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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2000
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 000-25599
ONEMAIN.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7375 11-3460073
- - ------------------------------- ------------------------- ----------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) industrial classification identification
number) number)
</TABLE>
1860 Michael Faraday Drive
2nd Floor
Reston, Virginia 20190
703-375-3000
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
-----------------------
Stephen E. Smith
Chairman and Chief Executive Officer
OneMain.com, Inc.
1860 Michael Faraday Drive
2nd Floor
Reston, Virginia 20190
(703) 375-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 12, 2000
Common Stock $.001 par value Number of Shares
---------------------------- ----------------
25,076,558
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<PAGE>
ONEMAIN.COM, INC.
Index
<TABLE>
Page
<S> <C> <C> <C>
Part I. - Financial Information 3
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 4
Consolidated Statements of Operations
For the Three Months Ended March 31, 2000 and March 31, 1999 5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and March 31, 1999 6
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2000 and March 31, 1999 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Part II. - Other Information 17
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
Signatures 18
</TABLE>
2
<PAGE>
ONEMAIN.COM, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, all adjustments necessary
for the fair presentation of the Company's results of operations, financial
position and changes therein for the periods presented have been included.
3
<PAGE>
ONEMAIN.COM, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................................ $ 16,227 $ 27,099
Marketable securities .................................................... 830 15,789
Accounts receivable, net of allowance for doubtful accounts of $1,743 and
$1,476 at March 31, 2000 and December 31, 1999, respectively .......... 5,527 5,474
Prepaid expenses and other current assets ................................ 4,740 3,760
--------- ---------
Total current assets .................................................. 27,324 52,122
Restricted marketable securities ......................................... 1,785 -
Property and equipment, net .............................................. 62,484 53,099
Goodwill, net ............................................................ 186,048 203,013
Customer lists, net ...................................................... 114,823 125,747
Other assets ............................................................. 823 912
========= =========
Total assets .......................................................... $ 393,287 $ 434,893
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ......................................................... $ 8,164 $ 9,338
Accrued expenses ......................................................... 17,457 14,320
Unearned revenue ......................................................... 25,482 23,228
Restructuring reserve .................................................... 7,045 -
Current portion of capital lease obligations ............................. 11,062 8,754
Current portion of long-term debt ........................................ 441 1,096
Notes payable to related parties ......................................... - 1,187
Deferred income tax liability ............................................ 17,661 17,661
Other current liabilities ................................................ 820 7,467
--------- ---------
Total current liabilities ............................................. 88,132 83,051
Capital lease obligations, net of current portion ........................ 14,148 10,867
Long-term debt, net of current portion ................................... 4,801 4,922
Deferred income tax liability ............................................ 20,592 24,846
Other liabilities ........................................................ 318 333
--------- ---------
Total liabilities ..................................................... 127,991 124,019
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized,
no shares issued or outstanding ........................................ - -
Common stock, $.001 par value; 100,000,000 shares authorized,
25,076,558 and 24,934,906 shares issued and outstanding
at March 31, 2000 and December 31, 1999, respectively .................. 25 25
Additional paid-in capital ............................................... 395,306 392,859
Accumulated deficit ...................................................... (130,035) (82,010)
--------- ---------
Total stockholders' equity ........................................... 265,296 310,874
========= =========
Total liabilities and stockholders' equity ........................... $ 393,287 $ 434,893
========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
ONEMAIN.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
------------- ------------
<S> <C> <C>
Revenues:
Access revenues .................................... $ 38,431 $ -
Other revenues ..................................... 1,381 -
------------ ------------
Total revenues ................................. 39,812 -
Costs and expenses:
Cost of access revenues ............................ 14,598 -
Cost of other revenues ............................. 502 -
------------ ------------
Total costs of revenues ........................ 15,100 -
------------ ------------
Gross margin .................................... 24,712 -
Operating expenses:
Operations and customer support .................... 7,988 -
Sales and marketing ................................ 9,051 -
General and administrative (exclusive of non-cash
compensation expense shown below) ............... 13,118 910
Restructuring charge ............................... 7,179 -
Non-cash compensation expense ...................... - 2,469
Amortization ....................................... 34,224 -
Depreciation ....................................... 5,108 -
Other (income), net ................................ (57) -
------------ ------------
Total operating expenses ....................... 76,611 3,379
Loss from operations ................................... (51,899) (3,379)
Non-operating income:
Interest income ........................................ 223 24
Interest expense ....................................... (587) (16)
------------ ------------
Total non-operating income, net ................ (364) 8
------------ ------------
Loss before income tax benefit ......................... (52,263) (3,371)
Income tax benefit ..................................... 4,238 -
------------ ------------
Net loss ............................................... $ (48,025) $ (3,371)
============ ============
Basic and diluted net loss per share ................... $ (1.92) $ (0.60)
============ ============
Shares used in the calculation of basic and
diluted net loss per share ......................... 25,002,439 5,622,939
============ ============
</TABLE>
See accompanying notes.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
---------------- ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .......................................................... $ (48,025) $ (3,371)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization .................................................. 34,224 -
Depreciation .................................................. 5,108 -
Provision for bad debts ....................................... 268 -
Deferred income tax benefit ................................... (4,238) -
Issuance of warrants for consulting services .................. 101 -
Non-cash compensation ......................................... - 2,469
Changes in operating assets and liabilities:
Accounts receivable ........................................ (272) -
Prepaid expenses and other current assets .................. (1,010) -
Other assets ............................................... 119 (433)
Unearned revenue ........................................... 1,886 -
Accounts payable ........................................... (2,422) 912
Accrued expenses ........................................... 2,671 -
Restructuring reserve ...................................... 7,045 -
Other liabilities .......................................... (573) -
--------- ---------
Net cash used in operating activities ........................... (5,118) (423)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired .................. (10,458) (68,073)
Maturities of marketable securities ............................... 15,740 -
Investments in marketable securities .............................. (781) -
Increase in restricted marketable securities ...................... (1,785) -
Purchases of property, plant and equipment ........................ (3,958) -
--------- ---------
Net cash (used in) investing activities ......................... (1,242) (68,073)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt assumed through acquisitions .......... - (6,310)
Repayment of capital lease obligations ............................ (3,109) -
Repayment of notes payable ........................................ (1,403) -
Proceeds from issuance of common stock in initial public offering
net of underwriter discounts and offering costs ................ - 165,533
Proceeds from note payable to founder ............................. - 500
--------- ---------
Net cash (used in) provided by financing activities ......... (4,512) 159,723
--------- ---------
Net (decrease) increase in cash and cash equivalents .............. (10,872) 91,227
Cash and cash equivalents, beginning of period .................... 27,099 172
--------- ---------
CASH and CASH EQUIVALENTS, END OF PERIOD .......................... $ 16,227 $ 91,399
========= =========
Supplemental disclosure of cash flow information
Issuance of common stock for acquisitions ......................... $ 2,346 $ 141,362
========= =========
Acquisition of property and equipment through issuance of capital
lease obligations and accounts payable ......................... $ 9,534 $ -
========= =========
</TABLE>
See accompanying notes.
6
<PAGE>
ONEMAIN.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Stock Total
---------------- Paid-In Accumulated Subscriptions Stockholders'
Shares Amount Capital Deficit Receivable Equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ............................. 4,782 $ 5 $ 53 $ (765) $ (11) $ (718)
Issuance of Common Stock ................................. 100 - 5 - (5) -
Issuance of Common Stock in connection with initial
public offering, net of underwriters' discounts and
offering costs ....................................... 8,500 9 164,241 - - 164,250
Issuance of Common Stock for acquisitions ................ 7,140 7 141,355 - - 141,362
Non-cash compensation expense ............................ - - 2,469 - - 2,469
Net loss for the three months ended March 31, 1999 ....... - - - (3,371) - (3,371)
----------------------------------------------------------------------
Balance at March 31, 1999 ................................ 20,522 $ 21 $ 308,123 $ (4,136) $ (16) $ 303,992
======================================================================
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Stock Total
---------------- Paid-In Accumulated Subscriptions Stockholders'
Shares Amount Capital Deficit Receivable Equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 ............................. 24,935 $ 25 $ 392,859 $ (82,010) $ - $ 310,874
Issuance of Common Stock for acquisitions ................ 142 - 2,346 - - 2,346
Issuance of warrants ..................................... - - 101 - - 101
Net loss for the three months ended March 31, 2000 ....... - - - (48,025) - (48,025)
----------------------------------------------------------------------
Balance at March 31, 2000 ................................ 25,077 $ 25 $ 395,306 $(130,035) $ - $ 265,296
======================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
ONEMAIN.COM, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
Recent Pronouncements. In December 1999, the SEC issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which is effective for fiscal years beginning after December 15, 1999. Under
SAB 101, revenue for set-up fees generally should be recognized on a straight-
line basis over the contractual period or longer if the relationship with the
customer is expected to extend beyond the initial term and the customer
continues to benefit from the payment of the set-up fee. The Company will
account for the change in accounting principle as a cumulative effect
adjustment in the second quarter of 2000 and does not believe that the
adjustment will not be material.
In January 2000, the EITF released Issue 99-17, "Accounting for Advertising
Barter Transactions" ("EITF 99-17"). EITF 99-17 provides guidance on the
revenue and expense recognition for advertising barter transactions. The
Company adopted the provisions of EITF 99-17 beginning January 1, 2000. The
effect on the Company's revenues and earnings was not material.
Note 2 - Organization and Basis of Presentation
OneMain.com, Inc., a Delaware corporation (the "Company"), was founded in August
1998 as a provider of Internet access and related services to individuals and
businesses located predominately in smaller metropolitan markets and rural
communities throughout the United States. Simultaneously with the completion of
an initial public offering of its common stock on March 30, 1999, the Company
acquired the outstanding capital stock and limited liability interests of 17
Internet service providers ("IPO Acquisitions"). During the remainder of 1999,
the Company acquired the outstanding capital stock, limited liability interests
and partnership interests of nine additional ISPs as well as certain assets of
various other ISPs ("Subsequent Acquisitions"). During the first quarter of
2000, the Company acquired DataStream Networks, Inc. for approximately $3,100 in
cash. The Company is currently one of the 10 largest independent Internet
service providers in the United States.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial statements have been
included in the accompanying unaudited financial statements. These adjustments
consisted of normal recurring adjustments in addition to a one-time, non-cash
equity compensation charge of $2,469 in the first quarter of 1999 associated
with the hiring of one executive and certain other consultants. The results for
the three months ended March 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000. The
consolidated financial statements and footnotes should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in this Form 10-Q and the Company's Form 10-K for the year
ended December 31, 1999, which included the financial statements and footnotes
for the year ended December 31, 1999.
Note 3 - Restricted Marketable Securities
During the first quarter of 2000, the Company entered into contracts for office
space and equipment, which required letters of credit, secured by 12-month
certificates of deposit as collateral. These certificates are classified as
short-term restricted assets as of March 31, 2000.
Note 4 - Commitments and Contingencies
The Company entered into a 10-year lease agreement to occupy 35,690 square feet
of office space in Reston, Virginia for its executive offices and data center
commencing April 1, 2000. The monthly lease payments are approximately $64 and
will increase 3% per annum commencing April 1, 2001 through the end of the lease
term. The lease includes one 5-year renewal option.
8
<PAGE>
ONEMAIN.COM, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS- (Continued)
(Dollar amounts in thousands)
(Unaudited)
Note 4 - Commitments and Contingencies (continued)
The Company entered into a 10-year lease agreement to occupy 9,733 square feet
of office space in New York, New York for offices of its Content and Strategic
Alliance department commencing approximately August 17, 2000. The monthly lease
payments are approximately $52 and will increase 1% per annum commencing March
17, 2001. Beginning in the sixth year of the lease, the monthly lease payments
will increase to approximately $55 and will increase 1% per annum commencing
March 17, 2007 through the end of the lease term.
The Company is engaged in ordinary and routine litigation incidental to its
business. Management does not anticipate that any amounts the Company may be
required to pay by reason thereof will have a material effect on the Company's
financial position or results of operations.
Note 5 - Restructuring Charge
During the first quarter of 2000, the Company recognized a restructuring charge
related to employee termination benefits and certain real estate contracts. A
plan for implementation was approved by the Board of Directors and communicated
to employees that would be affected by the plan. The plan included specific
identification of the number of employees to be terminated, their job functions
and their locations. The plan is to be implemented within a 12-month period and
no significant changes to the plan are anticipated.
As of March 31, 2000, the Company expensed approximately $7,179, of which $6,004
relates to employee termination benefits and $1,175 relates to the consolidation
of the Company's facilities. This appears as a separate item within the
Company's operating expenses. The plan calls for the elimination of over 650
positions. These reductions in Operations and Customer Support, Sales and
Marketing and General and Administrative expenses are the result of planned
consolidation of call centers and reduction in field administrative staffs.
Through March 31, 2000, the Company terminated three employees as a result of
its plan and charged approximately $134 against the liability "Restructuring
reserve." No additional adjustments have been made to the reserve.
Note 6 - Subsequent Event
The Company entered into a Convertible Debenture Purchase Agreement (the
"Agreement") and Registration Rights Agreement on April 27, 2000 in connection
with the sale of up to an aggregate principal amount of $32,000 6.75%
Convertible Debentures and Warrants to purchase shares of the Company's common
stock in three tranches. The Convertible Debentures are convertible into shares
of the Company's common stock at any time beginning 90 days after their issuance
of a Conversion Price as determined in accordance with the terms of the
Convertible Debenture. The warrants are exercisable for shares of the Company's
common stock at any time beginning immediately after issuance for an Exercise
Price as determined in accordance with the terms of the Warrant.
The Agreement, Registration Rights Agreement, Convertible Debenture and Warrant
have been filed by the Company as exhibits to a Current Report on Form 8-K with
the Securities and Exchange Commission on May 5, 2000.
On April 27, 2000, pursuant to the Agreement, the Company sold 6.75%
Convertible Debentures in the aggregate principal amount of $12,000 and
Warrants to purchase common stock for net proceeds to the Company of $11,580.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollar amounts in thousands, except share and per share
data)
Introduction
The following discussion of our results of operations and of our liquidity and
capital resources should be read in conjunction with our consolidated financial
statements and the related notes thereto contained elsewhere in this filing.
Overview
We successfully completed an initial public offering of 8,500,000 shares of our
common stock on March 30, 1999, concurrently with the acquisitions of 17 ISPs
(the "IPO Acquisitions"). On April 9, 1999, the underwriters exercised their
over-allotment option to purchase 1,275,000 shares of common stock at the
initial public offering price of $22.00 per share. During the remainder of 1999,
the Company acquired all of the outstanding common stock, limited liability
company interests and partnership interests of nine additional ISPs and selected
assets of various other ISPs (the "Subsequent Acquisitions"). On February 22,
2000, the Company acquired DataStream Networks, Inc. for approximately $3,100 in
cash. For financial reporting purposes, the IPO Acquisitions have been accounted
for under the purchase method of accounting from March 30, 1999 and the
Subsequent Acquisitions from the dates of acquisition. The purchase of these
companies, coupled with strategic internal growth, has increased the Company's
subscribers to approximately 762,000 at March 31, 2000.
Revenue
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 other revenues by charging set-up and installation fees, providing Web
page design and development and other technical services and by selling
advertising, equipment and software. Revenues from the sale of these products
and services have been classified as other revenues in the results of operations
tables set forth below.
Costs and Expenses
Our recurring costs and expenses include:
o cost of access revenues;
o cost of other revenues;
o operations and customer support;
o sales and marketing;
o general and administrative;
o amortization; and
o depreciation.
10
<PAGE>
Cost of access revenues consists primarily of the costs of maintaining
sufficient capacity to provide service to subscribers. For an ISP, capacity is a
measurement of the ISP's ability to connect subscribers to the Internet.
Capacity costs include:
o 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;
o the costs associated with leased lines connecting the Company's POPs
directly to the Internet or to our operations centers and connecting
the operations centers to the Internet; and
o 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 its subscribers.
We expect the cost of access revenues to increase over time on an absolute
basis, as our subscriber base grows. However, we expect to leverage the combined
scale of our ISPs to lower the cost of access revenues as a percentage of
revenues by:
o negotiating one or more relationships with national backbone providers
to connect our ISPs to the Internet;
o negotiating favorable local loop contracts and establishing
co-location arrangements with local exchange carriers;
o establishing relationships to reduce costs and improve
access and reliability for our subscribers; and
o negotiating discounts with equipment vendors.
Cost of other revenues consists primarily of:
o the salaries and benefits of the personnel providing installation of
equipment and software;
o Web development and technical services; and
o 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 primarily includes personnel and related
expenses of customer service and technical support employees. We expect
operations and customer support expenses to increase over time to support new
subscribers and expand existing subscribers' service. New subscribers tend to
have particularly heavy customer service and technical support requirements.
Because we anticipate rapid growth in our subscriber base to continue, these
costs are expected to comprise an increasing percentage of expenses in the near
term. In addition, we intend to consolidate our customer support operations in
regional call centers and increase our service level to 24 hours a day, 7 days a
week. This strategy will increase these expenses. In the longer term, as a
percentage of revenues, we believe operations and customer support expenses
should decline as we integrate our operations.
Sales and marketing includes the expenses associated with acquiring subscribers
and developing content. These costs include advertising, promotions, referral
bonuses, salaries and sales commissions. On a percentage of revenue basis, sales
and marketing expense is a relatively variable cost and will increase with our
development of a common brand supported by community-based marketing and
geographic community programs. We expect that, over time, sales and marketing
expense will decrease as a percent of revenues.
General and administrative expenses consist primarily of:
o the salaries and benefits of our management and administrative
employees;
o the cost of travel, entertainment, rent, utilities, credit card
processing, bad debt; and
o the cost of consulting and professional fees related to integration.
11
<PAGE>
We expect general and administrative costs to increase to support growth,
particularly as we integrate our operations by establishing network operations
centers, and by implementing common billing and financial reporting systems in
the near term. As a percentage of revenue, we have already begun to experience
the anticipated results of leveraging integration efficiencies, and over time,
we expect this trend to continue.
Amortization expense primarily relates to the amortization of goodwill and
customer lists resulting from the IPO Acquisitions and the Subsequent
Acquisitions. Our policy is to amortize, on a straight-line basis, the portion
of the acquisition purchase price attributable to customer lists and goodwill
over a three-year period.
Depreciation primarily relates to network and computing infrastructure and is
calculated over the estimated useful lives of the assets ranging from three to
seven years using the straight-line method. We expect our capital expenditures
to increase as we continue to expand our operations. We also anticipate that
financial resources will be utilized to acquire additional communications
equipment and improvements to technology that will allow our networks to grow to
support existing and new subscribers, build network operations and customer care
centers and integrate common billing and financial reporting systems.
Results of Operations
The following financial information for the three months ended March 31, 2000
includes our historical consolidated results of operations of subsequent
acquisitions from the date of acquisition only.
The following pro forma financial information for the three months ended March
31, 1999 includes (a) our historical consolidated results combined with the 17
ISPs as if the IPO Acquisitions had occurred on January 1, 1999; (b) the initial
public offering; (c) the amortization of goodwill resulting from the IPO
Acquisitions; (d) the elimination of interest expense for the debt that was paid
from the IPO proceeds; and, (e) an income tax benefit at an appropriate rate.
The pro forma financial information includes the results of operations of the
Subsequent Acquisitions from the dates of acquisition only.
The pro forma combined financial information does not purport to represent what
our results of operations would actually have been if such transactions and
events in fact had occurred on January 1, 1999 or to project our results of
operations for any future period.
<TABLE>
<CAPTION>
(Unaudited)
For the three months ended March 31,
2000 1999
-------------- ---------------
(Pro forma)
<S> <C> <C>
Statements of Operations Data:
Total revenues ............................................... $ 39,812 $ 19,502
Costs of access and other revenues ........................... 15,100 8,090
Operations and customer support .............................. 7,988 2,783
Sales and marketing .......................................... 9,051 2,370
General and administrative (exclusive of non-cash
compensation expense shown below) ......................... 13,118 5,499
Restructuring charge ......................................... 7,179 -
Non-cash compensation ........................................ - 2,469
Amortization ................................................. 34,224 20,814
Depreciation ................................................. 5,108 1,302
Other (income), net .......................................... (57) (11)
========= =========
Loss from operations ......................................... $ (51,899) $ (23,814)
========= =========
Approximate number of subscribers at the end of the period ... 762,000 371,000
========= =========
</TABLE>
12
<PAGE>
The following table, which is based on the preceding table, shows a comparison
of costs of revenues and other expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
For the three months ended March 31,
2000 1999
-------------- --------------
(Pro forma)
<S> <C> <C>
Combined Percentage of Revenues:
Costs of access and other revenues ................. 37.9% 41.5%
Operations and customer support .................... 20.1% 14.3%
Sales and marketing ................................ 22.7% 12.2%
General and administrative (exclusive of non-cash
compensation expense shown below) ............... 32.9% 28.2%
Restructuring charge ............................... 18.0% 0.0%
Non-cash compensation .............................. 0.0% 12.7%
Amortization ....................................... 86.0% 106.7%
Depreciation ....................................... 12.8% 6.7%
</TABLE>
13
<PAGE>
Three Months Ended March 31, 2000 Compared To Pro Forma Three Months Ended
March 31, 1999
We incurred an operating loss of $51,899 for the three months ended March 31,
2000 compared to a pro forma operating loss of $23,814 for three months ended
March 31, 1999.
Total Revenues. Total revenues for the three months ended March 31, 2000 were
$39,812 compared to $19,502 for the three months ended March 31, 1999, an
increase of 104.1%. The increase was primarily attributable to an increase in
the number of subscribers as a result of internal growth and strategic
acquisitions since our IPO. Revenues related to the Subsequent Acquisitions
totaled $14,249, or 35.8% of total revenues. Total subscribers at March 31, 2000
were approximately 762,000 compared to approximately 371,000 at March 31, 1999,
an increase of 391,000 or 105.4%. Of this increase, approximately 223,000
subscribers were a result of the Subsequent Acquisitions.
Access revenues for the three months ended March 31, 2000 were $38,431, compared
to $17,968 for the three months ended March 31, 1999, an increase of 113.9%. The
increase was primarily attributable to the increase in subscribers discussed
above, offset by the effects of promotional discounts during the comparative
periods.
Other revenues for the three months ended March 31, 2000 totaled $1,381 compared
to $1,534 for the three months ended March 31, 1999, a decrease of 10.0%. The
decrease was primarily attributable to a reduction of installation fees and
equipment sales.
Total costs of access and other revenues. Total costs of access and other
revenues for the three months ended March 31, 2000 were $15,100, an 86.7%
increase from $8,090 for the three months ended March 31, 1999. Stated as a
percentage of revenues, the total costs of access and other revenues decreased
to 37.9% from 41.5% for the three months ended March 31, 2000 and 1999,
respectively. As expected, the cost of access and other revenues, as a
percentage of revenues, has declined as we have begun to achieve the benefits of
network integration. Any decrease, however, may be partially offset by network
improvements and expansion projects.
Operations and customer support expenses. Operations and customer support
expenses for the three months ended March 31, 2000 were $7,988, a 187.0%
increase from $2,783 for the three months ended March 31, 1999. As a percentage
of revenues, operations and customer support expenses for the three months ended
March 31, 2000 increased to 20.1% from 14.3% for the three months ended March
31, 1999. The increase is due to the opening of our first national call center
and extending service hours at existing call centers.
Sales and marketing expenses. Sales and marketing expenses for the three months
ended March 31, 2000 were $9,051, an increase of 281.9% from $2,370 for the
three months ended March 31, 1999. Sales and marketing expense as a percentage
of revenues for the three months ended March 31, 2000 increased to 22.7% from
12.2% for the three months ended March 31, 1999. The increase is the result of
increased advertising and marketing promotions during the first quarter of 2000.
General and administrative costs. General and administrative costs were $13,118
for the three months ended March 31, 2000, an increase of 138.6% from $5,499 for
the three months ended March 31, 1999. General and administrative costs as a
percentage of revenues for the three months ended March 31, 2000 were 32.9%
compared to 28.2% for the three months ended March 31, 1999. The increase is
largely attributable to costs associated with our various integration efforts
during the first quarter of 2000.
14
<PAGE>
Restructuring Charge. As part of our integration plan, the Company recognized
charges totaling $7,179 associated with our employee termination benefits and
related to the consolidation of our facilities during the three months ended
March 31, 2000. The restructuring plan, which includes the termination of over
650 positions and consolidation of specifically identified facilities, was
approved by the Board of Directors and will be implemented and funded within a
12-month period. Sources of funds for the cash outlays necessary will come from
operating activities, as well as additional funding sources, including the
convertible debentures and warrants previously described. As a result of this
restructuring plan, we expect facility costs and payroll expenses related to
this restructuring to decrease in future periods. This would affect operating
expenses for operations and customer support, sales and marketing, and general
and administrative line items. Any decrease, however, may be partially offset by
expansion projects. There were no such restructuring costs reflected for the
comparative period of 1999.
Non-cash compensation expense. For the three months ended March 31, 2000, there
were no non-cash compensation expenses. For the three months ended March 31,
1999, a non-cash compensation expense was recorded related to stock options
granted to one executive and certain other consultants.
Amortization. Amortization expense for the three months ended March 31, 2000
totaled $34,224 compared to $20,814 for the same period of the prior year. This
increase is primarily attributable to the increase in goodwill and customer
lists from the IPO Acquisitions and Subsequent Acquisitions and includes
adjustments related to the definitive purchase agreements and contingent
payments made to former owners.
Depreciation. Depreciation expense for the three months ended March 31, 2000
totaled $5,108 compared to $1,302 for the three months ended March 31, 1999. The
increase is due to increased capital expenditures in support of our national
network, call centers and computing platforms.
Business Model
As a result of equity market trends in the consumer ISP market, we are revising
our business model to enhance our focus on business services and reduce our
reliance on revenue growth through acquisitions of consumer ISPs. We believe
that the combined consumer ISP/business services model will allow us to leverage
our continuing investments in infrastructure, brand, network, billing systems
and call centers over a broader revenue base. Although we are confident that our
enhanced business model will result in stronger long-term operating cash flows,
the interim reduction in the acquisitions of consumer ISPs may impede our
ability to leverage our immediate investment in infrastructure over the
short-term revenue base.
Effects of Inflation
We do not believe that inflation has had a material impact on our results of
operations during the three months ended March 31, 2000.
Liquidity and Capital Resources
As of March 31, 2000, our combined cash and cash equivalents balance was $16,227
compared with $27,099 at December 31, 1999. This decrease is primarily
attributable to repayment of long-term debt assumed through acquisitions,
repayment of capital lease obligations and notes payable, and the net effects
from cash flows from operating and investing activities described below.
Net cash used in operating activities was $5,118 for the three months ended
March 31, 2000.
Net cash provided by investing activities was $1,242 for the three months ended
March 31, 2000. This was the net result of the payment of the cash portion of
the purchase prices for Subsequent Acquisitions, maturities of marketable equity
securities, creation of restricted assets for letters of credit related to lease
obligations and purchases of property, plant and equipment.
15
<PAGE>
Net cash used in financing activities was $11,341 for the three months ended
March 31, 2000. We repaid $6,269 of debt assumed in connection with the
Subsequent Acquisitions. In addition, we repaid capital lease obligations and
notes payable totaling $5,072.
We expect our capital expenditures to increase as we continue to expand our
operations. We anticipate that financial resources will be utilized in acquiring
additional communications equipment and improvements to technology that will
allow our networks to grow to support existing and new subscribers, build a
network operations center and integrate billing and financial reporting systems.
We expect to pay out additional consideration that may be issued pursuant to
earn-out arrangements included in the definitive agreements for the IPO
Acquisitions and the Subsequent Acquisitions. The payment of additional
consideration is contingent upon the IPO and Subsequent Acquisitions meeting
certain operational and earning margin requirements. The amount of the
additional consideration will be payable in either cash or stock at our option.
We also expect to both pay additional consideration and to recover amounts
previously paid relating to the final purchase price calculations of certain of
the IPO and Subsequent Acquisitions. As of March 31, 2000, we estimate the
amount of additional consideration to be approximately $2,961, net of purchase
price adjustments related to the definitive agreements. Such amounts may be
adjusted further in future quarters, based on the final settlement of the
contingent considerations, as well as additional consideration for performance
goals that may be met in 2000.
Along with the funds already received from the convertible debentures noted
above in Note 5- Subsequent Event, we anticipate that our current cash on hand
and cash flows from operations will be sufficient to meet our liquidity
requirements for operations through the remainder of 2000. However, should we
decide to pursue additional acquisitions, we expect to fund these acquisitions
through a combination of cash and the issuance of shares of our common stock. To
the extent we elect to pursue acquisitions involving the payment of significant
amounts of cash to fund the purchase price of such acquisitions and the
repayment of assumed indebtedness, we are likely to require additional sources
of financing to fund such non-operating cash needs. We may determine to raise
additional debt or equity capital to finance potential acquisitions and/or to
fund accelerated growth. Any significant acquisitions or increases in our growth
rate could materially affect our operating and financial expectations and
results, liquidity and capital resources.
Effects of Recently Issued Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB 101"), which is effective for fiscal
years beginning after December 15, 1999. We are in the process of reviewing our
revenue recognition policies to determine that they are in accordance with SAB
101. We anticipate that the adoption of SAB 101 will require us to change the
way in which we account for set-up fees associated with Internet access
service. Our historical practice has been to recognize the revenue associated
with the fees when charged. Under SAB 101, revenue for set-up fees generally
should be recognized on a straight-line basis over the contractual period or
longer if the relationship with the customer is expected to extend beyond the
initial term and the customer continues to benefit from the payment of the
set-up fee. We anticipate that we will account for the change in accounting
principle as a cumulative effect adjustment in the second quarter of 2000 and
that the adjustment will not be material.
In January 2000, the EITF released 99-17, "Accounting for Advertising Barter
Transactions" ("EITF 99-17"). EITF 99-17 provides guidance on the revenue and
expense recognition for advertising barter transactions. We adopted the
provisions of EITF 99-17 beginning January 1, 2000. The effect on our revenues
and earnings was not material.
Forward-Looking Statements
Some of the statements contained in this Quarterly Report are "forward-looking
statements." These statements can sometimes be identified by our use of
forward-looking words such as "may," "will," "anticipate," "continue,"
"believe," "pro forma," "estimate," "expect" or "intend" or the negative thereof
or other variations thereon or comparable terminology. These forward-looking
statements are subject to known and unknown risks and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. These risks and uncertainties include our ability
to:
o retain and grow our subscriber base;
o sustain our projected growth;
o successfully integrate new subscribers and/or assets obtained through
acquisitions;
o succeed in the highly competitive markets in which we operate;
o obtain required financing on favorable terms;
o reduce operating costs resulting from the integration and optimization
of our acquisitions;
o respond to technological developments affecting the Internet; and
o protect our intellectual property.
16
<PAGE>
This list is intended to identify some of the principal factors that could cause
actual results to differ materially from those described in the forward-looking
statements included elsewhere in this prospectus. These risks and uncertainties
are not intended to represent a complete list of all risks and uncertainties
inherent in our business, and no assurance can be given that future results
indicated, whether expressed or implied, will be achieved. These forward-looking
statements are based on current expectations, and we assume no obligation to
update this information. Therefore, our actual experience and results achieved
during the period covered by any forward-looking statement may differ
substantially from those stated or implied. The forward-looking statements
should be read together with the information presented in this Form 10-Q and
included elsewhere in recent SEC filings.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to changes in interest rates primarily from our investments in
cash and cash equivalents and marketable securities. We believe that the market
risk associated with our cash and cash equivalents and marketable securities is
not material to our results of operations.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending litigation that would have a material effect
on our consolidated financial condition.
Item 2. Changes in Securities and Use of Proceeds
From the effective date of the initial public offering registration to March 31,
2000, the amount of net offering proceeds used for any purpose for which at
least 5% of the offering proceeds or $100,000 (whichever is less) was used is as
follows:
Repayment of indebtedness to directors and officers ............... $ 140
Repayment of indebtedness to others ............................... 9,658
Repayment of the founder notes .................................... 1,021
Cash portion of purchase price for IPO Acquisitions and
Subsequent Acquisitions ......................................... 145,976
-------
Total ............................................................. $ 156,795
=========
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K: None
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ONEMAIN.COM, INC.
Date: May 15, 2000 By: /s/ Marian G. O'Leary
------------ ----------------------------------------
Marian G. O'Leary
Chief Financial Officer
(Principal Financial Officer)
18
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