<PAGE>
PROSPECTUS SUPPLEMENT Rule 424(b)(3)
(To Prospectus dated May 3, 1999) Registration No. 333-77063
[OneMain.com Logo]
We have prepared this prospectus supplement to update information
included in our prospectus dated May 3, 1999. Our prospectus relates to the
offer and issuance of up to 4,000,000 shares of our common stock in acquisitions
of other businesses. This prospectus supplement includes our Quarterly Report on
Form 10-Q for the period ended June 30, 1999, which we filed with the Securities
and Exchange Commission on August 16, 1999.
The date of this prospectus supplement is August 26, 1999.
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to_____
Commission File Number 000-25599
-----------
ONEMAIN.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 7375 11-3460073
--------- ---- ----------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) industrial classification identification
number) number)
8150 Leesburg Pike
6th Floor
Vienna, Virginia 22182
703-883-8262
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
_______________________
Stephen E. Smith
Chairman, Chief Executive Officer
OneMain.com, Inc.
8150 Leesburg Pike
6th Floor
Vienna, Virginia 22182
(703) 883-8262
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 12, 1999.
Common Stock $.001 par value Number of Shares
----------------------- ----------------
22,549,000
ONEMAIN.COM, INC.
1
<PAGE>
Form 10-Q For the Quarterly Period Ended June 30, 1999
<TABLE>
<CAPTION>
Index Page
<S> <C>
Part I. - Financial Information 3
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1999 5
Condensed Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1999 6
Condensed Consolidated Statement of Stockholders'
(Deficit) Equity For the Six Months Ended
June 30, 1999 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. -Other Information 21
Exhibit Index 21
Signatures 22
</TABLE>
2
<PAGE>
ONEMAIN.COM, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, all adjustments necessary
for the fair presentation of the Company's results of operations, financial
position and changes therein for the periods presented have been included.
3
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------- ----------------
June 30, December 31,
1999 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 93,605,000 $ 172,000
Accounts receivable, net 3,475,000 -
Deferred offering costs - 6,159,000
Prepaid expenses and other current assets 2,006,000 -
------------ ----------
Total current assets 99,086,000 6,331,000
Property and equipment, net 22,459,000 -
Goodwill, net 167,851,000 -
Customer lists, net 107,474,000 -
Other assets 1,278,000 -
------------ ----------
Total assets $398,148,000 $6,331,000
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued expenses $ 11,299,000 $6,549,000
Unearned revenue 14,457,000 -
Current portion of capital lease obligations 3,620,000 -
Deferred tax liability 13,662,000 -
Other current liabilities 577,000 500,000
------------ ----------
Total current liabilities 43,615,000 7,049,000
Capital lease obligations, net of current portion 3,138,000 -
Deferred tax liability and other 24,423,000 -
------------ ----------
Total liabilities 71,176,000 7,049,000
Stockholders' equity (deficit)
Preferred stock, $.001 par value; 10,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.001 par value; 100,000,000 shares authorized,
22,471,141 and 4,782,500 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 23,000 5,000
Additional paid-in capital 350,797,000 53,000
Accumulated deficit (23,848,000) (765,000)
Stock subscriptions receivable - (11,000)
------------ ----------
Total stockholders' equity (deficit) 326,972,000 (718,000)
------------ ----------
Total liabilities and stockholders' equity (deficit) $398,148,000 $6,331,000
============ ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------- ------------
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1999
-------------- ------------
<S> <C> <C>
Revenues:
Access revenues $ 21,469,000 $ 21,469,000
Other revenues 1,543,000 1,543,000
------------ ------------
Total revenues 23,012,000 23,012,000
Costs and expenses:
Cost of access revenues 8,616,000 8,616,000
Cost of other revenues 533,000 533,000
------------ ------------
Total costs of revenues 9,149,000 9,149,000
------------ ------------
Gross margin 13,863,000 13,863,000
Operating expenses:
Operations and customer support 3,161,000 3,161,000
Sales and marketing 3,327,000 3,327,000
General and administrative 7,456,000 8,366,000
Equity compensation - 2,469,000
Amortization 22,296,000 22,296,000
Depreciation 1,586,000 1,586,000
Other income, net (83,000) (83,000)
------------ ------------
Total operating expenses 37,743,000 41,122,000
Loss from operations (23,880,000) (27,259,000)
Interest income 1,242,000 1,266,000
Interest expense (162,000) (178,000)
------------ ------------
Total nonoperating income 1,080,000 1,088,000
------------ ------------
Loss before income tax benefit (22,800,000) (26,171,000)
Income tax benefit 3,088,000 3,088,000
------------ ------------
Net loss $(19,712,000) $(23,083,000)
============ ============
Basic and diluted net loss per share $ (0.90) $ (1.09)
============ ============
Shares used in the calculation of basic
and diluted net loss per share 21,893,000 21,212,000
============ ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
--------------
For The Six
Months Ended
June 30, 1999
--------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net loss $ (23,083,000)
Adjustments to reconcile net loss to
net cash provided by operating activities
Amortization of goodwill and customer lists 22,296,000
Depreciation expense 1,586,000
Allowance for doubtful accounts 562,000
Income tax benefit (3,088,000)
Equity compensation 2,594,000
Changes in operating assets and liabilities:
Accounts receivable, (420,000)
Prepaid expenses and other current assets (346,000)
Unearned revenue 450,000
Accounts payable and accrued expenses 1,982,000
Other assets (340,000)
Other current liabilities 385,000
--------------
Net cash provided by operating activities 2,578,000
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (90,024,000)
Purchases of property, plant and equipment (2,461,000)
Proceeds from disposal of property and equipment 84,000
--------------
Net cash used in investing activities (92,401,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock in initial public offering
net of underwriters discounts and commissions and offering costs 190,625,000
Proceeds from note payable from stockholder 500,000
Repayment of notes payable from stockholder (1,000,000)
Repayment of long-term debt assumed through acquisitions (6,545,000)
Repayment of capital lease obligations (570,000)
Proceeds from exercise of common stock options 230,000
Proceeds from stock subscriptions receivable 16,000
--------------
Net cash provided by financing activities 183,256,000
--------------
Net increase in cash and cash equivalents 93,433,000
Cash and cash equivalents, beginning of period 172,000
--------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 93,605,000
==============
Supplemental disclosure of cash flow information:
Interest paid $ 184,000
==============
Issuance of common stock for acquisitions $ 157,546,000
==============
Acquisition of property and equipment through assumption of
capital lease obligations $ 1,506,000
==============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' (DEFICIT) EQUITY
For The Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Additional Stock
Common Stock Paid-In Subscriptions Accumulated
Shares Amount Capital Receivable Deficit
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 4,782,000 $ 5,000 $ 53,000 $ (11,000) $ (765,000)
Issuance of Common Stock on January 1, 1999 100,000 - 5,000 (5,000) -
Issuance of Common Stock in connection with initial
public offering and exercise of underwriters'
over-allotment, net of offering costs and
underwriters' discounts 9,775,000 10,000 190,378,000 - -
Issuance of Common Stock in connection with the
Transactions and Acquisitions 7,804,000 8,000 157,537,000 - -
Repayment of stock subscriptions receivable - - - 16,000 -
Exercise of Common Stock options 10,000 - 230,000 - -
Equity compensation expense - - 2,594,000 - -
Net loss for the six months ended June 30, 1999 - - - - (23,083,000)
-----------------------------------------------------------------
Balance at June 30, 1999 22,471,000 $23,000 $ 350,797,000 $ - $(23,848,000)
=================================================================
<CAPTION>
Total
Stockholders'
Equity
--------------
<S> <C>
Balance at December 31, 1998 $ (718,000)
Issuance of Common Stock on January 1, 1999 -
Issuance of Common Stock in connection with initial
public offering and exercise of underwriters'
over-allotment, net of offering costs and
underwriters' discounts 190,388,000
Issuance of Common Stock in connection with the
Transactions and Acquisitions 157,545,000
Repayment of stock subscriptions receivable 16,000
Exercise of Common Stock options 230,000
Equity compensation expense 2,594,000
Net loss for the six months ended June 30, 1999 (23,083,000)
-------------
Balance at June 30, 1999 $ 326,972,000
=============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) Organization and Basis of Presentation
In connection with the closing of the initial public offering of its Common
Stock on March 30, 1999 (the "Offering"), OneMain.com, Inc. (the "Company" or
"ONEM") acquired 17 Internet service providers (the "ISPs") effective March 30,
1999, in a series of separate business combination transactions (the
"Transactions"). The Company is one of the largest Internet service providers in
the United States focused on offering high levels of customer service to
individuals and businesses located predominantly in smaller metropolitan markets
and rural communities.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial statements have been
included. These adjustments consisted of normal recurring adjustments in
addition to a one-time, non-cash equity compensation charge of $2,469,000
associated with the hiring of one executive and certain other consultants. The
results of interim periods are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. The consolidated financial
statements and footnotes should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in this Form 10-Q and the Company's Form S-4 Registration Statement,
filed on April 27, 1999 with the Securities and Exchange Commission (File No.
333-77063), which included the financial statements and footnotes for the year
ended December 31, 1998.
2) Initial Public Offering
On March 30, 1999, ONEM completed its Offering of 8,500,000 shares of its Common
Stock at $22.00 per share. On April 9, 1999, the underwriters exercised their
over-allotment option to purchase 1,275,000 shares of Common Stock at the
initial public offering price of $22.00 per share. The gross proceeds from the
Offering were $215,050,000. The net proceeds after underwriter discounts and
commissions and offering costs were approximately $190,625,000.
The net proceeds have been used as follows: (1) approximately $10,147,000 for
legal, accounting, printing fees and other costs associated with the Offering,
(2) approximately $94,074,000 to pay the cash portion of the purchase prices for
the Transactions and Acquisitions, (3) $1,021,000 to pay the founders notes and
accrued interest and (4) approximately $6,545,000 to retire debt assumed by ONEM
in the Transactions. The remaining net proceeds will be used for general
corporate purposes, which may include future acquisitions, working capital and
the payment of any additional amounts payable to former owners of the ISPs under
the earn-out provisions of the acquisition agreements.
3) Business Combinations - ISPs
During the second quarter of 1999, the Company acquired all of the outstanding
common stock of two ISPs and certain assets of two ISPs (the "Acquisitions").
The Acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the statements of operations include the results of
operations for these ISPs from the date of acquisition. The total consideration
paid by the Company for the Acquisitions was $38,205,000, comprised of
$22,022,000 in cash and 664,000 shares of Common Stock.
8
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3) Business Combinations - ISPs (continued)
The total purchase price of $38,205,000 has been preliminarily allocated to the
fair value of the net assets acquired in the Acquisitions as follows:
Goodwill $ 22,351,000
Customer lists 23,165,000
Cash 71,000
Other current assets 854,000
Property and equipment 3,537,000
Deferred tax liability (6,030,000)
Other liabilities, net (5,743,000)
------------
$ 38,205,000
============
On March 30, 1999, the Company acquired all of the outstanding common stock and
limited liability company interests of 17 ISPs. The Transactions have been
accounted for using the purchase method of accounting assuming the acquisitions
were consummated on March 31, 1999, as opposed to the March 30, 1999 acquisition
date. Accordingly, the statements of operations include the results of
operations for these ISPs since March 31, 1999. Activity occurring on March 31,
1999 was not material to the results of operations for the periods presented.
The total consideration for the Transactions was $214,615,000, comprised of
$72,052,000 in cash, 7,140,000 shares of Common Stock and $1,200,000 in
estimated purchase price adjustments accrued through June 30, 1999.
The total purchase price of $214,615,000 has been preliminarily allocated to the
fair value of the net assets acquired in the Transactions as follows:
Goodwill $ 159,405,000
Customer lists 92,710,000
Cash 3,979,000
Other current assets 4,422,000
Property and equipment 16,631,000
Deferred tax liability (34,954,000)
Other liabilities, net (27,578,000)
-------------
$ 214,615,000
=============
During the quarter ended June 30, 1999, the Company accrued $1,200,000 in
estimated additional purchase price adjustments related to the earn-out
arrangements included in the definitive agreements and other contractual
adjustments. The estimated additional consideration may be adjusted further. The
payment of additional consideration is contingent upon certain operational and
earning margin requirements being met. The amount of the additional
consideration will be payable in either cash or stock at the option of the
Company.
4) Commitments and Contingencies
The Company is engaged in ordinary and routine litigation incidental to its
business. Management does not anticipate that any amounts the Company may be
required to pay by reason thereof will have a material effect on the Company's
financial position or results of operations.
The Company entered into a seven-year lease agreement to occupy 14,352 square
feet of office space for its executive offices commencing June 15, 1999. The
monthly lease payments are $28,704 and will increase 3% per annum commencing
June 15, 2000 through the end of the lease term. The lease includes one
five-year renewal option.
9
<PAGE>
5) Related Party Transactions
During 1998, the Company issued a promissory note in the amount of $500,000 to
one of its founders (the "founders notes"). During the first quarter of 1999,
the Company issued a second promissory note in the amount of $500,000 to the
founder. During the second quarter of 1999, the promissory notes and accrued
interest in the aggregate of $1,021,000 were paid in full.
On January 5, 1999, M. Cristina Dolan, an Executive Vice President and the Chief
Content and Strategic Alliances Officer of the Company, purchased 100,000 shares
of Common Stock of the Company for $5,000, or $.05 per share. In addition, the
Company issued options to purchase shares of the Company's Common Stock at
$22.00 per share to certain outside consultants on March 25, 1999. The Company
recognized a one-time, non-cash compensation charge of $2,469,000 in connection
with these transactions during the three months ended March 31, 1999. The
Company does not anticipate incurring similar equity compensation charges in the
future.
6) Pro Forma Combined Financial Information
The following pro forma combined financial information for the six months ended
June 30, 1999 and June 30, 1998, includes the results of OneMain.com as if the
Transactions and Acquisitions had occurred on January 1 of each respective
period. This pro forma combined financial information includes the effects of
(a) the Transactions and Acquisitions; (b) the Offering; (c) the amortization of
goodwill resulting from the Transactions and Acquisitions; (d) the elimination
of interest expense for the debt that was paid from the Offering proceeds; and
(e) an income tax benefit at an appropriate rate.
The pro forma combined financial information does not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions and events in fact had occurred on those dates or to
project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
--------------------------------
Six months ended
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Total revenues $ 49,581,000 $ 30,279,000
Net loss $(46,087,000) $(42,899,000)
============ ============
Basic and diluted net loss per share $ (2.12) $ (2.03)
============ ============
Shares used in calculation of basic and
diluted net loss per share 21,772,000 21,086,000
============ ============
</TABLE>
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
This filing contains forward-looking statements within the meaning of Section
27A of The Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements reflect the intent, belief
or current expectations of the Company and members of the management team.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance, involve risk and uncertainties, and that
actual results may differ materially from those contemplated by the forward-
looking statements as a result of, among other things, reflecting changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the unaudited
condensed consolidated financial statements of the Company and the related notes
thereto appearing in this filing.
Overview
The Company successfully completed an initial public offering of 8,500,000
shares of its Common Stock on March 30, 1999, concurrently with the acquisitions
of 17 ISPs (the "Transactions"). On April 9, 1999, the underwriters exercised
their over-allotment option to purchase 1,275,000 shares of Common Stock at the
initial public offering price of $22.00 per share. During the second quarter
of 1999 the Company acquired all of the outstanding common stock of two ISPs and
certain assets of two ISPs for approximately $38,205,000 in cash and Common
Stock (the "Acquisitions"). The purchase of these companies and strategic
organic growth increased the Company's subscribers to approximately 472,000 at
June 30, 1999.
Now serving nearly a half million customers in 27 states through over 965 access
points, the Company is one of the largest Internet service providers in the
United States focused on offering high levels of customer service to individuals
and businesses located predominantly in smaller metropolitan markets and rural
communities. The Company believes that its customers have traditionally been
under-served by other national on-line service providers, and that an
opportunity exists to meet their growing demand for Internet services.
Beyond the markets it serves, the Company is differentiating itself by providing
an online experience for its customers with high level of local content.
Instead of a virtual community where every customer is given the same
information regardless of the customer's home address, the Company is creating a
series of online geographic communities. When a customer logs onto the service,
by virtue of his or her area code, the customer will enter an online geographic
community specific to his or her region of the country. These geographic
communities enable the Company to customize local content with links to
information and entertainment that are relevant to its customers.
With a talented staff of network engineers and programmers, a knowledgeable team
of sales and marketing professionals and a dedicated group of customer care and
technical support specialists, the Company is positioned as a national ISP with
a strong presence in the local communities it serves.
The Company offers 56K-modem access through its dial-up locations and
dedicated high-speed Internet access, Web hosting and other services in certain
locations. The Company's ISPs support these services with superior customer
service at reasonable prices.
The Company launched its new logo and branding concept through its web site
http://www.onemain.com which includes a new Investor Relations section titled
- ----------------------
"Investor Corner." Shareholders, investors and analysts can now request
information on the Company and its ISPs through the Investor Corner. Current
enhancements to the Investor Corner were made which allow shareholders,
investors and analysts to connect and become more informed about the Company.
The Company's Common Stock is listed on the NASDAQ National Market under the
symbol ONEM.
----
11
<PAGE>
Results of Operations
The Company conducted no significant operations prior to March 31, 1999. The
Transactions closed on March 30, 1999. For financial reporting purposes, the
Transactions have been accounted for under the purchase method of accounting
from March 31, 1999. Activity that occurred on March 31, 1999 was not material
to the results of operations for the quarter.
From April 1, 1999 to June 30, 1999 the Company reported significant operations.
For a discussion of operations for the three and six months ended June 30, 1999
and 1998, see Results of Operations.
The Company reported net losses of $19,712,000 or $(.90) per share and
$23,083,000 or $(1.09) per share, for the three and six months ended June 30,
1999, respectively. The net loss for the three months ended June 30, 1999 was
the result of $19,208,000 of non-cash amortization, net of the related income
tax benefit and $2,551,000 of corporate-related expenses. The net loss for the
six months ended June 30, 1999 was the result of $19,208,000 of non-cash
amortization, net of the related income tax benefit, $3,453,000 of corporate
related expenses and a one-time, non-cash equity compensation charge of
$2,469,000 relating to the hiring of one executive and several outside
consultants. The Company does not anticipate incurring such equity compensation
charges in the future.
Liquidity and Capital Resources
As of June 30, 1999, the Company's combined cash and cash equivalents balance
was $93,605,000, compared with $172,000 at December 31, 1998. This increase is
mainly attributable to the receipt of $190,625,000 of net proceeds from the
Offering, the aggregate cash portion of the purchase price of the Transactions
and Acquisitions of $90,024,000, net of cash acquired, and the repayment of
$6,545,000 of debt assumed in the Transactions. In addition, the Company earned
net interest income of $1,088,000. At closing of the Transactions, the Company
retired substantially all of the acquired companies' debt obligations except to
the extent such obligations related to capitalized leases.
Net cash provided by operating activities amounted to $2,578,000 for the six
months ended June 30, 1999.
Net cash used in investing activities amounted to $92,401,000 during the six
months ended June 30, 1999, representing the payment of the cash portion of the
purchase prices for the Transactions and Acquisitions, net of cash acquired, and
the purchases of property, plant and equipment.
Net cash provided by financing activities amounted to $183,256,000 for the six
months ended June 30, 1999. The Company received net proceeds from the Offering
of $190,625,000. The Company repaid $6,545,000 of debt assumed in the
Transactions. Additionally, during the three months ended March 31, 1999 the
Company issued a second promissory note in the amount of $500,000 to one of its
founders to fund the payment of pre-Offering expenses. During the six months
ended June 30, 1999 the founders notes and accrued interest, in the aggregate of
$1,021,000 were paid in full.
Management expects the Company's capital expenditures to increase as its
operations continue to expand. It is anticipated that financial resources will
be utilized in acquiring additional communications equipment and improvements to
technology that will allow the Company's networks to grow to support new and
acquired subscribers, build a network operations center and integrate billing
and financial reporting systems. The Company expects to pay out additional
consideration that may be issued pursuant to earn-out arrangements included in
the definitive agreements for the Transactions. The payment of additional
consideration is contingent upon certain operational and earning margin
requirements being met. The amount of the additional consideration will be
payable in either cash or stock at the option of the Company. Through June 30,
1999 the Company estimates the amount of additional consideration to be
approximately $1,200,000 net of purchase price adjustments related to the
definitive agreements. Such amounts are anticipated to be adjusted further in
future quarters.
The Company anticipates that its current cash on hand and cash flow from
operations will be sufficient to meet the Company's liquidity requirements for
its operations through the remainder of the fiscal year. However, the Company is
currently pursuing, and intends to continue to pursue additional acquisitions,
which are expected to be funded through a combination of cash and the issuance
by the Company of shares of its Common Stock. To the extent the Company elects
to pursue acquisitions involving the payment of significant amounts of cash (to
fund the purchase price of such acquisitions and the repayment of assumed
indebtedness), the Company is likely to require additional sources of
12
<PAGE>
financing to fund such non-operating cash needs. The Company may determine to
raise additional debt or equity capital to finance potential acquisitions and/or
to fund accelerated growth. Any significant acquisitions or increases in the
Company's growth rate could materially affect the Company's operating and
financial expectations and results, liquidity and capital resources.
13
<PAGE>
Three Months Ended June 30, 1999 and June 30, 1998
Results of Operations
The following combined financial information for the three months ended June 30,
1999 includes the results of operations for the acquired ISPs of the
Transactions and Acquisitions from the dates of acquisition. The following pro
forma combined financial information for the three months ended June 30,1998,
and the six months ended June 30, 1999 and June 30, 1998 includes the results of
OneMain.com combined with the 17 ISPs as if the Transactions had occurred on
January 1, 1998. The actual combined financial information for the three months
ended June 30, 1999 and the pro forma combined financial for the six months
ended June 30, 1999, includes the results of operations of the acquisitions from
the date of acquisition only. This pro forma combined financial information
includes the effects of (a) the Transactions; (b) the Offering; (c) the
amortization of goodwill resulting from the Transactions; (d) the elimination of
interest expense for the debt that was paid from the Offering proceeds; and (e)
an income tax benefit at an appropriate rate.
The pro forma combined financial information does not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions and events in fact had occurred on those dates or to
project the Company's results of operations for any future period.
<TABLE>
<CAPTION>
----------------------------------- -------------------------------
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(Actual) (Pro Forma) (Pro Forma) (Pro Forma)
----------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues:
Access revenues $ 21,469,000 $ 12,117,000 $ 39,436,000 $ 22,434,000
Other revenues 1,543,000 1,090,000 3,077,000 2,244,000
------------- ------------- ------------- --------------
Total revenues 23,012,000 13,207,000 42,513,000 24,678,000
Costs and expenses:
Cost of access revenues 8,616,000 5,112,000 16,333,000 9,162,000
Cost of other revenues 533,000 301,000 907,000 573,000
------------- ------------- ------------- --------------
Total costs of revenues 9,149,000 5,413,000 17,240,000 9,735,000
------------- ------------- ------------- --------------
Gross margin 13,863,000 7,794,000 25,273,000 14,943,000
Operating expenses:
Operations and customer support 3,161,000 2,176,000 5,946,000 3,807,000
Sales and marketing 3,327,000 1,626,000 5,696,000 2,985,000
General and administrative 7,456,000 3,852,000 12,955,000 7,334,000
Equity compensation - - 2,469,000 -
Amortization 22,296,000 19,704,000 43,110,000 39,380,000
Depreciation 1,586,000 1,037,000 2,888,000 2,073,000
Other (income) expense (83,000) 77,000 (95,000) 245,000
------------- ------------- ------------- --------------
Total operating expenses 37,743,000 28,472,000 72,969,000 55,824,000
Loss from operations (23,880,000) (20,678,000) (47,696,000) (40,881,000)
Interest income 1,242,000 33,000 1,291,000 46,000
Interest expense (162,000) (56,000) (260,000) (101,000)
------------- ------------- ------------- --------------
Loss before income tax benefit (22,800,000) (20,701,000) (46,665,000) (40,936,000)
Income tax benefit 3,088,000 2,585,000 5,971,000 5,188,000
------------- ------------- ------------- --------------
Net loss $ (19,712,000) $ (18,116,000) $ (40,694,000) $ (35,748,000)
============= ============= ============= ==============
Basic and diluted net loss per share $ (0.90) $ (0.89) $ (1.92) $ (1.75)
============= ============= ============= ==============
Shares used in the calculation of basic
and diluted net loss per share 21,893,000 20,422,000 21,212,000 20,422,000
============= ============= ============= ==============
Subscribers at the end of the period 472,000 236,000 472,000 236,000
============= ============= ============= ==============
</TABLE>
14
<PAGE>
The Company reported a net loss of $19,712,000 or $(.90) per share for the three
months ended June 30, 1999 compared to a net loss of $18,116,000 or $(.89) per
share for the three months ended June 30, 1998. The net loss included non-cash
amortization costs, net of the related income tax benefits of $19,208,000 and
$17,119,000, associated with the purchase of the ISPs for the three months ended
June 30, 1999 and 1998, respectively. In addition to the non-cash amortization
and related income tax benefit, the net loss for the second quarter of 1999
included corporate-related expenses of $2,551,000 and net interest income of
$1,080,000. There were no corporate-related expenses included in the three
months ended June 30, 1998.
Exclusive of the non-cash amortization and related income tax benefit, the
Company's net loss would have been $504,000 or $(.02) per share for the three
months ended June 30, 1999 compared to a net loss of $997,000 or $(.05) per
share for the three months ended June 30, 1998.
Revenues. Total revenues for the three months ended June 30, 1999 were
approximately $23,012,000, compared to approximately $13,207,000 for the three
months ended June 30, 1998, an increase of 74.2%. The increase was primarily
attributable to an increase in the number of subscribers. Total subscribers at
June 30, 1999 were approximately 472,000 compared to approximately 236,000 at
June 30, 1998, an increase of 100%.
Access revenues for the three months ended June 30, 1999 were approximately
$21,469,000, compared to approximately $12,117,000 for the three months ended
June 30, 1998, an increase of 77.2%. The increase was primarily attributable to
the increase in subscribers discussed above. The subscriber increase is a
function of organic growth and acquisitions.
Access revenues are a recurring revenue stream for the Company. The Company
derives Internet access revenues primarily from subscriptions from individuals
and small businesses for dial-up access to the Internet. Subscription fees vary
among ISPs and by billing plan within the subscriber base for a particular ISP.
The Company also earns revenues by providing dedicated Internet access and Web
hosting services.
Other revenues for the three months ended June 30, 1999 totaled approximately
$1,543,000 compared to approximately $1,090,000 for the three months ended June
30, 1998, an increase of 41.6%. The increase is primarily the result of an
increase in set-up and installation fees resulting from an increase in the
number of subscribers.
Other revenues are derived primarily from set-ups and installations, Web page
design and development, and equipment and software sales.
Costs and Expenses. The following table provides a comparison of actual and pro
forma costs of revenues, operations and customer support, sales and marketing
and general and administrative expenses as a percentage of total revenues for
the three months ended June 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
(Actual) (Pro Forma)
------------------------------------
<S> <C> <C>
Total costs of revenues 39.8% 41.0%
Operations and customer support 13.7% 16.5%
Sales and marketing 14.5% 12.3%
General and administrative 32.4% 29.2%
</TABLE>
Total Costs of Revenues. Total costs of revenues as a percentage of revenues for
the three months ended June 30, 1999 decreased to 39.8% from 41.0% for the three
months ended June 30, 1998. The decline in percentage terms is due to the
individual ISPs growing size which enables them to benefit from economies of
scale in negotiating local access capacity.
Cost of access revenues consists primarily of the costs of maintaining
sufficient telecommunications capacity to provide service to the Company's
subscribers. For an ISP, capacity is a measurement of the ISP's ability to
connect subscribers to the Internet. Capacity costs include the costs to carry
subscriber calls to our points of presence, or "POPs", the costs associated with
connecting POPs to operations centers and the Internet, and Internet backbone
costs.
Cost of access revenues may increase over time to support the Company's growing
subscriber base. The Company will seek to leverage the combined scale of its
ISPs to lower telecommunications capacity costs as a percentage of revenues
15
<PAGE>
by negotiating one or more relationships with national Internet backbone
providers, negotiating more favorable local loop contracts with local exchange
carriers, establishing co-location arrangements with local exchange carriers,
establishing private peering relationships with other Internet connectivity
providers and negotiating discounts with equipment vendors. Increases in
individual subscriber usage may tend to offset the per subscriber cost savings
the Company may be able to achieve.
Cost of other revenues consists primarily of the salaries and benefits of the
personnel providing installation of equipment and software, Web development and
technical services and the costs of purchasing equipment and software for
resale.
Operations and customer support. Operations and customer support expense as a
percentage of revenues for the three months ended June 30, 1999 decreased to
13.7% from 16.5% for the three months ended June 30, 1998. The decrease is a
result of the Company's ability to leverage this relatively fixed costs over a
larger subscriber base.
Operations and customer support expense includes the costs associated with
customer service and technical support, consisting primarily of salaries and
benefits. The Company plans to extend customer service and technical support
hours to 24 hours a day, 7 days a week in certain markets. In the longer term,
as a percentage of revenues, the Company believes operations and customer
support expense should decline as these costs are leveraged over a growing
subscriber and revenue base. Therefore, the Company expects operations and
customer support expense to increase over time to support new and existing
subscribers.
Sales and marketing. Sales and marketing expense as a percentage of revenues
for the three months ended June 30, 1999 increased to 14.5% from 12.3% for the
three months ended June 30, 1998. The increase is the result of increased
marketing promotions during 1999.
Sales and marketing expense includes costs associated with acquiring
subscribers, including salaries, bonuses, sales commissions, advertising,
promotion and referral bonuses. On a percentage of revenue basis, sales and
marketing expense is a relatively variable cost and may increase with the
Company's development of a common brand supported by a community-based marketing
program. The Company expects that, over time, the increase in sales and
marketing expense will be more than offset by anticipated increases in revenues
attributable to overall subscriber growth.
General and administrative. General and administrative expense as a percentage
of revenues for the three months ended June 30, 1999 increased to 32.4% from
29.2% for the three months ended June 30, 1998. The increase in general and
administrative expense is attributable to putting together the corporate team
for the various integration projects and the management of the Company.
General and administrative expenses consist primarily of salaries and related
benefits, voice telephone lines, rent and credit card processing fees. The
Company expects general and administrative costs to increase to support its
growth, particularly as it establishes a network operations center and
implements common billing and financial reporting systems. Over time, the
Company expects these relatively fixed expenses to decrease as a percentage of
revenues.
Amortization, Depreciation and Income Tax Benefit. The following table provides
a comparison of actual and pro forma amortization, depreciation and income tax
benefit for three months ended June 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
(Actual) (Pro Forma)
-----------------------------------------------
<S> <C> <C>
Amortization $22,296,000 $19,704,000
Depreciation 1,586,000 1,037,000
Income tax benefit 3,088,000 2,585,000
</TABLE>
Amortization. Amortization expense for the three months ended June 30, 1999
totaled approximately $22,296,000 compared to approximately $19,704,000 for the
three months ended June 30, 1998. This increase is attributable to the increase
in subscribers or customer lists acquired in the Transactions and Acquisitions.
Amortization expense primarily relates to goodwill and customer lists acquired
in the Transactions and Acquisitions. The amortization period for both goodwill
and customer lists is three years.
16
<PAGE>
Depreciation. Depreciation expense for the three months ended June 30, 1999
totaled approximately $1,586,000 compared to approximately $1,037,000 for the
three months ended June 30, 1998. The increase is the result of increased
capital expenditures resulting from the Company's continuing effort to improve
its infrastructure to support its continued growth.
Depreciation primarily relates to the Company's hardware infrastructure and is
provided over the estimated useful lives of the assets ranging from three to
five years using the straight-line method. The Company expects depreciation
expense to increase as it grows its networks to support new and acquired
subscribers, builds a network operations center and implements common billing
and financial reporting systems.
Income Tax Benefit. The income tax benefit for the three months ended June 30,
1999 totaled approximately $3,088,000 compared to approximately $2,585,000 for
the three months ended June 30, 1998. As a result of the Acquisitions, the
Company recognized a deferred tax liability of $6,030,000 for the three months
ended June 30, 1999. The Company will amortize the deferred tax liability into
earnings over the three-year period in which it records the related amortization
expense associated with the customer lists. The Company anticipates recording
quarterly amortization expense of $24,700,000 relating to the amortization of
all intangibles and a deferred tax benefit of $3,415,000 related to the
amortization of customer lists. The Company does not anticipate recognizing any
other deferred tax benefits associated with its anticipated operating losses
because no asset will be established for such benefit until the Company has a
history of earnings.
Six Months Ended June 30, 1999 and June 30, 1998
Results of Operations
The Company reported a net loss of $40,694,000 or $(1.92) per share for the six
months ended June 30, 1999 compared to a net loss of $35,748,000 or $(1.75) per
share for the six months ended June 30, 1998. The net loss included non-cash
amortization costs, net of the related income tax benefit of $37,139,000 and
$34,192,000, associated with the purchase of the ISPs for the six months ended
June 30, 1999 and 1998, respectively. In addition to the non-cash amortization
and related income tax benefit, the net loss for the six months ended June 30,
1999 included corporate related expenses of $3,453,000, equity compensation
expense of $2,469,000 and net interest income of $1,088,000. There were no
corporate related expenses included in the six months ended June 30, 1998.
Exclusive of the non-cash amortization and related income tax benefit, the
Company's net loss would have been $3,555,000 or $(.17) per share for the six
months ended June 30, 1999 compared to $1,556,000 or $(.08) per share for the
six months ended June 30, 1998.
Revenues. Total revenues for the six months ended June 30, 1999 were
approximately $42,513,000, compared to approximately $24,678,000 for the six
months ended June 30, 1998, an increase of 72.3%. The increase was primarily
attributable to an increase in the number of subscribers. Total subscribers at
June 30, 1999 were approximately 472,000 compared to approximately 236,000 at
June 30, 1998, an increase of 100%.
Access revenues for the six months ended June 30, 1999 were approximately
$39,436,000, compared to approximately $22,434,000 for the six months ended June
30, 1998, an increase of 75.8%. The increase was primarily attributable to the
increase in subscribers discussed above. The subscriber increase is a function
of organic growth and acquisitions.
Other revenues for the six months ended June 30, 1999 totaled approximately
$3,077,000 compared to approximately $2,244,000 for the six months ended June
30, 1998, an increase of 37.1%. The increase is primarily the result of an
increase in set-up and installation fees resulting from an increase in the
number of subscribers.
Costs and Expenses. The following table provides a comparison of costs of
revenues, operations and customer support, sales and marketing and general and
administrative expenses as a percentage of total revenues:
17
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
(Pro Forma) (Pro Forma)
------------------------------------
<S> <C> <C>
Total costs of revenues 40.6% 39.4%
Operations and customer support 14.0% 15.4%
Sales and marketing 13.4% 12.1%
General and administrative 30.5% 29.7%
Equity compensation 5.8% -%
</TABLE>
Total Costs of Revenues. Total costs of revenues as a percentage of revenues for
the six months ended June 30, 1999 increased to 40.6% from 39.4% for the six
months ended June 30, 1998. This increase is attributable to increased costs
associated with adding telecommunications capacity to serve new subscribers. The
increase was partially offset by the individual ISPs benefitting from economies
of scale in negotiating local access capacity.
Operations and customer support. Operations and customer support expense as a
percentage of revenues for the six months ended June 30, 1999 decreased to 14%
from 15.4% for the six months ended June 30, 1998. The decrease is a result of
the Company's ability to leverage this relatively fixed costs over a larger
subscriber base.
Sales and marketing. Sales and marketing expense as a percentage of revenues
for the six months ended June 30, 1999 increased to 13.4% from 12.1% for the six
months ended June 30, 1998. The increase is the result of increased marketing
promotions during 1999.
General and administrative. General and administrative expense as a percentage
of revenues for the six months ended June 30, 1999 increased to 30.5% from 29.7%
for the six months ended June 30, 1998. The increase in general and
administrative expense is attributable to putting together the corporate team
for the various integration projects and the management of the Company.
Amortization, Depreciation and Income Tax Benefit. The following table provides
a comparison of pro forma amortization, depreciation and income tax benefit for
six months ended June 30, 1999 and June 30, 1998.
<TABLE>
<CAPTION>
1999 1998
(Pro Forma) (Pro Forma)
-----------------------------------------------
<S> <C> <C>
Amortization $ 43,110,000 $ 39,380,000
Depreciation 2,888,000 2,073,000
Income tax benefit 5,971,000 5,188,000
</TABLE>
Amortization. Amortization expense for the six months ended June 30, 1999
totaled approximately $43,110,000 compared to approximately $39,380,000 for the
six months ended June 30, 1998. This increase is attributable to the increase
in subscribers or customer lists acquired in the Transactions and Acquisitions.
Depreciation. Depreciation expense for the six months ended June 30, 1999
totaled approximately $2,888,000 compared to approximately $2,073,000 for the
six months ended June 30, 1998. The increase is the result of increased capital
expenditures resulting from the Company's continuing effort to improve its
infrastructure to support its continued growth.
Income Tax Benefit. Income tax benefit for the six months ended June 30, 1999
totaled approximately $5,971,000 compared to approximately $5,188,000 for the
six months ended June 30, 1998. As a result of the Transactions and the
Acquisitions, the Company recognized a deferred tax liability of $40,984,000
related to the portion of the purchase price allocated to the customer lists.
This deferred tax liability is being amortized over thirty six months.
Effects of Inflation
The Company does not believe that inflation has had a material impact on the
Company's results of operations during the six months ended June 30, 1999.
18
<PAGE>
Additional Factors That May Affect the Company's Future Results
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
FLUCTUATION IN QUARTERLY RESULTS OF OPERATIONS. The Company's Internet service
is subject to seasonal influences. The ISPs' revenues and profitability have
generally been lower in the second and third quarter of a calendar year,
primarily due to the lower level of business activity in the mid-spring and
summer months.
BUSINESS MODEL. With the combination of the ISPs, the Company will be applying a
business model that has not yet been tested in its industry. The success of this
business model depends on the Company's ability to build on the strengths of its
ISPs and to centralize many of its business functions. It may take the Company
longer than anticipated to implement its business model, and some components of
its model may not prove to be feasible or possible. As a result, the business
may not produce the level of profitability the Company expects to achieve.
The Company's success as a new national Internet service provider will depend
largely on its ability to integrate the operations and management its
independent ISPs acquired and its ability to integrate additional ISPs it may
acquire in the future. Failure to integrate its ISPs successfully may result in
significant operating inefficiencies, which may reduce the Company's
profitability. The Company will expend substantial managerial, operating,
financial and other resources to integrate these businesses and implement its
business model. In particular, to integrate its newly acquired ISPs
successfully, the Company 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 its various operating
sites and continue to expand its managerial, operational, technical and
financial resources.
ACQUISITIONS. If the Company cannot acquire additional Internet service
providers, or its acquisition activities are delayed, it may not be able to
execute its business strategy. The Company's business strategy depends, in
part, upon its ability to expand into new markets and broaden the services the
Company provides by identifying and acquiring additional ISPs. In pursuing
acquisitions, the Company competes against other Internet service providers,
some of which are larger than the Company and have greater financial and other
resources available. The Company competes for potential acquisitions based on a
number of factors, including price, terms and conditions, size and growth
potential, and ability to offer cash, stock or other forms of consideration.
Since the Company intends to offer a combination of cash and stock to potential
sellers of Internet service providers, any reduction in the Company's stock
price due to market or other factors would negatively impact the Company's
ability to pursue its acquisition strategy.
In addition, there can be no assurance that acquisitions will be available to
the Company on favorable terms. If the Company is unable to use its Common
Stock as consideration in acquisitions, for example, because it believes that
the market price of the Common Stock is too low or because the owners of
potential acquisition targets conclude that the market price of the Company's
Common Stock is too volatile, the Company would need to use cash to make such
acquisitions. This might adversely affect the pace of the Company's acquisition
program and the impact of acquisitions on the Company's quarterly results.
Failure to acquire additional businesses or to acquire such businesses on
favorable terms in accordance with the Company's growth strategy could have a
material adverse impact on growth.
There can be no assurance that companies acquired, or acquired in the future,
will achieve sales and profitability levels that justify the investment therein.
Acquisitions may involve a number of special risks that could have a material
adverse effect on the Company's operations and financial performance, including
adverse short-term effects on the Company's reported operating results;
diversion of management's attention; difficulties with the retention, hiring and
training of key personnel; risks associated with unanticipated problems or legal
liabilities; and amortization of acquired tangible assets.
COMPETITION. The Company has faced a competitive environment in the market for
Internet access and related services. The Company expects that competition will
continue to intensify as more people begin using the Internet. The Company's
current competitors consist of 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
19
<PAGE>
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 acquisition of its ISPs, the Company contacted each of its
ISPs to determine its Year 2000 readiness and received representation from the
former owners of each ISP that it does not face material, unresolved Year 2000
issues. Based on these representations and review of its Year 2000 readiness,
the Company does not expect significant Year 2000 problems in its network.
During the second quarter of 1999 the Company entered into an agreement with
Kenan/Arbor Systems, a wholly owned subsidiary of Lucent Technologies, to help
deliver a single, fully integrated billing system for its growing customer base.
The new system is Year 2000 compliant and will be implemented in three of the
company's ISPs by December 31, 1999. The Company plans to complete its
implementation to the new billing system for the remainder of the ISPs by the
end of the second quarter of 2000. The Company is developing a contingency plan
for these ISPs that will be implemented after 1999.
The company is currently in negotiations with two fully integrated financial
system suppliers and expect to engage one of the suppliers by the end of the
third quarter of 1999. The financial systems of both these suppliers are Year
2000 compliant, and are expected to be implemented in the majority of the ISPs
by the end of 1999. The Company is developing a contingency plan for these ISPs
that will be implemented after 1999.
Subsequent to second quarter 1999 the Company hired an outside consulting firm
to assist in analyzing and inventorying all its ISPs hardware and software
applications, to determine how these applications might be affected by the Year
2000 problem. All of the Company's 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 its ISPs have contacted their
major vendors to assess their Year 2000 readiness.
Costs. As of June 30, 1999, the Company has not incurred any material expense
relating in connection with the implementation of the Year 2000 Program Office
and Year 2000 program. The Company estimates that approximately $750,000 of
expenses will be incurred through the remainder of the Year 2000 program. These
costs will be expensed as incurred. The costs and estimates provided include our
estimate of the cost of internal resources directly attributable to the Year
2000 program. We have funded, and anticipate that we will continue funding, the
costs of the Year 2000 program from cash flows. The estimates for the costs of
the Year 2000 program are based upon management's best estimates and may be
updated or revise as additional information becomes available. We currently
believe these costs will not have a material effect on our financial condition,
liquidity or results of operations. There may, however, be interruptions or
other limitations of financial and operating systems' functionality, and the
Company may incur additional costs to avoid these interruptions or limitations.
Risks. To the extent that the ISPs 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 its systems could adversely affect the Company's
ability to provide services to its subscribers. The inability to provide
Internet access could have an adverse impact on one or more of the Company's
ISPs or OneMain.com as a whole. Although some of its 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.
The Company's 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:
the Company's 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,
the Company's success in addressing Year 2000 issues with third-parties with
whom it does business.
Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations.
Presently, however, we perceive that our most reasonably likely worst case
scenario related to the Year 2000 is associated with potential concerns with
third party services or products. Specifically, we are heavily dependent on a
significant number of third party vendors to provide both network services and
equipment. A significant Year 2000-related disruption of the network services or
equipment provided to us by third party vendors could cause customers to
consider seeking alternate providers or cause an unmanageable burden on customer
service and technical support, which in turn could materially and adversely
affect our results of operations, liquidity and financial condition. We are not
presently aware of any vendor related Year 2000 issue that is likely to result
in this type of disruption. Furthermore, our business depends on the continued
operation of, and widespread access to, the Internet. To the extent that the
normal operation of the Internet is disrupted by the Year 2000 issue, our
results of operations, liquidity and financial condition could be materially and
adversely affected. Although there is inherent uncertainty in the Year 2000
issue, we expect that as we progress in our Year 2000 program the level of
uncertainty about the impact of the Year 2000 issue will be reduced
significantly, and we should be better positioned to identify the nature and
extent of material risk to us as a result of any Year 2000 disruptions.
Contingency Plans. The Year 2000 program calls for the development of
contingency plans for at-risk functions. We have established a Contingency Plan
Committee to monitor and address the development of contingency plans. Due to
the current phase of the Year 2000 program in which we are in, we are currently
unable at this time to fully assess our risks and determine what contingency
plans, if any, need to be implemented. As we progress in our Year 2000 program
and identify specific risk areas, we intend to timely implement appropriate
remedial actions and contingency plans. The estimates and conclusions included
in this discussion contain forward-looking statements and are based on
management's best estimates of future events. Our expectations about risks,
future costs and the timely completion of its Year 2000 modifications may turn
out to be incorrect and any variance from these expectations could cause actual
results to differ materially from what has been discussed above. Factors that
could influence risks, amount of future costs and the effective timing of
remediation efforts include our success in identifying and correcting potential
Year 2000 issues and the ability of third parties to appropriately address their
Year 2000 issues. The foregoing Year 2000 discussion and the information
contained herein is provided as a "Year 2000 Readiness Disclosure" as defined in
the Year 2000 Information and Readiness Disclosure Act of 1998 (Public Law 105-
271, 112 Stat. 2386) enacted on October 19, 1998.
20
<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
1) From the effective date of the initial public offering registration to
June 30, 1999, the amount of net offering proceeds used for any purpose
for which at least 5% of the offering proceeds or $100,000 (whichever is
less) was used is as follows:
<TABLE>
<S> <C>
Repayment of indebtedness - directors
and officers 140,000
Repayment of indebtedness - other 6,405,000
Repayment of the founder notes 1,021,000
Cash portion of purchase price for
Transactions and Acquisitions 94,074,000
--------------
Total $ 101,640,000
==============
</TABLE>
Item 5. Other Information
On June 7, 1999, the Company announced the hiring effective June 16, 1999
of Michael D. Read, a former senior executive at British Telecom and
American Online, as the Company's new President and Chief Operating
Officer. Mr. Read's duties include oversight of all the Company's day-to-
day operations, including its marketing, technology, telecommunication
and engineering functions. Over the next 12 months, Mr. Read will receive
$225,000 in base salary and $125,000 in bonus for his services. In
addition, the Company granted Mr. Read options to purchase 500,000 shares
of the Company's Common Stock at an exercise price of $14.25 per share.
The options will vest as described in the Senior Management Agreement dated
as of June 7, 1999 between the Company and Mr. Read, a copy of which is
filed as Exhibit 10.1 to this quarterly report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K: None
(10.1) Senior Management Agreement dated as of June 7, 1000 between the
Company and Michael D. Read.
(10.2) OneMain.com, Inc. 1999 Stock Option Plan
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ONEMAIN.COM, INC.
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Date: August 16, 1999 By: /s/Dewey K. Shay
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Dewey K. Shay
Executive Vice President
Chief Financial Officer
(Authorized Officer on behalf of
Registrant and Principal Financial Officer)
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