<PAGE>
As filed with the Securities and Exchange Commission on March 22, 1999
Registration No. 333-69925
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3
TO
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. [_]
---------------
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.
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- --------------------------------------------------------------------------------
<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 22, 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.
----------
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>
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........................................................ 16
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Combined Pro Forma Financial Data............................... 23
Selected Historical Financial Data for Our ISPs.......................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
Business................................................................. 52
Management............................................................... 63
Transactions with Related Parties........................................ 71
Principal Stockholders................................................... 73
Description of Capital Stock............................................. 75
Shares Available for Future Sale......................................... 79
Underwriting............................................................. 82
Experts.................................................................. 85
Validity of the Shares................................................... 88
Forward-Looking Statements............................................... 88
Additional Information................................................... 88
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 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 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. For each
quarter in the two-year period ended December 31, 1998, our revenues grew by an
average of 16%, and the number of our subscribers grew by an average of 20%
over the previous quarter. 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 4,075,265 shares of common stock at the initial public offering price,
including options to purchase 1,143,050 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...
18,916,497 shares of common stock,
assuming the underwriters do not
exercise their over-allotment option;
or
20,416,496 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.
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............................................. 18,916,497
============
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........................................ 254,044,957 300,476,738
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 25 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. 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.
Failure to integrate our acquisitions successfully will result in significant
operating inefficiencies which may reduce our profitability
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 reduce our profitability. 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.
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.
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, resulting in reduced revenues
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, which will result in a reduction in our revenues. 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 which would reduce our cash available for operations
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 December 31, 1998
pro forma 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
10
<PAGE>
required to pay substantial additional cash consideration after the closing,
which would reduce our cash available for operations.
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.
If we pay additional earn-out consideration to the former owners of the
Internet service providers we will acquire, your investment in OneMain.com may
be worth less
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 pro forma
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 16 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 a reduction in our revenues
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 revenues 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.
If telecommunications carriers do not provide us with adequate communications
capacity to deliver our services, we may lose existing and fail to attract new
subscribers, which would result in reduced revenues and profitability
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 and a consequent reduction in revenues
and profitability
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, resulting in
additional expenses and reduced profitability
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, which could result in additional expenses and
reduced profitability.
13
<PAGE>
Problems related to the Year 2000 issue could cause failures in our systems
which would impair our operations
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.
To limit potential liability for information disseminated over our network, we
may have to spend substantial amounts of money or discontinue some product or
service offerings, resulting in reduced profitability
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
14
<PAGE>
more of the Internet service providers at the time of this offering or at all.
In this event, we 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 19 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 18,916,497 shares of common
stock outstanding, of which 10,916,497 shares will be "restricted shares." If
the underwriters exercise their over-allotment option in full, we will have
20,416,496 shares of common stock outstanding, of which 11,216,496 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 4,075,265 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 10,916,497
shares of common stock, or 11,216,496 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>
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.
16
<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 expense associated with those obligations or acquisitions.
17
<PAGE>
We have shown below information about the ISPs we will acquire when we close
this offering.
<TABLE>
<CAPTION>
Total Revenues
for the
Number of Three Months
Subscribers at Ended Total
December 31, December 31, Purchase
Name Headquarters 1998 1998 Price
- ---- --------------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Northeast Operating
Group
D&E SuperNet, Inc...... Lancaster, PA 23,150 $ 1,327,503 $ 18,651,188
SunLink, Inc. ......... Sunbury, PA 8,497 394,210 4,747,761
LebaNet, Inc. ......... Cornwall, PA 233 82,061 570,017
Plains States Operating
Group
SouthWind Internet
Access, Inc. ......... Wichita, KS 11,287 634,922 5,610,450
Horizon Internet
Technologies, Inc. ... Winfield, KS 7,261 369,864 3,386,378
Southeast Operating
Group
United States Internet,
Inc. ................. Knoxville, TN 35,289 2,286,106 33,570,760
Internet Partners of
America, LC .......... Fort Smith, AR 24,183 1,420,471 14,340,000
ZoomNet, Inc. ......... Portsmouth, OH 12,921 649,608 6,127,567
Palm.Net, USA, Inc. ... Merritt Island, FL 5,337 170,964 1,740,125
Internet Access Group,
Inc. ................. Altamonte Springs, FL 4,931 444,607 3,761,585
Midwest South Operating
Group
Midwest Internet,
L.L.C. ............... Carbondale, IL 21,581 1,333,078 13,326,071
Internet Solutions,
LLC................... Sullivan, MO 5,437 332,089 3,272,518
Midwest North Operating
Group
FGInet, Inc. .......... Springfield, IL 10,031 508,956 6,617,084
North Central Operating
Group
SuperHighway, Inc.
d/b/a IndyNet......... Indianapolis, IN 18,114 869,136 10,402,022
California Operating
Group
Lightspeed Net, Inc. .. Bakersfield, CA 15,672 1,190,328 16,090,597
JPS.Net Corporation ... Sacramento, CA 100,736 3,058,840 27,008,890
New England Operating
Group
TGF Technologies,
Inc. ................. Burlington, VT 27,189 1,455,921 24,571,000
------- ----------- ------------
Total....................................... 331,849 $16,528,664 $193,794,013
======= =========== ============
</TABLE>
18
<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.
19
<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 19 above and "Selected Combined Pro Forma Financial
Data" on page 23 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 16 above. See "Shares
Available for Future Sale" on page 79 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; 10,916,497 shares
issued and outstanding on a pro forma
combined basis; 18,916,497 shares
issued and outstanding on a pro forma
as adjusted basis...................... 4,783 10,916 18,916
Additional paid-in capital.............. 53,042 122,024,629 253,756,629
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>
20
<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
21
<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.... 10,916,497 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.................. 18,916,497 100.0% $274,035,545 100.0% $14.49
========== ===== ============ ===== ======
</TABLE>
22
<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 pro forma 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 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 net loss per share.................. $ (3.57)
============
Shares used in the calculation of pro forma basic and diluted
net loss per share............................................. 18,916,497
============
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>
23
<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........................................ 254,044,957 300,476,738
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 earnings or losses before interest, taxes, 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 $71,816,291
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 19 above.
24
<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.
25
<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. 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>
26
<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........... 89,565 167,486 139,283 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>
27
<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 2,086,754 3,879,590
Total members' 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 members' 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 members' 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.
28
<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;
29
<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 and other intangibles acquired in
the acquisitions of our 17 ISPs and is provided over three years. We expect
amortization expense to increase as
30
<PAGE>
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 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 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.
Pro Forma 1998 Compared to Pro Forma 1997
The following table shows our pro forma statement of operations data for the
years ended December 31, 1997 and 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. These
results are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1998
---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues............... $ 30,438.7 $ 56,686.8
Cost of access and other
revenues.................... 13,404.0 22,786.9
Operations and customer
support..................... 5,087.2 8,833.6
Sales and marketing.......... 3,595.9 7,114.9
General and administrative... 12,108.4 18,439.0
Amortization................. 71,773.0 72,684.9
Depreciation................. 3,126.7 4,281.4
---------- ----------
Operating loss............... $(78,656.5) $(77,453.9)
========== ==========
Subscribers at period end.... 158,204 331,849
</TABLE>
31
<PAGE>
Revenues. Revenues increased 86.2% 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 70.0% 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 decreased from 44.0% in 1997 to
40.2% in 1998, primarily as a result of existing excess capacity being used to
service new subscribers.
Operating expenses. Operating expenses, which include operations and customer
support, sales and marketing and general and administrative expenses, increased
65.4% from 1997 to 1998, primarily as a result of hiring additional customer
support, technical support and administrative personnel. Operating expenses as
a percentage of revenues decreased from 68.3% in 1997 to 60.7% in 1998,
primarily as a result of spreading the cost of existing personnel over a
growing subscriber base.
Combined Quarterly Results of Operations
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.
The following table shows our pro forma statement of operations data for the
eight quarters in the period ended December 31, 1998. This quarterly
information, in our opinion, reflects all the adjustments that we consider
necessary for fair presentation of this information under generally accepted
accounting principles. These quarterly results 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>
32
<PAGE>
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 $225,000, 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 86.2% 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. For each quarter in the
two-year period ended December 31, 1998, our revenues grew by an average of 16%
and the number of our subscribers grew by an average of 20% over the previous
quarter. 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 internal 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.
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<PAGE>
. Grow Our Subscriber Base.
Our ISPs have been successful both in attracting and acquiring new
subscribers and retaining existing subscribers. Subscribers are those
customers to whom we provide dial-up or dedicated Internet access, and
include customers paying full rates as well as special introductory rates.
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 internal
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 internal
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.
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Develop a National Brand. We will also seek to support internal growth by
converting to a national brand supported by community-based marketing
programs. This strategy includes two components:
. 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 Executive Vice President and Chief Technology
Officer
M. Cristina Dolan......... 38 Executive 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.................
Robert J. Dole............ 76 Director Nominee
</TABLE>
Stephen E. Smith has served as our President and Chief Executive Officer and
sole director since our inception in August 1998. Mr. Smith was an investment
banker having worked both in the Corporate Finance and Mergers and Acquisitions
Departments at Morgan Stanley & Co. Incorporated from March 1991 to July 1998.
From 1988 to 1991, Mr. Smith worked for the Trammell Crow Companies.
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,
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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.
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,
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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.
Robert J. Dole will become one of our directors following this offering. Sen.
Dole has been special counsel to the law firm of Verner, Liipfert, Bernhard,
McPherson and Hand Chartered since 1997. He was a United States Senator from
1969 to 1996, serving as Senate Republican Leader from 1985-1996. Sen. Dole is
also a director of Community Health Systems, Inc., Tiger Management L.L.C., and
serves on the Forstmann Little & Co. Advisory Board.
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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. Sen. Dole will receive an initial grant under this plan to purchase
50,000 shares upon his 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 300,000
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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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 40,000 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 73 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......................... $ 851,534 154,921 40,000
Allon H. Lefever............................ $ 872,779 125,603 33,000
Ella Fontanals de Cisneros ................. $6,922,600 1,010,000 --
</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 67 above.
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PRINCIPAL STOCKHOLDERS
The following shows forth the number and percentage of outstanding shares of
our common stock that were owned as of March 15, 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 March 15, 1999, there were 4,882,500 shares of common stock
outstanding. Following this offering, we will have outstanding 18,916,497
shares of common stock, assuming the underwriters do not exercise their over-
allotment option, or 20,416,496 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 4,075,265 shares of common stock at
the initial public offering price, including 1,143,050 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 14 of these stockholders. To
preserve the tax-deferred nature of the transactions in which we will acquire
our 17 ISPs, these 14 stockholders have agreed to forfeit up to 1,099,203
shares, on a pro rata basis, 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. The following table reflects this reduction with and without the
underwriters' over-allotment option. If, however, any of Messrs. Smith, Shay or
Ledecky purchases a significant number of shares in this offering, this
forfeiture could be significantly reduced or may not occur at all. If none of
their shares are forfeited, the 14 stockholders that are parties to the
stockholders agreement will benefically own approximately 24.1% of our
outstanding common stock after the offering.
Mr. Jenkins is the founder and controlling stockholder of JPS.Net. Mrs.
Cisneros' shares are held by SWIFT Company (B.V.I.) Limited, which is wholly
owned by Mrs. Cisneros 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% 1,150,332 6.0% 1,234,848 6.0%
50 Hawthorne Road
Southhampton, NY 11968
Michael C. Crabtree..... -- -- 154,963 * 154,963 *
1127 North Broadway
Knoxville, TN 37919
Dewey K. Shay........... 1,012,500 20.5 881,957 4.6 944,877 4.6
50 Hawthorne Road
Southhampton, NY 11968
Martin R. Lyons......... 200,000 4.1 154,461 * 166,890 *
50 Hawthorne Road
Southhampton, NY 11968
M. Cristina Dolan....... 100,000 2.0 77,230 * 83,445 *
50 Hawthorne Road
Southhampton, NY 11968
Allon H. Lefever........ 40,000 * 165,603 * 165,603 *
212 Spottswood Lane
Lancaster, PA 17601
Thomas R. Eisenmann..... -- -- -- -- -- --
Harvard Business
School
Baker West 188
Soldiers Field
Boston, MA 02163
Donald R. Kaufmann...... -- -- -- -- -- --
4139 Oregon Pike
Ephrata, PA 17522
Ella Fontanals de
Cisneros .............. -- -- 1,010,000 5.3 1,010,000 4.9
Calle Caribay
Qta. Los Cisnes
Caracas, Venezuela
Robert J. Dole.......... -- -- -- -- -- --
901 15th Street, N.W.
Washington, DC 20005
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 1,544,607 8.2 1,668,895 8.2
1400 34th Street, N.W.
Washington, D.C. 20007
All directors, director
nominees and executive
officers as a group
(10 persons)........... 2,700,000 55.3% 3,594,544 18.8% 3,760,624 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 March 15, 1999, there were 4,882,500 shares of our
common stock outstanding, held by 17 holders of record. Up to 1,099,203 of
these shares may be forfeited as described under "Principal Stockholders" on
page 72 above. We do not have any outstanding shares of preferred stock.
Following this offering, we will have outstanding 18,916,497 shares of common
stock, assuming the underwriters do not exercise their over-allotment option,
or 20,416,496 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 18,916,497 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option,
or 20,416,496 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 10,916,497 shares of common stock outstanding following this
offering, assuming the underwriters do not exercise their over-allotment
option, or 11,216,496 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 4,075,265 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;
. options to purchase 1,796,000 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; and
. fully vested options to purchase 45,000 shares of common stock to be
granted to an independent consultant and one of our service providers.
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 16
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 10,578,575 shares of common stock upon completion of this
offering, assuming the underwriters do not exercise their over-allotment
option, or 10,878,574 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 6,789,082 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 71 above.
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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. We expect to issue these shares on , 1999.
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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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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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.
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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
85
<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
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<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
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<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.
FORWARD-LOOKING STATEMENTS
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.
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
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<PAGE>
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-9
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.
Report 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
Report 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 and 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.COM (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 46,531,932 60,222,453
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 $ 46,431,781 $300,476,738
========== ============ ============ ============ ============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable.......... -- 3,064,094 3,064,094 $ -- $ 3,064,094 $ -- $ 3,064,094
Accrued expenses.......... 6,276,503 1,619,120 7,895,623 -- 7,895,623 (6,158,677) 1,736,946
Current portion of
unearned revenue......... -- 8,185,411 8,185,411 -- 8,185,411 -- 8,185,411
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 (82,091,539) 25,841,943
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 (85,308,219) 47,477,366
Stockholders' equity
(deficit)................
Preferred stock........... -- -- -- -- -- -- --
Common stock.............. 4,783 9,931,495 9,936,278 (9,925,362) 10,916 8,000 18,916
Additional paid-in
capital.................. 53,042 3,643,920 3,696,962 118,327,667 122,024,629 131,732,000 253,756,629
Partners' capital......... -- 184,800 184,800 184,800 -- -- --
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 $ 46,431,781 $300,476,738
========== ============ ============ ============ ============ ============ ============
</TABLE>
F-6
<PAGE>
ONEMAIN.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Combined
Acquisitions
with
Acquisition Transaction
Adjustments Adjustments Pro Forma
OneMain.com (See Note 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
Costs 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 costs and
expenses........... 761,074 61,526,757 62,287,831 71,852,861 134,140,692
--------- ----------- ----------- ------------ ------------
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 expense, net.... -- (319,011) (319,011) -- (319,011)
--------- ----------- ----------- ------------ ------------
Loss 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 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 the
calculation of basic
and diluted net loss
per share.............. 4,668,396
=========
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..... 18,916,497
============
</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>
Combined
Aquisitions
with
Acquisition Transaction
Adjustments 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.............. -- 64,033 64,033 -- 64,033
Accounts receivable
direct write-off...... -- 322,384 322,384 -- 322,384
Provision for doubtful
accounts.............. -- 645,768 645,768 -- 645,768
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.. -- (2,327,773) (2,327,773) -- (2,327,773)
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)
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>
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-9
<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 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(A) 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.. 12,599,081 1,226,414 20,971,679 33,570,760 (947,358) 13,352,490 21,165,628
IPA..................... 7,500,000 400,000 6,840,000 14,340,000 1,163,233 5,097,110 8,079,657
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 4,175,359 6,617,084 (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>
A. The net assets acquired from the ISPs reflect adjustments to the amounts
reported in the December 31, 1998 financial statements to account for debt
retained by the former shareholders, anticipated earnings for the period
January 1, 1999 through the date of acquisition, and the deferred tax
liabilities which will be recorded upon the consummation of the
Transactions. The adjustments to the individual ISP's are summarized as
follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
Anticipated
Earnings for the
Net Asset Per period January 1, Deferred Tax
December 31, 1998 Debt Retained by 1999 Through Liability
Financial Former The Date of Recorded in Net Assets
Statements Shareholders Acquisition Acquisition Acquired
----------------- ---------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
SuperNet................ 596,574 2,100,000 (96,574) (2,295,125) 304,875
SunLink................. 75,793 125,000 24,207 (860,923) (635,923)
LebaNet................. 102,875 -- (32,875) (49,579) 20,421
SouthWind............... 464,494 -- 25,506 (1,150,130) (660,130)
Horizon................. (16,258) -- 4,258 (717,575) (729,575)
United States Internet.. (3,026,084) 5,416,023 191,603 (3,528,900) (947,358)
IPA..................... (1,163,546) 3,500,000 -- (1,173,221) 1,163,233
ZoomNet................. 243,921 438,461 111,367 (1,346,047) (552,298)
Palm.Net................ 85,262 92,762 33,400 (519,271) (307,847)
IAG..................... (203,790) -- -- (493,100) (696,890)
Midwest Internet........ (185,639) -- 270,639 (1,025,277) (940,277)
Internet Solutions...... 155,294 241,000 59,706 -- 456,000
FGI..................... 217,987 -- 94,958 (1,003,100) (690,155)
Indynet................. 659,242 -- 6,400 (1,774,592) (1,108,950)
Lightspeed.............. 761,526 50,000 (3,784) (1,507,452) (699,710)
JPS..................... (2,966,036) 927,000 200,047 (10,073,600) (11,912,589)
TGF..................... (49,322) 30,000 -- (2,718,900) (2,738,222)
---------- ---------- ------- ----------- -----------
Total................ (4,247,707) 12,920,246 888,858 (30,236,792) (20,675,395)
========== ========== ======= =========== ===========
</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 2,050 100 45,000 3,000 7,448,105 -- 15,000
Additional paid-in
capital.................. -- 30,145 600 -- 19,065 -- -- 55,000
Partners' capital......... -- -- -- -- -- -- -- --
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 69,899 520,608 215,791 1,619,120
58,585 167,484 97,948 68,294 221,803 -- 346,445 5,583,406 279,991 8,185,411
-- -- -- -- -- -- -- -- -- 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
-- -- -- -- -- -- -- -- -- --
100 100 -- -- 459,089 87,503 874,751 12,582 500,000 9,931,495
400 17,570 -- -- -- -- 1,670,962 -- 1,850,178 3,643,920
-- -- -- 184,800 -- -- -- -- -- 184,800
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.......... -- -- -- -- -- -- (6,158,677)
----------- ----------- ------------ ------------ ------------ ----------- ------------
Total current
assets......... -- -- -- -- 131,740,000 (6,379,586) (78,828,482)
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) $(78,928,633)
=========== =========== ============ ============ ============ =========== ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts
payable........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Accrued
expenses....... -- -- -- -- -- -- (6,158,677)
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) (78,872,604)
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) (78,928,633)
Stockholders'
equity (deficit)
Preferred
stock.......... -- -- -- -- -- -- --
Common stock.... -- -- (9,925,362) (9,925,362) 8,000 -- --
Additional
paid-in
capital........ (71,816,291) -- 190,143,958 118,327,667 131,732,000 -- --
Partners'
capital........ -- -- (184,800) (184,800) -- -- --
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) $(78,928,633)
=========== =========== ============ ============ ============ =========== ============
<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.......... (6,158,677)
-------------
Total current
assets......... 46,531,932
Property and
equipment,
net............ --
Goodwill and
intangibles,
net............ --
Customer Lists,
net............ --
Deferred tax
asset.......... --
Due from
affiliates/stockholders.. (100,151)
Other assets.... --
-------------
Total assets.... $ 46,431,781
=============
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts
payable........ $ --
Accrued
expenses....... (6,158,677)
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.... (82,091,539)
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.... (85,308,219)
Stockholders'
equity (deficit)
Preferred
stock.......... --
Common stock.... 8,000
Additional
paid-in
capital........ 131,732,000
Partners'
capital........ --
Retained
earnings
(accumulated
deficit)....... --
-------------
Total
stockholders'
equity
(deficit)...... 131,740,000
-------------
Total liabilities
and
stockholders'
equity
(deficit)....... $ 46,431,781
=============
</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 $121,977,720) 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): The customer lists were valued at $250 per
subscriber acquired which represents the estimated fair value of such
subscribers based upon recent transactions in the ISP industry.
(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>
United
States
SuperNet SunLink LebaNet SouthWind Horizon Internet IPA ZoomNet
---------- ---------- -------- ---------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Access revenues........ $3,623,740 $1,411,164 $217,679 $2,032,310 $1,099,777 $ 6,011,020 $4,274,630 $1,853,373
Other revenues......... 323,064 -- 80,430 138,094 61,410 503,632 150,947 114,307
---------- ---------- -------- ---------- ---------- ------------ ---------- ----------
Total revenues....... 3,946,804 1,411,164 298,109 2,170,404 1,161,187 6,514,652 4,425,577 1,967,680
Cost and expenses:
Cost of access reve-
nues.................. 1,296,020 566,102 78,417 637,071 370,567 3,051,699 1,859,301 752,059
Cost of other reve-
nues.................. 169,774 -- 31,250 71,523 50,017 123,110 41,506 20,428
Operations and cus-
tomer support......... 541,786 374,213 18,596 437,890 48,916 1,174,588 583,987 175,424
Sales and marketing.... 612,753 102,507 448 83,200 166,582 951,393 349,409 259,851
General and adminis-
trative............... 604,457 303,948 30,254 450,652 395,745 4,798,140 1,471,226 339,459
Amortization........... 73,744 -- -- -- 4,345 477,952 127,405 11,799
Depreciation........... 191,720 125,565 22,743 160,271 66,611 587,551 511,924 206,776
---------- ---------- -------- ---------- ---------- ------------ ---------- ----------
Total cost and
expenses 3,490,254 1,472,335 181,708 1,840,607 1,102,783 11,164,433 4,944,758 1,765,796
---------- ---------- -------- ---------- ---------- ------------ ---------- ----------
Income (loss) from
operations............. 456,550 (61,171) 116,401 329,797 58,404 (4,649,781) (519,181) 201,884
Other income (expense)
Interest income........ -- -- -- 623 -- 28,797 -- --
Interest expense....... (99,046) (20,363) -- (10,523) (32,634) (311,946) (250,054) (40,895)
Other income (ex-
pense), net........... (52,070) -- -- 5,556 7,458 (141,674) -- (748)
---------- ---------- -------- ---------- ---------- ------------ ---------- ----------
Income (loss) before
provision (benefit) for
income taxes........... 305,434 (81,534) 116,401 325,453 33,228 (5,074,604) (769,235) 160,241
Provision (benefit) for
income taxes........... 54,985 -- -- -- -- -- -- 63,153
---------- ---------- -------- ---------- ---------- ------------ ---------- ----------
Net income (loss)....... $ 250,449 $ (81,534) $116,401 $ 325,453 $ 33,228 $(5,074,604) $(769,235) $ 97,088
========== ========== ======== ========== ========== ============ ========== ==========
</TABLE>
F-16
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(cont'd)
<TABLE>
<CAPTION>
Midwest Internet Combined
Palm.Net IAG Internet Solutions FGI Indynet Lightspeed JPS TGF Acquisitions
- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$583,930 $1,402,635 $3,925,868 $ 996,590 $1,330,059 $2,904,989 $4,463,663 $6,711,797 $4,864,132 $47,707,356
41,992 131,742 165,198 5,945 163,731 108,394 189,328 2,289,781 90,440 4,558,435
- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
625,922 1,534,377 4,091,066 1,002,535 1,493,790 3,013,383 4,652,991 9,001,578 4,954,572 52,265,791
148,787 558,046 1,364,873 371,893 495,776 900,834 1,864,723 3,723,345 1,747,470 19,786,983
13,750 99,365 -- -- 128,387 46,127 109,903 105,447 10,045 1,020,632
63,358 214,746 423,200 174,202 164,848 514,745 731,833 1,723,719 701,342 8,067,393
63,171 161,627 490,132 38,957 247,877 550,339 561,253 1,483,192 649,803 6,772,494
182,249 498,836 987,954 204,092 376,110 642,302 1,238,536 2,595,107 1,403,596 16,522,663
-- -- -- 27,675 90,267 795 8,977 132,467 -- 955,426
35,300 60,668 324,711 72,419 94,834 208,290 657,149 90,921 568,597 3,986,050
- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
506,615 1,593,288 3,590,870 889,238 1,598,099 2,863,432 5,172,374 9,854,198 5,080,853 57,111,641
- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
119,307 (58,911) 500,196 113,297 (104,309) 149,951 (519,383) (852,620) (126,281) (4,845,850)
300 1,207 -- 369 1,443 -- 1,972 50,700 730 86,141
(7,880) (34,450) (106,066) (21,075) (10,827) (13,861) -- (22,327) (61,694) (1,043,641)
(40,385) -- 9,288 -- (650) (13,652) -- (87,613) (4,521) (319,011)
- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
71,342 (92,154) 403,418 92,591 (114,343) 122,438 (517,411) (911,860) (191,766) (6,122,361)
-- -- -- -- (9,603) -- -- -- -- 108,535
- -------- ---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -----------
$ 71,342 $ (92,154) $ 403,418 $ 92,591 $(104,740) $ 122,438 $ (517,411) $ (911,860) $(191,766) $(6,230,896)
======== ========== ========== ========= ========== ========== ========== ========== ========== ===========
<CAPTION>
Combined
Acquisitions
with
Acquisition Acquisition
Palm.Net Adjustments(A.) Adjustments
- --------- --------------- -------------
<S> <C> <C>
$583,930 $4,106,706 $51,814,062
41,992 314,353 4,872,788
- --------- --------------- -------------
625,922 4,421,059 56,686,850
148,787 1,785,862 21,572,845
13,750 193,439 1,214,071
63,358 766,192 8,833,585
63,171 342,373 7,114,867
182,249 792,176 17,314,839
-- 239,646 1,195,072
35,300 295,428 4,281,478
- --------- --------------- -------------
506,615 4,415,116 61,526,757
- --------- --------------- -------------
119,307 5,943 (4,839,907)
300 6,232 92,373
(7,880) (54,080) (1,097,721)
(40,385) -- (319,011)
- --------- --------------- -------------
71,342 (41,905) (6,164,266)
-- -- 108,535
- --------- --------------- -------------
$ 71,342 $ (41,905) $(6,272,801)
========= =============== =============
</TABLE>
A. The Acquisition Adjustments have been recorded to reflect the pro forma
results of operations as if 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 lists 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) in compensation expense related to United
States Internet's stock appreciation rights which terminate under the
terms of the agreement upon a change of control. The adjustment is equal
to the charge recorded by United States Internet during 1998. The related
liability is not part of the purchase price paid by OneMain.com because
the liability will be retained by the former shareholders of United States
Internet. 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
States
SuperNet SunLink LebaNet SouthWind Horizon Internet IPA ZoomNet
---------- -------- -------- --------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income....... $ 250,449 (81,534) 116,401 325,453 33,228 (5,074,604) (769,235) 97,088
Adjustments to reconcile
net (loss) income to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 265,464 125,565 22,743 160,271 70,956 1,065,503 639,329 218,575
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 -- --
Accounts receivable
direct write-off...... -- -- -- -- -- -- -- --
Provision for doubtful
accounts.............. -- -- 3,337 17,828 25,964 334,455 63,000 22,100
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.. ( 31,307) 3,298 1,400 (35,082) (75,596) (609,199) (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............. -- -- -- -- -- -- -- --
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>
A. The acquisition adjustments have been recorded to reflect the pro forma
statement of cash flows as if the acquisition 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 the acquisitions.
F-22
<PAGE>
ONEMAIN.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (cont'd)
<TABLE>
<CAPTION>
Midwest Internet Combined Acquisition
Palm.Net IAG Internet Soutions FGI Indynet Lightspeed JPS TGF Aquisition AdjustmentsA
-------- ------- -------- -------- -------- -------- ---------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
71,342 (92,154) 403,418 92,591 (104,740) 122,438 (517,411) (911,860) (191,766) (6,230,896) (41,905)
35,300 60,668 324,711 100,094 185,101 209,085 666,126 223,388 568,597 4,941,476 535,074
-- -- (8,868) -- -- 3,649 -- 38,271 4,279 118,423 --
-- -- -- -- -- -- -- -- --
-- -- -- -- (9,603) -- -- -- -- (22,276) --
-- -- -- -- 7,750 -- -- -- -- 7,750 --
-- 21,864 -- -- -- -- -- -- -- 21,864 --
-- -- -- -- -- -- -- -- -- 64,033 --
-- -- -- -- -- 195,000 -- -- 127,384 322,384 --
-- -- -- -- -- 65,000 82,289 31,795 -- 645,768 --
-- -- -- -- -- -- -- -- -- 3,340,678 --
-- -- -- -- -- -- -- -- -- 108,915 --
-- -- -- -- -- -- -- -- -- 60,000 --
2,540 (59,514) (133,706) (5,636) (423) (149,816) (83,640) (301,351) (320,589) (1,834,604) (483,169)
-- -- -- -- (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 --
======= ======= ======== ======== ======== ======== ======== ========== ======== =========== ========
<CAPTION>
Combined
Acquisitions With
Aquisition
Palm.Net Total
- ----------- -----------------
<S> <C>
71,342 (6,272,801)
35,300 5,476,550
-- 118,423
-- --
-- (22,276)
-- 7,750
-- 21,864
-- 64,033
-- 322,384
-- 645,768
-- 3,340,678
-- 108,915
-- 60,000
2,540 (2,327,773)
-- (115,415)
(2,440) (358,226)
-- (5,501)
-- (934)
761 263,587
-- (172,180)
--
-- 751,975
-- 59,969
-- 110,639
22,821 4,513,817
-- 53,950
-- (4,643)
- ----------- -----------------
130,324 6,640,553
-- 8,981
-- (627,282)
-- (5,000)
-- (622,011)
(72,367) (6,211,724)
-- (1,129,116)
-- (2,303,705)
- ----------- -----------------
(72,367) (10,889,857)
-- (1,262,140)
-- (12,715)
-- (40,000)
-- (488,057)
-- 6,715,534
-- 1,438,242
(57,811) 192,189
-- (717,386)
- ----------- -----------------
(57,811) 5,825,667
- ----------- -----------------
146 1,576,363
15,476 1,401,365
- ----------- -----------------
15,622 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 TRANSACTION
ADJUSTMENTS.
The following table summarizes unaudited pro forma combined statement of cash
flows transaction adjustments for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Transaction
(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............. -- -- -- -- -- -- --
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 lists 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 -- ( 11,500) 45,525
Issuance of common stock
for services........... -- -- 800 -- -- 800
--------- ------ ------- --------- -------- ---------
Balance at December 31,
1998................... 4,782,500 $4,783 $53,042 $(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.. 12,599,081 1,226,414 20,971,679 33,570,760 (947,358) 13,352,490 21,165,628
IPA..................... 7,500,000 400,000 6,840,000 14,340,000 1,163,233 5,097,110 8,079,657
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 4,175,359 6,617,084 (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.
7. Subsequent Event
In January 1999, the Company issued 100,000 shares of Common Stock to an
employee at $0.05 per share. The Company anticipates that it will recognize a
non-cash compensation charge currently estimated to be approximately $1.5
million in the first quarter of 1999 resulting from this issuance.
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............. 48,601 155,502 265,464
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............................... (6,769) (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 Transactions
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
March 1, 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.......... 225,763 141,316 334,455
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................... (291,737) (140,150) (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,
$17,582 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 $250,054, 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
-------- --------
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.................................. 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 Company. 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................................. 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............. 178,771 301,244 324,711
(Gain) loss on sale or disposal of
equipment................................ 3,060 (37,269) (8,868)
Changes in operating assets and
liabilities:
Accounts receivable, net................ (227,830) 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.
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.
F-170
<PAGE>
MIDWEST INTERNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(continued)
<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
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-171
<PAGE>
[Page Intentionally Left Blank]
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>
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.
F-193
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
5. Financing Arrangements (continued)
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.
7. Stock Compensation
In 1996, the Company recorded compensation expense of $75,000 for voting
common stock issued to employed stockholders at less than fair value. Fair
value for purposes of calculating compensation expense was the most recent sale
price for voting common stock sold to outside investors. The difference between
this amount and the amount paid by the employed shareholders was recorded as
compensation expense.
8. Stock Options
The Board of Directors may grant voting and nonvoting common stock options to
employees, board members, and others who contribute materially to the success
of the Company. Stock options have been granted at prices which the Company's
Board of Directors believe approximate the fair market value of its common
stock at the date of grant, taking into consideration the stock's voting
rights, transferability and liquidity. Individual grants generally become
exercisable immediately. The contractual term of the options granted are five
years from the date of grant.
F-194
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
8. Stock Options (continued)
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.
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.
F-195
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
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>
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>
F-196
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
10. Acquisitions (continued)
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>
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.
F-197
<PAGE>
FGINET, INC.
NOTES TO FINANCIAL STATEMENTS--(continued)
Years ended December 31, 1996, 1997, and 1998
10. Acquisitions (continued)
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 as of December 31, 1997, and 1998, and the related statements of
income, stockholder's 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 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 --
-------- --------
Total current assets..................................... 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 and Stockholder's Equity
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
-------- --------
Total liabilities and stockholder's equity............... $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........... 212,659 500,692 666,126
Provision for doubtful accounts......... 11,245 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
(inception) to Year ended
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.
F-231
<PAGE>
JPS.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS--(continued)
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 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>
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>
(e) 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.
(f) Prior to filing this Registration Statement, the Registrant agreed to
issue approximately 6,123,200 shares of its Common Stock to 128 persons in
exchange for all the stock or limited liability company interests held by these
persons in 16 of the 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 and cash have
been valued at a total of approximately $169.2 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. After the
filing of this Registration Statement, the Registrant agreed to issue
approximately 1,010,000 shares of its Common Stock to one person in exchange
for its interest in one of the companies the Registrant will acquire upon
completion of its initial public offering. This transaction was effected
without registration under the Securities Act in reliance upon the exemption
from registration contained 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>
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Amended and Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated Bylaws of the Registrant
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 Form of 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
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
10.7 Form of 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
10.10 Form of 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 Form of 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)
23.28 Consent of Robert J. Dole (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>
--------
+ 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 15th day of March, 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>
Chairman, President
/s/ Stephen E. Smith and Chief Executive March 15, 1999
- ------------------------------------- Officer and
Stephen E. Smith Director (Principal
Executive Officer)
Executive Vice
/s/ Dewey K. Shay President, Chief March 16, 1999
- ------------------------------------- Financial Officer,
Dewey K. Shay Treasurer,
Secretary and
Director Nominee
(Principal
Financial and
Accounting Officer)
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibits Number
------- -------- ------
<C> <S> <C>
1.1 Form of Underwriting Agreement
Amended and Restated Certificate of Incorporation of the
3.1+ Registrant
3.2 Amended and Restated Bylaws of the Registrant
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 dated as of
February , 1999
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 Form of 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 Form of 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
Form of Senior Management Agreement between the Registrant
10.9+ and Stephen E. Smith
10.10 Form of Senior Management Agreement between the Registrant
and Michael C. Crabtree
Form of Senior Management Agreement between the Registrant
10.11+ and Martin R. Lyons
10.12 Amendment to Senior Management Agreement between the
Registrant and Martin R. Lyons
Senior Management Agreement between the Registrant and M.
10.13+ 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
Form of Senior Management Agreement between the Registrant
10.16 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
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)
23.28 Consent of Robert J. Dole (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>
- --------
+ Previously filed.
<PAGE>
EXHIBIT 1
8,000,000 Shares
OneMain.com, Inc.
Common Stock
($.001 Par Value)
UNDERWRITING AGREEMENT
----------------------
March ___, 1999
BT Alex. Brown Incorporated
ING Baring Furman Selz LLC
First Union Capital Markets Corp.
Soundview Technology Group
Wit Capital Corporation
As Representatives of the
several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
OneMain.com, Inc., a Delaware corporation (the "Company"), proposes to sell
to the several underwriters (the "Underwriters") named in Schedule I hereto for
whom you are acting as representatives (the "Representatives") an aggregate of
8,000,000 shares of the Company's Common Stock, $.001 par value (the "Firm
Shares"). The respective amounts of the Firm Shares to be so purchased by the
several Underwriters are set forth opposite their names in Schedule I hereto.
The Company also proposes to sell at the Underwriters' option an aggregate of up
to 1,200,000 additional shares of the Company's Common Stock (the "Option
Shares") as set forth below.
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm
-1-
<PAGE>
Shares set forth opposite their respective names in Schedule I, plus their pro
rata portion of the Option Shares if you elect to exercise the over-allotment
option in whole or in part for the accounts of the several Underwriters. The
Firm Shares and the Option Shares (to the extent the aforementioned option is
exercised) are herein collectively called the "Shares."
Simultaneously with the closing with respect to the purchase of the Firm
Shares by the Underwriters, the Company will acquire each of the Acquired
Companies (as hereinafter defined) (collectively, the "Acquisitions"), the
consideration for which will be a combination of cash and shares of the
Company's Common Stock as described in the Registration Statement.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (File No. 333-69925) with respect
to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") promulgated thereunder and has been filed
with the Commission. Copies of such registration statement, including any
amendments thereto, the preliminary prospectuses (meeting the requirements of
the Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement as amended at the
time it becomes effective, together with any registration statement filed by the
Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of this
Agreement. "Prospectus" means (a) the form of prospectus first filed with the
Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus
included in the Registration Statement filed prior to the time it becomes
effective or filed pursuant to Rule 424(a) under the Act that is delivered by
the Company to the Underwriters for delivery to purchasers of the Shares,
together with any term sheet or abbreviated term sheet filed with the Commission
pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included
in the Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or
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lease its properties and conduct its business as described in the Registration
Statement. Each of the entities which will become a subsidiary of the Company
upon the consummation of the Acquisitions as listed in Exhibit A hereto
(collectively, the "Acquired Companies") has been duly organized and is validly
existing as a corporation or limited liability company, as applicable, in good
standing under the laws of the jurisdiction of its incorporation or formation,
as the case may be, with corporate or limited liability company, as applicable,
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement. As of the date hereof, the Company has
no subsidiaries. The Company and each of the Acquired Companies are duly
qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification except where the failure to qualify
would not have a material adverse effect on the Company and the Acquired
Companies taken as a whole. The outstanding shares of capital stock of each of
the Acquired Companies that are corporations have been duly authorized and
validly issued, and are fully paid and non-assessable. The outstanding
membership interests of each of the Acquired Companies that are limited
liability companies have been duly authorized and validly issued and are fully
paid and non-assessable. As of the Closing Date (as hereinafter defined), after
giving effect to the Acquisitions, all of the outstanding shares of capital
stock and membership interests, as applicable, of each of the Acquired Companies
will be owned by the Company free and clear of all liens, encumbrances, equities
and claims; and except as described in the Registration Statement, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in the Acquired Companies will be outstanding.
(c) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the Shares
to be issued and sold by the Company pursuant to this Agreement have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and non-assessable; and no preemptive rights of stockholders
exist with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement nor the offering or sale of the Shares
as contemplated by this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
shares of Common Stock. Upon completion of the Acquisitions in the manner
described in the Registration Statement, the shares of Common Stock of the
Company to be issued in the Acquisitions will be duly authorized, validly
issued, fully paid and non-assessable, and no preemptive rights of stockholders
exist with respect to any of such shares or the issuance and sale thereof.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms, in all material respects, to the corporate law of the
jurisdiction of the Company's incorporation.
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(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform in all
material respects, to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not contain, and will
not contain, any untrue statement of a material fact and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus and any
amendments and supplements thereto do not contain, and will not contain, any
untrue statement of material fact; and do not omit, and will not omit, to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(f) The financial statements of the Company and the separate financial
statements of the Acquired Companies, in each case together with related notes
and schedules as set forth in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the Company
and the Acquired Companies, respectively, at the indicated dates and for the
indicated periods. Such financial statements and related schedules have been
prepared in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as disclosed
therein, and all adjustments necessary for a fair presentation of results for
such periods have been made. The summary financial and operating data included
in the Registration Statement present fairly the information shown therein and
such data has been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company and each of the
Acquired Companies. The combined pro forma financial statements of the Company
and the Acquired Companies and other pro forma financial information included in
the Registration Statement and the Prospectus present fairly the information
shown therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
(g) Ernst & Young LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
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(h) Each of Grant Thorton LLP, Coulter & Justus, P.C., Lopez, Levi &
Associates, P.A. and Kevin J. Tochtrop, Certified Public Accountant, who have
certified the financial statements of Southwind Internet Access, Inc., United
States Internet, Inc., Netrox, LLC and Internet Solutions, LLC, respectively,
filed with the Commission as part of the Registration Statement, are independent
public accountants as required by the Act and the Rules and Regulations.
(i) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the Acquired
Companies before any court or administrative agency or otherwise which if
determined adversely to the Company or any of the Acquired Companies would
result in any material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and of the Acquired Companies taken as a whole or
prevent the consummation of the transactions contemplated hereby, except as set
forth in the Registration Statement.
(j) Each of the Company and the Acquired Companies has good title to all
of the properties and assets reflected as owned by them in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. Each of the Company
and the Acquired Companies occupies its leased properties under valid and
binding leases conforming in all material respects to the description thereof
set forth in the Registration Statement.
(k) Each of the Company and the Acquired Companies has filed or obtained
an extension to file all Federal, State, local and foreign income tax returns
which have been required to be filed and has paid all taxes indicated by said
returns and all assessments received by it to the extent that such taxes have
become due and are not being contested in good faith. All tax liabilities
incurred by the Company and the Acquired Companies but not yet due have been
adequately provided for in the financial statements of the Company.
(l) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, financial condition, or prospects of the Company and
the Acquired Companies taken as a whole, whether or not occurring in the
ordinary course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered into
by the Company or the Acquired Companies, other than transactions in the
ordinary course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. Neither the
Company nor any of the Acquired Companies have any material contingent
obligations which are not disclosed in the Company's or such Acquired Company's
financial statements which are included in the Registration Statement.
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<PAGE>
(m) Neither the Company nor any of the Acquired Companies is, or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Certificate of Incorporation or By-Laws or operating agreement
or under any agreement, lease, contract, indenture or other instrument or
obligation to which it is a party or by which it, or any of its properties, is
bound and which default is of material significance in respect of the business,
management, properties, assets, rights, operations, financial condition or
prospects of the Company and the Acquired Companies taken as a whole. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Acquired Company is a party,
or of the Certificate of Incorporation or By-Laws of the Company or any order,
rule or regulation applicable to the Company or any Acquired Company of any
court or of any regulatory body or administrative agency or other governmental
body having jurisdiction except for such conflicts, breaches or defaults as
would not have a material adverse effect on the Company and the Acquired
Companies, taken as a whole.
(n) Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
necessary in connection with the execution and delivery by the Company of this
Agreement and the consummation of the transactions herein contemplated (except
such additional steps as may be required by the Commission or the National
Association of Securities Dealers, Inc. (the "NASD")) has been obtained or made
and is in full force and effect except for such approvals, consents, orders,
authorizations, designations, declarations or filings which the failure to
obtain or make would not have a material adverse effect on the Company and the
Acquired Companies, taken as a whole.
(o) The Company and each of the Acquired Companies holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their businesses; and neither the Company nor any of
the Acquired Companies has infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of the
Company and the Acquired Companies taken as a whole. The Company knows of no
material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company or any Acquired
Company.
(p) Neither the Company, nor to the Company's best knowledge, any of its
affiliates or any of the Acquired Companies or any of their affiliates, has
taken or may take, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the shares of
Common Stock to facilitate the sale or resale of the Shares.
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<PAGE>
(q) Neither the Company nor any of the Acquired Companies is required to
register as an "investment company" within the meaning of such term under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations of the Commission thereunder.
(r) The Company and each of the Acquired Companies maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(s) The Company and each of the Acquired Companies carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(t) The Company and each of the Acquired Companies are in compliance in
all material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the regulations
and published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company or any Acquired Company would have any liability;
neither the Company nor any of the Acquired Companies has incurred nor expects
to incur liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "Code"); and each "pension plan" for
which the Company or any of the Acquired Companies would have any liability that
is intended to be qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by action or by failure
to act, which would cause the loss of such qualification.
(u) The Company has provided the Representatives true and correct copies
of the material agreements entered into in connection with the Acquisitions (the
"Acquisition Agreements"); the Company expects that the Acquisitions will close
on or about the Closing Date in accordance with the terms of the Acquisition
Agreements.
2. Purchase, Sale and Delivery of the Firm Shares.
----------------------------------------------
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees to
sell to the Underwriters and
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each Underwriter agrees, severally and not jointly, to purchase, at a price of
$_____ per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance with
Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in same
day funds via wire transfer to the order of the Company against delivery of the
Firm Shares to the Representatives for the several accounts of the Underwriters.
Such payment and delivery are to be made at the offices of BT Alex. Brown
Incorporated, 1 South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore
time, on the third business day after the date of this Agreement or at such
other time and date not later than five business days thereafter as you and the
Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and are not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and in
such registrations as the Representatives request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representatives at least one business day prior to the
Closing Date.
(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in paragraph (a) of this Section 2.
The option granted hereby may be exercised in whole or in part by giving written
notice (i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by you, as Representatives of
the several Underwriters, to the Company setting forth the number of Option
Shares as to which the several Underwriters are exercising the option, the names
and denominations in which the Option Shares are to be registered and the time
and date at which such certificates are to be delivered. The time and date at
which the Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to __________, adjusted by you in such manner as to avoid fractional shares.
The option with respect to the Option Shares granted hereunder may be exercised
only to cover over-allotments in the sale of the Firm Shares by the
Underwriters. You, as Representatives of the several Underwriters, may cancel
such option at any time prior to its expiration by giving written notice of such
cancellation to the Company. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option Closing
Date in same day funds via wire transfer to the order of the Company against
delivery of
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<PAGE>
certificates therefor at the offices of BT Alex. Brown Incorporated, 1 South
Street, Baltimore, Maryland.
3. Offering by the Underwriters.
----------------------------
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
------------------------
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (i) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, to prepare and timely file with the Commission under
Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the
Representatives containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(b) The Company will advise the Representatives promptly (i) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (ii) of receipt of any comments from the Commission, (iii) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably
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<PAGE>
request. The Company will deliver to, or upon the order of, the
Representatives during the period when delivery of a Prospectus is required
under the Act, as many copies of the Prospectus in final form, or as thereafter
amended or supplemented, as the Representatives may reasonably request. The
Company will deliver to the Representatives at or before the Closing Date, four
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the Representatives
such number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested), and
of all amendments thereto, as the Representatives may reasonably request.
(d) The Company will comply with the Act and the Rules and Regulations,
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Underwriters, it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in light of the circumstances existing at
the time the Prospectus is delivered to a purchaser, not misleading, or, if it
is necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
Prospectus so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with the law.
(e) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 15 months
after the effective date of the Registration Statement, an earning statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the requirements of Section
11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(f) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all other
documents, reports and information furnished by the Company to its stockholders
or filed with any securities exchange pursuant to the requirements of such
exchange or with the Commission pursuant to the Act or the Exchange Act. The
Company will deliver to the Representatives similar reports with respect to
significant subsidiaries, as that term is defined in Regulation S-X promulgated
by the Commission, which are not consolidated in the Company's financial
statements.
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<PAGE>
(g) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or exchangeable
or exercisable for shares of Common Stock or derivative of Common Stock (or
agreement for such) will be made for a period of 180 days after the date of this
Agreement, directly or indirectly, by the Company without the prior written
consent of BT Alex. Brown Incorporated, except for shares of Common Stock issued
pursuant to the terms of the Acquisition Agreements (including, without
limitation, "earn-out" shares and shares issued upon exercise of options granted
in accordance with the Acquisition Agreements), the grant of employee stock
options (up to a maximum of 5,000,000 shares) under the 1999 Stock Option and
Incentive Plan, the issuance of shares pursuant to the 1999 Employee Stock
Purchase Plan (up to a maximum of 500,000 shares) or the issuance of shares in
connection with acquisitions of businesses, provided that future acquisition
agreements contain lock-up arrangements prohibiting dispositions of Common Stock
prior to the expiration of the aforementioned 180 day period.
(h) The Company will use its best efforts to arrange for the quotation of,
subject to notice of issuance, the Shares on the Nasdaq National Market.
(i) The Company has caused each officer and director, certain stockholders
and certain persons who will become shareholders of the Company upon the
consummation of the Acquisitions to furnish to you, on or prior to the date of
this Agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person has agreed not to offer, sell,
sell short, pledge or otherwise dispose of any shares of Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or derivative of
Common Shares owned by such person (or as to which such person has the right to
direct the disposition of) or request the registration for the offer or sale of
any of the foregoing, for a period of 180 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of BT Alex. Brown
Incorporated ("Lockup Agreements") and except for shares of Common Stock
purchased on the open market after the date of this Agreement.
(j) The Company will (i) use its reasonable best efforts to close the
Acquisitions in accordance with the terms of the Acquisition Agreements and (ii)
will promptly notify the Representatives of the occurrence of any event which
may result in the non-consummation of or material change in the terms of any of
the Acquisitions on the Closing Date.
(k) The Company shall apply the net proceeds of its sale of the Shares as
set forth in the Prospectus and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
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<PAGE>
(l) The Company shall not invest or otherwise use the proceeds received by
the Company from its sale of the Shares in such a manner as would require the
Company or any of the Acquired Companies to register as an investment company
under the 1940 Act.
(m) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the Common Stock.
(n) The Company will not take, directly or indirectly, any action designed
to cause or result in, or that has constituted or might reasonably be expected
to constitute, the stabilization or manipulation of the price of any securities
of the Company.
5. Costs and Expenses.
------------------
The Company will pay all costs, expenses and fees incident to the
performance of its obligations under this Agreement and in connection with the
Acquisitions, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of
counsel for the Company; the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Invitation
Letter; the filing fees of the Commission; the filing fee of the NASD; and the
Listing Fee of the Nasdaq Stock Market. The Company shall not, however, be
required to pay for any of the Underwriter's expenses (other than the NASD fee)
except that, if this Agreement shall not be consummated because the conditions
in Section 6 hereof are not satisfied, or because this Agreement is terminated
by the Representatives pursuant to Section 11(b)(i) or 11(b)(vi) hereof, or by
reason of any failure, refusal or inability on the part of the Company to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on its part to be performed, unless such failure to
satisfy said condition or to comply with said terms is due to the default or
omission of any Underwriter, then the Company shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
---------------------------------------------
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:
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(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Hogan & Hartson L.L.P.,
counsel for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly incorporated and is validly existing and in
good standing as of the date of the certificate specified in such opinion under
the laws of the State of Delaware. The Company has corporate power and
corporate authority under its Certificate of Incorporation and the Delaware
General Corporation Law ("DGCL") to own, lease and operate its properties and
conduct its business as described in the Registration Statement; the Company is
duly qualified to transact business as a foreign corporation in the States of
New York and Virginia, as of the dates of the certificates specified in such
opinion; and upon consummation of the Acquisitions pursuant to the Acquisition
Agreements, the outstanding shares of capital stock or membership interests, as
the case may be, of each of the Acquired Companies will be owned of record by
the Company; and, to such counsel's knowledge, upon consummation of the
Acquisitions, the outstanding shares of capital stock or membership interests of
each of the Acquired Companies will be owned free and clear of all liens,
encumbrances and equities and claims, and no options, warrants or other rights
to purchase, agreements or other obligations to issue or other rights to convert
any obligations into any shares of capital stock or of membership interests in
the Acquired Companies will be outstanding except as described in the
Prospectus.
(ii) The authorized, issued and outstanding capital stock of the Company,
as of December 31, 1998 was set forth under the caption "Capitalization" in the
Prospectus and except as set forth in the Prospectus, no change there to has
occurred since that date; the outstanding shares of the Company's Common Stock
have been duly authorized and assuming the receipt of consideration therefor as
provided in resolutions of the Company's Sole Director authorizing issuance
thereof, are validly issued, fully paid and non-assessable; all of the Shares
conform in all material respects to the description thereof set forth in the
Prospectus; the certificates evidencing the Shares, assuming they are in the
form filed with the Commission, comply with
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the requirements of Section 158 of the DGCL; when issued in accordance with
the terms of this Agreement and the Acquisition Agreements, respectively, the
Shares, and the shares of Common Stock to be issued in connection with the
Acquisitions will be duly authorized, validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this Agreement or
the Acquisition Agreements, as the case may be; and no holder of outstanding
shares of Common Stock has any statutory preemptive right under the DGCL, the
certificate of incorporation or bylaws of the Company, or to the knowledge of
such counsel, any contractual right to subscribe for any of the Shares or the
shares of Common Stock to be issued in connection with the Acquisitions.
(iii) Except as described in or contemplated by the Prospectus, to the
knowledge of such counsel, the Company has not issued any outstanding securities
convertible into or exchangeable for, or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company, outstanding or
authorized options, warrants or other rights to purchase or subscribe for any
shares of its capital stock or any securities convertible or exchangeable into
or evidencing the right to purchase or subscribe for any shares of such stock;
and except as described in the Prospectus, to the knowledge of such counsel, the
Company has not granted to any holder of any securities of the Company or any
other person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of the Shares or the
right to have any shares of Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act and, to
the best knowledge of such counsel, no stop order proceedings with respect
thereto have been instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus comply as to form in all
material respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements and related schedules therein).
(vi) The statements in the Prospectus under the captions "About
OneMain.com," "Business Government Regulation," "Management Employment
Agreements," "- 1999 Stock Option and Incentive Plan," "- 1999 Employee Stock
Purchase Plan," "Description of Capital Stock" and "Shares Available for Future
Sale," insofar as such statements constitute a summary of documents referred to
therein or matters of law, fairly summarize in all material respects the
information called for with respect to such documents and matters.
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<PAGE>
(vii) Each of the Acquisition Agreements has been duly authorized,
executed and delivered by the Company. Assuming due authorization, execution
and delivery by the other parties thereto, each Acquisition Agreement
constitutes a valid and binding obligation of the Company, except to the extent
that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and by general principles of equity
regardless of whether enforceability is considered in a proceeding in equity or
at law.
(viii) The execution, delivery and performance of this Agreement do not
and will not (a) violate the Certificate of Incorporation or By-Laws of the
Company, or (ii) conflict or result in a breach of any of the terms or
provisions of, or constitute a default under, any Acquisition Agreement or any
agreement or contract filed as an exhibit to the Registration Statement.
(ix) This Agreement has been duly authorized, executed and delivered by
the Company.
(x) No approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other governmental body
is necessary in connection with the execution and delivery of this Agreement and
the consummation of the transactions herein contemplated (other than as may be
required by the NASD and state securities or "blue sky" laws, as to which such
counsel need express no opinion) except such as have been obtained or made,
specifying the same.
(xi) The Company is not, and will not become as a result of the
consummation of the transactions contemplated by this Agreement and the
Acquisition Agreements, required to register as an investment company under the
1940 Act.
In rendering such opinion Hogan & Hartson L.L.P. may rely as to matters
governed by the laws of states other than Delaware or Federal laws and on local
counsel in such jurisdictions and may rely on counsel (such counsel having been
deemed acceptable by the Underwriters) to one or more of the Acquired Companies
with respect to matters relating to the Acquired Companies, provided that in
each case Hogan & Hartson L.L.P. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel and the opinion of
such other counsel shall confirm the entitlement of Hogan & Hartson L.L.P. and
the Underwriters to rely thereon. In addition to the matters set forth above,
such opinion shall also include a statement to the effect that no facts have
come to the attention of such counsel which causes them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the
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<PAGE>
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they were made, not misleading or (ii) there are any legal or
governmental proceedings pending or threatened against the Company or the
Acquired Companies that are required to be disclosed in the Registration
Statement or the Prospectus, other than those disclosed therein, or (iii) there
are any contracts or documents of a character required to be disclosed in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or referred to therein or so
filed; provided that in making the foregoing statements (which shall not
constitute an opinion) such counsel need not express any views as to financial
statements and supporting schedules and other financial and statistical
information and data included in or omitted from the Registration Statement or
the Prospectus. With respect to such statement, Hogan & Hartson L.L.P. may
state that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(c) The Representatives shall have received on the Closing Date the
opinion of counsel for each of the Acquired Companies dated the Closing Date,
addressed to the Underwriters (and stating that it may be relied upon by counsel
to the Underwriters) in substantially the form attached hereto as Exhibit A.
(d) The Representatives shall have received from Piper & Marbury L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of this Section 6, and
that the Company is a duly organized and validly existing corporation under the
laws of the State of Delaware. In rendering such opinion, Piper & Marbury
L.L.P. may rely as to all matters governed other than by the laws of the State
of Delaware or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective under
the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Piper &
Marbury L.L.P. may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
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(e) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of Ernst & Young LLP confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules of the Company and the Acquired Companies
examined by them and included in the Registration Statement comply in form in
all material respects with the applicable accounting requirements of the Act and
the related published Rules and Regulations; and containing such other
statements and information as is ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration Statement
and Prospectus.
(f) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of each of Grant Thorton LLP, Coulter & Justus,
P.C., Lopez, Levi & Associates, P.A. and Kevin J. Tochtrop, Certified Public
Accountant, confirming that they are independent public accountants within the
meaning of the Act and the applicable published Rules and Regulations thereunder
and stating that in their opinion the financial statements and schedules of the
Acquired Company examined by them and included in the Registration Statement
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations; and
containing such other statements and information as is ordinarily included in
accountants' "comfort letters" to Underwriters with respect to the financial
statements and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents in his capacity as an officer of the
Company as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
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<PAGE>
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the financial condition, of the Company and the Acquired
Companies taken as a whole or the earnings, business, management, properties,
assets, rights, operations, financial condition or prospects of the Company and
the Acquired Companies taken as a whole, whether or not arising in the ordinary
course of business.
(h) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, shall have been approved
for designation upon notice of issuance on the Nasdaq Stock Market.
(j) The Lockup Agreements described in Section 4(i) shall be in full force
and effect.
(k) Each of the Acquisitions shall have been completed upon terms which
are in all material respects consistent with the terms set forth in the
Prospectus simultaneously with the closing of the purchase of the Firm Shares by
the Underwriters.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Piper & Marbury L.L.P.,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
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7. Conditions of the Obligations of the Company.
--------------------------------------------
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances in which
they were made; and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or proceeding or in
responding to a subpoena or governmental inquiry related to the offering of the
Shares, whether or not such Underwriter or controlling person is a party to any
action or proceeding; provided, however, that the Company will not be liable in
any such case (x) to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement,
or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof, or (y) with respect to any Preliminary Prospectus to the
extent that any such loss, claim, damage or liability (or any actions or
proceedings in respect thereof) results from such Underwriter's sale of Shares
to a person as to whom it shall be established that there was not sent or given,
at or prior to the written confirmation of such sale, a copy of the Prospectus
as then amended or supplemented in any case where such delivery is required by
the Act if the Company has previously furnished copies thereof to such
Underwriter and the loss, claim, damage or liability of such Underwriter results
from an untrue statement or omission of a material fact contained in the
Preliminary Prospectus which was corrected in the Prospectus or in the
Prospectus as then amended or supplemented. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
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<PAGE>
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, mages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse upon demand any legal or other expenses reasonably incurred by
the Company or any such director, officer, or controlling person in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding or in responding to a subpoena or governmental inquiry related to
the offering of the Shares, whether or not the Company or any such director,
officer or controlling person is a party to any action or proceeding; provided,
however, that each Underwriter will be liable in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration Statement, any
Preliminary Prospectus, the Prospectus or such amendment or supplement, in
reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation) is
instituted involving any person in respect of which indemnity may be sought
pursuant to this Section 8, such person (the "indemnified party") shall promptly
notify each person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 8(a) or (b)
shall be available to any party who shall fail to give notice as provided in
this Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially prejudiced
by the failure to give such notice, but the failure to give such notice shall
not relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of the provisions of Section 8(a) or (b). In case any such proceeding
is brought against any indemnified party and it notifies the indemnifying party
of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it may elect, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party and shall pay as incurred the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel at its own
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expense. Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable period
of time after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment. In
addition, the indemnifying party will not, without the prior written consent
of the indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified
party is an actual or potential party to such claim, action or proceeding)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action
or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
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forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section
8(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
reimbursement, indemnification and contribution agreements contained in this
Agreement and the representations, warranties and covenants in this Agreement
shall remain operative in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement. A successor to any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution and reimbursement agreements
contained in this Section 8.
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9. Default by Underwriters.
-----------------------
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
-------
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated, 1
South Street, Baltimore, Maryland 21202, Attention: Scott Wieler; with a copy to
BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland 21202.
Attention: General Counsel; if to the Company, to OneMain.com, Inc., 50
Hawthorne Road, Southampton, NY 11968, Attention: Stephen E. Smith; with a copy
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<PAGE>
to Hogan & Hartson L.L.P., 555 Thirteenth Street, N.W., Washington, D.C. 20004,
Attention Steven A. Museles.
11. Termination.
-----------
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
earnings, business, management, properties, assets, rights, operations,
financial condition or prospects of the Company and the Acquired Companies taken
as a whole, whether or not arising in the ordinary course of business; (ii) any
outbreak or escalation of hostilities or declaration of war or national
emergency or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets of
the United States would, in your reasonable judgment, make it impracticable to
market the Shares or to enforce contracts for the sale of the Shares; (iii)
trading generally shall have been suspended or materially limited on or by, as
the case may be, any of the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market; (iv) the enactment, publication, decree or other
promulgation of any statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects or
may materially and adversely affect the business or operations of the Company;
(v) declaration of a banking moratorium by United States or New York State
authorities, (vi) the suspension of trading of the Company's common stock on the
Nasdaq Stock Market or (vii) the taking of any action by any governmental body
or agency in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
----------
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
-24-
<PAGE>
13. Information Provided by Underwriters.
------------------------------------
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. Miscellaneous.
-------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
ONEMAIN.COM, INC.
By
------------------------------------------
Stephen E. Smith, Chairman, President and
Chief Executive Officer
-25-
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
FIRST UNION CAPITAL MARKETS CORP.
ING BARING FURMAN SELZ LLC
SOUNDVIEW TECHNOLOGY GROUP
WIT CAPITAL CORPORATION
FIRST UNION CAPITAL MARKETS CORP.
ING BARING FURMAN SELZ LLC
AS REPRESENTATIVES OF THE SEVERAL
UNDERWRITERS LISTED ON SCHEDULE I
BY: BT ALEX. BROWN INCORPORATED
BY:
----------------------------------
AUTHORIZED OFFICER
-26-
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
- ----------- ----------------------
<S> <C>
BT ALEX. BROWN INCORPORATED
ING BARING FURMAN SELZ LLC
FIRST UNION CAPITAL MARKETS CORP.
SOUNDVIEW TECHNOLOGY GROUP
WIT CAPITAL
FIRST UNION CAPITAL MARKETS CORP.
ING BARING FURMAN SELZ LLC
</TABLE>
-27-
<PAGE>
EXHIBIT A
ACQUIRED COMPANIES
<TABLE>
<CAPTION>
<S> <C>
D&E SUPERNET, INC.
SUNLINK, INC.
LEBANET, INC.
SOUTHWIND INTERNET ACCESS, INC.
HORIZON INTERNET TECHNOLOGIES, INC.
UNITED STATES INTERNET, INC.
INTERNET PARTNERS OF AMERICA, LC
ZOOMNET, INC.
PALM.NET, USA, INC.
INTERNET ACCESS GROUP, INC.
MIDWEST INTERNET, L.L.C.
INTERNET SOLUTIONS, LLC
FGINET, INC.
SUPERHIGHWAY, INC. D/B/A/ INDYNET
LIGHTSPEED NET, INC.
JPS.NET CORPORATION
TGF TECHNOLOGIES, INC.
------------
TOTAL
------------
</TABLE>
-28-
<PAGE>
EXHIBIT 3.2
SECOND AMENDED AND RESTATED BYLAWS
OF
ONEMAIN.COM, INC.
1. OFFICES
1.1 Registered Office
The registered office of the Corporation shall be in Wilmington,
Delaware, and the initial registered agent in charge thereof shall be The
Corporation Trust Company.
1.2 Other Offices
The Corporation may also have offices at such other places, both
within and without the State of Delaware, as the Board of Directors of the
Corporation (the "Board") may from time to time determine or as may be necessary
or useful in connection with the business of the Corporation.
2. MEETINGS OF STOCKHOLDERS
2.1 Place of Meetings
All meetings of the stockholders shall be held at such place as may be
fixed from time to time by the Board, the Chairman, the Chief Executive Officer
or the President.
2.2 Annual Meetings
(a) The Corporation shall hold annual meetings of stockholders,
commencing with the year 2000, on such date and at such time as shall be
designated from time to time by the Board, the Chairman, the Chief Executive
Officer or the President. At each annual meeting, the stockholders shall elect
by a plurality vote (as provided in Section 2.9 hereof) directors to succeed
those whose terms expire at the time of the annual meeting. The nomination of
persons for election to the Board and the proposal of any other business to be
transacted at an
<PAGE>
annual meeting may be made only (i) by or at the direction of the Board or (ii)
by any stockholder of record who gives notice in accordance with the procedures
set forth in paragraph (b) of this Section 2.2 and who is a stockholder of
record both on the date of giving such notice and on the record date for the
determination of stockholders entitled to vote at such annual meeting; only
persons thereby nominated shall be eligible to serve as directors and only
business thereby proposed shall be transacted at an annual meeting. The
presiding officer of the annual meeting shall determine whether a nomination or
any proposal of business complies or complied with this Section 2.2.
(b) For nominations and other business to be brought properly before
an annual meeting by a stockholder pursuant to clause (ii) of paragraph (a) of
this Section 2.2, the stockholder must deliver notice to the Secretary of the
Corporation at the principal executive offices of the Corporation in accordance
with this Section 2.2(b). The notice must be received by the Secretary not less
than 60 days nor more than 90 days prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
-------- -------
date of the annual meeting is advanced by more than 30 days or delayed by more
than 60 days from such anniversary date, the stockholder must so deliver the
notice not earlier than the 90th day prior to such annual meeting and not later
than the close of business on the later of the 60th day prior to such annual
meeting or the tenth day following the day on which public announcement of the
date of such meeting is first made; provided further, however, that in the event
-------- ------- -------
that the number of directors to be elected to the Board is increased and there
is no public announcement naming all of the nominees for director or specifying
the size of the increased Board made by the Corporation at least 70 days prior
to the first anniversary of the preceding annual meeting, with respect to
nominees for any new position created by the increase, the stockholder must so
deliver the notice not later than the close of business on the tenth day
following the day on which such public announcement is first made. The
stockholder's notice must set forth: (i) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors pursuant to Section 14(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder (together with such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected), whether or not the Corporation is then subject to Section 14(a) and
such rules and regulations; (ii) as to any other business that the stockholder
proposes to transact at the meeting, a brief description of the business desired
to be brought before the meeting, the reasons for conducting the business at the
meeting and any material interest in the business of the stockholder and of the
beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to
the stockholder giving the notice and the beneficial owner, if
- 2 -
<PAGE>
any, on whose behalf the nomination or proposal is made, the name and address of
the stockholder, as they appear on the Corporation's books, and of such
beneficial owner, the class and number of shares of the Corporation that are
owned beneficially and of record by such stockholder and such beneficial owner
and a representation that the stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting. For
purposes of this Section 2.2 and Section 2.3 hereof, a "public announcement"
means disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service, in a document publicly filed with
the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of
the Exchange Act (or their successor provisions), or in a notice of meeting or
proxy statement mailed generally to the Corporation's stockholders. In giving
notice under this Section 2.2, a stockholder must also comply with state law and
the Exchange Act (and the rules and regulations thereunder). Nothing in this
Section 2.2 shall be deemed to affect the rights of a stockholder to request
inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 (or its successor provision) under the Exchange Act.
2.3 Special Meetings
Special meetings of the stockholders, for any purpose or purposes,
unless otherwise prescribed by statute, may be called only by the Board, the
Chairman, the Chief Executive Officer, or the President or by the stockholders
as set forth in the Corporation's Certificate of Incorporation (as amended and
amended and restated from time to time, the "Certificate of Incorporation").
Business transacted at any special meeting of stockholders shall be limited to
the purposes stated in the notice relating to such meeting (or to the purposes
for which the meeting is called if such notice is waived or is not required as
provided in the General Corporation Law of the State of Delaware (the "Delaware
General Corporation Law") or these Bylaws). In the case of a special meeting of
stockholders called for the purpose of electing directors, nominations may be
made only (i) by or at the direction of the Board or (ii) by any stockholder of
record who delivers to the Secretary, no later than the tenth day following the
day on which public announcement of the special meeting is made, a notice that
complies with and is delivered in accordance with Section 2.2(b) above.
2.4 Notice of Meetings
Written notice of any meeting of stockholders, stating the place, date
and hour of the meeting, and (if it is a special meeting) the purpose or
purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than ten nor more than 60 days before
the date of the meeting
- 3 -
<PAGE>
(except to the extent that such notice is waived or is not required as provided
in the Delaware General Corporation Law or these Bylaws). Such notice shall be
given in accordance with, and shall be deemed effective as set forth in, Section
222 (or any successor section) of the Delaware General Corporation Law.
2.5 Waivers of Notice
Whenever the giving of any notice is required by statute, the
Certificate of Incorporation or these Bylaws, a waiver thereof, in writing and
delivered to the Corporation, signed by the person or persons entitled to said
notice, whether before or after the event as to which such notice is required,
shall be deemed equivalent to notice. Attendance of a stockholder at a meeting
shall constitute a waiver of notice (1) of such meeting, except when the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (2) (if it is a special meeting) of
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the stockholder
objects to considering the matter at the beginning of the meeting.
2.6 List of Stockholders
After the record date for a meeting of stockholders has been fixed, at
least ten days before such meeting, the officer or other agent of the
Corporation who has charge of the stock ledger of the Corporation shall make a
list of all stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place in the city where the meeting is to be held, which
place is to be specified in the notice of the meeting, or at the place where the
meeting is to be held. Such list shall also, for the duration of the meeting,
be produced and kept open to the examination of any stockholder who is present
at the time and place of the meeting.
2.7 Quorum at Meetings
Stockholders may take action on a matter at a meeting only if a quorum
exists with respect to that matter. Except as otherwise provided by statute or
by the Certificate of Incorporation, a quorum shall exist if there are present
in person or represented by proxy the holders of a majority of the shares
entitled to vote at the meeting. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes, present
in person or
- 4 -
<PAGE>
represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter. Once a share is represented for any purpose
at a meeting (other than solely to object (1) to holding the meeting or
transacting business at the meeting or (2) (if it is a special meeting) to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice), it is deemed present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting.
The holders of a majority of the voting shares represented at a meeting, whether
or not a quorum is present, may adjourn such meeting from time to time.
2.8 Voting and Proxies
Unless otherwise provided in the Delaware General Corporation Law or
in the Certificate of Incorporation, and subject to the other provisions of
these Bylaws, each stockholder shall be entitled to one vote on each matter, in
person or by proxy, for each share of the Corporation's capital stock that has
voting power and that is held by such stockholder. No proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed appointment of proxy shall be irrevocable if the
appointment form states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
2.9 Required Vote
When a quorum is present at any meeting of stockholders, all matters
shall be determined, adopted and approved by the affirmative vote (which need
not be by ballot) of the holders of a majority of the shares present in person
or represented by proxy at the meeting and entitled to vote with respect to the
matter, unless the proposed action is one upon which, by express provision of
statutes or of the Certificate of Incorporation, a different vote is specified
and required, in which case such express provision shall govern and control with
respect to that vote on that matter. Where a separate vote by a class or
classes is required, the affirmative vote of the holders of a majority of the
shares of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class. Notwithstanding the foregoing,
directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors.
- 5 -
<PAGE>
2.10 Inspectors
Prior to any meeting of stockholders, the Board, the Chief Executive
Officer, or the President shall appoint one or more inspectors to act at such
meeting and make a written report thereof and may designate one or more persons
as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at the meeting of stockholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and
the voting power of each, determine the shares represented at the meeting and
the validity of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons to assist them in
the performance of their duties. The date and time of the opening and closing
of the polls for each matter upon which the stockholders will vote at a meeting
shall be announced at the meeting. No ballot, proxy or vote, nor any revocation
thereof or change thereto, shall be accepted by the inspectors after the closing
of the polls. In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted therewith, any information provided by a stockholder who submits a
proxy by telegram, cablegram or other electronic transmission from which it can
be determined that the proxy was authorized by the stockholder, ballots and the
regular books and records of the Corporation, and they may also consider other
reliable information for the limited purposes of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
that represent more votes than the holder of a proxy is authorized by the record
owner to cast or more votes than the stockholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
- 6 -
<PAGE>
3. DIRECTORS
3.1 Powers
The business and affairs of the Corporation shall be managed by or
under the direction of the Board, which may exercise all such powers of the
Corporation and do all such lawful acts and things, subject to any limitation
set forth in the Certificate of Incorporation or as otherwise may be provided in
the Delaware General Corporation Law.
3.2 Number and Election
The number of directors constituting the entire Board shall be the
number, within the range set forth in the Certificate of Incorporation, fixed
from time to time by the Board in the manner set forth in the Certificate of
Incorporation. Directors shall be elected at an annual meeting of the
stockholders in accordance with the Certificate of Incorporation. Vacancies on
the Board shall be filled in accordance with the Certificate of Incorporation.
Once elected or chosen pursuant to the Certificate of Incorporation, a director
shall hold office until the director's successor is elected and qualified or
until the director dies, resigns or is removed; provided, however, that if the
-----------------
Board decreases the number of directors constituting the Board and designates a
particular directorship to be eliminated due to the decrease, a director in the
eliminated directorship shall cease to hold office after the next election of
such directorship, unless the director is nominated and elected to another
directorship on the Board.
3.3 Meetings
3.3.1 Regular Meetings
Regular meetings of the Board may be held without notice at such time
and at such place as shall from time to time be determined by the Board.
3.3.2 Special Meetings
Special meetings of the Board may be called by the Chairman, the Chief
Executive Officer or the President on one day's notice to each director, either
personally or by telephone, express delivery service (so that the scheduled
delivery date of the notice is at least one day in advance of the meeting),
telegram or facsimile transmission, and on five days' notice by mail (effective
upon deposit of such notice in the mail). The notice need not describe the
purpose of a special meeting.
- 7 -
<PAGE>
3.3.3 Telephone Meetings
Members of the Board may participate in a meeting of the Board by any
communication by means of which all participating directors can simultaneously
hear each other during the meeting. A director participating in a meeting by
this means is deemed to be present in person at the meeting.
3.3.4 Action Without Meeting
Any action required or permitted to be taken at any meeting of the
Board may be taken without a meeting if the action is taken by all members of
the Board. The action must be evidenced by one or more written consents
describing the action taken, signed by each director, and delivered to the
Corporation for inclusion in the minute book.
3.3.5 Waiver of Notice of Meeting
A director may waive any notice required by statute, the Certificate
of Incorporation or these Bylaws before or after the date and time stated in the
notice. Except as set forth below, the waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the minute book. Notwithstanding the foregoing, a director's attendance at
or participation in a meeting waives any required notice to the director of the
meeting unless the director at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
3.4 Quorum and Vote at Meetings
At all meetings of the Board, a quorum of the Board consists of one-
third (1/3) of the total number of directors comprising the full Board as
established pursuant to Section 3.2 of these Bylaws. The vote of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board, except as may be otherwise specifically provided by statute or by
the Certificate of Incorporation or by these Bylaws.
3.5 Committees of Directors
The Board may designate one or more committees, each committee to
consist of one or more directors. The Board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. If a member of a committee
is absent from any meeting, or disqualified from voting thereat, the remaining
member or
- 8 -
<PAGE>
members present and not disqualified from voting, whether or not such member or
members constitute a quorum, may, by unanimous vote, appoint another member of
the Board to act at the meeting in the place of such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board, shall have and may exercise all the powers and authority of the Board in
the management of the business and affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers that may require it; but
no such committee shall have the power or authority in reference to approving or
adopting, or recommending to the stockholders, any action or matter expressly
required by the Delaware General Corporation Law to be submitted to stockholders
for approval or adopting, amending or repealing any Bylaw of the Corporation;
and unless the resolution designating the committee, these Bylaws or the
Certificate of Incorporation expressly so provides, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of stock
or to adopt a certificate of ownership and merger pursuant to Section 253 of the
Delaware General Corporation Law. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the Board. Each committee shall keep regular minutes of its meetings and report
the same to the Board, when required. Unless otherwise specified in the Board
resolution appointing the Committee, all provisions of the Delaware General
Corporation Law and these Bylaws relating to meetings, action without meetings,
notice (and waiver thereof) and quorum and voting requirements of the Board
apply, as well, to such committees and their members.
3.6 Compensation of Directors
The Board shall have the authority to fix the compensation of
directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
4. OFFICERS
4.1 Positions
The officers of the Corporation shall be a Chairman, a Chief Executive
Officer, a President, a Chief Operating Officer, a Chief Financial Officer, an
Executive Vice President, a Treasurer, and a Secretary, and such other officers
as the Board (or an officer authorized by the Board) from time to time may
appoint, including one or more Vice Chairmen, one or more Vice Presidents (any
of whom may be designated Senior Vice President), Assistant Secretaries and
Assistant Treasurers. Each such officer shall exercise such powers and perform
such duties
- 9 -
<PAGE>
as shall be set forth below and such other powers and duties as from time to
time may be specified by the Board or by any officer(s) authorized by the Board
to prescribe the duties of such other officers. Any number of offices may be
held by the same person, except that in no event shall the President and the
Secretary be the same person. Each of the Chairman, Chief Executive Officer,
President, Chief Operating Officer, Chief Financial Officer, Executive Vice
President and/or any Vice President may execute bonds, mortgages, contracts and
other instruments and documents under the seal of the Corporation, if required,
except where required or permitted by law to be otherwise executed and except
where the execution thereof shall be expressly delegated by the Board to some
other officer or agent of the Corporation.
4.2 Chairman and Vice Chairman
The Chairman shall (when present and unless otherwise provided by
resolution of the Board or delegated by the Chairman) preside at all meetings of
the Board and stockholders, and shall ensure that all orders and resolutions of
the Board and stockholders are carried into effect. The Vice Chairman (if there
be one, and if there be more than one, in the order designated, or in the
absence of any designation, then in the order of their election) shall, in the
absence of the Chairman (unless otherwise provided by resolution of the Board),
preside at all meetings of the Board and stockholders.
4.3 Chief Executive Officer
The Chief Executive Officer of the Corporation shall be the Chief
Executive of the Company and shall have full responsibility and authority for
management of the operations of the Corporation, subject, however, to the
control of the Board. The Chief Executive Officer shall perform all duties
incident to the office of the Chief Executive, and shall have and perform such
other duties as may be prescribed by the stockholders, the Board or the
Executive Committee (if any).
4.4 President
The President shall have shall have full responsibility and authority
for management of the operations of the Corporation, subject, however, to the
control of the Board. The President shall perform all duties incident to the
office of the President, and shall have and perform such other duties as may be
prescribed by the stockholders, the Board or the Executive Committee (if any).
- 10 -
<PAGE>
4.5 Chief Operating Officer
The Board may designate a Chief Operating Officer who shall have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President, the Board or the Executive Committee (if any).
4.6 Chief Financial Officer
The Board may designate a Chief Financial Officer who shall have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President, the Board or the Executive Committee (if any). Such responsibilities
may include all responsibilities assumed by the Treasurer, and may also include
the management of any and all Treasurers and Assistant Treasurers.
4.7 Executive Vice President
The Board may designate an Executive Vice President who shall have the
responsibilities and duties as set forth by the Chief Executive Officer, the
President, the Board or the Executive Committee (if any). Such responsibilities
may include all responsibilities assumed by any Vice President, and may also
include the management of any and all Vice Presidents.
4.8 Vice Presidents
In the absence of the Chief Executive Officer and the President, or in
the event of the inability or refusal to act by the Chief Executive Officer and
the President (or in the event there is more than one Vice President, the Vice
Presidents in the order designated, or in the absence of any designation, then
in the order of their election) shall perform the duties of the President, and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. Unless the order is otherwise designated, (i)
the Chief Operating Officer shall come in order before the Executive Vice
President, any Senior Vice President and any Vice President; (ii) the Chief
Operating Officer and the Executive Vice President shall come in order before
any Senior Vice President and any Vice President; and (iii) the Chief Operating
Officer, the Executive Vice President, and any Senior Vice President shall come
in order before any Vice President.
4.9 Secretary
The Secretary shall have responsibility for preparation of minutes of
meetings of the Board and of the stockholders and for authenticating records of
the Corporation. The Secretary shall give, or cause to be given, notice of all
meetings of
- 11 -
<PAGE>
the stockholders and special meetings of the Board. The Secretary or an
Assistant Secretary may also attest all instruments signed by any other officer
of the Corporation.
4.10 Assistant Secretary
The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there shall have been no
such determination, then in the order of their election), shall, in the absence
of the Secretary or in the event of the Secretary's inability or refusal to act,
perform the duties and exercise the powers of the Secretary.
4.11 Treasurer
The Treasurer, if one is appointed, shall have responsibility for the
custody of the corporate funds and securities and shall see to it that full and
accurate accounts of receipts and disbursements are kept in books belonging to
the Corporation. The Treasurer, if one is appointed, shall render to the
Chairman, the Chief Executive Officer, the President, the Chief Financial
Officer and the Board, upon request, an account of all financial transactions
and of the financial condition of the Corporation.
4.12 Assistant Treasurer
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board (or if there shall
have been no such determination, then in the order of their election), shall, in
the absence of the Treasurer or in the event of the Treasurer's inability or
refusal to act, perform the duties and exercise the powers of the Treasurer.
4.13 Term of Office
The officers of the Corporation shall hold office until their
successors are chosen and qualify or until their earlier resignation or removal.
Any officer may resign at any time upon written notice to the Corporation. Any
officer elected or appointed by the Board may be removed at any time, with or
without cause, by the affirmative vote of a majority of the Board.
- 12 -
<PAGE>
4.14 Compensation
The compensation of officers of the Corporation shall be fixed by the
Board or by any officer(s) authorized by the Board to prescribe the compensation
of such other officers.
4.15 Fidelity Bonds
The Corporation may secure the fidelity of any or all of its officers
or agents by bond or otherwise.
5. CAPITAL STOCK
5.1 Certificates of Stock; Uncertificated Shares
The shares of the Corporation shall be represented by certificates,
provided that the Board may provide by resolution that some or all of any or all
classes or series of the Corporation's stock be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until the
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board, every holder of stock represented by
certificates, and upon request every holder of uncertificated shares, shall be
entitled to have a certificate (representing the number of shares registered in
certificate form) signed in the name of the Corporation by the Chairman, the
Chief Executive Officer, the President, the Chief Operating Officer, the
Executive Vice President, or any Vice President, and by the Treasurer, Secretary
or any Assistant Treasurer or Assistant Secretary of the Corporation. Any or
all the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar whose signature or facsimile signature appears on a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
5.2 Lost Certificates
The Board, Chairman, Chief Executive Officer, President, Executive
Vice President or Secretary may direct a new certificate of stock to be issued
in place of any certificate theretofore issued by the Corporation and alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming that the certificate of stock has been lost, stolen
or destroyed. When authorizing such issuance of a new certificate, the Board or
any such officer
- 13 -
<PAGE>
may, as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or such owner's legal
representative, to advertise the same in such manner as the Board or such
officer shall require and/or to give the Corporation a bond or indemnity, in
such sum or on such terms and conditions as the Board or such officer may
direct, as indemnity against any claim that may be made against the Corporation
on account of the certificate alleged to have been lost, stolen or destroyed or
on account of the issuance of such new certificate or uncertificated shares.
5.3 Record Date
5.3.1 Actions by Stockholders
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, the Board may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than 60 days nor less than ten days before the date of such
meeting. If no record date is fixed by the Board, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be the close of business on the day next preceding the day on
which notice is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting, unless the Board
fixes a new record date for the adjourned meeting.
5.3.2 Payments
In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which
record date shall be not more than 60 days prior to such action. If no record
date is fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto.
5.4 Stockholders of Record
The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends, to
receive
- 14 -
<PAGE>
notifications, to vote as such owner and to exercise all the rights and powers
of an owner. The Corporation shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise may be provided by the Delaware General Corporation Law.
6. INDEMNIFICATION; INSURANCE
6.1 Authorization of Indemnification
Each person who was or is a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative and whether
by or in the right of the Corporation or otherwise (a "proceeding"), by reason
of the fact that he or she is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation 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, including service with respect to an employee benefit plan, shall be
(and shall be deemed to have a contractual right to be) indemnified and held
harmless by the Corporation (and any successor to the Corporation by merger or
otherwise) to the fullest extent authorized by, and subject to the conditions
and (except as provided herein) procedures set forth in the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but any such
amendment shall not be deemed to limit or prohibit the rights of indemnification
hereunder for past acts or omissions of any such person insofar as such
amendment limits or prohibits the indemnification rights that said law permitted
the Corporation to provide prior to such amendment), against all expenses,
liabilities and losses (including attorneys' fees, judgments, fines, ERISA taxes
or penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred or suffered by such person in connection therewith if such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal proceeding, had no reasonable cause to believe such person's
conduct was unlawful; provided, however, that the Corporation shall indemnify
--------- -------
any such person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person (except for a suit or action pursuant to
Section 6.2 hereof) only if such proceeding (or part thereof) was authorized by
the Board. Persons who are not directors or officers of the Corporation and are
not so serving at the request of the Corporation may be similarly indemnified in
respect of such service to the extent authorized at any time by the Board. The
indemnification conferred in this Section 6.1 also shall include the right to be
paid by the Corporation (and such
- 15 -
<PAGE>
successor) the expenses (including attorneys' fees) incurred in the defense of
or other involvement in any such proceeding in advance of its final disposition;
provided, however, that, if and to the extent the Delaware General Corporation
- --------- -------
Law requires, the payment of such expenses (including attorneys' fees) incurred
by a director or officer in advance of the final disposition of a proceeding
shall be made only upon delivery to the Corporation of an undertaking by or on
behalf of such director or officer to repay all amounts so paid in advance if it
shall ultimately be determined that such director or officer is not entitled to
be indemnified under this Section 6.1 or otherwise; and provided further, that
----------------
such expenses incurred by other employees and agents may be so paid in advance
upon such terms and conditions, if any, as the Board deems appropriate.
6.2 Right of Claimant to Bring Action Against the Corporation
If a claim under Section 6.1 is not paid in full by the Corporation
within 60 days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring an action against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled to be paid also the expense of prosecuting such
action. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in connection with any proceeding in
advance of its final disposition where the required undertaking, if any is
required, has been tendered to the Corporation) that the claimant has not met
the standards of conduct that make it permissible under the Delaware General
Corporation Law for the Corporation to indemnify the claimant for the amount
claimed or is otherwise not entitled to indemnification under Section 6.1, but
the burden of proving such defense shall be on the Corporation. The failure of
the Corporation to have made a determination (in the manner provided under the
Delaware General Corporation Law) prior to or after the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law shall not be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
Unless otherwise specified in an agreement with the claimant, an actual
determination by the Corporation (in the manner provided under the Delaware
General Corporation Law) after the commencement of such action that the claimant
has not met such applicable standard of conduct shall not be a defense to the
action, but shall create a presumption that the claimant has not met the
applicable standard of conduct.
- 16 -
<PAGE>
6.3 Non-exclusivity
The rights to indemnification and advance payment of expenses provided
by Section 6.1 hereof shall not be deemed exclusive of any other rights to which
those seeking indemnification and advance payment of expenses may be entitled
under any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
6.4 Survival of Indemnification
The indemnification and advance payment of expenses and rights thereto
provided by, or granted pursuant to, Section 6.1 hereof shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee, partner or agent and shall inure to the
benefit of the personal representatives, heirs, executors and administrators of
such person.
6.5 Insurance
The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation 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 such person or
incurred by such person in any such capacity, or arising out of such person's
status as such, and related expenses, whether or not the Corporation would have
the power to indemnify such person against such liability under the provisions
of the Delaware General Corporation Law.
7. GENERAL PROVISIONS
7.1 Inspection of Books and Records
Any stockholder, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the Corporation's
stock ledger, a list of its stockholders, and its other books and records, and
to make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholder. In every
instance where an attorney or
- 17 -
<PAGE>
other agent is the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing that
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at its registered
office or at its principal place of business.
7.2 Dividends
The Board may declare dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation and
the laws of the State of Delaware.
7.3 Reserves
The directors of the Corporation may set apart, out of the funds of
the Corporation available for dividends, a reserve or reserves for any proper
purpose and may abolish any such reserve.
7.4 Execution of Instruments
All checks, drafts or other orders for the payment of money and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board may from time to time designate.
7.5 Fiscal Year
The fiscal year of the Corporation shall end on the 31st of December
in each year.
7.6 Seal
The corporate seal shall be in such form as the Board shall approve.
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or otherwise reproduced.
* * * *
- 18 -
<PAGE>
The foregoing Second Amended and Restated Bylaws were adopted by the
Board of Directors on March , 1998.
---------------------------------
Dewey K. Shay
Secretary
- 19 -
<PAGE>
EXHIBIT 4.1
________________ ________________
NUMBER SHARES
OM
________________ ________________
ONEMAIN. COM [LOGO]
COMMON STOCK COMMON STOCK
PAR VALUE $.001 your hometown internet PAR VALUE $.001
ONEMAIN.COM, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT CUSIP 68267P 10 9
SEE REVERSE FOR
CERTAIN DEFINITIONS AND
A STATEMENT AS TO THE
RIGHTS, PREFERENCES,
PRIVILEGES AND
RESTRICTIONS ON SHARES
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE
PER SHARE, OF
ONEMAIN.COM, INC.
(the "Corporation")
The shares represented by this certificate are transferable on the stock
transfer books of the Corporation by the holder of record hereof, or by his duly
authorized attorney or legal representative, upon the surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation and Bylaws of the Corporation and any amendments
thereto, copies of which are on file at the principal executive offices of the
Corporation, to all of which provisions the holder by acceptance hereof assents.
This certificate is not valid unless countersigned and registered by the
Corporation's Transfer Agent and Registrar.
IN WITNESS THEREOF, the Corporation has caused this certificate to be
executed by the facsimile signatures of its duly authorized officers and has
caused a facsimile of its corporate seal to be hereunto affixed.
Dated:
/s/ Dewey K. Shay /s/ Stephen E. Smith
[SEAL]
Executive Vice President, Chief Chairman, President and
Financial Officer and Treasurer Chief Executive Officer
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
ONEMAIN.COM, INC.
THE ISSUER OF THESE SHARES (THE "COMPANY") WILL FURNISH WITHOUT CHARGE TO EACH
STOCKHOLDER WHO SO REQUESTS, A FULL STATEMENT OF ALL OF THE POWERS,
DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL
RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AUTHORIZED TO BE ISSUED BY THE
COMPANY AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-__________Custodian___________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right Under Uniform Gifts to Minors
of survivorship and not as Act __________________________
tenants in common (State)
UNIF TRAN MIN ACT-__________Custodian___________
(Cust) (Minor)
under Uniform Transfers to Minors
Act __________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________Attorney,
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated:_____________________
X____________________________________________
X____________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER
Signature(s) Guaranteed
By________________________________________
THE SIGNATURES SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO SEC RULE 17Ad-IS
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<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 "Validity of the Shares" 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 10.6
------------
FIRST ADDENDUM TO STOCK EXCHANGE AGREEMENT
This FIRST ADDENDUM TO STOCK EXCHANGE AGREEMENT ("First Addendum") is
entered into as of February ___, 1999, by and among ONEMAIN.COM, INC., a
Delaware corporation formerly named U.S. Internet Providers, Inc. (the
"Acquirer"), JPS.NET, CORP., a California corporation ("Company"), and the
SHAREHOLDERS OF COMPANY listed on the signature page hereof (collectively, the
"Transferors"). The Acquirer, Company and the Transferors are referred to
herein individually as a "Party" and collectively as the "Parties."
WHEREAS, the Parties entered into the Stock Exchange Agreement dated
December 18, 1998 (the "Agreement"), and 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 Addendum.
2. Section 2.2. The amount of Funded Indebtedness referred to in
Section 2.2 of the Agreement shall be calculated based on E&Y's December 31,
- -----------
1998, audit of the Company and Company's good faith estimate prior to Closing of
Company's Funded Indebtedness as of March 15, 1999. To the extent the actual
Funded Indebtedness as of the Closing Date, as determined by E&Y after the
Closing Date, differs from the Funded Indebtedness estimated by Company, any
adjustments required by the Agreement shall be added to or subtracted from the
Cash Escrow.
3. Section 2.3. Section 2.3 of the Agreement is hereby deleted in
-----------
its entirety and replaced by the following:
Net Worth Adjustment. The Cash Portion of the Transfer Consideration
--------------------
shall be adjusted downward on a dollar-for-dollar basis by the amount by which
the Net Worth of Company is less than negative $1,747,565 as of the Closing
Date. The Net Worth of Company as of the Closing Date shall be based on E&Y's
December 31, 1998 audit of the Company and Company's good faith estimate prior
to Closing of Company'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 Company, the difference shall be
added to or subtracted from the Cash Escrow if, and to the extent, necessary to
accomplish the adjustment provided for above.
4. Escrow Agreement. The form of Escrow Agreement attached to the
Agreement as Exhibit A is hereby deleted in its entirety and replaced by the
---------
Escrow Agreement attached hereto as Exhibit A.
---------
<PAGE>
5. Joinder to Registration Rights Agreement. The Joinder to the
Registration Rights Agreement attached to the Agreement as Exhibit F is hereby
---------
deleted in its entirety and replaced by the Joinder Agreement attached hereto as
Exhibit B.
- ---------
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
Addendum 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
Addendum as of the date first above written.
ACQUIRER:
ONEMAIN.COM, INC.
By:_________________________________
Name:____________________________
Title:___________________________
COMPANY:
JPS.NET, CORP.
By:_________________________________
Name:____________________________
Title:___________________________
TRANSFERORS:
________________________________________________
Brad Jenkins as Transferors' Representative on
behalf of the Transferors named in the Agreement
<PAGE>
EXHIBIT 10.7
------------
FIRST AMENDMENT TO THE STOCK EXCHANGE AGREEMENT
This FIRST AMENDMENT TO THE STOCK EXCHANGE AGREEMENT ("First
Amendment") is entered into as of the ____ day of February, 1999, by and among
ONEMAIN.COM, INC., a Delaware corporation formerly named U.S. Internet
Providers, Inc. (the "Acquirer"), D&E SUPERNET, INC., a Delaware corporation
("Target"), and the SHAREHOLDERS OF TARGET listed on the signature page hereof
(collectively, the "Transferors"). The Acquirer, Target and the Transferors 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.
WHEREAS, Supernet Interactive Services, Inc. distributed to its three
shareholders its ownership interest in D&E Supernet, Inc. and then merged into
D&E Supernet, Inc.
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 2.2. The amount of Funded Indebtedness referred to in
Section 2.2 of the Agreement shall be calculated based on E&Y's December 31,
- -----------
1998, audit of the Target and Target's good faith estimate prior to Closing of
Target's Funded Indebtedness as of March 15, 1999. To the extent the actual
Funded Indebtedness as of the Closing Date, as determined by E&Y after the
Closing Date, differs from the Funded Indebtedness estimated by Target, any
adjustments required by the Agreement shall be added to or subtracted from the
Cash Escrow.
3. 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 downward on a dollar-for-dollar basis by the amount by which
the Net Worth of Target is less than $201,052 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.
4. 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.
---------
<PAGE>
5. 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.
- ---------
6. 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.
---------
7. 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.
8. 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:
--------------------------------
Name:
--------------------------
Title:
--------------------------
TARGET:
D&E SUPERNET, INC.
By: /s/ Rodney A. Lefever
--------------------------------
Name: Rodney A. Lefever
--------------------------
Title: President
--------------------------
TRANSFERORS:
/s/ Allon H. Lefever
--------------------------------------
Allon H. Lefever
/s/ Carlton L. Miller
--------------------------------------
Carlton L. Miller
/s/ Rodney A. Lefever
--------------------------------------
Rodney A. Lefever
D&E INVESTMENTS CORP.
By: /s/ Thomas E. Morell
--------------------------------
Name: Thomas E. Morell
Title: Secretary/Treasurer
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 upon the request of the Securities and Exchange
Commission.
<PAGE>
EXHIBIT 10.10
-------------
SENIOR MANAGEMENT AGREEMENT
---------------------------
THIS SENIOR MANAGEMENT AGREEMENT (this "Agreement") is made as of
---------
March __, 1999, between ONEMAIN.COM, INC., a Delaware corporation (the
"Company"), and MICHAEL C. CRABTREE ("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(c) 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 President of the Southeast Region and Chief Operating Officer
of the Company and shall have the normal duties, responsibilities and authority
of the President of the Southeast Region and Chief Operating 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 of the Southeast Region and
Chief Operating Officer. Executive shall report to the Chief Executive Officer
of the Company and Executive shall devote his best efforts and substantially all
of his business time and attention to the business and affairs of the Company
and its Subsidiaries.
(b) Salary, Bonus and Benefits. Effective as of the date hereof, 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 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 and agreed upon by Executive and
the Company in good faith. 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
as are from time to time made available to all of the Company's senior
executives, including vacation
<PAGE>
time, tuition reimbursement, reimbursement of business expenses and healthcare,
disability and life insurance benefits.
(c) Issuance of Stock Options. Executive shall receive options for
-------------------------
the purchase of 50,000 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 12,500 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 37,500 shares) shall vest at
the rate of 1/36 per month thereafter (or 1,041.67 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
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 options shall vest in accordance with their terms
without reference to continuing employment), 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, for one year from the
effective date of termination (such payments, the "Severance Payment") which
-----------------
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
2
<PAGE>
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 paid for by the Company.
2. Confidential Information.
------------------------
(a) Executive acknowledges that the Company and its Subsidiaries are
engaged in internet access systems and services, dial-up and dedicated internet
access, web hosting, web consulting, and information technology consulting
services, that are marketed or sold to the public, government or any business
entities (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 Company's ISP marketing, backbone and internal
management, 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
3
<PAGE>
order may result) and (ii) Executive shall afford the Company a reasonable
opportunity to prevent or limit any such disclosure, all at Company's expense.
(c) During the Employment Period and for a period of two (2) years
thereafter, Executive will not disclose 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 as described in Section 1(d),
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 by the Company or
--------------
any Subsidiary and for an additional one year thereafter (the "Noncompete
----------
Period"), he 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 person known by Executive to be an
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 known by Executive to be an employee of the Company
or any of its Subsidiaries within 60 days prior to the time such employee was
hired by the Executive, (iii) knowingly induce or attempt to induce any owner of
a site location,
4
<PAGE>
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 knowingly interfere with the relationship between any such customer,
supplier, licensee or business relation and the Company or any of its
Subsidiaries or (iv) knowingly 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 pursue 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. 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.
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
5
<PAGE>
or any of their customers or suppliers, (ii) substantial 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 as agreed upon by the Company and Executive 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 material
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 Board 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 any way 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) a material change in Executive's compensation or
benefits, or (iii) 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:
6
<PAGE>
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:
Michael C. Crabtree
11106 Poplar Ridge Road
Knoxville, TN 37932
with a copy to:
Kennerly, Montgomery & Finley, P.C.
550 Main Street, 14th Floor
Knoxville, TN 37902
Attention: James H. Price
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; provided, however, that in the event a court of law
determines Delaware law does not apply to this Agreement, Tennessee law shall
apply.
(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 as described in Section 1(d)
and shall remain in full force and effect after such Separation.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Senior
Management Agreement on the date first written above.
ONEMAIN.COM, INC.
By:
---------------------------
Name: Stephen E. Smith
Its: Chairman
------------------------------
Michael C. Crabtree
9
<PAGE>
EXHIBIT 10.12
-------------
AMENDMENT TO SENIOR MANAGEMENT AGREEMENT
----------------------------------------
THIS AMENDMENT TO THE SENIOR MANAGEMENT AGREEMENT (this "Amendment")
---------
is made as of February 18, 1999, by and between ONEMAIN.COM, INC., a Delaware
corporation (the "Company") and MARTIN LYONS ("Executive") (collectively, the
---------
"Parties").
- --------
Whereas, the Parties entered into that Senior Management Agreement
(the "Agreement") dated October 16, 1998, the Parties now desire to amend the
---------
Agreement as set forth below.
I. The following section shall be added to the Agreement as Section
-------
1(e):
- ----
(e) No Public Offering or Sale of the Company.
-----------------------------------------
In the event the Company does not conduct an initial public offering
or is not sold to another entity on or before June 30, 1999, Executive may be
terminated at the Company's sole discretion, and Executive will receive three
months of her Annual Base Salary, and all Executive options shall immediately
terminate, and Executive will receive no employee benefits.
II. Other than as set forth herein, the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment on
the date first written above.
ONEMAIN.COM, INC.
By: /s/ Stephen E. Smith
--------------------
Stephen E. Smith
Chairman
/s/ Martin Lyons
-------------------------
Martin Lyons
<PAGE>
EXHIBIT 10.14
-------------
AMENDMENT TO SENIOR MANAGEMENT AGREEMENT
----------------------------------------
THIS AMENDMENT TO THE SENIOR MANAGEMENT AGREEMENT (this "Amendment")
---------
is made as of February 18, 1999, by and between ONEMAIN.COM, INC., a Delaware
corporation (the "Company") and M. CRISTINA DOLAN ("Executive") (collectively,
---------
the "Parties").
-------
Whereas, the Parties entered into that Senior Management Agreement
(the "Agreement") dated January 1, 1999, the Parties now desire to amend the
---------
Agreement as set forth below.
I. The following section shall be added to the Agreement as Section
-------
1(e):
- ----
(e) No Public Offering or Sale of the Company.
-----------------------------------------
In the event the Company does not conduct an initial public offering
or is not sold to another entity on or before June 30, 1999, Executive may be
terminated at the Company's sole discretion, and Executive will receive three
months of her Annual Base Salary, and all Executive options shall immediately
terminate, and Executive will receive no employee benefits.
II. Other than as set forth herein, the Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the Parties hereto have executed this Amendment on
the date first written above.
ONEMAIN.COM, INC.
By: /s/ Stephen E. Smith
--------------------
Stephen E. Smith
Chairman
/s/ M. Cristina Dolan
-------------------------
M. Cristina Dolan
<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 and shall be
- -------
<PAGE>
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
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
2
<PAGE>
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 options
issued to the Executive pursuant to Section 1(c) shall continue to vest in the
------------
ordinary course, 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,
3
<PAGE>
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 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:
-----------------------------------
Name:
Its:
----------------------------------------
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 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. 3 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 19, 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. 3 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 19, 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. 3 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 19, 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. 3 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 19, 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. 3 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 18, 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. 3 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
Wichita, Kansas
March 19, 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. 3
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
March 19, 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. 3 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
March 17, 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. 3 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
March 19, 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. 3 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
March 19, 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. 3 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
March 19, 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. 3 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 19, 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. 3 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 19, 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. 3 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
March 17, 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. 3 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
March 19, 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. 3 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
March 19, 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. 3 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
March 19, 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. 3 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
March 19, 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. 3 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
March 19, 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. 3 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 19, 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. 3 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
Burlington, Vermont
March 17, 1999
<PAGE>
EXHIBIT 23.28
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/ Robert J. Dole
---------------------------
Robert J. Dole
Dated: March 18, 1999
