14,268) 160,560
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.......... (83,324) (56,427) (260,317)
Proceeds from sale of property and
equipment................................... -- -- 4,892
--------- --------- ---------
Net cash used in investing activities...... (83,324) (56,427) (255,425)
--------- --------- ---------
Cash flows from financing activities:
Principal payments under capital lease
obligations................................. (120,173) (493,385) (486,589)
Deposits and prepayments made on lease
obligations................................. (20,049) (15,462) --
Capital contributions........................ 440,330 543,495 530,000
Issuance of note payable--related party...... -- -- 250,000
--------- --------- ---------
Net cash provided by financing activities.. 300,108 34,648 293,411
--------- --------- ---------
Net increase (decrease) in cash............ 46,392 (36,047) 198,546
Cash at beginning of year..................... 986 47,378 11,331
--------- --------- ---------
Cash at end of year........................... $ 47,378 11,331 209,877
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest.................................... $ 33,916 $ 70,549 $ 61,694
Income taxes................................ 150 542 575
Noncash financing activities:
Capital lease obligations of $440,842,
$895,709 and $303,043 were incurred in
1996, 1997 and 1998, respectively.
</TABLE>
See accompanying notes.
F-237
<PAGE>
TGF TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
1.Nature of Operations
TGF Technologies, Inc. (the "Company") or ("TGF") was incorporated in Vermont
on May 9, 1994 and commenced operations in November 1994. The stock of the
Company is owned by NWST Corporation and Together Foundation for Global Unity
(the "Foundation"). The Company is a regional provider of Internet access and
offers a broad spectrum of Internet access services to both individual and
business customers ranging from dial-up services to continuous access services
using dedicated telephone connections and Web hosting services. The principal
market areas are Vermont, Central New Hampshire, Eastern New York and to a
lesser extent, Southeastern Quebec.
2.Summary of Significant Accounting Policies
(a)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.
(b)Revenue Recognition and Customer Deposits
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. Advance billings are recorded as
deferred revenue and recognized as revenue when earned. Collections
relating to future access services are recorded as customer deposits.
(c)Bartered Services
The Company participates in bartered services transactions with certain
media organizations. In exchange for free Internet service from the
Company, these organizations provide advertising services to the Company.
The Company also provides Internet access to various local organizations at
no charge. These transactions are recognized by the Company as Internet
access revenues and marketing expense in equal amounts at the fair value of
Internet access services provided by the Company. The Company has
recognized bartered services transactions in the amount of $30,900, $63,720
and $93,480 in 1996, 1997 and 1998, respectively.
(d)Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
F-238
<PAGE>
TGF TECNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
2.Summary of Significant Accounting Policies--(continued)
(e)Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the
assets for property and equipment acquired after January 1, 1996. Property
and equipment acquired prior to January 1, 1996 are depreciated using the
double declining balance method. The estimated useful lives of the assets
range from three (3) to seven (7) years. The Company leases certain of its
data communications and other equipment under capital lease agreements. The
assets and liabilities under capital leases are recorded at the lesser of
the present value of aggregate future minimum lease payments or the fair
value of the assets under the lease. Assets under capital lease are
depreciated over their estimated useful lives or the lease term as
applicable.
(f)Income Taxes
Income taxes are accounted for under the asset and liability method.
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 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. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(g)Foreign Currency
The Company transacts some of its business in Canadian dollars. This
activity has been remeasured into the Company's functional currency (U.S.
dollars) as of year end. Foreign exchange gain or loss is recorded as a
component of general and administrative expense, and was not material in
1996, 1997 and 1998.
(h)Advertising Costs
The Company incurs advertising costs associated with the marketing of its
services. These costs of advertising are expensed either as incurred or the
first time the advertising takes place, depending on the nature of expense.
Advertising expense, including advertising expense related to bartered
transactions, totaled $70,077, $199,065 and $157,196 for the years ended
December 31, 1996, 1997 and 1998, respectively.
F-239
<PAGE>
TGF TECNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
2.Summary of Significant Accounting Policies--(continued)
(i)Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
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.
(j)Fair Value of 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 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.
The carrying value of short-term financial instruments, including cash
and cash equivalents, trade accounts receivable and payable and certain
accrued liabilities, approximates their carrying amounts in the financial
statements due to the short maturity of such instruments. The carrying
amount of note payable-related party approximates its fair value based on
the Company's ability to obtain borrowings with similar terms from a
related party.
(k)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.
F-240
<PAGE>
TGF TECNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
2.Summary of Significant Accounting Policies--(continued)
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 on
the financial statements are not required.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 98-1 ("SOP 98-1") Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. The SOP requires that certain costs
related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software.
SOP 98-1 is effective for financial statements issued for fiscal years
beginning after December 15, 1998. TGF adopted the SOP early as of January
1, 1998. There was no significant impact on the Company's financial
statements upon adoption of this pronouncement.
Commitments
In order to provide local access numbers to its current subscriber base,
the Company must enter into agreements with various providers to provide
telecommunications lines. The terms of the agreements vary in length but
generally do not exceed five years. In the event TGF no longer required the
service of these telecommunications lines the Company would be liable for
termination fees levied by such providers.
3.Leases
The Company leases certain equipment under capital lease agreements that
expire at various dates through December 2002. At December 31, 1997 and 1998,
the gross amount of equipment and related accumulated amortization recorded
under capital leases were as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Computer and telecommunications equipment........... $1,382,100 $ 1,685,114
Less accumulated amortization....................... (536,417) (1,021,640)
---------- -----------
$ 845,683 $ 663,474
========== ===========
</TABLE>
Amortization of assets held under capital lease is included with depreciation
expense.
F-241
<PAGE>
TGF TECNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
3.Leases--(continued)
The Company also has several operating leases, primarily for office space and
office equipment, with expiration dates through October 2001. Rental expense
for operating leases during 1996, 1997 and 1998 was $24,795, $88,514 and
$143,835, respectively.
Future minimum lease payments under capital and operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ended December 31: Capital Leases Operating Leases
----------------------- -------------- ----------------
<S> <C> <C>
1999....................................... $349,285 $124,069
2000....................................... 227,545 125,821
2001....................................... 46,955 12,775
2002....................................... 2,508 --
-------- --------
Total minimum lease payments............. 626,293 $262,665
========
Less amounts representing interest....... 52,296
--------
Present value of minimum capital lease
payments................................ 573,997
Less current installments of obligations
under capital leases.................... 311,878
--------
Obligations under capital leases,
excluding current installments.......... $262,119
========
</TABLE>
4.Related Party Transactions
The Company leases office space from a company related by common ownership.
The lease is an informal agreement for $1,000 a month through June 30, 1997 and
$2,500 a month thereafter. Rent expense in 1996, 1997 and 1998 was $12,000,
$21,000 and $30,000, respectively. Rent payable of $13,000 and $1,000 at
December 31, 1997 and 1998, respectively, is included in accounts payable.
The Company pays some operating expenses, such as postage, telephone and
employee benefits, for the Foundation. In addition, the Company collects some
cash receipts for credit card sales by the Foundation. The expenses generally
exceed the cash receipts and the Foundation reimburses the Company monthly. At
December 31, 1997 and 1998, the Company has recorded a receivable of $614 and
$5,938, respectively, from the Foundation.
During 1996 the Company provided consulting services to a related company by
common ownership in the amount of $19,000. This amount is reflected in other
revenue for the year ended December 31, 1996.
The Chairperson of the Board of Directors (a related party by common stock
ownership) provides financial support to the Company for operating needs.
Capital contributions in the amounts of $440,330, $543,495 and $530,000 were
contributed by this related party to TGF during 1996, 1997 and 1998,
respectively. During 1998 the Company borrowed $250,000 from the Chairperson.
The note is non-interest bearing, unsecured and due on demand.
F-242
<PAGE>
TGF TECNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1997 and 1998
5.Income Taxes
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 and 1997 are presented
below:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts.............................. $ 9,450 $ 17,900
Property and equipment, principally due to differ-
ences in depreciation.............................. 17,100 21,700
Accrued compensation................................ 6,250 9,400
Net operating loss carryforwards.................... 441,000 464,300
-------- ---------
Total gross deferred tax assets..................... 473,800 513,300
Less valuation allowance............................ (473,800) (513,300)
-------- ---------
Net deferred tax assets............................. $ -- $ --
======== =========
</TABLE>
The Company has provided a valuation allowance for net deferred tax assets
since realization of these benefits cannot be reasonably assured.
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $2,200,000 which may be used to offset future taxable income. The
loss carryforwards expire in the years 2009 through 2013.
F-243
<PAGE>
<PAGE>
8,000,000 Shares
Common Stock
------------
PROSPECTUS
------------
BT Alex. Brown
First Union Capital Markets Corp.
ING Baring Furman Selz LLC
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............. $ 51,152
NASD filing fee................................................. 18,900
Nasdaq National Market listing fee.............................. 95,000
Accounting fees and expenses.................................... 6,000,000
Legal fees and expenses......................................... 2,000,000
Printing and engraving expenses................................. 1,200,000
Transfer agent and registrar fees............................... 3,000
Miscellaneous expenses.......................................... 631,948
-----------
Total......................................................... $10,000,000
===========
</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 from registration contained in
Section 4(2) of the Securities Act.
(d) On November 30, 1998, the Registrant sold 5,000 shares of Common Stock to
Diane Strahan for cash at a purchase price of $1.00 per share for an aggregate
consideration of $5,000. 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.
II-2
<PAGE>
On January 1, 1999, in connection with entering into a Senior Management
Agreement, M. Cristina Dolan purchased 100,000 shares of Common Stock at a
price per share of $0.05 for an aggregate consideration of $5,000, paid in
cash. This sale was effected without registration under the Securities Act in
reliance upon the exemption from registration contained in Rule 701 of
Regulation F promulgated under the Securities Act.
Prior to filing this Registration Statement, the Registrant agreed to issue
approximately 7,133,200 shares of its Common Stock to 129 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. 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 $ million by the Registrant. These transactions were
effected without registration under the Securities Act in reliance upon the
exemptions from registration contained in Rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act and in Regulation S promulgated under
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>
<S> <C>
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
4.1* Form of Common Stock Certificate
5.1 Opinion of Hogan & Hartson L.L.P.
9.1 Form of Stockholders Agreement by and among the Registrant and certain
stockholders of the Registrant
10.1+ Stock Exchange Agreement by and among the Registrant, United States
Internet, Inc. and certain shareholders of United States Internet,
Inc. dated as of December 21, 1998
10.2 Form of Shareholder Consent, Power of Attorney and Investor
Questionnaire executed by certain shareholders of United States
Internet, Inc.
10.3+ Stock Exchange Agreement by and among the Registrant, JPS.Net
Corporation and the shareholders of JPS.Net Corporation dated as of
December 18, 1998
10.4+ Stock Exchange Agreement by and among the Registrant, D&E SuperNet,
Inc. and the shareholders of D&E SuperNet, Inc. dated as of December
21, 1998
10.5 Amendment No. 1 to Stock Exchange Agreement dated as of December 21,
1998 by and among the Registrant, United States Internet, Inc. and
certain shareholders of United States Internet, Inc.
10.6* Amendment No. 1 to Stock Exchange Agreement dated as of December 18,
1998 by and among the Registrant, JPS.Net Corporation and the
shareholders of JPS.Net Corporation
10.7* Amendment No. 1 to Stock Exchange Agreement dated as of December 21,
1998 by and among the Registrant, D&E SuperNet, Inc. and the
shareholders of D&E SuperNet, Inc.
10.8 Stock Exchange Agreement by and among the Registrant, TGF
Technologies, Inc. and the shareholders of TGF Technologies, Inc.
dated as of February 18, 1999
10.9 Form of Senior Management Agreement between the Registrant and Stephen
E. Smith
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
10.10* Senior Management Agreement between the Registrant and Michael C. Crabtree
10.11 Form of Senior Management Agreement between the Registrant and Martin R. Lyons
10.12* Amendment to Senior Management Agreement between the Registrant and Martin R. Lyons
10.13 Senior Management Agreement between the Registrant and M. Cristina Dolan
10.14* Amendment to Senior Management Agreement between the Registrant and M. Cristina Dolan
10.15 Form of Senior Management Agreement between the Registrant and Dewey K. Shay
10.16 Senior Management Agreement between the Registrant and Allon H. Lefever
10.17 Registration Rights Agreement among the Registrant and certain stockholders of the Registrant
10.18 OneMain.com, Inc. 1999 Stock Option and Incentive Plan
10.19 OneMain.com, Inc. 1999 Employee Stock Purchase Plan
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors (OneMain.com, Inc.)
23.2 Consent of Ernst & Young LLP, Independent Auditors (D&E SuperNet, Inc.)
23.3 Consent of Ernst & Young LLP, Independent Auditors (SunLink, Inc.)
23.4 Consent of Ernst & Young LLP, Independent Auditors (LebaNet, Inc.)
23.5 Consent of Grant Thornton LLP, Independent Auditors (Southwind Internet Access, Inc.)
23.6 Consent of Ernst & Young LLP, Independent Auditors (Southwind Internet Access, Inc.)
23.7 Consent of Ernst & Young LLP, Independent Auditors (Horizon Internet Technologies, Inc.)
23.8 Consent of Coulter & Justus, P.C., Independent Auditors (United States Internet, Inc.)
23.9 Consent of Ernst & Young LLP, Independent Auditors (United States Internet, Inc.)
23.10 Consent of Ernst & Young LLP, Independent Auditors (Internet Partners of America, LC)
23.11 Consent of Ernst & Young LLP, Independent Auditors (Zoom.Net, Inc.)
23.12 Consent of Ernst & Young LLP, Independent Auditors (Palm.Net, USA, Inc.)
23.13 Consent of Ernst & Young LLP, Independent Auditors (Internet Access Group, Inc.)
23.14 Consent of Ernst & Young LLP, Independent Auditors (Midwest Internet, L.L.C.)
23.15 Consent of Kevin J. Tochtrop, Certified Public Accountant, Independent Auditor
(Internet Solutions, LLC)
23.16 Consent of Ernst & Young LLP, Independent Auditors (Internet Solutions LLC)
23.17 Consent of Ernst & Young LLP, Independent Auditors (FGInet, Inc.)
23.18 Consent of Ernst & Young LLP, Independent Auditors (Superhighway, Inc.)
23.19 Consent of Ernst & Young LLP, independent Auditors (Lightspeed Net, Inc.)
23.20 Consent of Ernst & Young LLP, Independent Auditors (JPS.Net Corporation)
23.21 Consent of KPMG Peat Marwick LLP, Independent Auditors (TGF Technologies, Inc.)
23.22 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.23+ Consent of Allon H. Lefever (Director Nominee)
23.24+ Consent of Michael C. Crabtree (Director Nominee)
23.25+ Consent of Thomas R. Eisenmann (Director Nominee)
23.26 Consent of Donald R. Kaufmann (Director Nominee)
23.27 Consent of Ella Fontanals de Cisneros (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 Subscriber of Companies to be Acquired by Registrant
99.4+ Text of Wit Capital Corporation Web site Established for this Offering
</TABLE>
--------
* To be filed by amendment.
+ Previously filed.
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 22nd day of February, 1999.
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.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Stephen E. Smith Chairman, President
- ------------------------------------- and Chief Executive February
Stephen E. Smith Officer and 22, 1999
Director (Principal
Executive Officer)
/s/ Dewey K. Shay
- ------------------------------------- Vice President and February
Dewey K. Shay Chief Financial 22, 1999
Officer and
Director Nominee
(Principal
Financial and
Accounting Officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibits Number
------- -------- ------
<S> <C> <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
4.1* Form of Common Stock Certificate
5.1 Opinion of Hogan & Hartson L.L.P.
Form of Stockholders Agreement by and among the Registrant
and certain stockholders of the Registrant dated as of
9.1 February , 1999
Stock Exchange Agreement by and among the Registrant, United
States Internet, Inc. and certain shareholders of United
10.1+ States Internet, Inc. dated as of December 21, 1998
Form of Shareholder Consent, Power of Attorney and Investor
Questionnaire executed by certain shareholders of United
10.2 States Internet, Inc.
Stock Exchange Agreement by and among the Registrant, JPS.NET
Corporation and the shareholders of JPS.Net Corporation dated
10.3+ as of December 18, 1998
Stock Exchange Agreement by and among the Registrant, D&E
SuperNet, Inc. and the shareholders of D&E SuperNet, Inc.
10.4+ dated as of December 21, 1998
Amendment No. 1 to Stock Exchange Agreement dated as of
December 21, 1998 by and among the Registrant, United States
Internet, Inc. and certain shareholders of United States
10.5 Internet, Inc.
Amendment No. 1 to Stock Exchange Agreement dated as of
December 18, 1998 by and among the Registrant, JPS.Net
10.6* Corporation and the shareholders of JPS.Net Corporation
Amendment No. 1 to Stock Exchange Agreement dated as of
December 21, 1998 by and among the Registrant, D&E SuperNet,
10.7* Inc. and the shareholders of D&E SuperNet, Inc.
Stock Exchange Agreement by and among the Registrant, TGF
Technologies, Inc. and the shareholders of TGF Technologies,
10.8 Inc. dated as of February 18, 1999
Form of Senior Management Agreement between the Registrant
10.9 and Stephen E. Smith
Senior Management Agreement between the Registrant and
10.10* Michael C. Crabtree
Form of Senior Management Agreement between the Registrant
10.11 and Martin R. Lyons
Amendment to Senior Management Agreement between the
10.12* Registrant and Martin R. Lyons
Senior Management Agreement between the Registrant and M.
10.13 Cristina Dolan
Amendment to Senior Management Agreement between the
10.14* Registrant and M. Cristina Dolan
Form of Senior Management Agreement between the Registrant
10.15 and Dewey K. Shay
Senior Management Agreement between the Registrant and Allon
10.16 H. Lefever
Registration Rights Agreement among the Registrant and
10.17 certain stockholders of the Registrant
10.18 OneMain.com, Inc. 1999 Stock Option and Incentive Plan
10.19 OneMain.com, Inc. 1999 Employee Stock Purchase Plan
21.1 Subsidiaries of the Registrant
Consent of Ernst & Young LLP, Independent Auditors
23.1 (OneMain.com, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (D&E
23.2 SuperNet, Inc.)
Consent of Ernst & Young LLP, Independent Auditors (SunLink,
23.3 Inc.)
Consent of Ernst & Young LLP, Independent Auditors (LebaNet,
23.4 Inc.)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
23.5 Consent of Grant Thornton LLP, Independent Auditors (Southwind Internet Access, Inc.)
23.6 Consent of Ernst & Young LLP, Independent Auditors (Southwind Internet Access, Inc.)
23.7 Consent of Ernst & Young LLP, Independent Auditors (Horizon Internet Technologies, Inc.)
23.8 Consent of Coulter & Justus, P.C., Independent Auditors (United States Internet, Inc.)
23.9 Consent of Ernst & Young LLP, Independent Auditors (United States Internet, Inc.)
23.10 Consent of Ernst & Young LLP, Independent Auditors (Internet Partners of America, LC)
23.11 Consent of Ernst & Young LLP, Independent Auditors (ZoomNet, Inc.)
23.12 Consent of Ernst & Young LLP, Independent Auditors (Palm.Net, USA, Inc.)
23.13 Consent of Ernst & Young LLP, Independent Auditors (Internet Access Group, Inc.)
23.14 Consent of Ernst & Young LLP, Independent Auditors (Midwest Internet L.L.C.)
23.15 Consent of Kevin J. Tochtrop, Certified Public Accountant, Independent Auditor
(Internet Solutions, LLC)
23.16 Consent of Ernst & Young LLP, Independent Auditors (Internet Solutions LLC)
23.17 Consent of Ernst & Young LLP, Independent Auditors (FGInet, Inc.)
23.18 Consent of Ernst & Young LLP, Independent Auditors (Superhighway, Inc.)
23.19 Consent of Ernst & Young LLP, Independent Auditors (Lightspeed Net, Inc.)
23.20 Consent of Ernst & Young LLP, Independent Auditors (JPS.Net Corporation)
23.21 Consent of Ernst & Young LLP, Independent Auditors (TGF Technologies, Inc.)
23.22 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
23.23+ Consent of Allon H. Lefever (Director Nominee)
23.24+ Consent of Michael C. Crabtree (Director Nominee)
23.25+ Consent of Thomas R. Eisenmann (Director Nominee)
23.26 Consent of Donald R. Kaufmann (Director Nominee)
23.27 Consent of Ella Fontanals de Cisneros (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 Subscriber of Companies to be Acquired by Registrant
99.4+ Text of Wit Capital Corporation Web site Established for this Offering
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
[LETTERHEAD OF HOGAN & HARTSON L.L.P]
EXHIBIT 5.1
-----------
March 3, 1999
Mr. Stephen E. Smith
Sole Director
OneMain.com, Inc.
50 Hawthorne Road
Southampton, New York 11968
Mr. Smith:
We are acting as counsel to OneMain.com, Inc., a Delaware corporation
(the "Company"), in connection with its registration statement on Form S-1, as
amended (the "Registration Statement") filed with the Securities and Exchange
Commission relating to the proposed public offering of up to 9,200,000 shares of
the Company's common stock, par value $0.001 per share, all of which shares (the
"Shares") are to be sold by the Company. This opinion letter is furnished to
you at your request to enable you to fulfill the requirements of Item 601(b)(5)
of Regulation S-K, 17 C.F.R. (S) 229.601(b)(5), in connection with the
Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Certificate of Incorporation of the Company, as certified by
the Secretary of the State of the State of Delaware on February
24, 1999 and by the President of the Company on the date hereof
as then being complete, accurate and in effect.
3. The Bylaws of the Company, as certified by the President of the
Company on the date hereof as then being complete, accurate and
in effect.
<PAGE>
Mr. Stephen E. Smith
March 3, 1999
Page 2
4. The proposed form of Underwriting Agreement among the Company
and the several Underwriters to be named therein, for whom BT
Alex. Brown, Incorporated, ING Baring Furman Selz LLC, SoundView
Technology Group, Inc. and Wit Capital Corporation (as e-
Manager(TM)) will act as representatives, filed as Exhibit 1
to the Registration Statement (the "Underwriting Agreement").
5. Resolutions of the Sole Director of the Company adopted on
December 23, 1998, as certified by the President of the Company
on the date hereof as then being complete, accurate and in
effect, relating to the issuance and sale of the Shares and
arrangements in connection therewith.
In our examination of the Underwriting Agreement and the aforesaid
Certificates, records and documents, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the authenticity of all
original documents and the conformity to authentic original documents of all
documents submitted to us as copies (including telecopies). This opinion letter
is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
General Corporation Law of the State of Delaware. We express no opinion herein
as to any other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) final action of the Sole Director of the Company
approving the price of the Shares, (ii) execution and delivery by the Company of
the Underwriting Agreement, (iii) effectiveness of the Registration Statement,
(iv) issuance of the Shares pursuant to the terms of the Underwriting Agreement
and (v) receipt by the Company of the consideration for the Shares specified in
the resolutions of the Sole Director referred to above and in the Underwriting
Agreement, the Shares will be validly issued, fully paid and nonassessable under
the General Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter and should not be quoted in whole
or in part or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
<PAGE>
Mr. Stephen E. Smith
March 3, 1999
Page 3
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ Hogan & Hartson L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
EXHIBIT 9.1
STOCKHOLDERS AGREEMENT
----------------------
THIS STOCKHOLDERS AGREEMENT (this "AGREEMENT") is made as of February
__, 1999, by and among ONEMAIN.COM, INC., a Delaware corporation (the "COMPANY")
and the Stockholders of the Company listed on the Schedule of Holders attached
hereto as Exhibit A and each other holder of Common Stock who hereafter executes
---------
a Joinder Agreement agreeing to be bound by the terms hereof. (The Persons
listed on Exhibit A and such additional Persons who execute Joinder Agreements
---------
are referred to collectively herein as the "STOCKHOLDERS".)
RECITALS
--------
A. The Stockholders have previously agreed that, in connection with
the Target Acquisitions, it is intended that the sellers of the companies
involved in such transactions receive capital stock of the Company in a manner
that qualifies for tax-free treatment under Section 351 of the Code. The
Stockholders agreed that, if necessary to preserve such tax-free treatment, they
would reduce their aggregate stake in the Company so that such stake plus the
stake of all Other Holders constitutes less than 20% of the outstanding Common
Stock of the Company, measured post-consummation of the IPO Event and the Target
Acquisitions. The Stockholders agreed that they would accomplish such reduction
by surrendering to the Company an appropriate number of their shares of the
Company's Common Stock immediately prior to the consummation of the Target
Acquisitions and the IPO Event.
B. As an integral part of the IPO Event, the Company will give the
underwriters an option (the "OVER-ALLOTMENT OPTION") to purchase additional
shares of the Company's Common Stock in order to cover over-allotments made in
connection with the sale of such stock to the public. By its terms, the Over-
Allotment Option will be exercisable not later than 30 days after the date of
the underwriting agreement pursuant to which shares are sold in the IPO Event.
C. The parties hereto wish by this Agreement to provide in a more
comprehensive fashion for the reduction in their aggregate ownership of Common
Stock and to address expressly the possibility that the underwriters may not
exercise the Over-Allotment Option as to some or all of the shares subject to
the Over-Allotment Option.
D. Any other Persons who acquire shares of the Company's capital
stock subsequent to the date of this Agreement but prior to the IPO Event and
the Target Acquisitions shall become parties to this Agreement with respect to
all of such capital stock by executing a Joinder Agreement.
<PAGE>
AGREEMENT
---------
In consideration of the foregoing and the covenants set forth herein and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
DEFINITIONS. For purposes of this Agreement, in addition to terms defined
-----------
elsewhere herein, the following terms when used herein shall have the following
meanings:
"CODE" means the U.S. Internal Revenue Code of 1986, as amended.
"COMMON STOCK" means shares of the Company's Common Stock, $.001 par value
per share.
"IPO EVENT" means an underwritten public offering, pursuant to an effective
registration statement under the Securities Act, that is underwritten by one or
more nationally-recognized investment banking firms and results in the Company
receiving not less than $10,000,000 in aggregate cash proceeds from such
offering.
"OTHER HOLDERS" means persons who own Common Stock prior to the IPO Event
and the Target Acquisitions but who are not bound by the terms of this
Agreement.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government body.
"PRO RATA SHARE" means the holder's pro rata share of the outstanding
Common Stock held by the Stockholders immediately prior to the consummation of
the Target Acquisitions and the IPO Event (the "applicable time"), which shall
be a fraction calculated by dividing (i) the number of shares of Common Stock
held by the holder as of the applicable time by (ii) the total number of shares
of Common Stock held by the Stockholders as of the applicable time.
"TARGET ACQUISITIONS" means the acquisitions by the Company of various
internet service providers that are expected to close in conjunction with the
IPO Event.
-2-
<PAGE>
ARTICLE II
CUTBACK PROVISION
2.1 INITIAL CUTBACK. If, in connection with the consummation of the
---------------
IPO Event and the Target Acquisitions and based on the advice of the Company's
counsel and independent accountants, it becomes necessary to reduce the
Stockholders' aggregate holdings of Common Stock so that such holdings plus the
holdings of all Other Holders will constitute less than 20% of the outstanding
Common Stock of the Company (measured post-consummation of the IPO Event and the
Target Acquisitions), each of the Stockholders agrees to surrender to the
Company, immediately prior to the consummation of the Target Acquisitions and
the IPO Event, his or her Pro Rata Share of the aggregate number of shares of
the Company's Common Stock necessary to effect such reduction.
2.2 NUMBER OF SHARES OUTSTANDING. The determination of the number of
----------------------------
shares of the Company's Common Stock that the Stockholders are required to
surrender to the Company immediately prior to the consummation of the Target
Acquisitions and the IPO Event pursuant to Section 2.1 shall be based on the
-----------
number of shares of Common Stock that will be outstanding immediately after
completion of the IPO Event and the Target Acquisitions. In recognition of the
fact that the Over-Allotment Option is an integral part of the IPO Event, the
shares that are subject to the Over-Allotment Option will be treated for this
purpose as outstanding immediately after completion of the IPO Event and the
Target Acquisitions.
2.3 SUBSEQUENT CUTBACK. If, by the close of the last day on which
------------------
the Over-Allotment Option is exercisable (and, in any event, by no later than
the end of the thirtieth day following the date of the underwriting agreement
pursuant to which shares are sold in the IPO Event), the Over-Allotment Option
has not been exercised as to part or all of the shares of Common Stock subject
to the Over-Allotment Option, the Stockholders shall immediately surrender to
the Company additional shares of their Common Stock. The aggregate number of
additional shares of Common Stock the Stockholders must surrender pursuant to
this Section 2.3 shall equal 25% (rounded upward in the case of a fractional
-----------
share) of the number of shares of Common Stock that were subject to the Over-
Allotment Option but as to which the Over-Allotment Option was not exercised.
The obligation to surrender additional shares of Common Stock pursuant to this
Section 2.3 shall be allocated among the Stockholders in the same proportions
- -----------
that the obligation to surrender shares pursuant to Section 2.1 was allocated.
-----------
-3-
<PAGE>
ARTICLE III
EFFECT ON STOCKHOLDERS AGREEMENT
TERMINATION; ADDITIONAL PARTIES
3.1 EFFECT OF STOCKHOLDERS AGREEMENT. The provisions of this
--------------------------------
Agreement supersede and replace any provisions of other agreements entered into
by and among the Stockholders that are inconsistent with this Agreement.
3.2 TERMINATION. All rights and obligations set forth in this
-----------
Agreement, to the extent not previously terminated, shall terminate upon the
earlier of (i) the completion of the surrender of shares of Common Stock
pursuant to the provisions of Article II of this Agreement, and (ii) the written
-----------
agreement of the Stockholders holding 66 2/3% of the Stockholders' Common Stock.
3.3 ADDITIONAL PARTIES. Any other Persons who acquire shares of the
------------------
Company's capital stock prior to the IPO Event and the Target Acquisitions shall
become parties to this Agreement with respect to all of such capital stock by
executing a Joinder Agreement in the form attached hereto as Exhibit B.
---------
ARTICLE IV
MISCELLANEOUS
4.1 LEGEND. All certificates evidencing Equity Securities restricted
------
by this Agreement shall bear a legend indicating the existence of the
restrictions imposed hereby and a stop transfer order may be placed with respect
to such securities. The legend referred to in the preceding sentence shall be
substantially in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE
ARE SUBJECT TO THE TRANSFER RESTRICTIONS AND
OTHER TERMS OF A STOCKHOLDERS AGREEMENT DATED AS
OF FEBRUARY __, 1999, AMONG ONEMAIN.COM, INC.
AND CERTAIN STOCKHOLDERS THEREOF AND MAY NOT BE
TRANSFERRED EXCEPT IN ACCORDANCE WITH SUCH
AGREEMENT. A COPY OF SUCH AGREEMENT IS ON FILE
AT THE PRINCIPAL OFFICE OF ONEMAIN.COM, INC. AND
WILL BE FURNISHED UPON REQUEST TO THE HOLDER OF
RECORD OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE.
4.2 NO WAIVER OF RIGHTS. No failure or delay on the part of any
-------------------
party in the exercise of any power or right hereunder shall operate as a waiver
thereof. No single or partial exercise of any right or power hereunder shall
operate
-4-
<PAGE>
as a waiver of such right or power or of any other right or power. The waiver by
any party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach hereunder. Except as
otherwise expressly provided herein, all rights and remedies existing under this
Agreement are cumulative with, and not exclusive of, any rights or remedies
otherwise available.
4.3 AMENDMENT. Except as otherwise expressly set forth in this
---------
Agreement, this Agreement may be amended or supplemented only by the written
agreement of the Company and the holders of at least sixty-six and two-thirds
percent (66-2/3%) of all outstanding shares of Common Stock held by the
Stockholders.
4.4 ENTIRE AGREEMENT; SUCCESSORS; THIRD PARTIES. This Agreement
-------------------------------------------
contains the entire agreement among the parties with respect to the transactions
contemplated hereby and supersedes all prior arrangements or understandings with
respect thereto, written or oral. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors, heirs, executors, administrators and permitted assigns.
Except as specifically set forth herein, nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto and
their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities.
4.5 NOTICES. All notices or other communications which are required
-------
or permitted hereunder shall be in writing and sufficient if delivered
personally, by facsimile or sent by overnight express or by registered or
certified mail, postage prepaid, addressed as follows:
If to the Company to:
OneMain.com, Inc.
c/o Unison Partners
50 Hawthorne Road
Southampton, NY 11968
Attention: Stephen E. Smith
President
Tel: (516) 287-4084
Fax: (516) 287-4767
During the term of this Agreement, the Company shall maintain a
current list of all Stockholders (the "LIST"), including their names, addresses
and facsimile numbers, if any, for purposes of sending notices and other
communications pursuant to this Section 4.5. At the request of any party
-----------
hereto, the Company promptly shall provide a copy of the List to such party.
All deliveries of notice shall
-5-
<PAGE>
be deemed effective when received by the persons entitled to such receipt or
when delivery has been attempted but refused by such person or persons.
4.6 CAPTIONS. The captions contained in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
4.7 COUNTERPARTS; FACSIMILES. This Agreement may be executed in any
------------------------
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement. This Agreement may be executed and delivered by facsimile
transmission.
4.8 GOVERNING LAW AND VENUE. The validity, interpretation,
-----------------------
construction and performance of this Agreement shall be governed by the laws of
the State of Delaware applicable to agreements made and entirely to be performed
within such jurisdiction. The party bringing any action under this Agreement
shall only be entitled to choose the federal or local courts in the District of
Columbia or Delaware as the venue for such action, and each party consents to
the jurisdiction of the court chosen in such manner for such action.
4.9 SEVERABILITY. The provisions of this Agreement are severable,
------------
and the unenforceability of any provision of this Agreement shall not affect the
enforceability of the remainder of this Agreement. The parties acknowledge that
it is their intention that if any provision of this Agreement is determined by a
court to be invalid, illegal or unenforceable as drafted, that provision should
be construed in a manner designed to effectuate the purpose of that provision to
the greatest extent possible under applicable law.
4.10 TRANSFERS; TRANSFERS IN VIOLATION OF AGREEMENT. Prior to
----------------------------------------------
Transferring any Common Stock of the Company ("EQUITY SECURITIES") to any
Person, the transferring Stockholder shall cause the prospective transferee to
execute and deliver to the Company a Joinder to this Agreement in the form of
Exhibit B hereto. Any Transfer or attempted Transfer of any Equity Securities
- ---------
in violation of any provision of this Agreement shall be void, and the Company
shall not record such transfer on its books or treat any purported transferee of
such Equity Securities as the owner of such shares for any purpose.
4.11 SPECIFIC PERFORMANCE. The rights of the parties under this
--------------------
Agreement are unique and the failure of a party to perform its obligations
hereunder would irreparably harm the other parties hereto. Accordingly, the
parties shall, in addition to such other remedies as may be available at law or
in equity, have the right to enforce their rights hereunder by actions for
specific performance to the extent permitted by law.
-6-
<PAGE>
4.12 FURTHER ASSURANCES. Each of the parties hereto agrees to
------------------
execute all such further instruments and documents and to take all such further
action as any other party may reasonably require in order to effectuate the
terms and purposes of this Agreement.
[Execution Pages Follow]
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed as of the day and year first
above written.
ONEMAIN.COM, INC.
By: ______________________________
Stephen E. Smith
President
-8-
<PAGE>
EXHIBIT A to
Stockholders Agreement
----------------------
SCHEDULE OF HOLDERS
-------------------
STOCKHOLDERS:
- ------------
Jonathan J. Ledecky
Stephen E. Smith
Theresa Cagnina
Gregory C. Smith
Grant J. Smith
Alice R. Thomas
Christa G. Poston
Dewey K. Shay
Maryanne Shay
Jill Shay
Charles D. Smith and
Kathryn D. Smith
Jan Shay
Martin Lyons
Merrell Stout
M. Cristina Dolan
-9-
<PAGE>
EXHIBIT B to
Stockholders Agreement
----------------------
JOINDER AGREEMENT
-----------------
This Joinder Agreement (this "JOINDER AGREEMENT") is made as of the
date written below by the undersigned (the "JOINING PARTY") and the parties to
the Stockholders Agreement, dated as of February __ , 1999 (the "STOCKHOLDERS
AGREEMENT") among OneMain.com, Inc. and the Stockholders. Capitalized terms
used but not defined herein shall have the meanings given such terms in the
Stockholders Agreement.
Accordingly, the Joining Party hereby acknowledges, agrees and
confirms that, by its execution of this Joinder Agreement, the Joining Party
will be deemed to be a party to the Stockholders Agreement and shall have all of
the obligations of a "STOCKHOLDER" thereunder as if it had executed the
Stockholders Agreement. The Joining Party hereby ratifies, as of the date
hereof, and agrees to be bound by, all of the terms, provisions and conditions
contained in the Stockholders Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Joinder
Agreement as of the date written below.
Date: _________________________
STOCKHOLDER
_______________________________
[NAME]
Address:
_______________________________
_______________________________
Tel:___________________________
Fax:___________________________
-10-
<PAGE>
EXHIBIT 10.2
-----------
- --------------------------------------------------------------------------------
SHAREHOLDER CONSENT,
POWER OF ATTORNEY
AND
INVESTOR QUESTIONNAIRE
FOR
[ATTACH LABEL HERE]
A SHAREHOLDER OF UNITED STATES INTERNET, INC.
- --------------------------------------------------------------------------------
THE SIGNATURE OF THE SHAREHOLDER LISTED ABOVE ON THE
CONSENT AND POWER OF ATTORNEY MUST BE ACKNOWLEDGED BY
A NOTARY PUBLIC IN THE SPACE PROVIDED.
<PAGE>
U.S. Internet Providers ("USIP") is negotiating to acquire all of the
outstanding shares of United States Internet, Inc. (the "COMPANY") from its
current shareholders. Shareholders who qualify as "accredited investors" under
the federal securities laws will receive a combination of USIP stock and cash.
Shareholders who do not qualify as "accredited investors" under the federal
securities laws will receive only cash. USIP reserves the exclusive right to
determine which shareholders qualify as accredited investors. In making this
determination, USIP may rely on the representations made by each shareholder in
the Investor Questionnaire previously sent to each shareholder. The terms of the
cash offer to "un-accredited investors" is set forth in detail in this consent
(the "CONSENT") and we urge you to read this Consent in its entirety before
completing this Consent.
THE COMPANY RECOMMENDS THAT EACH SHAREHOLDER ACCEPT THE OFFER.
--------------------------------------------------------------
This letter contains a Shareholder Consent and Power of Attorney, which
seeks each shareholder's consent to the terms of the offer as set forth in this
Consent and includes a power of attorney. The power of attorney grants certain
officers or representatives of the Company a power of attorney solely for the
purpose of executing stock power agreements and certain other documents related
thereto in connection with the purchase by USIP of such shareholder's Company
stock.
SHAREHOLDERS ARE URGED TO READ THIS CONSENT CAREFULLY. ONCE YOU HAVE
ACCEPTED THE OFFER AND RETURNED THIS CONSENT, YOU WILL BE BOUND BY THE TERMS OF
THIS CONSENT, INCLUDING A COMMITMENT BY YOU TO SELL YOUR COMPANY SHARES TO USIP
UPON CONSUMMATION OF THE USIP INITIAL PUBLIC OFFERING. IF YOU HAVE ANY QUESTIONS
REGARDING THE OFFER, PLEASE CONTACT MICHAEL C. CRABTREE AT THE COMPANY AT (423)
540-7140.
PLEASE COMPLETE AND RETURN THIS CONSENT AS SOON AS POSSIBLE BUT NOT LATER
THAN DECEMBER 31, 1998 TO:
United States Internet, Inc.
1127 NORTH BROADWAY
KNOXVILLE, TENNESSEE 37917
ATTENTION: MICHAEL C. CRABTREE
<PAGE>
SHAREHOLDER CONSENT AND POWER OF ATTORNEY
NAME:___________________________________________________________
ADDRESS:________________________________________________________
________________________________________________________________
TELEPHONE NUMBER: ( )
____________________________________________
The undersigned acknowledges that this Consent and Power of Attorney
operates as an approval of all related transactions necessary to effectuate the
sale of the undersigned's stock in the Company to USIP. By executing and
returning this Consent and Power of Attorney, the undersigned (a) agrees to sell
his/her shares to USIP for cash, and (b) grants the power of attorney set forth
in Article II below.
ARTICLE I. FOREIGN PERSON STATUS
- ---------- ---------------------
The undersigned hereby certifies under penalty of perjury that the
undersigned is or is not a foreign person within the meaning of Section 1445 of
the U.S. Internal Revenue Code.
[_] Yes, the undersigned is a foreign person.
[_] No, the undersigned is not a foreign person.
ARTICLE II. CONSENT AND POWER OF ATTORNEY
- ----------- -----------------------------
1. CONSENT
The undersigned hereby agrees to sell all the undersigned's shares of stock
in the Company to USIP upon the terms and subject to the conditions set forth
below, which the undersigned acknowledges having read.
2. POWER OF ATTORNEY
2.1 Grant of Power of Attorney. The undersigned hereby irrevocably
--------------------------
appoints Michael C. Crabtree, acting in his capacity as attorney-in-fact
pursuant hereto, the "ATTORNEY-IN-FACT" as the true and lawful Attorney-In-Fact
and agent of the undersigned, to act on behalf of the undersigned with respect
to all matters related hereto, including the authority to execute any stock
power agreements on behalf of the undersigned and to make, execute and deliver
contracts, receipts and certificates in connection with, and to take all other
actions necessary to carry out the transactions contemplated by this Consent and
Power of Attorney (the "POWER OF ATTORNEY"). The Power of Attorney granted
hereby and all authority conferred hereby is coupled with an interest and
therefore shall be irrevocable and shall not
<PAGE>
be terminated by any act of the undersigned or by operation of law, whether by
the death, disability, incapacity or liquidation of the undersigned or by the
occurrence of any other event or events (including without limitation the
termination of any trust or estate for which the undersigned is acting as a
fiduciary or fiduciaries), and if, after the execution hereof, the undersigned
shall die or become disabled or incapacitated or is liquidated, or if any other
such event or events shall occur before the completion of the transactions
contemplated by this Consent and Power of Attorney, the Attorney-in-Fact shall
nevertheless be authorized and directed to complete all such transactions as if
such death, disability, incapacity, liquidation or other event or events had not
occurred and regardless of notice thereof. In the event Michael C. Crabtree is
unable to fulfill his duties as Attorney-in-Fact, the undersigned hereby
irrevocably appoints Niels Jonker as the substitute Attorney-in-Fact.
2.2 Purchase Price. Each share of common stock of the Company owned by
--------------
the undersigned shall be purchased by USIP for $10.91 (the "PURCHASE PRICE")
simultaneously with the completion of an initial public offering of stock by
USIP (the "IPO"). Payment of the Purchase Price shall be wired to the
undersigned within five days of the IPO. USIP's purchase of the stock
described in this Section 2.2 is subject to the successful completion of the
-----------
IPO by June 30, 1999. All rights, obligations and powers, including the Power
of Attorney, created by this Consent shall terminate and have no further power
or effect after June 30, 1999.
2.3 Limitation of Liability. It is understood that the Attorney-in-Fact
-----------------------
assumes no responsibility or liability to any person by virtue of the Power of
Attorney granted by the undersigned hereby. The Attorney-in-Fact makes no
representations with respect to and shall have no responsibility for any aspect
of this Consent, and he shall not be liable for any error of judgment or for any
act done or omitted or for any mistake of fact or law except for his own gross
negligence or bad faith. The undersigned agrees to indemnify the Attorney-in-
Fact for and to hold the Attorney-in-Fact harmless against any loss, claim,
damage or liability incurred by him arising out of or in connection with acting
as the Attorney-in-Fact under the Power of Attorney created by the undersigned
hereby, as well as the cost and expense of investigating and defending against
any such loss, claim, damage or liability, except to the extent such loss,
claim, damage or liability is due to the gross negligence or bad faith of the
Attorney-in-Fact. The undersigned agrees that the Attorney-in-Fact may consult
with counsel of his or her own choice (who may also be counsel for USIP) and the
Attorney-in-Fact shall have full and complete authorization and protection for
any action taken or suffered by the Attorney-in-Fact hereunder in good faith and
in accordance with the opinion of such counsel. It is understood that the
Attorney-in-Fact may, without breaching any express or implied obligation to the
undersigned hereunder, release, amend or modify any other power of attorney
granted by any other person under any related agreement.
<PAGE>
2.4 Ratification: Third Party Reliance. The undersigned does hereby
----------------------------------
ratify and confirm all that the Attorney-in-Fact shall lawfully do or cause to
be done by virtue of the exercise of the powers granted unto the Attorney-in-
Fact by the undersigned hereunder, and the undersigned authorizes the reliance
of third parties on this Power of Attorney and waives its rights, if any, as
against any such third party for its reliance hereon.
[Remainder of page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Shareholder Consent
and Power of Attorney as of the date set forth below.
IF BY AN INDIVIDUAL ON BEHALF OF HIMSELF OR HERSELF:
____________________________________________________
Signature Date
____________________________________________________
Print Name
____________________________________________________
Signature of Co-Owner, if any Date
____________________________________________________
Print Name
IF ON BEHALF OF AN ENTITY, OR AS TRUSTEE, CUSTODIAN OR PARTNER:
____________________________________________________
Print Name of Entity
By:_________________________________________________
Signature of Officer, Trustee or Partner Date
____________________________________________________
Print Name of Officer, Trustee or Partner
<PAGE>
Individual Acknowledgment
- -------------------------
STATE OF )
) SS.
COUNTY OF )
On the ____ day of ______ 1998, before me personally came
____________________________________________________, to me known and known to
me to be the individual described in the foregoing instrument, and acknowledged
that he or she executed the same.
__________________________________
Notary Public
Corporate Acknowledgment
- ------------------------
STATE OF )
) SS.
COUNTY OF )
On the ____ day of ______ 1998, before me personally came
______________________, to me known, who being by me duly sworn, did depose and
say that he or she resides at
__________________________________________________, that he or she is
___________________________, of _______________________________, a
___________________ corporation, which executed the foregoing instrument, and
that he or she signed his or her name thereto on behalf of said corporation by
order of the board of directors of said corporation, and as the act and deed of
said of corporation for the uses and purposes of therein mentioned.
_________________________________
Notary Public
<PAGE>
Trustee Acknowledgment
- ----------------------
STATE OF )
) SS.
COUNTY OF )
On the ____ day of ______ 1998, before me personally came
_____________________________, to me known, who being by me duly sworn, did
depose and say that he or she resides at
________________________________________, that he or she is Trustee for
___________________________________________________, the trust described in and
which executed the foregoing instrument, and that he or she signed his or her
name thereto on behalf of said trust.
________________________________
Notary Public
Partnership Acknowledgment
- --------------------------
STATE OF )
) SS.
COUNTY OF )
On the ____ day of ______ 1998, before me personally came
_______________________________, to me known, who being by me duly sworn, did
depose and say that he or she resides at
________________________________________, that he or she is
______________________ of _____________________________________, a partnership,
which executed the foregoing instrument, and that he or she signed his or her
name thereto on behalf of said partnership, and as the act and deed of said
partnership for the uses and purposes of therein mentioned.
_________________________________
Notary Public
<PAGE>
EXHIBIT 10.5
FIRST AMENDMENT TO THE STOCK EXCHANGE AGREEMENT
This FIRST AMENDMENT TO THE STOCK EXCHANGE AGREEMENT ("FIRST
AMENDMENT") is entered into as of the 12th day of February, 1999, by and among
ONEMAIN.COM, INC., a Delaware corporation formerly named U.S. Internet
Providers, Inc. (the "ACQUIRER"), UNITED STATES INTERNET, INC., a Tennessee
corporation ("TARGET"), and the TRANSFERORS' REPRESENTATIVE listed on the
signature page hereof (the "TRANSFERORS' REPRESENTATIVE"). The Acquirer, Target
and the Transferors' Representative are referred to herein individually as a
"PARTY" and collectively as the "PARTIES."
WHEREAS, the Parties entered into the Stock Exchange Agreement dated
December 21, 1998 (the "AGREEMENT"), the Parties hereto desire to amend the
Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, the parties do hereby agree as
follows:
1. DEFINITIONS. Capitalized terms used herein and not defined
herein shall have the meanings ascribed to such terms in the Agreement, as
amended by this First Amendment.
2. SECTION 2.3. Section 2.3 of the Agreement should be deleted in
-----------
its entirety and replaced by the following:
NET WORTH ADJUSTMENT. The Cash Portion of the Transfer Consideration shall
--------------------
be adjusted upward or downward on a dollar-for-dollar basis by the amount by
which the Net Worth of Target is more or less than negative $1,213,221 as of the
Closing Date. The Net Worth of Target as of the Closing Date shall be based on
E&Y's December 31, 1998, audit of the Target and Target's good faith estimate
prior to Closing of Target's Net Worth as of March 15, 1999. To the extent the
actual Net Worth as of the Closing Date, as determined by E&Y after the Closing
Date, differs from the Net Worth estimated by Target, the difference shall be
added to or subtracted from the Cash Escrow.
3. ESCROW AGREEMENT. The form of Escrow Agreement attached to the
Agreement as Exhibit A shall be deleted in its entirety and replaced by the
---------
Escrow Agreement attached hereto as Exhibit A.
---------
4. JOINDER TO REGISTRATION RIGHTS AGREEMENT. The Joinder to the
Registration Rights Agreement attached to the Agreement as Exhibit F shall be
---------
deleted in its entirety and replaced by the Joinder Agreement attached hereto as
Exhibit B.
- ---------
5. OPINION LETTER. The form of opinion letter attached to the
Agreement as Exhibit G shall be deleted in its entirety and replaced by the
---------
opinion letter attached hereto as Exhibit C.
---------
<PAGE>
6. CONTINUED EFFECT. Except as modified herein, all terms and
conditions of the Agreement shall remain in full force and effect, which terms
and conditions the Parties hereby ratify and affirm.
7. COUNTERPARTS; FAX SIGNATURES. To facilitate execution, this
First Amendment may be executed in counterparts and by facsimile, and all
counterparts shall collectively constitute a single agreement.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this First
Amendment as of the date first above written.
ACQUIRER:
ONEMAIN.COM, INC.
By: /s/ Stephen E. Smith
------------------------------------
Name: Stephen E. Smith
----------------------------
Title: President
----------------------------
TARGET:
UNITED STATES INTERNET, INC.
By: /s/ Michael C. Crabtree
------------------------------------
Name: Michael C. Crabtree
----------------------------
Title: Chairman and CEO
----------------------------
TRANSFERORS:
By: TRANSFERORS' REPRESENTATIVE
/s/ Michael C. Crabtree
-----------------------------------
Michael C. Crabtree
The Exhibits to this First Amendment to the Stock Exchange Agreement are not
included with this Registration Statement on Form S-1. The Registrant will
provide these Exhibits and Schedules upon the request of the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 10.8
STOCK EXCHANGE AGREEMENT
BY AND AMONG
ONEMAIN.COM, INC.,
TGF TECHNOLOGIES, INC.,
THE TOGETHER FOUNDATION FOR GLOBAL UNITY
N.W.S.T. CORP.,
SWIFT COMPANY LIMITED
AND
ELLA CISNEROS
DATED AS OF FEBRUARY 18, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I................................................................. 1
DEFINITIONS............................................................... 1
1.1 DEFINITIONS...................................................... 1
ARTICLE II................................................................ 8
THE EXCHANGE OF SHARES.................................................... 8
2.1 BASIC TRANSACTIONS............................................... 8
2.2 TRANSFER CONSIDERATION........................................... 8
2.3 NET WORTH ADJUSTMENT............................................. 9
2.4 RESERVED......................................................... 9
2.5 RESERVED......................................................... 9
2.6 THE CLOSING...................................................... 9
2.7 DELIVERIES AT THE CLOSING........................................ 9
2.8 RESERVED......................................................... 9
2.9 ESCROW ARRANGEMENTS.............................................. 10
ARTICLE III REPRESENTATIONS AND WARRANTIES RELATING TO THE TOGETHER
PARTIES...................................................... 10
3.1 AUTHORIZATION OF TRANSACTION..................................... 10
3.2 NONCONTRAVENTION................................................. 11
3.3 BROKER'S FEES.................................................... 11
3.4 INVESTMENT....................................................... 11
3.5 COMPANY SHARES................................................... 11
3.6 DISCLOSURE....................................................... 11
3.7 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER................. 12
3.8 REGULATION S..................................................... 12
ARTICLE IV REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY....... 14
4.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER................. 14
4.2 CAPITALIZATION................................................... 14
4.3 NONCONTRAVENTION................................................. 15
4.4 SUBSIDIARIES..................................................... 15
4.5 FINANCIAL STATEMENTS............................................. 15
4.6 EVENTS SUBSEQUENT TO DECEMBER 31, 1998........................... 16
4.7 UNDISCLOSED LIABILITIES.......................................... 16
4.8 TAX MATTERS...................................................... 17
4.9 TANGIBLE ASSETS.................................................. 18
4.10 OWNED REAL PROPERTY............................................. 18
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.11 INTELLECTUAL PROPERTY......................................... 18
4.12 CONTRACTS..................................................... 19
4.13 NOTES AND ACCOUNTS RECEIVABLE................................. 20
4.14 INSURANCE..................................................... 21
4.15 LITIGATION.................................................... 21
4.16 EMPLOYEES..................................................... 21
4.17 EMPLOYEE BENEFITS............................................. 22
4.18 GUARANTIES.................................................... 22
4.19 LEGAL COMPLIANCE.............................................. 22
4.20 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY............... 22
4.21 BROKERS' FEES................................................. 23
4.22 SYSTEMS....................................................... 23
4.23 SUBSCRIBERS................................................... 23
4.24 DISCLOSURE.................................................... 24
ARTICLE V REPRESENTATIONS AND WARRANTIES OF ACQUIRER.................. 24
5.1 ORGANIZATION OF THE ACQUIRER.................................. 24
5.2 AUTHORIZATION OF TRANSACTION.................................. 24
5.3 BROKERS' FEES................................................. 24
5.4 ACQUIRER'S CAPITALIZATION..................................... 24
5.5 NONCONTRAVENTION.............................................. 24
5.6 DISCLOSURE.................................................... 25
ARTICLE VI PRE-CLOSING COVENANTS....................................... 25
6.1 GENERAL....................................................... 25
6.2 NOTICES AND CONSENTS.......................................... 25
6.3 OPERATION OF BUSINESS PRIOR TO THE CLOSING DATE............... 25
6.4 PRESERVATION OF BUSINESS...................................... 26
6.5 ACCESS........................................................ 26
6.6 NOTICE OF DEVELOPMENTS........................................ 27
6.7 EXCLUSIVITY................................................... 27
6.8 MAIL SERVER................................................... 27
6.9 RESERVED...................................................... 30
6.10 LANDLORDS' CONSENTS........................................... 27
6.11 RESERVED...................................................... 27
6.12 TAX MATTERS................................................... 27
6.13 MANAGEMENT LETTERS, ETC....................................... 28
ARTICLE VII POST-CLOSING COVENANTS...................................... 28
7.1 GENERAL....................................................... 28
7.2 TRANSITION.................................................... 28
7.3 CONFIDENTIALITY............................................... 28
7.4 COVENANT NOT TO COMPETE....................................... 29
7.5 TAX FREE EXCHANGE INTENT...................................... 29
</TABLE>
<PAGE>
<TABLE>
<S> <C>
7.6 BOARD REPRESENTATION........................................... 29
7.7 LICENSE AGREEMENT.............................................. 29
7.8 RELATIONSHIP WITH THE FOUNDATION............................... 29
ARTICLE VIII CONDITIONS TO OBLIGATIONS TO CLOSE........................... 30
8.1 CONDITIONS TO OBLIGATIONS OF THE ACQUIRER...................... 30
8.2 CONDITIONS TO OBLIGATIONS OF THE TOGETHER PARTIES.............. 32
ARTICLE IX REMEDIES FOR BREACHES OF THIS AGREEMENT...................... 33
9.1 INDEMNIFICATION OF THE ACQUIRER................................ 33
9.2 DEFENSE OF THIRD PARTY CLAIMS.................................. 34
9.3 PROCEDURE FOR CLAIMS........................................... 35
9.4 TAX AUDITS, ETC................................................ 35
9.5 INDEMNIFICATION OF TOGETHER PARTIES............................ 36
9.6 LIMITS ON INDEMNIFICATION...................................... 36
ARTICLE X TERMINATION.................................................. 37
10.1 TERMINATION OF AGREEMENT....................................... 37
10.2 EFFECT OF TERMINATION.......................................... 38
ARTICLE XI MISCELLANEOUS................................................ 38
11.1 PRESS RELEASES AND ANNOUNCEMENTS............................... 38
11.2 NO THIRD-PARTY BENEFICIARIES................................... 38
11.3 ENTIRE AGREEMENT............................................... 38
11.4 SUCCESSION AND ASSIGNMENT...................................... 38
11.5 FACSIMILE/COUNTERPARTS......................................... 39
11.6 NOTICES........................................................ 39
11.7 DISPUTE RESOLUTIONS............................................ 40
11.8 GOVERNING LAW.................................................. 41
11.9 AMENDMENTS AND WAIVERS......................................... 41
11.10 SEVERABILITY................................................... 41
11.11 EXPENSES....................................................... 42
11.12 CONSTRUCTION................................................... 42
11.13 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES.............. 42
11.14 SPECIFIC PERFORMANCE........................................... 42
</TABLE>
<PAGE>
LIST OF EXHIBITS AND ANNEXES
EXHIBITS
- --------
Exhibit A Form of Escrow Agreement
Exhibit B The Company's Financial Statements
Exhibit C-1 Officer/Together Parties Certificate
Exhibit C-2 Secretary's Certificate
Exhibit D Form of Equity Subscription Agreement
Exhibit E Form of Employment Agreement
Exhibit F Joinder to the Registration Agreement
Exhibit G Form of Opinion of the Together Parties and The Company's Legal
Exhibit H License Agreement
ANNEXES
- -------
Annex I Reserved
Annex II Determination of Stock Portion of Transfer Consideration
Annex III Reserved
Annex IV Acquirer's Capitalization Schedule
Annex V Allocation Summary
Annex VI List of Optionholders
DISCLOSURE SCHEDULES
Schedule 3.7 Officers and Directors of The Foundation and SWIFT
Schedule 4.1 Officers and Directors of the Company and N.W.S.T.
Schedule 4.2 Capitalization
Schedule 4.4 Subsidiaries
Schedule 4.6 Material Events
Schedule 4.7 Material Liabilities
Schedule 4.8 Tax Matters
Schedule 4.11 Intellectual Property
Schedule 4.12 Contracts
Schedule 4.14 Insurance
Schedule 4.15 Litigation
Schedule 4.20 Affiliate Relationships
Schedule 4.21 Brokers' Fees
Schedule 4.22 Systems
Schedule 4.23 Subscribers
The Exhibits and Schedules to this Stock Exchange Agreement are not included
with this Registration Statement on Form S-1. The Registrant will provide these
Exhibits and Schedules upon the request of the Securities and Exchange
Commission.
<PAGE>
STOCK EXCHANGE AGREEMENT
This STOCK EXCHANGE AGREEMENT ("AGREEMENT") is entered into as of the
18 day of February, 1999, by and among ONEMAIN.COM, INC., a Delaware corporation
(the "ACQUIRER"), TGF TECHNOLOGIES, INC., a Vermont corporation (the "COMPANY"),
THE TOGETHER FOUNDATION FOR UNITY, a Delaware Corporation organized under
Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the
"Foundation"), N.W.S.T. Corp., a Delaware corporation ("N.W.S.T.") and SWIFT
COMPANY LIMITED, a British Virgin Islands corporation ("SWIFT") and ELLA
CISNEROS DE FONTANULS ("ELLA CISNEROS"). The Company, the Foundation, N.W.S.T.,
SWIFT and ELLA CISNEROS are referred to herein individually as a "TOGETHER
PARTY" and collectively as the "TOGETHER PARTIES" and the Acquirer and the
Together Parties are referred to herein individually as a "PARTY" and
collectively as the "PARTIES."
RECITALS
--------
A. The Foundation and N.W.S.T. own all of the outstanding capital
stock of the Company, a corporation engaged in the business of providing
internet access and services, web hosting and other internet related services
and support operating under the name Together Networks (the "BUSINESS").
B. SWIFT is the sole stockholder of N.W.S.T.
C. Ella Cisneros is the sole stockholder of SWIFT
D. This Agreement contemplates transactions in which (1) the
Foundation will exchange all of the capital stock of the Company which it owns
for the Foundation Transfer Consideration (as hereinafter identified), and (2)
SWIFT will exchange all of the capital stock of N.W.S.T. which it owns for the
SWIFT Transfer Consideration (as hereinafter defined).
E. This Agreement further contemplates that the aforementioned
transactions will occur in conjunction with certain related transactions,
consisting of the IPO (as defined hereinafter) and the transfers of certain
other businesses by their owners to the Acquirer (the "RELATED TRANSACTIONS"),
and it is intended that the receipt of Acquirer's Shares (as hereinafter
defined), by SWIFT and shares of Acquirer's Common Stock by the parties involved
in the Related Transactions will be tax-free under Section 351 of the Code (as
defined).
AGREEMENT
---------
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS.
-----------
<PAGE>
"ACQUIRER" has the meaning set forth in the preface above.
"ACQUIRER'S COMMON STOCK" means the Acquirer's common stock, par value
$0.001 per share.
"ACQUIRER'S SHARES" means the shares of the Acquirer's Common Stock
which are issued to SWIFT pursuant to this Agreement.
"ADVERSE CONSEQUENCES" means all damages from complaints, actions,
suits, proceedings, hearings, investigations, claims, demands, judgments,
orders, decrees, stipulations, injunctions, damages, dues, penalties, fines,
costs, amounts paid in settlement, liabilities, obligations, taxes, liens,
losses, expenses, and fees, including all reasonable attorneys' fees and court
costs.
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
"AFFILIATED GROUP" means any affiliated group within the meaning of
Code Sec. 1504 (or any similar group defined under a similar provision of state,
local or foreign law).
"ALLOCATION SUMMARY" means the summary of the allocation of the
Transfer Consideration attached hereto as Annex V.
-------
"BASIS" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms the reasonable basis for any
specified consequence.
"CASH PORTION OF THE SWIFT TRANSFER CONSIDERATION" has the meaning set
forth in Section 2.2 below.
-----------
"CLOSING" has the meaning set forth in Section 2.6 below.
-----------
"CLOSING DATE" has the meaning set forth in Section 2.6 below.
-----------
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY SHARES" means all outstanding shares of the common stock, no
par value per share, of the Company.
"CONFIDENTIAL INFORMATION" means all confidential information and
trade secrets of the Acquirer or any of the Together Parties, as the case may
be, including, without limitation, the identity, lists or descriptions of any
customers, referral sources or organizations; financial statements, cost reports
or other financial information; contract proposals, or bidding information;
business plans and training and operations methods and manuals; personnel
records; fee structure; and management systems, policies or procedures,
including related forms and manuals; provided, that the Confidential Information
shall not include information which (a) was or becomes
-2-
<PAGE>
generally available to the public other than as a result of a disclosure by the
receiving Party, (b) was or becomes available to the receiving Party on a non-
confidential basis from a source other than the Acquirer or its advisors, in a
case in which a Together Party is the receiving Party, or a Together Party or
its advisers, in a case in which the Acquirer is the receiving Party, without
breach of this Agreement provided that such source is not known to such
receiving Party to be bound by a confidentiality agreement or otherwise
prohibited from transmitting the information to such receiving Party by a
contractual, legal or fiduciary obligation known to such receiving Party, (c)
was within the receiving Party's possession prior to its being furnished to such
receiving Party without breach of this Agreement, provided that the source of
such information was not bound by a confidentiality agreement with the Acquirer
or a Together Party or otherwise prohibited from transmitting the information to
the receiving party by a contractual, legal or fiduciary obligation, (d) which
is required to be and actually is disclosed by operation of law, or (e) relates
generally to the acquisition strategy of "rolling-up" or consolidating an
industry, other than the pricing strategy, revenue and subscriber multiples, and
performance adjustments thereto, used for acquisitions by the Acquirer.
"CONTROLLED GROUP OF CORPORATIONS" has the meaning set forth in Code
Sec. 1563.
"DEFERRED INTERCOMPANY TRANSACTION" has the meaning set forth in
Treas. Reg. (S)1.1502-13.
"DISCLOSURE SCHEDULES" means the informational schedules relating to
the Together Parties as attached hereto.
"E&Y" shall mean Ernst & Young, L.L.P.
"EMPLOYEE BENEFIT PLAN" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or
Material fringe benefit plan or program.
"EMPLOYEE PENSION BENEFIT PLAN" has the meaning set forth in ERISA
Sec. 3(2).
"EMPLOYEE WELFARE BENEFIT PLAN" has the meaning set forth in ERISA
Sec. 3(1).
"EQUITABLE EXCEPTIONS" shall have the meaning set forth in Section 3.1
-----------
below.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW AGENT" means First Union National Bank, N.A.
-3-
<PAGE>
"ESCROW AGREEMENT" means the Escrow Agreement to be executed by and
among the Together Parties, the Acquirer and the Escrow Agent in the form of
Exhibit A attached hereto.
- ---------
"ESCROW PERIOD" has the meaning specified in Section 2.9.
-----------
"ESCROW SUM" has the meaning specified in Section 2.9.
-----------
"FAIR MARKET VALUE" of the Acquirer's Common Stock as of a particular
date means: (a) if traded on an exchange or the over-the-counter market, quoted
on the Nasdaq National Market or otherwise by the Nasdaq Stock Market, Inc. or
reported by the National Quotation Bureau, Inc., then the most recently reported
closing or bid price or (b) otherwise, the price, not less than book value,
determined in good faith and in such a reasonable manner as prescribed by a
majority of the Acquirer's directors who are not officers of the Acquirer.
"FINANCIAL STATEMENTS" has the meaning set forth in Section 4.5 below.
-----------
"FOUNDATION SHARES" means all of the Company Shares owned by the
Foundation.
"FOUNDATION TRANSFER CONSIDERATION" has the meaning set forth in
Section 2.2 below.
- -----------
"FUNDED INDEBTEDNESS" means all (a) indebtedness of Company for
borrowed money or other interest-bearing indebtedness, including without
limitation all lines of credit and notes payable; (b) obligations of Company to
pay the deferred purchase or acquisition price for goods or services, other than
trade accounts payable or accrued expenses in the ordinary course of business on
no more than 90 day payment terms; (c) indebtedness of others guaranteed by
Company or secured by an encumbrance on Company's property; (d) indebtedness of
Company under extended credit terms of more than 60 days from vendors to
Company; and (e) transaction costs of Company and/or the Transferor associated
with this Agreement or the transactions contemplated hereby that are paid by
Company; notwithstanding the foregoing, $110,000 of the amount loaned by Ella
Cisneros to the Company, as documented by a Loan Term Sheet dated September 21,
1998, shall not be deemed Funded Indebtedness.
"GAAP" means generally accepted accounting principles, consistently
applied, as in effect from time to time.
"GROSS REVENUES" means the gross revenue of the Company as normally
calculated on the Financial Statements as calculated in accordance with GAAP on
the accrual basis of accounting.
"INDEMNIFIED PARTIES" has the meaning set forth in Section 9.1 below.
-----------
"INTELLECTUAL PROPERTY" means the following intellectual property of
the Company: all (a) trademarks, service marks, trade dress, logos, trade names,
and corporate names and registrations and
-4-
<PAGE>
applications for registration thereof, (b) copyrights and registrations and
applications for registration thereof, (c) computer software, data, and
documentation, (d) trade secrets and confidential business information
(including formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information, and (e) copies and tangible embodiments thereof (in whatever form
or medium).
"IPO" means the first underwritten public offering of the Acquirer's
Common Stock pursuant to an effective registration statement under the
Securities Act that will result in an aggregate post-IPO market capitalization
of the Acquirer of at least $100 million (determined by multiplying the
outstanding shares of the Acquirer's Common Stock by the IPO offering price).
"KNOWLEDGE" means, with respect to (a) each of the Together Parties,
information which is actually known by Ella Cisneros, Robin Lane, Zachary
Chambers and Phillip A. Cecchini and which a prudent person in the position of
such individuals would reasonably be deemed to know, and (b) with respect to the
Acquirer, the knowledge of the executive officers of Acquirer.
"LIABILITY" means any liability, debt, obligation, amount or sum due
(whether known or unknown, whether absolute or contingent, whether liquidated or
unliquidated, and whether due or to become due) including any liability for
Taxes.
"MATERIAL" means, in relation to an event or matter, consequential in
the amount of at least $50,000; provided that the inaccuracy, incorrectness or
falsity of any representation or warranty contained in this Agreement will not
be deemed to be "Material," to cause a "Material" adverse change in or in
respect of, to have a "Material" adverse effect or to cause a Party to be
"Materially" affected unless the loss that may reasonably be expected to occur
as a result thereof to the Party to which such representation or warranty is
made, when taken together with all other losses that may reasonably be expected
to occur to such Party as a result of the inaccuracy, incorrectness or falsity
of all representations and warranties of the Party making such representation or
warranty, would exceed $50,000 in the aggregate or unless such event or matter
constitutes a criminal violation of law by the Party making such representation
or warranty. Notwithstanding the foregoing or any other provision hereof, any
adverse change or adverse effect with respect to the Company which is
experienced generally within the Internet service provider industry (without
regard to America Online, Inc.) shall not be deemed to constitute a Material
adverse change or Material adverse effect with respect to the Company. For
purposes of this definition, the word "loss" shall mean any and all direct or
indirect payments, obligations, assessments, losses, losses of income,
liabilities, costs and expenses paid or incurred, or reasonably likely to be
paid or incurred, or diminution in value or reduction in benefits or rights of
any kind or character (whether or not known or asserted before the date of this
Agreement, fixed or unfixed, conditional or unconditional, choate or inchoate,
liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent
or otherwise) that are reasonably likely to occur, including without limitation,
penalties, interest on any amount payable to a third party as a result of the
foregoing, and any reasonable legal or other expenses reasonably expected to be
incurred in connection with defending
-5-
<PAGE>
any demands, claims, actions or causes of action that, if adversely determined,
could reasonably be expected to result in losses, and all amounts paid in
settlement of claims or actions; provided, however, that losses shall be net of
any insurance proceeds entitled to be received from a nonaffiliated insurance
company on account of such loss (after taking into account any cost incurred in
obtaining such proceeds or any increases in insurance premiums as a direct
result thereof). Notwithstanding the foregoing, a Subscriber Contract or
Agreement is "Material" if during either calendar year 1998 or calendar year
1999 such Subscriber Contract or Agreement produced or is expected to produce
$25,000 of Gross Revenues, respectively.
"NET WORTH OF THE COMPANY" means the total assets of the Company less
the total liabilities of the Company including any costs of conversion from a
cash basis to an accrual method of accounting, determined in accordance with
GAAP, consistently applied and on the accrual method of accounting. In
calculating the total assets of the Company, no material increase in the
intangible assets of the Company since December 31, 1998 shall be included in
calculating the Net Worth of the Company without the written consent of the
Acquirer. Notwithstanding the foregoing, (i) the cost associated with the mail
server discussed in Section 6.8 below shall be accounted for in the calculation
-----------
of both the assets and liabilities of the Net Worth of the Company and (ii)
$60,000 of the Company's accounting cost as described in Section 11.11 below
shall not accounted for in the calculation of the Net Worth of the Company.
"ORDINARY COURSE OF BUSINESS" means conduct of the Business consistent
with the past practices of the Company.
"N.W.S.T. SHARES" means all of the outstanding shares of capital stock
of N.W.S.T.
"OUTAGE" means any loss of service to any system of the Business,
including but not limited to network access, e-mail, web, news or other
services.
"PARTY" has the meaning set forth in the preface above.
"REGISTRATION AGREEMENT" means that certain Registration Agreement to
be entered into by and among the Acquirer and the stockholders of the Acquirer.
"REGISTRATION STATEMENT" means the Acquirer's registration statement
on Form S-1 filed with the SEC in connection with the IPO.
"RELATED TRANSACTIONS" has the meaning set forth in the Recitals.
"REPORTABLE EVENT" has the meaning set forth in ERISA Sec. 4043.
"REVENUE RUN RATE" shall mean at any given time the total revenues of
the Company for the three-month period ended December 31, 1998 multiplied by a
factor of four.
"SEC" means the U.S. Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
-6-
<PAGE>
"SECURITY INTEREST" means any mortgage, pledge, security interest,
encumbrance, charge, or other lien, other than (a) mechanic's, materialmen's and
similar liens, (b) liens for Taxes not yet due and payable (or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings), (c)
liens arising under workers' compensation, unemployment insurance, social
security, retirement, and similar legislation, (d) liens arising in connection
with sales of foreign receivables, (e) liens on goods in transit incurred
pursuant to documentary letters of credit, (f) purchase money liens and liens
securing rental payments under capital lease arrangements, and (g) other liens
arising in the Ordinary Course of Business and not incurred in connection with
the borrowing of money.
"STOCK PORTION OF THE N.W.S.T. TRANSFER CONSIDERATION" has the meaning
set forth in Section 2.2 below.
-----------
"SUBSCRIBER" means any customers of the Company who (a) are currently
connected to and receiving internet related services from the Company's Systems;
(b) are being charged or have pre-paid the Company standard rates (which rates
are set forth on Schedule 4.23) pursuant to Company's standard form contracts
-------------
previously provided to the Acquirer; (c) have paid such stated rates in full for
at least one full month; (d) are not two or more months delinquent in the
payment of any invoice from the Company; (e) have not, in the preceding two
months, been given a waiver or forgiveness of service charges; (f) have not
received any inducement to become connected to the Company's Systems or to
receive or pay for services (other than pursuant to the Company's customary
marketing practices); and (g) have not notified the Company of their intention
to cancel service.
"SUBSCRIBER CONTRACT OR AGREEMENT" means any agreement whereby the
Company provides services to a Subscriber.
"SUBSIDIARY" means any corporation with respect to which another
specified corporation has the power to vote or direct the voting of sufficient
securities to elect a majority of the directors.
"SWIFT TRANSFER CONSIDERATION" has the meaning set forth in Section
2.2, below.
"SYSTEMS" means the infrastructure used to provide internet access and
related services, including network components, communications facilities,
servers, services and service platforms (including for e-mail, news, DNS, web,
authentication and other services), power plants, data processing platforms, MIS
systems, office automation systems and internal LAN network management systems.
"TAX" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty or addition thereto.
-7-
<PAGE>
"TAX RETURN" means any federal, foreign, state and local governmental
tax return, declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
"TOGETHER PARTIES" has the meaning set forth in the recitals above.
"TRANSFER CONSIDERATION" has the meaning set forth in Section 2.2
-----------
below.
ARTICLE II
THE EXCHANGE OF SHARES
2.1 BASIC TRANSACTIONS. On and subject to the terms and conditions of
------------------
this Agreement, (a) the Acquirer agrees to exchange with the Foundation, and the
Foundation agrees to exchange with the Acquirer, all of the Company Shares held
by it for the Foundation Transfer Consideration specified below in this Section
-------
2, and (b) the Acquirer agrees to exchange with SWIFT, and SWIFT agrees to
- -
exchange with the Acquirer, all of the N.W.S.T. Shares, for the SWIFT Transfer
Consideration specified below in this Section 2.
---------
2.2 TRANSFER CONSIDERATION.
----------------------
(A) GENERALLY. The Transfer Consideration exchanged for the
---------
Foundation Shares and the N.W.S.T. Shares shall be composed of (i) the
Foundation Transfer Consideration, (ii) the Cash Portion of the SWIFT Transfer
Consideration, and (iii) the Stock Portion of the SWIFT Transfer Consideration.
(B) TRANSFER CONSIDERATION; ADJUSTMENTS. The Acquirer agrees to
-----------------------------------
pay to the Foundation and SWIFT in the aggregate, the sum of (i) $7,300,000 in
immediately available funds, consisting of $348,000 payable to the Foundation
(subject to adjustment as hereinafter provided, the "Foundation Transfer
Consideration") (ii) $6,952,000 payable to SWIFT (subject to adjustment as
hereinafter provided, the "SWIFT Transfer Consideration") to be adjusted dollar
for dollar downward by (1) the amount of any outstanding Funded Indebtedness as
of Closing, and (2) the Net Worth adjustment, if any, made pursuant to Section
-------
2.3 below; and (iii) $10,100,000 worth of the Acquirer's Shares, consisting of
- ---
1,010,000 shares of Acquirer's Common Stock (the "STOCK PORTION OF THE TRANSFER
CONSIDERATION"), in exchange for the Foundation Shares and the N.W.S.T. Shares
to be purchased by the Acquirer pursuant to the terms hereof.
(C) ESCROW PAYMENTS. At the Closing, (i) $17,400 of the Foundation
---------------
Transfer Consideration and $347,600 of the Cash Portion of the SWIFT Transfer
Consideration will be paid in immediately available funds by wire transfer to
the Escrow Agent and (ii) five percent (5%) of the Stock Portion of the SWIFT
Transfer Consideration in the form of the Acquirer's Shares valued as of the
Closing Date shall be delivered to the Escrow Agent by the Acquirer to
collectively be held in escrow pursuant to Section 2.9 for satisfaction of the
-----------
Together Parties' indemnification obligations specified in Article IX.
----------
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<PAGE>
(D) PAYMENT. The balance of the Foundation Transfer Consideration
-------
and of the Cash Portion of the SWIFT Transfer Consideration shall be paid by the
Acquirer at the Closing by delivery of immediately available funds by wire
transfer in the percentages set forth on the Allocation Summary. The balance of
the Stock Portion of the SWIFT Transfer Consideration shall be issued by the
Acquirer at the Closing by the delivery of the Acquirer's Shares to SWIFT The
sum of the Foundation Transfer Consideration, the Cash Portion of the SWIFT
Transfer Consideration, and the Stock Portion of the SWIFT Transfer
Consideration shall be referred to as the "TRANSFER CONSIDERATION." Cash by wire
transfer of immediately payable funds will be paid in lieu of any fractional
Acquirer's Shares which would otherwise be issued in accordance with this
Agreement.
2.3 NET WORTH ADJUSTMENT. The Foundation Transfer Consideration and the
--------------------
Cash Portion of the SWIFT Transfer Consideration shall be adjusted downward pro
---
rata on a dollar-for-dollar basis by the amount by which the Net Worth of the
- ----
Company, determined on the same basis as was used in the preparation of the
balance sheet included in the Company's December 31, 1998 Financial Statements
(the "1998 Balance Sheet"), is less than negative $49,322 as of the Closing
Date. The Net Worth of the Company as of the Closing Date shall be estimated by
the Company in good faith upon the request of the Acquirer prior to the Closing
Date. To the extent the actual Net Worth as of the Closing Date as determined
by E&Y after the Closing Date, determined on the same basis as was used in the
preparation of the 1998 Balance Sheet, is less than the Net Worth estimated by
the Company, the difference shall be refunded to the Acquirer from the Escrow
Sum.
2.4 RESERVED.
--------
2.5 RESERVED.
---------
2.6 THE CLOSING. The closing of the transactions contemplated by this
-----------
Agreement (the "CLOSING") shall take place at the offices of Hogan & Hartson,
L.L.P. in Washington, D.C. commencing at 9:00 a.m. local time simultaneously
with the closing of the IPO and the Related Transactions or such other date as
the Acquirer and the Together Parties may mutually determine (the "CLOSING
DATE").
2.7 DELIVERIES AT THE CLOSING. At the Closing, (a) the Together Parties
-------------------------
will deliver to the Acquirer the various certificates, instruments, and
documents referred to in Section 8.1 below, (b) the Acquirer will deliver to the
-----------
Together Parties (as applicable) the various certificates, instruments, and
documents referred to in Section 8.2 below, (c) the Foundation will deliver to
-----------
the Acquirer stock certificates representing all of the Foundation Shares it
owns and SWIFT will deliver to the Acquirer the N.W.S.T. Shares, endorsed in
blank or accompanied by duly executed assignment documents and (d) the Acquirer
will deliver to the Foundation and SWIFT the Transfer Consideration specified in
Section 2.2 above, subject to adjustment after the Closing pursuant to Sections
- ----------- --------
2.3 above and Section 2.9 below.
- --- -----------
2.8 RESERVED.
--------
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<PAGE>
2.9 ESCROW ARRANGEMENTS. Pursuant to the Escrow Agreement to be entered
-------------------
into among the Foundation, SWIFT, the Acquirer and the Escrow Agent (i) $365,000
of the Foundation Transfer Consideration and of the Cash Portion of the SWIFT
Transfer Consideration (the "CASH ESCROW") in immediately available funds and
(ii) five percent (5%) of the Stock Portion of the N.W.S.T. Transfer
Consideration in the form of Acquirer's Shares shall be delivered to the Escrow
Agent at Closing. Such monies and securities (which, together with all interest
accrued thereon which may be due to the Party to whom such funds are ultimately
paid in accordance with the terms of the Escrow Agreement, is herein referred to
as the "ESCROW SUM") shall be held pursuant to the terms of the Escrow Agreement
for payment from such Escrow Sum of the amounts, if any, owing by the Together
Parties to the Acquirer pursuant to the indemnification provisions of Article IX
----------
below, together with accrued interest thereon. Pursuant to the terms of the
Escrow Agreement, the Cash Escrow shall be used first, and the Stock Escrow
shall be used second, to satisfy any such owed amounts. At the conclusion of the
period ending on the first anniversary of the Closing Date (such period being
referred to herein as the "ESCROW PERIOD"), such remaining portion of the Escrow
Sum not theretofore paid to the Acquirer in accordance with the terms of the
Escrow Agreement or subject to a pending claim under the Escrow Agreement and
this Agreement shall be disbursed to the Foundation and SWIFT together with
accrued interest thereon. The Foundation, SWIFT and the Acquirer agree that each
will execute and deliver such reasonable instruments and documents as are
furnished by any other Party to enable such furnishing Party to receive those
portions of the Escrow Sum to which the furnishing Party is entitled under the
provisions of the Escrow Agreement and this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
RELATING TO N.W.S.T. AND SWIFT, THE FOUNDATION AND ELLA CISNEROS
The Foundation, N.W.S.T., SWIFT and Ella Cisneros jointly and
severally represent and warrant to the Acquirer as follows as of the date of
this Agreement and as of the Closing Date (as though made then and as though the
Closing Date were substituted for the date of this Agreement throughout this
Article III):
- -----------
3.1 AUTHORIZATION OF TRANSACTION. Each of N.W.S.T., SWIFT, the Foundation
----------------------------
and Ella Cisneros has full power and authority to execute and deliver this
Agreement and to perform its or her obligations hereunder and this Agreement has
been duly executed and delivered by each of N.W.S.T., SWIFT, the Foundation and
Ella Cisneros. This Agreement constitutes the valid and legally binding
obligation of each of N.W.S.T., SWIFT, the Foundation and Ella Cisneros,
enforceable against it or her in accordance with its terms and conditions,
except that (a) such enforceability may be subject to bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws, decisions or
equitable principles now or hereafter in effect relating to or affecting the
enforcement of creditors' rights or debtors' obligations generally or non-
competition arrangements, and to general equity principles, and (b) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought (the terms of clause (a) and (b) are
sometimes collectively referred to as the "EQUITABLE EXCEPTIONS"). N.W.S.T.,
SWIFT, the Foundation and Ella Cisneros need not give any notice to,
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<PAGE>
make any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order to consummate the transactions
contemplated by this Agreement (other than as provided for in Article II of this
----------
Agreement).
3.2 NONCONTRAVENTION. Neither the execution and delivery of this
----------------
Agreement by N.W.S.T., SWIFT, the Foundation and Ella Cisneros, nor the
consummation of the transactions contemplated hereby by N.W.S.T., SWIFT, the
Foundation and Ella Cisneros, will (a) violate any statute, regulation, rule,
judgment, order, decree, stipulation, injunction, charge, or other restriction
of any government, governmental agency, or court to which N.W.S.T., SWIFT, the
Foundation and Ella Cisneros is subject or (b) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create in any
part the right to accelerate, terminate, modify, or cancel, or require any
notice under any contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money, instrument of
indebtedness, Security Interest, or other arrangement to which N.W.S.T., SWIFT,
the Foundation or Ella Cisneros is a party or by which either of them is bound
or to which any of their respective assets is subject.
3.3 BROKER'S FEES. None of N.W.S.T., SWIFT, the Foundation and Ella
-------------
Cisneros has any Liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions contemplated by this
Agreement for which the Acquirer could become liable or obligated.
3.4 INVESTMENT. Neither of SWIFT nor Ella Cisneros is acquiring the
----------
Acquirer's Shares with a view to or for sale in connection with any distribution
thereof within the meaning of the Securities Act.
3.5 COMPANY SHARES. The Foundation and N.W.S.T. hold of record and
--------------
beneficially own the Company Shares in the numbers set forth next to their names
on Schedule 4.2. SWIFT holds of record and beneficially owns the N.W.S.T.
------------
Shares. The Company Shares and the N.W.S.T. Shares are free and clear of any
restrictions on transfer (other than any restrictions under the Securities Act
and state securities laws), claims, Taxes, Security Interests, options,
warrants, rights, contracts, calls, commitments, equities, and demands. None of
the Foundation, N.W.S.T., Ella Cisneros and SWIFT is a party to (or have
otherwise waived all rights under) any option, warrant, right, contract, call,
put, or other agreement or commitment providing for the disposition or
acquisition of any capital stock of the Company or N.W.S.T. (other than this
Agreement). None of the Foundation, N.W.S.T., Ella Cisneros and SWIFT is a party
to (or has otherwise terminated) any voting trust, proxy, or other agreement or
understanding with respect to the voting of any capital stock of the Company or
N.W.S.T. Ella Cisneros is the sole stockholder of SWIFT
3.6 DISCLOSURE. To the Knowledge of the Foundation, N.W.S.T., Ella
----------
Cisneros and SWIFT, the representations and warranties contained in this Article
-------
III do not contain any untrue statement of a Material fact or omit to state any
- ---
Material fact necessary in order to make the statements contained in this
Article III not misleading.
- -----------
3.7 ORGANIZATION, QUALIFICATION AND CORPORATE POWER. The Foundation and
------------------------------------------------
SWIFT are corporations duly organized, validly existing, and in good standing
under the laws of the jurisdictions of their incorporation. The Foundation and
SWIFT are duly authorized to conduct
-11-
<PAGE>
business and are in good standing under the laws of all states in which the
nature of their businesses or the ownership or leasing of their properties
requires such qualification. Schedule 3.7 lists the directors and officers of
------------
the Foundation and SWIFT The Foundation and SWIFT have delivered to the Acquirer
correct and complete copies of the charters and bylaws of the Foundation and
SWIFT (as amended to date). The Foundation and SWIFT are not in default under or
in violation of any provision of their charters or bylaws.
3.8 REGULATION S.
-------------
(a) Neither SWIFT nor Ella Cisneros is a U.S. Person as that term is
defined in Regulation S promulgated under the Securities Act ("REGULATION S").
(b) Each of SWIFT and Ella Cisneros is outside the United States as
of the date of the execution and delivery of this Agreement and will be outside
the United States at the time of the closing of the transactions contemplated by
this Agreement; provided, that delivery of the N.W.S.T. Shares to Acquirer and
--------
delivery of the Acquirer's Shares to SWIFT may be effected in the United States
through an agent of SWIFT as long as each of SWIFT and Ella Cisneros is outside
the United States at the time of such deliveries.
(c) Each of SWIFT and Ella Cisneros is acquiring the Acquirer's Shares
for their own account and not for the account or benefit of any U.S. Person and
neither of them is a Distributor as that term is defined in Regulation S; upon
consummation of the transactions contemplated by this Agreement, SWIFT and/or
Ella Cisneros will be the sole beneficial owners of the Acquirer's Shares and
neither of them has pre-arranged any sale with any purchaser or purchasers who
is or are a U.S. Person or U.S. Persons in the United States.
(d) Each of SWIFT and Ella Cisneros is sufficiently experienced in
financial and business matters to be capable of evaluating the merits and risks
of their investments and to make an informed decision relating thereto.
(e) Neither SWIFT nor Ella Cisneros is an underwriter of, or dealer
in, any of the Acquirer's Shares issued hereunder, and neither SWIFT nor Ella
Cisneros is participating, pursuant to a contractual agreement or otherwise, in
the distribution of any of the Acquirer's Shares.
(f) Neither SWIFT nor Ella Cisneros is an affiliate of the Acquirer as
that term is defined in Rule 405 promulgated under the Securities Act.
(g) Each of SWIFT and Ella Cisneros represents and warrants and hereby
agrees that all offers and sales of the Acquirer's Shares shall be made only in
accordance with the provisions of Regulation S, pursuant to registration under
the Securities Act or pursuant to an available exemption from the registration
requirements of the Securities Act.
(h) Each of SWIFT and Ella Cisneros represents and warrants and hereby
agrees not to engage in hedging transactions with regard to the Acquirer's
Shares unless in compliance with the Securities Act.
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<PAGE>
(i) Each of SWIFT and Ella Cisneros acknowledges that acquisition of
the Acquirer's Shares involves a high degree of risk, and is aware of these
risks and further acknowledges that SWIFT and Ella Cisneros can bear the
economic risk of the acquisition of the Acquirer's Shares, including the total
loss of their investment.
(j) Each of SWIFT and Ella Cisneros understands that the Acquirer's
Shares have not been and will not be registered under the Securities Act and are
being offered and sold to SWIFT in reliance on specific exemptions from the
registration requirements of U.S. securities laws and that the Acquirer is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of S.W.I.F.T and Ella Cisneros
set forth herein in order to determine the applicability of such exemptions and
the suitability of SWIFT and Ella Cisneros to acquire beneficial ownership of
the Acquirer's Shares.
(k) Each of SWIFT and Ella Cisneros understands that, in the view of
the SEC, the statutory basis for the exemption claimed for this transaction
would not be available if the offering of the Acquirer's Shares, including,
without limitation, any series of transactions relating thereto, although in
technical compliance with Regulation S, is part of a plan or scheme to evade the
registration provisions of the Securities Act.
(l) Each of SWIFT and Ella Cisneros expressly acknowledges that, in
accordance with the provisions of Regulation S, the Acquirer is required to
refuse to register any transfer of the Acquirer's Shares not made in accordance
with the provisions of Regulation S, pursuant to an effective registration under
the Securities Act or pursuant to an available exemption from the registration
requirements of the Securities Act.
(m) Each of SWIFT and Ella Cisneros acknowledges and hereby agrees
that any certificate or certificates representing the Acquirer's Shares to be
issued to SWIFT hereunder shall bear a legend substantially in the following
form until the first anniversary of the Closing Date:
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), and may not be encumbered, pledged, hypothecated, sold,
transferred or otherwise disposed of within the United States or
to or for the account or benefit of U.S. Persons except in
accordance with the provisions of Regulation S promulgated under
the Act, pursuant to registration under the Act or pursuant to an
available exemption from registration. The holder may not engage
in any hedging transactions with regard to these securities
unless conducted in compliance with the Act.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES RELATING TO THE COMPANY
AND N.W.S.T.
The Foundation, N.W.S.T., SWIFT and Ella Cisneros jointly and
severally represent and warrant to the Acquirer that, subject to the specific
qualifications and limitations set forth herein, the statements contained in
this Article IV are correct and complete as of the date of this
----------
-13-
<PAGE>
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article IV). Unless otherwise noted, or unless the
----------
context otherwise indicates, all references to the Company in Sections 4.3
------------
through 4.24 below shall also refer to N.W.S.T.
- ------------
4.1 ORGANIZATION, QUALIFICATION, AND CORPORATE POWER. The Company and
------------------------------------------------
N.W.S.T. are corporations duly organized, validly existing, and in good standing
under the laws of the jurisdictions of their incorporation. The Company is duly
authorized to conduct business and is in good standing under the laws of the
States of New Hampshire and New York, which are the only jurisdictions in which
the nature of its businesses or the ownership or leasing of its properties
requires such qualification, except where any failure so to qualify would not
have a Material adverse effect on the Company. N.W.S.T. is duly authorized to
conduct business and is in good standing under the laws of all states in which
the nature of its businesses or the ownership or leasing of its properties
requires such qualification. The Company has full corporate power and authority
to carry on the Business and to own and use the properties owned and used by it.
Schedule 4.1 lists the directors and officers of the Company and N.W.S.T. The
- ------------
Company and N.W.S.T. have delivered to the Acquirer correct and complete copies
of the charters and bylaws of the Company and N.W.S.T. (as amended to date). The
minute books containing the records of meetings and/or resolutions of the
stockholders, the board of directors, and any committees of the board of
directors, the stock certificate books and the stock record books of the Company
and N.W.S.T. are correct and complete in all Material respects. The Company and
N.W.S.T. are not in default under or in violation of any provision of their
charters or bylaws.
4.2 CAPITALIZATION.
--------------
(a) THE COMPANY. The entire authorized capital stock of the Company
-----------
consists of 1,000 shares of common stock authorized, no par value, of which 100
shares are issued and outstanding, none are subject to issuance pursuant to
vested options, none are subject to issuance pursuant to unvested options and
none are reserved for issuance pursuant to future option grants. The issued and
outstanding shares of, and the holders of record of, the capital stock of the
Company are set forth on Schedule 4.2 attached hereto. All of the issued and
------------
outstanding Company Shares have been duly authorized, are validly issued, fully
paid, and nonassessable, and are held of record by the Foundation and N.W.S.T.
There are no outstanding or authorized options, warrants, rights, contracts,
calls, puts, rights to subscribe, conversion rights, or other agreements or
commitments to which the Company is a party or which are binding upon the
Company providing for the issuance, disposition, or acquisition of any of its
capital stock. There are no outstanding or authorized options, stock
appreciation, phantom stock, or similar rights with respect to the Company.
There are no voting trusts, proxies, or any other agreements or understandings
with respect to the voting of the capital stock of the Company.
(b) N.W.S.T. The entire authorized capital stock of N.W.S.T. consists of
--------
1,500 shares of common stock authorized, $1.00 par value, of which 1,000 shares
are issued and outstanding, none are subject to issuance pursuant to vested
options, none are subject to issuance pursuant to unvested options and none are
reserved for issuance pursuant to future option grants. The issued
-14-
<PAGE>
and outstanding shares of, and the holders of record of, the capital stock of
N.W.S.T. are set forth on Schedule 4.2 attached hereto. All of the issued and
------------
outstanding shares of N.W.S.T. have been duly authorized, are validly issued,
fully paid, and nonassessable, and are held of record by SWIFT There are no
outstanding or authorized options, warrants, rights, contracts, calls, puts,
rights to subscribe, conversion rights, or other agreements or commitments to
which the N.W.S.T. is a party or which are binding upon N.W.S.T. providing for
the issuance, disposition, or acquisition of any of its capital stock. There are
no outstanding or authorized options, stock appreciation, phantom stock, or
similar rights with respect to N.W.S.T. There are no voting trusts, proxies, or
any other agreements or understandings with respect to the voting of the capital
stock of N.W.S.T.
4.3 NONCONTRAVENTION. Neither the execution and the delivery of this
----------------
Agreement, nor the consummation of the transactions contemplated hereby, will
(a) violate any statute, regulation, rule, judgment, order, decree, stipulation,
injunction, charge, or other restriction of any government, governmental agency,
or court to which the Company is subject or any provision of the charter or
bylaws of the Company, except to the extent any such violation does not or could
not reasonably be expected to result in a Material adverse effect on the
Company, or (b) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
contract, lease, sublease, license, sublicense, franchise, permit, indenture,
agreement or mortgage for borrowed money, instrument of indebtedness, Security
Interest, or other arrangement to which the Company is a party or by which it is
bound or to which any of its assets are subject (or result in the imposition of
any Security Interest upon any of its assets), except where any of the foregoing
does not or could not reasonably be expected to have an adverse effect. The
Company does not need to give any notice to, make any filing with, nor obtain
any authorization, consent, or approval of any government or governmental agency
in order for the Parties to consummate the transactions contemplated by this
Agreement.
4.4 SUBSIDIARIES. The Company has no Subsidiaries other than the
------------
parent/subsidiary relationship between N.W.S.T. and the TGF Technologies, Inc.,
other than S.G.I. Corp.
4.5 FINANCIAL STATEMENTS. Attached hereto as Exhibit B are the Company's
-------------------- ---------
financial statements (collectively the "FINANCIAL STATEMENTS") for its three
most recent fiscal years. The Financial Statements have been prepared in
accordance with standards described on Exhibit B applied on a consistent basis
---------
throughout the periods covered thereby, fairly present the financial condition
of the Company as of such dates, and are consistent with the books and records
of the Company (which books and records are correct and complete) in all
Material respects.
4.6 EVENTS SUBSEQUENT TO DECEMBER 31, 1998. Since December 31, 1998,
--------------------------------------
there has not been any Material adverse change in the assets, Liabilities,
business, financial condition, operations, results of operations, or future
prospects of the Company. Without limiting the generality of the foregoing
since that date, except as set forth on Schedule 4.6 :
------------
(A) The Company has not sold, leased, transferred, or assigned any of
its assets, tangible or intangible, other than for a fair consideration in the
Ordinary Course of Business;
-15-
<PAGE>
(B) The Company has not entered into any Material contract, lease,
sublease, license or sublicense (or series or related contracts, leases,
subleases, licenses and sublicenses) outside the ordinary course of business;
(C) The Company has not made any capital expenditure (or series of
related capital expenditures) involving more than $200,000 in the aggregate, or
outside the Ordinary Course of Business;
(D) The Company has not entered into any employment contract or
collective bargaining agreement, written or oral, or modified the terms of any
existing such contract or agreement with any of its full-time staff employees
other than in the Ordinary Course of Business;
(E) The Company has not granted any dividends or any increase outside
the Ordinary Course of Business in the base compensation of any of its
directors, officers, and employees, nor has the Company made any payments or
promises or commitments to make any other payments (other than salary and
reimbursement of customary expenses) to any of such Persons, including without
limitation bonuses other than in the Ordinary Course of Business; and
(F) The Company has not adopted any (i) bonus, (ii) profit-sharing,
(iii) incentive compensation, (iv) pension, (v) retirement, (vi) medical,
hospitalization, life, or other insurance, (vii) severance or (viii) other plan,
contract or commitment for any of its directors, officers, and employees, or
modified or terminated any existing plan, contract or commitment.
4.7 UNDISCLOSED LIABILITIES. Except as set forth on Schedule 4.7, the
----------------------- ------------
Company does not have any Liability (and, to its Knowledge, there is no valid
Basis for any present or future charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand against the Company giving rise to any
Liability) which is individually in excess of $25,000, except for (a)
Liabilities set forth on the face of the 1998 Balance Sheet, and (b) Liabilities
which have arisen after the December 31, 1998 in the Ordinary Course of Business
(none of which relates to any breach of contract, breach of warranty, tort,
infringement, or violation of law or arose out of any charge, complaint, action,
suit, proceedings, hearing, investigation, claim, or demand).
4.8 TAX MATTERS. Except as set forth on Schedule 4.8:
----------- ------------
(A) The Company has filed all Tax Returns that it was required to
file. All such Tax Returns were correct and complete in all respects. All Taxes
the Company (whether or not shown on any Tax Return) based on operations through
December 31, 1998 and due and payable as of the date hereof have been paid or
accrued on the 1998 Balance Sheet. The Company currently is not the beneficiary
of any extension of time within which to file any Tax Return. No claim has ever
been made by any taxing authority in a jurisdiction where the Company does not
file Tax Returns that it is or may be subject to taxation by that jurisdiction.
There are no Security Interests on any of the assets of the Company that arose
in connection with any failure (or alleged failure) to pay any Tax, other than
for Taxes that are not yet due which are accrued for since December 31, 1998.
-16-
<PAGE>
(B) The Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
creditor, independent contractor, or other third party and the Company has
properly reflected the status of all employees and independent contractors in
connection therewith as required by applicable Tax law and the Fair Labor
Standards Act of 1938, as amended, and the rules and regulations promulgated
thereunder.
(C) The Company has not received any notice that any taxing authority
intends to assess any additional Taxes for any period for which Tax Returns have
been filed, and none of the Together Parties, no officer of the Company and no
employee of the Company with responsibility for Tax matters has Knowledge of any
valid Basis upon which a claim for such additional Taxes could validly be made.
There is no dispute or claim concerning any Tax Liability of the Company either
(i) claimed or raised by any authority in writing or (ii) as to which any of the
Together Parties or any of the officers of the Company or employees responsible
for Tax matters of the Company has Knowledge based upon personal contact with
any agent of such authority. Schedule 4.8 lists all federal, state, local, and
------------
foreign income Tax Returns filed with respect to the Company for taxable periods
ended on or after December 31, 1995, indicates those Tax Returns that have been
audited, and indicates those Tax Returns that currently are the subject of
audit. The Company has delivered to the Acquirer correct and complete copies of
all federal income Tax Returns filed, examination reports received, assessed
against or agreed to, by the Company since December 31, 1995. The Company has
not waived any statute of limitations in respect of Taxes which waiver is
currently in effect. The Company is not a party to any "closing agreement," as
described in Section 7121 of the Code or any corresponding provision of state or
local Tax law, and there are no Tax rulings or requests for Tax rulings with
respect to the Company.
(D) The Company has not filed a consent under Code Sec. 341(f)
concerning collapsible corporations. The Company has not made any payments, is
not obligated to make any payments, and is not a party to any agreement that
could obligate it to make any payments that, under any circumstances, will not
be deductible to the Company under Code Sec. 280G. The Company is not and has
never been a United States real property holding corporation within the meaning
of Code Sec. 897(c)(2). The Company has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code Sec. 6662. The
Company is not a party to any Tax allocation or sharing agreement. The Company
has never been (nor has any Liability for unpaid Taxes because it once was) a
member of an Affiliated Group filing a consolidated federal income Tax Return
and has never incurred any Liability for the Taxes of any Person under Treas.
Reg. (S)1.1502-6 (or any similar provision of state, local, or foreign law). The
Company has never incurred any Liability for the Taxes of any Person as a
transferee or successor, by contract, or otherwise.
4.9 TANGIBLE ASSETS. The Company owns or leases substantially all
---------------
tangible assets necessary for the conduct of the Business as presently
conducted; notwithstanding the foregoing, the Parties acknowledge that the
Company's mail server is currently operating slightly beyond capacity. To the
Knowledge of the Together Parties, each such tangible asset of the Company is
free from Material defects (patent and latent), has been maintained in
accordance with normal industry practice, is in good operating condition and
repair (subject to normal wear and tear), and is suitable for the purposes for
which it presently is used.
-17-
<PAGE>
4.10 NO OWNED REAL PROPERTY. The Company does not own nor does it have any
----------------------
interest in any real property or improvements thereon (other than the leases
disclosed in Schedule 4.12, and the leasehold improvements relating to the same)
-------------
nor does the Company have any options, agreements or contracts under which it
has the right or obligation to acquire any interest in any real property or
improvements.
4.11 INTELLECTUAL PROPERTY.
---------------------
(A) Attached hereto as Schedule 4.11 is a list and brief description
-------------
of all Intellectual Property owned or utilized by the Company, other than
standard off-the-shelf software used by the Company. The Company has furnished
the Acquirer with copies of all license agreements to which the Company is a
party, either as licenser or licensee, with respect to any Intellectual
Property. Except as set forth on Schedule 4.11, to the Knowledge of the Together
-------------
Parties, the Company has good title to or the right to use all the Intellectual
Property necessary for the conduct of the Business, as presently conducted or
currently proposed to be conducted and the Company is not infringing on any
Intellectual Property right of others, and the Together Parties have no
Knowledge of any infringement by others of any such rights owned by the Company.
(B) Except as set forth on Schedule 4.11, to the knowledge of the
-------------
Together Parties, all licenses set forth on Schedule 4.11 are valid and binding
-------------
obligations of the Company, and to the Knowledge of the Together Parties, of the
other parties thereto, and enforceable against the Company and, to the Knowledge
of the Together Parties, the other parties thereto, in accordance with their
respective terms, except for the Equitable Exceptions, except where any failure
would not have a Material adverse effect on the Company.
(C) Except as set forth on Schedule 4.11, the Company has taken all
--------------
commercially reasonable measures to protect and maintain the rights of the
Company in its Intellectual Property. Each piece of Intellectual Property used
by the Company is used with the authorization of every other claimant thereto
and the execution, delivery and performance of this Agreement will not impair
such use, except where any failure would not have a Material adverse effect on
the Company.
(D) The Company has also delivered to the Acquirer correct and
complete samples or copies of all trademarks, service marks, trade names,
copyrights, patents, registrations and, as relate to the foregoing,
applications, licenses, agreements, and permissions (as amended to date) held by
the Company, and have made available to the Acquirer correct and complete copies
of all other written documentation evidencing ownership and prosecution (if
applicable) of each such item. Except as set forth on Schedule 4.11, to the
-------------
Knowledge of the Together Parties with respect to each item of Intellectual
Property used in, or otherwise necessary for the conduct of, the Business as
heretofore conducted: (i) the identified owner possesses all right, title, and
interest in and to the item; (ii) the item is not subject to any outstanding
judgment, order, decree, stipulation, injunction, or charge; (iii) no charge,
complaint, action, suit, proceeding, hearing, investigation, claim, or demand is
pending or, to the Knowledge of any of the Together Parties (and employees of
the Company with responsibility for Intellectual Property matters) of the
Company, is threatened which challenges the legality, validity, enforceability,
use, or ownership of the item; and (iv) the Company
-18-
<PAGE>
has not agreed to indemnify any person or entity for or against any
interference, infringement, misappropriation, or other conflict with respect to
the item, except where any failure would not have a Material adverse effect on
the Company.
(E) To the Knowledge of the Together Parties, none of the Material
computer software, computer firmware, computer hardware (whether general or
special purpose), and other similar or related items of automated, computerized,
and/or software system(s) that are used or relied on by the Company in the
conduct of its business will in any Material respect malfunction, cease to
function, generate incorrect data, or produce incorrect results when processing,
providing, and/or receiving (i) date-related data into and between the twentieth
and twenty-first centuries and (ii) date-related data in connection with any
valid date in the twentieth and twenty-first centuries through the year 2030.
4.12 CONTRACTS. Except as disclosed on Schedule 4.12, the Company is not a
--------- -------------
party to or bound by, and none of the assets of the Company are covered by or
subject to the following contracts, agreements, Subscriber Contracts or
Agreements (whether written or oral):
(A) any written agreement (or group of related written agreements)
for the lease of real or personal property from or to third parties providing
for lease payments in excess of $25,000 per annum;
(B) any Material equipment or supplier agreement;
(C) any written agreement (or group of related written agreement)
under which it has created, incurred, assumed, or guaranteed (or may create,
incur, assume, or guarantee) indebtedness (including capitalized lease
obligations) involving more than $25,000 or under which it has imposed (or may
impose) a Security Interest on any of its assets, tangible or intangible;
(D) any Material Subscriber contract;
(E) any formal or informal partnering arrangement with any merchant
or service or Web content provider;
(F) any agreement with any local exchange carrier, competitive local
exchange carrier, competitive access provider or other telecommunications
carrier;
(G) any peering, transit or other agreement with any Internet service
provider, online company or similar entity; or
(H) any written arrangement requiring confidentiality or
noncompetition other than the confidentiality agreement between Company and the
Acquirer dated January 28, 1999, (the "Confidentiality Agreement") and
agreements with customers, employees or subcontractors in the Ordinary Course of
Business;
-19-
<PAGE>
(I) any other written arrangement (or group of related written
arrangements) either involving more than $25,000 per annum or not entered into
in the Ordinary Course of Business.
The Company has delivered to the Acquirer or made available for review by the
Acquirer a correct and complete copy of each written arrangement listed on
Schedule 4.12 (as amended to date). With respect to each written arrangement so
- -------------
listed and assuming Material performance by the other parties thereto: (a) the
written arrangement is legal, valid, binding, enforceable, and in full force and
effect, subject to Equitable Exceptions; (b) the written arrangement will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms immediately following the Closing, subject to Equitable
Exceptions; (c) the Company is not, nor to the Knowledge of the Together Parties
is any other party to such agreements, in breach or default, and no event has
occurred which to the Knowledge of the Together Parties with notice or lapse of
time would constitute a breach or default or permit termination, modification,
or acceleration, under the written arrangement; and (d) the Company has not, nor
to the Knowledge of the Together Parties has any other party, repudiated any
provision of the written arrangement. Except as set forth on Schedule 4.12, the
Company is not a party to any oral contract, agreement or other arrangement
which, if reduced to written form, would be required to be listed in Schedule
--------
4.12 under the terms of this Section 4.12. No unfilled Subscriber Contract or
- ---- ------------
Agreement obligating the Company to perform services will result in a loss to
the Company upon completion of performance. Except as set forth on Schedule
--------
4.12, the Company has not been notified that any of its Subscribers intend
- ----
either to dispute charges in an aggregate amount exceeding $5,000 under or to
terminate early a Material Subscriber Contract or Agreement.
4.13 NOTES AND ACCOUNTS RECEIVABLE. All notes and accounts receivable of
-----------------------------
the Company are reflected properly on its books and records, are valid
receivables and, to the Knowledge of the Together Parties are subject to no
setoffs or counterclaims, are presently current and collectible, and will be
collected in accordance with their terms at their recorded amounts, subject only
to the reserve for bad debts set forth on the face of the 1998 Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Company.
4.14 INSURANCE.
---------
(A) Schedule 4.14 sets forth the following information with respect
-------------
to each insurance policy (including policies providing property, casualty,
liability, and workers' compensation coverage and bond and surety arrangements)
to which the Company has been a party, a named insured, or otherwise the
beneficiary of coverage at any time within the past two (2) years: the name
address and telephone number of the agent; the name of the insurer, the name of
the policyholder, and the name of each covered insured; the policy number and
the period of coverage; the scope and amount (including a description of how
deductibles and ceilings are calculated and operate) of coverage; and a
description of any material retroactive premium adjustments or other loss
sharing arrangements.
-20-
<PAGE>
(B) With respect to each insurance policy listed on Schedule 4.14 and
-------------
assuming the Material performance of the other parties thereto: (i) the policy
is legal, valid, binding, and enforceable and in full force and effect; (ii) the
policy will continue to be legal, valid, binding, and enforceable and in full
force and effect on identical terms immediately following the Closing Date;
(iii) the Company is not in breach or default (including with respect to the
payment of premiums or the giving of notices), and no event has occurred which,
with notice or the lapse of time, would constitute such a breach or default or
permit termination, modification, or acceleration under the policy; and (iv) the
Company has not and to the Knowledge of the Together Parties and the Company, no
other party to the policy has repudiated any provision thereof. The Company has
been covered during the past three (3) years by insurance in scope and amount
customary and reasonable for the businesses in which it has engaged during the
aforementioned period. Except as set forth in Schedule 4.14, the Company
-------------
currently has no and has never had any self-insurance arrangements.
4.15 LITIGATION. Schedule 4.15 sets forth each instance in which the
---------- -------------
Company (a) is subject to any unsatisfied judgment, order, decree, stipulation,
injunction, or charge or (b) is a party or, to the Knowledge of the Together
Parties, is threatened to be made a party to any charge, complaint, action,
suit, proceeding, hearing, or investigation of or in any court or quasi-judicial
or administrative agency of any federal, state, local, or foreign jurisdiction
or before any arbitrator. Except as specifically described on Schedule 4.15, no
-------------
matter listed thereon could reasonably be expected, individually, to result in a
Material adverse effect on the Company. None of the Together Parties has any
reason to believe that any such charge, complaint, action, suit, proceeding,
hearing, or investigation having a valid Basis for recovery from or sanction of
the Company may be brought or threatened against the Company.
4.16 EMPLOYEES. To the Knowledge of the Together Parties, no non-clerical
---------
employee or any full-time group of employees has any plans to terminate
employment with the Company, and the Company has not committed any unfair labor
practice.
4.17 EMPLOYEE BENEFITS. Except as set forth on Schedule 4.17, the Company
----------------- -------------
has no Employee Benefit Plans that the Company maintains or to which the Company
contributes for the benefit of any current or former employee of the Company,
and the Company has never been a party to any Employee Benefit Plan.
4.18 GUARANTIES. The Company is not a guarantor nor, to the Knowledge of
----------
the Together Parties, is it otherwise liable for any Liability or obligation
(including indebtedness) of any other person other than such potential
liabilities to which the Company is subject based on the acts or omissions of
its employees, subcontractors and other agents performing services for the
Company in the Ordinary Course of Business (of which the Company has no
Knowledge of any claim for actual liability therefor).
4.19 LEGAL COMPLIANCE. To the Knowledge of the Together Parties, except as
----------------
listed on Schedule 4.8 or Schedule 4.19 or would not, individually or in the
------------ -------------
aggregate, have a Material adverse effect on the Company:
-21-
<PAGE>
(A) the Company has complied with all laws (including rules and
regulations thereunder) of federal, state, local, and foreign governments (and
all agencies thereof), including without limitation, all environmental and
employee health and safety laws. No charge, complaint, action, suit, proceeding,
hearing, investigation, claim, demand, or notice has been filed or commenced
against the Company which is currently pending and alleges any failure to comply
with any such law or regulation.
(B) the Company has complied with all applicable laws (including
rules and regulations thereunder) relating to the employment of labor employee
civil rights, hiring of or otherwise engaging non-United States citizens to
perform services, and equal employment opportunities.
(C) the Company has not made or agreed to make any contribution,
payment, or gift of funds or property to any governmental official, employee, or
agent where either the contribution, payment, or gift or the purpose thereof was
illegal under the laws of any federal, state, local, or foreign jurisdiction;
(D) the Company has filed in a timely manner all reports, documents,
and other materials it was required to file (and the information contained
therein was correct and complete in all respects) under all applicable laws
(including rules and regulations thereunder).
(E) the Company has possession of all records and documents it was
required to retain under all applicable laws (including rules and regulations
thereunder).
4.20 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY. Except as set forth
-----------------------------------------------
on Schedule 4.20, none of the other Together Parties or any of their Affiliates
-------------
has been involved in any business arrangement or relationship with the Company
within the past twelve (12) months other than service relationships in the
Ordinary Course of Business, and neither the Together Parties nor their
Affiliates owns any material property or right, tangible or intangible, which is
used in the business of the Company.
4.21 BROKERS' FEES. The Company does not have any Liability or obligation
-------------
to pay any fees or commissions to any broker, finder, or similar representative
with respect to the transactions contemplated by this Agreement.
4.22 SYSTEMS. To the Knowledge of the Together Parties, except as set
-------
forth on Schedule 4.22 and with such other exceptions as will not, individually
-------------
or in the aggregate, have a Material adverse effect on the Company, (i) all of
the Systems services and platform servers are running, or peaking, at no higher
than 90% of capacity, (ii) all of the Systems services that under standard
industry practice would be so replicated are replicated in a redundant manner
across available platform servers, (iii) all remote physical points of presence
("POPS") are secure, conform to equipment manufacturers' recommended
environmental parameters, and contain an uninterrupted power supply with a
battery back-up of at least [60] minutes, (iv) the ratio of Subscribers to
modems does not exceed 10:1 at any of the POPs, (v) the configuration diagrams
provided to the Acquirer reasonably represent the redundant network facilities
between major backbone locations, and between remote physical POPs and major
network concentration points,
-22-
<PAGE>
(vi) the existing power plant at the Company's main location is equipped with an
uninterrupted power supply with a battery back-up of at least [30] minutes,
(vii) except in Glens Falls, New York, and Waitsfield, Vermont all deployed
dial-in modem, modem shelf and corresponding technology conform to applicable
industry standards necessary to support Subscriber traffic at a rate of 56Kbps
or above, (viii) all Systems owned, leased by, or licensed to or by the Company,
which will be in use by the Company after February 28, 1999, are, or are in the
process of being made to be year 2000 compliant, (ix) the Company utilizes a
DHCP, or other dynamic, IP address allocation scheme that conforms to industry
standards, and (x) the Company has access to the quantity of IP addresses
sufficient to support the Company's Subscriber base as currently existing.
4.23 SUBSCRIBERS. Schedule 4.23 sets forth (a) the number or Subscribers
----------- -------------
served by the Company by type of business (i.e., segregated by the following
categories, if applicable to the Company: (i) dial-up, (ii) dedicated access,
(iii) web hosting, and (iv) other businesses) as of December 31, 1998 and the
Company's standard rates for such Subscribers for each type of business; (b) for
the period commencing January 1, 1997 through December 31, 1998, the Company's
monthly churn rate (consisting of (i) cancellations of month-to-month service
and/or long-term subscription or service contracts prior to expiration (ii)
terminations of any such contracts, and (iii) non-renewal of any such contracts
upon expiration) by business type during each full calendar month prior to the
date hereof; and (c) as of December 31, 1998, detail as to the amount of prepaid
subscription or service contracts and the amount of unearned revenue for all
Subscriber contracts with a remaining term of (i) less than or equal to 90 days,
(ii) greater than 90 days and less than or equal to one year, (iii) greater than
one year and less than or equal to two years, (iv) greater than two years and
less than or equal to three years and (v) greater than three years.
4.24 DISCLOSURE. To the Knowledge of the Together Parties, the
----------
representations and warranties contained in this Article IV as amended, modified
----------
and/or supplemented by the Disclosure Schedules do not contain any untrue
statement of a Material fact or omit to state any Material fact necessary in
order to make the statements and information contained in this Article IV not
----------
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIRER
The Acquirer represents and warrants to the Together Parties the
statements contained in this Article V are correct and complete as of the date
---------
of this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date of
this Agreement throughout this Article V):
---------
5.1 ORGANIZATION OF THE ACQUIRER. The Acquirer is a corporation duly
----------------------------
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation.
5.2 AUTHORIZATION OF TRANSACTION. The Acquirer has full power and
----------------------------
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder and this Agreement has
been duly executed and delivered by
-23-
<PAGE>
the Acquirer. This Agreement constitutes the valid and legally binding
obligation of the Acquirer, enforceable in accordance with its terms and
conditions except for Equitable Exceptions. The Acquirer does not need to give
any notice to, make any filing with, nor obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement (other than as provided for in
Article II of this Agreement).
- ----------
5.3 BROKERS' FEES. The Acquirer has no Liability nor obligation to pay
-------------
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Together Parties could
become liable or obligated.
5.4 ACQUIRER'S CAPITALIZATION. As of the date of this Agreement, the
-------------------------
authorized capital stock of the Acquirer consists of (a) 100,000,000 shares of
common stock, and (b) 10,000,000 shares of preferred stock. The issued and
outstanding shares of and the holders of record of the Acquirer's Common Stock
are as set forth in Annex IV, and as of the date hereof, there are no issued and
--------
outstanding shares of preferred stock. All of the Acquirer's issued and
outstanding common stock have been duly authorized, are validly issued, fully
paid, and nonassessable.
5.5 NONCONTRAVENTION. Neither the execution and the delivery of this
----------------
Agreement by Acquirer, nor the consummation of the transactions contemplated
hereby by the Acquirer, will (a) violate any statute, regulation, rule,
judgment, order, decree, stipulation, injunction, change, or other restriction
of any government, governmental agency, or court to which the Acquirer is
subject or (b) conflict with, result in a breach of, constitute a default under,
result in the acceleration of, create in any part the right to accelerate,
terminate, modify, or cancel, or require any notice under any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest, or
other agreement to which the Acquirer is a party or by which it is bound or to
which any of its assets are subject.
5.6 DISCLOSURE. To the Knowledge of the Acquirer, the representations and
----------
warranties contained in this Article V do not contain any untrue statement of a
---------
fact or omit to state any Material fact necessary in order to make the
statements in Article V not misleading.
---------
ARTICLE VI
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the execution of
this Agreement and the Closing or the earlier termination of this Agreement:
6.1 GENERAL. Each of the Parties will use its reasonable efforts to take
-------
all action and to do all things necessary, proper, or advisable to consummate
and make effective the transactions contemplated by this Agreement (including
satisfying the closing conditions set forth in Article IX below).
----------
-24-
<PAGE>
6.2 NOTICES AND CONSENTS. Each of the Parties will give any notices to
--------------------
third-parties, and will use best efforts to obtain third-party consents, that
the other Party may reasonably request in connection with matters disclosed or
required to be disclosed on the Disclosure Schedules. Each of the Parties will
take any additional action (and N.W.S.T. and SWIFT will cause the Company to
take any additional action) that may be necessary, proper, or advisable in
connection with any other notices to, filings with, and authorizations,
consents, and approvals of governments, governmental agencies, and third parties
that he, she or it may be required to give, make, or obtain.
6.3 OPERATION OF BUSINESS PRIOR TO THE CLOSING DATE. Except as
-----------------------------------------------
contemplated hereby, or as may be incidental to or in furtherance of the
transactions contemplated hereby, or as may have been set forth herein or in the
Disclosure Schedules, the Company will not (and N.W.S.T., SWIFT and Ella
Cisneros will not cause or permit the Company to) engage in any practice, take
any action, embark on any course of inaction, or enter into any transaction
outside the Ordinary Course of Business other than as described in Section 6.11.
------------
All references to the Company contained in this Section 6.3 shall also refer to
N.W.S.T. Without limiting the generality of the foregoing, from the date hereof
to the Closing Date:
(A) the Company will not adopt or propose any change in its
certificate of incorporation or bylaws;
(B) the Company will not merge or consolidate with any other Person
or acquire a material amount of assets of any other Person;
(C) the Company will not sell, lease, license or otherwise dispose of
any material assets or property except (i) pursuant to existing contracts or
commitments and (ii) in the ordinary course of business;
(D) except as otherwise provided for in this Agreement, the Company
will not issue, sell, purchase, repurchase, redeem or otherwise acquire any
Company securities;
(E) except with the prior written consent of the Acquirer, the
Company shall not make any Tax election that would have an adverse effect on the
Company;
(F) the Company will timely file all Tax Returns due on or before the
Closing Date and pay (or reserve for) all Taxes due and payable with respect to
periods;
(G) the Company will not do any of the items described in Section
-------
4.6; and
(H) the Company will not agree or commitment to do any of the
foregoing.
6.4 PRESERVATION OF BUSINESS. Except as contemplated hereby, or as may be
------------------------
incidental to or in furtherance of the transactions contemplated hereby, or as
may have been set forth herein or in the Schedules, N.W.S.T., SWIFT and Ella
Cisneros will cause the Company to use reasonable commercial efforts to keep its
business and properties substantially intact,
-25-
<PAGE>
including its present operations, physical facilities, working conditions, and
relationships with lessors, licensers, suppliers, Subscribers, any other
customers, and employees.
6.5 ACCESS.
------
(A) Only in the event that neither the Acquirer nor the Together
Parties exercise their right to terminate this Agreement as provided in Article
-------
X herein, the Together Parties will cause the Company to permit the Acquirer's
- -
representatives access at reasonable times by advance arrangement, and in a
manner so as not to interfere with the normal business operations of the
Company, to the headquarters of the Company and to all books, records,
contracts, Tax records, and documents of or pertaining to the Company; provided,
however, that the Acquirer shall direct all requests for information and
material only through Ella Cisneros or her designee in writing or the Together
Parties' legal counsel, unless otherwise agreed to by the Acquirer and Ella
Cisneros in writing.
(B) The Acquirer shall proceed to arrange in writing with Ella
Cisneros or her designee or the Together Parties' legal counsel a mutually
agreeable time and place at which the Acquirer may conduct interviews with key
employees and/or customers of the Company mutually agreed to in writing by the
Acquirer and Ella Cisneros or her designee or the Together Parties' legal
counsel.
6.6 NOTICE OF DEVELOPMENTS. The Company and N.W.S.T. will give prompt
----------------------
written notice to the Acquirer of any Material development adversely affecting
the assets, Liabilities, business, financial condition, operations, results of
operations, or future prospects of the Company and N.W.S.T. including but not
limited to (a) any development affecting the ability of the Company and N.W.S.T.
to consummate the transactions contemplated by this Agreement, (b) any Outage
affecting more than 1% of all Subscribers lasting for 3 hours or more or (c) any
loss of any Material Subscriber or any Material equipment or other supplier to
the Company. No disclosure by any Party pursuant to this Section 6.6 shall be
-----------
deemed to amend or supplement the Disclosure Schedules or to prevent or cure any
misrepresentation, breach of warranty, and/or breach of covenant.
6.7 EXCLUSIVITY. Until the earlier of termination of this Agreement in
-----------
accordance with Article X or June 30, 1999, the Together Parties will not (a)
solicit, initiate, or encourage the submission of any proposal or offer from any
person relating to any (i) liquidation, dissolution, or recapitalization, (ii)
merger or consolidation, (iii) acquisition or purchase of securities or assets
or (iv) similar transaction or business combination involving the Company, or
(b) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any person to do or seek any of the
foregoing. The Together Parties will notify the Acquirer immediately if any
entity or person makes any such proposal, offer, inquiry, or contact with
respect to any of the foregoing and will provide the identity of such entity or
person as well as any other relevant details regarding the contact.
6.8 MAIL SERVER. The Company shall use commercially reasonable efforts to
-----------
install a new mailer server.
-26-
<PAGE>
6.9 RESERVED.
---------
6.10 LANDLORD'S CONSENTS. The Company shall use all commercially
-------------------
reasonable efforts on or before the Closing Date to obtain from its landlord
(unless not specifically required under the pertinent premises lease) written
consent to the assignment of the Company's lease being assumed by the Acquirer,
which assignment is deemed to have resulted from the transactions contemplated
by this Agreement.
6.11 RESERVED.
---------
6.12 TAX MATTERS.
------------
(A) TAX RETURNS. The Company and N.W.S.T. shall, and N.W.S.T., SWIFT
-----------
and Ella Cisneros shall cause the Company to, file with the appropriate
governmental authorities all Tax returns required to be filed by it for any
taxable period ending prior to the Closing Date and the Company shall remit any
Taxes due and payable in respect of such Tax returns. In addition, the Company
shall cause E&Y to prepare a short period tax return for Company covering the
period January 1, 1998 through the Closing Date. The cost of preparation of such
short period tax return shall be paid by SWIFT.
(B) INDEMNITY. The Together Parties (other than the Company and
---------
N.W.S.T.) shall be liable for, and shall indemnify and hold Acquirer, the
Company and N.W.S.T. harmless against, any Taxes or other costs attributable to
a failure on the part of any of the such other Together Parties to take all
actions required of them under this Section 6.12 for periods prior to the
------------
Closing Date.
6.13 MANAGEMENT LETTERS, ETC. The Together Parties and any of the officers
-----------------------
or directors of the Company, in their capacities as officers and directors of
the Company, shall provide all management letters, reports or representations
reasonably requested by such auditors in connection with such audits, and in
connection with audits of the Company for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.
ARTICLE VII
POST-CLOSING COVENANTS
7.1 GENERAL. In case at any time after the Closing any further action is
-------
necessary or desirable to carry out the purposes of this Agreement, each of the
Parties and Cisneros will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Article IX below). The Together Parties acknowledge and agree that from and
- ----------
after the Closing the Acquirer will be entitled to possession of all documents,
books, records, agreements, and financial data of any sort relating to the
Company; provided that the Together Parties may retain any originals (and shall
in such case furnish copies) or copies of the foregoing as shall be necessary to
comply with applicable tax and other laws, regulations and ordinances.
-27-
<PAGE>
7.2 TRANSITION. The Together Parties will not take any action that
----------
primarily is designed or intended to have the effect of discouraging any lessor,
licenser, subscriber, supplier, or other business associate of the Company from
maintaining the same business relationships with the Company after the Closing
for a period of twenty-four (24) months thereafter as it maintained with the
Company prior to the Closing.
7.3 CONFIDENTIALITY. The Company, N.W.S.T. and the Acquirer, on the one
---------------
hand, and the Together Parties, on the other hand, shall, and shall cause their
subsidiaries, affiliates, officers, directors, employees, accountants, counsel,
financial advisors and other representatives and agents, to treat and hold as
such all of the Confidential Information regarding the other Parties, refrain
from disclosing or using any of such Confidential Information except in
connection with this Agreement and the transactions contemplated hereby for a
period of two (2) years from the date hereof, and except as otherwise permitted
hereunder or as may be required by law, deliver promptly to the Acquirer or
destroy, at the request and option of the Acquirer, all tangible embodiments
(and all copies) of the Confidential Information regarding the other Parties
which are in the possession of the Company or any of the Together Parties. In
the event that any of the Together Parties, other than the Company or N.W.S.T.
after the Closing Date, or the Acquirer is requested or required (by request for
information or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar legal process) to disclose any Confidential
Information, the Company, N.W.S.T. and the Acquirer, on the one hand, or the
Together Parties, on the other hand, will notify the other Parties promptly of
the request or requirement so that the other Parties may seek an appropriate
protective order or waive compliance with the provisions of this Section 7.3.
-----------
If, in the absence of a protective order or the receipt of a waiver hereunder,
the Company, N.W.S.T. and the Acquirer, on the one hand, or any Together Parties
other than the Company and N.W.S.T., or the Acquirer is compelled to disclose
any Confidential Information or else stand liable for contempt, then the
Company, N.W.S.T. and the Acquirer, on the one hand, or such Together Parties,
other than the Company and N.W.S.T. after the Closing Date, or the Acquirer may
disclose such Confidential Information; provided, however, that it or they shall
use its or their reasonable efforts to obtain, at the reasonable request of the
other Parties, an order or other assurance that confidential treatment will be
accorded to such portion of such Confidential Information required to be
disclosed as the other Parties shall reasonably designate.
7.4 COVENANT NOT TO COMPETE. For a period of three (3) years from and
-----------------------
after the Closing Date, Together Parties other than the Company and N.W.S.T.
will not, directly or indirectly, as principal, agent, trustee or through the
agency of any corporation, partnership, association or agent or agency, (i) own,
manage, control, participate in, consult with, render services for, or in any
manner engage in any activity or business competing with the Company in the
State of Vermont, (ii) service or solicit from the Company any Subscriber or
other customer of the Company, (iii) request or advise any Subscriber or other
customer of the Company to withdraw, curtail or cancel such subscriber's or
others customer's business with the Company, or (iv) solicit for employment any
person employed by the Company at any time within the two (2) year period
immediately preceding such solicitation; provided, however, that no owner of
less than five percent (5%) of the outstanding stock of any publicly traded
corporation shall be deemed to engage solely by reason thereof in any of that
corporation's businesses. For purposes
-28-
<PAGE>
of this Agreement, the Parties have agreed to allocate $50,000 of the Transfer
Consideration to the covenant not to compete contained in this Section 7.4.
-----------
7.5 TAX FREE EXCHANGE INTENT. The Parties agree that this transaction
------------------------
will occur in conjunction with the Related Transactions, and the Parties intend
that the receipt of the Acquirer's Shares by SWIFT and by the parties involved
in the Related Transactions will be tax-free under Section 351 of the Code.
7.6 BOARD REPRESENTATION. The Acquirer agrees to use its best efforts to
--------------------
elect or appoint Ella Cisneros to the Board of Directors of Acquirer for a
period of not less than three years commencing on the Closing Date.
7.7 LICENSE AGREEMENT. The Company will enter into a license agreement
-----------------
with the Foundation substantially in the form of Exhibit H attached hereto.
----------
7.8 RELATIONSHIP WITH THE FOUNDATION. The Company, N.W.S.T. and the
--------------------------------
Foundation shall use their reasonable best efforts to terminate their
relationships described in Sections 2 and 4 of Schedule 4.20 of this Agreement.
---------------- -------------
ARTICLE VIII
CONDITIONS TO OBLIGATIONS TO CLOSE
8.1 CONDITIONS TO OBLIGATIONS OF THE ACQUIRER. The obligation of the
-----------------------------------------
Acquirer to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction or waiver of the following conditions:
(A) COVENANTS, REPRESENTATIONS AND WARRANTIES. The representations
-----------------------------------------
and warranties of the Together Parties set forth in Articles III and IV above
shall be true and correct in all material respects at and as of the Closing Date
and the Together Parties shall have performed and complied with all of their
covenants hereunder in all material respects through the Closing;
(B) CONSENTS. The Together Parties will have procured all third party
--------
consents and given all notices required in connection with this Agreement and
the transactions contemplated hereby, including without limitation all action
necessary in connection with and/or the receipt of any notices to, filings with,
and authorizations, consents and approvals of governments, governmental
agencies, and third parties as set forth herein or in the Disclosure Schedules;
(C) RESIGNATIONS. The Acquirer shall have received the resignations,
------------
effective as of the Closing, of each director of the Company and N.W.S.T. prior
to the Closing.
(D) DOCUMENTS TO BE DELIVERED BY THE TOGETHER PARTIES. The following
-------------------------------------------------
documents shall be delivered at Closing by the Together Parties:
(i) Certificates. The Together Parties shall have delivered to
------------
the Acquirer Officers' Certificates and Secretary's Certificates substantially
in the forms of the certificates respectively attached as Exhibit C-1 and C-2
----------- ---
hereto.
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<PAGE>
(ii) Escrow Agreement. The Acquirer shall have received from the
----------------
Foundation and SWIFT an executed Escrow Agreement substantially in the form and
substance set forth as Exhibit A attached hereto.
---------
(iii) Employment Agreements. The Acquirer shall have received
---------------------
from Robin Lane, Philip A. Cecchini and Zachary Chambers executed employment
agreements substantially in the form and substance attached hereto as Exhibit E.
---------
(iv) Registration Agreement Joinder. The Acquirer shall have
------------------------------
received from SWIFT an executed joinder to the Registration Agreement
substantially in the form and substance set forth as Exhibit F attached hereto;
---------
(v) Subscription Agreement Joinder. SWIFT shall have caused the
------------------------------
executed and delivered to the Acquirer an Equity Subscription Agreement
substantially in the form of Exhibit D hereto;
---------
(vi) Opinion of Counsel. The Acquirer shall have received from
------------------
the Together Parties and the Company opinion of counsel substantially in the
form and substance set forth as Exhibit G hereto.
---------
(E) FINANCIAL CONDITION. Each of the following shall be true and
-------------------
complete as of the Closing Date:
(i) the Acquirer shall be reasonably satisfied that the Net
Worth of the Company on the Closing Date equaled or exceeded negative $49,322 or
an appropriate adjustment shall have been made to the Transfer Consideration as
provided in Section 2.3
-----------
(ii) the Together Parties shall have used commercially
reasonable efforts to cause liens and Security Interests securing debts of the
Company and N.W.S.T. which have been paid in full prior to or at the Closing to
have been fully released of record to the reasonable satisfaction of the
Acquirer and all Uniform Commercial Code financing statements covering such paid
debts shall have been terminated;
(iii) no unsatisfied liens for the failure to pay Taxes of any
nature whatsoever shall exist against the Company or N.W.S.T., or against or in
any way affecting the Company Shares or shares of N.W.S.T.;
(iv) all of the Company's and N.W.S.T.'s officers, directors
and/or key employees shall have repaid in full all debts and other obligations,
if any, owed to the Company and N.W.S.T.;
(v) the Company, Ella Cisneros and Acquirer will terminate the
loan described in the definition of Funded Indebtedness, Acquirer shall repay
Ella Cisneros the outstanding amount due under such Loan Term Sheet, and all
security interests pursuant to such Loan Term Sheet shall be terminated.
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<PAGE>
(F) MATERIAL ADVERSE CHANGE. No Material adverse change with respect
-----------------------
to the Company amounting to $50,000 or more or Materially adversely affecting
the ability of the Company to conduct the Business after the Closing as
conducted prior to the Closing shall have occurred;
(G) IPO. The Acquirer has received from the Company the Financial
---
Statements and such Financial Statements must, in the opinion of the Acquirer's
independent public accountants, be suitable or readily adaptable for
incorporation in the Registration Statement, and any prospectus and annual and
periodic reports to be filed by the Acquirer with the SEC relating to the IPO
and the Registration Statement shall have become effective and there shall be no
other impediments to the closing of the IPO not resulting from a breach by the
Acquirer of its obligations hereunder or under the Related Transactions
documentation; and
(H) DELIVERED SHARES. The Foundation and SWIFT shall deliver the
----------------
certificates representing the Foundation Shares and the N.W.S.T. Shares
respectively owned by them to the Acquirer, and the acquisition by the Acquirer
of the Company Shares so transferred by the Foundation and those owned by
N.W.S.T. (the N.W.S.T. shares being all of the outstanding capital stock of
N.W.S.T. to be purchased by the Acquirer hereunder) shall represent one hundred
percent (100%) of the issued and outstanding capital stock of the Company and
all of such Company Shares shall be free and clear of any Security Interests or
other liens, claims or encumbrances of any nature whatsoever.
(I) DUE DILIGENCE COMPLETED. The Acquirer shall be satisfied in its
-----------------------
sole discretion with the results of its continuing legal, financial and business
due diligence investigation of the Company, all of which shall be final and
completed to the Acquirer's satisfaction prior to Closing.
(J) TAX RETURNS. The Company and N.W.S.T. shall use their reasonable
-----------
best efforts to have filed their 1996 and 1997 federal and state tax returns in
a manner satisfactory to the Acquirer.
The Acquirer may waive any condition specified in this Section 8.1 if
-----------
it executes a writing so stating at or prior to the Closing.
8.2 CONDITIONS TO OBLIGATIONS OF THE TOGETHER PARTIES. The obligations of
-------------------------------------------------
the Together Parties to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction or waiver of the
following conditions:
(A) COVENANTS, REPRESENTATIONS AND WARRANTIES. The representations
-----------------------------------------
and warranties of the Acquirer set forth in Article V above shall be true and
---------
correct in all material respects at and as of the Closing Date and the Acquirer
shall have performed and complied with all of its covenants hereunder required
to be performed and complied with by it at or prior to the Closing in all
material respects through the Closing;
(B) CONSENTS. The Acquirer will have procured all third party
--------
consents needed by the Acquirer and given all notices required in connection
with this Agreement and the
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<PAGE>
transactions contemplated hereby, including without limitation all action
necessary in connection with and/or the receipt of any notices to, filings with,
and authorizations, consents and approvals of governments, governmental
agencies, and third parties as set forth herein or in the Disclosure Schedules
including any filing required under the Hart-Scott-Rodino Act;
(C) MINIMUM IPO PRICE. The Registration Statement shall have become
-----------------
effective and there shall be no other impediments to the closing of the IPO.
(D) DOCUMENTS TO BE DELIVERED BY THE ACQUIRER. The following
-----------------------------------------
documents shall be delivered at the Closing by Acquirer.
(i) Certificates. The Acquirer shall have delivered to the
------------
Together Parties an Officer's Certificate substantially in the form attached as
Exhibit C-1 hereto.
- -----------
(ii) Escrow Agreement. The Foundation and SWIFT shall have
----------------
received from the Acquirer an executed Escrow Agreement substantially in the
form and substance set forth as Exhibit A attached hereto.
---------
(iii) Subscription Agreement Joinder. The Acquirer shall execute
------------------------------
and deliver an Equity Subscription Agreement substantially in the form of
Exhibit D hereto, with SWIFT
- ---------
(iv) Employment Agreement. Robin Lane, Philip A. Cecchini and
---------------------
Zachary Chambers shall have received from the Company an executed employment
Agreement, substantially in the form and substance attached hereto as Exhibit E;
---------
(v) Registration Agreement Joinder. SWIFT shall have received
------------------------------
from the Acquirer an executed joinder to the Registration Agreement
substantially in the form and substance set forth as Exhibit F attached hereto;
---------
and
(vi) Options. The Acquirer shall have issued options for the
-------
purchase of shares of the Acquirer's Common Stock to those certain non-
stockholder management and employees of the Company and in the amounts and on
the terms set forth on Annex VI hereto.
--------
(e) RECEIPT OF TRANSFER CONSIDERATION. The Foundation and SWIFT shall
---------------------------------
receive the Transfer Consideration at the Closing in accordance with Section 2
---------
above.
(f) LOAN TERM SHEET. The Company, Ella Cisneros and Acquirer will
---------------
terminate the loan described in the definition of Funded Indebtedness, Acquirer
shall repay Ella Cisneros the outstanding amount due under such Loan Term Sheet,
and all security interests pursuant to such Loan Term Sheet shall be terminated.
The Together Parties may waive any condition specified in this Section
-------
8.2 if they execute a writing so stating at or prior to the Closing.
- ---
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<PAGE>
ARTICLE IX
REMEDIES FOR BREACHES OF THIS AGREEMENT
9.1 INDEMNIFICATION OF THE ACQUIRER Except as provided in and subject to
-------------------------------
Section 9.6, the Together Parties (other than the Company and N.W.S.T.) agree to
- -----------
indemnify and hold harmless the Acquirer, each officer and director of the
Acquirer and any successor thereof (collectively, the "INDEMNIFIED PARTIES")
from and against any and all Adverse Consequences, which any of the Indemnified
Parties may sustain, or to which any of the Indemnified Parties may be
subjected, arising out of (a) any misrepresentation, breach or default by the
Together Parties (other than by the Company or N.W.S.T. after the Closing) of or
under any of the representations, warranties, covenants, agreements or other
provisions of this Agreement or any agreement or document executed in connection
herewith and (b) such other Together Parties' tortious acts or omissions to act
prior to Closing for which the Company did not carry liability insurance for
itself as the insured party sufficient to satisfy such claim or liability,
whether or not such acts or omissions to act result in a breach or violation of
any representation or warranty.
9.2 DEFENSE OF THIRD PARTY CLAIMS. If any legal proceeding shall be
-----------------------------
instituted, or any claim or demand made, by any third party against any
Indemnified Parties in respect of which such other Together Parties may be
liable hereunder (and such determination shall be made without regard to the
limitations set forth in Section 9.6), such Indemnified Party shall give prompt
-----------
written notice thereof to such other Together Parties and, except as otherwise
provided in Section 9.4 below, such other Together Parties shall have the right
-----------
to defend any litigation, action, suit, demand, or claim for which such
Indemnified Party may seek indemnification with counsel satisfactory to such
other Together Parties; provided, however, that such other Together Parties may
not settle any such litigation, action, suit, demand, or claim without the prior
written consent of the Acquirer, which shall not be unreasonably withheld.
Notwithstanding the foregoing, if in the reasonable judgment of the Acquirer,
such litigation, action, suit, demand or claim, or the resolution thereof, would
have a (a) Material adverse effect on the Acquirer or the Company or (b) such
other Together Parties have a conflict of interest in defending such action on
Acquirer's or the Company's behalf, at the Acquirer's election, the Acquirer may
defend itself and in either of such instances such other Together Parties shall
be liable for all expenses reasonably incurred in connection therewith
(including, without limitation, settlement payments and reasonable attorney's
fees); provided, however, that the Acquirer may not settle any such litigation,
action, suit, demand, or claim without the prior written consent of such other
Together Parties, which shall not be unreasonably withheld. If neither (a) nor
(b) are applicable but the Acquirer desires to participate in the defense of an
action such other Together Parties are defending because in the Acquirer's
reasonable judgment the outcome of such action could have an ongoing effect on
the Acquirer (or its successors), the Acquirer may participate but at its own
expense. In the event such other Together Parties fail or refuse to defend any
legal proceeding they are required to defend under this Article IX within a
----------
reasonable length of time, the Indemnified Parties shall be entitled to assume
the defense thereof, and such other Together Parties shall be liable to repay
the Indemnified Parties for all expenses reasonably incurred in connection with
said defense (including, without limitation, settlement payments and reasonable
attorney's fees). If such other Together Parties do not or refuse to assume the
defense of any litigation, action, suit, demand, or claim in any legal
proceeding they are required to defend
-33-
<PAGE>
under this Article IX, the Indemnified Parties shall have the absolute right, at
----------
such other Together Parties' expense, to control the defense of and to settle,
in their sole discretion and without the consent of such other Together Parties,
such litigation, action, suit, demand, or claim, but such other Together Parties
shall be entitled, at their own expense, to participate in such litigation,
action, suit, demand, or claim, and if such other Together Parties elect to
participate in such litigation the Indemnified Parties shall consult with such
other Together Parties prior to settling such litigation. The Party controlling
any defense pursuant to this Section 9.2 shall deliver, or cause to be delivered
-----------
to the other Party, copies of all correspondence, pleadings, motions, briefs
appeals or other written statements relating to or submitted in connection with
the defense of any such litigation, action, suit, demand, or claim, and timely
notices of any hearing or other court proceeding relating to such litigation,
action, suit, demand, or claim.
9.3 PROCEDURE FOR CLAIMS.
--------------------
(A) ESCROW CLAIMS. If any claim for indemnification is made by an
-------------
Indemnified Party pursuant to this Article IX prior to the expiration of the
----------
Escrow Period, such Indemnified Party shall first apply to the Escrow Agent for
reimbursement of such claim in accordance with the provisions of the Escrow
Agreement; provided, however, the Escrow Sum is not intended to be an exclusive
remedy in the event the Acquirer has indemnification claims hereunder which
exceed such amount. Once the Cash Escrow sum has been fully depleted to satisfy
claims pursuant to Section 9.1, SWIFT shall have the option to satisfy such
-----------
Together Parties' obligation to the Acquirer by surrendering to the Acquirer
that portion of the Stock Portion of the SWIFT Transfer Consideration required
to fund such other Together Parties' indemnification obligation (with such
surrendered Acquirer's Shares valued at the Fair Market Value of such shares).
(B) OTHER CLAIMS. If pursuant to this Article IX any claim for
------------ ----------
indemnification is made by an Indemnified Party, within the period allotted
therefor as provided in Section 9.6 but after the Escrow Sum has been completely
-----------
paid out (the "CLAIMANT"), shall send written notice to the other person (by
certified mail, return receipt requested or by personal service as provided in
Section 11.7 hereof) setting forth in reasonable detail a description of the
- ------------
facts upon which the claim is based and a reasonable estimate of the amount of
the claim (a "CLAIM", with the notice thereof referred to as the "CLAIM
NOTICE"). The person against whom the Claim is brought (the "RESPONDENT") shall
have fifteen (15) calendar days from receipt of the Claim Notice to respond to
such Claim. Such response shall be in writing and shall (i) set forth in
reasonable detail the Respondent's objection to the Claim and the basis for such
objection, or (ii) the efforts undertaken or to be undertaken by the Respondent
to cure the Claim. In the event the Respondent fails to respond to the Claim
Notice in the manner set forth above within such 15-day period, the Respondent
shall be deemed to have conceded the Claim in full. In the event the Parties
are unable to resolve the Claim within thirty (30) calendar days from the date
of receipt of the Claim Notice, the Claim shall be submitted to arbitration in
accordance with Section 11.8 below.
-------------
9.4 TAX AUDITS, ETC. In the event of an audit of a Tax Return of the
---------------
Company with respect to which an Indemnified Party might be entitled to
indemnification pursuant to this Article IX, the Acquirer shall have the right
----------
to control any and all such audits which may result
-34-
<PAGE>
in the assessment of additional Taxes against the Company and any and all
subsequent proceedings in connection therewith, including appeals (subject to
the prior written consent of the Together Parties other than the Company and
N.W.S.T., which shall not unreasonably be withheld and subject to the right of
such other Together Parties to have their accountants and attorneys consult with
the Acquirer on such audits or procedures at such other Together Parties'
expense); provided, however, that such other Together Parties and the Acquirer
shall jointly control, and shall cooperate with each other in connection with,
any and all such audits which may result in the assessment of additional Taxes
against both such other Together Parties and the Company. Such Together Parties
other than the Company and N.W.S.T. shall cooperate fully in all matters
relating to any such audit or other Tax proceeding (including according access
to all records pertaining thereto), and will execute and file any and all
consents, powers of attorney, and other documents as shall be reasonably
necessary in connection therewith. If additional Taxes are payable by the
Company as a result of any such audit or other proceeding, such other Together
Parties shall be responsible for and shall promptly pay all Taxes, interest, and
penalties for which any of the Indemnified Parties shall be entitled to
indemnification.
9.5 INDEMNIFICATION OF TOGETHER PARTIES. The Acquirer and the Together
-----------------------------------
Parties, other than SWIFT, Ella Cisneros and the Foundation, agree to indemnify
and hold harmless such other Together Parties and each officer, director,
stockholder or affiliate of such other Together Parties, from and against any
Adverse Consequence arising out of any misrepresentation, breach or default by
the Acquirer of or under any of the covenants, agreements or other provisions of
this Agreement or any agreement or document executed in connection herewith in
accordance with the procedures set forth in this Article IX; provided that for
----------
purposes of interpreting procedures required by the preceding clauses of this
Section 9.5 "Indemnified Parties" shall mean such other Together Parties and
"such other Together Parties" or "SWIFT" shall mean the Acquirer.
9.6 LIMITS ON INDEMNIFICATION. All Adverse Consequences for which
-------------------------
indemnification is sought by any Party hereunder shall be net of any insurance
proceeds received by such Party with respect to such claim (less the present
value of any premium increases occurring as a result of such claim). Except for
any claims for breach of the representations, warranties and covenants of the
Together Parties other than the Company and N.W.S.T. under Sections 4.8, 4.19,
------------ ----
and 4.21 hereof (for which indemnification claims must be made prior to the
----
expiration of the applicable statute of limitations plus sixty (60) days and if
so made, such claims shall continue after such date until finally resolved and
made) and Sections 3.5 and 4.2 hereof (pursuant to which the right to make
------------ ---
claims for indemnification under this Article IX shall survive the Closing Date
----------
indefinitely), the right to make claims for indemnification provided under this
Article IX shall expire on the first anniversary of the Closing Date (except for
- ----------
claims made prior to such date which shall continue after such date until
finally resolved). The Together Parties other than the Company and N.W.S.T.
shall not be obligated to pay any amounts for indemnification under this Article
-------
IX until the aggregate Adverse Consequences for which indemnification sought by
- --
the Acquirer Indemnified Party/Parties related to the Acquirer hereunder exceeds
$50,000, whereupon SWIFT and Ella Cisneros shall be liable for all amounts for
which indemnification may be sought in excess of $50,000 of such Adverse
Consequences up to a maximum indemnification equal to the Transfer
Consideration; provided, however, that
-35-
<PAGE>
notwithstanding the foregoing, such $50,000 indemnity obligation threshold shall
not apply to any penalties, damages, fines or other costs associated with the
Company's and N.W.S.T.'s failure to file their 1996 and 1997 federal and state
tax returns on time and Acquirer shall be entitled to a full indemnity for such
penalties, damages, fines or other costs. The Acquirer shall not be obligated to
pay any amounts for indemnification under this Article IX until the aggregate
----------
indemnification obligation sought by such other Together Parties hereunder
exceeds $50,000, whereupon the Acquirer shall be liable for all amounts for
which indemnification may be sought in excess of $50,000 of such Adverse
Consequences. For purposes of Section 9.1 or Section 9.5, any requirement in any
----------- -----------
representation or warranty that an event or fact be Material or have a Material
adverse effect, as appropriate, in order for such event or fact to constitute a
misrepresentation or breach of such representation or warranty shall be ignored.
Notwithstanding the foregoing, in no event shall the aggregate liability of any
individual Together Party to the Acquirer or the Acquirer to any of the Together
Parties exceed the Transfer Consideration received by such Together Party;
provided, however, that the aggregate liability of Ella Cisneros shall be
equivalent to the Transfer Consideration received by SWIFT However, nothing in
this Article IX shall limit the Acquirer or such other Together Parties in
exercising or securing any remedies provided by applicable statutory or common
law with respect to the conduct of the other in connection with this Agreement
or in the amount of damages that it can recover from the other in the event that
a Party successfully proves intentional fraud or intentional fraudulent conduct
in connection with this Agreement. The amount of all Adverse Consequences for
which indemnification is received from the Foundation and/or SWIFT shall be
deemed to be a reduction of the Transfer Consideration paid by Acquirer under
this Agreement.
ARTICLE X
TERMINATION
10.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement as
------------------------
provided below:
(A) the Acquirer and the Together Parties may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(B) the Acquirer may terminate this Agreement by giving written
notice to the Together Parties at any time prior to the Closing in the event the
Together Parties are in breach of any representation, warranty, or covenant
contained in this Agreement which has had or is reasonably foreseeable as having
a Material adverse effect on the Company of the magnitude set forth in Section
-------
8.1(f) and such breach has not been cured within ten (10) days of written notice
- ------
thereof. The Together Parties may terminate this Agreement by giving written
notice to the Acquirer at any time prior to the Closing in the event the
Acquirer is in breach of any representation, warranty, or covenant contained in
this Agreement in any Material respect and such breach has not been cured within
ten (10) days of written notice thereof;
(C) this Agreement will terminate if the Closing shall not have
occurred on or before March 31, 1999; provided, however, that in the event
Acquirer has filed a registration agreement with the SEC and either (i)
Acquirer's lead underwriter informs Acquirer that a public
-36-
<PAGE>
offering of stock is not advisable or (ii) the registration statement has not
been declared effective but Acquirer is using reasonable efforts to have the
registration statement declared effective, this Agreement shall terminate on
June 30, 1999; provided, however, that in the event this Agreement is extended
to a date after March 31, 1999, the Foundation Transfer Consideration, the Cash
Portion of the SWIFT Transfer Consideration, after accounting for the
adjustments described in Section 2.2(b)(i), and the Stock Portion of the
Transfer Consideration SWIFT will each be increased by three (3) percent.
(D) Nothing contained in this Section 10.1 shall alter, affect,
------------
modify or restrict any Parties' rights to rely on and/or seek indemnification
for a breach of any of the representations and warranties and/or conditions or
covenants of any of the Parties contained in this Agreement, subject to Section
--------
10.1(d).
- -------
10.2 EFFECT OF TERMINATION. If either the Acquirer or the Together Parties
---------------------
terminate this Agreement pursuant to Section 10.1 above, all obligations of the
------------
Parties hereunder shall terminate without any Liability of any Party to any
other Party.
ARTICLE XI
MISCELLANEOUS
11.1 PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by
--------------------------------
applicable securities laws or stock exchange requirements, no Party shall issue
any press release or public announcement relating to the subject matter of this
Agreement prior to, at or about the Closing without the prior written approval
of the Acquirer and the Together Parties, which written approval will not be
unreasonably withheld by each party; provided, however, that any Party may make
any public disclosure it believes in good faith, with the advice of counsel, is
required by law or regulation (in which case the disclosing Party will advise
the other Parties prior to making the disclosure).
11.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
----------------------------
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns.
11.3 ENTIRE AGREEMENT. This Agreement (including the documents referred to
----------------
herein) and the Confidentiality Agreement constitute the entire agreement among
the Parties and supersede any prior or contemporaneous understandings,
agreements, or representations by or among the Parties, written or oral, that
may have related in any way to the subject matter hereof.
11.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
-------------------------
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the Acquirer and the Together Parties; provided, however, that the Acquirer
may assign (i) any or all of its rights and interests hereunder to a wholly-
owned Subsidiary of the Acquirer (in any or all of which cases the Acquirer
nonetheless shall remain liable and responsible for the performance of all of
its respective obligations hereunder) or (ii) any or all of rights of the
Agreement to any lender providing debt financing to the Acquirer or its
Affiliates.
-37-
<PAGE>
11.5 FACSIMILE/COUNTERPARTS. This Agreement may be executed in one or more
----------------------
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more parties
hereto, and an executed copy of this Agreement may be delivered by one or more
parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes. At the request of any Party hereto, all parties
hereto agree to execute an original of this Agreement as well as any facsimile,
telecopy or other reproduction hereof.
11.6 NOTICES. All notices or other communications hereunder will be in
-------
writing and shall be delivered by hand, facsimile or sent, postage prepaid, by
registered or certified mail or reputable overnight courier service (and shall
be deemed given when so delivered by hand or facsimile, or, if mailed, five days
after mailing (one business day in the case of overnight courier)) addressed to
the intended recipient as set forth below:
If to TGF Technologies, Inc.
208 Flynn Avenue
Burlington, Vermont 05401
Attn: President
Tel: (802)862-2030
Fax: (802)862-1890
If to the Foundation:
Together Foundation
55 E. 75/th/ Street
New York, New York 10021
Attn: Ella Cisneros
Tel: (212)628-1939
Fax: (212)628-4265
If to N.W.S.T. or SWIFT:
SWIFT
c/o Trident Trust Company (B.V.I) Limited
P.O. Box 146, Road Town
Tortola, British Virgin Islands
Attn: Managing Director
-38-
<PAGE>
with a copy in each of the foregoing cases to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Attn.: Richard R. Kelly
Tel: (617)542-6000
Fax: (617)542-2241
If to the Acquirer:
OneMain.com, Inc.
c/o Unison Partners
50 Hawthorne Road
Southampton, NY 11968
Attn.: Stephen E. Smith
Tel: (516)287-4084
Fax: (516)287-4767
with a copy to:
Hogan & Hartson L.L.P.
555 Thirteenth Street, NW
Washington, D.C. 20004
Attn.: J. Hovey Kemp and
Christopher J. Hagan
Tel: (202)637-5623
Fax: (202)637-5910
Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other parties notice in the manner herein set forth.
11.7 DISPUTE RESOLUTIONS. THE PARTIES AGREE TO SUBMIT TO ARBITRATION, IN
-------------------
ACCORDANCE WITH THESE PROVISIONS, ANY DISPUTED CLAIM OR CONTROVERSY ARISING FROM
OR RELATED TO THE ALLEGED BREACH OF THIS AGREEMENT OR ANY DISPUTED
INDEMNIFICATION CLAIM MADE PURSUANT TO THIS ARTICLE XI. THE PARTIES FURTHER
AGREE THAT THE ARBITRATION PROCESS AGREED UPON HEREIN SHALL BE THE EXCLUSIVE
MEANS FOR RESOLVING ALL DISPUTES MADE SUBJECT TO ARBITRATION HEREIN, BUT THAT NO
ARBITRATOR SHALL HAVE AUTHORITY TO EXPAND THE SCOPE OF THESE ARBITRATION
PROVISIONS. ANY ARBITRATION HEREUNDER SHALL BE CONDUCTED UNDER THE COMMERCIAL
ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION (AAA). EITHER PARTY
MAY INVOKE ARBITRATION PROCEDURES HEREIN BY WRITTEN NOTICE FOR ARBITRATION
CONTAINING A
-39-
<PAGE>
STATEMENT OF THE MATTER TO BE ARBITRATED. THE PARTIES SHALL THEN HAVE FOURTEEN
(14) DAYS IN WHICH THEY MAY IDENTIFY A MUTUALLY AGREEABLE, NEUTRAL ARBITRATOR.
AFTER THE FOURTEEN (14) DAY PERIOD HAS EXPIRED, THE PARTIES SHALL PREPARE AND
SUBMIT TO THE AAA A JOINT SUBMISSION, WITH EACH PARTY TO CONTRIBUTE HALF OF THE
APPROPRIATE ADMINISTRATIVE FEE. IN THE EVENT THE PARTIES CANNOT AGREE UPON A
NEUTRAL ARBITRATOR WITHIN FOURTEEN (14) DAYS AFTER WRITTEN NOTICE FOR
ARBITRATION IS RECEIVED, THEIR JOINT SUBMISSION TO THE AAA SHALL REQUEST
ARBITRATORS WHO ARE PRACTICING ATTORNEYS WITH PROFESSIONAL EXPERIENCE IN THE
FIELD OF CORPORATE LAW, AND THE PARTIES SHALL ATTEMPT TO SELECT AN ARBITRATOR
FROM THE PANEL ACCORDING TO AAA PROCEDURES. UNLESS OTHERWISE AGREED BY THE
PARTIES, THE ARBITRATION HEARING SHALL TAKE PLACE IN THE WASHINGTON, D.C.
METROPOLITAN AREA, AT A PLACE DESIGNATED BY THE AAA. ALL ARBITRATION PROCEDURES
HEREUNDER SHALL BE CONFIDENTIAL. EACH PARTY SHALL BE RESPONSIBLE FOR ITS COSTS
INCURRED IN ANY ARBITRATION, AND THE ARBITRATOR SHALL NOT HAVE AUTHORITY TO
INCLUDE ALL OR ANY PORTION OF SAID COSTS IN AN AWARD REGARDLESS OF WHICH PARTY
PREVAILS. WITHOUT LIMITING SECTION 11.14, THE ARBITRATOR MAY INCLUDE EQUITABLE
RELIEF. ANY ARBITRATION AWARDED SHALL BE ACCOMPANIED BY A WRITTEN STATEMENT
CONTAINING A SUMMARY OF THE ISSUES IN CONTROVERSY, A DESCRIPTION OF THE AWARD,
AND AN EXPLANATION OF THE REASONS FOR THE AWARD.
11.8 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
-------------
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE.
11.9 AMENDMENTS AND WAIVERS. No amendment of any provision of this
----------------------
Agreement shall be valid unless the same shall be in writing and signed by the
Acquirer and the Together Parties. No waiver by any Party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.10 SEVERABILITY. Any term or provision of this Agreement that is invalid
------------
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified after the expiration of the time within
which the judgment may be appealed.
-40-
<PAGE>
11.11 EXPENSES. Each of the Parties will bear its own costs and expenses
--------
(including legal fees and expenses and investment banking fees) incurred in
connection with this Agreement and the transactions contemplated hereby. Such
expenses described in this Section 11.11 will not be paid by the Company;
--------------
provided, however, that upon consummation of the IPO, the Company shall only be
responsible for paying its accounting expenses incurred as a direct result of
its preparation of audits for fiscal years 1996 and 1998 to the extent such
accounting expenses exceed $60,000; such initial $60,000 of accounting expenses
shall be paid by Acquirer at Closing.
11.12 CONSTRUCTION. The language used in this Agreement will be deemed to
------------
be the language chosen by the Parties to express their mutual intent, and no
rule of strict construction shall be applied against any Party. Any reference
to any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise. The Parties intend that each representation, warranty, and
covenant contained herein shall have independent significance. If any Party has
breached any representation, warranty, or covenant relating to the same subject
matter as any other representation, warranty or covenant (regardless of the
relative levels of specificity) which the Party has not breached, it shall not
detract from or mitigate the fact that the Party is in breach of the first
representation, warranty, or covenant.
11.13 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
-------------------------------------------------
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
11.14 SPECIFIC PERFORMANCE. Each of the Parties acknowledges and agrees
--------------------
that the other Parties would be damaged substantially, immediately and
irreparably and that monetary damages may not be readily determinable in the
cases of any breach of a representation or warranty contained herein in the
event any of the provisions of this Agreement are not performed in accordance
with their specific terms or otherwise are breached. Accordingly, each of the
Parties agrees that the other Parties shall be entitled in such circumstances to
an injunction or injunctions to prevent breaches of the provisions of this
Agreement and to enforce specifically this Agreement and the terms and
provisions hereof in any action instituted in any court of the United States or
any state thereof having jurisdiction over the Parties and the matter, in
addition to any other remedy to which they may be entitled, at law or in equity.
[THIS SPACE INTENTIONALLY LEFT BLANK]
-41-
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written.
ACQUIRER:
ONEMAIN.COM, INC.
By: /s/ Stephen E. Smith
------------------------------
Stephen E. Smith
President
THE COMPANY
TGF TECHNOLOGIES, INC.
By: /s/ Ella Cisneros
------------------------------
Name: Ella Cisneros
Title: President, CEO
N.W.S.T.:
N.W.S.T. CORP.
By: /s/ Ella Cisneros
------------------------------
Name: Ella Cisneros
Title: President
SWIFT:
SWIFT COMPANY LIMITED
By: /s/ Ella Cisneros
------------------------------
Name: Ella Cisneros
Title: Chairman & CEO
<PAGE>
FOUNDATION:
THE TOGETHER FOUNDATION FOR GLOBAL UNITY
By: /s/ Ella Cisneros
-------------------------------
Name: Ella Cisneros
Title: President
ELLA CISNEROS
/s/ Ella Cisneros
------------------------------------
Ella Cisneros
-43-
<PAGE>
EXHIBIT 10.9
SENIOR MANAGEMENT AGREEMENT
---------------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
February __, 1999, but is effective as of August 19, 1998, between ONEMAIN.COM,
INC., a Delaware corporation (the "Company"), and STEPHEN E. SMITH
-------
("Executive").
---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the third anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the third anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Chairman, Chief Executive Officer and President of the
Company and shall have the normal duties, responsibilities and authority of the
President, subject to the power of the Chairman, the Chief Executive Officer or
the Company's board of directors (the "Board") to expand or limit such duties,
-----
responsibilities and authority and to override actions of the President and
Chief Operating Officer. Executive shall report to the Chairman of the Company
and Executive shall devote his best efforts and of his full business time and
attention to the business and affairs of the Company and its Subsidiaries.
(b) Salary, Bonus and Benefits. The Company will pay Executive a base
--------------------------
salary of $150,000 per annum, subject to any annual increase during the
Employment Period as determined by the Board based upon the Company's
achievements of budgetary and other objectives set by the Board (the "Annual
------
Base Salary"). In addition, Executive shall be eligible to receive an annual
- -----------
bonus (commencing with the Company's fiscal year ending December 31, 1999) of up
to $50,000 based upon the Company's achievement of budgetary and other
objectives set by the Board. Executive's Annual Base Salary for any partial
year will be prorated based upon the number of days elapsed in such year. In
addition, during the Employment Period, Executive will be entitled to such other
benefits approved by the Board and made available to the Company's senior
executives, including vacation time, tuition reimbursement, reimbursement of
business expenses, car allowance and healthcare benefits.
<PAGE>
(c) Issuance of Stock and Stock Options. Executive shall also receive
-----------------------------------
options for the purchase of 200,000 shares of the Common Stock upon
implementation of the Company's employee stock option plan on the earlier of the
IPO or June 30, 1999. The options will vest as follows: (i) 100,000 of the
shares will vest at the IPO and (ii) 1/4 of the other 100,000 shares (or 25,000
shares) will vest on the first anniversary of the earlier of the IPO or June 30,
2000 and the remaining 3/4 of the other 100,000 shares (or 75,000 shares) shall
vest at the rate of 1/36 per month thereafter (or 2,083.33 shares per month).
All shares shall be fully vested no later than the earlier of the fourth
anniversary of the IPO or June 30, 2003. Executive will be eligible for grants
of additional options during the Employment Period approved by the Board based
on Executive's and the Company's performance. All shares and options issued to
Executive shall be made through stock purchase agreements or options agreements,
as appropriate, based on the Company's standard form for its executives.
(d) Separation. Executive's employment by the Company during the
----------
Employment Period will continue until Executive's resignation at any time or
until Executive's disability or death or until the Board terminates Executive's
Employment at any time during the Employment Period. If the Employment Period
is terminated by the Executive without Good Reason, then the termination will be
effective sixty (60) days after the date of delivery of written notice of
termination. If the Employment Period is terminated by the Board without Cause
or by the Executive with Good Reason, then the termination will be effective
thirty (30) days after the date of delivery of written notice of termination.
If the Employment Period is terminated by the Board with Cause, termination will
be effective as of the date of notice of termination. If the Employment Period
is terminated by the Board with Cause or by the Executive without Good Reason,
then the Executive shall be entitled to receive his Annual Base Salary, bonuses
and his fringe benefits only through the effective date of termination. If the
Employment Period is terminated by the Board without Cause or by the Executive
with Good Reason, then (i) all shares issued to the Executive as of the date
hereof (i.e., 200,000 shares) shall vest immediately, and (ii) the Executive
shall be entitled to receive his Annual Base Salary and his life insurance,
medical insurance and disability insurance benefits, if any, (but no bonuses or
other fringe benefits) for one year from the effective date of termination (such
payments, the "Severance Payment") shall be payable over time in accordance with
-----------------
normal payroll practices. If the Employment Period is terminated due to death,
then the Annual Base Salary and medical insurance will be continued through the
next full calendar month following the month in which the Executive died. If
the Employment Period is terminated due to Disability, then the Annual Base
Salary, medical insurance and disability insurance will be continued until the
last day of the six-month period following Disability; provided, however, that
such Annual Base Salary shall be reduced by the amount of any disability income
payments made to the Executive during such six-month period from any insurance
or other policies provided by the Company.
2
<PAGE>
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company and its Subsidiaries are
engaged in the internet service provider business and related internet services
(the "Business"). Executive further acknowledges that the Business and its
--------
continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall first have given prompt
notice to the Company of any such possible or prospective order (or proceeding
pursuant to which any such order may result) and (ii) Executive shall afford the
Company a reasonable opportunity to prevent or limit any such disclosure.
(c) During the Employment Period and for a period of five (5) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a Separation, or at any
other time
3
<PAGE>
the Company may request in writing, all memoranda, notes, plans, records,
reports and other documents (and copies thereof) containing or otherwise
relating to any of the Confidential Information (including, without limitation,
all acquisition prospects, lists and contact information) which he may then
possess or have under his control. Executive acknowledges that all such
memoranda, notes, plans, records, reports and other documents are and at all
times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of his employment with the Company he will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. So long as Executive is employed or affiliated
--------------
with the Company or any Subsidiary and for an additional (i) two years
thereafter (the "Noncompete Period"), he shall not, anywhere within 100 miles of
-----------------
any of the Company's and its subsidiaries' offices in the United States,
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in the Business. Nothing in this
Section 3 shall in any manner prohibit Executive from continuing his employment,
ownership, management, control, participation in, consulting, or operation of
Sprocket Labs, Inc., a California corporation whose primary line of business
includes but is not limited to the development and sale of Internet related
software and tools so long as such participation does not unreasonably interfere
with Executive's duties to the Company.
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) induce or attempt to
induce any employee of the Company or any of its Subsidiaries to leave the
employ of the Company or such Subsidiary, or in any way interfere with the
relationship between the Company or any of its Subsidiaries and any employee
thereof, (ii) hire any person who was an employee of the Company or any of its
Subsidiaries within 180 days prior to the time such employee was hired by the
Executive, (iii) induce or attempt to induce any owner of a site location,
customer, supplier, licensee or other business relation of the Company or any of
its Subsidiaries to cease doing business with the Company or such Subsidiary or
in any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the
4
<PAGE>
Company or any of its Subsidiaries or (iv) directly or indirectly acquire or
attempt to acquire an interest in any business relating to the business of the
Company or any of its Subsidiaries and with which, to Executive's knowledge, the
Company or any of its Subsidiaries has entertained discussions or has requested
and received information relating to the acquisition of such business by the
Company or any of its Subsidiaries in the one-year period immediately preceding
a Separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or 3 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
(d) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and 3 do not preclude Executive from earning a
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
GENERAL PROVISIONS
4. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
5
<PAGE>
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; or
(v) any intentional breach of Section 2 or 3 of this Agreement by Executive not
cured within ten (10) business days after written notice thereof from the
Company. Any election by the Company not to renew the Employment Period on the
third anniversary of the date hereof or any renewal thereof shall be deemed to
be a termination by the Company without Cause. The failure of the Company or
the Executive to achieve budgetary or other operational objectives established
by the Board of Directors shall not in and of itself constitute Cause.
"Disability" means a physical or mental condition which, for a
----------
continuous period of at least six (6) months has or will prevent the Executive
from performing his duties on a full time basis and in a professional and
consistent manner. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of Section 1 of this Agreement by the
Company which is not cured within ten (10) business days after written notice
thereof from Executive, (ii) the Company has not consummated the IPO by June 30,
1999, or (iii) Executive in his sole discretion and in good faith determines
that he is unable to continue to work with the current chief executive officer,
president, or other senior officer of the Company prior to January 1, 1999.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation of which fifty percent (50%) or
----------
more of the securities having ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity.
5. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage
6
<PAGE>
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
If to the Company:
c/o Unison Partners
50 Hawthorne Road
Southhampton, NY 11968
Attention: Dewey K. Shay
with a copy to:
Hogan & Hartson, LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: Christopher J. Hagan
If to the Executive:
Stephen E. Smith
139 East 66th St.
Apt. 6N
New York, NY 10021
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
6. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the
7
<PAGE>
parties, written or oral, which may have related to the subject matter hereof in
any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a) and 1(b)) shall survive a Separation and shall remain in full
force and effect after such Separation.
* * * * *
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior Management
Agreement on the date first written above.
ONEMAIN.COM, INC.
By: __________________________________
Name:
Title:
__________________________________________
Stephen E. Smith
9
<PAGE>
EXHIBIT 10.11
-------------
SENIOR MANAGEMENT AGREEMENT
---------------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
October 16, 1998, between US INTERNET PROVIDERS, INC., a Delaware corporation
(the "Company"), and MARTIN LYONS ("Executive").
------- ---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the third anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the third anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Chief Technology Officer of the Company and shall have the
normal duties, responsibilities and authority of the Chief Tecnology Officer,
subject to the power of the Chairman, the Chief Executive Officer or the
Company's board of directors (the "Board") to expand or limit such duties,
-----
responsibilities and authority and to override actions of the President and
Chief Operating Officer. Executive shall report to the Chief Executive Officer
of the Company and Executive shall devote his best efforts and of his full
business time and attention to the business and affairs of the Company and its
Subsidiaries.
(b) Salary, Bonus and Benefits. Effective January 1, 1999, the
--------------------------
Company will pay Executive a base salary of $150,000 per annum, subject to any
annual increase during the Employment Period as determined by the Board based
upon the Company's achievements of budgetary and other objectives set by the
Board (the "Annual Base Salary"). In addition, Executive shall be eligible to
------------------
receive (i) a $50,000 bonus upon consummation of the Company's initial public
offering pursuant to a registration statement on Form S-1 declared effective by
the Securities and Exchange Commission (the "IPO") and (ii) an annual bonus
---
(commencing with the Company's fiscal year ending December 31, 1999) of up to
Ten (10%) percent of the Annual Base Salary based upon the Company's achievement
of budgetary and other objectives set by the Board. Executive's Annual Base
Salary for any partial year will be prorated based upon the number of days
elapsed in such year. In addition, during the Employment Period, Executive will
be entitled to such other benefits approved by the Board and made available to
<PAGE>
the Company's senior executives, including vacation time, tuition reimbursement,
reimbursement of business expenses and healthcare benefits.
(c) Issuance of Stock and Stock Options. Executive shall also be
-----------------------------------
eligible to purchase 200,000 shares of the Company's common stock (the "Common
------
Stock") at a purchase price of $.05 per share (an aggregate purchase price of
- -----
$10,000), of which 100,000 shares shall vest upon the execution of this
Agreement and 100,000 shares shall vest only upon the earlier of consummation of
the IPO or June 30, 1999. The Executive shall pay the purchase price for such
200,000 shares of Common Stock by executing a recourse note(s) in the amount of
$10,000. In addition, Executive shall also receive options for the purchase of
300,000 shares of the Common Stock upon implementation of the Company's employee
stock option plan on the earlier of the IPO or June 30, 1999. The options will
vest as follows: the first 1/4 of the shares (or 75,000 shares) will vest on
the first anniversary of the earlier of the IPO or June 30, 2000. The remaining
3/4 of the shares (or 225,000 shares) shall vest at the rate of 1/36 per month
thereafter (or 6,250 shares per month). All shares shall be fully vested no
later than the earlier of the fourth anniversary of the IPO or June 30, 2003.
Executive will be eligible for grants of additional options during the
Employment Period approved by the Board based on Executive's and the Company's
performance. All shares and options issued to Executive shall be made through
stock purchase agreements or options agreements, as appropriate, based on the
Company's standard form for its executives.
(d) Separation. Executive's employment by the Company during the
----------
Employment Period will continue until Executive's resignation at any time or
until Executive's disability or death or until the Board terminates Executive's
Employment at any time during the Employment Period. If the Employment Period
is terminated by the Executive without Good Reason, then the termination will be
effective sixty (60) days after the date of delivery of written notice of
termination. If the Employment Period is terminated by the Board without Cause
or by the Executive with Good Reason, then the termination will be effective
thirty (30) days after the date of delivery of written notice of termination.
If the Employment Period is terminated by the Board with Cause, termination will
be effective as of the date of notice of termination. If the Employment Period
is terminated by the Board with Cause or by the Executive without Good Reason,
then the Executive shall be entitled to receive his Annual Base Salary, bonuses
and his fringe benefits only through the effective date of termination. If the
Employment Period is terminated by the Board without Cause or by the Executive
with Good Reason, then (i) all shares issued to the Executive as of the date
hereof (i.e., 200,000 shares) shall vest immediately, and (ii) the Executive
shall be entitled to receive his Annual Base Salary and his life insurance,
medical insurance and disability insurance benefits, if any, (but no bonuses or
other fringe benefits) for one year from the effective date of termination (such
payments, the "Severance Payment") shall be payable over time in accordance with
-----------------
normal payroll practices. If the Employment Period is terminated due to death,
then the Annual Base Salary and medical insurance will be continued through the
next full calendar month following the month in which the Executive died. If
the Employment Period is terminated due to Disability, then the Annual Base
Salary, medical insurance and disability
2
<PAGE>
insurance will be continued until the last day of the six-month period following
Disability; provided, however, that such Annual Base Salary shall be reduced by
the amount of any disability income payments made to the Executive during such
six-month period from any insurance or other policies provided by the Company.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company and its Subsidiaries are
engaged in the internet service provider business and related internet services
(the "Business"). Executive further acknowledges that the Business and its
--------
continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall first have given prompt
notice to the Company of any such possible or prospective order (or proceeding
pursuant to which any such order may result) and (ii) Executive shall afford the
Company a reasonable opportunity to prevent or limit any such disclosure.
3
<PAGE>
(c) During the Employment Period and for a period of five (5) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a Separation, or at any
other time the Company may request in writing, all memoranda, notes, plans,
records, reports and other documents (and copies thereof) containing or
otherwise relating to any of the Confidential Information (including, without
limitation, all acquisition prospects, lists and contact information) which he
may then possess or have under his control. Executive acknowledges that all
such memoranda, notes, plans, records, reports and other documents are and at
all times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of his employment with the Company he will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. So long as Executive is employed or affiliated
--------------
with the Company or any Subsidiary and for an additional (i) two years
thereafter (the "Noncompete Period"), he shall not, anywhere within 100 miles of
-----------------
any of the Company's and its subsidiaries' offices in the United States,
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in the Business. Nothing in this
Section 3 shall in any manner prohibit Executive from continuing his employment,
ownership, management, control, participation in, consulting, or operation of
Sprocket Labs, Inc., a California corporation whose primary line of business
includes but is not limited to the development and sale of Internet related
software and tools so long as such participation does not unreasonably interfere
with Executive's duties to the Company.
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) induce or attempt to
induce any employee of the Company or any of its Subsidiaries to leave the
employ of the
4
<PAGE>
Company or such Subsidiary, or in any way interfere with the relationship
between the Company or any of its Subsidiaries and any employee thereof,
(ii) hire any person who was an employee of the Company or any of its
Subsidiaries within 180 days prior to the time such employee was hired by the
Executive, (iii) induce or attempt to induce any owner of a site location,
customer, supplier, licensee or other business relation of the Company or any of
its Subsidiaries to cease doing business with the Company or such Subsidiary or
in any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company or any of its Subsidiaries or
(iv) directly or indirectly acquire or attempt to acquire an interest in any
business relating to the business of the Company or any of its Subsidiaries and
with which, to Executive's knowledge, the Company or any of its Subsidiaries has
entertained discussions or has requested and received information relating to
the acquisition of such business by the Company or any of its Subsidiaries in
the one-year period immediately preceding a Separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or 3 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
(d) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and 3 do not preclude Executive from earning a
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
5
<PAGE>
GENERAL PROVISIONS
4. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; or
(v) any intentional breach of Section 2 or 3 of this Agreement by Executive not
cured within ten (10) business days after written notice thereof from the
Company. Any election by the Company not to renew the Employment Period on the
third anniversary of the date hereof or any renewal thereof shall be deemed to
be a termination by the Company without Cause. The failure of the Company or
the Executive to achieve budgetary or other operational objectives established
by the Board of Directors shall not in and of itself constitute Cause.
"Disability" means a physical or mental condition which, for a
----------
continuous period of at least six (6) months has or will prevent the Executive
from performing his duties on a full time basis and in a professional and
consistent manner. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of Section 1 of this Agreement by the
Company which is not cured within ten (10) business days after written notice
thereof from Executive, (ii) the Company has not consummated the IPO by June 30,
1999, or (iii) Executive in his sole discretion and in good faith determines
that he is unable to continue to work with the current chief executive officer,
president, or other senior officer of the Company prior to January 1, 1999.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation of which fifty percent (50%) or
----------
more of the securities having ordinary voting power in electing the board of
6
<PAGE>
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity.
5. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
If to the Company:
c/o Unison Partners
50 Hawthorne Road
Southhampton, NY 11968
Attention: Dewey K. Shay
with a copy to:
Hogan & Hartson, LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: Christopher J. Hagan
If to the Executive:
Marty Lyons
4407 Van Buren Street
University Park, MD 20782
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
6. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
7
<PAGE>
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
8
<PAGE>
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a) and 1(b)) shall survive a Separation and shall remain in full
force and effect after such Separation.
* * * * *
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior Management
Agreement on the date first written above.
US INTERNET PROVIDERS, INC.
By: /s/ Stephen E. Smith
--------------------
Name: Stephen E. Smith
Its: Chairman
/s/ Martin Lyons
----------------
Martin Lyons
10
<PAGE>
EXHIBIT 10.13
-------------
SENIOR MANAGEMENT AGREEMENT
---------------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
January 1, 1999, between ONEMAIN.COM, INC., a Delaware corporation (the
"Company"), and M. CRISTINA DOLAN ("Executive").
------- ---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the third anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the third anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Executive Vice President - Chief Content and Strategic
Alliances Officer of the Company and shall have the normal duties,
responsibilities and authority of the Executive Vice President - Chief Content
and Strategic Alliances Officer, subject to the power of the Chairman, the Chief
Executive Officer or the Company's board of directors (the "Board") to expand or
-----
limit such duties, responsibilities and authority and to override actions of the
Executive Vice President - Chief Content and Strategic Alliances Officer.
Executive shall report to the Chief Executive Officer of the Company and
Executive shall devote her best efforts and of her full business time and
attention to the business and affairs of the Company and its Subsidiaries.
(b) Salary, Bonus and Benefits. Effective January 1, 1999, the
--------------------------
Company will pay Executive a base salary of $150,000 per annum, subject to any
annual increase during the Employment Period as determined by the Board based
upon the Company's achievements of budgetary and other objectives set by the
Board (the "Annual Base Salary"). In addition, Executive shall be eligible to
------------------
receive an annual bonus (commencing with the Company's fiscal year ending
December 31, 1999) of up to 33.3% (initially $50,000) of the Annual Base Salary
based upon the Company's achievement of budgetary and other objectives set by
the Board. Executive's Annual Base Salary for any partial year will be prorated
based upon the number of days elapsed in such year. In addition, during the
Employment Period, Executive will be entitled to such other benefits approved by
the Board and made
<PAGE>
available to the Company's senior executives, including vacation time, tuition
reimbursement, reimbursement of business expenses and healthcare benefits.
(c) Issuance of Stock and Stock Options. Executive shall also be
-----------------------------------
eligible to purchase 100,000 shares of the Company's common stock (the "Common
------
Stock") at a purchase price of $0.05 per share (an aggregate purchase price of
- -----
$5,000), all of which shares shall vest upon the commencement of Executive's
employment with the Company. The Executive shall pay the purchase price for
such 100,000 shares of Common Stock by delivery of a check in the amount of
$5,000. In addition, Executive shall also receive options for the purchase of
300,000 shares of the Common Stock upon implementation of the Company's employee
stock option plan on the earlier of the consummation of the Company's initial
public offering pursuant to a registration statement on Form S-1 declared
effective by the Securities and Exchange Commission (the "IPO") or June 30,
---
1999. The options will vest as follows: the first 1/4 of the shares (or 75,000
shares) will vest on the first anniversary of the earlier of the IPO or June 30,
2000. The remaining 3/4 of the shares (or 225,000 shares) shall vest at the
rate of 1/36 per month thereafter (or 6,250 shares per month). All shares
exercisable pursuant to the options shall be fully vested no later than the
earlier of (i) the fourth anniversary of the IPO; (ii) upon a change in control
of the Company (as such term is defined under the rules promulgated pursuant to
the Securities Act of 1993, as amended); or (iii) June 30, 2003. Executive will
be eligible for grants of additional options during the Employment Period
approved by the Board based on Executive's and the Company's performance. All
shares and options issued to Executive shall be made through stock purchase
agreements or options agreements, as appropriate, based on the Company's
standard form for its executives.
(d) Separation. Executive's employment by the Company during the
----------
Employment Period will continue until Executive's resignation at any time or
until Executive's disability or death or until the Board terminates Executive's
Employment at any time during the Employment Period. If the Employment Period
is terminated by the Executive without Good Reason, then the termination will be
effective sixty (60) days after the date of delivery of written notice of
termination. If the Employment Period is terminated by the Board without Cause
or by the Executive with Good Reason, then the termination will be effective
thirty (30) days after the date of delivery of written notice of termination.
If the Employment Period is terminated by the Board with Cause, termination will
be effective as of the date of notice of termination. If the Employment Period
is terminated by the Board with Cause or by the Executive without Good Reason,
then the Executive shall be entitled to receive her Annual Base Salary, bonuses
and her fringe benefits only through the effective date of termination. If the
Employment Period is terminated by the Board without Cause or by the Executive
with Good Reason, then (i) all shares issued to the Executive as of the date
hereof (i.e., 100,000 shares) shall vest immediately (all options shall vest in
accordance with their terms), and (ii) the Executive shall be entitled to
receive her Annual Base Salary
2
<PAGE>
and her life insurance, medical insurance and disability insurance benefits, if
any, (but no bonuses or other fringe benefits) for one year from the effective
date of termination (such payments, the "Severance Payment") shall be payable
-----------------
over time in accordance with normal payroll practices. If the Employment Period
is terminated due to death, then the Annual Base Salary and medical insurance
will be continued through the next full calendar month following the month in
which the Executive died. If the Employment Period is terminated due to
Disability, then the Annual Base Salary, medical insurance and disability
insurance will be continued until the last day of the six-month period following
Disability; provided, however, that such Annual Base Salary shall be reduced by
the amount of any disability income payments made to the Executive during such
six-month period from any insurance or other policies provided by the Company.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company and its Subsidiaries are
engaged in the internet service provider business and related internet services
(the "Business"). Executive further acknowledges that the Business and its
--------
continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that she holds a position of trust
and confidence by virtue of which she necessarily possesses, has access to and,
as a consequence of her signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for her to make use of this information for the benefit of
herself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order
3
<PAGE>
of a court or other governmental body or agency within the United States;
provided, however, that (i) Executive shall first have given prompt notice to
the Company of any such possible or prospective order (or proceeding pursuant to
which any such order may result) and (ii) Executive shall afford the Company a
reasonable opportunity to prevent or limit any such disclosure.
(c) During the Employment Period and for a period of five (5) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
her own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a Separation, or at any
other time the Company may request in writing, all memoranda, notes, plans,
records, reports and other documents (and copies thereof) containing or
otherwise relating to any of the Confidential Information (including, without
limitation, all acquisition prospects, lists and contact information) which she
may then possess or have under her control. Executive acknowledges that all
such memoranda, notes, plans, records, reports and other documents are and at
all times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of her employment with the Company she will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that her services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of her
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. So long as Executive is employed or affiliated
--------------
with the Company or any Subsidiary and for an additional one year thereafter
(the "Noncompete Period"), she shall not work directly for any internet service
-----------------
provider business in the United States.
(b) Nonsolicitation. During the Noncompete Period and for a period of
---------------
one year thereafter, Executive shall not directly or indirectly through another
entity (i) induce or attempt to induce any employee of the Company or any of its
Subsidiaries to leave the employ of the Company or such Subsidiary, or in any
way interfere with the relationship between the Company or any of its
Subsidiaries and any employee thereof, (ii) hire any person who was an employee
of the Company or
4
<PAGE>
any of its Subsidiaries within 180 days prior to the time such employee was
hired by the Executive, (iii) induce or attempt to induce any owner of a site
location, customer, supplier, licensee or other business relation of the Company
or any of its Subsidiaries to cease doing business with the Company or such
Subsidiary or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Company or any of its
Subsidiaries or (iv) directly or indirectly acquire or attempt to acquire an
interest in any business relating to the business of the Company or any of its
Subsidiaries and with which, to Executive's knowledge, the Company or any of its
Subsidiaries has entertained discussions or has requested and received
information relating to the acquisition of such business by the Company or any
of its Subsidiaries in the one-year period immediately preceding a Separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or 3 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
(d) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and 3 do not preclude Executive from earning a
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that she has carefully read this Agreement and has given careful consideration
to the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
5
<PAGE>
GENERAL PROVISIONS
4. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; or
(v) any intentional breach of Section 2 or 3 of this Agreement by Executive not
cured within ten (10) business days after written notice thereof from the
Company. Any election by the Company not to renew the Employment Period on the
third anniversary of the date hereof or any renewal thereof shall be deemed to
be a termination by the Company without Cause. The failure of the Company or
the Executive to achieve budgetary or other operational objectives established
by the Board of Directors shall not in and of itself constitute Cause.
"Disability" means a physical or mental condition which, for a
----------
continuous period of at least six (6) months has or will prevent the Executive
from performing her duties on a full time basis and in a professional and
consistent manner. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
her discovery of any material breach of Section 1 of this Agreement by the
Company which is not cured within ten (10) business days after written notice
thereof from Executive, or (ii) the Company has not consummated the IPO by June
30, 1999.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation of which fifty percent (50%) or
----------
more of the securities having ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity.
6
<PAGE>
5. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
If to the Company:
c/o Unison Partners
50 Hawthorne Road
Southhampton, NY 11968
Attention: Dewey K. Shay
with a copy to:
Hogan & Hartson, LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: Christopher J. Hagan
If to the Executive:
M. Cristina Dolan
207 East 74th Street
New York, NY 10021
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
6. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and
7
<PAGE>
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a) and 1(b)) shall survive a Separation and shall remain in full
force and effect after such Separation.
* * * * *
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
ONEMAIN.COM, INC.
By: /s/ Stephen E. Smith
--------------------
Name: Stephen E. Smith
--------------------
Its: Chairman
/s/ M. Cristina Dolan
--------------------------
M. Cristina Dolan
9
<PAGE>
EXHIBIT 10.15
SENIOR MANAGEMENT AGREEMENT
---------------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
February __, 1999, but is effective as of August 19, 1998, between ONEMAIN.COM,
INC., a Delaware corporation (the "Company"), and DEWEY K. SHAY ("Executive").
------- ---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the third anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the third anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties. During the Employment Period, Executive
-------------------
shall serve as the Chief Financial Officer of the Company and shall have the
normal duties, responsibilities and authority of the Chief Financial Officer,
subject to the power of the Chairman, the Chief Executive Officer or the
Company's board of directors (the "Board") to expand or limit such duties,
-----
responsibilities and authority and to override actions of the President and
Chief Operating Officer. Executive shall report to the Chief Executive Officer
of the Company and Executive shall devote his best efforts and of his full
business time and attention to the business and affairs of the Company and its
Subsidiaries.
(b) Salary, Bonus and Benefits. The Company will pay Executive a base
--------------------------
salary of $150,000 per annum, subject to any annual increase during the
Employment Period as determined by the Board based upon the Company's
achievements of budgetary and other objectives set by the Board (the "Annual
------
Base Salary"). In addition, Executive shall be eligible to receive an annual
- -----------
bonus (commencing with the Company's fiscal year ending December 31, 1999) of up
to $50,000 based upon the Company's achievement of budgetary and other
objectives set by the Board. Executive's Annual Base Salary for any partial
year will be prorated based upon the number of days elapsed in such year. In
addition, during the Employment Period, Executive will be entitled to such other
benefits approved by the Board and made available to the Company's senior
executives, including vacation time, tuition reimbursement, reimbursement of
business expenses, car allowance and healthcare benefits.
<PAGE>
(c) Issuance of Stock and Stock Options. Executive shall also receive
-----------------------------------
options for the purchase of 200,000 shares of the Common Stock upon
implementation of the Company's employee stock option plan on the earlier of the
IPO or June 30, 1999. The options will vest as follows: (i) 100,000 of the
shares will vest at the IPO and (ii) 1/4 of the other 100,000 shares (or 25,000
shares) will vest on the first anniversary of the earlier of the IPO or June 30,
2000 and the remaining 3/4 of the other 100,000 shares (or 75,000 shares) shall
vest at the rate of 1/36 per month thereafter (or 2,083.33 shares per month).
All shares shall be fully vested no later than the earlier of the fourth
anniversary of the IPO or June 30, 2003. Executive will be eligible for grants
of additional options during the Employment Period approved by the Board based
on Executive's and the Company's performance. All shares and options issued to
Executive shall be made through stock purchase agreements or options agreements,
as appropriate, based on the Company's standard form for its executives.
(d) Separation. Executive's employment by the Company during the
----------
Employment Period will continue until Executive's resignation at any time or
until Executive's disability or death or until the Board terminates Executive's
Employment at any time during the Employment Period. If the Employment Period
is terminated by the Executive without Good Reason, then the termination will be
effective sixty (60) days after the date of delivery of written notice of
termination. If the Employment Period is terminated by the Board without Cause
or by the Executive with Good Reason, then the termination will be effective
thirty (30) days after the date of delivery of written notice of termination.
If the Employment Period is terminated by the Board with Cause, termination will
be effective as of the date of notice of termination. If the Employment Period
is terminated by the Board with Cause or by the Executive without Good Reason,
then the Executive shall be entitled to receive his Annual Base Salary, bonuses
and his fringe benefits only through the effective date of termination. If the
Employment Period is terminated by the Board without Cause or by the Executive
with Good Reason, then (i) all shares issued to the Executive as of the date
hereof (i.e., 200,000 shares) shall vest immediately, and (ii) the Executive
shall be entitled to receive his Annual Base Salary and his life insurance,
medical insurance and disability insurance benefits, if any, (but no bonuses or
other fringe benefits) for one year from the effective date of termination (such
payments, the "Severance Payment") shall be payable over time in accordance with
-----------------
normal payroll practices. If the Employment Period is terminated due to death,
then the Annual Base Salary and medical insurance will be continued through the
next full calendar month following the month in which the Executive died. If
the Employment Period is terminated due to Disability, then the Annual Base
Salary, medical insurance and disability insurance will be continued until the
last day of the six-month period following Disability; provided, however, that
such Annual Base Salary shall be reduced by the amount of any disability income
payments made to the Executive during such six-month period from any insurance
or other policies provided by the Company.
2
<PAGE>
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company and its Subsidiaries are
engaged in the internet service provider business and related internet services
(the "Business"). Executive further acknowledges that the Business and its
--------
continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial and business plans, employee
lists, numbers and location of sales representatives, new and existing programs
and services (and those under development), prices and terms, customer service,
integration processes requirements, costs of providing service, support and
equipment and equipment maintenance costs. Confidential Information shall not
include any information that has become generally known to and available for use
by the public other than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall first have given prompt
notice to the Company of any such possible or prospective order (or proceeding
pursuant to which any such order may result) and (ii) Executive shall afford the
Company a reasonable opportunity to prevent or limit any such disclosure.
(c) During the Employment Period and for a period of five (5) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent.
3
<PAGE>
Executive agrees to deliver to the Company at a Separation, or at any other time
the Company may request in writing, all memoranda, notes, plans, records,
reports and other documents (and copies thereof) containing or otherwise
relating to any of the Confidential Information (including, without limitation,
all acquisition prospects, lists and contact information) which he may then
possess or have under his control. Executive acknowledges that all such
memoranda, notes, plans, records, reports and other documents are and at all
times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of his employment with the Company he will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
(a) Noncompetition. So long as Executive is employed or affiliated
--------------
with the Company or any Subsidiary and for an additional (i) two years
thereafter (the "Noncompete Period"), he shall not, anywhere within 100 miles of
-----------------
any of the Company's and its subsidiaries' offices in the United States,
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in the Business. Nothing in this
Section 3 shall in any manner prohibit Executive from continuing his employment,
ownership, management, control, participation in, consulting, or operation of
Sprocket Labs, Inc., a California corporation whose primary line of business
includes but is not limited to the development and sale of Internet related
software and tools so long as such participation does not unreasonably interfere
with Executive's duties to the Company.
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) induce or attempt to
induce any employee of the Company or any of its Subsidiaries to leave the
employ of the Company or such Subsidiary, or in any way interfere with the
relationship between the Company or any of its Subsidiaries and any employee
thereof, (ii) hire any person who was an employee of the Company or any of its
Subsidiaries within 180 days prior to the time such employee was hired by the
Executive, (iii) induce or attempt to induce any owner of a site location,
customer, supplier, licensee or other business relation of the Company or any of
its Subsidiaries to cease doing business with the Company or such Subsidiary or
in any way interfere with the relationship
4
<PAGE>
between any such customer, supplier, licensee or business relation and the
Company or any of its Subsidiaries or (iv) directly or indirectly acquire or
attempt to acquire an interest in any business relating to the business of the
Company or any of its Subsidiaries and with which, to Executive's knowledge, the
Company or any of its Subsidiaries has entertained discussions or has requested
and received information relating to the acquisition of such business by the
Company or any of its Subsidiaries in the one-year period immediately preceding
a Separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or 3 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
(d) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and 3 do not preclude Executive from earning a
livelihood, nor does it unreasonably impose limitations on Executive's ability
to earn a living. In addition, Executive agrees and acknowledges that the
potential harm to the Company of its non-enforcement outweighs any harm to the
Executive of its enforcement by injunction or otherwise. Executive acknowledges
that he has carefully read this Agreement and has given careful consideration to
the restraints imposed upon the Executive by this Agreement, and is in full
accord as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
GENERAL PROVISIONS
4. Definitions.
-----------
5
<PAGE>
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries; or
(v) any intentional breach of Section 2 or 3 of this Agreement by Executive not
cured within ten (10) business days after written notice thereof from the
Company. Any election by the Company not to renew the Employment Period on the
third anniversary of the date hereof or any renewal thereof shall be deemed to
be a termination by the Company without Cause. The failure of the Company or
the Executive to achieve budgetary or other operational objectives established
by the Board of Directors shall not in and of itself constitute Cause.
"Disability" means a physical or mental condition which, for a
----------
continuous period of at least six (6) months has or will prevent the Executive
from performing his duties on a full time basis and in a professional and
consistent manner. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of Section 1 of this Agreement by the
Company which is not cured within ten (10) business days after written notice
thereof from Executive, (ii) the Company has not consummated the IPO by June 30,
1999, or (iii) Executive in his sole discretion and in good faith determines
that he is unable to continue to work with the current chief executive officer,
president, or other senior officer of the Company prior to January 1, 1999.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation of which fifty percent (50%) or
----------
more of the securities having ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity.
6
<PAGE>
5. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
If to the Company:
c/o Unison Partners
50 Hawthorne Road
Southhampton, NY 11968
Attention: Dewey K. Shay
with a copy to:
Hogan & Hartson, LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: Christopher J. Hagan
If to the Executive:
Dewey K. Shay
240 Central Park South
18-I
New York, NY 10019
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
6. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and
7
<PAGE>
preempt any prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter hereof in
any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a) and 1(b)) shall survive a Separation and shall remain in full
force and effect after such Separation.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
ONEMAIN.COM, INC.
By: __________________________________
Stephen E. Smith
President
__________________________________________
Dewey K. Shay
9
<PAGE>
EXHIBIT 10.16
-------------
SENIOR MANAGEMENT AGREEMENT
---------------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
January 1, 1999, between US INTERNET PROVIDERS, INC., a Delaware corporation
(the "Company"), and ALLON H. LEFEVER ("Executive").
------- ---------
The parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
accepts such employment for the period beginning as of the date hereof and
ending on the third anniversary of the date hereof or upon Executive's earlier
separation pursuant to Section 1(d) hereof (the "Employment Period"); provided,
------------ -----------------
however, that the Employment Period shall automatically be renewed for an
additional two year period commencing on the third anniversary of the date
hereof unless either the Company or the Executive gives the other at least 60
days written notice prior to the Expiration of the Employment Period of its
desire to terminate this Agreement.
(a) Position and Duties.
-------------------
(i) During the Employment Period, Executive shall serve as the Vice
Chairman of the board of directors and President - North East Group and Central
Plains Group of the Company and shall have the normal duties, responsibilities
and authority of the Vice Chairman and President - North East Group and Central
Plains Group, subject to the power of the Chairman, the Chief Executive Officer
or the Company's board of directors (the "Board") to expand or limit such
-----
duties, responsibilities and authority and to override actions of the Vice
Chairman and President - North East Group and Central Plains Group. Executive
shall report to the Chief Executive Officer of the Company and Executive shall
devote his best efforts and of his full business time and attention to the
business and affairs of the Company and its Subsidiaries. During the Employment
Period, the Company shall use its reasonable best efforts to cause Executive to
be elected or appointed to the Board and to the board of directors of any
Subsidiary in the North East Group and Central Plains Group.
(ii) During the Employment Period, Executive shall have the authority,
based upon the performance criteria set forth in Annex A attached hereto,
-------
(subject to Board approval which shall not be unreasonably withheld) to allocate
among certain key employees of the North East Group and Central Plans Group of
the Company options for the purchase of the Company's common stock based on the
criteria set forth therein ("Performance Options"). The Performance Options
shall be subject to vesting in accordance with the terms set forth on Annex A
-------
<PAGE>
and shall be exercisable in accordance with the terms set forth on Annex A.
-------
Executive shall be permitted to allocate a portion of the Performance Options to
himself.
(b) Salary, Bonus and Benefits. Effective January 1, 1999, the
--------------------------
Company will pay Executive a base salary of $200,000 per annum, subject to any
annual increase during the Employment Period as determined by the Board based
upon the Company's achievements of reasonable objectives set by the Board (the
"Annual Base Salary"). In addition, Executive shall be eligible to receive an
- -------------------
annual bonus (commencing with the Company's fiscal year ending December 31,
1999) of up to $50,000 based upon the North East Group's and Central Plains
Group's combined achievement of 33% growth in revenue year to year, budgetary
and other objectives set by the Board. Executive's Annual Base Salary for any
partial year will be prorated based upon the number of days elapsed in such
year. In addition, during the Employment Period, Executive will be entitled to
such other benefits approved by the Board and made available to the Company's
senior executives, including vacation time, car allowance, tuition
reimbursement, reimbursement of business expenses and healthcare benefits.
(c) Issuance of Stock Options. Executive shall receive options for
-------------------------
the purchase of 200,000 shares of the Company's common stock (the "Common
------
Stock") upon implementation of the Company's employee stock option plan on the
earlier of the of consummation of the Company's initial public offering pursuant
to a registration statement on Form S-1 declared effective by the Securities and
Exchange Commission (the "IPO") or June 30, 1999. The options will vest as
---
follows: the first 1/4 of the shares (or 50,000 shares) will vest on the first
anniversary of the earlier of the IPO or June 30, 2000. The remaining 3/4 of
the shares exercisable pursuant to the options (or 150,000 shares) shall vest at
the rate of 1/36 per month thereafter (or 4,167 shares per month). All options
shall be fully vested no later than the earlier of (i) a "change in control" of
the Company occurs (as such term is defined under the rules promulgated under
the Securities Act of 1933, as amended); (ii) the fourth anniversary of the IPO;
or (iii) June 30, 2003. Executive will be eligible for grants of additional
options during the Employment Period approved by the Board based on Executive's
and the Company's performance. All shares and options issued to Executive shall
be made through stock purchase agreements or options agreements, as appropriate,
based on the Company's standard form for its executives.
(d) Separation. Executive's employment by the Company during the
----------
Employment Period will continue until Executive's resignation at any time or
until Executive's disability or death or until the Board terminates Executive's
Employment at any time during the Employment Period. If the Employment Period
is terminated by the Executive without Good Reason, then the termination will be
effective sixty (60) days after the date of delivery of written notice of
termination. If the Employment Period is terminated by the Board without Cause
2
<PAGE>
or by the Executive with Good Reason, then the termination will be effective
thirty (30) days after the date of delivery of written notice of termination.
If the Employment Period is terminated by the Board with Cause, termination will
be effective as of the date of notice of termination. If the Employment Period
is terminated by the Board with Cause or by the Executive without Good Reason,
then the Executive shall be entitled to receive his Annual Base Salary, bonuses
and his fringe benefits only through the effective date of termination. If the
Employment Period is terminated by the Board without Cause or by the Executive
with Good Reason, then (i) all shares issued to the Executive as "founding
shares" shall vest immediately, and (ii) the Executive shall be entitled to
receive his Annual Base Salary and his life insurance, medical insurance and
disability insurance benefits, if any, (but no bonuses or other fringe benefits)
for one year from the effective date of termination (such payments, the
"Severance Payment") shall be payable over time in accordance with normal
- ------------------
payroll practices. If the Employment Period is terminated due to death, then
the Annual Base Salary and medical insurance will be continued through the next
full calendar month following the month in which the Executive died. If the
Employment Period is terminated due to Disability, then the Annual Base Salary,
medical insurance and disability insurance will be continued until the last day
of the six-month period following Disability; provided, however, that such
Annual Base Salary shall be reduced by the amount of any disability income
payments made to the Executive during such six-month period from any insurance
or other policies provided by the Company.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company and its Subsidiaries are
engaged in the internet service provider business and related internet services
(the "Business"). Executive further acknowledges that the Business and its
--------
continued success depend upon the use and protection of a large body of
confidential and proprietary information, and that he holds a position of trust
and confidence by virtue of which he necessarily possesses, has access to and,
as a consequence of his signing this Agreement, will continue to possess and
have access to, highly valuable, confidential and proprietary information of the
Company and its Subsidiaries not known to the public in general, and that it
would be improper for him to make use of this information for the benefit of
himself and others. All of such confidential and proprietary information now
existing or to be developed in the future will be referred to in this Agreement
as "Confidential Information." This includes, without specific limitation,
------------------------
information relating to the nature and operation of the Business or any other
business conducted by the Company's Subsidiaries (the "Subsidiary Business"),
-------------------
the persons, firms and corporations which are customers or active prospects of
the Company or the Subsidiary Business during Executive's employment by the
Company, the Company's and the Subsidiary Business' development transition and
transformation plans, methodology and methods of doing business, strategic,
acquisition, marketing and expansion plans, including plans regarding planned
and potential acquisitions and sales, financial
3
<PAGE>
and business plans, employee lists, numbers and location of sales
representatives, new and existing programs and services (and those under
development), prices and terms, customer service, integration processes
requirements, costs of providing service, support and equipment and equipment
maintenance costs. Confidential Information shall not include any information
that has become generally known to and available for use by the public other
than as a result of Executive's acts or omissions.
(b) Disclosure of any Confidential Information of the Company shall
not be prohibited if such disclosure is directly pursuant to a valid and
existing order of a court or other governmental body or agency within the United
States; provided, however, that (i) Executive shall first have given prompt
notice to the Company of any such possible or prospective order (or proceeding
pursuant to which any such order may result) and (ii) Executive shall afford the
Company a reasonable opportunity to prevent or limit any such disclosure.
(c) During the Employment Period and for a period of five (5) years
thereafter, Executive will preserve and protect as confidential all of the
Confidential Information known to Executive or at any time in Executive's
possession. In addition, during the Employment Period and at all times
thereafter, Executive will not disclose to any unauthorized person or use for
his own account any of such Confidential Information without the Board's written
consent. Executive agrees to deliver to the Company at a Separation, or at any
other time the Company may request in writing, all memoranda, notes, plans,
records, reports and other documents (and copies thereof) containing or
otherwise relating to any of the Confidential Information (including, without
limitation, all acquisition prospects, lists and contact information) which he
may then possess or have under his control. Executive acknowledges that all
such memoranda, notes, plans, records, reports and other documents are and at
all times will be and remain the property of the Company.
(d) Executive will fully comply with any agreement reasonably required
by any of the Company's Subsidiaries, business partners, suppliers or
contractors with respect to the protection of the confidential and proprietary
information of such entities.
3. Noncompetition and Nonsolicitation. Executive acknowledges that
----------------------------------
in the course of his employment with the Company he will become familiar with
the Confidential Information concerning the Company and such Subsidiaries and
that his services will be of special, unique and extraordinary value to the
Company. Executive agrees that the Company has a protectable interest in the
Confidential Information acquired by Executive during the course of his
employment with the Company. Therefore, Executive agrees that:
4
<PAGE>
(a) Noncompetition. So long as Executive is employed or affiliated
--------------
with the Company or any Subsidiary and for an additional (i) two years
thereafter (the "Noncompete Period"), he shall not, anywhere within 100 miles of
-----------------
any of the Company's and its subsidiaries' offices in the United States,
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in the Business.
(b) Nonsolicitation. During the Noncompete Period, Executive shall
---------------
not directly or indirectly through another entity (i) induce or attempt to
induce any employee of the Company or any of its Subsidiaries to leave the
employ of the Company or such Subsidiary, or in any way interfere with the
relationship between the Company or any of its Subsidiaries and any employee
thereof, (ii) hire any person who was an employee of the Company or any of its
Subsidiaries within 180 days prior to the time such employee was hired by the
Executive, (iii) induce or attempt to induce any owner of a site location,
customer, supplier, licensee or other business relation of the Company or any of
its Subsidiaries to cease doing business with the Company or such Subsidiary or
in any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company or any of its Subsidiaries or
(iv) directly or indirectly acquire or attempt to acquire an interest in any
business relating to the business of the Company or any of its Subsidiaries and
with which, to Executive's knowledge, the Company or any of its Subsidiaries has
entertained discussions or has requested and received information relating to
the acquisition of such business by the Company or any of its Subsidiaries in
the one-year period immediately preceding a Separation.
(c) Enforcement. If, at the time of enforcement of Section 2 or 3 of
-----------
this Agreement, a court holds that the restrictions stated herein are
unreasonable under circumstances then existing, the parties hereto agree that
the maximum duration, scope or geographical area reasonable under such
circumstances shall be substituted for the stated period, scope or area and that
the court shall be allowed to revise the restrictions contained herein to cover
the maximum duration, scope and area permitted by law. Because Executive's
services are unique and because Executive has access to Confidential
Information, the parties hereto agree that money damages would be an inadequate
remedy for any breach of this Agreement. Therefore, in the event of a breach or
threatened breach of Section 2 or Section 3 of this Agreement, the Company or
any of its successors or assigns shall, in addition to other rights and remedies
existing in its favor, be entitled to specific performance and/or injunctive or
other relief in order to enforce, or prevent any violations of, the provisions
of Section 2 or Section 3 from any court of competent jurisdiction.
(d) Additional Acknowledgments. Executive acknowledges that the
--------------------------
provisions of this Section are in consideration of: (i) employment with the
Company and (ii) additional good and valuable consideration as set forth in this
Agreement. Executive expressly agrees and acknowledges that the restrictions
contained in Sections 2 and 3 do not preclude Executive from earning a
livelihood, nor does it
5
<PAGE>
unreasonably impose limitations on Executive's ability to earn a living. In
addition, Executive agrees and acknowledges that the potential harm to the
Company of its non-enforcement outweighs any harm to the Executive of its
enforcement by injunction or otherwise. Executive acknowledges that he has
carefully read this Agreement and has given careful consideration to the
restraints imposed upon the Executive by this Agreement, and is in full accord
as to their necessity for the reasonable and proper protection of the
Confidential Information. Executive expressly acknowledges and agrees that each
and every restraint imposed by this Agreement is reasonable with respect to
subject matter, time period and geographical area.
GENERAL PROVISIONS
4. Definitions.
-----------
"Cause" means (i) the commission of a felony or a crime involving
-----
moral turpitude or the intentional commission of any other act or omission
involving dishonesty or fraud with respect to the Company or any of its
Subsidiaries or any of their customers or suppliers, (ii) conduct tending to
bring the Company or any of its Subsidiaries into substantial public disgrace or
disrepute, (iii) substantial and repeated failure to perform duties of the
office held by Executive as reasonably directed by the Board not cured within
ten (10) business days after written notice thereof, (iv) gross negligence or
willful misconduct with respect to the Company or any of its Subsidiaries;
(v) any intentional breach of Section 2 or 3 of this Agreement by Executive not
cured within ten (10) business days after written notice thereof from the
Company; or (vi) if an initial public offering of the Company's stock or the
completion of a private equity investment as described in Section 8.2(d) of the
--------------
Stock Exchange Agreement by and among Company, D&E Supernet, Inc. ("D&E") and
stockholders of D&E, has not occurred by June 30, 1999. Any election by the
Company not to renew the Employment Period on the third anniversary of the date
hereof or any renewal thereof shall be deemed to be a termination by the Company
without Cause. The failure of the Company or the Executive to achieve budgetary
or other operational objectives established by the Board of Directors shall not
in and of itself constitute Cause.
"Disability" means a physical or mental condition which, for a
----------
continuous period of at least six (6) months has or will prevent the Executive
from performing his duties on a full time basis and in a professional and
consistent manner. Any dispute as to the Executive's Disability shall be
referred to and resolved by a licensed physician selected and approved by the
Company and the Executive.
"Good Reason" means (i) Executive's resignation within 30 days after
-----------
his discovery of any material breach of Section 1 of this Agreement by the
Company
6
<PAGE>
which is not cured within ten (10) business days after written notice thereof
from Executive, or (ii) the Company has not consummated the IPO by June 30,
1999.
"Person" means an individual, a partnership, a limited liability
------
company, a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"Subsidiary" means any corporation of which fifty percent (50%) or
----------
more of the securities having ordinary voting power in electing the board of
directors are, at the time as of which any determination is being made, owned by
the Company either directly or through one or more Subsidiaries. The term
Subsidiary shall also include any joint venture arrangement between the Company
and any other entity.
5. Notices. Any notice provided for in this Agreement must be in
-------
writing and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable overnight
courier service (charges prepaid) to the recipient at the address below
indicated:
If to the Company:
c/o Unison Partners
50 Hawthorne Road
Southhampton, NY 11968
Attention: Dewey K. Shay
with a copy to:
Hogan & Hartson, LLP
555 13th Street, N.W.
Washington, D.C. 20004
Attention: Christopher J. Hagan
If to the Executive:
Allon H. Lefever
212 Spottswood Lane
Lancaster, Pennsylvania 17601
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or sent or, if mailed, five days after deposit in the U.S. mail.
7
<PAGE>
6. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by Executive
and the Company and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity and interpretation of this Agreement and the exhibits hereto will be
governed by and construed in accordance with the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of Delaware.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including attorney's fees) caused by any breach of any provision of this
Agreement and to exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any party may in its
sole discretion apply to any court of law or equity of competent jurisdiction
(without posting any bond or deposit) for specific performance and/or other
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement.
8
<PAGE>
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and the
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or holiday in the
state in which the Company's principal place of business is located, the time
period shall be automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
(i) Termination. This Agreement (except for the provisions of
-----------
Sections 1(a) and 1(b)) shall survive a Separation and shall remain in full
force and effect after such Separation.
* * * * *
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Senior Management
Agreement on the date first written above.
US INTERNET PROVIDERS, INC.
By: /s/ Stephen E. Smith
--------------------
Name:
Its:
/s/ Allon H. Lefever
--------------------
Allon H. Lefever
10
<PAGE>
ANNEX A
TYPE OF OPTIONS: PERFORMANCE OPTIONS ARE NON-QUALIFIED STOCK OPTIONS.
- ---------------
NUMBER OF OPTIONS: THE TOTAL NUMBER OF PERFORMANCE OPTIONS TO BE AWARDED TO
- -----------------
KEY MEMBERS OF COMPANY'S NORTH EAST GROUP AND CENTRAL
PLAINS GROUP BY EXECUTIVE SHALL BE CALCULATED IN THE
FOLLOWING MANNER BASED ON THE PERFORMANCE OF D&E SUPERNET,
INC., SUNLINK, INC., LEBANET, INC., HORIZON INTERNET
TECHNOLOGIES, INC., AND SOUTHWIND INTERNET ACCESS, INC.:
. Initial Grant -- The greater of (i) 20 options per $1,000
of Revenue Run Rate (as defined in the Stock Exchange
Agreement by and between Company and D&E Supernet, Inc.)
as of June 30, 1998 or (ii) 5 options per subscriber.
. Secondary Grant -- The greater of (i) 20 options per
$1,000 of Revenue Run Rate as of June 30, 1999 in excess
of the Revenue Run Rate on June 30, 1998 or (ii) 5
options per subscriber as of June 30, 1999 in excess of
the number of subscribers on June 30, 1998.
Grant date: Performance Options are granted upon the Company's IPO
- ---------- for the Initial Grant and June 30, 1999 for the Secondary
Grant.
Term: The term of each Performance Option is 10 years from the
- ---- grant date, as long as the option holder remains an
employee of Employer.
Exercise price: The exercise price of each Performance Option is equal to
- -------------- the price per share of the common stock issued to the
public in the Company's IPO for the Initial Grant and the
fair market value of the common stock on the day of the
grant for the Secondary Grant.
Fixed vesting: Performance Options vest on a fixed vesting schedule of
- ------------- 1/3 each year on the sixth, seventh and eighth anniversary
of the grant date, as long as the optionholder remains an
employee of Employer.
Accelerated vesting: Performance Options have accelerated vesting upon
- ------------------- achievement of "Revenue Increments" on the following
schedule based upon the results of the companies listed
above under the "Number of Options" section:
20% @ $7.5 million of Revenue Increment
40% @ $10 million of Revenue Increment
60% @ $12.5 million of Revenue Increment
80% @ $15 million of Revenue Increment
100% @ $17.5 million of Revenue Increment
Option plan: The Performance Options will be options issued under the
- ----------- Company's Equity Compensation Plan to be put in place
before the IPO.
11
<PAGE>
EXHIBIT 10.17
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS AGREEMENT (the "Agreement") is made as of February 1, 1999, by
and among OneMain.com, Inc., a Delaware corporation (the "Company"), and each
Person listed on the Schedule of Holders attached hereto as Exhibit A (together
------------------- ---------
the "Shareholders"). Unless otherwise provided in this Agreement, capitalized
terms used herein shall have the meanings set forth in Section 7 hereof.
---------
Recitals:
--------
A. The Company was founded by certain Shareholders listed on Exhibit
-------
A, and such Shareholders, gifted some of their stock to certain other
- -
Shareholders.
B. The Company and certain Shareholders entered into employment
agreements whereby the Shareholders purchased Stock in the Company.
C. The Company and certain Shareholders are parties to certain Stock
Exchange Agreements (the "Exchange Agreements") pursuant to which the
Shareholders received shares of the Company's common stock (the "Common Stock").
In order to induce the Shareholders to enter into the Exchange Agreements, the
Company agreed to provide the registration rights set forth in this Agreement.
D. Any other Persons who purchase or receive capital stock of the
Company may, with the consent of the Company's Board of Directors become parties
to this Agreement by executing the Joinder Agreement attached hereto as Exhibit
-------
B (which Joinder Agreement was attached to the Exchange Agreements as Exhibit F
- - ---------
thereto).
Agreement
---------
In consideration of the premises and mutual covenants set forth
herein, the receipt and adequacy which are hereby acknowledged, the parties
hereto agree as follows:
1. Piggyback Registrations.
-----------------------
(a) Right to Piggyback. Subject to any applicable lock-up and
------------------
transfer restrictions contained in any Equity Subscription, Subscription,
Executive Stock Purchase or Stock Purchase Agreement pursuant to which the
Shareholders acquired their respective shares of Common Stock, whenever the
Company proposes to register any of its securities under the Securities Act
(other than pursuant to a registration on Form S-4, Form S-8 or any successor
form) and the registration form to be used may be used for the registration of
Registrable Securities (a "Piggyback Registration"), the Company shall give
prompt written notice to all holders of Registrable Securities of its intention
to effect such a registration. The
<PAGE>
Company shall include in such registration all Registrable Securities with
respect to which the Company has received written requests for inclusion therein
within 10 days after the receipt of the Company's notice. Notwithstanding the
foregoing, in the event of the Company's Initial Public Offering, no Piggyback
Registration shall be permitted without the approval of the Company's Board of
Directors.
(b) Priority on Primary Registrations. If a Piggyback Registration
---------------------------------
is an underwritten primary registration on behalf of the Company, and the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in an orderly manner in such offering within a price
range acceptable to the Company, the Company shall include in such registration:
(i) first, the securities the Company proposes to sell; (ii) second, the
Registrable Securities requested to be included in such registration, pro rata
among the holders of such Registrable Securities on the basis of the number of
shares owned by such holders; and (iii) third, other securities requested to be
included in such registration, pro rata among the holders thereof on the basis
of the number of their securities requested to be included therein.
Priority on Secondary Registrations. If a Piggyback
-----------------------------------
Registration is an underwritten secondary registration on behalf of the Company
or holders of the Company's securities and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in an
orderly manner in such offering within a price range acceptable to the Company,
the Company shall include in such registration: (i) first, the securities, the
Company proposes to sell and the securities requested to be included therein by
the holders requesting such registration; (ii) second, the Registrable
Securities requested to be included in such registration, pro rata among the
holders of such Registrable Securities on the basis of the number of shares
owned by such holders; and (iii) third, other securities requested to be
included in such registration, pro rata among the holders thereof on the basis
of the number of their securities requested to be included therein.
2. Holdback Agreement. Each holder of Registrable Securities shall
------------------
not effect any public sale or distribution (including sales pursuant to Rule
144) of equity securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and for such period as requested by the underwriter managing the Piggyback
Registration for the period beginning on the effective date of any underwritten
Piggyback Registration in which Registrable Securities are included (except as
part of such underwritten registration).
3. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company shall use its reasonable best efforts to effect
the registration and the sale of such Registrable Securities in accordance with
the intended method of disposition thereof, and pursuant thereto the Company
shall as expeditiously as possible:
-2-
<PAGE>
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities and use its
reasonable best efforts to cause such registration statement to become
effective;
(b) notify each holder of Registrable Securities of the effectiveness
of each registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective for a period of not less
than 90 days and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration statement
during such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such registration statement; provided, however,
that if the Company is eligible to use Form S-3, the holders of Registrable
Securities may require the Company to keep such registration effective as a
"shelf registration" for a period of up to 180 days;
(c) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;
(d) use its reasonable best efforts to register or qualify such
Registrable Securities under such other securities or blue sky laws of such
jurisdictions as any seller reasonably requests and do any and all other acts
and things which may be reasonably necessary or advisable to enable such seller
to consummate the disposition in such jurisdictions of the Registrable
Securities owned by such seller; provided that the Company shall not be required
to: (i) qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph; (ii) subject itself
to taxation in any such jurisdiction; or (iii) consent to general service of
process in any such jurisdiction;
(e) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company shall
prepare a supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not contain an untrue statement of a material fact or omit to state any
fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed or quoted on
each securities exchange or market on which similar securities issued by the
Company are then listed; provided, however, that if the Company's securities are
not listed or quoted on a securities exchange or market, the Stockholders will
not have the right to a Piggyback Registration contained in this Agreement;
-3-
<PAGE>
(g) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) in order to expedite or facilitate the disposition
of such Registrable Securities;
(i) make available for inspection by any underwriter participating in
any disposition pursuant to such registration statement, and any attorney,
accountant or other agent retained by any such underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors, employees and independent accountants
to supply all information reasonably requested by any such underwriter,
attorney, accountant or agent in connection with such registration statement;
(j) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Securities and Exchange Commission, and
make available to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least 12 months beginning with the
first day of the Company's first full calendar quarter after the effective date
of the registration statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Common Stock included in such registration statement for sale in any
jurisdiction, the Company shall use its reasonable best efforts promptly to
obtain the withdrawal of such order;
(l) subject to Section 3(d) above, use its reasonable best efforts
------------
to cause any Registrable Securities covered by such registration statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to enable the sellers thereof to consummate the disposition
of such Registrable Securities;
(m) if the offering is underwritten, use its reasonable best efforts
to furnish on the date that Registrable Securities are delivered to the
underwriters for sale pursuant to such registration, an opinion dated such date
of counsel representing the Company for the purposes of such registration,
addressed to the underwriters covering such issues as are reasonably required by
such underwriters; and
(n) notwithstanding anything in the foregoing to the contrary, the
Company may delay the effectiveness of any registration statement, or suspend
offers and sales under any effective registration statement, at any time for an
aggregate of up to 90 days in any 12-month period if the Company's Board of
Directors determines, in good faith, that such delay or suspension would be in
the best interests of the Company.
-4-
<PAGE>
4. Registration Expenses.
---------------------
(a) Payment of Registration Expenses. All expenses incident to
--------------------------------
the Company's performance of or compliance with this Agreement, including
without limitation all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws, printing expenses, messenger and
delivery expenses, fees and disbursements of custodians, and fees and
disbursements of counsel for the Company and all independent certified public
accountants, underwriters (excluding discounts and commissions) and other
Persons retained by the Company (all such expenses being herein called
"Registration Expenses"), shall be borne by the Company. The Company shall, in
addition, pay its internal expenses (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties), the expense of any annual audit or quarterly review, the expense of any
liability insurance and the expenses and fees for listing or quoting the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed or on the NASD automated
quotation system.
(b) Payment of Registration Expenses by Holders of Registrable
----------------------------------------------------------
Securities. To the extent Registration Expenses are not required to be paid by
- ----------
the Company (including, without limitation, any underwriting discounts or
commissions that are the responsibility of the holders of Registrable
Securities), each holder of securities included in any registration hereunder
shall pay those Registration Expenses allocable to the registration of such
holder's securities so included, and any Registration Expenses not so allocable
shall be payable by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so registered.
5. Indemnification.
---------------
(a) Indemnification by the Company. The Company agrees to
------------------------------
indemnify, to the extent permitted by law, each holder of Registrable
Securities, its officers and directors and each Person who controls such holder
(within the meaning of the Securities Act) against all losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus or any amendment thereof or supplement thereto or any omission or
alleged omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as the same are
caused by or contained in any information furnished in writing to the Company by
such holder expressly for use therein, results from the failure of such holder
to provide information necessary for the registration statement to the Company,
or by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies of the same. In
connection with an underwritten offering, as required by the underwriters, the
Company shall indemnify such underwriters, their officers and directors and each
Person who controls such underwriters (within the meaning of the Securities Act)
to the same extent as provided above with respect to the indemnification of the
holders of Registrable Securities.
-5-
<PAGE>
(b) Indemnification by the Holders of Registrable Securities. In
--------------------------------------------------------
connection with any registration statement in which a holder of Registrable
Securities is participating, each such holder shall furnish to the Company in
writing such information and affidavits as the Company reasonably requests for
use in connection with any such registration statement or prospectus and, to the
extent permitted by law, shall indemnify the Company, its directors and officers
and each Person who controls the Company (within the meaning of the Securities
Act) against any losses, claims, damages, liabilities and expenses resulting
from any untrue or alleged untrue statement of material fact contained in the
registration statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto resulting from such information provided by such
holder or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading and
not provided by such holder; provided that the obligation to indemnify shall be
individual, not joint and several, for each holder and shall be limited to the
net amount of proceeds received by such holder from the sale of Registrable
Securities pursuant to such registration statement.
(c) Procedure for Indemnification. Any Person entitled to
-----------------------------
indemnification hereunder shall (i) give prompt written notice to the
indemnifying party of any claim with respect to which it seeks indemnification
(provided that the failure to give prompt notice shall not impair any Person's
right to indemnification hereunder to the extent such failure has not prejudiced
the indemnifying party) and (ii) unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and indemnifying
parties may exist with respect to such claim, permit such indemnifying party to
assume the defense of such claim with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying party shall not
be subject to any liability for any settlement made by the indemnified party
without its consent (but such consent shall not be unreasonably withheld). An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim shall not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim. Notwithstanding anything in
this Section 5(C) to the contrary, in the event the Company determines, in good
faith, that a claim materially affects the interests of the Company, the Company
may solely control the defense of such claim with counsel reasonably
satisfactory to the Company. In the event the Company is an indemnified party
pursuant to this Section V, the indemnifying party may be subject to liability
if the Company settles a claim in good faith and in a reasonable manner.
6. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder unless such Person:
(a) in the case of a registration which is underwritten, agrees to
sell such Person's securities on the basis provided in any underwriting
arrangements approved by the Company;
(b) as expeditiously as possible, notifies the Company, at any time
when a prospectus relating to such Person's Registrable Securities is required
to be delivered
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under the Securities Act, of the happening of any event as a result of which
such prospectus contains an untrue statement of a material fact or omits any
fact necessary to make the statements therein not misleading;
(c) complies with all reasonable requests made by the Company or
its counsel with respect to the registration of such Person's Registrable
Securities, including, without limitation, providing access to all relevant
books and records; and
(d) completes, executes and delivers all questionnaires, powers of
attorney, indemnities, underwriting agreements and other usual and customary
documents necessary or appropriate with respect to the offering of such Person's
Registrable Securities, and in the case of a registration which is underwritten,
necessary or appropriate under the terms of such underwriting arrangements
(subject to the provision in Section 6(a) above).
------------
7. Definitions.
-----------
(a) The term "Initial Public Offering" means the first registered
public offering of the Common Stock by the Company under the Securities Act
which will result in an aggregate post-IPO market capitalization of the Company
of at least $100 million (determined by multiplying the outstanding shares of
the Common Stock by the initial offering price).
(b) The term "Person" means any individual, corporation,
partnership, joint venture, association, joint-stock company, limited liability
company, trust or unincorporated organization.
(c) The term "Registration Expenses" has the meaning set forth in
Section 4 above.
- ---------
(d) The term "Registrable Securities" means (i) any Common Stock
issued (A) to the Company's founders (as noted on the Schedule of Holders) and
-------------------
(B) pursuant to the Exchange Agreements, (whether issued before or after the
date hereof), (C) pursuant to an employment agreement with the Company, (D) to a
member of the Company's Board of Directors or (E) to parties who, with the
consent of the Company's Board of Directors, become a party to this Agreement by
signing a Joinder Agreement substantially in the form of Exhibit B, (ii) any
---------
other Common Stock issued or issuable with respect to the securities referred to
in clause (i) by way of a gift, a stock dividend or stock split or in connection
with an exchange or combination of shares, recapitalization, merger,
consolidation or other reorganization, and (iii) any other shares of Common
Stock held by Persons holding securities described in clauses (i) and (ii),
inclusive, above. As to any particular Registrable Securities, such securities
shall cease to be Registrable Securities when they have been distributed to the
public pursuant to an offering registered under the Securities Act or sold to
the public through a broker, dealer or market maker in compliance with Rule 144
under the Securities Act (or any similar rule then in force).
(e) The term "Securities Act" means the Securities Act of 1933, as
amended, or any similar federal law then in force.
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(f) The term "Securities Exchange Act" means the Securities Exchange
Act of 1934, as amended, or any similar federal law then in force.
8. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter
--------------------------
enter into any agreement with respect to its securities which is inconsistent
with or violates the rights granted to the holders of Registrable Securities in
this Agreement.
(b) Adjustments Affecting Registrable Securities. The Company
--------------------------------------------
shall not take any action, or permit any change to occur, with respect to its
securities which would adversely affect the ability of the holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement or which would adversely affect the
marketability of such Registrable Securities in any such registration
(including, without limitation, effecting a stock split or a combination of
shares).
(c) Remedies. Any Person having rights under any provision of
--------
this Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
(d) Amendments and Waivers. Except as otherwise provided herein,
----------------------
the provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of at least 51% of the Registrable
Securities.
(e) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities. Upon any
transfer of Registrable Securities, the holder of the Registrable Securities
shall use its best efforts to have the new holder of Registrable Securities sign
the Joinder Agreement attached hereto as Exhibit B.
---------
(f) Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
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<PAGE>
(g) Counterparts; Facsimile Transmission. This Agreement may be
------------------------------------
executed simultaneously in two or more counterparts, any one of which need not
contain the signatures of more than one party, but all such counterparts taken
together shall constitute one and the same Agreement. Each party to this
Agreement agrees that it will be bound by its own telecopied signature and that
it accepts the telecopied signature of each other party to this Agreement.
(h) Descriptive Headings. The descriptive headings of this
--------------------
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(i) Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the domestic laws of the State of Delaware, without
giving effect to any choice of law or conflict of law rules or provisions
(whether of the State of Delaware or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
Delaware.
(j) Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, sent to the recipient by reputable overnight courier service
(charges prepaid) or 48 hours after deposited in the United States mail, first
class, to the recipient by postage prepaid or by facsimile. Such notices,
demands and other communications shall be sent to each Shareholder at the
addresses indicated on the Schedule of Holders and to the Company at the address
of its corporate headquarters or to such other address or to the attention of
such other Person as the recipient party has specified by prior written notice
to the sending party.
(k) Parties. The Persons described in Section 7 above may become
------- ---------
parties to this Agreement by either signing this Agreement or by executing a
Joinder Agreement substantially in the form of Exhibit B attached hereto.
---------
(l) New Parties. During the term of this Agreement, the Company
-----------
may, with the consent of the Company's Board of Directors, permit additional
Persons to become parties to this Agreement by executing a Joinder Agreement
substantially in the form of Exhibit B attached hereto, and the Schedule of
--------- -----------
Holders attached hereto as Exhibit A shall be revised and updated accordingly.
- ------- ---------
(m) Termination of Agreement. All rights granted hereunder will
------------------------
expire and this Agreement will be terminated on the earlier of (i) the 4th
anniversary of the date of this Agreement, (ii) for any individual Shareholder,
at such time as such holder is able to sell all of his or her Registrable
Securities pursuant to Rule 144(k) under the Securities Act (or any similar rule
then in force) in one transaction or (iii) at such time as the Company has
registered the Registrable Securities via a shelf registration on Form S-3 (or a
successor form) and has kept such Form S-3 effective for at least one year.
Notwithstanding the foregoing, in the event that a holder of Registrable
Securities is unable to sell all of his or her then-remaining Registrable
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Securities pursuant to Rule 144(k) in a single transaction as of the 4th
anniversary of the date of this Agreement (where, for example, such holder is
deemed to be an "Affiliate" of the Company, as defined in the Securities Act),
the Agreement shall be extended until the 6th anniversary of the date of this
Agreement only with regard to such holder of Registrable Securities.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ONEMAIN.COM, INC.
By: /s/ Stephen E. Smith
-------------------------------
Stephen E. Smith
President
/s/ Stephen E. Smith
------------------------------------
Stephen E. Smith
/s/ Dewey K. Shay
------------------------------------
Dewey K. Shay
/s/ Jonathan J. Ledecky
------------------------------------
Jonathan J. Ledecky
The Exhibits to this Registration Rights Agreement are not included with this
Registration Statement on Form S-1. The Registrant will provide these Exhibits
upon the request of the Securities and Exchange Commission.
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<PAGE>
EXHIBIT 10.18
ONEMAIN.COM, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. PURPOSE................................................................................................... 1
2. DEFINITIONS............................................................................................... 1
3. ADMINISTRATION OF THE PLAN................................................................................ 5
3.1. Board............................................................................................... 5
3.2. Committee........................................................................................... 5
3.3. Awards.............................................................................................. 5
3.4. No Liability........................................................................................ 6
4. STOCK SUBJECT TO THE PLAN................................................................................. 7
5. EFFECTIVE DATE AND TERM OF THE PLAN....................................................................... 7
5.1. Effective Date...................................................................................... 7
5.2. Term................................................................................................ 7
6. OPTION GRANTS............................................................................................. 8
6.1. Company or Subsidiary Employees; Service Providers; Other Persons................................... 8
6.2. Successive Awards................................................................................... 8
6.3. Reload Options...................................................................................... 8
7. LIMITATIONS ON GRANTS..................................................................................... 8
7.1. Limitation on Shares of Stock Subject to Grants and Cash Awards..................................... 8
7.2. Limitations on Incentive Stock Options.............................................................. 9
8. AWARD AGREEMENT........................................................................................... 9
9. OPTION PRICE.............................................................................................. 9
10. VESTING, TERM AND EXERCISE OF OPTIONS..................................................................... 10
10.1. Vesting and Option Period.......................................................................... 10
10.2. Term............................................................................................... 10
10.3. Acceleration....................................................................................... 10
10.4. Termination of Employment or Other Relationship.................................................... 10
10.5. Rights in the Event of Death....................................................................... 11
10.6. Rights in the Event of Disability.................................................................. 11
10.7. Limitations on Exercise of Option.................................................................. 11
10.8. Method of Exercise................................................................................. 11
10.9. Delivery of Stock Certificates..................................................................... 12
11. GRANTS TO OUTSIDE DIRECTORS............................................................................... 12
11.1. Initial Grants of Options.......................................................................... 12
11.2. Subsequent Grants of Options....................................................................... 13
12. STOCK APPRECIATION RIGHTS................................................................................. 13
12.1. Right to Payment................................................................................... 13
12.2. Other Terms........................................................................................ 13
13. TRANSFERABILITY OF OPTIONS................................................................................ 13
13.1. Transferability of Options......................................................................... 13
</TABLE>
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<TABLE>
<S> <C>
13.2. Family Transfers................................................................................... 14
14. RESTRICTED STOCK.......................................................................................... 14
14.1. Grant of Restricted Stock or Restricted Stock Units................................................ 14
14.2. Restrictions....................................................................................... 14
14.3. Restricted Stock Certificates...................................................................... 15
14.4. Rights of Holders of Restricted Stock.............................................................. 15
14.5. Rights of Holders of Restricted Stock Units........................................................ 15
14.6. Termination of Employment or Other Relationship.................................................... 15
14.7. Rights in the Event of Death....................................................................... 16
14.8. Rights in the Event of Disability.................................................................. 16
14.9. Delivery of Stock and Payment Therefor............................................................. 16
15. DEFERRED STOCK AWARDS..................................................................................... 17
15.1. Nature of Deferred Stock Awards.................................................................... 17
15.2. Election to Receive Deferred Stock Awards in Lieu of Compensation.................................. 17
15.3. Rights as a Stockholder............................................................................ 17
15.4. Restrictions....................................................................................... 17
15.5. Termination........................................................................................ 17
16. UNRESTRICTED STOCK AWARDS................................................................................. 18
16.1. Grant or Sale of Unrestricted Stock................................................................ 18
17. PERFORMANCE STOCK AWARDS.................................................................................. 18
17.1. Nature of Performance Stock Awards................................................................. 18
17.2. Rights as a Stockholder............................................................................ 18
17.3. Termination........................................................................................ 19
17.4. Acceleration, Waiver, Etc.......................................................................... 19
18. DIVIDEND EQUIVALENT RIGHTS................................................................................ 19
18.1. Dividend Equivalent Rights......................................................................... 19
18.2. Interest Equivalents............................................................................... 19
18.3. Termination........................................................................................ 20
19. CERTAIN PROVISIONS APPLICABLE TO AWARDS................................................................... 20
19.1. Stand-Alone, Additional, Tandem, and Substitute Awards............................................. 20
19.2. Term of Awards..................................................................................... 20
19.3. Form and Timing of Payment Under Awards; Deferrals................................................. 20
19.4. Performance and Annual Incentive Awards............................................................ 21
19.4.1. Performance Conditions.................................................................... 21
19.4.2. Performance Awards Granted to Designated Covered Employees............................... 21
19.4.3. Annual Incentive Awards Granted to Designated Covered Employees.......................... 23
19.4.4. Written Determinations.................................................................... 24
19.4.5. Status of Section 19.4.3 and Section 19.4.2 Awards Under Code Section 162(m)............. 25
20. PARACHUTE LIMITATIONS..................................................................................... 25
21. REQUIREMENTS OF LAW....................................................................................... 26
21.1. General............................................................................................ 26
</TABLE>
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<TABLE>
<S> <C>
21.2. Rule 16b-3......................................................................................... 27
22. AMENDMENT AND TERMINATION OF THE PLAN..................................................................... 27
23. EFFECT OF CHANGES IN CAPITALIZATION....................................................................... 28
23.1. Changes in Stock................................................................................... 28
23.2. Reorganization in Which the Company Is the Surviving Entity and in Which No Change of Control
Occurs............................................................................................. 28
23.3. Reorganization, Sale of Assets or Sale of Stock Which Involves a Change of Control................. 28
23.4. Adjustments........................................................................................ 29
23.5. No Limitations on Company.......................................................................... 29
24. DISCLAIMER OF RIGHTS...................................................................................... 29
25. NONEXCLUSIVITY OF THE PLAN................................................................................ 30
26. WITHHOLDING TAXES......................................................................................... 30
27. CAPTIONS.................................................................................................. 31
28. OTHER PROVISIONS.......................................................................................... 31
29. NUMBER AND GENDER......................................................................................... 31
30. SEVERABILITY.............................................................................................. 31
31. GOVERNING LAW............................................................................................. 31
</TABLE>
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ONEMAIN.COM, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
OneMain.com, Inc., a Delaware corporation (the "Company"), sets forth herein
the terms of its 1999 Stock Option and Incentive Plan (the "Plan") as follows:
1. PURPOSE
The purpose of the Plan is to enhance the Company's ability to attract,
retain, and compensate highly qualified officers, key employees, and other
persons, and to motivate such officers, key employees, and other persons to
serve the Company and its affiliates (as defined herein) and to expend maximum
effort to improve the business results and earnings of the Company, by providing
to such officers, key employees and other persons an opportunity to acquire or
increase a direct proprietary interest in the operations and future success of
the Company and with other financial incentives. To this end, the Plan provides
for the grant of stock options, stock appreciation rights, restricted stock,
restricted stock units, deferred stock awards, unrestricted stock awards,
performance stock awards, dividend equivalent rights, performance awards and
annual incentive awards in accordance with the terms hereof. Stock options
granted under the Plan may be non-qualified stock options or incentive stock
options, as provided herein.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including Award
Agreements), the following definitions shall apply:
2.1 "affiliate" of, or person "affiliated" with, a person means any
company or other trade or business that controls, is controlled by or is under
common control with such person within the meaning of Rule 405 of Regulation C
under the Securities Act.
2.2 "Annual Incentive Award" means a conditional right granted to a
Grantee under SECTION 19.4.3 hereof to receive a cash payment, Stock or other
Award, unless otherwise determined by the Committee, after the end of a
specified fiscal year.
2.3 "Award" means a grant of an Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Deferred Stock, Unrestricted Stock,
Performance Stock, Dividend Equivalent Rights, Performance or Annual Incentive
Awards under the Plan.
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2.4 "Award Agreement" means the stock option agreement, stock appreciation
rights agreement, restricted stock agreement, restricted stock unit agreement,
deferred stock award agreement, unrestricted stock award agreement, performance
stock award agreement, dividend equivalent rights agreement, performance award
agreement, annual incentive award agreement or other written agreement between
the Company and a Grantee that evidences and sets out the terms and conditions
of an Award.
2.5 "Benefit Arrangement" shall have the meaning set forth in SECTION 20
hereof.
2.6 "Board" means the Board of Directors of the Company.
2.7 "Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended.
2.8 "Committee" means a committee of, and designated from time to time by
resolution of, the Board, which shall consist of no fewer than two members of
the Board, none of whom shall be an officer or other salaried employee of the
Company or any affiliate of the Company.
2.9 "Company" means OneMain.com, Inc.
2.10 "Covered Employee" means a Grantee who is a Covered Employee within
the meaning of Section 162(m)(3) of the Code.
2.11 "Deferred Stock" means a right, granted to a Grantee under SECTION 15
hereof, to receive Stock, cash or a combination thereof at the end of a
specified deferral period.
2.12 "Dividend Equivalent" means a right, granted to a Grantee under
SECTION 18 hereof, to receive cash, Stock, other Awards or other property equal
in value to dividends paid with respect to a specified number of shares of
Stock, or other periodic payments.
2.13 "Effective Date" means December 23, 1998, the date on which the Plan
was adopted by the Board.
2.14 "Exchange Act" means the Securities Exchange Act of 1934, as now in
effect or as hereafter amended.
2.15 "Fair Market Value" means the value of a share of Stock, determined as
follows: if on the Grant Date or other determination date the Stock is listed
on an established national or regional stock exchange, is admitted to quotation
on the NASDAQ National Market, or is publicly traded on an established
securities market,
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the Fair Market Value of a share of Stock shall be the closing price of the
Stock on such exchange or in such market (the highest such closing price if
there is more than one such exchange or market) on the Grant Date or such other
determination date (or if there is no such reported closing price, the Fair
Market Value shall be the mean between the highest bid and lowest asked prices
or between the high and low sale prices on such trading day) or, if no sale of
Stock is reported for such trading day, on the next preceding day on which any
sale shall have been reported. If the Stock is not listed on such an exchange,
quoted on such system or traded on such a market, Fair Market Value shall be the
value of the Stock as determined by the Board in good faith.
2.16 "Grant" means an award of an Option, Stock Appreciation Right,
Restricted Stock, Restricted Stock Unit, Deferred Stock, Unrestricted Stock,
Performance Stock, or Dividend Equivalent Rights under the Plan.
2.17 "Grant Date" means, as determined by the Board or authorized
Committee, (i) the date as of which the Board or such Committee approves an
Award, (ii) the date on which the recipient of such Award first became an
employee of or otherwise entered into a relationship with the Company or an
affiliate of the Company or (iii) such other date as may be specified by the
Board or such Committee.
2.18 "Grantee" means a person who receives or holds a grant of an Option,
Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Deferred
Stock, Unrestricted Stock, Performance Stock, Performance or Annual Incentive
Awards, or Dividend Equivalent Rights under the Plan.
2.19 "Immediate Family Members" means the spouse, children and
grandchildren of the Grantee.
2.20 "Incentive Stock Option" means an "incentive stock option" within the
meaning of Section 422 of the Code, or the corresponding provision of any
subsequently enacted tax statute, as amended from time to time.
2.21 "Option" means an option to purchase one or more shares of Stock
pursuant to the Plan.
2.22 "Option Period" means the period during which Options may be exercised
as set forth in SECTION 10 hereof.
2.23 "Option Price" means the purchase price for each share of Stock
subject to an Option.
2.24 "Other Agreement" shall have the meaning set forth in SECTION 20
hereof.
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2.25 "Outside Director" means a member of the Board who is not an officer
or employee of the Company.
2.26 "Performance Stock Award" means Awards granted pursuant to SECTION 17.
2.27 "Plan" means this OneMain.com, Inc. 1999 Stock Option and Incentive
Plan.
2.28 "Reporting Person" means a person who is required to file reports
under Section 16(a) of the Exchange Act.
2.29 "Restricted Period" means the period during which Restricted Stock or
Restricted Stock Units are subject to restrictions or conditions pursuant to
SECTION 14.2 hereof.
2.30 "Restricted Stock" means shares of Stock, awarded to a Grantee
pursuant to SECTION 14 hereof, that are subject to restrictions and to a risk of
forfeiture.
2.31 "Restricted Stock Unit" means a unit awarded to a Grantee pursuant to
SECTION 14 hereof, which represents a conditional right to receive a share of
Stock in the future, and which is subject to restrictions and to a risk of
forfeiture.
2.32 "Securities Act" means the Securities Act of 1933, as now in effect or
as hereafter amended.
2.33 "Service Provider" means a consultant or adviser to the Company, a
manager of the Company's properties or affairs, or other similar service
provider or affiliate of the Company, and employees of any of the foregoing, as
such persons may be designated from time to time by the Board pursuant to
SECTION 6 hereof.
2.34 "Stock" means the common stock, par value $0.001 per share, of the
Company.
2.35 "Stock Appreciation Rights" or "SAR" means a right granted to a
Grantee under SECTION 12 hereof.
2.36 "Subsidiary" means any "subsidiary corporation" of the Company within
the meaning of Section 424(f) of the Code.
2.37 "Termination Date" shall be the date upon which an Option shall
terminate or expire, as set forth in SECTION 10.2 hereof.
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2.38 "Unrestricted Stock Award" means any Award granted pursuant to SECTION
16.
3. ADMINISTRATION OF THE PLAN
3.1. BOARD
The Board shall have such powers and authorities related to the
administration of the Plan as are consistent with the Company's certificate of
incorporation and by-laws and applicable law. The Board shall have full power
and authority to take all actions and to make all determinations required or
provided for under the Plan, any Award or any Award Agreement, and shall have
full power and authority to take all such other actions and make all such other
determinations not inconsistent with the specific terms and provisions of the
Plan that the Board deems to be necessary or appropriate to the administration
of the Plan, any Award or any Award Agreement. All such actions and
determinations shall be by the affirmative vote of a majority of the members of
the Board present at a meeting or by unanimous consent of the Board executed in
writing in accordance with the Company's articles of incorporation and by-laws
and applicable law. The interpretation and construction by the Board of any
provision of the Plan, any Award or any Award Agreement shall be final and
conclusive. As permitted by law, the Board may delegate its authority under the
Plan to a member of the Board of Directors or an executive officer of the
Company.
3.2. COMMITTEE.
The Board from time to time may delegate to a Committee such powers and
authorities related to the administration and implementation of the Plan, as set
forth in SECTION 3.1 above and in other applicable provisions, as the Board
shall determine, consistent with the certificate of incorporation and by-laws of
the Corporation and applicable law. In the event that the Plan, any Award or any
Award Agreement entered into hereunder provides for any action to be taken by or
determination to be made by the Board, such action may be taken or such
determination may be made by the Committee if the power and authority to do so
has been delegated to the Committee by the Board as provided for in this
Section. Unless otherwise expressly determined by the Board, any such action or
determination by the Committee shall be final, binding and conclusive. As
permitted by law, the Committee may delegate its authority under the Plan to a
member of the Board of Directors or an executive officer of the Company.
3.3. AWARDS
Subject to the other terms and conditions of the Plan, the Board shall have
full and final authority (i) to designate Grantees, (ii) to determine the type
or types of Awards to be made to a Grantee, (iii) to determine the number of
shares of Stock to be
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<PAGE>
subject to an Award,(iv) to establish the terms and conditions of each Award
(including, but not limited to, the exercise price of any Option, the nature and
duration of any restriction or condition (or provision for lapse thereof)
relating to the vesting, exercise, transfer, or forfeiture of an Award or the
shares of Stock subject thereto, and any terms or conditions that may be
necessary to qualify Options as Incentive Stock Options), (v) to prescribe the
form of each Award Agreement evidencing an Award, and (vi) to amend, modify, or
supplement the terms of any outstanding Award. Such authority specifically
includes the authority, in order to effectuate the purposes of the Plan but
without amending the Plan, to modify Awards to eligible individuals who are
foreign nationals or are individuals who are employed outside the United States
to recognize differences in local law, tax policy, or custom. As a condition to
any subsequent Award, the Board shall have the right, at its discretion, to
require Grantees to return to the Company Awards previously made under the Plan.
Subject to the terms and conditions of the Plan, any such new Award shall be
upon such terms and conditions as are specified by the Board at the time the new
Award is made.
3.4. NO LIABILITY.
No member of the Board or of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Award or
Award Agreement.
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4. STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in SECTION 23 hereof, the number of
shares of Stock available for issuance under the Plan shall be 5,000,000, no
more than 1,250,000 of which may be issued pursuant to awards of other than
Options. Stock issued or to be issued under the Plan shall be authorized but
unissued shares. If any shares covered by a Grant are not purchased or are
forfeited, or if a Grant otherwise terminates without delivery of any Stock
subject thereto, then the number of shares of Stock counted against the
aggregate number of shares available under the Plan with respect to such Grant
shall, to the extent of any such forfeiture or termination, again be available
for making Grants under the Plan.
5. EFFECTIVE DATE AND TERM OF THE PLAN
5.1. EFFECTIVE DATE.
The Plan shall be effective as of the Effective Date, subject to approval
of the Plan within one year of the Effective Date, by a majority of the votes
cast on the proposal at a meeting of shareholders, provided that the total votes
cast represent a majority of all shares entitled to vote. Upon approval of the
Plan by the shareholders of the Company as set forth above, all Awards made
under the Plan on or after the Effective Date shall be fully effective as if the
shareholders of the Company had approved the Plan on the Effective Date. If the
shareholders fail to approve the Plan within one year after the Effective Date,
any Awards made hereunder shall be null and void and of no effect.
5.2. TERM.
The Plan has no termination date; however, no Incentive Stock Option may be
granted on or after the tenth anniversary of the Effective Date.
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6. OPTION GRANTS
6.1. COMPANY OR SUBSIDIARY EMPLOYEES; SERVICE PROVIDERS; OTHER PERSONS
Awards (including Grants of Incentive Stock Options) may be made under the
Plan to: (i) any employee of, or a Service Provider to, the Company or of any
Subsidiary, including any such employee who is an officer or director of the
Company or of any Subsidiary, as the Board shall determine and designate from
time to time, and (ii) any other individual whose participation in the Plan is
determined to be in the best interests of the Company by the Board.
6.2. SUCCESSIVE AWARDS.
An eligible person may receive more than one Award, subject to such
restrictions as are provided herein.
6.3. RELOAD OPTIONS.
At the discretion of the Board and subject to such restrictions, terms and
conditions as the Board may establish, Options granted under the Plan may
include a "reload" feature pursuant to which a Grantee exercising an Option by
the delivery of a number of shares of Stock in accordance with SECTION 10.8
hereof would automatically be granted an additional Option (with an exercise
price equal to the Fair Market Value of the Stock on the date the additional
Option is granted and with such other terms as the Board may provide) to
purchase that number of shares of Stock equal to the number delivered to
exercise the original Option with an Option term equal to the remainder of the
original Option term unless the Board otherwise determines in the Option Award
Agreement for the original grant.
7. LIMITATIONS ON GRANTS
7.1. LIMITATION ON SHARES OF STOCK SUBJECT TO GRANTS AND CASH AWARDS.
During any time when the Company has a class of equity security registered
under Section 12 of the Exchange Act, the maximum number of shares of Stock
subject to Options that can be awarded under the Plan to any person eligible for
a Grant under SECTION 6 hereof is 1,000,000 per year. During any time when the
Company has a class of equity security registered under Section 12 of the
Exchange Act, the maximum number of shares that can be awarded under the Plan,
other than pursuant to an Option to any person eligible for a Grant under
SECTION 6 hereof is 250,000 per year. The maximum amount that may be earned as
an Annual Incentive Award or other cash Award in any fiscal year by any one
Grantee shall be
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$300,000 and the maximum amount that may be earned as a Performance Award or
other cash Award in respect of a performance period by any one Grantee shall be
$900,000.
7.2. LIMITATIONS ON INCENTIVE STOCK OPTIONS.
An Option shall constitute an Incentive Stock Option only (i) if the
Grantee of such Option is an employee of the Company or any Subsidiary of the
Company; (ii) to the extent specifically provided in the related Award
Agreement; and (iii) to the extent that the aggregate Fair Market Value
(determined at the time the Option is granted) of the shares of Stock with
respect to which all Incentive Stock Options held by such Grantee become
exercisable for the first time during any calendar year (under the Plan and all
other plans of the Grantee's employer and its affiliates) does not exceed
$100,000. This limitation shall be applied by taking Options into account in the
order in which they were granted.
8. AWARD AGREEMENT
Each Award granted pursuant to the Plan shall be evidenced by an Award
Agreement, to be executed by the Company and by the Grantee, in such form or
forms as the Board shall from time to time determine. Award Agreements granted
from time to time or at the same time need not contain similar provisions but
shall be consistent with the terms of the Plan. Each Award Agreement evidencing
a Grant of Options shall specify whether such Options are intended to be non-
qualified stock options or Incentive Stock Options, and in the absence of such
specification such options shall be deemed non-qualified stock options.
9. OPTION PRICE
The Option Price of each Option shall be fixed by the Board and stated in
the Award Agreement evidencing such Option. The Option Price shall be the
aggregate Fair Market Value on the Grant Date of the shares of Stock subject to
the Option; provided, however, that in the event that a Grantee would otherwise
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be ineligible to receive an Incentive Stock Option by reason of the provisions
of Sections 422(b)(6) and 424(d) of the Code (relating to ownership of more than
ten percent of the Company's outstanding Stock), the Option Price of an Option
granted to such Grantee that is intended to be an Incentive Stock Option shall
be not less than the greater of the par value of a share of Stock or 110 percent
of the Fair Market Value of a share of Stock on the Grant Date. In no case
shall the Option Price of any Option be less than the par value of a share of
Stock.
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10. VESTING, TERM AND EXERCISE OF OPTIONS
10.1. VESTING AND OPTION PERIOD.
Subject to SECTIONS 10.2 AND 23.3 hereof, each Option granted under the
Plan shall become exercisable at such times and under such conditions as shall
be determined by the Board and stated in the Award Agreement. For purposes of
this SECTION 10.1, fractional numbers of shares of Stock subject to an Option
shall be rounded down to the next nearest whole number. The period during which
any Option shall be exercisable shall constitute the "Option Period" with
respect to such Option.
10.2. TERM.
Each Option granted under the Plan shall terminate, and all rights to
purchase shares of Stock thereunder shall cease, upon the expiration of ten
years from the date such Option is granted, or under such circumstances and on
such date prior thereto as is set forth in the Plan or as may be fixed by the
Board and stated in the Award Agreement relating to such Option (the
"Termination Date"); provided, however, that in the event that the Grantee would
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otherwise be ineligible to receive an Incentive Stock Option by reason of the
provisions of Sections 422(b)(6) and 424(d) of the Code (relating to ownership
of more than ten percent of the outstanding Stock), an Option granted to such
Grantee that is intended to be an Incentive Stock Option shall not be
exercisable after the expiration of five years from its Grant Date.
10.3. ACCELERATION.
Any limitation on the exercise of an Option contained in any Award
Agreement may be rescinded, modified or waived by the Board, in its sole
discretion, at any time and from time to time after the Grant Date of such
Option, so as to accelerate the time at which the Option may be exercised.
Notwithstanding any other provision of the Plan, no Option shall be exercisable
in whole or in part prior to the date the Plan is approved by the shareholders
of the Company as provided in SECTION 5.1 hereof.
10.4. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Upon the termination of a Grantee's employment or other relationship with
the Company other than by reason of death or "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code), any Option or portion
thereof held by such Grantee that has not vested in accordance with the
provisions of SECTION 10.1 hereof shall terminate immediately, and any Option or
portion thereof that has vested in accordance with the provisions of SECTION
10.1 hereof but has not been exercised shall terminate at the close of business
on the 90th day following the Grantee's termination of employment or other
relationship, unless the Board, in its discretion, extends the period during
which the Option may be exercised (which period may not be extended beyond the
original term of the Option). Upon termination of an Option or portion thereof,
the Grantee shall have no further right to
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purchase shares of Stock pursuant to such Option or portion thereof. Whether a
leave of absence or leave on military or government service shall constitute a
termination of employment or other relationship for purposes of the Plan shall
be determined by the Board, which determination shall be final and conclusive.
For purposes of the Plan, a termination of employment, service or other
relationship shall not be deemed to occur if the Grantee is immediately
thereafter a director of the Company.
10.5. RIGHTS IN THE EVENT OF DEATH.
If a Grantee dies while employed by or providing services to the Company,
all Options granted to such Grantee shall fully vest on the date of death, and
the executors or Boards or legatees or distributees of such Grantee's estate
shall have the right, at any time within one year after the date of such
Grantee's death (or such longer period as the Board, in its discretion, may
determine prior to the expiration of such one-year period) and prior to
termination of the Option pursuant to SECTION 10.2 above, to exercise any Option
held by such Grantee at the date of such Grantee's death.
10.6. RIGHTS IN THE EVENT OF DISABILITY.
If a Grantee terminates employment or other relationship with the Company
by reason of the "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code) of such Grantee, such Grantee's Options shall continue to
vest, and shall be exercisable to the extent that they are vested, for a period
of one year after such termination of employment or service (or such longer
period as the Board, in its discretion, may determine prior to the expiration of
such one-year period), subject to earlier termination of the Option as provided
in SECTION 10.2 above. Whether a termination of employment or service is to be
considered by reason of "permanent and total disability" for purposes of the
Plan shall be determined by the Board, which determination shall be final and
conclusive.
10.7. LIMITATIONS ON EXERCISE OF OPTION.
Notwithstanding any other provision of the Plan, in no event may any Option
be exercised, in whole or in part, prior to the date the Plan is approved by the
shareholders of the Company as provided herein, or after ten years following the
date upon which the Option is granted, or after the occurrence of an event
referred to in SECTION 23 hereof which results in termination of the Option.
10.8. METHOD OF EXERCISE.
An Option that is exercisable may be exercised by the Grantee's delivery to
the Company of written notice of exercise on any business day, at the Company's
principal office, addressed to the attention of the Board. Such notice shall
specify the number of shares of Stock with respect to which the Option is being
exercised and shall be accompanied by payment in full of the Option Price of the
shares for which the Option is being exercised. The minimum number of shares of
Stock with respect to which an Option may be exercised, in whole or in part, at
any time shall be the
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lesser of (i) 100 shares or such lesser number set forth in the applicable Award
Agreement and (ii) the maximum number of shares available for purchase under the
Option at the time of exercise. Payment of the Option Price for the shares
purchased pursuant to the exercise of an Option shall be made (i) in cash or in
cash equivalents; (ii) through the tender to the Company of shares of Stock,
which shares, if acquired from the Company, shall have been held for at least
six months and which shall be valued, for purposes of determining the extent to
which the Option Price has been paid thereby, at their Fair Market Value on the
date of exercise; or (iii) by a combination of the methods described in (i) and
(ii). The Board may provide, by inclusion of appropriate language in an Award
Agreement, that payment in full of the Option Price need not accompany the
written notice of exercise provided that the notice of exercise directs that the
certificate or certificates for the shares of Stock for which the Option is
exercised be delivered to a licensed broker acceptable to the Company as the
agent for the individual exercising the Option and, at the time such certificate
or certificates are delivered, the broker tenders to the Company cash (or cash
equivalents acceptable to the Company) equal to the Option Price for the shares
of Stock purchased pursuant to the exercise of the Option plus the amount (if
any) of federal and/or other taxes which the Company may in its judgment, be
required to withhold with respect to the exercise of the Option. An attempt to
exercise any Option granted hereunder other than as set forth above shall be
invalid and of no force and effect. Unless otherwise stated in the applicable
Award Agreement, an individual holding or exercising an Option shall have none
of the rights of a shareholder (for example, the right to receive cash or
dividend payments or distributions attributable to the subject shares of Stock
or to direct the voting of the subject shares of Stock ) until the shares of
Stock covered thereby are fully paid and issued to him. Except as provided in
SECTION 23 hereof, no adjustment shall be made for dividends, distributions or
other rights for which the record date is prior to the date of such issuance.
10.9. DELIVERY OF STOCK CERTIFICATES.
Promptly after the exercise of an Option by a Grantee and the payment in
full of the Option Price, such Grantee shall be entitled to the issuance of a
stock certificate or certificates evidencing his or her ownership of the shares
of Stock subject to the Option.
11. GRANTS TO OUTSIDE DIRECTORS
11.1. INITIAL GRANTS OF OPTIONS.
Each Outside Director who is initially elected to the Board on or after the
Effective Date shall, upon the date of his or her initial election by the Board
or the shareholders of the Company, automatically be awarded a Grant of an
Option, which shall not be an Incentive Stock Option, to purchase 25,000 shares
of Stock (which amount shall be subject to adjustment as provided in SECTION
23).
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11.2. SUBSEQUENT GRANTS OF OPTIONS.
Immediately following each Annual Meeting of Stockholders of the Company
held after the Effective Date, each Outside Director then duly elected and
serving (other than an Outside Director initially elected to the Board at such
Annual Meeting of Shareholders) shall automatically be awarded a Grant of an
Option, which shall not be an Incentive Stock Option, to purchase 5,000 shares
of Stock (which amount shall be subject to adjustment as provided in SECTION
23); provided, however, that no Outside Director shall be eligible to receive a
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Grant of Options under this SECTION 11.2 unless such person attended, in person
or by telephone, at least seventy-five percent of the meetings held by the Board
during the immediately preceding calendar year (or such portion thereof during
which the Outside Director served on the Board).
12. STOCK APPRECIATION RIGHTS
The Board each is authorized to grant SARs to Grantees on the following
terms and conditions:
12.1. RIGHT TO PAYMENT.
A SAR shall confer on the Grantee to whom it is granted a right to receive,
upon exercise thereof, the excess of (A) the Fair Market Value of one share of
Stock on the date of exercise over (B) the grant price of the SAR as determined
by the Board. The grant price of an SAR shall not be less than the Fair Market
Value of a share of Stock on the date of grant except as provided in SECTION
19.1.
12.2. OTHER TERMS.
The Board shall determine at the date of grant or thereafter, the time or
times at which and the circumstances under which a SAR may be exercised in whole
or in part (including based on achievement of performance goals and/or future
service requirements), the time or times at which SARs shall cease to be or
become exercisable following termination of employment or upon other conditions,
the method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed to be
delivered to Grantees, whether or not a SAR shall be in tandem or in combination
with any other Award, and any other terms and conditions of any SAR. SARs may
be either freestanding or in tandem with other Awards.
13. TRANSFERABILITY OF OPTIONS
13.1. TRANSFERABILITY OF OPTIONS
Except as provided in SECTION 13.2, during the lifetime of a Grantee, only
the Grantee (or, in the event of legal incapacity or incompetency, the Grantee's
guardian or legal representative) may exercise an Option. Except as provided in
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SECTION 13.2, no Option shall be assignable or transferable by the Grantee to
whom it is granted, other than by will or the laws of descent and distribution.
13.2. FAMILY TRANSFERS.
If authorized in the applicable Award Agreement, a Grantee may transfer all
or part of an Option which is not an Incentive Stock Option to (i) any Immediate
Family Member, (ii) a trust or trusts for the exclusive benefit of any Immediate
Family Member, or (iii) a partnership in which Immediate Family Members are the
only partners, provided that (x) there may be no consideration for any such
transfer, and (y) subsequent transfers of transferred Options are prohibited
except those in accordance with this SECTION 13.2 or by will or the laws of
descent and distribution. Following transfer, any such Option shall continue to
be subject to the same terms and conditions as were applicable immediately prior
to transfer, provided that for purposes of SECTION 13.2 hereof the term
"Grantee" shall be deemed to refer the transferee. The events of termination of
the employment or other relationship of SECTION 10.4 hereof shall continue to be
applied with respect to the original Grantee, following which the Option shall
be exercisable by the transferee only to the extent, and for the periods
specified in SECTIONS 10.4, 10.5 or 10.6.
14. RESTRICTED STOCK
14.1. GRANT OF RESTRICTED STOCK OR RESTRICTED STOCK UNITS.
The Board may from time to time grant Restricted Stock or Restricted Stock
Units to persons eligible to receive Awards under SECTION 6 hereof, subject to
such restrictions, conditions and other terms as the Board may determine.
14.2. RESTRICTIONS.
At the time a Grant of Restricted Stock or Restricted Stock Units is made,
the Board shall establish a period of time (the "Restricted Period") applicable
to such Restricted Stock or Restricted Stock Units. Each Grant of Restricted
Stock or Restricted Stock Units may be subject to a different Restricted Period.
The Board may, in its sole discretion, at the time a Grant of Restricted Stock
or Restricted Stock Units is made, prescribe restrictions in addition to or
other than the expiration of the Restricted Period, including the satisfaction
of corporate or individual performance objectives, which may be applicable to
all or any portion of the Restricted Stock or Restricted Stock Units in
accordance with SECTION 19.4.1 and 19.4.2. Neither Restricted Stock nor
Restricted Stock Units may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of during the Restricted Period or prior to the
satisfaction of any other restrictions prescribed by the Board with respect to
such Restricted Stock or Restricted Stock Units.
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14.3. RESTRICTED STOCK CERTIFICATES.
The Company shall issue, in the name of each Grantee to whom Restricted
Stock has been granted, stock certificates representing the total number of
shares of Restricted Stock granted to the Grantee, as soon as reasonably
practicable after the Grant Date. The Board may provide in an Award Agreement
that either (i) the Secretary of the Company shall hold such certificates for
the Grantee's benefit until such time as the Restricted Stock is forfeited to
the Company or the restrictions lapse, or (ii) such certificates shall be
delivered to the Grantee, provided, however, that such certificates shall bear a
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legend or legends that complies with the applicable securities laws and
regulations and makes appropriate reference to the restrictions imposed under
the Plan and the Award Agreement.
14.4. RIGHTS OF HOLDERS OF RESTRICTED STOCK.
Unless the Board otherwise provides in an Award Agreement, holders of
Restricted Stock shall have the right to vote such Stock and the right to
receive any dividends declared or paid with respect to such Stock. The Board
may provide that any dividends paid on Restricted Stock must be reinvested in
shares of Stock, which may or may not be subject to the same vesting conditions
and restrictions applicable to such Restricted Stock. All distributions, if
any, received by a Grantee with respect to Restricted Stock as a result of any
stock split, stock dividend, combination of shares, or other similar transaction
shall be subject to the restrictions applicable to the original Grant.
14.5. RIGHTS OF HOLDERS OF RESTRICTED STOCK UNITS.
Unless the Board otherwise provides in an Award Agreement, holders of
Restricted Stock Units shall have no rights as stockholders of the Company. The
Board may provide in an Award Agreement evidencing a Grant of Restricted Stock
Units that the holder of such Restricted Stock Units shall be entitled to
receive, upon the Company's payment of a cash dividend on its outstanding Stock,
a cash payment for each Restricted Stock Unit held equal to the per-share
dividend paid on the Stock. Such Award Agreement may also provide that such
cash payment will be deemed reinvested in additional Restricted Stock Units at a
price per unit equal to the Fair Market Value of a share of Stock on the date
that such dividend is paid.
14.6. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Upon the termination of a Grantee's employment or other relationship with
the Company other than by reason of death or "permanent and total disability"
(within the meaning of Section 22(e)(3) of the Code), any Restricted Stock or
Restricted Stock Units held by such Grantee that has not vested, or with respect
to which all applicable restrictions and conditions have not lapsed, shall
immediately be deemed forfeited, unless the Board, in its discretion, determines
otherwise. Upon forfeiture of Restricted Stock or Restricted Stock Units, the
Grantee shall have no further rights
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with respect to such Grant, including but not limited to any right to vote
Restricted Stock or any right to receive dividends with respect to shares of
Restricted Stock or Restricted Stock Units. Whether a leave of absence or leave
on military or government service shall constitute a termination of employment
or other relationship for purposes of the Plan shall be determined by the Board,
which determination shall be final and conclusive. For purposes of the Plan, a
termination of employment, service or other relationship shall not be deemed to
occur if the Grantee is immediately thereafter a director of the Company.
14.7. RIGHTS IN THE EVENT OF DEATH.
Unless otherwise provided in the Award Agreement, if a Grantee dies while
employed by the Company, all Restricted Stock or Restricted Stock Units granted
to such Grantee shall fully vest on the date of death, and the shares of Stock
represented thereby shall be deliverable in accordance with the terms of the
Plan to the executors, administrators, legatees or distributees of the Grantee's
estate.
14.8. RIGHTS IN THE EVENT OF DISABILITY.
Unless otherwise provided in the Award Agreement, if a Grantee terminates
employment or other relationship with the Company by reason of the "permanent
and total disability" (within the meaning of Section 22(e)(3) of the Code) of
such Grantee, such Grantee's Restricted Stock or Restricted Stock Units shall
continue to vest in accordance with the applicable Award Agreement for a period
of one year after such termination of employment or service (or such longer
period as the Board, in its discretion, may determine prior to the expiration of
such one-year period), subject to the earlier forfeiture of such Restricted
Stock or Restricted Stock Units in accordance with the terms of the applicable
Award Agreement. Whether a termination of employment or service is to be
considered by reason of "permanent and total disability" for purposes of the
Plan shall be determined by the Board, which determination shall be final and
conclusive.
14.9. DELIVERY OF STOCK AND PAYMENT THEREFOR.
Upon the expiration or termination of the Restricted Period and the
satisfaction of any other conditions prescribed by the Board, the restrictions
applicable to shares of Restricted Stock or Restricted Stock Units shall lapse,
and, unless otherwise provided in the Award Agreement, upon payment by the
Grantee to the Company, in cash or by check, of the aggregate par value of the
shares of Stock represented by such Restricted Stock or Restricted Stock Units
(or such other higher purchase price determined by the Board), a stock
certificate for such shares shall be delivered, free of all such restrictions,
to the Grantee or the Grantee's beneficiary or estate, as the case may be.
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15. DEFERRED STOCK AWARDS
15.1. NATURE OF DEFERRED STOCK AWARDS.
A Deferred Stock Award is an Award of phantom Stock units to a Grantee,
subject to restrictions and conditions as the Board may determine at the time of
grant. Conditions may be based on continuing employment (or other business
relationship) and/or achievement of pre-established performance goals and
objectives. The grant of a Deferred Stock Award is contingent on the Grantee
executing the Deferred Stock Award Agreement. The terms and conditions of each
such agreement shall be determined by the Board, and such terms and conditions
may differ among individual Awards and Grantees. At the end of the deferral
period, the Deferred Stock Award, to the extent vested, shall be paid to the
Grantee in the form of shares of Stock.
15.2. ELECTION TO RECEIVE DEFERRED STOCK AWARDS IN LIEU OF COMPENSATION.
The Board may, in its sole discretion, permit a Grantee to elect to receive
a portion of the cash compensation or Restricted Stock Award otherwise due to
such Grantee in the form of a Deferred Stock Award. Any such election shall be
made in writing and shall be delivered to the Company no later than the date
specified by the Board and in accordance with rules and procedures established
by the Board. The Board shall have the sole right to determine whether and
under what circumstances to permit such elections and to impose such limitations
and other terms and conditions thereon as the Board deems appropriate.
15.3. RIGHTS AS A STOCKHOLDER.
During the deferral period, a Grantee shall have no rights as a
Stockholder; provided, however, that the Grantee may be credited with Dividend
Equivalent Rights with respect to the phantom Stock units underlying his
Deferred Stock Award, subject to such terms and conditions as the Board may
determine.
15.4. RESTRICTIONS.
A Deferred Stock Award may not be sold, assigned, transferred, pledged or
otherwise encumbered or disposed of during the deferral period.
15.5. TERMINATION.
Except as may otherwise be provided by the Board either in the Award
Agreement or, in writing after the Award Agreement is issued, a Grantee's right
in all Deferred Stock Awards that have not vested shall automatically terminate
upon
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the Grantee's termination of employment or other relationship with the Company
for any reason.
16. UNRESTRICTED STOCK AWARDS
16.1. GRANT OR SALE OF UNRESTRICTED STOCK.
The Board may, in its sole discretion, grant (or sell at par value or such
other higher purchase price determined by the Board) an Unrestricted Stock Award
to any Grantee pursuant to which such Grantee may receive shares of Stock free
of any restrictions ("Unrestricted Stock") under the Plan. Unrestricted Stock
Awards may be granted or sold as described in the preceding sentence in respect
of past services or other valid consideration, or in lieu of any cash
compensation due to such Grantee.
17. PERFORMANCE STOCK AWARDS
17.1. NATURE OF PERFORMANCE STOCK AWARDS.
A Performance Stock Award is an Award entitling the recipient to acquire
shares of Stock upon the attainment of specified performance goals. The Board
may make Performance Stock Awards independent of or in connection with the
granting of any other Award under the Plan. The Board in its sole discretion
shall determine whether and to whom Performance Stock Awards shall be made, the
performance goals applicable under each such Award, the periods during which
performance is to be measured, and all other limitations and conditions
applicable to the awarded Performance Stock; provided, however, that the Board
may rely on the performance goals and other standards applicable to other
performance unit plans of the Company in setting the standards for Performance
Stock Awards under the Plan.
17.2. RIGHTS AS A STOCKHOLDER.
A Grantee receiving a Performance Stock Award shall have the rights of a
Stockholder only as to shares actually received by the Grantee under the Plan
and not with respect to shares subject to the Award but not actually received by
the Grantee. A Grantee shall be entitled to receive a Stock certificate
evidencing the acquisition of Stock under a Performance Stock Award only upon
satisfaction of all conditions specified in the written instrument evidencing
the Performance Stock Award (or in a performance plan adopted by the Board).
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17.3. TERMINATION.
Except as may otherwise be provided by the Board either in the Award
Agreement in writing after the Award Agreement is issued, a Grantee's rights in
all Performance Stock Awards shall automatically terminate upon the Grantee's
termination of employment or other relationship with the Company and its
Subsidiaries for any reason.
17.4. ACCELERATION, WAIVER, ETC.
At any time prior to the Grantee's termination of employment (or other
business relationship) by the Company and its Subsidiaries, the Board may in its
sole discretion accelerate, waive or amend any or all of the goals, restrictions
or conditions imposed under any Performance Stock Award.
18. DIVIDEND EQUIVALENT RIGHTS
18.1. DIVIDEND EQUIVALENT RIGHTS.
A Dividend Equivalent Right is an Award entitling the recipient to receive
credits based on cash distributions that would have been paid on the shares of
Stock specified in the Dividend Equivalent Right (or other award to which it
relates) if such shares had been issued to and held by the recipient. A
Dividend Equivalent Right may be granted hereunder to any Grantee as a component
of another Award or as a freestanding award. The terms and conditions of
Dividend Equivalent Rights shall be specified in the grant. Dividend
Equivalents credited to the holder of a Dividend Equivalent Right may be paid
currently or may be deemed to be reinvested in additional shares of Stock, which
may thereafter accrue additional equivalents. Any such reinvestment shall be at
Fair Market Value on the date of reinvestment. Dividend Equivalent Rights may
be settled in cash or Stock or a combination thereof, in a single installment or
installments, all determined in the sole discretion of the Board. A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement, or payment
of, or lapse of restrictions on, such other award, and that such Dividend
Equivalent Right shall expire or be forfeited or annulled under the same
conditions as such other award. A Dividend Equivalent Right granted as a
component of another Award may also contain terms and conditions different from
such other award.
18.2. INTEREST EQUIVALENTS.
Any Award under this Plan that is settled in whole or in part in cash on a
deferred basis may provide in the grant for interest equivalents to be credited
with
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respect to such cash payment. Interest equivalents may be compounded and shall
be paid upon such terms and conditions as may be specified by the grant.
18.3. TERMINATION.
Except as may otherwise be provided by the Board either in the Award
Agreement or in writing after the Award Agreement is issued, a Grantee's rights
in all Dividend Equivalent Rights or interest equivalents shall automatically
terminate upon the Grantee's termination of employment or other relationship
with the Company and its Subsidiaries for any reason.
19. CERTAIN PROVISIONS APPLICABLE TO AWARDS
19.1. STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS
Awards granted under the Plan may, in the discretion of the Board, be
granted either alone or in addition to, in tandem with, or in substitution or
exchange for, any other Award or any award granted under another plan of the
Company, any Subsidiary, or any business entity to be acquired by the Company or
a Subsidiary, or any other right of a Grantee to receive payment from the
Company or any Subsidiary. Such additional, tandem, and substitute or exchange
Awards may be granted at any time. If an Award is granted in substitution or
exchange for another Award, the Board shall require the surrender of such other
Award in consideration for the grant of the new Award. In addition, Awards may
be granted in lieu of cash compensation, including in lieu of cash amounts
payable under other plans of the Company or any Subsidiary, in which the value
of Stock subject to the Award is equivalent in value to the cash compensation
(for example, Deferred Stock or Restricted Stock), or in which the exercise
price, grant price or purchase price of the Award in the nature of a right that
may be exercised is equal to the Fair Market Value of the underlying Stock minus
the value of the cash compensation surrendered (for example, Options granted
with an exercise price "discounted" by the amount of the cash compensation
surrendered).
19.2. TERM OF AWARDS
The term of each Award shall be for such period as may be determined by the
Board; provided that in no event shall the term of any Option or SAR exceed a
period of ten years (or such shorter term as may be required in respect of an
ISO under Section 422 of the Code).
19.3. FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS
Subject to the terms of the Plan and any applicable Award Agreement,
payments to be made by the Company or a Subsidiary upon the exercise of an
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Option or other Award or settlement of an Award may be made in such forms as the
Board shall determine, including, without limitation, cash, Stock, other Awards
or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis. The settlement of any Award may be
accelerated, and cash paid in lieu of Stock in connection with such settlement,
in the discretion of the Board or upon occurrence of one or more specified
events. Installment or deferred payments may be required by the Board or
permitted at the election of the Grantee on terms and conditions established by
the Board. Payments may include, without limitation, provisions for the payment
or crediting of a reasonable interest rate on installment or deferred payments
or the grant or crediting of Dividend Equivalents or other amounts in respect of
installment or deferred payments denominated in Stock.
19.4. PERFORMANCE AND ANNUAL INCENTIVE AWARDS
19.4.1. PERFORMANCE CONDITIONS
The right of a Grantee to exercise or receive a grant or settlement
of any Award, and the timing thereof, may be subject to such performance
conditions as may be specified by the Board. The Board may use such business
criteria and other measures of performance as it may deem appropriate in
establishing any performance conditions, and may exercise its discretion to
reduce the amounts payable under any Award subject to performance conditions,
except as limited under SECTIONS 19.4.2 AND 19.4.3 hereof in the case of a
Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m). If and to the extent required under Code Section 162(m), any
power or authority relating to a Performance Award or Annual Incentive Award
intended to qualify under Code Section 162(m), shall be exercised by the
Committee and not the Board.
19.4.2. PERFORMANCE AWARDS GRANTED TO DESIGNATED COVERED EMPLOYEES
If and to the extent that the Committee determines that a
Performance Award to be granted to a Grantee who is designated by the Committee
as likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Performance Award shall be contingent upon achievement of
preestablished performance goals and other terms set forth in this SECTION
19.4.2.
(i) Performance Goals Generally. The performance goals for
such Performance Awards shall consist of one or more business
criteria and a targeted level or levels of performance with respect
to each of such criteria, as specified by the Committee consistent
with this SECTION 19.4.2. Performance goals shall be objective and
shall otherwise meet the requirements of Code Section
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162(m) and regulations thereunder including the requirement that the
level or levels of performance targeted by the Committee result in
the achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance Awards
shall be granted, exercised and/or settled upon achievement of any
one performance goal or that two or more of the performance goals
must be achieved as a condition to grant, exercise and/or settlement
of such Performance Awards. Performance goals may differ for
Performance Awards granted to any one Grantee or to different
Grantees.
(ii) Business Criteria. 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), shall be used exclusively by the Committee in
establishing performance goals for such Performance Awards: (1)
total stockholder return; (2) such 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 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. One
or more of the foregoing business criteria shall also be exclusively
used in establishing performance goals for Annual Incentive Awards
granted to a Covered Employee under SECTION 1943 hereof that are
intended to qualify as "performance-based compensation" under Code
Section 162(m).
(iii) Performance Period; Timing For Establishing
Performance Goals. Achievement of performance goals in respect of
such Performance Awards shall be measured over a performance period
of up to ten years, as specified by the Committee. Performance goals
shall be established not later than 90 days after the beginning of
any performance period applicable to such Performance Awards, or at
such other date as may be required or permitted for "performance-
based compensation" under Code Section 162(m).
(iv) Performance Award Pool. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for
purposes of measuring Company performance in connection with
Performance Awards. The amount of such Performance Award pool shall
be based upon the achievement of a performance goal or goals
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based on one or more of the business criteria set forth in SECTION
19.4.2(II) hereof during the given performance period, as specified
by the Committee in accordance with SECTION 19.4.2(III) hereof. The
Committee may specify the amount of the Performance Award pool as a
percentage of any 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.
(v) Settlement of Performance Awards; Other Terms.
Settlement of such Performance Awards shall be in cash, Stock, other
Awards or other property, in the discretion of the Committee. The
Committee may, in its discretion, reduce the amount of a settlement
otherwise to be made in connection with such Performance Awards. The
Committee shall specify the circumstances in which such Performance
Awards shall be paid or forfeited in the event of termination of
employment by the Grantee prior to the end of a performance period
or settlement of Performance Awards.
19.4.3. ANNUAL INCENTIVE AWARDS GRANTED TO DESIGNATED COVERED
EMPLOYEES.
If and to the extent that the Committee determines that an Annual
Incentive Award to be granted to a Grantee who is designated by the Committee as
likely to be a Covered Employee should qualify as "performance-based
compensation" for purposes of Code Section 162(m), the grant, exercise and/or
settlement of such Annual Incentive Award shall be contingent upon achievement
of preestablished performance goals and other terms set forth in this SECTION
19.4.3.
(i) Annual Incentive Award Pool. The Committee may
establish an Annual Incentive Award pool, which shall be an unfunded
pool, for purposes of measuring Company performance in connection
with Annual Incentive Awards. The amount of such Annual Incentive
Award pool shall be based upon the achievement of a performance goal
or goals based on one or more of the business criteria set forth in
19.4.2(II) hereof during the given performance period, as specified
by the Committee in accordance with 19.4.2(III) hereof. The
Committee may specify the amount of the Annual Incentive Award pool
as a percentage of any 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.
(ii) Potential Annual Incentive Awards. Not later than the
end of the 90th day of each fiscal year, or at such other date as
may be required or permitted in the case of Awards intended to be
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"performance-based compensation" under Code Section 162(m), the
Committee shall determine the Eligible Persons who will potentially
receive Annual Incentive Awards, and the amounts potentially payable
thereunder, for that fiscal year, either out of an Annual Incentive
Award pool established by such date under SECTION 19.4.3(I) hereof
or as individual Annual Incentive Awards. In the case of individual
Annual Incentive Awards intended to qualify under Code Section
162(m), the amount potentially payable shall be based upon the
achievement of a performance goal or goals based on one or more of
the business criteria set forth in SECTION 19.4.2(II) hereof in the
given performance year, as specified by the Committee; in other
cases, such amount shall be based on such criteria as shall be
established by the Committee. In all cases, the maximum Annual
Incentive Award of any Grantee shall be subject to the limitation
set forth in SECTION 7.1 hereof.
(iii) Payout of Annual Incentive Awards. After the end of
each fiscal year, the Committee shall determine the amount, if any,
of (A) the Annual Incentive Award pool, and the maximum amount of
potential Annual Incentive Award payable to each Grantee in the
Annual Incentive Award pool, or (B) the amount of potential Annual
Incentive Award otherwise payable to each Grantee. The Committee
may, in its discretion, determine that the amount payable to any
Grantee as an Annual Incentive Award shall be reduced from the
amount of his or her potential Annual Incentive Award, including a
determination to make no Award whatsoever. The Committee shall
specify the circumstances in which an Annual Incentive Award shall
be paid or forfeited in the event of termination of employment by
the Grantee prior to the end of a fiscal year or settlement of such
Annual Incentive Award.
19.4.4. WRITTEN DETERMINATIONS.
All determinations by the Committee as to the establishment of
performance goals, the amount of any Performance Award pool or potential
individual Performance Awards and as to the achievement of performance goals
relating to Performance Awards under SECTION 19.4.2, and the amount of any
Annual Incentive Award pool or potential individual Annual Incentive Awards and
the amount of final Annual Incentive Awards under SECTION 19.4.3, shall be made
in writing in the case of any Award intended to qualify under Code Section
162(m). To the extent required to comply with Code Section 162(m), the Committee
may delegate any responsibility relating to such Performance Awards or Annual
Incentive Awards.
19.4.5. STATUS OF SECTION 19.4.3 AND SECTION 19.4.2 AWARDS
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UNDER CODE SECTION 162(M)
It is the intent of the Company that Performance Awards and Annual
Incentive Awards under SECTION 19.4.2 and SECTION 19.4.3 hereof granted to
persons who are designated by the Committee as likely to be Covered Employees
within the meaning of Code Section 162(m) and regulations thereunder shall, if
so designated by the Committee, constitute "qualified performance-based
compensation" within the meaning of Code Section 162(m) and regulations
thereunder. Accordingly, the terms of SECTION 19.4.2 and SECTION 19.4.3,
including the definitions of Covered Employee and other terms used therein,
shall be interpreted in a manner consistent with Code Section 162(m) and
regulations thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Grantee will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the
Committee, at the time of grant of Performance Awards or an Annual Incentive
Award, as likely to be a Covered Employee with respect to that fiscal year. If
any provision of the Plan or any agreement relating to such Performance Awards
or Annual Incentive Awards does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements.
20. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Plan or of any other agreement,
contract, or understanding heretofore or hereafter entered into by a Grantee
with the Company or any Subsidiary, except an agreement, contract, or
understanding hereafter entered into that expressly modifies or excludes
application of this paragraph (an "Other Agreement"), and notwithstanding any
formal or informal plan or other arrangement for the direct or indirect
provision of compensation to the Grantee (including groups or classes of
Grantees or beneficiaries of which the Grantee is a member), whether or not such
compensation is deferred, is in cash, or is in the form of a benefit to or for
the Grantee (a "Benefit Arrangement"), if the Grantee is a "disqualified
individual," as defined in Section 280G(c) of the Code, any Option, Restricted
Stock or Restricted Stock Unit held by that Grantee and any right to receive any
payment or other benefit under this Plan shall not become exercisable or vested
(i) to the extent that such right to exercise, vesting, payment, or benefit,
taking into account all other rights, payments, or benefits to or for the
Grantee under this Plan, all Other Agreements, and all Benefit Arrangements,
would cause any payment or benefit to the Grantee under this Plan to be
considered a "parachute payment" within the meaning of Section 280G(b)(2) of the
Code as then in effect (a "Parachute Payment") and (ii) if, as a result of
---
receiving a Parachute Payment, the aggregate after-tax amounts received by the
Grantee from the Company under this Plan, all Other Agreements, and all Benefit
Arrangements would be less than the maximum
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after-tax amount that could be received by the Grantee without causing any such
payment or benefit to be considered a Parachute Payment. In the event that the
receipt of any such right to exercise, vesting, payment, or benefit under this
Plan, in conjunction with all other rights, payments, or benefits to or for the
Grantee under any Other Agreement or any Benefit Arrangement would cause the
Grantee to be considered to have received a Parachute Payment under this Plan
that would have the effect of decreasing the after-tax amount received by the
Grantee as described in clause (ii) of the preceding sentence, then the Grantee
shall have the right, in the Grantee's sole discretion, to designate those
rights, payments, or benefits under this Plan, any Other Agreements, and any
Benefit Arrangements that should be reduced or eliminated so as to avoid having
the payment or benefit to the Grantee under this Plan be deemed to be a
Parachute Payment.
21. REQUIREMENTS OF LAW
21.1. GENERAL.
The Company shall not be required to sell or issue any shares of Stock
under any Award if the sale or issuance of such shares would constitute a
violation by the Grantee, any other individual exercising an Option, or the
Company of any provision of any law or regulation of any governmental authority,
including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion, that
the listing, registration or qualification of any shares subject to an Award
upon any securities exchange or under any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the issuance or
purchase of shares hereunder, no shares of Stock may be issued or sold to the
Grantee or any other individual exercising an Option pursuant to such Award
unless such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Company,
and any delay caused thereby shall in no way affect the date of termination of
the Award. Specifically, in connection with the Securities Act, upon the
exercise of any Option or the delivery of any shares of Stock underlying an
Award, unless a registration statement under such Act is in effect with respect
to the shares of Stock covered by such Award, the Company shall not be required
to sell or issue such shares unless the Board has received evidence satisfactory
to it that the Grantee or any other individual exercising an Option may acquire
such shares pursuant to an exemption from registration under the Securities Act.
Any determination in this connection by the Board shall be final, binding, and
conclusive. The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities Act. The Company shall not
be obligated to take any affirmative action in order to cause the exercise of an
Option or the issuance of shares of Stock pursuant to the Plan to comply with
any law or regulation of any governmental authority. As to any jurisdiction that
expressly imposes the requirement that an Option shall not be exercisable until
the shares of Stock covered by such Option are registered or are exempt from
registration, the exercise of such Option (under circumstances in which
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the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
21.2. RULE 16B-3.
During any time when the Company has a class of equity security registered
under Section 12 of the Exchange Act, it is the intent of the Company that
Awards pursuant to the Plan and the exercise of Options granted hereunder will
qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the
extent that any provision of the Plan or action by the Board does not comply
with the requirements of Rule 16b-3, it shall be deemed inoperative to the
extent permitted by law and deemed advisable by the Board, and shall not affect
the validity of the Plan. In the event that Rule 16b-3 is revised or replaced,
the Board may exercise its discretion to modify this Plan in any respect
necessary to satisfy the requirements of, or to take advantage of any features
of, the revised exemption or its replacement.
22. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend, or
terminate the Plan as to any shares of Stock as to which Awards have not been
made; provided, however, that the Board shall not, without approval of the
-------- -------
Company's shareholders, amend the Plan such that it does not comply with the
Code. The Company may retain the right in an Award Agreement to cause a
forfeiture of the gain realized by a Grantee on account of the Grantee taking
actions in "competition with the Company," as defined in the applicable Award
Agreement. Furthermore, the Company may annul an Award if the Grantee is an
employee of the Company or an affiliate and is terminated "for cause" as defined
in the applicable Award Agreement. Except as permitted under this SECTION 22 or
SECTION 23 hereof, no amendment, suspension, or termination of the Plan shall,
without the consent of the Grantee, alter or impair rights or obligations under
any Award theretofore awarded under the Plan.
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23. EFFECT OF CHANGES IN CAPITALIZATION
23.1. CHANGES IN STOCK.
If the number of outstanding shares of Stock is increased or decreased or
the shares of Stock are changed into or exchanged for a different number or
kind of shares or other securities of the Company on account of any
recapitalization, reclassification, stock split, reverse split, combination of
shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by the Company occurring after the Effective Date, the
number and kinds of shares for which grants of Options and other Awards may be
made under the Plan shall be adjusted proportionately and accordingly by the
Company. In addition, the number and kind of shares for which Awards are
outstanding shall be adjusted proportionately and accordingly so that the
proportionate interest of the Grantee immediately following such event shall, to
the extent practicable, be the same as immediately before such event. Any such
adjustment in outstanding Options shall not change the aggregate Option Price
payable with respect to shares that are subject to the unexercised portion of an
Option outstanding but shall include a corresponding proportionate adjustment in
the Option Price per share.
23.2. REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING ENTITY AND IN
WHICH NO CHANGE OF CONTROL OCCURS.
Subject to SECTION 23.3 hereof, if the Company shall be the surviving
entity in any reorganization, merger, or consolidation of the Company with one
or more other entities, any Option theretofore granted pursuant to the Plan
shall pertain to and apply to the securities to which a holder of the number of
shares of Stock subject to such Option would have been entitled immediately
following such reorganization, merger, or consolidation, with a corresponding
proportionate adjustment of the Option Price per share so that the aggregate
Option Price thereafter shall be the same as the aggregate Option Price of the
shares remaining subject to the Option immediately prior to such reorganization,
merger, or consolidation. Subject to any contrary language in an Award Agreement
evidencing an Award, any restrictions applicable to such Grant shall apply as
well to any replacement shares received by the Grantee as a result of the
reorganization, merger or consolidation.
23.3. REORGANIZATION, SALE OF ASSETS OR SALE OF STOCK WHICH INVOLVES A
CHANGE OF CONTROL.
Upon the dissolution or liquidation of the Company or upon a merger,
consolidation, or reorganization of the Company with one or more other entities
in which the Company is not the surviving entity, or upon a sale of
substantially all of the assets of the Company to another entity, or upon any
transaction (including, without limitation, a merger or reorganization in which
the Company is the surviving entity) approved by the Board that results in any
person or entity (or person or
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entities acting as a group or otherwise in concert, owning fifty percent (50%)
or more of the combined voting power of all classes of securities of the
Company), (i) all outstanding shares subject to Grants shall be deemed to have
vested, and all restrictions and conditions applicable to such shares subject to
Grants shall be deemed to have lapsed, immediately prior to the occurrence of
such event, and (ii) all Options outstanding hereunder shall become immediately
exercisable for a period of fifteen days immediately prior to the scheduled
consummation of the event. Any exercise of an Option during such fifteen-day
period shall be conditioned upon the consummation of the event and shall be
effective only immediately before the consummation of the event. Upon
consummation of any such event, the Plan and all outstanding but unexercised
Options shall terminate, except to the extent provision is made in writing in
connection with such transaction for the continuation of the Plan or the
assumption of such Options theretofore granted, or for the substitution for such
Options of new options covering the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares or units and exercise prices, in which event the Plan and Options
theretofore granted shall continue in the manner and under the terms so
provided. The Board shall send written notice of an event that will result in
such a termination to all individuals who hold Options not later than the time
at which the Company gives notice thereof to its shareholders.
23.4. ADJUSTMENTS.
Adjustments under this SECTION 23 related to shares of Stock or securities
of the Company shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. No fractional shares or other
securities shall be issued pursuant to any such adjustment, and any fractions
resulting from any such adjustment shall be eliminated in each case by rounding
downward to the nearest whole share.
23.5. NO LIMITATIONS ON COMPANY.
The making of Awards pursuant to the Plan shall not affect or limit in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations, or changes of its capital or business structure or to merge,
consolidate, dissolve, or liquidate, or to sell or transfer all or any part of
its business or assets.
24. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Award or Award Agreement shall be
construed to confer upon any individual the right to remain in the employ or
service of the Company or any affiliate, or to interfere in any way with any
contractual or other right or authority of the Company either to increase or
decrease the compensation or other payments to any individual at any time, or to
terminate any employment or other relationship between any individual and the
Company. In
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addition, notwithstanding anything contained in the Plan to the contrary, unless
otherwise stated in the applicable Award Agreement, no Award granted under the
Plan shall be affected by any change of duties or position of the Grantee, so
long as such Grantee continues to be a director, officer, consultant or employee
of the Company. The obligation of the Company to pay any benefits pursuant to
this Plan shall be interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed
herein. The Plan shall in no way be interpreted to require the Company to
transfer any amounts to a third party trustee or otherwise hold any amounts in
trust or escrow for payment to any Grantee or beneficiary under the terms of the
Plan. No Grantee shall have any of the rights of a shareholder with respect to
the shares of Stock subject to an Option except to the extent the certificates
for such shares of Stock shall have been issued upon the exercise of the Option.
25. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
shareholders of the Company for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or particular individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan.
26. WITHHOLDING TAXES
The Company or a Subsidiary, as the case may be, shall have the right to
deduct from payments of any kind otherwise due to a Grantee any Federal, state,
or local taxes of any kind required by law to be withheld with respect to the
vesting of or other lapse of restrictions applicable to an Award or upon the
issuance of any shares of Stock upon the exercise of an Option or pursuant to an
Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay
to the Company or the Subsidiary, as the case may be, any amount that the
Company or the Subsidiary may reasonably determine to be necessary to satisfy
such withholding obligation. Subject to the prior approval of the Company or
the Subsidiary, which may be withheld by the Company or the Subsidiary, as the
case may be, in its sole discretion, the Grantee may elect to satisfy such
obligations, in whole or in part, (i) by causing the Company or the Subsidiary
to withhold shares of Stock otherwise issuable to the Grantee or (ii) by
delivering to the Company or the Subsidiary shares of Stock already owned by the
Grantee. The shares of Stock so delivered or withheld shall have an aggregate
Fair Market Value equal to such withholding obligations. The Fair Market Value
of the shares of Stock used to satisfy such withholding obligation shall be
determined by the Company or the Subsidiary as of the date that the amount of
tax to be withheld is to be determined. A Grantee who has made an election
pursuant to this SECTION 26 may satisfy his or her withholding obligation only
with shares of Stock that are not
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subject to any repurchase, forfeiture, unfulfilled vesting, or other similar
requirements.
27. CAPTIONS
The use of captions in this Plan or any Award Agreement is for the
convenience of reference only and shall not affect the meaning of any provision
of the Plan or such Award Agreement.
28. OTHER PROVISIONS
Each Award granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Board, in
its sole discretion.
29. NUMBER AND GENDER
With respect to words used in this Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, etc.,
as the context requires.
30. SEVERABILITY
If any provision of the Plan or any Award Agreement shall be determined to
be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
31. GOVERNING LAW
The validity and construction of this Plan and the instruments evidencing
the Awards granted hereunder shall be governed by the laws of the State of
Delaware (without giving effect to the choice of law provisions thereof).
* * *
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The Plan was duly adopted and approved by the Sole Director of the Company
as of the 23rd day of December, 1998.
_____________________________________
Dewey K. Shay
Secretary
The Plan was duly approved by the stockholders of the Company on the 23rd
day of December, 1998.
_____________________________________
Dewey K. Shay
Secretary
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EXHIBIT 10.19
ONEMAIN.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
----------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. SHARES SUBJECT TO THE PLAN............................................................................... 1
2. ADMINISTRATION........................................................................................... 1
3. INTERPRETATION........................................................................................... 1
4. ELIGIBLE EMPLOYEES....................................................................................... 1
5. PARTICIPATION IN THE PLAN................................................................................ 2
6. OFFERINGS................................................................................................ 2
7. OFFERING PERIODS......................................................................................... 2
8. RIGHTS TO PURCHASE COMMON STOCK; PURCHASE PRICE.......................................................... 2
9. TIMING OF PURCHASE; PURCHASE LIMITATION.................................................................. 3
10. ISSUANCE OF STOCK CERTIFICATES.......................................................................... 4
11. WITHHOLDING OF TAXES.................................................................................... 4
12. ACCOUNT STATEMENTS...................................................................................... 4
13. PARTICIPATION ADJUSTMENT................................................................................ 4
14. CHANGES IN ELECTIONS TO PURCHASE........................................................................ 5
15. VOLUNTARY TERMINATION OF EMPLOYMENT OR DISCHARGE........................................................ 5
16. RETIREMENT OR SEVERANCE................................................................................. 5
17. LAY-OFF, AUTHORIZED LEAVE OR ABSENCE OR DISABILITY...................................................... 6
18. DEATH................................................................................................... 7
19. FAILURE TO MAKE PERIODIC CASH PAYMENTS.................................................................. 7
20. TERMINATION OF PARTICIPATION............................................................................ 7
21. ASSIGNMENT.............................................................................................. 7
22. APPLICATION OF FUNDS.................................................................................... 8
23. NO RIGHT TO CONTINUED EMPLOYMENT........................................................................ 8
24. AMENDMENT OF PLAN....................................................................................... 8
25. EFFECTIVE DATE; TERM AND TERMINATION OF THE PLAN........................................................ 8
26. EFFECT OF CHANGES IN CAPITALIZATION..................................................................... 9
(a) Changes in Stock.................................................................................... 9
(b) Reorganization in Which the Company Is the Surviving Corporation.................................... 9
(c) Reorganization in Which the Company Is Not the Surviving Corporation or Sale of Assets or Stock..... 10
(d) Adjustments......................................................................................... 10
(e) No Limitations on Company........................................................................... 10
27. GOVERNMENTAL REGULATION................................................................................. 10
28. STOCKHOLDER RIGHTS...................................................................................... 11
29. RULE 16b-3.............................................................................................. 11
30. PAYMENT OF PLAN EXPENSES................................................................................ 11
</TABLE>
-i-
<PAGE>
ONEMAIN.COM, INC.
EMPLOYEE STOCK PURCHASE PLAN
The Sole Director of OneMain.com, Inc. (the "Company") has adopted this
Employee Stock Purchase Plan (the "Plan") to enable eligible employees of the
Company and its participating Affiliates (as defined below), through payroll
deductions, to purchase shares of the Company's Common Stock, par value $0.001
per share (the "Common Stock"). The Plan is for the benefit of the employees of
OneMain.com, Inc. and any participating Affiliates. The Plan is intended to
benefit the Company by increasing the employees' interest in the Company's
growth and success and encouraging employees to remain in the employ of the
Company or its participating Affiliates. The provisions of the Plan are set
forth below:
1. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in Section 26 below, the aggregate number
of shares of Common Stock that may be made available for purchase by
participating employees under the Plan is 500,000. The shares issuable under the
Plan may, in the discretion of the Board of Directors of the Company (the
"Board"), be either authorized but unissued shares or treasury shares.
2. ADMINISTRATION.
The Plan shall be administered under the direction of the Compensation
Committee of the Board (the "Committee"). No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan.
3. INTERPRETATION.
It is intended that the Plan will meet the requirements for an "employee
stock purchase plan" under Section 423 of the Internal Revenue Code of 1986 (the
"Code"), and it is to be so applied and interpreted. Subject to the express
provisions of the Plan, the Committee shall have authority to interpret the
Plan, to prescribe, amend and rescind rules relating to it, and to make all
other determinations necessary or advisable in administering the Plan, all of
which determinations will be final and binding upon all persons.
4. ELIGIBLE EMPLOYEES.
Any employee of the Company or any of its participating Affiliates may
participate in the Plan, except the following, who are ineligible to
participate: (a) an employee who has been employed by the Company or any of its
participating Affiliates for less than three months as of the beginning of an
Offering Period (as defined in Section 7 below); (b) an employee whose customary
employment is for
<PAGE>
less than five months in any calendar year; (c) an employee whose customary
employment is 20 hours or less per week; and (d) an employee who, after
exercising his or her rights to purchase shares under the Plan, would own shares
of Common Stock (including shares that may be acquired under any outstanding
options) representing five percent or more of the total combined voting power of
all classes of stock of the Company. The term "participating Affiliate" means
any company or other trade or business that is a subsidiary of the Company
(determined in accordance with the principles of Sections 424(e) and (f) of the
Code and the regulations thereunder). The Board may at any time in its sole
discretion, if it deems it advisable to do so, terminate the participation of
the employees of a particular participating Affiliate.
5. PARTICIPATION IN THE PLAN.
An eligible employee may become a participating employee in the Plan by
completing an election to participate in the Plan on a form provided by the
Company and submitting that form to the Payroll Department of the Company. The
form will authorize payroll deductions (as provided in Section 6 below) and
authorize the purchase of shares of Common Stock for the employee's account in
accordance with the terms of the Plan. Enrollment will become effective upon the
first day of the first Offering Period.
6. OFFERINGS.
At the time an eligible employee submits his or her election to participate
in the Plan (as provided in Section 5 above), the employee shall elect to have
deductions made from his or her pay subject to a maximum of fifteen percent
(15%) of total compensation, on each pay day following his or her enrollment in
the Plan, and for as long as he or she shall participate in the Plan. The
deductions will be credited to the participating employee's account under the
Plan. An employee may not during any Offering Period change his or her
percentage of payroll deduction for that Offering Period, nor may an employee
withdraw any contributed funds, other than in accordance with Sections 14
through 20 below.
7. OFFERING PERIODS.
The Offering Periods shall be determined by the Committee. The first
Offering Period under the Plan shall commence on the date determined by the
Committee.
8. RIGHTS TO PURCHASE COMMON STOCK; PURCHASE PRICE.
Rights to purchase shares of Common Stock will be deemed granted to
participating employees as of the first trading day of each Offering Period. The
purchase price of each share of Common Stock (the "Purchase Price") shall be
determined by the Committee; provided, however, the Purchase Price shall not be
-----------------
-2-
<PAGE>
less than the lesser of 85 percent of the fair market value of the Common Stock
(i) on the first trading day of the Offering Period or (ii) on the last trading
day of such Offering Period; provided, further, that in no event shall the
-----------------
Purchase Price be less than the par value of the Common Stock. For purposes of
the Plan, "fair market value" means the value of each share of Common Stock
subject to the Plan on a given date determined as follows: if on such date the
shares of Common Stock are listed on an established national or regional stock
exchange, are admitted to quotation on The Nasdaq Stock Market, or are publicly
traded on an established securities market, the fair market value of the shares
of Common Stock shall be the closing price of the shares of Common Stock on such
exchange or in such market (the highest such closing price if there is more than
one such exchange or market) on such date or, if such date is not a trading day,
on the trading day immediately preceding such date (or if there is no such
reported closing price, the fair market value shall be the mean between the
highest bid and lowest asked prices or between the high and low sale prices on
such trading day) or, if no sale of the shares of Common Stock is reported for
such trading day, on the next preceding day on which any sale shall have been
reported. If the shares of Common Stock are not listed on such an exchange,
quoted on such System or traded on such a market, fair market value shall be
determined by the Board in good faith.
9. TIMING OF PURCHASE; PURCHASE LIMITATION.
Unless a participating employee has given prior written notice terminating
such employee's participation in the Plan, or the employee's participation in
the Plan has otherwise been terminated as provided in Sections 15 through 20
below, such employee will be deemed to have exercised automatically his or her
right to purchase Common Stock on the last trading day of the Offering Period
(except as provided in Section 14 below) for the number of shares of Common
Stock which the accumulated funds in the employee's account at that time will
purchase at the Purchase Price, subject to the participation adjustment provided
for in Section 13 below and subject to adjustment under Section 26 below.
Notwithstanding any other provision of the Plan, no employee may purchase in any
one calendar year under the Plan and all other "employee stock purchase plans"
of the Company and its participating Affiliates shares of Common Stock having an
aggregate fair market value in excess of $25,000, determined as of the first
trading date of the Offering Period as to shares purchased during such period.
Effective upon the last trading day of the Offering Period, a participating
employee will become a stockholder with respect to the shares purchased during
such period, and will thereupon have all dividend, voting and other ownership
rights incident thereto. Notwithstanding the foregoing, no shares shall be sold
pursuant to the Plan unless the Plan is approved by the Company's stockholders
in accordance with Section 25 below.
-3-
<PAGE>
10. ISSUANCE OF STOCK CERTIFICATES.
On the last trading day of the Offering Period, a participating employee
will be credited with the number of shares of Common Stock purchased for his or
her account under the Plan during such Offering Period. Shares purchased under
the Plan will be held in the custody of an agent (the "Agent") appointed by the
Board of Directors. The Agent may hold the shares purchased under the Plan in
stock certificates in nominee names and may commingle shares held in its custody
in a single account or stock certificate without identification as to individual
participating employees. A participating employee may, at any time following his
or her purchase of shares under the Plan, by written notice instruct the Agent
to have all or part of such shares reissued in the participating employee's own
name and have the stock certificate delivered to the employee.
11. WITHHOLDING OF TAXES.
To the extent that a participating employee realizes ordinary income in
connection with a sale or other transfer of any shares of Common Stock purchased
under the Plan, the Company may withhold amounts needed to cover such taxes from
any payments otherwise due and owing to the participating employee or from
shares that would otherwise be issued to the participating employee hereunder.
Any participating employee who sells or otherwise transfers shares purchased
under the Plan within two years after the beginning of the Offering Period in
which the shares were purchased must within 30 days of such transfer notify the
Payroll Department of the Company in writing of such transfer.
12. ACCOUNT STATEMENTS.
The Company will cause the Agent to deliver to each participating employee
a statement for each Offering Period during which the employee purchases Common
Stock under the Plan, reflecting the amount of payroll deductions during the
Offering Period, the number of shares purchased for the employee's account, the
price per share of the shares purchased for the employee's account and the
number of shares held for the employee's account at the end of the Offering
Period.
13. PARTICIPATION ADJUSTMENT.
If in any Offering Period the number of unsold shares that may be made
available for purchase under the Plan pursuant to Section 1 above is
insufficient to permit exercise of all rights deemed exercised by all
participating employees pursuant to Section 9 above, a participation adjustment
will be made, and the number of shares purchasable by all participating
employees will be reduced proportionately. Any funds then remaining in a
participating employee's account after such exercise will be refunded to the
employee.
-4-
<PAGE>
14. CHANGES IN ELECTIONS TO PURCHASE.
(a) A participating employee may, at any time prior to the last trading
day of the Offering Period, by written notice to the Company, direct the Company
to cease payroll deductions (or, if the payment for shares is being made through
periodic cash payments, notify the Company that such payments will be
terminated), in accordance with the following alternatives:
(i) The employee's option to purchase shall be reduced to the
number of shares which may be purchased, as of the last day of the Offering
Period, with the amount then credited to the employee's account; or
(ii) Withdraw the amount in such employee's account and terminate
such employee's option to purchase.
(b) Any participating employee may increase or decrease his or her payroll
deduction or periodic cash payments, to take effect on the first day of the next
Offering Period, by delivering to the Company a new form regarding election to
participate in the Plan under Section 5 above.
15. VOLUNTARY TERMINATION OF EMPLOYMENT OR DISCHARGE.
In the event a participating employee voluntarily leaves the employ of the
Company or a participating Affiliate, otherwise than by retirement under a plan
of the Company or a participating Affiliate, or is discharged for cause prior to
the last day of the Offering Period, the amount in the employee's account will
be distributed and the employee's option to purchase will terminate.
16. RETIREMENT OR SEVERANCE.
In the event a participating employee who has an option to purchase shares
leaves the employ of the Company or a participating Affiliate because of
retirement under a plan of the Company or a participating Affiliate, or because
of termination of the employee's employment by the Company or a participating
Affiliate for any reason except discharge for cause, the participating employee
may elect, within 10 days after the date of such retirement or termination, one
of the following alternatives:
(a) The employee's option to purchase shall be reduced to the number of
shares which may be purchased, as of the last day of the Offering Period, with
the amount then credited to the employee's account; or
(b) Withdraw the amount in such employee's account and terminate such
employee's option to purchase.
-5-
<PAGE>
In the event the participating employee does not make an election within
the aforesaid 10-day period, he or she will be deemed to have elected subsection
16(b) above.
17. LAY-OFF, AUTHORIZED LEAVE OR ABSENCE OR DISABILITY.
Payroll deductions for shares for which a participating employee has an
option to purchase may be suspended during any period of absence of the employee
from work due to lay-off, authorized leave of absence or disability or, if the
employee so elects, periodic payments for such shares may continue to be made in
cash.
If such employee returns to active service prior to the last day of the
Offering Period, the employee's payroll deductions will be resumed and if said
employee did not make periodic cash payments during the employee's period of
absence, the employee shall, by written notice to the Company's Payroll
Department within 10 days after the employee's return to active service, but not
later than the last day of the Offering Period, elect:
(a) To make up any deficiency in the employee's account resulting from a
suspension of payroll deductions by an immediate cash payment;
(b) Not to make up such deficiency, in which event the number of shares to
be purchased by the employee shall be reduced to the number of whole shares
which may be purchased with the amount, if any, then credited to the employee's
account plus the aggregate amount, if any, of all payroll deductions to be made
thereafter; or
(c) Withdraw the amount in the employee's account and terminate the
employee's option to purchase.
A participating employee on lay-off, authorized leave of absence or
disability on the last day of the Offering Period shall deliver written notice
to his or her employer on or before the last day of the Offering Period,
electing one of the alternatives provided in the foregoing clauses (a), (b) and
(c) of this Section 17. If any employee fails to deliver such written notice
within 10 days after the employee's return to active service or by the last day
of the Offering Period, whichever is earlier, the employee shall be deemed to
have elected subsection 17(c) above.
If the period of a participating employee's lay-off, authorized leave of
absence or disability shall terminate on or before the last day of the Offering
Period, and the employee shall not resume active employment with the Company or
a participating Affiliate, the employee shall receive a distribution in
accordance with the provisions of Section 16 of this Plan.
-6-
<PAGE>
18. DEATH.
In the event of the death of a participating employee while the employee's
option to purchase shares is in effect, the legal representatives of such
employee may, within three months after the employee's death (but no later than
the last day of the Offering Period) by written notice to the Company or
participating Affiliate, elect one of the following alternatives:
(a) The employee's option to purchase shall be reduced to the number of
shares which may be purchased, as of the last day of the Offering Period, with
the amount then credited to the employee's account; or
(b) Withdraw the amount in such employee's account and terminate such
employee's option to purchase.
In the event the legal representatives of such employee fail to deliver
such written notice to the Company or participating Affiliate within the
prescribed period, the election to purchase shares shall terminate and the
amount, then credited to the employee's account shall be paid to such legal
representatives.
19. FAILURE TO MAKE PERIODIC CASH PAYMENTS.
Under any of the circumstances contemplated by this Plan, where the
purchase of shares is to be made through periodic cash payments in lieu of
payroll deductions, the failure to make any such payments shall reduce, to the
extent of the deficiency in such payments, the number of shares purchasable
under this Plan.
20. TERMINATION OF PARTICIPATION.
A participating employee will be refunded all moneys in his or her account,
and his or her participation in the Plan will be terminated if either (a) the
Board elects to terminate the Plan as provided in Section 25 below, or (b) the
employee ceases to be eligible to participate in the Plan under Section 4 above.
As soon as practicable following termination of an employee's participation in
the Plan, the Company will deliver to the employee a check representing the
amount in the employee's account and a stock certificate representing the number
of whole shares held in the employee's account. Once terminated, participation
may not be reinstated for the then current Offering Period, but, if otherwise
eligible, the employee may elect to participate in any subsequent Offering
Period.
21. ASSIGNMENT.
No participating employee may assign his or her rights to purchase shares
of Common Stock under the Plan, whether voluntarily, by operation of law or
otherwise. Any payment of cash or issuance of shares of Common Stock under the
-7-
<PAGE>
Plan may be made only to the participating employee (or, in the event of the
employee's death, to the employee's estate). Once a stock certificate has been
issued to the employee or for his or her account, such certificate may be
assigned the same as any other stock certificate.
22. APPLICATION OF FUNDS.
All funds received or held by the Company under the Plan may be used for
any corporate purpose until applied to the purchase of Common Stock and/or
refunded to participating employees. Participating employees' accounts will not
be segregated.
23. NO RIGHT TO CONTINUED EMPLOYMENT.
Neither the Plan nor any right to purchase Common Stock under the Plan
confers upon any employee any right to continued employment with the Company or
any of its participating Affiliates, nor will an employee's participation in the
Plan restrict or interfere in any way with the right of the Company or any of
its participating Affiliates to terminate the employee's employment at any time.
24. AMENDMENT OF PLAN.
The Board may, at any time, amend the Plan in any respect (including an
increase in the percentage specified in Section 8 above used in calculating the
Purchase Price); provided, however, that without approval of the stockholders of
-----------------
the Company no amendment shall be made (a) increasing the number of shares
specified in Section 1 above that may be made available for purchase under the
Plan (except as provided in Section 26 below), (b) changing the eligibility
requirements for participating in the Plan, or (c) impairing the vested rights
of participating employees.
25. EFFECTIVE DATE; TERM AND TERMINATION OF THE PLAN.
The Plan shall be effective as of the date of adoption by the Board, which
date is set forth below, subject to approval of the Plan by a majority of the
votes present and entitled to vote at a duly held meeting of the shareholders of
the Company at which a quorum representing a majority of all outstanding voting
stock is present, either in person or by proxy; provided, however, that upon
-----------------
approval of the Plan by the shareholders of the Company as set forth above, all
rights to purchase shares granted under the Plan on or after the effective date
shall be fully effective as if the shareholders of the Company had approved the
Plan on the effective date. If the shareholders fail to approve the Plan on or
before one year after the effective date, the Plan shall terminate, any rights
to purchase shares granted hereunder shall be null and void and of no effect,
and all contributed funds shall be refunded to participating employees. The
Board may terminate the Plan at any time and for any reason or for no reason,
provided that such termination shall not impair any
-8-
<PAGE>
rights of participating employees that have vested at the time of termination.
In any event, the Plan shall, without further action of the Board, terminate ten
(10) years after the date of adoption of the Plan by the Board or, if earlier,
at such time as all shares of Common Stock that may be made available for
purchase under the Plan pursuant to Section 1 above have been issued.
26. EFFECT OF CHANGES IN CAPITALIZATION.
(A) CHANGES IN STOCK.
If the number of outstanding shares of Common Stock is increased or
decreased or the shares of Common Stock are changed into or exchanged for a
different number or kind of shares or other securities of the Company by reason
of any recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend, or other distribution
payable in capital stock, or other increase or decrease in such shares effected
without receipt of consideration by the Company occurring after the effective
date of the Plan, the number and kinds of shares that may be purchased under the
Plan shall be adjusted proportionately and accordingly by the Company. In
addition, the number and kind of shares for which rights are outstanding shall
be similarly adjusted so that the proportionate interest of a participating
employee immediately following such event shall, to the extent practicable, be
the same as immediately prior to such event. Any such adjustment in outstanding
rights shall not change the aggregate Purchase Price payable by a participating
employee with respect to shares subject to such rights, but shall include a
corresponding proportionate adjustment in the Purchase Price per share.
(B) REORGANIZATION IN WHICH THE COMPANY IS THE SURVIVING CORPORATION.
Subject to Subsection (c) of this Section 26, if the Company shall be the
surviving corporation in any reorganization, merger or consolidation of the
Company with one or more other corporations, all outstanding rights under the
Plan shall pertain to and apply to the securities to which a holder of the
number of shares of Common Stock subject to such rights would have been entitled
immediately following such reorganization, merger or consolidation, with a
corresponding proportionate adjustment of the Purchase Price per share so that
the aggregate Purchase Price thereafter shall be the same as the aggregate
Purchase Price of the shares subject to such rights immediately prior to such
reorganization, merger or consolidation.
-9-
<PAGE>
(C) REORGANIZATION IN WHICH THE COMPANY IS NOT THE SURVIVING CORPORATION
OR SALE OF ASSETS OR STOCK.
Upon any dissolution or liquidation of the Company, or upon a merger,
consolidation or reorganization of the Company with one or more other
corporations in which the Company is not the surviving corporation, or upon a
sale of all or substantially all of the assets of the Company to another
corporation, or upon any transaction (including, without limitation, a merger or
reorganization in which the Company is the surviving corporation) approved by
the Board that results in any person or entity owning more than 80 percent of
the combined voting power of all classes of stock of the Company, the Plan and
all rights outstanding hereunder shall terminate, except to the extent provision
is made in writing in connection with such transaction for the continuation of
the Plan and/or the assumption of the rights theretofore granted, or for the
substitution for such rights of new rights covering the stock of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kinds of shares and exercise prices, in which event the Plan
and rights theretofore granted shall continue in the manner and under the terms
so provided. In the event of any such termination of the Plan, the Offering
Period shall be deemed to have ended on the last trading day prior to such
termination, and in accordance with Section 10 above the rights of each
participating employee then outstanding shall be deemed to be automatically
exercised on such last trading day. The Board shall send written notice of an
event that will result in such a termination to all participating employees not
later than the time at which the Company gives notice thereof to its
stockholders.
(D) ADJUSTMENTS.
Adjustments under this Section 26 related to stock or securities of the
Company shall be made by the Committee, whose determination in that respect
shall be final, binding, and conclusive.
(E) NO LIMITATIONS ON COMPANY.
The grant of a right pursuant to the Plan shall not affect or limit in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge,
consolidate, dissolve or liquidate, or to sell or transfer all or any part of
its business or assets.
27. GOVERNMENTAL REGULATION.
The Company's obligation to issue, sell and deliver shares of Common Stock
pursuant to the Plan is subject to such approval of any governmental authority
and any national securities exchange or other market quotation system as may be
required in connection with the authorization, issuance or sale of such shares.
-10-
<PAGE>
28. STOCKHOLDER RIGHTS.
Any dividends paid on shares held by the Company for a participating
employee's account will be transmitted to the employee. The Company will deliver
to each participating employee who purchases shares of Common Stock under the
Plan, as promptly as practicable by mail or otherwise, all notices of meetings,
proxy statements, proxies and other materials distributed by the Company to its
stockholders. Any shares of Common Stock held by the Agent for an employee's
account will be voted in accordance with the employee's duly delivered and
signed proxy instructions. There will be no charge to participating employees in
connection with such notices, proxies and other materials.
29. RULE 16B-3.
Transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or any successor provision under the Securities
Exchange Act of 1934, as amended. If any provision of the Plan or action by the
Board fails to so comply, it shall be deemed null and void to the extent
permitted by law and deemed advisable by the Board. Moreover, in the event the
Plan does not include a provision required by Rule 16b-3 to be stated herein,
such provision (other than one relating to eligibility requirements, or the
price and amount of awards) shall be deemed automatically to be incorporated by
reference into the Plan.
30. PAYMENT OF PLAN EXPENSES.
The Company will bear all costs of administering and carrying out the Plan.
* * *
This Plan was duly adopted and approved by the Sole Director of the Company
by written consent on the 23rd of December, 1998.
_______________________________________
Dewey K. Shay
Secretary of the Company
This Plan was duly approved by the stockholders of the Company by written
consent on the 23rd of December, 1998.
_______________________________________
Dewey K. Shay
Secretary of the Company
-11-
<PAGE>
EXHIBIT 21.1
State of Incorporation
Name or Organization
- ---- ----------------------
D&E Supernet, Inc. Delaware
SunLink, Inc. Pennsylvania
LebaNet, Inc. Pennsylvania
SouthWind Internet Access, Inc. Kansas
Horizon Internet Technologies, Inc. Kansas
United States Internet, Inc. Tennessee
Internet Partners of America, LC Arkansas
ZoomNet, Inc. Ohio
Palm.Net, USA, Inc. Florida
Internet Access Group, Inc. Florida
Midwest Internet L.L.C. Illinois
Internet Solutions, LLC Missouri
FGInet, Inc. Illinois
Superhighway, Inc., d/b/a IndyNet Indiana
Lightspeed Net, Inc. California
JPS.Net Corporation California
TGF Technologies, Inc. Vermont
<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 February 25, 1999, in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
March 2, 1999
<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 January 21, 1999 with respect to the financial
statements of D&E SuperNet included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 1999
<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 January 20, 1999 with respect to the financial
statements of SunLink, Inc. included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 1999
<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 January 15, 1999 with respect to the financial
statements of LebaNet, Inc. included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 1, 1999
<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 Amendment No. 2 to
the Registration Statement (Form S-1 No. 333-69925) 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
March 1, 1999
<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 January 25, 1999, except for Note 10, as to which
the date is February 11, 1999 with respect to the financial statements of
Southwind Internet Access, Inc. included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Birmingham, Alabama
February 26, 1999
<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 January 29, 1999 with respect to the financial
statements of Horizon Internet Technologies, Inc. included in Amendment No. 2
to the Registration Statement (Form S-1 No. 333-69925) and related Prospectus
of OneMain.com, Inc. for the registration of 8,000,000 shares of its Common
Stock.
/s/ Ernst & Young LLP
Birmingham, Alabama
February 26, 1999
<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 November 4, 1998 with respect to the financial
statements of United States Internet, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Coulter & Justus, P.C.
Knoxville, Tennessee
February 25, 1999
<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 February 26, 1999 with respect to the financial
statements of United States Internet, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Birmingham, Alabama
February 26, 1999
<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 January 29, 1999 with respect to the financial
statements of Internet Partners of American, LC included in Amendment No. 2 to
the Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Little Rock, Arkansas
February 25, 1999
<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 January 23, 1999 with respect to the financial
statements of ZoomNet, Inc. included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Columbus, Ohio
February 25, 1999
<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 January 19, 1999 with respect to the financial
statements of Palm.Net, USA, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Jacksonville, Florida
March 1, 1999
<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 January 14, 1999 with respect to the financial
statements of Internet Access Group, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Jacksonville, Florida
February 26, 1999
<PAGE>
EXHIBIT 23.14
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 26, 1999 except for Note 10 as to which the
date is February 3, 1999, with respect to the financial statements of Midwest
Internet, L.L.C. included in Amendment No. 2 to the Registration Statement
(Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc. for the
registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 25, 1999
<PAGE>
EXHIBIT 23.15
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 the financial
statements of Internet Solutions, LLC included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Kevin J. Tochtrop,
Certified Public Accountant
Washington, Missouri
February 26, 1999
<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 January 26, 1999 with respect to the financial
statements of Internet Solutions, LLC included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Washington, Missouri
February 26, 1999
<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 January 29, 1999 with respect to the financial
statements of FGInet, Inc. included in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
St. Louis, Missouri
February 26, 1999
<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 January 22, 1999 with respect to the financial
statements of Superhighway, Inc. d/b/a Indynet included in Amendment No. 2 to
the Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Indianapolis, Indiana
February 25, 1999
<PAGE>
EXHIBIT 23.19
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 29, 1999 with respect to the financial
statements of Lightspeed Net, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Los Angeles, California
February 26, 1999
<PAGE>
EXHIBIT 23.20
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 15, 1999 with respect to the financial
statements of JPS.Net Corporation included in the Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-69925) and related Prospectus of
OneMain.com, Inc. for the registration of 8,000,000 shares of its Common Stock.
/s/ Ernst & Young LLP
Vienna, Virginia
February 25, 1999
<PAGE>
EXHIBIT 23.21
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 6, 1999 with respect to the financial
statements of TGF Technologies Inc. in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-69925) and related Prospectus of OneMain.com, Inc.
for the registration of its Common Stock.
/s/ KPMG LLP
,
February 25, 1999
<PAGE>
EXHIBIT 23.26
CONSENT OF DIRECTOR NOMINEE
To OneMain.com, 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
OneMain.com, Inc. (the "Company") on Form S-1 (File No. 333-69925), 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/ Donald R. Kaufmann
_____________________________________
Donald R. Kaufmann
Dated: February 2, 1999
<PAGE>
EXHIBIT 23.27
CONSENT OF DIRECTOR NOMINEE
To OneMain.com, 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
OneMain.com, Inc. (the "Company") on Form S-1 (File No. 333-69925), 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/ Ella Fontanals de Cisneros
_____________________________________
Ella Fontanals de Cisneros
Dated: February 23, 1999
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ONEMAIN.COM,
INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<SECURITIES> 0
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0
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<INCOME-PRETAX> (764,673)
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