<PAGE> 1
As filed with the Securities and Exchange Commission on September 30, 1999.
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ESPERNET.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7375 52-2191573
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NO.)
NUMBER)
</TABLE>
383 West 12th Street
New York, New York 10014
(212) 989-4706
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARTIN D. PRAZAK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
383 WEST 12TH STREET, NEW YORK, NEW YORK 10014
(212) 989-4706
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
THOMAS L. FAIRFIELD, ESQ. SEAN P. GRIFFITHS, ESQ. KENNETH R. LAMB, ESQ.
JOHN J. ALTORELLI, ESQ. GIBSON, DUNN & CRUTCHER LLP GIBSON, DUNN & CRUTCHER LLP
LEBOEUF, LAMB, GREENE & MACRAE, L.L.P. 200 PARK AVENUE ONE MONTGOMERY STREET
225 ASYLUM STREET NEW YORK, NEW YORK 10166 SUITE 2600
HARTFORD, CONNECTICUT 06103 (212) 351-4000 SAN FRANCISCO, CALIFORNIA 94104
(860) 293-3500 (415) 393-8200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the 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 the box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 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(d)
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.001 per share $172,500,000 $47,955
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- SEPTEMBER 30, 1999
PROSPECTUS
SHARES
[ESPERNET.COM LOGO]
COMMON STOCK
This is an initial public offering of espernet.com, inc. All of the
shares of common stock are being sold by espernet.com.
We expect the price to the public in this offering will be between $
and $ per share.
Prior to this offering, there has been no public market for the common
stock. We have applied to include the common stock on the Nasdaq National Market
under the symbol "ESNT."
SEE "RISK FACTORS" BEGINNING ON PAGE TO READ ABOUT RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
---------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts...................................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
The underwriters have an option to purchase up to an additional
shares of our common stock from us at the public offering price less
the underwriting discount.
---------------------------
The underwriters expect to deliver the shares against payment in San
Francisco, California on .
E*OFFERING DLJDIRECT INC.
---------------------------
WR HAMBRECHT + CO
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 9
Forward-Looking Statements.......... 21
About espernet.com.................. 22
Use of Proceeds..................... 23
Dividend Policy..................... 24
Capitalization...................... 25
Dilution............................ 26
Selected Combined Pro Forma
Financial Data.................... 27
Selected Historical Financial Data
for Our ISPs...................... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operation...................... 43
Business............................ 106
Management.......................... 117
Transactions with Related Parties... 124
Principal Stockholders.............. 126
Description of Capital Stock........ 127
Shares Available for Future Sale.... 130
Underwriting........................ 132
Experts............................. 134
Validity of the Shares.............. 139
Additional Information.............. 139
Index to Financial Statements....... F-1
Espernet.com of New York, Inc....... F-42
Cumberland Technologies
International (d/b/a PAdotNET).... F-58
Pennsylvania Online Ltd............. F-66
Innernet, Inc....................... F-78
Delanet, Inc........................ F-89
Internet Access Services (A Division
Of Weidner Associates, Inc.)...... F-103
Southern Maryland Internet, Inc..... F-114
NuNet, Inc.......................... F-125
Enter.Net, Inc...................... F-138
Prometheus Information Corp......... F-150
E-Znet Incorporated................. F-162
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USA Choice Internet Services, Co.... F-177
Crocker Communications Internet (A
Division Of Crocker
Communications, Inc.)............. F-190
COL Networks, Inc................... F-200
Perigee.net Corporation............. F-211
DuplinNet Corporation............... F-222
WaveNet, Inc........................ F-232
The 3rd Door, Inc................... F-244
InfoRamp, Inc....................... F-255
Midwest Communications, Inc......... F-265
Alliance Internet Technologies,
L.L.C............................. F-281
ComQuest Networks, Inc.............. F-292
Fairnet, Inc........................ F-303
Wisconsin Internet, Inc............. F-315
NConnect, Inc....................... F-326
Netwurx, Inc........................ F-337
Provide.Net......................... F-349
The Computer Care Company, Inc...... F-358
ISP Management, Inc................. F-372
Nethawk of Alma, Inc................ F-378
The Internet Access Services
Division of Sensible Computer
Solutions, Inc.................... F-389
www.internet solutions, inc......... F-400
Copper.net, Inc..................... F-412
NetPlus Communications, Inc......... F-426
Internet Nebraska Corporation....... F-437
RapidNet, Inc....................... F-448
CSW Net, Inc........................ F-461
IOCC.com, LLC....................... F-472
Futura, Inc......................... F-483
Internet Solutions, Inc. -- ISP
Business.......................... F-494
Black Sheep Computing, Inc. -- ISP
Business.......................... F-503
Intensity Computer Systems.......... F-514
ECSIS.Net, LLC...................... F-522
World Trade Network, Inc............ F-532
STIC.NET, Inc....................... F-544
NetWest Online, Inc................. F-555
</TABLE>
------------------------------
This prospectus includes product names, trade names and trademarks of other
companies.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this
prospectus. You should read the entire prospectus carefully, especially the
risks of investing in our common stock discussed under "Risk Factors." All
information in this prospectus assumes the underwriters will not exercise their
over-allotment option, unless otherwise stated.
ESPERNET.COM
OUR BUSINESS
At the completion of this offering, espernet.com will acquire 43 Internet
service providers, or ISPs, and become a leading national ISP with more than
274,000 subscribers. Based on information published by Jupiter Communications,
we will be one of the twenty largest ISPs in the United States. We will have
coverage across 46 states through a combined network that provides local access
to the Internet through more than 2,700 points of presence, or POPs.
We negotiated and executed definitive agreements to acquire our 43 ISPs
within a 16 week period starting in April 1999. We intend to continue to
selectively acquire local and regional ISPs and to integrate our ISPs to achieve
operational efficiencies. We also intend to offer new products and services and
provide superior customer service and technical support to increase our revenues
through subscriber growth.
On a pro forma combined basis, our 43 ISPs have achieved significant
growth. Revenues have grown at a compound annual growth rate of 111% from $7.6
million for the year ended December 31, 1996 to $34.1 million for the year ended
December 31, 1998. In addition, revenues grew 75% from $14.5 million for the six
months ended June 30, 1998 to $25.4 million for the six months ended June 30,
1999.
[TOTAL REVENUE BAR CHART]
<TABLE>
<CAPTION>
COMBINED HISTORICAL REVENUES
----------------------------
<S> <C>
1996 7622.00
1997 18015.00
1998 34060.00
6 months ending|6/30/98 14529.00
6 months ending|6/30/99 25393.00
</TABLE>
1
<PAGE> 5
On a pro forma combined basis, the number of our subscribers has grown at a
compound annual growth rate of 130% from approximately 38,439 as of December 31,
1996 to approximately 203,829 as of December 31, 1998. In addition, our
subscriber base grew 90% from approximately 144,227 as of June 30, 1998 to
approximately 274,320 as of June 30, 1999.
[END OF PERIOD SUBSCRIBERS BAR CHART]
<TABLE>
<CAPTION>
END OF PERIOD SUBSCRIBERS
-------------------------
<S> <C>
12/31/96 38439.00
12/31/97 101739.00
12/31/98 203829.00
6/30/98 144227.00
6/30/99 274320.00
</TABLE>
OUR MARKET OPPORTUNITY
We believe we are well positioned to capitalize on a significant market
opportunity to provide Internet access and related products and services. We
believe this opportunity exists because:
- the number of Internet users in the United States will grow at a compound
annual growth rate of 23% from 62.8 million in 1998 to 177.0 million by
the end of 2003, according to International Data Corporation, or IDC;
- IDC also forecasts that Internet access service revenues in the United
States will more than triple from $10.7 billion in 1998 to $37.4 billion
in 2003; and
- Boardwatch Data estimates that there are currently approximately 6,700
ISPs in the United States, including many small local and regional
providers.
We believe that the ISP industry will undergo a period of rapid
consolidation over the next few years because many local and regional ISPs lack
sufficient capital resources to provide the products and services that customers
demand.
OUR GROWTH STRATEGY
We believe that the consolidation of the ISP industry presents us with an
opportunity to create a new, national ISP that offers a broad range of products
and a superior customer experience. To continue our revenue and subscriber
growth, we plan to:
- selectively acquire and integrate additional local and regional ISPs in
our target markets;
- achieve economies of scale and streamline our operations;
- build espernet.com into a national brand supported by locally focused
marketing and sales programs;
- provide Internet users with a superior Internet experience;
- offer a broad range of products and services to meet customer demand; and
- increase our revenues by charging third parties, such as advertisers,
Internet portal Web sites, Internet content providers and online
merchants for preferred access to our subscriber base.
------------------------
2
<PAGE> 6
We are a Delaware corporation. Our principal executive offices are located
at 383 West 12th Street, New York, New York 10014, and our telephone number is
(212) 989-5386.
In this prospectus, "espernet.com," "our company," "we," "us" and "our"
refer to
espernet.com, inc. and our wholly owned subsidiaries, and "Espernet.com NY"
refers to Espernet.com of New York, Inc., unless the context otherwise requires.
Our Web site address is www.espernet.com. Neither the information contained in
our Web site nor the Web sites of any of our subsidiaries constitute part of
this prospectus.
3
<PAGE> 7
THE OFFERING
Common stock offered by us... shares
Common stock to be outstanding
after this offering.......... shares
Over-allotment option.......... shares
Use of proceeds................ We will use the net proceeds of this offering of
approximately $ as follows:
- to pay the cash portion of the purchase
price and related expenses in connection
with the acquisition of 43 ISPs; and
- for general corporate purposes, including
future acquisitions and working capital.
See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol....................... "ESNT"
Risk Factors................... See "Risk Factors" beginning on page for a
discussion of the material factors that you
should consider before purchasing shares of our
common stock.
Dividend policy................ We do not anticipate paying cash dividends on
our common stock.
Unless otherwise indicated, the share information in this prospectus
excludes 4,000,000 shares of common stock reserved for issuance under our 1999
Stock Option/Stock Issuance Plan, including grants of options covering 1,657,500
shares to be granted to employees, directors and consultants simultaneously with
the closing of this offering. See "Management--The 1999 Stock Option/Stock
Issuance Plan."
The share information in this prospectus also reflects the issuance of
shares in connection with the acquisitions of Espernet.com of New York,
Inc. and our 43 ISPs, which will be completed simultaneously with the completion
of this offering, unless otherwise indicated.
The closing of the acquisitions of the 43 ISPs that we have entered into
agreements to acquire is conditioned on the completion of this offering.
4
<PAGE> 8
SUMMARY COMBINED PRO FORMA FINANCIAL DATA
We formed espernet.com, inc. in April 1999. To date, our operations have
been limited to negotiating and entering into agreements to acquire 43 ISPs,
preparing this prospectus and the related documents for this offering,
recruiting our management team and developing our corporate structure and
strategy.
We present below our summary combined pro forma statement of operations and
other operating data for the year ended December 31, 1998 and for the six months
ended June 30, 1999 and the combined pro forma balance sheet data as of June 30,
1999. This information is based on the combined historical results for
espernet.com and the 43 ISPs with which we have entered into agreements to
acquire, after applying pro forma adjustments and giving effect to this
offering. The summary combined pro forma statement of operations and other
operating data for the year ended December 31, 1998 and for the six months ended
June 30, 1999 assume that the 43 ISP acquisitions and this offering were
consummated on January 1, 1998 and 1999, respectively. The combined pro forma
balance sheet data assumes that the 43 ISP acquisitions and this offering were
consummated on June 30, 1999.
The summary combined pro forma statement of operations and other operating
data includes, under the line item labeled "EBITDA," our operating loss adding
back depreciation and amortization on a pro forma combined basis for the year
ended December 31, 1998 and for the six months ended June 30, 1999. We have
included EBITDA because we believe investors commonly analyze and compare
companies based on operating performance data. 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.
The summary combined pro forma financial data does not necessarily indicate
the operating results or financial position which would have resulted from our
operation on a combined basis during the periods presented, nor does this pro
forma data necessarily represent any future operating results or financial
position of espernet.com. In addition to this summary financial data, you should
also refer to the more complete financial information included elsewhere in this
prospectus, including audited historical results for our 43 ISPs and our
unaudited pro forma combined results.
5
<PAGE> 9
SUMMARY COMBINED PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
------------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT
SUBSCRIBER AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 34,060 $ 25,393
Costs and expenses:
Cost of Internet services................................ 15,625 11,158
Selling, general and administrative(1)................... 17,036 12,547
Depreciation and amortization(2)......................... 67,959 34,713
----------- -----------
Total costs and expenses.............................. 100,620 58,418
----------- -----------
Loss from operations....................................... (66,560) (33,025)
Interest income............................................ 15 7
Interest expense........................................... (725) (438)
Other expense, net......................................... (199) (22)
----------- -----------
Loss before provision for income taxes..................... (67,469) (33,478)
Benefit for income taxes(3)................................ 9,215 4,481
----------- -----------
Net loss................................................... $ (58,254) $ (28,997)
=========== ===========
Pro forma basic and diluted net loss per share(4).......... $ $
=========== ===========
Shares used in the calculation of pro forma basic and
diluted net loss per share(4)............................
OTHER OPERATING DATA:
Approximate number of subscribers, end of period......... 203,829 274,320
EBITDA................................................... $ 1,399 $ 1,688
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1999
--------------
PRO FORMA
AS ADJUSTED(5)
--------------
(AMOUNTS
IN THOUSANDS)
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Cash...................................................... $ 32,063
Working capital........................................... 20,738
Total assets.............................................. 244,154
Total long-term debt and capital lease obligations
(excluding current portion)............................ 3,851
Total stockholders' equity................................ $ 203,157
</TABLE>
- -------------------------
(1) Includes the net increase of approximately $0.9 million and $0.3 million in
compensation expense attributable to owners and employees of our ISPs and
our new corporate management for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively.
6
<PAGE> 10
(2) Includes amortization expenses of $65.1 million and $32.5 million for the
year ended December 31, 1998 and the six months ended June 30, 1999,
respectively, to be recorded as a result of the 43 ISP acquisitions. These
amortization charges are attributable to goodwill and customer lists, which
will be amortized over three years.
(3) Includes the incremental provision (benefit) for federal and state income
taxes assuming all entities were subject to federal and state income tax and
other adjustments for income taxes on S-Corporation income. The pro forma
adjusted benefit for income taxes for the year ended December 31, 1998 and
the six months ended June 30, 1999 equals 13% of our loss before provision
for income taxes compared to the expected federal benefit of 35% principally
because of the amortization of goodwill.
(4) The number of shares used in the calculation of pro forma basic and diluted
net loss per share was calculated assuming million shares issued in our
share exchange with Espernet.com of New York, Inc., million shares issued
to the former owners of our ISPs and million shares issued in this
offering.
(5) Adjusted to reflect the sale of the million shares of common stock in
this offering and the application of the estimated net proceeds. See "Use of
Proceeds."
7
<PAGE> 11
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
The following table presents summary historical combined financial data for
the 43 ISPs that we will acquire at the closing of this offering for each of
their three most recent fiscal years and the six months ended June 30, 1998 and
June 30, 1999. The combined financial data presented below are derived from the
more detailed historical financial statements and notes of our ISPs included
elsewhere in this prospectus and have not been adjusted for the pro forma
adjustments reflected in the unaudited combined pro forma financial statements
included elsewhere in the prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1996 1997 1998 1998 1999
------ ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C>
Approximate subscribers...... 38,439 101,739 203,829 144,227 274,320
Revenues..................... $7,622 $18,015 $34,060 $14,529 $25,393
Income (loss) from
operations................. (1,762) (1,188) (566) 213 40(1)
</TABLE>
- ---------------
(1) Reflects non-cash compensation expenses of $1.4 million in aggregate at
Midwest Communications, Inc. and Delanet, Inc., two of our ISPs, for
the six months ended June 30, 1999.
8
<PAGE> 12
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider carefully the following risks before you decide to buy our
common stock. The risks and uncertainties described below are not the only ones
we face. If any of the following risks occurs, our business, financial condition
and 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.
RISKS RELATED TO OUR OPERATIONS
THE HISTORY OF OPERATING LOSSES AMONG MANY OF OUR INTERNET SERVICE PROVIDERS MAY
RESULT IN CONTINUED LOSSES OR REDUCED PROFITS
We may be unable to achieve or maintain overall profitability or
profitability of any of our individual Internet service providers, or ISPs. On a
pro forma basis, we had operating losses of $66.6 million for the year ended
December 31, 1998 and $33.0 million for the six months ended June 30, 1999. In
addition, for the year ended December 31, 1998, 17 of our ISPs reported
operating losses and, for the six months ended June 30, 1999, 16 of our ISPs
reported operating losses.
WE DO NOT HAVE AN OPERATING HISTORY AND IF WE DO NOT SUCCESSFULLY MANAGE OUR
ANTICIPATED GROWTH OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our company was recently organized and has no operating history. We will be
subject to risks generally associated with the formation of any new business and
specifically to the risks associated with our anticipated growth. Our
performance as an ISP will depend on our ability to manage this anticipated
growth effectively by implementing operational and administrative systems on a
timely basis, building and maintaining our network infrastructure, conducting
successful marketing and sales programs and attracting and retaining qualified
employees.
WE FACE RISKS ASSOCIATED WITH INTEGRATING NUMEROUS ACQUISITIONS
Our plan to acquire and integrate 43 separate local and regional ISPs into
a single national ISP and to continue to expand our business by seeking to
identify and acquire additional ISPs involves numerous risks and will require us
to expend significant managerial, operational and financial resources. As a
result, we may fail to achieve or maintain profitability. The risks involved in
our acquisition of ISPs include:
- difficulties in assimilating the operations, technologies, products and
personnel of acquired ISPs;
- loss of subscribers in acquired ISPs;
- diversion of management's attention from other business concerns;
- developing management information and operating systems that encompass
the businesses of the 43 ISPs we will acquire and any future
acquisitions;
- loss of key employees of acquired ISPs; and
- entering markets in which we have limited prior experience.
In particular, to integrate our newly acquired ISPs successfully, we must
install and standardize adequate managerial, operational and control systems,
deploy equipment and telecommunications capabilities, implement marketing
efforts in new and 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. Failure
to integrate our existing and future ISPs or successfully manage our increasing
size may result in significant operating inefficiencies and cause a significant
strain on our managerial, operational, financial and information systems
resources. This may have a negative effect on our service and our subscriber
relationships which in turn may result in subscription cancellations and
declines in revenues.
9
<PAGE> 13
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our ISPs have limited operating histories, and we have no history operating
them as a group. We cannot forecast our operating expenses based on the
historical results of our ISPs. We intend to establish our expense levels in
advance based in part on our projections of future revenues, which are
inherently difficult to predict. Our revenues will depend heavily on our ability
to attract and retain subscribers. If our actual revenues are less than our
projected revenues, we may be unable to reduce expenses proportionately, and our
operating results, cash flows and liquidity could be adversely affected.
We expect that our revenues and operating results will fluctuate
significantly from quarter to quarter. A number of factors are likely to cause
these fluctuations, including:
- the rate at which we attract new subscribers;
- the rate at which we lose subscribers;
- the rate at which we increase the number of subscribers through
acquisitions;
- the effect of acquisitions;
- integration costs;
- changes in our pricing policies or those of our competitors;
- capital expenditures and other costs relating to the expansion of our
operations;
- timing of new product and service announcements by us or our competitors;
- introduction of alternative technologies;
- the rate of growth of the Internet;
- seasonality of new subscriber registrations;
- increased competition in our markets;
- market acceptance of new and enhanced versions of our products and
services; and
- personnel changes.
IF OUR ACQUISITION ACTIVITIES ARE DELAYED OR WE CANNOT ACQUIRE ADDITIONAL ISPS,
WE MAY BE UNABLE TO EXECUTE OUR BUSINESS STRATEGY
In order for our business strategy to succeed, we must expand into new
markets. We plan to do so by identifying and acquiring additional ISPs. However,
we may not be successful in achieving these goals. In pursuing acquisitions, we
compete against other ISPs, many of which are larger than we are and have
greater financial and other resources than we have. We compete for potential
acquisitions based on a number of factors, including price, terms and
conditions, size and growth potential and ability to offer cash, stock or other
forms of consideration. Consequently, the terms of any agreements to acquire
additional ISPs may be more costly or otherwise less favorable than the terms of
the 43 agreements we have with our ISPs.
We may be unable to use stock as currency for acquisitions because of
declines or volatility in our stock price due to market conditions or other
factors. In addition, future transactions could require us to incur debt or
issue additional equity securities to raise cash, which would dilute our
stockholders' ownership. If we are unable to fund acquisitions from our existing
cash resources, borrowed funds or with stock we would be unable to execute our
business strategy.
As we grow, some of our acquisitions could be subject to existing or future
regulatory requirements, such as the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, compliance with which could adversely affect the pace of our
acquisition activity. In addition, significant acquisitions could require
preparation, filing and Securities and Exchange Commission review of
registration statements. These regulatory requirements could limit or delay our
flexibility in growing and operating our business.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO GROW OUR BUSINESS
Our ability to grow depends significantly on our ability to expand our
operations by acquiring new ISPs, expanding our marketing and sales efforts and
opening new points of presence, or POPs, which are the physical
10
<PAGE> 14
connections that provide access to the Internet. These activities require
significant expenditures to locate, evaluate and acquire ISPs and significant
investments in equipment, marketing and sales. We anticipate that our cash
requirements for 2000 will include disbursements for some or all of the
following purposes or contingencies, which may require us to seek additional
capital:
- future acquisitions;
- increasing our marketing and sales operations;
- expanding our network infrastructure;
- developing our information and operating systems to encompass the
businesses of the 43 ISPs we intend to acquire and any future
acquisitions;
- expansion of our customer service and technical support operations;
- hiring additional technical, customer support and management personnel;
- increases in our growth rate;
- shortfalls in anticipated revenues or increases in expenses;
- developing new products and services; and
- unanticipated opportunities, such as strategic alliances or acquisitions
of complementary businesses.
We cannot be certain that we will be able to raise additional capital in
the future on terms acceptable to us or at all. If sources of financing are
insufficient or unavailable, we will be required to modify our growth and
operating plans in accordance with available financing. In addition, if we raise
additional capital by issuing additional equity securities, such issuance could
dilute our stockholders' ownership.
WE COMPETE WITH OTHER ISPS, WHICH COULD CAUSE US TO LOWER PRICES RESULTING IN
REDUCED REVENUES AND INCREASED EXPENSES
The Internet access services market is extremely competitive and highly
fragmented. The costs and other barriers to entry are relatively low. We face
competition from numerous types of providers, and we anticipate that this
competition will intensify. 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 intense competition, including
pressure to reduce prices. We currently compete or expect to compete with the
following types of companies:
- national ISPs, including America Online, Microsoft Network, Prodigy,
EarthLink Network, Inc. and MindSpring Enterprises, Inc. (with EarthLink
and MindSpring having announced on September 23, 1999 that they intend to
merge);
- numerous regional and local ISPs, many of which have significant market
share in their particular market area;
- national long distance carriers such as AT&T Corporation, MCI WorldCom
and Sprint Corporation;
- computer hardware and software and other technology companies that
provide Internet connectivity with their products, including Dell,
Gateway and Compaq;
- cable operators, including Tele-Communications, Inc., MediaOne and Time
Warner;
- regional Bell operating companies, local telephone companies and
competitive local exchange carriers;
- providers of Web hosting and other Internet-based business services, such
as Verio, Inc.;
- various satellite and fixed wireless providers in certain niche markets;
and
- nonprofit or educational ISPs.
Our current competitors include many large companies that have
substantially greater market presence, brand name recognition and financial
resources than we do. Some of our local or regional competitors also enjoy
greater recognition within particular communities.
The national ISPs have a significant presence throughout the United States
and offer a broader variety of access and data services,
11
<PAGE> 15
including high speed Internet access through digital subscriber lines, or DSL,
and cable modems, and may have done so for longer periods of time than have any
of our ISPs.
Most of the major long-distance companies 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 ISP
market. We believe long-distance and local carriers are moving toward horizontal
integration through acquisitions of, and joint ventures with, ISPs. Accordingly,
we expect we will experience increased competition from the traditional
telecommunications carriers for subscribers and ISPs that we may wish to
acquire. Many of these telecommunications carriers have large commercial
subscriber bases and substantially greater coverage, market presence and
financial, technical and personnel resources. 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 could result in reduced revenues.
In addition, cable companies offer high speed Internet access via cable
modems in a growing number of markets, either directly or through alliances with
Internet access providers. Other alternative service companies are approaching
the Internet access market with various newer fixed wireless and satellite-based
service technologies. These alternative means of Internet access may attract
subscribers who would otherwise purchase our services.
Recently, several national access providers have begun to offer Internet
access for free or at substantial discounts to prevailing rates, which may
result in significant downward pricing pressure. We also believe that
manufacturers of computer hardware and software products, media and
telecommunications companies and others will continue to enter the Internet
services market, often bundling Internet access with another product or service,
which will also intensify competition. Any of these developments could
materially and adversely affect our business, operating results and financial
condition.
WE MAY BE UNSUCCESSFUL IN RETAINING OR ATTRACTING SUBSCRIBERS
We believe that our long-term success depends largely on our ability to
retain our existing subscribers, while continuing to attract new subscribers. We
plan to invest significant resources in our network infrastructure and customer
and technical support capabilities to provide high levels of customer service.
We cannot be certain that these investments will maintain or improve subscriber
retention.
We believe that intense competition from our competitors, some of which
offer many free hours of service or other enticements for new subscribers, has
caused, and may continue to cause, some of our subscribers to switch to our
competitors' services. In addition, some new subscribers use the Internet only
as a novelty and do not become consistent users of Internet services and,
therefore, may be more likely to discontinue using our service. These factors
may adversely affect our subscriber retention rates. Any decline in subscriber
retention rates would adversely affect our revenues and ability to achieve or
improve profitability.
IF WE ARE UNABLE TO CONTINUE TO UPGRADE OUR NETWORK INFRASTRUCTURE TO MEET
ADDITIONAL DEMAND AND CHANGING SUBSCRIBER REQUIREMENTS, WE COULD LOSE
SUBSCRIBERS, WHICH WOULD RESULT IN REDUCED REVENUES
The success of our growth strategy is dependent upon our ability to provide
high quality, dependable access to the Internet. We must continue to upgrade and
adapt our network infrastructure as the number of subscribers and the amount and
type of information they wish to transmit and receive over the Internet
increases. We face capacity constraints at the POP level, which could affect
subscribers attempting to use those POPs. We also face capacity constraints in
connection with network services such as e-mail.
If we experience delayed delivery from suppliers of new telephone lines,
modems, routers, terminal servers or other equipment, the modem lines at some of
our POPs may become full during peak times, resulting in
12
<PAGE> 16
busy signals for subscribers who are trying to connect through those POPs. We
may experience similar problems if we are unable to expand the capacity of our
information servers for e-mail, news and Web hosting fast enough to keep up with
demand from a growing subscriber base. Service delays or slowdowns for some or
all of our Internet services would occur if our server capacity is exceeded or
if we do not maintain sufficient Internet backbone capacity. If we fail to
expand or enhance our network infrastructure on a timely basis or to adapt it to
changing subscriber requirements or evolving industry standards, we could lose
subscribers, which would result in reduced revenues.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE
Our market is susceptible to rapid technological innovation, evolving
industry standards, changes in subscriber needs and frequent new service and
product introductions. New services and products based on new technologies or
new industry standards expose us to risks of equipment obsolescence. We will
need to use leading technologies effectively, continue to develop our technical
expertise and enhance our existing services on a timely basis to compete
successfully in this industry. We cannot be certain that we will be successful
in using new technologies effectively, developing new services or enhancing
existing services on a timely basis or that any new technologies or enhancements
used by us or offered to our customers will achieve market acceptance.
Our ability to compete successfully also depends on the continued
compatibility and integration of our services with products and systems sold by
various third parties. Although we intend to support emerging standards in the
market for Internet access and enhanced business services, we cannot be certain
that industry standards will be established or, if they become established, that
we will be able to conform to these new standards in a timely fashion and
maintain a competitive position in the market.
WE FACE THE RISK OF FUNDAMENTAL CHANGES IN THE WAY ELECTRONIC DATA, INCLUDING
INTERNET ACCESS, IS DELIVERED
Internet services are currently accessed primarily by computers connected
to telephone lines. Several companies offer customers DSL, cable modems,
wireless and satellite access to provide Internet access at substantially faster
speeds than the technology currently used by most of our subscribers. Our
competitors are also continually developing technology to offer Internet access
using alternative delivery methods at higher speeds. While some of our ISPs
currently offer DSL, wireless modems and/or satellite access, these access
services are not available from most of our ISPs. As the Internet becomes more
accessible through these alternative methods, or customer requirements change
the way Internet access is provided, we will have to develop new technology or
modify our existing technology to accommodate those new developments.
We may also have to negotiate access agreements or alliances with cable
companies, local telephone companies and other companies offering alternative
access devices and conduits. These companies may not agree to allow us to use
their systems to provide Internet access to our subscribers at commercially
reasonable prices or at all. Our pursuit of these technologically advanced
access methods may require substantial time and expense, and we may not succeed
in adapting our Internet access business to alternative access conduits. Our
failure to respond in a timely and effective manner to these and other new and
evolving technologies could have a negative impact on our ability to compete and
be successful.
IF TELECOMMUNICATIONS CARRIERS DO NOT PROVIDE US WITH ADEQUATE COMMUNICATIONS
CAPACITY TO DELIVER OUR SERVICES, WE MAY LOSE EXISTING SUBSCRIBERS 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
13
<PAGE> 17
subscribers. We may be unable to replace or
supplement these services on a timely basis or at all. In addition, because we
rely on third-party telecommunications service providers for our backbone
connections 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 be unable to deploy new technologies when desirable because our
telecommunications providers may not be able to support the technology on
their backbones; and
- we may be unable to establish new POPs rapidly enough to respond to
increased subscriber demand.
Expansion of our network infrastructure and other competitors' needs will
continue to place a significant demand on our suppliers and telecommunications
carriers. Our telecommunications carriers also sell or lease their services to
our competitors and in most cases are competitors themselves. Our
telecommunications carriers may enter into exclusive arrangements with our
competitors.
We also cannot be certain that our suppliers and telecommunications
carriers will continue to sell or lease their products and services, or provide
data communications capacity, to us at commercially reasonable prices or at all.
Difficulties in developing alternative sources of supply, if required, could
adversely affect our ability to maintain, upgrade and expand our network
infrastructure, which would adversely affect our ability to deliver services to
our subscribers and compete.
WE FACE THE RISK THAT WE WILL BE UNABLE TO REDUCE OUR TELECOMMUNICATIONS COSTS
WHICH MAY HAVE AN ADVERSE EFFECT ON OUR ABILITY TO IMPLEMENT OUR INTEGRATION
STRATEGY
One element of our strategy is to reduce our costs by negotiating more
favorable rates for telecommunications services. Some of the larger ISPs that we
will acquire may already have telecommunications costs that are at or near the
lowest available in their markets. Therefore, even if we are able to negotiate
more favorable telecommunications services rates for our smaller ISPs, it may
not significantly reduce our costs overall.
In addition, some of the ISPs that we will acquire may currently purchase
telecommunications services from providers that deliver less reliable service
than we intend to offer our subscribers. As a result, we may need to purchase
telecommunications services from other providers. Even if we are able to
negotiate favorable terms with these other telecommunications service providers,
our costs may nevertheless be higher than they were with the less reliable
provider.
Finally, even if we are able to reduce our telecommunications costs on a
per circuit basis, our costs may nevertheless increase overall or per subscriber
if we require additional circuits to establish and maintain our national
network. If we are unable to reduce our telecommunications services costs, we
may not be able to fully implement our strategy, which could adversely affect
our business and results of operations.
WE COULD FACE LOSSES AND LIABILITY IF NATURAL DISASTERS, SYSTEM FAILURES,
INTRUSIONS, VIRUSES OR SIMILAR DISRUPTIONS TO OUR NETWORK OR COMPUTER SYSTEMS
CAUSE DISRUPTIONS IN OUR SERVICE OR COMPROMISE THE SECURITY OF OUR SUBSCRIBERS'
CONFIDENTIAL INFORMATION
The occurrence of natural disasters or other unanticipated problems at any
of our POPs could cause service interruptions for our subscribers. In addition,
if our telecommunications service providers fail to provide the data
communications capacity we require as a result of a natural disaster,
operational disruption or for any other reason, our subscribers could experience
service disruptions. We do not currently maintain fully redundant Internet
services, backbone facilities or other 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.
Although we have implemented, and will continue to implement, security
measures, our
14
<PAGE> 18
network and computer systems are vulnerable to intrusions, computer viruses or
similar disruptive problems caused by, or transmitted through, our subscribers
or other Internet users. Computer viruses or similar disruptions could lead to
interruptions, delays or cessation in service. Inappropriate use of the Internet
by third parties could also potentially jeopardize the security of confidential
information stored in our computer systems or those of our subscribers, which
may cause losses to either us or our subscribers. The potential that this can
occur may deter potential subscribers from subscribing to our services.
Addressing problems caused by computer viruses or other breaches of
security could cause interruptions, delays or cessation in service to our
subscribers, which could have a material adverse effect on our business and
operations. In addition, we expect that our subscribers will increasingly use
the Internet for commercial transactions. Any network malfunction or security
breach could cause these transactions to be delayed, not completed, or completed
with compromised security. It is possible that subscribers or others could
assert claims of liability against us as a result of any such failure.
Furthermore, until more comprehensive security technologies are developed, the
security and privacy concerns of existing and potential subscribers may inhibit
the growth of the Internet service industry in general, and our subscriber base
and revenues, in particular.
IF WE DO NOT COMPLETE THIS OFFERING BY DECEMBER 31, 1999, THE PURCHASE PRICES
FOR THE 43 ISPS REFLECTED IN THIS PROSPECTUS WILL INCREASE WHICH WOULD REDUCE
OUR CASH AVAILABLE FOR OPERATIONS
If we do not complete this offering by December 31, 1999, we are obligated
to increase the amount of the consideration paid for the ISPs we will acquire by
$25 per subscriber, based on the number of their subscribers on the closing
date. If we do not complete this offering by January 31, 2000, we will increase
the amount of the consideration paid for the ISPs we will acquire by an
additional $25 per subscriber, based on the number of their subscribers on the
closing date.
For example, if this offering were completed on January 15, 2000 and our
ISPs had a total of 300,000 subscribers on that date, the aggregate purchase
price for the 43 ISPs would increase by $7.5 million. If this offering were
completed on February 15, 2000 and our ISPs had a total of 300,000 subscribers
on that date, the aggregate purchase price for the 43 ISPs would increase by
$15.0 million.
Furthermore, under the agreement we have entered into with one of our ISPs
which has approximately 10,000 subscribers, we are obligated to pay, in addition
to the increases described above, an additional $25 per subscriber based on the
number of subscribers on the closing date if we do not complete this offering by
November 30, 1999. Also, if we close this offering after November 30, 1999, but
by December 31, 1999, another of our ISPs will receive an additional $1.0
million in cash and our common stock under the terms of its agreement with us.
Our acquisition agreement with this ISP terminates December 31, 1999. The pro
forma financial information in this prospectus does not reflect these possible
increases in the purchase prices for these acquisitions except for the
additional $1.0 million payment described above.
Payment of these obligations in cash may substantially deplete our cash
reserves. The additional consideration will also result in additional goodwill
and an increase in the related amortization expenses.
WE MAY ACQUIRE CONTINGENT OR UNDISCLOSED LIABILITIES THAT WILL INCREASE OUR
EXPENSES AND DEPLETE OUR CASH RESERVES
When we acquire ISPs, including the 43 that we have agreements to acquire,
we may acquire liabilities that we did not know about at the time we negotiated
these acquisitions, that we do not know about now or that are contingent or
prove to be larger than anticipated. If any of these liabilities arise, we have
only limited recourse against the former owners of our ISPs. If any substantial
contingent obligations are realized or if we discover any substantial unknown
liabilities, our expenses would increase and cash reserves would decline.
15
<PAGE> 19
OUR SUCCESS IS DEPENDENT UPON RETAINING AND ATTRACTING KEY PERSONNEL
Our success will depend in large part on our retaining and attracting key
personnel, particularly senior management, marketing and sales, customer support
and technical personnel. The market has experienced a serious shortage of such
personnel and is intensely competitive. We may not be able to retain or attract
personnel, and the costs involved in retaining or attracting them may be
prohibitive. These costs may include demands for options or other stock-based
awards that may be highly dilutive to our stockholders.
The loss of the services of any of the members of our senior management or
other key personnel could have an adverse effect on our business, financial
condition and results of operations. Although we have entered into employment
agreements and noncompetition agreements with each of our executive officers, we
cannot assure you that they will comply with these agreements or that we will
enjoy the continued service of our senior management. We do not have employment
agreements with any other employees. You should read "Management--Employee
Agreements" for a more detailed description of our arrangements with senior
management.
YEAR 2000 RISKS MAY ADVERSELY AFFECT OUR COMPANY
The Year 2000 issue is the result of computer programs using two digits
rather than four digits 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.
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--Impact of Year 2000 Issue."
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS IS DEPENDENT ON THE CONTINUED RAPID GROWTH OF THE INTERNET
Our business relies on rapid growth in 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.
Widespread use of the Internet is a relatively recent phenomenon. Our
future success substantially depends on continued rapid growth in the use of the
Internet and the continued development of the Internet as a viable commercial
medium. We cannot be certain that Internet usage will continue to grow as it has
in the past or that extensive Internet content will continue to be developed and
continue to be accessible for free or at nominal cost to Internet users. If the
use of the Internet does not continue to grow rapidly or evolves in a way that
we cannot address, our business may fail.
Our business will not grow 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 access market becomes saturated with competitors; or
- the Internet access and related products and services we offer are not
widely accepted.
16
<PAGE> 20
IMPLEMENTATION OF NEW REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS
Although ISPs 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 or our ability to provide those services at all.
For example, the imposition of interstate access charges to ISPs or changes in
the interpretation of reciprocal compensation arrangements for local telephone
companies or the elimination of reciprocal compensation agreements for local
telephone companies may increase our costs of serving dial-up customers.
In addition, the FCC may, in the future, reconsider its past ruling that
Internet access service is not "telecommunications" service and that ISPs are
not subject to the requirement that "telecommunications" service providers pay a
percentage of their gross revenues to a new federal universal service fund
established to replace current local rate subsidies and to fund public programs.
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 be unable to recover these costs from our
customers. For more information on regulation of our business, see
"Business--Government Regulation."
WE MAY FACE POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK
As the law relating to liability of ISPs for information carried on or
disseminated through their networks is not settled, we may be subject to such
liability. A number of lawsuits have sought to impose liability for defamatory
speech, indecent materials and infringement of copyrighted materials. The United
States Supreme Court has let stand a lower court ruling that an ISP was
protected from liability for material posted on its system by a provision of the
Communications Decency Act. However, the findings in that case may not apply in
other circumstances. Other courts have held that online service providers and
ISPs may be subject to damages for copying or distributing copyrighted
materials. Provisions of the Communications Decency Act that impose criminal
penalties for using an interactive computer service for transmitting obscene or
indecent communications have been found unconstitutional by the United States
Supreme Court. However, on October 21, 1998, new federal legislation was enacted
that requires limits on access to pornography and other material deemed "harmful
to minors." This legislation has been challenged in court as a violation of the
First Amendment of the United States Constitution. We are unable to predict the
outcome of this case.
Potential liability imposed on ISPs for material carried on or disseminated
through network systems could require us to implement measures to reduce our
exposure to that liability. These measures may require us to spend substantial
resources or discontinue certain service offerings. Our errors and omissions
insurance coverage may not be adequate or available to compensate us for all
liability that may be imposed. The imposition of liability in excess of, or the
unavailability in the future of, such coverage could have a material adverse
effect on our business or financial results.
17
<PAGE> 21
RISKS RELATED TO THIS OFFERING
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 shares of common
stock outstanding, of which shares will be "restricted shares," of
which will be held by the former owners of the ISPs we are acquiring. If the
underwriters exercise their over-allotment option in full, we will have
shares of common stock outstanding. 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. Commencing
on the first anniversary of the closing of this offering, holders of
restricted shares who are not affiliates will be entitled to sell
those shares in accordance with Rule 144. Commencing on the second anniversary
of the closing of this offering, those holders 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.
All members of our senior management and directors have agreed pursuant to
written lock-up agreements with the underwriters that, for a period of 180 days
from the date of this prospectus, they will not, among other things, sell their
shares. In addition, under the terms of the stock exchange agreements we entered
into with the stockholders of each of the ISPs and with the stockholders of
Espernet.com of New York, Inc., pursuant to which these stockholders will
receive shares of our common stock, these stockholders have agreed that they
will not, without our prior written consent, offer, sell, pledge or otherwise
dispose of any of their shares of our common stock, for a period of one year
following the closing. Stockholders holding shares have also agreed not to
sell more than 25% of their shares in any calendar quarter following the first
anniversary of the closing. As a result, within the first calendar quarter
following the first anniversary of the closing of this offering, shares of
our common stock will be eligible for sale, subject to volume and other
restrictions under federal securities laws. See "Shares Available for Future
Sale."
Simultaneously with the completion of this offering, we will issue options
to acquire 1,657,500 shares of common stock at the public offering price. Within
approximately 180 days after the completion of this offering, we intend to file
one or more registration statements to register up to 4,000,000 shares of common
stock subject to outstanding options or reserved for issuance under our equity
compensation plans.
In addition, upon completion of this offering, the holders of
shares of common stock, may be entitled to participate in a future registration
of our common stock, which would allow these stockholders to sell their shares
in the market simultaneously with any further public offerings by us of our
equity securities.
THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE
The market price of our shares of common stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as:
- actual or anticipated variations in our results of operations;
- announcements of technological innovations;
- new services introduced by us or our competitors;
- changes in financial estimates by security analysts;
- conditions and trends in the Internet and computer industries;
18
<PAGE> 22
- fluctuations in the valuation of companies perceived by investors to be
comparable to us;
- any shortfall in reserve or net income or any increase in losses from
levels expected by securities analysts or investors; and
- general market conditions.
Furthermore, the stock markets, and in particular Nasdaq, have experienced
extreme price and volume fluctuations that have affected and continue to affect
the market prices of equity securities of many technology companies. These
fluctuations have often been unrelated or disproportionate to the operating
performance of those companies.
These market fluctuations, as well as general economic, political and
market conditions such as political instability or uncertainty, military
conflicts, recessions, interest rate changes or international currency
fluctuations, may negatively impact the market price of our common stock. In the
past, following periods of volatility in the market price of a company's
securities, class action litigation has often been brought against such
companies. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and distract management's attention
and resources, which would likely have a material adverse effect on us.
BECAUSE WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS ON OUR COMMON STOCK, THE ONLY
WAY YOU CAN REALIZE A PROFIT ON YOUR STOCK IS THROUGH A SALE, WHICH YOU MAY NOT
BE ABLE MAKE AT A PRICE HIGHER THAN YOU PAID
We have never declared or paid any cash dividends on our capital stock and
do not anticipate paying cash dividends in the foreseeable future. In addition,
any future credit facility or preferred stock offering will likely contain
limits on our ability to declare and pay cash dividends on our common stock.
Because you will not receive dividends on your shares, the only way you will
realize a profit on your investment will be to sell your shares. We cannot
assure you that an active trading market will develop in our common stock or
that you will be able to sell your shares at a profit or even recover all or any
portion of the price you paid.
ANTI-TAKEOVER PROVISIONS COULD NEGATIVELY IMPACT OUR STOCKHOLDERS
Provisions of our certificate of incorporation, bylaws and the Delaware
General Corporation Law could make it more difficult for a third party to
acquire us, even if a change of ownership would benefit our stockholders.
Specifically, our certificate of incorporation and bylaws:
- limit the ability to call special meetings of our stockholders to our
board of directors, our chairman, our chief executive officer or our
president; and
- provide that our board of directors will be divided into three classes of
directors, who will serve for staggered three-year terms.
In addition, Section 203 of the Delaware General Corporation Law, which we
will be subject to, generally prohibits a 15% stockholder from engaging in any
business combination with us, including a merger or a sale of more than 10% of
our assets, unless our board of directors approves the transaction. See
"Description of Capital Stock."
NEW INVESTORS WILL SUFFER IMMEDIATE SUBSTANTIAL DILUTION
This offering is expected to create a public market for our common stock
and will substantially increase the market value of the initial investments of
our management and other existing stockholders. On a pro forma basis as of
September 1999, assuming the stockholders of Espernet.com of New York, Inc. held
the shares of our common stock which they will be issued upon completion
of this offering, and based on an assumed offering price of $ per share and the
sale of shares in this offering, the value of the shares held by the
stockholders of Espernet.com of New York, Inc. following this offering would be
approximately $ million over the amount of consid-
19
<PAGE> 23
eration paid for those shares by such stockholders for their shares of
Espernet.com of New York, Inc. In addition, the offering price is substantially
higher than the book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
and substantial dilution of $ per share in the net tangible book value of
the common stock from the offering price. See "Dilution."
20
<PAGE> 24
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations,
which are "forward-looking statements." Any statement in this prospectus that is
not a statement of historical fact may be deemed to be a forward-looking
statement. These statements include:
- forecasts of growth in the number of consumers using Internet access
services;
- statements regarding our plans for and costs of the integration of our
ISPs;
- statements regarding our anticipated revenues, expense levels, liquidity
and capital resources and projections of when we will complete various
phases of our acquisition and integration strategy;
- statements regarding our preparedness for the year 2000 date change; and
- statements containing words such as "anticipate," "believe," "plan,"
"estimate," "seek," "intend" and other similar words that signify
forward-looking statements.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Specific factors that might cause such a difference include:
- the need to successfully complete the integration of our ISPs;
- our ability to retain subscribers;
- our ability to acquire ISPs on attractive terms;
- our lack of operating history and anticipation of future losses;
- our dependence on third-party access service providers;
- potential fluctuations in our operating results;
- our need for additional capital;
- our potential inability to expand our services and related products;
- competition;
- government regulation; and
- our ability to attract and retain skilled personnel.
For a discussion of these and other factors that could affect
forward-looking statements in this prospectus, see "Risk Factors."
21
<PAGE> 25
ABOUT ESPERNET.COM
Upon completion of this offering, we will acquire 43 local and regional
Internet service providers, or ISPs, that we plan to integrate into a national
network. On a combined basis, our 43 ISPs had more than 274,000 subscribers as
of June 30, 1999.
Subject to the adjustments described below, the combined purchase price for
our ISPs is approximately $91.0 million in cash and approximately $82.1 million
in shares of our common stock. We will pay the purchase price using cash from
this offering and newly issued common stock.
The 43 ISPs will be purchased in accordance with agreements negotiated with
the current owners of these ISPs. We generally negotiated a purchase price for
each ISP based upon net revenues, historical growth, potential for future
growth, expenses and the number, type and subscription price of the subscribers
of 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 the assets or equity
interests in the ISP. The agreements for the acquisitions of the ISPs provide
for reductions in the purchase price based on:
- the failure to have a minimum amount of net current assets at closing;
- the failure to achieve a minimum annual subscriber growth rate from the
date of the agreement through closing;
- exceeding a maximum monthly subscriber turnover rate of approximately 3%;
and
- any long-term debt outstanding as of the closing date.
In addition, we will hold back 6% of the total purchase price for the 43
ISPs, or approximately $10 million in the aggregate, from the cash portion of
the consideration payable to former ISP owners. We will hold these funds in
escrow to indemnify us for losses resulting from breaches of representations and
warranties.
If this offering is not completed by December 31, 1999, the purchase price
for the ISPs will increase by $25 per subscriber, based on the total number of
subscribers on the closing date. If this offering is not completed by January
31, 1999, the purchase price for the ISPs will increase by an additional $25 per
subscriber, based on the total number of subscribers on the closing date. For
example, if this offering were to close on January 15, 2000 and our ISPs had a
total of 300,000 subscribers on that date, the aggregate purchase price for the
43 ISPs would increase by $7.5 million. If this offering were to close on
February 15, 2000 and our ISPs had a total of 300,000 subscribers on that date,
the aggregate purchase price for the 43 ISPs would increase by $15.0 million.
Furthermore, under the agreement we have entered into with one of our ISPs which
has approximately 7,600 subscribers, we are obligated to pay, in addition to the
foregoing increases, an additional $25 per subscriber based on the total number
of subscribers on the closing date if this offering is not completed by November
30, 1999. The pro forma financial information in this prospectus does not
reflect this possible increase in the purchase price for these acquisitions.
Also, if we close this offering after November 30, 1999, but by December
31, 1999, another of our ISPs will be paid an additional $1.0 million (in cash
and our common stock) under the terms of its agreement with us. The acquisition
agreement for this ISP terminates if this offering is not completed by December
31, 1999. The pro forma financial information in this prospectus includes the
additional $1 million in cash and our common stock payable with respect to this
acquisition. See "Selected Historical Financial Data For Our ISPs" for
information about the ISPs we will acquire at the time this offering is
completed.
Under an Administrative Services Agreement with us dated June 8, 1999,
Espernet.com NY manages our operations and provides us with accounting and
financial, legal, research and development, acquisition and administrative
services through its employees and consul-
22
<PAGE> 26
tants. Espernet.com NY also provides us with the use of office space and
equipment and licenses trademarks to us. In exchange, we agreed to pay all of
Espernet.com NY's costs and expenses relating to providing these services with
proceeds from this offering.
Simultaneously with the completion of this offering, we will exchange
restricted shares of our common stock for the shares of Espernet.com NY held by
its stockholders and Espernet.com NY will become our wholly owned subsidiary. A
number of our executive officers and directors are stockholders in Espernet.com
NY, including Chinh E. Chu, our Chairman of the Board of Directors, and Martin
D. Prazak, our President and Chief Executive Officer. See "Transactions with
Related Parties."
We believe that this offering, the acquisition of the 43 ISPs and the share
exchange between us and the stockholders of Espernet.com NY described above will
generally qualify for tax-free treatment under section 351 of the Internal
Revenue Code of 1986. However the ISP owners (or the ISPs themselves in cases
where we acquire the assets of ISPs) will recognize a taxable gain to the extent
of cash consideration paid for the ISPs. We believe that investors purchasing
shares in this offering, the ISP owners (or the ISPs themselves in cases where
we acquired the assets of the ISP) and the stockholders of Espernet.com NY will
be treated as a single group. For these transactions to qualify for this tax
treatment, this group must own at least 80% of the voting power and 80% of the
number of our issued and outstanding shares immediately after the transaction,
which will be the case upon the closing of this offering.
Our federal income tax basis in the assets acquired from several ISPs in
exchange for our stock will be equal to the historical tax basis of those assets
in the hands of the ISPs immediately prior to the exchange, increased for any
gain recognized by the ISPs. Therefore, future amortization or depreciation
deductions and any gain from a subsequent sale of this property will be measured
by that basis.
USE OF PROCEEDS
We estimate that we will receive approximately $122.5 million in net
proceeds from this offering based upon an assumed offering price equal to $
per share. This amount reflects deductions from the gross proceeds of the
offering of:
- approximately $10.5 million, which will be retained by the underwriters
as discounts and commissions; and
- approximately $17.0 million, representing our estimated expenses for this
offering and the acquisitions of the 43 ISPs, of which $8.3 million
constitutes estimated accounting fees.
We will use approximately $91.0 million of the net proceeds to pay the cash
portion of the purchase prices payable in the acquisitions of our 43 ISPs and
the commissions, overrides and finders fees.
We will use the remainder of the net proceeds, estimated to be
approximately $32.1 million, for general corporate purposes, which may include
future acquisitions of ISPs, capital expenditures and working capital. This use
of proceeds does not reflect the exercise of the underwriters' over-allotment
option. We estimate that we will receive $20.9 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.
23
<PAGE> 27
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. Our future decisions
concerning the payment of dividends will depend upon our results of operations,
financial condition, expansion plans and availability of funds as well as other
factors that the board of directors, in its sole discretion, may consider
relevant.
24
<PAGE> 28
CAPITALIZATION
The following table shows our capitalization at June 30, 1999 on an actual
basis, a pro forma combined basis and a pro forma as adjusted basis. The pro
forma combined presentation considers the combined historical balance sheets for
espernet.com, Espernet.com of New York, Inc. and the 43 ISPs we will acquire
upon the closing of this offering, and applies pro forma adjustments to the
historical information.
The pro forma combined data assumes that we have completed the acquisition
of Espernet.com of New York, Inc. in exchange for shares. See Note 1
of the combined pro forma financial statement.
The pro forma combined data also assumes that we will issue
shares of common stock as partial consideration for the acquisitions of our
ISPs. The pro forma as adjusted data reflects the pro forma combined data
adjustments described above, the consummation of this offering at an assumed
initial public offering price of $ per share and the anticipated application of
the estimated net proceeds we will receive in this offering. See "Use of
Proceeds" and "Selected Combined Pro Forma Financial Data." For a description of
the pro forma combined data adjustments, you should refer to our unaudited pro
forma combined financial statements and notes included elsewhere in this
prospectus. The pro forma as adjusted data does not include:
- shares to be issued if the underwriters exercise their
over-allotment option in full;
- any adjustments to the purchase price of our ISPs under the term of the
stock exchange agreement; and
- 4,000,000 shares of common stock reserved for issuance under our 1999
Stock Option/Stock Issuance. See "Management--1999 Stock Option/Stock
Issuance Plan."
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------------
PRO FORMA PRO FORMA
ACTUAL COMBINED AS ADJUSTED
------ --------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................................ $ -- $ 2,075 $ 32,063
==== ======== ========
Short-term debt and current portion of long term debt and
capital lease obligations................................. -- 3,618 3,618
Cash portion of acquisition costs of ISPs................... -- 91,012 --
Long-term debt and capital lease obligations, less current
portion................................................... -- 3,851 3,851
Stockholders' equity:
Common stock, $.001 par value per share:
100,000,000 shares authorized; 1 share issued and
outstanding on an actual basis; shares issued
and outstanding on a pro forma combined basis;
shares issued and outstanding on a pro forma
as adjusted basis...................................... -- 6
Deferred compensation..................................... -- (160)
Additional paid-in-capital................................ -- 82,980
Accumulated deficit....................................... -- (1,711)
Stock subscription receivable............................. -- (458)
---- -------- --------
Total stockholders' equity.................................. -- 80,657
---- -------- --------
Total capitalization........................................ $ -- $179,138
==== ======== ========
</TABLE>
25
<PAGE> 29
DILUTION
As of June 30, 1999, our pro forma negative net tangible book value is
$(115,807) or $( ) per share. Pro forma net tangible book value per share
represents our total tangible assets less total liabilities, divided by the
number of outstanding shares of common stock after giving effect to the
acquisition of our ISPs and the acquisition of Espernet.com of New York, Inc.
Dilution per share represents the difference between the amount per share paid
by investors in this offering of common stock and the net tangible book value
per share after this offering. After giving effect to the sale of shares
of common stock in this offering and after application of the estimated net
proceeds from this offering, our pro forma net tangible book value as of June
30, 1999 would have been $6,693, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders, including the former owners of ISPs who will receive
shares as partial payment for their equity interests in our ISPs, and the former
owners of Espernet.com of New York, Inc., who will exchange all of their shares
in that corporation for our shares, all of which will happen upon completion of
this offering, and an immediate dilution in pro forma net tangible book value of
$ per share to new investors purchasing shares of common stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $
Pro forma negative net tangible book value per share
before the offering.................................... ()
Pro forma increase in net tangible book value per share
attributable to new investors..........................
------
Pro forma net tangible book value per share after the
offering..................................................
------
Pro forma dilution in net tangible book value per share to
new investors............................................. $
------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
after giving effect to the acquisition of our ISPs and the acquisition of
Espernet.com of New York, Inc., the total number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid by:
- the owners of Espernet.com of New York, Inc., who will receive shares of
common stock in consideration for their sale to us of 100% of the stock
of that corporation, valuing their shares of that corporation at the
amount they paid for those shares;
- the former owners of our ISPs who will receive shares of common stock as
partial payment for their equity interests in our ISPs, valuing these
shares at the initial public offering price; and
- new investors purchasing shares in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... % %
New investors............................... % %
---------- ----- ------------ -----
Total....................................... 100.0% $ 100.0%
========== ===== ============ =====
</TABLE>
The calculations in the above tables assume no exercise of the
Underwriters' over-allotment option or exercise of the 1,657,000 stock options
to be outstanding at the close of this offering.
26
<PAGE> 30
SELECTED COMBINED PRO FORMA FINANCIAL DATA
We formed espernet.com, inc. in April 1999. To date, our operations have
been limited to negotiating and entering into agreements to acquire 43 ISPs,
preparing this prospectus and the related documents for this offering,
recruiting our management team and developing our corporate organization.
We present below our selected combined pro forma statement of operations
and other operating data for the year ended December 31, 1998 and for the six
months ended June 30, 1999, and the combined pro forma balance sheet data as of
June 30, 1999. This information is based on the combined historical results for
espernet.com and the 43 ISPs which we will acquire, after applying our pro forma
adjustments and after giving effect to this offering. The selected combined pro
forma statement of operations and other operating data for the year ended
December 31, 1998 and for the six months ended June 30, 1999 assume that the 43
ISP acquisitions and this offering were consummated on January 1, 1998 and 1999,
respectively. The combined pro forma balance sheet data assumes that the 43 ISP
acquisitions were consummated on June 30, 1999.
The selected combined pro forma statement of operations and other operating
data includes, under the line item labeled "EBITDA," our operating loss adding
back depreciation and amortization on a pro forma combined basis for the year
ended December 31, 1998 and for the six months ended June 30, 1999. We have
included EBITDA because we believe investors often analyze and compare companies
based on operating performance data. 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.
The selected combined pro forma financial data does not necessarily
indicate the operating results or financial position which would have resulted
from our operation on a combined basis during the periods presented, nor does
this pro forma data necessarily represent any future operating results or
financial position of espernet.com. In addition to this summary financial data,
you should also refer to the more complete financial information included
elsewhere in this prospectus, including audited historical results for our ISPs
and our unaudited pro forma combined results.
27
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
1998 JUNE 30, 1999
------------ ----------------
(AMOUNTS IN THOUSANDS, EXCEPT
SUBSCRIBER AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 34,060 $ 25,393
Costs and expenses:
Cost of Internet services................................. 15,625 11,158
Selling, general and administrative(1).................... 17,036 12,547
Depreciation and amortization(2).......................... 67,959 34,713
----------- -----------
Total costs and expenses............................... 100,620 58,418
----------- -----------
Loss from operations........................................ (66,560) (33,025)
Interest income............................................. 15 7
Interest expense............................................ (725) (438)
Other expense, net.......................................... (199) (22)
----------- -----------
Loss before provision for income taxes...................... (67,469) (33,478)
Benefit for income taxes(3)................................. 9,215 4,481
----------- -----------
Net loss.................................................... $ (58,254) $ (28,997)
=========== ===========
Pro Forma basic and diluted net loss per share(4)........... $ $
=========== ===========
Shares used in the calculation of pro forma basic and
diluted net loss per share(4).............................
OTHER OPERATING DATA:
Approximate number of subscribers, end of period.......... 203,829 274,320
EBITDA.................................................... $1,399 $1,688
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------
PRO FORMA PRO FORMA
COMBINED AS ADJUSTED(5)
--------- --------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Cash........................................................ $2,075 $ 32,063
Working capital(6).......................................... (101,762) 20,738
Total assets................................................ 214,166 244,154
Total long-term debt and capital lease obligations
(excluding current portion)............................... 3,851 3,851
Total Stockholders' equity.................................. $80,657 $203,157
</TABLE>
- -------------------------
(1) Includes the net increase of approximately $0.9 million and $0.3 million in
compensation expense attributable to owners and employees of our ISPs and
our new corporate management for the year ended December 31, 1998 and the
six months ended June 30, 1999, respectively.
(2) Includes amortization expenses of $65.1 million and $32.5 million for the
year ended December 31, 1998 and the six months ended June 30, 1999,
respectively, to be recorded as a result of the 43 ISP
28
<PAGE> 32
acquisitions. These amortization expenses are attributable to goodwill and
customer lists and will be amortized over three years.
(3) Includes the incremental provision (benefit) for federal and state income
taxes assuming all entities were subject to federal and state income tax and
other adjustments for income taxes on S-Corporation income. The pro forma
adjusted benefit for income taxes for the year ended December 31, 1998 and
the six months ended June 30, 1999 equals 13% of our loss before provision
for income taxes compared to the expected federal benefit of 35% principally
because of the amortization of goodwill.
(4) The number of shares used in the calculation of pro forma basic and diluted
net loss per share was calculated assuming shares issued in our
share exchange with Espernet.com of New York, Inc., shares issued
to the former owners of our ISPs and shares issued in this
offering.
(5) Adjusted to reflect the sale of the shares of common stock in this
offering and the application of the estimated net proceeds. See "Use of
Proceeds."
(6) Includes the effect of recording as current liabilities $91.0 million
representing the cash portion of the cost of the 43 ISP acquisitions. These
acquisitions are contingent upon the closing of this offering. This amount
may be adjusted based on the financial conditions of the ISPs as of the
closing date of this offering. See "About espernet.com," "Use of Proceeds"
and notes to the unaudited pro forma combined financial statements.
29
<PAGE> 33
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS
The selected historical financial data for our ISPs is derived from the
more detailed historical financial statements and notes of our ISPs included
elsewhere in this prospectus, except subscriber data.
The balance sheet data as of December 31, 1997 and 1998, and the statements
of operations for the years ended December 31, 1996, 1997 and 1998, for the ISPs
have been derived from the audited financial statements of the ISPs included
elsewhere in this prospectus.
The selected historical financial data for the six month periods ended June
30, 1998 and 1999, and as of June 30, 1999, have been derived from the unaudited
financial statements of the ISPs included elsewhere in this prospectus which
reflect, in the opinion of management of the ISPs, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial data for such periods. Results for interim periods are not necessarily
indicative of results for the full year.
The balance sheet data as of December 31, 1994, 1995 and 1996, and the
statements of operations for the years ended December 31, 1994 and 1995, for the
ISPs have been derived from the ISPs' respective unaudited financial statements.
In the opinion of management of the ISPs, the unaudited data reflects all
adjustments (which include only normal, recurring adjustments) necessary for a
fair presentation of such data.
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 of our ISPs have fiscal years ending
December 31.
30
<PAGE> 34
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
The following table shows selected historical financial data for our ISPs
for the stated periods.
STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
COMMENCED ------------------------------------------- -----------------
OPERATIONS 1994 1995 1996 1997 1998 1998 1999
-------------- ---- ------ ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA OPERATING GROUP
Cumberland Technologies
International (d/b/a
PAdotNET) July 1995
Revenues................ -- $ 53 $ 192 $ 234 $ 577 $ 231 $ 526
Income (loss) from
operations............ -- (11) (3) (84) (8) (6) 77
Approximate
subscribers........... 1,000 1,700 4,357 2,498 6,243
Pennsylvania Online Ltd. July 1995
Revenues................ -- $ 82 $ 254 $ 573 $ 917 $ 413 $ 644
Income (loss) from
operations............ -- 14 25 51 (10) 23 144
Approximate
subscribers........... 1,078 3,571 6,809 4,840 8,461
Innernet, Inc. June 1996
Revenues................ -- -- $ 87 $ 417 $ 958 $ 402 $ 789
Income (loss) from
operations............ -- -- (33) (39) 206 79 256
Approximate
subscribers........... 900 2,287 5,188 3,282 7,258
Delanet, Inc. May 1996
Revenues................ -- -- $ 6 $ 271 $ 716 $ 189 $ 666
Loss from operations.... -- -- (152) (161) (184) (17) (524)
Approximate
subscribers........... 25 2,678 5,603 3,949 7,586
Internet Access Services (A
Division of Weidner
Associates, Inc.) July 1996
Revenues................ -- -- $ 51 $ 173 $ 432 $ 164 $ 387
Income (loss) from
operations............ -- -- (56) (142) (14) (57) 53
Approximate
subscribers........... 335 1,363 2,774 2,290 3,240
Southern Maryland Internet,
Inc. April 1996
Revenues................ -- -- $ 103 $ 311 $ 539 $ 182 $ 407
Loss from operations.... -- -- (88) (49) (80) (73) (25)
Approximate
subscribers........... 596 1,703 3,070 2,485 3,724
NuNet, Inc. January 1996
Revenues................ -- -- $ 153 $ 580 $ 1,211 $ 567 $ 898
Loss from operations.... -- -- (71) (197) (877) (158) (269)
Approximate
subscribers........... 1,865 4,353 7,574 6,244 10,700
</TABLE>
31
<PAGE> 35
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
COMMENCED ------------------------------------------- -----------------
OPERATIONS 1994 1995 1996 1997 1998 1998 1999
-------------- ---- ------ ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Enter.Net, Inc. April 1995
Revenues................ -- $ 157 $ 612 $ 1,377 $ 2,489 $ 1,091 $ 1,573
Loss from operations.... -- (104) (105) (143) (209) (48) (76)
Approximate
subscribers........... 4,000 8,000 14,932 11,000 18,243
Prometheus Information
Corp. June 1994
Revenues................ $ 93 $ 265 $ 605 $ 568 $ 527 $ 276 $ 189
Income (loss) from
operations............ (6) (18) (52) (74) 68 50 (33)
Approximate
subscribers........... 1,927 1,523 1,354 1,438 1,249
NEW YORK OPERATING GROUP
E-Znet Incorporated May 1994
Revenues................ $ 17 $ 237 $ 422 $ 959 $ 2,308 $ 1,035 $ 1,401
Income (loss) from
operations............ (49) (57) (192) (13) 265 173 86
Approximate
subscribers........... 1,535 6,006 10,893 8,035 11,705
USA Choice Internet
Services, Co. June 1996
Revenues................ -- -- $ 55 $ 195 $ 346 $ 155 $ 384
Income (loss) from
operations............ -- -- (31) -- 16 11 34
Approximate
subscribers........... 387 972 2,577 1,577 5,680
Crocker Communications
Internet (A Division of
Crocker Communications,
Inc.) November 1994
Revenues................ $ 26 $ 108 $ 378 $ 600 $ 847 $ 361 $ 547
Income (loss) from
operations............ -- (4) (16) 62 110 46 122
Approximate
subscribers........... 1,522 2,303 3,161 2,621 3,564
CAROLINA OPERATING GROUP
COL Networks, Inc. January 1996
Revenues................ -- -- $ 105 $ 433 $ 974 $ 374 $ 812
Income from
operations............ -- -- 12 78 149 59 59
Approximate
subscribers........... 1,000 2,023 4,220 3,422 10,231
Perigee.net Corporation April 1996
Revenues................ -- -- $ 104 $ 468 $ 515 $ 242 $ 307
Income (loss) from
operations............ -- -- (33) (4) 27 1 46
Approximate
subscribers........... 659 1,871 2,458 2,220 2,404
DuplinNet Corporation May 1996
Revenues................ -- -- $ 19 $ 88 $ 201 $ 83 $ 156
Income (loss) from
operations............ -- -- (19) 11 53 24 22
Approximate
subscribers........... 350 968 2,211 1,913 3,330
</TABLE>
32
<PAGE> 36
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
COMMENCED ------------------------------------------- -----------------
OPERATIONS 1994 1995 1996 1997 1998 1998 1999
-------------- ---- ------ ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WaveNet, Inc. April 1996
Revenues................ -- -- $ 27 $ 163 $ 310 $ 134 $ 212
Income (loss) from
operations............ -- -- (9) (2) (5) (3) 5
Approximate
subscribers........... 365 1,335 2,092 1,609 2,241
The 3rd Door, Inc. April 1995
Revenues................ -- $ 26 $ 75 $ 254 $ 346 $ 161 $ 214
Income (loss) from
operations............ -- (16) 4 20 5 7 23
Approximate
subscribers........... 650 1,100 1,607 1,350 1,780
CHICAGO OPERATING GROUP
InfoRamp, Inc. May 1995
Revenues................ -- $ 39 $ 388 $ 778 $ 1,635 $ 669 $ 1,645
Income (loss) from
operations............ -- (52) (8) 67 109 30 301
Approximate
subscribers........... 1,255 7,625 18,375 10,946 25,311
Midwest Communications,
Inc. April 1995
Revenues................ -- $ 131 $ 532 $ 971 $ 1,387 $ 671 $ 936
Income (loss) from
operations............ -- (47) (133) (6) (62) 60 (822)
Approximate
subscribers........... 2,119 4,443 6,101 4,963 11,870
Alliance Internet
Technologies, L.L.C. May 1998
Revenues................ -- -- -- -- $ 461 $ 75 $ 525
Loss from operations.... -- -- -- -- (37) (13) (16)
Approximate
subscribers........... -- -- 3,175 2,410 3,802
ComQuest Networks, Inc. August 1997
Revenues................ -- -- -- $ 23 $ 214 $ 74 $ 232
Income from
operations............ -- -- -- -- 61 19 68
Approximate
subscribers........... -- 265 1,473 574 2,400
Fairnet, Inc. June 1996
Revenues................ -- -- $ 8 $ 94 $ 206 $ 89 $ 186
Income (loss) from
operations............ -- -- (12) (1) (30) 9 (36)
Approximate
subscribers........... 82 369 1,013 559 1,449
Wisconsin Internet, Inc. June 1995
Revenues................ -- $ 32 $ 97 $ 355 $ 602 $ 274 $ 414
Income (loss) from
operations............ -- (7) (23) (26) 37 19 42
Approximate
subscribers........... 1,200 2,121 3,897 3,251 4,500
</TABLE>
33
<PAGE> 37
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
COMMENCED ------------------------------------------- -----------------
OPERATIONS 1994 1995 1996 1997 1998 1998 1999
-------------- ---- ------ ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NConnect, Inc. November 1995
Revenues................ -- $ 12 $ 137 $ 435 $ 660 $ 289 $ 515
Loss from operations.... -- (15) (30) (42) (200) (77) (18)
Approximate
subscribers........... 500 1,500 4,443 3,464 5,554
Netwurx, Inc. May 1997
Revenues................ -- -- -- $ 63 $ 337 $ 132 $ 372
Loss from operations.... -- -- -- (11) (131) (25) (20)
Approximate
subscribers........... -- 400 2,263 1,174 3,503
MICHIGAN-OHIO OPERATING GROUP
Provide.Net February 1996
Revenues................ -- -- $ 34 $ 478 $ 1,304 $ 617 $ 1,028
Income (loss) from
operations............ -- -- (141) (102) 289 201 273
Approximate
subscribers........... 1,124 4,766 9,768 7,639 11,903
The Computer Care Company,
Inc. August 1995
Revenues................ -- $ 135 $ 606 $ 892 $ 1,160 $ 477 $ 682
Income (loss) from
operations............ -- 12 (27) (13) 19 (3) 53
Approximate
subscribers........... 800 1,995 3,367 2,559 4,172
ISP Management, Inc. January 1997
Revenues................ -- -- -- $ 202 $ 538 $ 220 $ 359
Income (loss) from
operations............ -- -- -- (233) 42 17 (47)
Approximate
subscribers........... -- 1,500 2,950 2,206 3,139
www.internet solutions,
inc. July 1996
Revenues................ -- -- $ 26 $ 164 $ 470 $ 204 $ 279
Loss from operations.... -- -- (138) (165) (102) (49) (76)
Approximate
subscribers........... 125 1,350 2,629 1,900 3,100
Copper.net, Inc. January 1995
Revenues................ -- $ 7 $ 62 $ 180 $ 417 $ 178 $ 372
Income (loss) from
operations............ -- (9) (12) (38) 29 4 (48)
Approximate
subscribers........... 550 1,907 3,948 2,575 6,691
NetPlus Communications,
Inc. August 1996
Revenues................ -- -- $ 14 $ 87 $ 209 $ 99 $ 181
Income (loss) from
operations............ -- -- (16) (45) 10 6 1
Approximate
subscribers........... 89 615 1,437 1,251 2,012
</TABLE>
34
<PAGE> 38
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
COMMENCED ------------------------------------------- -----------------
OPERATIONS 1994 1995 1996 1997 1998 1998 1999
-------------- ---- ------ ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEBRASKA OPERATING GROUP
Internet Nebraska
Corporation August 1994
Revenues................ $ 28 $ 119 $ 276 $ 608 $ 1,071 $ 473 $ 796
Income (loss) from
operations............ (4) 14 56 137 277 132 155
Approximate
subscribers........... 1,662 4,500 7,444 5,978 9,213
SOUTH DAKOTA OPERATING GROUP
RapidNet, Inc. September 1995
Revenues................ -- $ 76 $ 239 $ 686 $ 1,344 $ 641 $ 730
Income (loss) from
operations............ -- (98) (244) (219) (138) (37) 50
Approximate
subscribers........... 1,866 3,828 5,183 4,272 5,898
ARKANSAS OPERATING GROUP
CSW Net, Inc. May 1995
Revenues................ -- $ 49 $ 775 $ 1,196 $ 1,352 $ 610 $ 1,082
Income (loss) from
operations............ -- (24) 29 311 (314) (231) 142
Approximate
subscribers........... 1,740 4,400 7,294 5,390 9,565
IOCC.com, LLC December 1995
Revenues................ -- $ 1 $ 43 $ 125 $ 221 $ 95 $ 208
Income (loss) from
operations............ -- (2) 3 42 46 26 30
Approximate
subscribers........... 320 513 968 690 1,616
Futura, Inc. September 1995
Revenues................ -- $ 2 $ 50 $ 107 $ 261 $ 104 $ 306
Income (loss) from
operations............ -- (10) 2 (5) (16) (4) (55)
Approximate
subscribers........... 330 820 1,596 1,380 2,228
Internet Solutions,
Inc. -- ISP Business January 1996
Revenues................ -- -- $ 107 $ 276 $ 370 $ 170 $ 193
Income (loss) from
operations............ -- -- (12) 42 68 23 37
Approximate
subscribers........... 530 1,040 1,285 1,176 1,451
Black Sheep Computing,
Inc. -- ISP Business October 1996
Revenues................ -- -- $ 1 $ 95 $ 266 $ 113 $ 337
Income (loss) from
operations............ -- -- (3) (41) (115) (44) 20
Approximate
subscribers........... 38 1,523 3,577 2,092 4,352
</TABLE>
35
<PAGE> 39
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
COMMENCED ------------------------------------------- -----------------
OPERATIONS 1994 1995 1996 1997 1998 1998 1999
-------------- ---- ------ ------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Intensity Computer Systems June 1997
Revenues................ -- -- -- $ 8 $ 171 $ 60 $ 116
Income (loss) from
operations............ -- -- -- (20) 14 (4) 10
Approximate
subscribers........... -- 50 462 162 839
ECSIS.Net, LLC December 1995
Revenues................ -- $ 1 $ 77 $ 147 $ 388 $ 167 $ 299
Income (loss) from
operations............ -- (5) (75) (93) 27 (28) 93
Approximate
subscribers........... 494 891 2,539 1,604 3,257
TEXAS OPERATING GROUP
World Trade Network, Inc. November 1995
Revenues................ -- $ 9 $ 356 $ 1,289 $ 2,834 $ 1,116 $ 2,081
Income (loss) from
operations............ -- (62) (44) (43) 100 64 (88)
Approximate
subscribers........... 2,501 6,509 17,143 6,751 24,963
STIC.NET, Inc. May 1995
Revenues................ -- $ 35 $ 475 $ 706 $ 1,196 $ 547 $ 822
Income (loss) from
operations............ -- (73) (29) 3 (127) (40) 3
Approximate
subscribers........... 2,420 3,524 7,277 6,169 9,215
NetWest Online, Inc. April 1996
Revenues................ -- -- $ 71 $ 386 $ 773 $ 305 $ 585
Income (loss) from
operations............ -- -- (86) (1) 66 47 (12)
Approximate
subscribers........... 500 1,529 3,342 2,319 4,678
TOTAL COMBINED
Revenues................ $164 $1,576 $ 7,622 $18,015 $34,060 $14,529 $25,393
Income (loss) from
operations............ (59) (574) (1,762) (1,188) (566) 213 40
Approximate
subscribers........... 38,439 101,739 203,829 144,227 274,320
</TABLE>
36
<PAGE> 40
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
The following table shows selected historical financial data for our ISPs
for the stated periods.
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
COMMENCED ----------------------------------------- AS OF
OPERATIONS 1994 1995 1996 1997 1998 JUNE 30, 1999
-------------- ---- ------ ------ ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA OPERATING GROUP
Cumberland Technologies
International (d/b/a PAdotNET) July 1995
Total assets.................. $ -- $ 37 $ 99 $ 177 $ 197 $ 234
Long-term debt................ -- -- -- -- -- --
Total stockholders' deficit... -- (11) (14) (98) (106) (29)
Pennsylvania Online Ltd. July 1995
Total assets.................. $ -- $ 40 $ 57 $ 212 $ 222 $ 246
Long-term debt................ -- -- -- 81 39 15
Total stockholders' equity
(deficit)................... -- 14 (21) (59) (121) 1
Innernet, Inc. June 1996
Total assets.................. $ -- $ -- $ 135 $ 269 $ 470 $ 535
Long-term debt................ -- -- 54 63 89 108
Total stockholders' equity
(deficit)................... -- -- 18 (20) 9 81
Delanet, Inc. May 1996
Total assets.................. $ -- $ -- $ 83 $ 223 $ 447 $ 585
Long-term debt................ -- -- 47 68 72 87
Total stockholders' deficit... -- -- (92) (255) (221) (271)
Internet Access Services (A
Division of Weidner
Associates, Inc.) July 1996
Total assets.................. $ -- $ -- $ 68 $ 161 $ 181 $ 186
Long-term debt................ -- -- -- 48 18 15
Total stockholders' deficit... -- -- (56) (202) (221) (170)
Southern Maryland Internet, Inc. April 1996
Total assets.................. $ -- $ -- $ 193 $ 182 $ 237 $ 221
Long-term debt................ -- -- 188 133 120 104
Total stockholders' deficit... -- -- (22) (124) (225) (262)
NuNet, Inc. January 1996
Total assets.................. $ -- $ -- $ 161 $ 198 $ 295 $ 920
Long-term debt................ -- -- 119 33 122 417
Total stockholders' deficit... -- -- (59) (139) (1,031) (1,320)
</TABLE>
37
<PAGE> 41
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
COMMENCED ----------------------------------------- AS OF
OPERATIONS 1994 1995 1996 1997 1998 JUNE 30, 1999
-------------- ---- ------ ------ ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Enter.Net, Inc. April 1995
Total assets.................. $ -- $ 432 $ 552 $ 405 $ 550 $ 553
Long-term debt................ -- 402 396 90 122 73
Total stockholders' equity
(deficit)................... -- 3 (103) (266) (556) (764)
Prometheus Information Corp. June 1994
Total assets.................. $185 $ 210 $ 216 $ 125 $ 72 $ 101
Long-term debt................ 119 131 134 41 22 25
Total stockholders' deficit... (11) (40) (76) (216) (168) (209)
NEW YORK OPERATING GROUP
E-Znet Incorporated May 1994
Total assets.................. $ 51 $ 178 $ 284 $ 384 $ 745 $ 813
Long-term debt................ -- -- 227 127 187 187
Total stockholders' equity
(deficit)................... (15) 125 (20) (13) 253 320
USA Choice Internet Services, Co. June 1996
Total assets.................. $ -- $ -- $ 73 $ 133 $ 197 $ 496
Long-term debt................ -- -- -- 10 17 77
Total stockholders' equity.... -- -- 62 98 46 75
Crocker Communications Internet
(A Division of Crocker
Communications, Inc.) November 1994
Total assets.................. $162 $ 149 $ 57 $ 236 $ 342 $ 378
Long-term debt................ 51 49 38 4 -- --
Total stockholders' equity
(deficit)................... 3 (4) 8 46 85 98
CAROLINA OPERATING GROUP
COL Networks, Inc. January 1996
Total assets.................. $ -- $ -- $ 59 $ 158 $ 352 $ 795
Long-term debt................ -- -- 35 22 29 247
Total stockholders' equity.... -- -- 13 89 230 280
Perigee.net Corporation April 1996
Total assets.................. $ -- $ -- $ 64 $ 142 $ 111 $ 69
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity
(deficit)................... -- -- 17 30 (3) (19)
DuplinNet Corporation May 1996
Total assets.................. $ -- $ -- $ 48 $ 81 $ 134 $ 156
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity
(deficit)................... -- -- (23) 81 134 156
</TABLE>
38
<PAGE> 42
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
COMMENCED ----------------------------------------- AS OF
OPERATIONS 1994 1995 1996 1997 1998 JUNE 30, 1999
-------------- ---- ------ ------ ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
WaveNet, Inc. April 1996
Total assets.................. $ -- $ -- $ 39 $ 77 $ 88 $ 77
Long-term debt................ -- -- 8 28 10 6
Total stockholders' equity
(deficit)................... -- -- 1 (6) (15) (12)
The 3rd Door, Inc. April 1995
Total assets.................. $ -- $ 17 $ 44 $ 61 $ 64 $ 112
Long-term debt................ -- -- -- -- -- 21
Total stockholders' equity.... -- 19 1 20 24 40
CHICAGO OPERATING GROUP
InfoRamp, Inc. May 1995
Total assets.................. $ -- $ 69 $ 136 $ 336 $ 627 $ 1,085
Long-term debt................ -- 80 80 80 80 80
Total stockholders' equity
(deficit)................... -- (23) (38) 5 112 411
Midwest Communications, Inc. April 1995
Total assets.................. $ -- $ 135 $ 290 $ 393 $ 651 $ 686
Long-term debt................ -- 68 244 128 201 156
Total stockholders' deficit... -- (9) (144) (131) (343) (297)
Alliance Internet Technologies,
L.L.C. May 1998
Total assets.................. $ -- $ -- $ -- $ -- $ 257 $ 333
Long-term debt................ -- -- -- -- 34 --
Total stockholders' equity.... -- -- -- -- 87 104
ComQuest Networks, Inc. August 1997
Total assets.................. $ -- $ -- $ -- $ 15 $ 74 $ 153
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity.... -- -- -- 1 62 130
Fairnet, Inc. June 1996
Total assets.................. $ -- $ -- $ 27 $ 48 $ 131 $ 157
Long-term debt................ -- -- -- -- 49 51
Total stockholders' deficit... -- -- (4) (5) (38) (34)
Wisconsin Internet, Inc. June 1995
Total assets.................. $ -- $ 41 $ 88 $ 156 $ 263 $ 362
Long-term debt................ -- 35 14 15 12 --
Total stockholders' equity
(deficit)................... -- (6) 14 (14) 28 54
NConnect, Inc. November 1995
Total assets.................. $ -- $ 81 $ 170 $ 222 $ 221 $ 248
Long-term debt................ -- 84 160 78 54 63
Total stockholders' deficit... -- (17) (50) (100) (321) (341)
</TABLE>
39
<PAGE> 43
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
COMMENCED ----------------------------------------- AS OF
OPERATIONS 1994 1995 1996 1997 1998 JUNE 30, 1999
-------------- ---- ------ ------ ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Netwurx, Inc. May 1997
Total assets.................. $ -- $ -- $ -- $ 84 $ 148 $ 265
Long-term debt................ -- -- -- 38 42 68
Total stockholders' deficit... -- -- -- (4) (151) (184)
MICHIGAN-OHIO OPERATING GROUP
Provide.Net February 1996
Total assets.................. $ -- $ -- $ (104) $ 480 $ 612 $ 731
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity
(deficit)................... -- -- (156) 376 402 653
The Computer Care Company, Inc. August 1995
Total assets.................. $ -- $ 104 $ 137 $ 186 $ 360 $ 485
Long-term debt................ -- 45 27 72 108 109
Total stockholders' equity
(deficit)................... -- 5 27 (65) (85) (92)
ISP Management, Inc.* January 1997
Total assets.................. $ -- $ -- $ -- $ 129 $ 199 $ 182
Long-term debt................ -- -- -- 157 183 227
Total stockholders' deficit... -- -- -- (173) (174) (242)
www.internet solutions, inc. July 1996
Total assets.................. $ -- $ -- $ 90 $ 113 $ 192 $ 204
Long-term debt................ -- -- -- -- -- 15
Total stockholders' deficit... -- -- (4) (309) (418) (499)
Copper.net Group, Inc. January 1995
Total assets.................. $ -- $ 156 $ 165 $ 77 $ 218 $ 365
Long-term debt................ -- 80 77 29 94 153
Total stockholders' deficit... -- (11) (25) (88) (126) (227)
NetPlus Communications, Inc. August 1996
Total assets.................. $ -- $ -- $ 39 $ 55 $ 95 $ 143
Long-term debt................ -- -- 54 13 28 44
Total stockholders' deficit... -- -- (16) (11) (4) (6)
NEBRASKA OPERATING GROUP
Internet Nebraska Corporation August 1994
Total assets.................. $ 16 $ 52 $ 132 $ 244 $ 452 $ 597
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity.... 14 11 76 160 324 416
SOUTH DAKOTA OPERATING GROUP
RapidNet, Inc. September 1995
Total assets.................. $ -- $ 177 $ 149 $ 607 $ 401 $ 394
Long-term debt................ -- 220 212 78 379 505
Total stockholders' deficit... -- (100) (369) (345) (513) (508)
</TABLE>
40
<PAGE> 44
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
COMMENCED ----------------------------------------- AS OF
OPERATIONS 1994 1995 1996 1997 1998 JUNE 30, 1999
-------------- ---- ------ ------ ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ARKANSAS OPERATING GROUP
CSW Net, Inc. May 1995
Total assets.................. $ -- $ 41 $ 479 $ 771 $ 759 $ 522
Long-term debt................ -- 44 303 155 203 203
Total stockholders' equity
(deficit)................... -- (26) 14 215 (270) (458)
IOCC.com, LLC December 1995
Total assets.................. $ -- $ 28 $ 37 $ 74 $ 112 $ 136
Long-term debt................ -- -- 16 -- 2 4
Total stockholders' equity.... -- 19 17 50 52 69
Futura, Inc. September 1995
Total assets.................. $ -- $ 23 $ 43 $ 60 $ 93 $ 196
Long-term debt................ -- -- -- 7 8 25
Total stockholders' equity
(deficit)................... -- 4 19 11 (7) (67)
Internet Solutions, Inc. -- ISP
Business January 1996
Total assets.................. $ -- $ -- $ 69 $ 68 $ 121 $ 86
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity
(deficit)................... -- -- 69 37 30 (17)
Black Sheep Computing,
Inc. -- ISP Business October 1996
Total assets.................. $ -- $ -- $ 17 $ 37 $ 153 $ 280
Long-term debt................ -- -- 12 32 115 175
Total stockholders' deficit... -- -- -- (45) (174) (170)
Intensity Computer Systems June 1997
Total assets.................. $ -- $ -- $ -- $ 27 $ 37 $ 42
Long-term debt................ -- -- -- -- 10 2
Total stockholders' equity
(deficit)................... -- -- -- (5) 7 16
ECSIS.Net, LLC December 1995
Total assets.................. $ -- $ 44 $ 46 $ 57 $ 78 $ 89
Long-term debt................ -- -- -- -- -- --
Total stockholders' equity.... -- 42 42 42 59 66
TEXAS OPERATING GROUP
World Trade Network, Inc. November 1995
Total Assets.................. $ -- $ 31 $ 119 $ 376 $ 767 $ 1,439
Long-term debt................ -- -- -- 1 43 493
Total stockholders' equity.... -- 19 36 74 122 53
</TABLE>
41
<PAGE> 45
SELECTED HISTORICAL FINANCIAL DATA FOR OUR ISPS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
COMMENCED ----------------------------------------- AS OF
OPERATIONS 1994 1995 1996 1997 1998 JUNE 30, 1999
-------------- ---- ------ ------ ------ ------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STIC.NET, Inc. May 1995
Total Assets.................. $ -- $ 148 $ 219 $ 354 $ 578 $ 563
Long-term debt................ -- 243 345 449 270 96
Total stockholders' deficit... -- (87) (126) (144) (321) (364)
NetWest Online, Inc. April 1996
Total Assets.................. $ -- $ -- $ 97 $ 136 $ 251 $ 321
Long-term debt................ -- -- 111 -- 3 --
Total stockholders' equity
(deficit)................... -- -- (50) (36) 9 (5)
TOTAL COMBINED
Total assets.................. $414 $2,193 $4,677 $8,329 $12,554 $16,541
Long-term debt................ 170 1,481 2,901 2,080 2,765 3,851
Total stockholders' equity
(deficit)................... (9) (73) (1,034) (1,538) (3,537) (3,544)
</TABLE>
42
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the combined pro forma results of espernet.com and the historical results for
each of our ISPs for which separate data has been included elsewhere in this
prospectus. See "Selected Combined Pro Forma Financial Data" for the basis of
the pro forma presentation for espernet.com.
OVERVIEW
Upon completion of this offering, we will acquire 43 local and regional
Internet service providers, or ISPs, that we plan to integrate into a national
network. On a combined basis, our 43 ISPs had more than 274,000 subscribers as
of June 30, 1999. In addition, our combined network will provide local Internet
access in 46 states through 2,771 points of presence, or POPs.
From June 30, 1998 to June 30, 1999, the combined subscriber base of our 43
ISPs grew more than 90% from approximately 144,000 to over 274,000. To continue
this growth, we intend to acquire and integrate additional high quality local
and regional ISPs. As a national ISP, we believe that we will be able to achieve
significant economies of scale and streamline our operations. We also plan to
attract new subscribers by offering a broad range of products and services,
providing high quality customer service and technical support, building a
national brand and strategically marketing our products and services through
cost effective local and regional advertising.
REVENUES
We derive our revenues primarily from monthly subscription fees charged to
subscribers for dial-up access to the Internet. Subscription fees vary among our
ISPs and within the subscriber base for a particular ISP. To a lesser extent, we
also earn our revenues by providing broadband access to the Internet via digital
subscriber lines and other forms of dedicated Internet access and by providing
Web hosting and other value-added services to subscribers.
COSTS AND EXPENSES
Our costs and expenses primarily include:
- cost of Internet services;
- selling, general and administrative; and
- depreciation and amortization.
Cost of Internet services consists primarily of maintaining sufficient
capacity to provide services to our subscribers. These costs include:
- access, switching, capacity and recurring telecommunication costs,
including local telephone lines to carry subscriber calls to our POPs;
and
- costs associated with connecting our POPs to the Internet.
We expect that the cost of Internet services will increase over time if we
successfully grow our subscriber base. We expect to use our combined purchasing
power to negotiate discounts with telecommunications service providers and
equipment vendors. However, we cannot assure you that we will successfully
negotiate these discounts.
Selling, general and administrative expenses include marketing and sales
expenses associated with acquiring subscribers, providing customer service and
technical support and paying employee related costs, rent and utilities.
We expect our marketing and sales expenses to increase over time with the
growth in our subscriber base. Generally, marketing and sales expenses are
variable costs and may increase with our development of a national brand
supported by local marketing programs.
We expect our general and administrative expenses to increase over time as
a result of an increase in our subscriber base and the implementation of our
customer service and tech-
43
<PAGE> 47
nical support program which we will operate on a 24 hours per day, seven days
per week basis. Customer service and technical support expenses consist
primarily of our customer service and technical support employees' salaries and
benefits.
In addition, we expect general and administrative expenses to increase to
support our growth, particularly as we implement common billing and financial
reporting systems in the near term. We will incur restructuring and integration
costs as a result of combining operations and centralizing customer service and
technical support and certain sales, general and administrative functions of
acquired ISPs.
Depreciation expense consists primarily of the depreciation of our data
communications equipment, computers, data servers, and office equipment, and is
amortized using the straight-line method over the estimated useful life of the
assets, which ranges from three to five years.
Amortization expense reflected in the pro forma financial information
consists of the amortization of goodwill and subscriber lists acquired in the
acquisitions of our 43 ISPs, which are amortized over three years.
We will account for the acquisition of our ISPs as a purchase for financial
reporting purposes and allocate the excess of the purchase price for each ISP
over the fair value of that ISPs net tangible assets primarily to goodwill and
subscriber lists. The aggregate excess purchase price over fair value of net
tangible assets equals approximately $195.3 million.
We will amortize amounts allocated to these intangibles over three years
from the closing of the acquisitions. As a result, we will record annual
amortization expenses for the intangible assets acquired in these 43
acquisitions of approximately $65.1 million during each of the next three years.
If we make additional acquisitions after completion of this offering, we may
record additional amortization expense associated with those acquisitions. We
expect amortization expenses to increase if additional acquisitions are
completed.
COMBINED RESULTS OF OPERATIONS
The operating results for our individual ISPs have fluctuated in the past,
and our operating results in the future may fluctuate significantly depending
upon a variety of factors, including subscriber growth, subscriber retention
rates, demand for Internet access services, integration costs and changing
prices.
Consequently, we believe that period-to-period comparisons of our
individual ISPs' operating results are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of our combined future
performance.
PRO FORMA SIX MONTHS ENDED
JUNE 30, 1998 AND 1999
The following table shows our pro forma statements of operations data for
the year ended December 31, 1998 and the six months ended June 30, 1998 and
1999. In our opinion, this information 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>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1998 1998 1999
------------ -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues............. $ 34,060 $ 14,529 $ 25,393
Cost of Internet
services........... 15,625 6,537 11,158
Selling, general and
administrative..... 17,036 6,771 12,547
Depreciation and
amortization....... 67,959 33,862 34,713
-------- -------- --------
Loss from
operations......... $(66,560) $(32,641) $(33,025)
======== ======== ========
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ---------------
1998 1998 1999
------------ ---- ----
(AS A PERCENT OF REVENUES)
<S> <C> <C> <C>
Revenues.............. 100 % 100% 100%
Cost of Internet
services............ 46 45 44
Selling, general and
administrative...... 50 47 49
Depreciation and
amortization........ 200 233 137
---- ---- ----
Loss from
operations.......... (196)% (225)% (130)%
==== ==== ====
</TABLE>
REVENUES
For the six months ended June 30, 1999 as compared with the six months
ended June 30, 1998, revenues increased $10.9 million, from $14.5 million to
$25.4 million, or 75%. This increase was primarily due to an increase in the
number of subscribers, partially offset by a decline in average revenue per
subscriber.
COST OF INTERNET SERVICES
For the six months ended June 30, 1999 as compared with the six months
ended June 30, 1998, cost of Internet services increased $4.6 million from $6.5
million to $11.2 million, or 71%. This increase was primarily due to an increase
in the costs associated with adding capacity to service new subscribers.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
For the six months ended June 30, 1999 as compared with the six months
ended June 30, 1998, selling, general and administrative expenses increased $5.7
million, from $6.8 million to $12.5 million, or 84%. The increase was primarily
due to the hiring of additional customer service and technical support and
administrative personnel to serve a larger subscriber base and non-cash
compensation charges of $1.4 million in the first half of 1999 at Midwest
Communications, Inc. and Delanet, Inc., two of our acquired ISPs.
PRO FORMA COMBINED LIQUIDITY AND CAPITAL RESOURCES
On a stand-alone basis, certain of our ISPs are thinly capitalized. Five of
our 43 ISPs have received opinions from their auditors which expressed doubt as
to their ability to continue independently as going concerns. Following the
completion of this offering, our ISPs will be wholly owned subsidiaries of
espernet.com. We expect to be a source of capital to our subsidiaries to allow
them to fund growth in their subscriber base and maintain and expand their
network infrastructure.
On a pro forma combined basis, for the year ended December 31, 1998 and for
the six months ended June 30, 1999, we generated cash flow from operations of
$5.2 million and $4.3 million, utilized cash flow in investing activities of
$3.3 million and $2.7 million, and utilized $1.5 million and $0.6 million in
financing activities, respectively. The cash flow utilized in investing
activities was primarily for capital expenditures for equipment used to service
our subscriber base and selected small acquisitions. The cash flow utilized in
financing activities was primarily to repay debt.
Upon completion of this offering and the application of the net proceeds as
set forth under "Use of Proceeds," we will have approximately $32.1 million of
cash and approximately $7.5 million in debt and capitalized lease obligations.
We expect to need cash primarily to fund our working capital needs,
operating activities, capital expenditures, marketing programs and general
corporate purposes. We also intend to pursue an acquisition program that we will
fund with cash, debt or the issuance of additional common stock to the owners of
any companies that we may acquire in the future. We currently anticipate that
the net proceeds from this offering and any cash generated from operations will
be sufficient to fund our needs for cash for the next twelve months.
However, we may need to raise additional capital through public or private
debt or equity financing, equipment leases or other financing arrangements. This
additional funding, if needed, might not be available on terms acceptable to us,
or at all. Our failure to raise sufficient capital when needed would require us
to curtail our plans for growth and limit our ability to make acquisitions, and
could seriously harm our business, results of opera-
45
<PAGE> 49
tions and financial condition. If additional funds were raised through the
issuance of equity securities, or if we issue stock as consideration for
acquisitions, the percentage of stock owned by our then-current stockholders
would be reduced. Furthermore, any preferred stock or debt securities that we
issue might have rights, preferences or privileges senior to those of our common
stock.
IMPACT OF YEAR 2000 ISSUE
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
access the Internet, process transactions, send invoices or engage in similar
business activities.
In connection with the acquisitions of our 43 ISPs, we have received
representations from the former owners of each ISP that such ISP does not face
material, unresolved Year 2000 issues. We have also received completed
questionnaires relating to Year 2000 issues from each of our ISPs. Based on the
questionnaires and representations made by each of our ISPs, none of our ISPs
expects significant Year 2000 problems 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 ready. To the extent their representations and
questionnaires failed to disclose material Year 2000 issues and we suffer
damages, our operating results and financial condition may be adversely
affected.
Many of our ISPs have contacted their major vendors to assess their Year
2000 readiness. Although some of our ISPs have investigated the readiness of
their electrical and telecommunications providers, most of them have not
contacted these providers to determine 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 espernet.com as a whole. 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 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:
- 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.
46
<PAGE> 50
RESULTS OF OPERATIONS -- CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
Cumberland Technologies International (d/b/a PAdotNET) ("PAdotNET")
commenced operations as a sole proprietorship in July 1995. PAdotNET's target
market is the Pennsylvania area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $192 100% $234 100% $577 100% $231 100% $526 100%
Cost of Internet services................... 113 59 175 75 215 37 82 35 151 29
Operating expenses.......................... 82 43 143 61 370 64 155 67 298 57
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $ (3) (2)% $(84) (36)% $ (8) (1)% $ (6) (2)% $ 77 14%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 1,000 1,700 4,357 2,498 6,243
</TABLE>
PADOTNET SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 128% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 84% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 35% for the six months ended June 30, 1999 to 29% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 92% during the six months ended June 30, 1999
compared to the six months ended June 30, 1998, primarily as a result of hiring
customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 67% for the six months ended June 30, 1998
to 57% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
PADOTNET YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 147% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 23% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 75% in 1997 to 37% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 159% from 1997 to 1998. Operating expenses as
a percentage of revenues increased from 61% in 1997 to 64% in 1998, primarily as
a result of increases in customer support personnel.
47
<PAGE> 51
PADOTNET YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 22% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 55% from 1996 to 1997, primarily as a
result of the increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 59% in 1996 to 75% in 1997, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 74% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 43% in 1996 to 61% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- PENNSYLVANIA ONLINE LTD.
Pennsylvania Online Ltd. commenced operations as a corporation in July
1995. Pennsylvania Online Ltd.'s target market is the Pennsylvania area. The
following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $254 100% $573 100% $917 100% $413 100% $644 100%
Cost of Internet services................... 54 21 151 26 278 30 122 30 145 23
Operating expenses.......................... 175 69 371 65 649 71 268 65 355 55
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $ 25 10% $ 51 9% $(10) (1)% $ 23 5% $144 22%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 1,078 3,571 6,809 4,840 8,461
</TABLE>
PENNSYLVANIA ONLINE LTD. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 56% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 19% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 30% for the six months ended June 30, 1998 to 23% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 32% during the six months ended June 30, 1999
compared to the six months ended June 30, 1998, primarily as a result of hiring
customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 65% for the six months ended June 30,
1998, to 55% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
48
<PAGE> 52
PENNSYLVANIA ONLINE LTD.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 60% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 84% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 26% in 1997 to 30% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 75% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 65% in 1997 to 71% in 1998, primarily as a
result of increases in customer support personnel.
PENNSYLVANIA ONLINE LTD.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 126% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 180% from 1996 to 1997, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 21% in 1996 to 26% in 1997, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 112% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 69% in 1996 to 65% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- INNERNET, INC.
Innernet, Inc. commenced operations as an S-corp. in June 1996. Innernet,
Inc.'s target market is the Pennsylvania area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 87 100% $417 100% $ 958 100% $402 100% $789 100%
Cost of Internet services.................. 62 71 217 52 334 35 147 37 257 33
Operating expenses......................... 58 67 239 57 418 44 176 44 276 35
---- --- ---- --- ----- --- ---- --- ---- ---
(Loss) income from operations.............. $(33) (38)% $(39) (9)% $ 206 21% $ 79 19% $256 32%
==== === ==== === ===== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 900 2,287 5,188 3,282 7,258
</TABLE>
INNERNET, INC. SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 96% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
49
<PAGE> 53
COST OF INTERNET SERVICES
Cost of Internet services increased 75% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 37% for the six months ended June 30, 1998, to 33% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 57% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 44% for the six months ended June 30, 1998
to 35% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
INNERNET, INC. YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 130% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 54% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 52% in 1997 to 35% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 75% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 57% in 1997 to 44% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
INNERNET, INC. YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 379% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 250% from 1996 to 1997, primarily as a
result of the increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 71% in 1996 to 52% in 1997, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 312% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 67% in 1996 to 57% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
50
<PAGE> 54
RESULTS OF OPERATIONS -- DELANET, INC.
Delanet, Inc. was incorporated in May 1996. Delanet, Inc.'s target market
is the Delaware area. The following table shows historical data (in thousands,
except number of subscribers data) and those data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 6 100% $ 271 100% $ 716 100% $189 100% $ 666 100%
Cost of Internet services................. 65 1,083 191 70 268 37 71 38 275 41
Operating expenses........................ 93 1,550 241 89 632 88 135 71 915 138
----- ------ ----- --- ----- --- ---- --- ----- ---
Loss from operations...................... $(152) (2,533)% $(161) (59)% $(184) (25)% $(17) (9)% $(524) (79)%
===== ====== ===== === ===== === ==== === ===== ===
Approximate total subscribers at period
end..................................... 25 2,678 5,603 3,949 7,586
</TABLE>
DELANET, INC. SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 252% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers resulting in part from
the acquisition of another ISP business.
COST OF INTERNET SERVICES
Cost of Internet services increased 287% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 38% for the six months ended June 30, 1998 and
41% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 578% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of the
issuance of 198 shares of common stock to principals for past services. The
resulting charge to operating expenses was $496. Excluding the impact of stock
compensation expense in 1999, operating expenses as a percentage of revenues
decreased from 71% for the six months ended June 30, 1998 to 63% for the six
months ended June 30, 1999, primarily as a result of spreading the cost of
existing personnel over a growing subscriber base.
DELANET, INC. YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 164% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers resulting in part from
the acquisition of another ISP business.
COST OF INTERNET SERVICES
Cost of Internet services increased 40% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 70% in 1997 to 37% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 162% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses
remained relatively constant at 89% in 1997 and 88% in 1998.
51
<PAGE> 55
DELANET, INC. YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 4,417% from 1996 to 1997. The increase was attributable
to an increase in the number of subscribers and a full year of operations in
1997 compared to eight months in 1996.
COST OF INTERNET SERVICES
Cost of Internet services increased 194% from 1996 to 1997, as a result of
increased costs associated with adding capacity to service new subscribers and a
full year of operations in 1997 compared to eight months in 1996. Cost of
Internet Services as a percentage of revenues decreased from 1,083% in 1996 to
70% in 1997, primarily as a result of existing excess capacity being used to
satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 159% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel and a full year of
operations in 1997 compared to eight months in 1996. Operating expenses as a
percentage of revenues decreased from 1,550% in 1996 to 89% in 1997, primarily
as a result of spreading the cost of existing personnel over a growing
subscriber base.
RESULTS OF OPERATIONS -- INTERNET ACCESS SERVICES (A DIVISION OF WEIDNER
ASSOCIATES, INC.)
Weidner Associates, Inc. commenced operations as a corporation in July
1996. Weidner Associates, Inc.'s target market is the Pennsylvania area. The
following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 51 100% $ 173 100% $432 100% $164 100% $387 100%
Cost of Internet services................. 27 53 129 75 175 41 98 60 133 34
Operating expenses........................ 80 157 186 108 271 63 123 75 201 52
---- ---- ----- --- ---- --- ---- --- ---- ---
(Loss) income from operations............. $(56) (110)% $(142) (83)% $(14) (4)% $(57) (35)% $ 53 14%
==== ==== ===== === ==== === ==== === ==== ===
Approximate total subscribers at period
end..................................... 335 1,363 2,774 2,290 3,240
</TABLE>
INTERNET ACCESS SERVICES (A DIVISION OF WEIDNER ASSOCIATES, INC.) SIX MONTHS
ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 136% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 36% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 60% for the six months ended June 30, 1998 to 34% for the six
months ended June 30, 1998, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 63% during the six months ended June 30, 1999
as
52
<PAGE> 56
compared to the six months ended June 30, 1998, primarily as a result of hiring
customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 75% for the six months ended June 30, 1998
to 52% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 150% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers as a result of
acquiring customer lists.
COST OF INTERNET SERVICES
Cost of Internet services increased 36% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 75% in 1997 to 41% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 46% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 108% in 1997 to 63% in 1998, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 239% from 1996 to 1997. The increase was attributable to
an increase in the total number of subscribers resulting in part from the
acquisition of an ISP business and a full year of operations in 1997 compared to
six months in 1996.
COST OF INTERNET SERVICES
Cost of Internet services increased 378% from 1996 to 1997, as a result of
increased costs associated with adding capacity to service new subscribers and a
full year of operations in 1997 compared to six months in 1996. Cost of Internet
services as a percentage of revenues increased from 53% in 1996 to 75% in 1997,
primarily as a result of providing additional capacity to service future
subscriber growth.
OPERATING EXPENSES
Operating expenses increased 133% from 1996 to 1997, as a result of hiring
customer support and administrative personnel and a full year of operations in
1997 compared to six months in 1996. Operating expenses as a percentage of
revenues decreased from 157% in 1996 to 108% in 1997, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
53
<PAGE> 57
RESULTS OF OPERATIONS -- SOUTHERN MARYLAND INTERNET, INC.
Southern Maryland Internet, Inc. commenced operations in April 1996.
Southern Maryland Internet, Inc.'s target market is the Maryland area. The
following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $103 100% $311 100% $539 100% $182 100% $407 100%
Cost of Internet services................... 19 18 49 16 159 29 50 27 146 36
Operating expenses.......................... 172 167 311 100 460 85 205 113 286 70
---- --- ---- --- ---- --- ---- --- ---- ---
Loss from operations........................ $(88) (85)% $(49) (16)% $(80) (14)% $(73) (40)% $(25) (6)%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 596 1,703 3,070 2,485 3,724
</TABLE>
SOUTHERN MARYLAND INTERNET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 124% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 192% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 27% for the six months ended June 30, 1998, to 36% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 40% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 113% for the six months ended June 30,
1998 to 70% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
SOUTHERN MARYLAND INTERNET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 73% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 224% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 16% in 1997 to 29% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 48% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 100% in 1997 to 85% in 1998, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
54
<PAGE> 58
SOUTHERN MARYLAND INTERNET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 202% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 158% from 1996 to 1997, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services decreased from 18% in 1996 to 16% in
1997, primarily as a result of existing excess capacity being used to satisfy
new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 81% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 167% in 1996 to 100% in 1997, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- NUNET, INC.
NuNet, Inc. commenced operations as an S-Corp. in January 1996. NuNet,
Inc.'s target market is the Pennsylvania area. In March 1999, NuNet, Inc.
acquired U.S. Netway Inc. ("U.S. Netway") through the purchase of U.S. Netway's
stock. The U.S. Netway market is the northeastern Pennsylvania area. The
following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ----------- ------------ ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $153 100% $ 580 100% $1,211 100% $ 567 100% $ 898 100%
Cost of Internet services............. 79 52 270 46 734 61 326 57 430 48
Operating expenses.................... 145 95 507 88 1,354 112 399 70 737 82
---- --- ----- --- ------ --- ----- --- ----- ---
(Loss) income from operations......... $(71) (47)% $(197) (34)% $ (877) (73)% $(156) (27)% $(269) (30)%
==== === ===== === ====== === ===== === ===== ===
Approximate total subscribers
at period end....................... 1,865 4,353 7,574 6,244 10,700
</TABLE>
NUNET, INC. SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 58% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers including the
subscribers obtained from the acquisition of U.S. Netway.
COST OF INTERNET SERVICES
Cost of Internet services increased 32% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers and the additional costs associated with the operations
of U.S. Netway. Cost of Internet services as a percentage of revenues decreased
from 57% for the six months ended June 30, 1998 to 48% for the six months ended
June 30, 1999, primarily as a result of existing excess capacity being used to
satisfy new subscriber growth.
55
<PAGE> 59
OPERATING EXPENSES
Operating expenses increased 86% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 70% for the six months ended June 30, 1998
to 82% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel and amortization of goodwill associated
with the U.S. Netway acquisition.
NUNET, INC. YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 108% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 172% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 46% in 1997 to 61% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 167% from 1997 to 1998, primarily as a result
of NuNet, Inc. recording expenses of approximately $600 which management
believes to be excess billings for services provided. NuNet, Inc. has filed
claims for breach of contract and excess billing for services provided.
Excluding the impact of these expenses, operating expenses as a percentage of
revenues decreased from 88% in 1997 to approximately 62% in 1998, primarily as a
result of existing excess capacity being used to satisfy new subscriber growth.
NUNET, INC. YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 279% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 242% from 1996 to 1997, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 52% in 1996 to 46% in 1997, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 250% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 95% in 1996 to 88% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
56
<PAGE> 60
RESULTS OF OPERATIONS -- ENTER.NET, INC.
Enter Net, Inc. commenced operations as a sole proprietorship in April 1995
and was incorporated in March 1996. Enter Net, Inc.'s target market is the
Pennsylvania area. The following table shows historical data (in thousands,
except number of subscribers data) and those data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 612 100% $1,377 100% $2,489 100% $1,091 100% $1,573 100%
Cost of Internet services.................. 145 24 381 28 691 28 301 28 464 29
Operating expenses......................... 572 93 1,139 83 2,007 81 838 77 1,185 75
----- --- ------ --- ------ --- ------ --- ------ ---
Loss from operations....................... $(105) (17)% $ (143) (11)% $ (209) (9)% $ (48) (5)% $ (76) (4)%
===== === ====== === ====== === ====== === ====== ===
Approximate total subscribers at period
end...................................... 4,000 8,000 14,932 11,000 18,243
</TABLE>
ENTER.NET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 44% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 54% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 28% for the six months ended June 30, 1998 and
29% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 41% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 77% for the six months ended June 30,
1998, to 75% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
ENTER NET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 81% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 81% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
constant at 28% in 1997 and 1998.
OPERATING EXPENSES
Operating expenses increased 76% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 83% in 1997 to 81% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
57
<PAGE> 61
ENTER.NET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 125% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 163% from 1996 to 1997, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 24% in 1996 to 28% in 1997, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 99% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 93% in 1996 to 83% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- PROMETHEUS INFORMATION CORP.
Prometheus Information Corp. was incorporated in June 1994. Prometheus
Information Corp.'s target market is the Pennsylvania area. The following table
shows historical data (in thousands, except number of subscribers data) and
those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $605 100% $568 100% $527 100% $276 100% $189 100%
Cost of Internet services................... 207 34 221 39 150 28 78 28 74 39
Operating expenses.......................... 450 74 421 74 309 59 148 54 148 78
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $(52) (8)% $(74) (13)% $ 68 13% $ 50 18% $(33) (17)%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 1,927 1,523 1,354 1,438 1,249
</TABLE>
PROMETHEUS INFORMATION CORP. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues decreased 32% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The decrease was primarily
attributable to a decrease in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services decreased 5% during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. The decrease was
primarily attributable to decreased costs associated with reducing capacity to
service fewer subscribers. Cost of Internet services as a percentage of revenues
increased from 28% for the six months ended June 30, 1998 to 39% for the six
months ended June 30, 1999, primarily as a result of excess capacity created by
a decrease in subscribers.
OPERATING EXPENSES
Operating expenses remained constant during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. Operating expenses as a
percentage of revenues increased from 54% for the six months ended June 30, 1998
to 78% for the six months ended June 30, 1999, primarily as a
58
<PAGE> 62
result of absorbing the cost of existing personnel over a smaller subscriber
base.
PROMETHEUS INFORMATION CORP.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues decreased 7% from 1997 to 1998. The decrease was primarily
attributable to a decrease in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services decreased 32% from 1997 to 1998, primarily as a
result of decreased costs associated with reducing capacity to service fewer
subscribers. Cost of Internet services as a percentage of revenues decreased
from 39% in 1997 to 28% in 1998, primarily as a result of reducing capacity.
OPERATING EXPENSES
Operating expenses decreased 27% from 1997 to 1998. Operating expenses as a
percentage of revenues decreased from 74% in 1997 to 59% in 1998, primarily as a
result of reductions in customer support personnel.
PROMETHEUS INFORMATION CORP.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues decreased 6% from 1996 to 1997. The decrease was primarily
attributable to a decrease in the total number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 7% from 1996 to 1997, primarily as a
result of the increased costs associated with adding capacity to service future
subscriber growth. Cost of Internet services as a percentage of revenues
increased from 34% in 1996 to 39% in 1997.
OPERATING EXPENSES
Operating expenses decreased 6% from 1996 to 1997. Operating expenses as a
percentage of revenues remained relatively constant at 74% in 1996 and 1997.
RESULTS OF OPERATIONS -- E-ZNET INCORPORATED
E-Znet Incorporated was incorporated in May 1994. E-Znet Incorporated's
target market is the New York area. The following table shows historical data
(in thousands, except number of subscribers data) and those data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 422 100% $959 100% $2,308 100% $1,035 100% $1,401 100%
Cost of Internet services.................. 138 33 387 40 1,011 44 420 41 572 41
Operating expenses......................... 476 113 585 61 1,032 45 442 43 743 53
----- --- ---- --- ------ --- ------ --- ------ ---
(Loss) income from operations.............. $(192) (46)% $(13) (1)% $ 265 11% $ 173 16% $ 86 6%
===== === ==== === ====== === ====== === ====== ===
Approximate total subscribers at period
end...................................... 1,535 6,006 10,893 8,035 11,705
</TABLE>
E-ZNET INCORPORATED
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 35% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 36% during the six months ended June
30, 1999 as
59
<PAGE> 63
compared to the six months ended June 30, 1998. The increase was primarily
attributable to increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
constant at 41% for the six months ended June 30, 1998 and 1999.
OPERATING EXPENSES
Operating expenses increased 68% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 43% for the six months ended June 30, 1998
to 53% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
E-ZNET INCORPORATED
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 141% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 161% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 40% in 1997 to 44% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 76% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 61% in 1997 to 45% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
E-ZNET INCORPORATED
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 127% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 180% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 33% in 1996 to 40% in 1997, primarily as a result of providing
additional capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 23% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 113% in 1996 to 61% in 1997, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
60
<PAGE> 64
RESULTS OF OPERATIONS -- USA CHOICE INTERNET SERVICES, CO.
USA Choice Internet Services, Co. commenced operations as a limited
liability company in June 1996 and was organized in January 1996. USA Choice
Internet Services, Co.'s target market is the Pennsylvania area. The following
table shows historical data (in thousands, except number of subscribers data)
and those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 55 100% $195 100% $346 100% $155 100% $384 100%
Cost of Internet services................... 36 65 137 70 212 61 103 66 210 55
Operating expenses.......................... 50 90 58 30 118 34 41 26 140 36
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $(31) (55)% $ -- --% $ 16 5% $ 11 8% $ 34 9%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 387 972 2,577 1,577 5,680
</TABLE>
USA CHOICE INTERNET SERVICES, CO. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 148% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 104% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 66% for the six months ended June 30, 1998 to 55% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 241% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 26% for the six months ended June 30, 1998
to 36% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
USA CHOICE INTERNET SERVICES, CO.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 77% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 55% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 70% in 1997 to 61% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 103% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 30% in 1997 to 34% in 1998, primarily as a
result of increases in customer support personnel.
61
<PAGE> 65
USA CHOICE INTERNET SERVICES, CO.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 255% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 281% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 65% in 1996 to 70% in 1997, primarily as a result of providing
additional capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 16% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 90% in 1996 to 30% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- CROCKER COMMUNICATIONS, INC.
Crocker Communications, Inc. was founded in 1963 as a sole proprietorship
providing telephone answering services. In November 1994, Crocker
Communications, Inc. started an Internet service business to capitalize on the
growing demand for Internet access. In August 1997, Crocker Communications, Inc.
was incorporated as an S-Corp. Crocker Communications, Inc. target market is the
Massachusetts area. The following table shows historical data (in thousands,
except number of subscribers data) and those data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $378 100% $600 100% $ 847 100% $361 100% $547 100%
Cost of Internet services.................. 209 55 244 41 377 45 153 42 245 45
Operating expenses......................... 185 49 294 49 360 43 162 45 180 33
---- --- ---- --- ----- --- ---- --- ---- ---
(Loss) income from operations.............. $(16) (4)% $ 62 10% $ 110 12% $ 46 13% $122 22%
==== === ==== === ===== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 1,522 2,303 3,161 2,621 3,564
</TABLE>
CROCKER COMMUNICATIONS, INCORPORATED. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 52% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 60% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 42% for the six months ended June 30, 1998, to 45% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 11% during the six months ended June 30, 1999
as compared to the six months ended June 30,
62
<PAGE> 66
1998, primarily as a result of hiring customer support and administrative
personnel. Operating expenses as a percentage of revenues decreased from 45% for
the six months ended June 30, 1998 to 33% for the six months ended June 30,
1999, primarily as a result of spreading the cost of existing personnel over a
growing subscriber base.
CROCKER COMMUNICATIONS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 41% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 55% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 41% in 1997 to 45% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 22% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 49% in 1997 to 43% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
CROCKER COMMUNICATIONS, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 59% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 17% from 1996 to 1997. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 55% in 1996 to 41% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 59% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained constant at 49% in 1996 and 1997.
63
<PAGE> 67
RESULTS OF OPERATIONS -- COL NETWORKS, INC.
COL Networks, Inc. commenced operations as a sole proprietorship in January
1996 and was incorporated in March 1998. COL Networks, Inc.'s target market is
the North Carolina area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $105 100% $433 100% $974 100% $374 100% $812 100%
Cost of Internet services................... 68 65 238 55 516 53 190 51 423 52
Operating expenses.......................... 25 24 117 27 309 32 125 33 330 41
---- --- ---- --- ---- --- ---- --- ---- ---
Income from operations...................... $ 12 11% $ 78 18% $149 15% $ 59 16% $ 59 7%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 1,000 2,023 4,220 3,422 10,231
</TABLE>
COL NETWORKS, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 117% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers. In April 1999, COL
Networks, Inc. acquired an ISP resulting in the addition of approximately 2,000
subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 123% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 51% for the six months ended June 30, 1998 and
52% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 164% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 33% for the six months ended June 30, 1998
to 41% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
COL NETWORKS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 125% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 117% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 55% in 1997 to 53% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 164% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 27% in 1997 to 32% in 1998, primarily as a
result of increases in customer support personnel.
64
<PAGE> 68
COL NETWORKS, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 312% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 250% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 65% in 1996 to 55% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 368% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 24% in 1996 to 27% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- PERIGEE.NET CORPORATION
Perigee.net Corporation was incorporated in January 1999. Prior to January
1999, Perigee.net Corporation operated as Perigee, Inc. Perigee, Inc. was
incorporated in November 1994. Perigee, Inc. commenced commercial Internet
service operations in April 1996. Perigee.net Corporation's target market is the
North Carolina area. The following table shows historical data (in thousands,
except number of subscribers data) and those data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $104 100% $468 100% $515 100% $242 100% $307 100%
Cost of Internet services................... 62 60 215 46 271 53 140 58 153 50
Operating expenses.......................... 75 72 257 55 217 42 101 42 108 35
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $(33) (32)% $ (4) (1)% $ 27 5% $ 1 --% $ 46 15%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 659 1,871 2,458 2,220 2,404
</TABLE>
PERIGEE.NET CORPORATION SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 27% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 9% during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 58% for the six months ended June 30, 1998, to 50% for the six
months ended June 30, 1998, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 7% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Oper-
65
<PAGE> 69
ating expenses as a percentage of revenues
decreased from 42% for the six months ended June 30, 1998 to 35% for the six
months ended June 30, 1999, primarily as a result of spreading the cost of
existing personnel over a growing subscriber base.
PERIGEE.NET CORPORATION
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 10% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 26% from 1997 to 1998, primarily as a
result of the increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 46% in 1997 to 53% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses decreased 15% from 1997 to 1998. Operating expenses as a
percentage of revenues decreased from 55% in 1997 to 42% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
PERIGEE.NET CORPORATION
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 350% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 247% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 60% in 1996 to 46% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 243% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 72% in 1996 to 55% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- DUPLINNET CORPORATION
DuplinNet Corporation was incorporated in May 1996. DuplinNet Corporation's
target market is the North Carolina area. The following table shows historical
data (in thousands, except number of subscribers data) and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 19 100% $ 88 100% $201 100% $ 83 100% $156 100%
Cost of Internet services.................. 32 168 64 73 110 55 42 51 89 57
Operating expenses......................... 6 32 13 15 38 19 17 20 45 29
---- ---- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations.............. $(19) (100)% $ 11 (12)% $ 53 26% $ 24 29% $ 22 14%
==== ==== ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 350 968 2,211 1,913 3,330
</TABLE>
66
<PAGE> 70
DUPLINNET CORPORATION SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 88% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 112% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 51% for the six months ended June 30, 1998 to 57% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 165% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 20% for the six months ended June 30, 1998
to 29% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
DUPLINNET CORPORATION YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 128% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 72% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 73% in 1997 to 55% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 192% from 1997 to 1998. Operating expenses as
a percentage of revenues increased from 15% in 1997 to 19% in 1998, primarily as
a result of increases in customer support personnel.
DUPLINNET CORPORATION YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 363% from 1996 to 1997. The increase was attributable to
an increase in the number of subscribers and a full year of operations in 1997
compared to eight months during 1996.
COST OF INTERNET SERVICES
Cost of Internet services increased 100% from 1996 to 1997. The increase
was primarily attributable to a full year of operations in 1997 compared to
eight months during 1996. Cost of Internet services as a percentage of revenues
decreased from 168% in 1997 to 73% in 1996, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 117% from 1996 to 1997, primarily as a result
of a full year of operations in 1997 compared to eight months during 1996.
Operating expenses as a percentage of revenues decreased from 32% in 1997 to 15%
in 1996, primarily as a result of spreading the cost of existing personnel over
a growing subscriber base.
67
<PAGE> 71
RESULTS OF OPERATIONS -- WAVENET, INC.
WaveNet, Inc. was incorporated in April 1996. WaveNet, Inc.'s target market
is the North Carolina area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................................... $27 100% $163 100% $310 100% $134 100% $212 100%
Cost of Internet services.................... 21 78 68 42 137 44 61 46 85 40
Operating expenses........................... 15 56 97 60 178 57 76 57 122 58
--- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations................ $(9) (34)% $ (2) (2)% $ (5) (1)% $ (3) (3)% $ 5 2%
=== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end........................................ 365 1,335 2,092 1,609 2,241
</TABLE>
WAVENET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 58% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 39% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 46% for the six months ended June 30, 1998 to 40% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 60% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained relatively constant at 57% for the six months
ended June 30, 1998 and 58% in the six months ended June 30, 1999.
WAVENET, INC. YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 90% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 101% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
relatively constant at 42% in 1997 and 44% in 1998.
OPERATING EXPENSES
Operating expenses increased 84% from 1997 to 1998. Operating expenses as a
percentage of revenues decreased from 60% in 1997 to 57% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
WAVENET, INC. YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 504% from 1996 to 1997. The increase was attributable to
an
68
<PAGE> 72
increase in the number of subscribers and a full year of operations in 1998
compared to nine months during 1997.
COST OF INTERNET SERVICES
Cost of Internet services increased 224% from 1996 to 1997. The increase
was attributable to increased costs associated with adding capacity to service
new subscribers and a full year of operations in 1998 compared to nine months
during 1997. Cost of Internet services as a percentage of revenues decreased
from 78% in 1996 to 42% in 1997 primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 547% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel and a full year of
operations in 1998 compared to nine months during 1997. Operating expenses as a
percentage of revenues increased from 56% in 1996 to 60% in 1997 primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- THE 3RD DOOR, INC.
The 3rd Door, Inc. was incorporated in April 1995. The 3rd Door, Inc.'s
target market is the North Carolina area. The following table shows historical
data (in thousands, except number of subscribers data) and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................................... $75 100% $254 100% $346 100% $161 100% $214 100%
Cost of Internet services.................... 43 57 118 46 161 47 81 50 84 39
Operating expenses........................... 28 37 116 46 180 52 73 45 107 50
--- --- ---- --- ---- --- ---- --- ---- ---
Income from operations....................... $ 4 6% $ 20 8% $ 5 1% $ 7 5% $ 23 11%
=== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end........................................ 650 1,100 1,607 1,350 1,780
</TABLE>
THE 3RD DOOR, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 33% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 4% during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 50% for the six months ended June 30, 1998 to 39% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 47% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 45% for the six months ended June 30, 1998
to 50% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
69
<PAGE> 73
THE 3RD DOOR, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 36% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 36% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
relatively constant at 46% in 1997 and 47% in 1998.
OPERATING EXPENSES
Operating expenses increased 55% from 1997 to 1998. Operating expenses as a
percentage of revenues increased from 46% in 1997 to 52% in 1998, primarily as a
result of increases in customer support personnel.
THE 3RD DOOR, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 239% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 174% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 57% in 1996 to 46% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 314% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 37% in 1996 to 46% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- INFORAMP, INC.
InfoRamp, Inc. was incorporated in April 1995. InfoRamp, Inc.'s target
market is the Illinois area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $388 100% $778 100% $1,635 100% $669 100% $1,645 100%
Cost of Internet services.................. 142 37 285 37 646 40 247 37 703 43
Operating expenses......................... 254 65 426 55 880 54 392 59 641 39
---- --- ---- --- ------ --- ---- --- ------ ---
(Loss) income from operations.............. $ (8) (2)% $ 67 8% $ 109 6% $ 30 4% $ 301 18%
==== === ==== === ====== === ==== === ====== ===
Approximate total subscribers at period
end...................................... 1,255 7,625 18,375 10,946 25,311
</TABLE>
70
<PAGE> 74
INFORAMP, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 146% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 185% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 37% for the six months ended June 30, 1998 to 43% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 64% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 59% for the six months ended June 30, 1998
to 39% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
INFORAMP, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 110% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 127% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 37% in 1997 to 40% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 107% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained relatively constant at 55% in 1997 and 54% in
1998.
INFORAMP, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 100% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 101% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained constant at 37% in 1996 and 1997.
OPERATING EXPENSES
Operating expenses increased 68% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 65% in 1996 to 55% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
71
<PAGE> 75
RESULTS OF OPERATIONS -- MIDWEST COMMUNICATIONS, INC.
Midwest Communications, Inc. was incorporated in April 1995. Midwest
Communications, Inc.'s target market is the Iowa area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1996 1997 1998 1998 1999
------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. $ 532 100% $971 100% $1,387 100% $671 100% $ 936 100%
Cost of Internet services................ 269 51 386 40 734 53 295 44 476 51
Operating expenses....................... 396 74 591 61 715 52 316 47 1,282 137
----- ---- ---- --- ------ --- ---- --- ------ ---
(Loss) income from operations............ $(133) (25)% $ (6) (1)% $ (62) (5)% $ 60 9% $ (822) (88)%
===== ==== ==== === ====== === ==== === ====== ===
Approximate total subscribers at period
end.................................... 2,119 4,443 6,101 4,963 11,870
</TABLE>
MIDWEST COMMUNICATIONS, INC. SIX
MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues
Revenues increased 39% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 61% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 44% for the six months ended June 30, 1998 to 51% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 306% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of the
issuance of 956,000 shares of common stock to employees and shareholders as
compensation for past services. The resulting charge to operating expense was
$916. Excluding the impact of stock compensation expense in 1999, operating
expenses as a percentage of revenues decreased from 47% for the six months ended
June 30, 1998 to 39% for the six months ended June 30, 1999, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
MIDWEST COMMUNICATIONS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 43% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers resulting in part from
the acquisition of another ISP business in 1998.
COST OF INTERNET SERVICES
Cost of Internet services increased 90% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 40% in 1997 to 53% in 1998, primarily as a result of adding additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 21% from 1997 to 1998. Operating expenses as a
72
<PAGE> 76
percentage of revenues decreased from 61% in 1997 to 52% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
MIDWEST COMMUNICATIONS, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 83% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 43% from 1996 to 1997. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 51% in 1996 to 40% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 49% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 74% in 1996 to 61% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- ALLIANCE INTERNET TECHNOLOGIES, LLC
Alliance Internet Technologies, L.L.C. commenced operations as a limited
liability company in June 1998. Alliance Internet Technologies, L.L.C.'s target
market is the Illinois area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------ ------------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................................ $-- --% $-- --% $461 100% $ 75 100% $525 100%
Cost of Internet services....................... -- -- -- -- 422 92 70 93 446 85
Operating expenses.............................. -- -- -- -- 76 16 18 24 95 18
--- --- --- --- ---- --- ---- --- ---- ---
Loss from operations............................ $-- --% $-- --% $(37) (8)% $(13) (17)% $(16) (3)%
=== === === === ==== === ==== === ==== ===
Approximate total subscribers at period end..... -- -- 3,175 2,410 3,802
</TABLE>
ALLIANCE INTERNET TECHNOLOGIES, LLC SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 600% during the six months ended June 30, 1999 as
compared to the one month ended June 30, 1998. The increase was attributable to
an increase in the number of subscribers and six months of operations during
1999 compared to a single month during 1998.
COST OF INTERNET SERVICES
Cost of Internet services increased 537% during the six months ended June
30, 1999 as compared to the one month ended June 30, 1998. The increase was
attributable to increased costs associated with adding capacity to service new
subscribers and six months of operations during 1999 compared to a single month
during 1998. Cost of Internet services as a percentage of revenues decreased
from 93% for the single month ended June 30, 1998 to 85% for the six months
ended June 30, 1999, primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
73
<PAGE> 77
OPERATING EXPENSES
Operating expenses increased 428% during the six months ended June 30, 1999
as compared to the one month ended June 30, 1998, as a result of hiring customer
support and administrative personnel and six months of operations during 1999
compared to a single month during 1998. Operating expenses as a percentage of
revenues decreased from 24% for the single month ended June 30, 1998 to 18% for
the six months ended June 30, 1999, primarily as a result of spreading the cost
of existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- COMQUEST NETWORKS, INC.
ComQuest Networks, Inc. was incorporated in August 1997. ComQuest Networks,
Inc.'s target market is the Indiana area. The following table shows historical
data and those data (in thousands except number of subscribers data) as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------------
1997 1998 1998 1999
----------- ------------ --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................................. $23 100% $214 100% $74 100% $232 100%
Cost of Internet services............................ 13 57 72 34 29 39 64 28
Operating expenses................................... 10 43 81 38 26 35 100 43
--- --- ---- --- --- --- ---- ---
Income from operations............................... $-- --% $ 61 28% $19 26% $ 68 29%
=== === ==== === === === ==== ===
Approximate total subscribers at period end.......... 265 1,473 574 2,400
</TABLE>
COMQUEST NETWORKS, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 214% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 121% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 39% for the six months ended June 30, 1998, to 28% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 285% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 35% for the six months ended June 30,
1998, to 43% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
COMQUEST NETWORKS, INC.
PERIODS ENDED 1998 AND 1997
REVENUES
Revenues increased 830% from 1997 to 1998. The increase was attributable to
an increase in the number of subscribers as a result of acquiring customer lists
and a full year of operations in 1998 compared to five months during 1997.
74
<PAGE> 78
COST OF INTERNET SERVICES
Cost of Internet services increased 454% from 1997 to 1998. The increase
was a result of increased costs associated with adding capacity to service new
subscribers and a full year of operations in 1998 compared to five months during
1997. Cost of Internet services as a percentage of revenues decreased from 57%
in 1997 to 34% in 1998, primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 710% from 1997 to 1998, as a result of hiring
customer support and administrative personnel and a full year of operations in
1998 compared to five months during 1997. Operating expenses as a percentage of
revenues decreased from 43% in 1997 to 38% in 1998, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- FAIRNET, INC.
Fairnet, Inc. commenced operations as a corporation in June 1996. Fairnet,
Inc.'s target market is the Indiana area. The following table shows historical
data (in thousands, except number of subscribers data) and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................................... $ 8 100% $94 100% $206 100% $89 100% $186 100%
Cost of Internet services.................... 8 100 51 54 114 55 48 54 128 69
Operating expenses........................... 12 150 44 47 122 59 32 36 94 50
---- ---- --- --- ---- --- --- --- ---- ---
(Loss) income from operations................ $(12) (150)% $(1) (1)% $(30) (14)% $ 9 10% $(36) (19)%
==== ==== === === ==== === === === ==== ===
Approximate total subscribers at period
end........................................ 82 369 1,013 559 1,449
</TABLE>
FAIRNET, INC. SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 109% during the six months ended June 30, 1999 as
compared to the six months ended June 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 167% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 54% for the six months ended June 30, 1999 to 69% for the six
months ended June 30, 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 194% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 36% for the six months ended June 30, 1998
to 50% for the six months ended June 30, 1998, primarily as a result of
increases in customer support personnel.
FAIRNET, INC. YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 119% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
75
<PAGE> 79
COST OF INTERNET SERVICES
Cost of Internet services increased 124% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
relatively constant at 54% in 1997 and 55% in 1998.
OPERATING EXPENSES
Operating expenses increased 177% from 1997 to 1998. Operating expenses as
a percentage of revenues increased from 47% in 1997 to 59% in 1998, primarily as
a result of increases in customer support personnel.
FAIRNET, INC. YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 266% from 1996 to 1997. The increase was attributable to
an increase in the number of subscribers and a full year of operations in 1997
compared to seven months in 1996.
COST OF INTERNET SERVICES
Cost of Internet services increased 538% from 1996 to 1997. The increase
was attributable to increased costs associated with adding capacity to service
new subscribers and a full year of operations in 1997 compared to seven months
in 1996. Cost of Internet services as a percentage of revenues decreased from
100% in 1996 to 54% in 1997, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 267% from 1996 to 1997, as a result of hiring
customer support and administrative personnel and a full year of operations in
1997 compared to seven months in 1996. Operating expenses as a percentage of
revenues decreased from 150% in 1996 to 47% in 1997, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- WISCONSIN INTERNET, INC.
Wisconsin Internet, Inc. was incorporated in June 1995. Wisconsin Internet,
Inc.'s target market is the Wisconsin area. The following table shows historical
data (in thousands, except number of subscribers data) and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 97 100% $355 100% $602 100% $ 274 100% $414 100%
Cost of Internet services................. 90 93 279 79 407 68 185 67 274 66
Operating expenses........................ 30 31 102 29 158 26 70 26 98 24
---- ---- ---- --- ---- --- ----- --- ---- ---
(Loss) income from operations............. $(23) (24)% $(26) (8)% $ 37 6% $ 19 7% $ 42 10%
==== ==== ==== === ==== === ===== === ==== ===
Approximate total subscribers at period
end..................................... 1,200 2,121 3,897 3,251 4,500
</TABLE>
WISCONSIN INTERNET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 51% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 48% during the six months ended June
30, 1999 as compared to the six months ended June 30,
76
<PAGE> 80
1998. The increase was primarily attributable to increased costs associated with
adding capacity to service new subscribers. Cost of Internet services as a
percentage of revenues remained relatively constant at 67% for the six months
ended June 30, 1998 and 66% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 40% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained relatively constant at 26% for the six months
ended June 30, 1998 and 24% for the six months ended June 30, 1999.
WISCONSIN INTERNET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 70% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 46% from 1997 to 1998, primarily as a
result of the increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 79% in 1997 to 68% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 55% from 1997 to 1998. Operating expenses as a
percentage of revenues decreased from 29% in 1997 to 26% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
WISCONSIN INTERNET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 266% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 210% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 93% in 1996 to 79% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 240% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained relatively constant at 31% in 1996 and 29% in
1997.
77
<PAGE> 81
RESULTS OF OPERATIONS -- NCONNECT, INC.
NConnect, Inc. commenced operations as a corporation in November 1995.
NConnect, Inc.'s target market is the Wisconsin area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $137 100% $435 100% $ 660 100% $ 289 100% $515 100%
Cost of Internet services................. 89 65 295 68 560 85 231 80 335 65
Operating expenses........................ 78 57 182 42 300 45 135 47 198 38
---- --- ---- --- ----- --- ----- --- ---- ---
Loss from operations...................... $(30) (22)% $(42) (10)% $(200) (30)% $ (77) (27)% $(18) (3)%
==== === ==== === ===== === ===== === ==== ===
Approximate total subscribers at period
end..................................... 500 1,500 4,443 3,464 5,554
</TABLE>
NCONNECT, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 78% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 45% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 80% for the six months ended June 30, 1999 to 65% for the six
months ended June 30, 1998, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 47% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 47% for the six months ended June 30, 1998
to 38% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
NCONNECT, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 52% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 90% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 68% in 1997 to 85% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 65% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 42% in 1997 to 45% in 1998, primarily as a
result of increases in customer support personnel.
78
<PAGE> 82
NCONNECT, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 218% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 231% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 65% in 1997 to 68% in 1997, primarily as a result of providing
additional capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 133% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 57% in 1996 to 42% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- NETWURX, INC.
Netwurx, Inc. commenced operations as a corporation in May 1997. Netwurx,
Inc.'s target market is the Wisconsin area. The following table shows historical
data (in thousands, except number of subscribers data) and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ------------------------
1997 1998 1998 1999
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................................ $ 63 100% $ 337 100% $132 100% $372 100%
Cost of Internet services............................... 30 48 288 85 103 78 238 64
Operating expenses...................................... 44 70 180 53 54 41 154 41
---- --- ----- --- ---- --- ---- ---
Loss from operations.................................... $(11) (18)% $(131) (38)% $(25) (19)% $(20) (5)%
==== === ===== === ==== === ==== ===
Approximate total subscribers at period end............. 400 2,263 1,174 3,503
</TABLE>
NETWURX, INC. SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 181% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 131% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 78% for the six months ended June 30, 1998 to 64% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 185% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained constant at 41% for the six months ended June
30, 1998 and 1999.
79
<PAGE> 83
NETWURX, INC.
PERIODS ENDED 1998 AND 1997
REVENUES
Revenues increased 435% from 1997 to 1998. The increase was attributable to
an increase in the number of subscribers and a full year of operations in 1998
compared to eight months in 1997.
COST OF INTERNET SERVICES
Cost of Internet services increased 860% from 1997 to 1998, as a result of
increased costs associated with adding capacity to service new subscribers and a
full year of operations in 1998 compared to eight months in 1997. Cost of
Internet services as a percentage of revenues increased from 48% in 1997 to 85%
in 1998, primarily as a result of providing additional capacity to service
future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 309% from 1997 to 1998, as a result of hiring
customer support and administrative personnel and a full year of operations in
1998 compared to eight months in 1997. Operating expenses as a percentage of
revenues decreased from 70% in 1997 to 53% in 1998, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- PROVIDE.NET
Provide.Net commenced operations as a sole proprietorship in February 1996.
Provide.Net's target market is the Michigan area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ----------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 34 100% $ 478 100% $1,304 100% $617 100% $1,028 100%
Cost of Internet services.................. 126 371 369 77 678 52 268 43 471 46
Operating expenses......................... 49 144 211 44 337 26 148 24 284 28
----- ---- ----- --- ------ --- ---- --- ------ ---
(Loss) income from operations.............. $(141) (415)% $(102) (21)% $ 289 22% $201 33% $ 273 26%
===== ==== ===== === ====== === ==== === ====== ===
Approximate total subscribers at period
end...................................... 1,124 4,766 9,768 7,639 11,903
</TABLE>
PROVIDE.NET SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 67% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 76% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 43% for the six months ended June 30, 1998 to 46% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 92% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 24% for the six months ended
80
<PAGE> 84
June 30, 1998 to 28% for the six months ended
June 30, 1999, primarily as a result of increases in customer support personnel.
PROVIDE.NET
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 173% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 84% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 77% in 1997 to 52% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 60% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 44% in 1997 to 26% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
PROVIDE.NET
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 1,306% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 193% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 371% in 1996 to 77% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 331% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 144% in 1996 to 44% in 1997, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- THE COMPUTER CARE COMPANY, INC.
The Computer Care Company, Inc. commenced operations as a partnership in
August 1992 and was incorporated in January 1998. The Computer Care Company,
Inc.'s target market is the Michigan area. The following table shows historical
data (in thousands, except number of subscribers data) and those data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $606 100% $892 100% $1,160 100% $477 100% $682 100%
Cost of Internet services................. 397 66 486 54 590 51 214 45 335 49
Operating expenses........................ 236 39 419 47 551 48 266 56 294 43
---- --- ---- --- ------ --- ---- --- ---- ---
(Loss) income from operations............. $(27) (5)% $(13) (1)% $ 19 1% $ (3) (1)% $ 53 8%
==== === ==== === ====== === ==== === ==== ===
Approximate total subscribers at period
end..................................... 800 1,995 3,367 2,559 4,172
</TABLE>
81
<PAGE> 85
THE COMPUTER CARE COMPANY, INC.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 43% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 57% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased 45% for the six months ended June 30, 1998 to 49% for the six months
ended June 30, 1999, primarily as a result of providing additional capacity to
service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 11% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 56% for the six months ended June 30, 1998
to 43% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
THE COMPUTER CARE COMPANY, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 30% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 21% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 54% in 1997 to 51% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 32% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained relatively constant at 47% in 1997 and 48% in
1998.
THE COMPUTER CARE COMPANY, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 47% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 22% from 1996 to 1997. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 66% in 1996 to 54% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 78% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 39% in 1996 to 47% in 1997, primarily as a
result of increases in customer support personnel.
82
<PAGE> 86
RESULTS OF OPERATIONS -- ISP MANAGEMENT, INC.
Nethawk of Alma, Inc. ("Nethawk") and the Internet Access Services division
of Sensible Computer Solutions, Inc. ("Sensible") commenced full-scale Internet
access services in January, 1997. The two companies combined operations in early
1999 to become a premier provider of full-service Internet connectivity in
central Michigan. ISP Management, Inc. was incorporated in January 1999 for the
purpose of combining the operations of Nethawk and Sensible. The following table
shows historical data (in thousands, except number of subscribers data) and
those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1999
----------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................................... $220 100% $359 100%
Cost of Internet services................................... 113 52 209 58
Operating expenses.......................................... 90 41 197 55
---- --- ---- ---
(Loss) income from operations............................... $ 17 7% $(47) (13)%
==== === ==== ===
Approximate total subscribers at period end................. 2,206 3,139
</TABLE>
ISP MANAGEMENT, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues
Revenues increased 63% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
Cost of internet service
Cost of Internet services increased 85% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 52% for the six months ended June 30, 1998 to 58% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
Operating expenses
Operating expenses increased 119% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 41% for the six months ended June 30, 1998
to 55% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
83
<PAGE> 87
RESULTS OF OPERATIONS -- NETHAWK OF ALMA, INC.
Nethawk of Alma, Inc. commenced full-scale Internet access services on
January 1997. The company is a provider of full-service Internet connectivity in
central Michigan. The following table shows historical data (in thousands,
except number of subscribers data) and those data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 85 100% $ 275 100% $ -- --% $ -- --%
Cost of Internet services............. 146 172 155 56 -- -- -- --
Operating expenses.................... 51 60 71 26 -- -- -- --
----- ---- ------ --- ---- --- ---- ---
(Loss) income from operations......... $(112) (132)% $ 49 18% $ -- --% $ -- --%
===== ==== ====== === ==== === ==== ===
Approximate total subscribers at
period end.......................... 645 1,535 -- --
</TABLE>
NETHAWK OF ALMA, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 224% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 6% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 172% in 1997 to 56% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 39% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 60% in 1997 to 26% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
84
<PAGE> 88
RESULTS OF OPERATIONS -- THE INTERNET ACCESS SERVICES DIVISION
OF SENSIBLE COMPUTER SOLUTIONS, INC.
The Internet Access Services Division of Sensible Computer Solutions, Inc.
commenced full-scale Internet access services in January 1997. The division
provides full-service Internet connectivity in central Michigan. The following
table shows historical data (in thousands, except number of subscribers 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.................................................... $ 117 100% $ 263 100%
Cost of Internet services................................... 130 111 160 61
Operating expenses.......................................... 108 92 110 42
----- ---- ------ ---
Loss from operations........................................ $(121) (103)% $ (7) (3)%
===== ==== ====== ===
Approximate total subscribers at period end................. 855 1,415
</TABLE>
THE INTERNET ACCESS SERVICES DIVISION
OF SENSIBLE COMPUTER SOLUTIONS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 125% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 23% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 111% in 1997 to 61% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 2% from 1997 to 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 92% in 1997 to 42% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
85
<PAGE> 89
RESULTS OF OPERATIONS -- WWW.INTERNET SOLUTIONS, INC.
www.internet solutions, inc. commenced operations as a corporation in July
1996. www.internet solutions, inc.'s target market is the Ohio area. The
following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------------
1996 1997 1998 1998 1999
------------ ------------ ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 26 100% $ 164 100% $ 470 100% $204 100% $279 100%
Cost of Internet services.................. 60 231 153 93 275 59 125 61 152 54
Operating expenses......................... 104 400 176 107 297 63 128 63 203 73
----- ---- ----- ---- ----- --- ---- --- ---- ---
Loss from operations....................... $(138) (531)% $(165) (100)% $(102) (22)% $(49) (24)% $(76) (27)%
===== ==== ===== ==== ===== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 125 1,350 2,629 1,900 3,100
</TABLE>
WWW.INTERNET SOLUTIONS, INC.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 37% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 22% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 61% for the six months ended June 30, 1998 to 54% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 59% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 63% for the six months ended June 30, 1998
to 73% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
WWW.INTERNET SOLUTIONS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 187% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 80% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 93% in 1997 to 59% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 69% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 107% in 1997 and 63% in 1998.
86
<PAGE> 90
WWW.INTERNET SOLUTIONS, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 531% from 1996 to 1997. The increase was attributable to
an increase in the number of subscribers and a full year of operations in 1997
compared to six months in 1996.
COST OF INTERNET SERVICES
Cost of Internet services increased 155% from 1996 to 1997. The increase
was attributable to increased costs associated with adding capacity to service
new subscribers and a full year of operations in 1997 compared to six months in
1996. Cost of Internet services as a percentage of revenues decreased from 231%
in 1996 and 93% in 1997, primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 69% from 1996 to 1997, as a result of hiring
customer support and administrative personnel and a full year of operations in
1997 compared to six months in 1996. Operating expenses as a percentage of
revenues decreased from 400% in 1996 to 107% in 1997.
RESULTS OF OPERATIONS -- COPPER.NET, INC.
Copper.net, Inc. commenced pre-incorporation operations in 1995, and was
incorporated in December 1997. Copper.net, Inc.'s target market is the Ohio
area. The following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 62 100% $180 100% $417 100% $178 100% $372 100%
Cost of Internet services................... 56 90 136 76 146 35 69 39 170 46
Operating expenses.......................... 18 29 82 46 242 58 115 65 250 67
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $(12) (19)% $(38) (22)% $ 29 7% $ (6) (4)% $(48) (13)%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 550 1,907 3,948 2,575 6,691
</TABLE>
COPPER.NET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 109% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 146% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 39% for the six months ended June 30, 1998 to 46% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 117% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 65% for the six months ended
87
<PAGE> 91
June 30, 1998 to 67% for the six months ended June 30, 1999, primarily as a
result of increases in customer support personnel.
COPPER.NET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 132% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 7% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 76% in 1997 to 35% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 195% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 46% in 1997 to 58% in 1998, primarily as a
result of increases in customer support personnel.
COPPER.NET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 190% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 143% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 90% in 1996 to 76% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 356% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 29% in 1996 to 46% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- NETPLUS COMMUNICATIONS, INC.
NetPlus Communications, Inc. was incorporated in August 1996. NetPlus
Communications, Inc.'s target market is the Ohio area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 14 100% $ 87 100% $209 100% $99 100% $181 100%
Cost of Internet services................... 17 121 67 77 164 78 76 77 146 81
Operating expenses.......................... 13 93 65 75 35 17 17 17 34 19
---- ---- ---- --- ---- --- --- --- ---- ---
(Loss) income from operations............... $(16) (114)% $(45) (52)% $ 10 5% $ 6 6% $ 1 --
==== ==== ==== === ==== === === === ==== ===
Approximate total subscribers at period
end....................................... 89 615 1,437 1,251 2,012
</TABLE>
88
<PAGE> 92
NETPLUS COMMUNICATIONS, INC.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 83% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 92% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 77% for the six months ended June 30, 1998 to 81% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 100% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues remained relatively constant at 17% for the six months
ended June 30, 1998 and 19% for the six months ended June 30, 1999.
NETPLUS COMMUNICATIONS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 140% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 145% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
relatively constant at 77% in 1997 and 78% in 1998.
OPERATING EXPENSES
Operating expenses decreased 46% from 1997 to 1998, primarily as a result
of the 1997 impact of stock compensation expense of $42 recorded for stock
issued to certain shareholders during 1997. Excluding this expense operating
expenses as a percentage of revenues decreased from 75% in 1997 to 17% in 1998
primarily as a result of spreading the cost of existing personnel over a growing
subscriber base.
NETPLUS COMMUNICATIONS, INC.
YEAR ENDED 1997 AND PERIOD ENDED 1996
REVENUES
Revenues increased 521% from 1996 to 1997. The increase was attributable to
an increase in the number of subscribers and a full year of operations in 1997
compared to four months in 1996.
COST OF INTERNET SERVICES
Cost of Internet services increased 294% from 1996 to 1997. The increase
was attributable to increased costs associated with adding capacity to service
new subscribers and a full year of operations in 1997 compared to four months in
1996. Cost of Internet services as a percentage of revenues decreased from 121%
in 1996 to 77% in 1997, primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 400% from 1996 to 1997, as a result of hiring
customer support and administrative personnel and a full year of operations in
1997 compared to four months in 1996. Operating expenses as a percentage of
revenues decreased from 93% in 1996 to 75% in 1997, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
89
<PAGE> 93
RESULTS OF OPERATIONS -- INTERNET NEBRASKA CORPORATION
Internet Nebraska Corporation was incorporated in August 1994. Internet
Nebraska Corporation target market is the Nebraska area. The following table
shows historical data (in thousands, except number of subscribers data) and
those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $276 100% $608 100% $1,071 100% $473 100% $796 100%
Cost of Internet services................. 93 34 242 40 493 46 201 42 381 48
Operating expenses........................ 127 46 229 38 301 28 140 30 260 33
---- --- ---- --- ------ --- ---- --- ---- ---
Income from operations.................... $ 56 20% $137 22% $ 277 26% $132 28% $155 19%
==== === ==== === ====== === ==== === ==== ===
Approximate total subscribers at period
end..................................... 1,662 4,500 7,444 5,978 9,213
</TABLE>
INTERNET NEBRASKA CORPORATION SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 68% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 90% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 42% for the six months ended June 30, 1998 to 48% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 86% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 30% for the six months ended June 30, 1998
to 33% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
INTERNET NEBRASKA CORPORATION YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 76% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers resulting in part from
the acquisition of another ISP business.
COST OF INTERNET SERVICES
Cost of Internet services increased 104% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 40% in 1997 to 46% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 31% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 38% in 1997 to 28% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
90
<PAGE> 94
INTERNET NEBRASKA CORPORATION
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 120% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 160% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 34% in 1997 to 40% in 1997, primarily as a result of providing
additional capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 80% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 46% in 1996 to 38% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- RAPIDNET, INC.
RapidNet, L.L.C., was initially formed as a limited liability company in
September 1995. In April 1998, RapidNet, Inc. was formed in connection with the
conversion of its legal organization from a limited liability company to an
S-Corp. RapidNet, Inc.'s target market is the South Dakota area. The following
table shows historical data (in thousands, except number of subscribers data)
and those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------- -----------------------
1996 1997 1998 1998 1999
------------ ----------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 239 100% $ 686 100% $1,344 100% $641 100% $730 100%
Cost of Internet services.................. 158 66 390 57 769 57 298 46 387 53
Operating expenses......................... 325 136 515 75 713 53 380 59 293 40
----- ---- ----- --- ------ --- ---- --- ---- ---
(Loss) income from operations.............. $(244) (102)% $(219) (32)% $ (138) (10)% $(37) (5)% $ 50 7%
===== ==== ===== === ====== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 1,866 3,828 5,183 4,272 5,898
</TABLE>
RAPIDNET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 14% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers. This increase was
partially offset by the closure of RapidNet, Inc.'s Sioux Falls office during
January 1999 which provided a substantial portion of RapidNet, Inc.'s non-ISP
revenues in 1998.
COST OF INTERNET SERVICES
Cost of Internet services increased 30% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 46% for the six months ended June 30, 1998 to 53% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
91
<PAGE> 95
OPERATING EXPENSES
Operating expenses decreased 23% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of the
closing of RapidNet, Inc.'s Sioux Falls office in January 1999. Operating
expenses as a percentage of revenues decreased from 59% for the six months ended
June 30, 1998 to 40% for the six months ended June 30, 1999, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RAPIDNET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 96% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 97% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
constant at 57% in 1997 and 1998.
OPERATING EXPENSES
Operating expenses increased 38% from 1997 to 1998 primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 75% in 1997 to 53% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RAPIDNET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 187% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers as a result of
acquiring customers lists.
COST OF INTERNET SERVICES
Cost of Internet services increased 147% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 66% in 1996 to 57% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 58% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 136% in 1996 to 75% in 1997, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
92
<PAGE> 96
RESULTS OF OPERATIONS -- CSW NET, INC.
CSW Net, Inc. was incorporated in May 1995. CSW Net, Inc.'s target market
is the Arkansas area. The following table shows historical data (in thousands,
except numbers of subscribers data) and those data as a percentage of revenues
for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ------------------------------
1996 1997 1998 1998 1999
---------- ------------ ------------ ----------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $775 100% $1,196 100% $1,352 100% $ 610 100% $1,082 100%
Cost of Internet services.............. 512 66 502 42 940 70 468 77 477 44
Operating expenses..................... 234 30 383 32 726 54 373 61 463 43
---- --- ------ --- ------ --- ----- --- ------ ---
(Loss) income from operations.......... $ 29 4% $ 311 26% $ (314) (24)% $(231) (38)% $ 142 13%
==== === ====== === ====== === ===== === ====== ===
Approximate total subscribers at period
end.................................. 1,740 4,400 7,294 5,390 9,565
</TABLE>
CSW NET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 77% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 2% during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 77% for the six months ended June 30, 1998 to 44% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 24% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 61% for the six months ended June 30, 1998
to 43% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
CSW NET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 13% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 87% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 42% in 1997 to 70% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 90% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 32% in 1997 to 54% in 1998, primarily as a
result of increases in customer support personnel.
93
<PAGE> 97
CSW NET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 54% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services decreased 2% from 1996 to 1997. Cost of Internet
services as a percentage of revenues decreased from 66% in 1996 to 42% in 1997,
primarily as a result of existing excess capacity being used to satisfy new
subscriber growth.
OPERATING EXPENSES
Operating expenses increased 64% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 30% in 1996 to 32% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- IOCC.COM, LLC
IOCC.com, LLC was incorporated in December 1995. IOCC.com, LLC's target
market is the Arkansas area. The following table shows historical data (in
thousands, except numbers of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................................... $43 100% $125 100% $221 100% $95 100% $208 100%
Cost of Internet services..................... 30 70 51 41 95 43 34 36 109 52
Operating expenses............................ 10 23 32 26 80 36 35 37 69 33
--- --- ---- --- ---- --- --- --- ---- ---
Income from operations........................ $ 3 7% $ 42 33% $ 46 21% $26 27% $ 30 15%
=== === ==== === ==== === === === ==== ===
Approximate total subscribers at period end... 320 513 968 690 1,616
</TABLE>
IOCC.COM, LLC
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 119% during the six months ended June 30, 1999 as
compared to six months ended June 30, 1998. The increase was primarily
attributable to increases in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 221% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 36% for the six months ended June 30, 1998, to 52% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 97% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 37% for the six months ended June 30, 1998
to 33% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
94
<PAGE> 98
IOCC.COM, LLC
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 77% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 86% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues increased
from 41% in 1997 to 43% in 1998, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 150% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 26% in 1997 to 36% in 1998, primarily as a
result of increases in customer support personnel.
IOCC.COM, LLC
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 191% 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 70% from 1996 to 1997. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 70% in 1996 to 41% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 220% 1996 to 1997, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 23% 1996 to 26% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- FUTURA, INC.
Futura, Inc. was incorporated in September 1995. Futura, Inc.'s target
market is the Arkansas area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................................... $50 100% $107 100% $261 100% $104 100% $306 100%
Cost of Internet services.................... 31 62 86 80 141 54 67 64 161 53
Operating expenses........................... 17 34 26 24 136 52 41 39 200 65
--- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations................ $ 2 4% $ (5) (4)% $(16) (6)% $ (4) (3)% $(55) (18)%
=== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end........................................ 330 820 1,596 1,380 2,228
</TABLE>
95
<PAGE> 99
FUTURA, INC. SIX MONTHS ENDED
JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 194% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers as a result of
acquiring customer lists.
COST OF INTERNET SERVICES
Cost of Internet services increased 140% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. These increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 64% for the six months ended June 30, 1998 to 53% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 388% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 39% for the six months ended June 30, 1998
to 65% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
FUTURA, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 144% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 64% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 80% in 1997 to 54% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 423% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 24% in 1997 to 52% in 1998, primarily as a
result of increases in customer support personnel.
FUTURA, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 114% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 177% from 1996 to 1997. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 62% in 1996 to 80% in 1997, primarily as a result of providing
additional capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 53% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 34% in 1996 to 24% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
96
<PAGE> 100
RESULTS OF OPERATIONS -- INTERNET SOLUTIONS, INC.
Internet Solutions, Inc. was incorporated in October 25, 1995. Internet
Solution, Inc.'s target market is the Arkansas area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $107 100% $276 100% $370 100% $170 100% $193 100%
Cost of Internet services................... 61 57 117 42 139 38 71 42 77 40
Operating expenses.......................... 58 54 117 42 163 44 76 45 79 41
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $(12) (11)% $ 42 16% $ 68 18% $ 23 13% $ 37 19%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 530 1,040 1,285 1,176 1,451
</TABLE>
INTERNET SOLUTIONS, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 14% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 8% during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 42% for the six months ended June 30, 1998 and
40% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 4% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 45% for the six months ended June 30, 1998
to 41% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
INTERNET SOLUTIONS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 34% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 19% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 42% in 1997 to 38% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 39% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 42% in 1997 to 44% in 1998, primarily as a
result of increases in customer support personnel.
97
<PAGE> 101
INTERNET SOLUTIONS, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 158% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 92% from 1996 to 1997. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 57% in 1996 to 42% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 102% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 54% in 1996 to 42% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- BLACK SHEEP COMPUTING, INC. -- ISP BUSINESS
Black Sheep Computing Inc., established in 1992 as sole proprietorship,
commenced operations as a dial-up Internet access and support service ("ISP") in
October 1996. Black Sheep Computing Inc. was incorporated in May 1997. Black
Sheep Computing, Inc.'s target market is the Arkansas area. The following table
shows historical data (in thousands, except number of subscribers data) and
those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 1 100% $ 95 100% $ 266 100% $113 100% $337 100%
Cost of Internet services.................. 3 300 69 73 183 69 68 60 200 59
Operating expenses......................... 1 100 67 71 198 74 89 79 117 35
--- ---- ---- --- ----- --- ---- --- ---- ---
(Loss) income from operations.............. $(3) (300)% $(41) (44)% $(115) (43)% $(44) (39)% $ 20 6%
=== ==== ==== === ===== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 38 1,523 3,577 2,092 4,352
</TABLE>
BLACK SHEEP COMPUTING, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 198% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 194% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 60% for the six months ended June 30, 1998 and
59% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 31% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 79% for the six months ended June 30,
1996, to 35% for the six months ended June 30, 1999, primarily as a result of
spreading
98
<PAGE> 102
the cost of existing personnel over a growing subscriber base.
BLACK SHEEP COMPUTING, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 180% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 165% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 73% in 1997 to 69% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth in 1997 and 1998.
OPERATING EXPENSES
Operating expenses increased 196% from 1997 to 1998 primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 71% in 1997 to 74% in 1998, primarily as a
result of increases in customer support personnel.
BLACK SHEEP COMPUTING, INC.
YEARS ENDED 1997 AND 1996
Black Sheep Computing, Inc. commenced its ISP operations in late 1996.
Revenues, cost of Internet services and operating expenses all increased from
1996 to 1997 as a result of a full year of operations in 1997 compared to 3
months in 1996.
RESULTS OF OPERATIONS -- INTENSITY COMPUTER SYSTEMS, INC.
Intensity Computer Systems, Inc. commenced operations as a sole
proprietorship in June 1997 and was incorporated in January 1998. Intensity
Computer Systems, Inc.'s target market is the Arkansas area. The following table
shows historical data (in thousands, except numbers of subscribers data) and
those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------------
1997 1998 1998 1999
----------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................................... $ 8 100% $171 100% $60 100% $116 100%
Cost of Internet services.............................. 15 188 102 60 42 70 59 51
Operating expenses..................................... 13 162 55 32 22 37 47 41
---- ---- ---- --- --- --- ---- ---
(Loss) income from operations.......................... $(20) (250)% $ 14 8% $(4) (7)% $ 10 9%
==== ==== ==== === === === ==== ===
Approximate total subscribers at period end............ 50 462 162 839
</TABLE>
INTENSITY COMPUTER SYSTEMS, INC.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 93% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 40% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 70% for the six months ended June 30,
99
<PAGE> 103
1998 to 51% for the six months ended June 30,
1999, primarily as a result of existing excess capacity being used to satisfy
new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 114% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 37% for the six months ended June 30,
1998, to 41% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
INTENSITY COMPUTER SYSTEMS, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 204% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers and a full year of
operations in 1998 compared to seven months in 1997.
COST OF INTERNET SERVICES
Cost of Internet services increased 580% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers and a full year of operations in 1998 compared to seven months in
1997. Cost of Internet services as a percentage of revenues decreased from 188%
in 1997 to 60% in 1998, primarily as a result of existing excess capacity being
used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 323% from 1997 to 1998, as a result of
increases in customer support personnel and a full year of operations in 1998
compared to seven months in 1997. Operating expenses as a percentage of revenues
decreased from 162% in 1997 to 32% in 1998, primarily as a result of spreading
the cost of existing personnel over a growing subscriber base.
RESULTS OF OPERATIONS -- ECSIS.NET, LLC
ECSIS.Net, LLC was incorporated in January 1997. Prior to incorporation,
ECSIS.Net operated as a division of ECS, LLC. and commenced operations in
December 1995. ECSIS.Net, LLC's target market is the Tennessee area. The
following table shows historical data (in thousands, except number of
subscribers data) and those data as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................... $ 77 100% $147 100% $388 100% $167 100% $299 100%
Cost of Internet services................... 68 88 104 71 192 49 119 71 124 41
Operating expenses.......................... 84 109 136 93 169 44 76 46 82 27
---- --- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations............... $(75) (97)% $(93) (64)% $ 27 7% $(28) (17)% $ 93 32%
==== === ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end....................................... 494 891 2,539 1,604 3,257
</TABLE>
ECSIS.NET, LLC SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 79% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
100
<PAGE> 104
COST OF INTERNET SERVICES
Cost of Internet services increased 4% during the six months ended June 30,
1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 71% for the six months ended June 30, 1998 to 41% for the six
months ended June 30, 1999, primarily as a result of existing excess capacity
being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 8% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 46% for the six months ended June 30, 1998
to 27% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
ECSIS.NET, LLC
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 164% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 85% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 71% in 1997 to 49% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 24% from 1997 to 1998 primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 93% in 1997 to 44% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
ECSIS.NET, LLC
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 91% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 53% from 1996 to 1997. The increase was
primarily attributable to the increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 88% in 1996 to 71% in 1997, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 62% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 109% in 1996 to 93% in 1997, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
101
<PAGE> 105
RESULTS OF OPERATIONS -- WORLD TRADE NETWORK, INC.
World Trade Network, Inc. was incorporated in May 1995. World Trade
Network, Inc.'s target market is the Texas area. The following table shows
historical data (in thousands, except number of subscribers data) and those data
as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------
1996 1997 1998 1998 1999
---------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. $356 100% $1,289 100% $2,834 100% $1,116 100% $2,081 100%
Cost of Internet services................ 107 30 401 31 811 29 386 35 712 34
Operating expenses....................... 293 82 931 72 1,923 68 666 60 1,457 70
---- --- ------ --- ------ --- ------ --- ------ ---
(Loss) income from operations............ $(44) (12)% $ (43) (3)% $ 100 3% $ 64 5% $ (88) (4)%
==== === ====== === ====== === ====== === ====== ===
Approximate total subscribers at period
end.................................... 2,501 6,509 17,143 6,751 24,963
</TABLE>
WORLD TRADE NETWORK, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 86% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 84% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 35% for the six months ended June 30, 1998 and
34% for the six months ended June 30, 1999.
OPERATING EXPENSES
Operating expenses increased 119% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 60% for the six months ended June 30, 1998
to 70% for the six month period ended June 30, 1999, primarily as a result of
increases in customer support personnel.
WORLD TRADE NETWORK, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 120% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 102% from 1997 to 1998. The increase
was primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
decreased from 31% in 1997 to 29% in 1998, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 107% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 72% in 1997 to 68% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
102
<PAGE> 106
WORLD TRADE NETWORK, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 262% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 275% from 1996 to 1997, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues remained
relatively constant at 30% in 1996 and 31% in 1997.
OPERATING EXPENSES
Operating expenses increased 218% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 82% in 1996 to 72% in 1997, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
RESULTS OF OPERATIONS -- STIC.NET, INC.
STIC.NET, Inc. was incorporated in July 1995. STIC.Net, Inc.'s target
market is the Texas area. The following table shows historical data (in
thousands, except number of subscribers data) and those data as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $475 100% $706 100% $1,196 100% $547 100% $822 100%
Cost of Internet services................. 210 44 199 28 347 29 142 26 233 28
Operating expenses........................ 294 62 504 71 976 82 445 81 586 71
---- --- ---- --- ------ --- ---- --- ---- ---
(Loss) income from operations............. $(29) (6)% $ 3 1% $ (127) (11)% $(40) (7)% $ 3 1%
==== === ==== === ====== === ==== === ==== ===
Approximate total subscribers at period
end..................................... 2,420 3,524 7,277 6,169 9,215
</TABLE>
STIC.NET, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 50% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 64% during the six months ended June
30, 1999 as compared to the six months ended June 30, 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
increased from 26% for the six months ended June 30, 1998, to 28% for the six
months ended June 30, 1999, primarily as a result of providing additional
capacity to service future subscriber growth.
OPERATING EXPENSES
Operating expenses increased 32% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 81% for the six months ended June 30, 1998
to 71% for the six months ended June 30, 1999, primarily as a result of
spreading the cost of existing personnel over a growing subscriber base.
103
<PAGE> 107
STIC.NET, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 69% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 74% from 1997 to 1998. The increase was
primarily attributable to increased costs associated with adding capacity to
service new subscribers. Cost of Internet services as a percentage of revenues
remained relatively constant at 28% in 1997 and 29% in 1998.
OPERATING EXPENSES
Operating expenses increased 94% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 71% in 1997 to 82% in 1998, primarily as
result of increases in customer support personnel.
STIC.NET, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 49% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services decreased 5% from 1996 to 1997. Cost of Internet
services as a percentage of revenues decreased from 44% in 1996 to 28% in 1997,
primarily as a result of existing excess capacity being used to satisfy new
subscriber growth.
OPERATING EXPENSES
Operating expenses increased 71% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 62% in 1996 to 71% in 1997, primarily as a
result of increases in customer support personnel.
RESULTS OF OPERATIONS -- NETWEST ONLINE, INC.
NetWest Online, Inc. was incorporated in April 1996. NetWest Online, Inc.'s
target market is the southwestern Texas. The following table shows historical
data and those data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................... $ 71 100% $386 100% $773 100% $305 100% $585 100%
Cost of Internet services.................. 29 41 108 28 203 26 85 28 155 26
Operating expenses......................... 128 180 279 72 504 65 173 57 442 76
---- ---- ---- --- ---- --- ---- --- ---- ---
(Loss) income from operations.............. $(86) (121)% $ (1) --% $ 66 9% $ 47 15% $(12) (2)%
==== ==== ==== === ==== === ==== === ==== ===
Approximate total subscribers at period
end...................................... 500 1,529 3,342 2,319 4,678
</TABLE>
NETWEST ONLINE, INC. SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues increased 92% during the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 82% during the six months ended June
30, 1999 as
104
<PAGE> 108
compared to the six months ended June 30,
1998. The increase was primarily attributable to increased costs associated with
adding capacity to service new subscribers. Cost of Internet services as a
percentage of revenues decreased from 28% for the six months ended June 30, 1998
to 26% for the six months ended June 30, 1999, primarily as a result of existing
excess capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 155% during the six months ended June 30, 1999
as compared to the six months ended June 30, 1998, primarily as a result of
hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues increased from 57% for the six months ended June 30, 1998
to 76% for the six months ended June 30, 1999, primarily as a result of
increases in customer support personnel.
NETWEST ONLINE, INC.
YEARS ENDED 1998 AND 1997
REVENUES
Revenues increased 100% from 1997 to 1998. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 88% from 1997 to 1998, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 28% in 1997 to 26% in 1998, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 81% from 1997 to 1998, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 72% in 1997 to 65% in 1998, primarily as a
result of spreading the cost of existing personnel over a growing subscriber
base.
NETWEST ONLINE, INC.
YEARS ENDED 1997 AND 1996
REVENUES
Revenues increased 444% from 1996 to 1997. The increase was primarily
attributable to an increase in the number of subscribers.
COST OF INTERNET SERVICES
Cost of Internet services increased 272% from 1996 to 1997, primarily as a
result of increased costs associated with adding capacity to service new
subscribers. Cost of Internet services as a percentage of revenues decreased
from 41% in 1996 to 28% in 1997, primarily as a result of existing excess
capacity being used to satisfy new subscriber growth.
OPERATING EXPENSES
Operating expenses increased 118% from 1996 to 1997, primarily as a result
of hiring customer support and administrative personnel. Operating expenses as a
percentage of revenues decreased from 180% in 1996 to 72% in 1997, primarily as
a result of spreading the cost of existing personnel over a growing subscriber
base.
105
<PAGE> 109
BUSINESS
OVERVIEW
Upon completion of this offering, we will acquire 43 local and regional
Internet service providers, or ISPs, that we plan to integrate into a national
network. On a combined basis, our 43 ISPs had more than 274,000 subscribers as
of June 30, 1999. According to data published by Jupiter Communications, this
would make us one of the twenty largest ISPs in the United States. In addition,
our combined network will provide our subscribers with local Internet access in
46 states through 2,771 points of presence, or POPs.
From June 30, 1998 to June 30, 1999, the combined subscriber base of our 43
ISPs grew more than 90% from approximately 144,227 to approximately 274,320. To
continue this growth, we intend to acquire and integrate additional high quality
local and regional ISPs. As a national ISP, we believe that we will be able to
achieve significant economies of scale and streamline our operations. We also
plan to attract new subscribers by offering a broad range of products and
services, providing high quality customer service and technical support,
building a national brand and strategically marketing our products and services
through cost effective local and regional advertising.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET
The Internet is an increasingly popular global electronic medium that
enables millions of consumers and businesses to access information, communicate
and engage in commerce. International Data Corporation, or IDC, estimates that
in the United States there were approximately 62.8 million Internet users at the
end of 1998 and that the number of users will grow at a 23% compound annual
growth rate to more than 177.0 million by the end of 2003. IDC also estimates
that the percentage of United States households accessing the Internet increased
from 7% in 1996 to nearly 26% in 1998.
Businesses also increasingly rely on the Internet to access and provide
information and to reach customers. IDC estimates that nearly 100% of United
States companies with 100 or more employees have Internet access and 87%
maintain a Web site. In addition, according to IDC, the value of goods and
services sold over the Internet in the United States was $37.2 billion in 1998
and is expected to grow at a compound annual growth rate of more than 80% to
$707.9 billion in 2003.
GROWTH OF THE INTERNET ACCESS SERVICES MARKET
The Internet access services market is large and growing. Most Internet
users connect their computers to ISPs over telephone lines or by dedicated
access lines. The ISPs in turn provide connections to the Internet. To generate
revenues, most ISPs charge their customers for access to the Internet and for
related value-added services, such as electronic commerce, Internet fax and Web
site design. IDC estimates that Internet access service revenues in the United
States will more than triple from $10.7 billion in 1998 to $37.4 billion in
2003. According to IDC, the consumer access market totaled $4.7 billion in 1998
and the corporate access and value-added services markets each totaled nearly
$3.0 billion.
HIGHLY FRAGMENTED MARKET
The Internet access services market is highly fragmented as a result of
high demand, low barriers to entry and the need for local connections to avoid
toll or long distance charges. According to a recent estimate by Boardwatch
Data, there are approximately 6,700 ISPs in the United States. Although there
are several large national ISPs, most ISPs are small local or regional
businesses.
We believe that the ISP industry will undergo a period of rapid
consolidation, especially among local and regional ISPs. To succeed in the
increasingly competitive Internet access services market, ISPs will have to
offer their customers not only dial-up access but also attractively priced
products and services and
106
<PAGE> 110
high-speed connections to the Internet, commonly referred to as broadband
access. We believe that it is unlikely many local and regional ISPs will have
sufficient capital resources to provide these products and services. In
addition, in the face of increased competition from national ISPs and other
large enterprises, local and regional ISPs will likely need to consolidate to
realize economies of scale, greater operational efficiencies and improved access
to capital.
OUR OPPORTUNITY
As the fragmented ISP industry consolidates, we believe that local and
regional ISPs will face intense competition from national ISPs seeking to
penetrate new markets or add subscribers in their existing markets. With their
more extensive capital resources, national ISPs will be able to offer
subscribers a broader selection of attractively priced products and services.
National ISPs may also be able to take advantage of greater brand recognition
and larger marketing budgets.
Despite the competitive advantages enjoyed by national ISPs, many local and
regional ISPs have achieved rapid growth as well as high customer satisfaction
and loyalty in markets underserved by national ISPs. In addition, some local and
regional ISPs have also achieved rapid growth in direct competition with
national ISPs by providing superior customer service and technical support and
reliable Internet access.
We believe that these factors and the trend towards consolidation in the
ISP industry have created an opportunity for espernet.com to acquire and
integrate high quality local and regional ISPs into a new, national ISP that
offers a broad range of products and a superior customer experience.
OUR SOLUTION
We believe that by acquiring and integrating our 43 ISPs and additional
high quality local and regional ISPs we can:
- offer customers a broad range of products and services;
- provide superior customer service and technical support;
- achieve economies of scale;
- create a national ISP with a recognized brand name; and
- strategically market our products and services.
We believe that our solution will allow us to rapidly increase our base of
subscribers and our revenues.
OUR STRATEGY
We believe we can achieve rapid growth by acquiring additional ISPs,
attracting new subscribers and selling additional value-added products and
services. To achieve this goal, we plan to implement the following growth
strategy:
SELECTIVELY ACQUIRE AND INTEGRATE ISPS IN TARGET MARKETS
In addition to the 43 ISPs we have agreed to acquire, to continue to
increase our customer base and expand our network, we intend to selectively
acquire and then integrate additional local and regional ISPs. We will focus on
acquiring ISPs within and contiguous to the markets that we currently serve and
in other markets that we believe are underserved or offer rapid growth
opportunities. By acquiring ISPs in our existing markets and in markets
contiguous to them, we anticipate that we will be able to increase the density
of our subscriber base in these geographic regions and thereby reduce our cost
per subscriber. We believe that ISPs will continue to be attracted to, and
benefit from, the opportunity to combine with us because they will gain access
to our greater capital resources, broader product and service offerings, more
extensive network and centralized management structure.
BUILD A NATIONAL BRAND AND PURSUE LOCALLY FOCUSED MARKETING AND SALES
To expand our subscriber base and increase our growth rate, we plan to
build espernet.com into a national brand through
107
<PAGE> 111
strategic marketing. We intend to utilize focused advertising campaigns to
create a recognized brand name in all of the markets that we serve. Some of our
individual ISPs have extensive experience with local marketing programs, have
developed local sales forces and have fostered relationships with local
merchants to resell their products. We plan to leverage these local marketing
abilities and relationships to design cost effective marketing programs to
attract new subscribers.
ENHANCE SUBSCRIBERS' INTERNET EXPERIENCE
We intend to continue to attract and retain subscribers by offering a
superior Internet access service that includes:
- an easy to use CD-ROM that enables users to quickly set up their Internet
access;
- network infrastructure technology that minimizes busy signals and
supports emerging Internet-based technologies such as digital subscriber
lines, or DSL, wireless, cable modems and Internet telephony;
- relationships with national merchants that make more products and
services available to our subscribers, such as our agreement with
Research in Motion Limited to provide small, wireless e-mail devices. See
"--Partnerships and Strategic Alliances;"
- local, customizable content such as weather, events, news and sports
information through strategic relationships, such as our agreement with
LookSmart, Ltd. See "--Partnerships and Strategic Alliances;" and
- knowledgeable and attentive customer service and technical support
available 24 hours per day, seven days per week.
PROVIDE NEW PRODUCTS AND SERVICES TO MEET CUSTOMER DEMAND
We intend to offer a suite of products uniformly throughout our network and
introduce new value-added products and services, such as broadband access, Web
site domain name registration and electronic commerce applications. By offering
a broad range of products and services, we believe that we can attract and
retain customers, sell additional products and services to each subscriber and
increase our revenues.
LEVERAGE OUR SUBSCRIBER BASE TO INCREASE REVENUES
We believe that we can also increase our revenues by charging advertisers,
Internet portals, content providers, online merchants and other enterprises for
preferred access to our subscriber base. In this way, we plan to leverage our
subscriber base to increase revenues.
ACHIEVE OPERATIONAL LEVERAGE
As a national ISP, we expect to be able to achieve economies of scale that
will increase the efficiency of our operations. We plan to streamline our
operations by eliminating redundant network equipment and consolidating network
operations, customer service and technical support and back office functions. In
addition, we anticipate that we will be able to negotiate more favorable
contracts with third party providers by leveraging our combined purchasing
power. For example, we believe that we can negotiate more favorable rates for
telecommunications services, the costs of which have been nearly half of our pro
forma combined revenues from 1996 through 1998. We also believe that our size
will enable us to enter into strategic relationships with companies that might
not be interested in contracting with small local and regional ISPs.
ACQUISITIONS
As part of our growth strategy, we intend to continue to selectively
acquire ISPs. Since April 1999, we have entered into agreements to acquire 43
ISPs. To locate these 43 ISPs, we approached and screened more than 200 ISPs and
made our selections based on the following:
- geographic location in regions with significant growth potential;
108
<PAGE> 112
- revenue growth and positive cash flow;
- number of subscribers;
- experienced management team;
- quality network infrastructure;
- superior customer support; and
- high customer retention rate.
We will continue to focus on these criteria for future acquisitions. We
plan to acquire ISPs in markets that offer the opportunity to increase the
density of our subscriber base, increase the number of our subscribers or expand
our network.
We plan to implement our acquisition strategy through our corporate
development staff which currently consists of seven professionals and 16
independent representatives who we have trained to help identify acquisition
candidates. Our corporate development staff works closely with our legal counsel
and accountants throughout our multi-step acquisition process, which includes
identification of acquisition candidates, due diligence, contract negotiation
and closing. We obtain leads for acquisition candidates through our independent
representatives, suppliers, ISP owners, business brokers and participation in
industry conferences and events.
As a national ISP, we believe that we will offer local and regional ISPs an
attractive opportunity by providing them with:
- greater access to capital;
- experienced management, streamlined operations and administrative
support;
- a national brand;
- coordinated marketing;
- 24 hours per day, seven days per week customer service and technical
support;
- enhanced product and service offerings;
- better network infrastructure; and
- equity ownership in a publicly traded entity.
INTEGRATION AND OPERATION OF OUR ISPS
We believe that we can realize significant economies of scale and achieve
operational efficiencies by integrating our 43 ISPs and additional ISPs that we
acquire. Initially, our integration efforts will focus on:
- centralizing and consolidating the management structure of our company;
- using our combined purchasing power to negotiate discounts with
telecommunications service providers and equipment vendors;
- eliminating redundant network equipment and facilities; and
- consolidating and standardizing back office functions such as billing,
collections, personnel management and accounting.
At a later stage in our integration process, we intend to:
- migrate our ISPs' information systems onto a single, centralized
platform;
- consolidate customer service functions into regional operations centers;
and
- standardize product and service offerings.
At each stage in the implementation of our integration plan, we intend to
carefully consider the following:
- the economic benefits derived from any particular measure;
- the impact on the quality of our service; and
- the redundancy of the function or facility.
To effectively run and manage our company, we intend to organize into
operating groups by geographic region. Our three initial regions will be:
- the Mid-Atlantic Region consisting of three operating groups with 17
ISPs;
109
<PAGE> 113
- the Mid-West Region consisting of four operating groups with 16 ISPs; and
- the Mid-South Region consisting of two operating groups with 10 ISPs.
We believe that the collective knowledge and experience of the owners and
operators of our 43 ISPs will be one of our key assets in the integration and
operation of our company. Therefore, we have established a Council of Presidents
whose members will be key executives from our operating groups, including some
of the former owners of the 43 ISPs that we will acquire, independent industry
professionals and our senior executives. This council will advise senior
management on the execution of our integration strategy and promote best
practices within our organization.
MARKETING AND SALES
Our marketing philosophy is based on our belief that a consumer's selection
of an ISP is often strongly influenced by a personal referral. Accordingly, we
believe that one of our most effective marketing strategies in building a
recognized brand name is to maintain a high level of satisfaction among our
existing subscribers by providing them with a superior Internet experience.
In the past, personal referrals have generated a significant number of new
accounts for our ISPs and we anticipate that personal referrals will continue to
drive growth. Most of our ISPs have referral programs that reward customers who
refer new subscribers. We intend to capitalize on the success of these programs
by launching a unified subscriber referral program throughout our network.
We also believe that by maintaining strong community ties, particularly in
small and medium-sized markets, we can continue to attract and retain
subscribers. For example, some of our ISPs sponsor local sports teams and
community events. We plan to continue these sponsorships because they have
proven to be a cost effective way of generating new subscribers. As part of this
approach, we employ a staff of more than 70 full-time marketing and sales
professionals with strong knowledge of their local markets.
In addition, our ISPs use a mix of local radio, television, newspaper and
billboard advertising in the markets that they serve. The mix of advertising
depends on the level of success that our ISPs have achieved with each medium in
any given market. Because we believe that this approach is cost effective, we
plan to continue to use a mix of advertising mediums in each of the markets that
we serve. At the same time, we plan to develop a unified national marketing
campaign that can be tailored to local market needs.
We also plan to market our services through strategic relationships with
value-added resellers, or VARs. These relationships have historically been, and
we expect that they will continue to be, a significant source of new customers.
These VARs include computer dealers, trade associations, unions, Web development
companies, local area network administrators and retail stores that represent
and promote us on a commission basis.
Our Web site (www.espernet.com) will provide Internet users with the
opportunity to learn about us and purchase our products and services. Upon
viewing information about our services, potential customers will be able to
either subscribe online or contact a customer support representative for
enrollment. Customers who subscribe online or through our toll-free number have
their accounts created almost instantly and are thus able to use their accounts
within minutes of activation. We will maintain listings in various ISP
information and referral databases that will direct potential customers to our
registration site.
PRODUCTS AND SERVICES
We offer dial-up Internet access and value-added products and services
tailored to meet the needs of our residential and business customers. Although
not all of our ISPs currently provide the same mix of products and services, our
goal is to offer uniform products and services throughout our network. The
110
<PAGE> 114
following products and services will be offered to all our subscribers:
DIAL-UP ACCESS
Dial-up services provide our subscribers with reliable Internet access
through standard dial-up modems. Dial-up Internet access service is currently
offered by all of our ISPs. The service typically includes:
- local access and 1-800 telephone numbers;
- customer support;
- storage for personal Web sites;
- e-mail accounts; and
- Internet chat and news groups.
WEB HOSTING
Web hosting service consists of the operation of a customer's Web site and
related software on our servers. This service includes state-of-the-art Web
servers, high speed connections to the Internet at our network operations
centers, customer domain name registration and Web site traffic reporting
services. Most of our ISPs currently offer this service.
E-COMMERCE APPLICATIONS
E-commerce applications provide business customers with the ability to sell
merchandise over the Internet. These applications include reporting and payment
processing capabilities, electronic catalogs, extra e-mail accounts, additional
Web space and secure payment mechanisms. E-commerce products are currently
offered by some of our ISPs. By integrating proven off-the-shelf software and
hardware, we will help facilitate Internet commerce for individuals and
organizations.
DIGITAL SUBSCRIBER LINES
Through various reseller arrangements with competitive local exchange
carriers and regional Bell operating companies, some of our ISPs offer
high-speed Internet access to customers in select areas through traditional
telephone lines using DSL technology.
DEDICATED ACCESS
Many of our ISPs offer business and residential subscribers continuous
connections, or dedicated Internet access, using traditional telecommunications
lines.
SERVER CO-LOCATION
For customers who prefer to own and have physical access to their servers,
but require the reliability, security and performance of our facilities, some of
our ISPs house, or co-locate, customers' equipment at our network operating
centers. These ISPs also provide a direct, high-speed connection to the
Internet.
CABLE MODEMS
In partnerships with local cable operators, we plan to offer broadband
Internet access through modems integrated with cable television systems.
VIRTUAL PRIVATE NETWORK SERVICE
Some of our ISPs offer virtual private networks, also known as VPNs, to our
business subscribers. By encrypting and segregating the Internet traffic
transmitted by a subscriber, VPNs offer some assurance that these transmissions
will securely travel over the Internet.
EMERGING INTERNET TECHNOLOGIES
We intend to offer additional products and services based on emerging
technologies as those services become available at commercially affordable
prices. Some of these services include Internet call manager, Internet
telephony, Internet voice mail and video on demand.
The majority of our customers have month-to-month subscriptions, although
many of our ISPs offer longer term subscriptions, often at discounts from the
monthly rate. Customers can subscribe to our services by mail, over the
telephone, in person at the offices of one of our ISPs or by enrolling
111
<PAGE> 115
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.
Some of our ISPs offer unlimited use pricing, while others offer tiered
pricing plans. As part of our integration efforts, we intend to offer common
nationwide pricing plans as soon as practical. Each of our ISPs provides its
subscribers with a CD-ROM that includes Web browsers such as 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 offer one
nationally branded CD-ROM as soon as practical.
SUBSCRIBERS
As of June 30, 1999, our 43 ISPs had more than 274,000 subscribers. The
majority of our subscribers are residential customers. A small portion of our
subscribers are small and medium-sized businesses. Our subscribers also include
schools as well as community and civic entities. We believe that the planned
expansion of our marketing and sales activities and the expanded market coverage
provided by third-party owned POPs from which we purchase access, known as
virtual POPs, greatly expands the regions in which we are able to offer service
and significantly enhances our potential customer base to nearly the entire
continental United States.
As we continue to expand and improve our network, we expect that the
revenues generated by businesses and other non-residential customers will
increase as a percentage of our total revenues. We intend to grow our business
services subscriber base by utilizing our sales force and targeting small and
medium-sized businesses nationwide.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
We believe that customer service and technical support have been, and will
continue to be, critical to our success. Accordingly, we plan to provide all of
our customer service and technical support internally so we can ensure that our
subscribers receive superior customer care.
Although our 43 ISPs currently provide customer service and technical
support through their own organizations, we intend to consolidate these
functions on a regional basis to maintain the quality of the service provided
and to reduce costs by eliminating redundancies. To ensure superior customer
service, we also plan to increase the availability of support to a 24 hours per
day, seven days per week basis and draw on the best practices and experience of
each of our ISPs' customer service centers.
Our plans to integrate our customer service and technical support functions
are designed to enable our regional operations centers to handle customer
service and technical support requests from subscribers within the region served
by that center. This capability will allow us to more efficiently handle
customer requests, thereby maintaining high service levels while controlling
costs. We intend to implement regular training programs for our customer service
staff and equip these centers with technologies to help manage customer calls
more effectively. We will also focus on high quality, low cost ways of providing
customers with online support.
COMPETITION
The Internet access services market is extremely competitive and highly
fragmented. We face competition from numerous types of providers, and we
anticipate that this competition will intensify in the future. 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 intense
competition and pressure to reduce prices. We currently compete, or expect to
compete, with the following types of companies:
- other national, regional and local ISPs;
- long-distance and local telecommunications companies;
- cable television companies;
112
<PAGE> 116
- direct broadcast satellite companies; and
- wireless communications providers.
We believe that ISPs compete primarily on the basis of:
- quality of service;
- ease of use;
- speed of access;
- availability of local access numbers and scope of geographic coverage;
- range of products and services offered; and
- brand awareness.
Our ISPs have competed successfully in their local and regional markets. We
believe that our greater financial management and technical resources will
enable us to build on their success.
NETWORK INFRASTRUCTURE AND TECHNOLOGY
Upon completion of this offering, our network will consist of 43 individual
networks that provide local access in 46 states. Our combined network will
consist of 1,141 company owned POPs and 1,630 virtual POPs. Our POPs will
generally be connected to one or more central network hubs linked to the
Internet by high speed dedicated circuits. We intend to establish a centralized
national network operations center and one or more backup centers. The network
operations center will perform network monitoring and will track problems and
incidents relating to network outages, repairs and installation.
Our ISPs accept dial-up connections over high capacity digital telephone
circuits at speeds up to 56K. Most of our ISPs have purchased these telephone
circuits from competitive local exchange carriers and regional Bell operating
companies in their area. Several of our ISPs provide broadband service over DSL,
wireless or satellite technology and have developed expertise with these
technologies that we intend to use to develop a comprehensive broadband rollout
strategy.
We expect to standardize hardware and other key technology components to
leverage purchasing power and thereby reduce equipment costs and improve the
operating efficiency of our network installation, troubleshooting and
maintenance teams. We also intend to identify and eliminate redundant POPs and
to outsource the operation of POPs in markets where it is cost effective or
increases flexibility. We intend to implement a redundant wide area network that
will connect our POPs together with high speed dedicated circuits. We believe we
can then eliminate many of our Internet backbone connections. The wide area
network will also be used for our internal information technology purposes. We
intend to accomplish most of our network standardization and integration within
approximately one year, although there can be no assurance that we will be able
to do so.
PARTNERSHIPS AND STRATEGIC ALLIANCES
We believe that we can increase revenues and enhance customer loyalty by
entering into strategic relationships with third party providers of advanced
technology and value-added products and services. Therefore, we plan to pursue
strategic relationships with leading businesses that can provide our customers
with these products and services. Because of the size of our subscriber base, we
believe that we offer these enterprises an opportunity to reach a large group of
subscribers.
We have established alliances with the following organizations:
Research in Motion Limited -- Through an agreement with Research in Motion,
a supplier of wireless Internet appliances and services for the mobile data
communications market, we intend to offer our subscribers state-of-the-art
wireless technology to send and receive e-mail remotely with a handheld device.
LookSmart -- We have entered into a strategic alliance with LookSmart,
Ltd., an Internet-based news and information service, to provide content for our
Web site. LookSmart aggregates local and national content and allows users to
customize the information to fit their tastes. We believe that providing
informa-
113
<PAGE> 117
tion relevant to the local market such as news, advertising, bulletin boards,
stock quotes, sports scores, and movie and entertainment guides will help
solidify our status as a preferred local provider of Internet services.
INTELLECTUAL PROPERTY
We have filed a registration application with the United States Patent and
Trademark Office for our trade name "espernet.com" and for our stylized "e"
logo. In addition, we will acquire the trademarks, service marks and logos of
our ISPs. We use "off-the-shelf" software and hardware readily available from a
number of vendors to operate our ISPs.
At this time, we do not believe that the operation or success of our
business is dependent upon proprietary information or technology. Instead, we
believe that our success depends upon our ability to use readily available
technology to provide a level and quality of service and support not available
from other providers.
We may develop proprietary software or other intellectual property that we
will use in the operation of our business. If we do, we will take steps
appropriate to protect our interests in such software or other intellectual
property, including registering our copyrights, seeking confidentiality
agreements with employees and vendors and taking other measures that we deem
appropriate to protect our interests in our intellectual property. We cannot
assure you that these efforts will be successful.
PERSONNEL
As of August 31, 1999, on a pro forma basis, we employed approximately 370
individuals full time and 188 individuals part time. Our employees included 76
marketing and sales personnel, 218 subscriber and technical support
representatives, 91 network operations personnel, 127 administrative personnel
and 46 Web site development and design personnel. None of these employees is
represented by a labor union. Neither we nor any of our ISPs is a party to any
collective bargaining agreement.
GOVERNMENT REGULATION
We provide Internet access, in part, through transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. As an ISP, we are not
currently directly regulated by the Federal Communications Commission, or FCC,
nor by any other agency, other than through regulations applicable to businesses
generally. We could, however, become subject in the future to regulation by the
FCC 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 the charges that we pay or for other services.
Currently, we, like other ISPs, 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 information service
providers, including ISPs, should not be required to pay carrier access charges.
In an April 1998 report to Congress, the FCC suggested that ISPs providing
phone-to-phone Internet telephony services may ultimately be required to pay
access charges. In addition, in a February 1999 order regarding compensation
between carriers for dial-up Internet traffic, the FCC characterized Internet
traffic as largely interstate, rather than local, in nature. However, in that
February 1999 order, the FCC preserved the rule that exempted ISPs and other
information service providers from access charges.
To the extent that an end user's call to an ISP 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
114
<PAGE> 118
compensation is an obligation arising under federal law for local telephone
companies to compensate each other for terminating calls originating on
another's network. With competitive wireline telephone companies, a carrier
terminating a call that originated on another carrier's network is entitled to
compensation for that service from the originating carrier.
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 ISP is interstate in
nature rather than local. Although the FCC also found that presently local
companies remain bound by their existing compensation agreements, the
determination that most Internet traffic is interstate in nature could
potentially eliminate the payment of reciprocal compensation to the local
telephone company, which ultimately may affect our costs.
The FCC is considering comments on proposals to govern carrier-to-carrier
compensation for handling Internet traffic. 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 ISPs should not be required to contribute
to the universal service fund, a fund that is intended to replace current local
rate subsidies and to meet other public policy objectives, such as ensuring that
enhanced communications systems are made available to schools, libraries and
health care providers. As a result, unlike telecommunications carriers and other
telecommunications providers, ISPs 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 ISPs, 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.
The law relating to the liability of ISPs 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, we cannot assure you 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
115
<PAGE> 119
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.
PROPERTIES
Our ISPs lease space in their markets for their POPs and also for their
offices. Our leases cover in the aggregate approximately 80,000 square feet. 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, is material. We will
acquire one parcel of real property in Ypsilanti, Michigan in connection with
the acquisition of our ISPs. 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. We currently operate our national headquarters in leased
premises at 383 West 12th Street, New York, New York. We are currently seeking
office space in New York City in which to establish our permanent headquarters.
LEGAL PROCEEDINGS
We are not a party to, or the subject of, any material pending legal
proceeding. Several of our ISPs are subject to litigation involving commercial
disputes relating to the operation of their companies; however, we do not
believe that any of these proceedings will have a material adverse effect on our
business or results of operations.
116
<PAGE> 120
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>
Chinh E. Chu(3)........................... 32 Founder and Chairman of the Board of Directors
Martin D. Prazak(1)....................... 34 President, Chief Executive Officer, Director, and
Member of the Council of Presidents
Ihsan M. Essaid........................... 32 Treasurer, Chief Financial Officer, Director, and
Member of the Council of Presidents
Paul J. Hart(1)(2)........................ 49 Founder, Executive Vice President, Secretary and
Director
Janet M. Rogers........................... 38 Chief Technology Officer and Member of the Council of
Presidents
Steven F. DeMar........................... 45 Vice President -- Mid-West Region, Vice President --
Marketing and Sales, Member of the Council of
Presidents and Director Nominee
Keith W. Abell(1)(2)(3)................... 42 Founder and Director Nominee
Kevin J. Bennis(2)........................ 46 Director Nominee
Bruno Ducharme............................ 41 Director Nominee
William R. Fields......................... 50 Director Nominee
Gary R. Martino(3)........................ 39 Director Nominee
</TABLE>
- -------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
CHINH E. CHU co-founded Espernet.com of New York, Inc. in April 1999 and
espernet.com in June 1999. He was elected as a Director of espernet.com in June
1999 and as Chairman of the Board of Directors in September 1999. Mr. Chu is a
Managing Director of The Blackstone Group L.P. which he joined in 1990. From
1988 to 1990, Mr. Chu was a member of the Mergers and Acquisitions Group of
Salomon Brothers Inc. He currently serves on the boards of directors of Graham
Packaging Company, Prime Succession, Inc., Rose Hills, Inc. and Haynes
International, Inc.
MARTIN D. PRAZAK joined espernet.com as President and Chief Executive
Officer in August 1999 and was elected as a Director and was appointed to our
Council of Presidents in September 1999. From 1989 to 1999, Mr. Prazak held
positions in human resources, finance and marketing with GTE Corporation, most
recently leading marketing and product management for online services at GTE
Internetworking's consumer ISP division.
IHSAN M. ESSAID joined espernet.com as Chief Financial Officer and
Treasurer, was elected as a Director and was appointed to our Council of
Presidents in September 1999. From 1998 to 1999, Mr. Essaid served as Vice
President of Corporate Finance and Mergers and Acquisitions at Holberg
Industries, Inc., a privately held industrial company. From 1994 to 1998, Mr.
Essaid served as an investment banker with Donaldson, Lufkin & Jenrette
Securities Corporation, most recently as a Vice President in the Satellite
Finance Group.
PAUL J. HART co-founded Espernet.com of New York, Inc. in April 1999 and
espernet.com in June 1999. He was appointed as Executive Vice President and was
elected as a Director in
117
<PAGE> 121
September 1999. From 1996 to 1998, Mr. Hart served as Corporate Counsel to
Loewen Group International, Inc. From 1993 to 1996, Mr. Hart was engaged in the
private practice of law as a sole practitioner. From 1990 to 1993, Mr. Hart
served as Vice President and General Counsel of Atlantic Container Line, A.B.
From 1981 to 1990, Mr. Hart served as an attorney with RJR Nabisco, Inc., most
recently as Vice President--Law and Secretary of RJR Nabisco Investments, Inc.
from 1989 to 1990.
JANET M. ROGERS joined espernet.com as Chief Technology Officer and was
appointed to our Council of Presidents in September 1999. In 1995, Ms. Rogers
co-founded InfoRamp, Inc., one of our acquired ISPs, and has served as Chief
Technical Officer since its inception. From 1991 to 1995, Ms. Rogers was an
independent Unix systems and networking consultant.
STEVEN F. DEMAR joined espernet.com as Vice President--Midwest Region and
Vice President--Sales and Marketing in September 1999. He was appointed to our
Council of Presidents and was elected as a Director in September 1999. In 1995,
Mr. DeMar co-founded InfoRamp, Inc., one of our acquired ISPs, and has served as
President and Chief Executive Officer since its inception. From 1990 to the
present, Mr. DeMar has also served as President and Chief Executive Officer of
Cellular Dynamics, Inc.
KEITH W. ABELL Co-founded Espernet.com of New York, Inc. and espernet.com
in June 1999. He was nominated as a Director in September 1999. Mr. Abell is a
Senior Managing Director of GSCP, Inc., which manages the Greenwich Street
Capital Partners group of private equity funds and which he joined at its
inception in 1994. From 1990 to 1994, Mr. Abell served as a Managing Director of
the Blackstone Group L.P. From 1986 to 1990, Mr. Abell served as an investment
banker with Goldman, Sachs & Co, most recently as a Vice President. He currently
serves as Chairman of the Board of Worth Media and on the board of directors of
Telex Communications, Inc.
KEVIN J. BENNIS was nominated as a Director in September 1999. Mr. Bennis
was recently appointed Executive Vice President and Chief Operating Officer of
Call-Net Enterprises, a publicly owned, Canadian telecommunications company. Mr.
Bennis was also recently appointed as President and Chief Executive Officer for
the United States Operations of Call-Net, a related entity. From 1998 to 1999,
Mr. Bennis served as President and Executive Vice President of Communication
Services of Pathnet, a long haul bandwidth provider. From 1996 to 1998, Mr.
Bennis served as President of Frontier Communications, an integrated services
provider. From 1975 to 1996, Mr. Bennis served in various positions at MCI,
including as President of its Integrated Client Services Division from 1995 to
1996, as President and Chief Operating Officer of Aventel, its joint venture
with Banamex in Mexico, from 1994 to 1995, and as Senior Vice President of
Business Marketing from 1992 to 1994.
BRUNO DUCHARME was nominated as a Director in September 1999. Since 1994,
Mr. Ducharme has served as President and Chief Executive Officer of Telesystem
International Wireless Inc., a global mobile communications operator, and is
currently its Chairman. Since 1990, Mr. Ducharme has also served as Executive
Vice-President of Telesystem Ltd., a related entity. He also serves on the
boards of directors of Teleglobe Inc., MDSI Mobile Data Solutions Inc.,
Cognicase Inc., Telemig Celular Participacoes SA, and TeleNorte Celular
Participacoes SA.
WILLIAM R. FIELDS was nominated as a Director in September 1999. Since
1997, Mr. Fields has served as President and Chief Executive Officer of Hudson's
Bay Company, one of Canada's largest retail store chains. From 1996 to 1997, Mr.
Fields served as Chairman and Chief Executive Officer of Blockbuster
Entertainment Group. From 1971 to 1996, Mr. Fields served in various positions
at Wal-Mart Inc., most recently as President and Chief Executive Officer of
Wal-Mart Stores Division from 1995 to 1996. Mr. Fields currently serves on the
boards of directors of Lexmark International, Inc., and of iHomeDecor, Inc., a
home decorating e-commerce Web portal.
GARY R. MARTINO was nominated as a Director in September 1999. Mr. Martino
has served as Chairman of the Board of Information Management Associates, Inc.,
a customer interaction software company, since its inception in 1990 and was
Chief Financial Officer
118
<PAGE> 122
from 1990 to September 1999. Since May 1999, Mr. Martino has also served as
Chief Executive Officer and as a Director of buyingedge.com inc., a related
entity which conducts a reverse auction e-commerce business.
Our board of directors will consist of between three and 20 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
EXECUTIVE COMMITTEE
Our board of directors has an executive committee which exercises the
powers of the board of directors, subject to certain limitations, in the
management of the business and affairs of the company when the board of
directors is not in session. The executive committee will also act as the
nominating committee to recommend director nominees to the board of directors.
COMPENSATION COMMITTEE
Our board of directors has a compensation committee which consists solely
of non-employee directors. The compensation committee will provide a general
review of our compensation plans to ensure that they meet corporate objectives,
will administer our stock plans and will authorize and determine all other
matters relating to our compensation and benefits.
AUDIT COMMITTEE
Our board of directors has an audit committee which consists of a majority
of non-employee directors. The audit committee will recommend the hiring of
independent auditors, will review our audited financial statements, and will
meet with and consider suggestions from management and our independent
accountants concerning our financial operations.
DIRECTOR COMPENSATION
Directors who are not currently receiving compensation as officers,
employees or consultants of our company are entitled to receive a fee of
$10,000, plus reimbursement of out-of-pocket expenses, for each board meeting
attended in person. In addition, upon becoming a director, each non-employee
director will receive options to acquire up to 40,000 shares of common stock
under our 1999 Stock Option/Stock Issuance Plan. These options will vest over
three years and be exercisable at the initial offering price.
COUNCIL OF PRESIDENTS
Members of the Council of Presidents who are not currently receiving
compensation as officers, directors, employees or consultants of our company are
entitled to receive a fee of $5,000, plus reimbursement of out-of-pocket
expenses, for each Council meeting attended in person. The current members of
our Council of Presidents are James Dougherty, formerly an executive with
Prodigy Communications Corporation; Jamie Lin, currently Director of Information
Technology and Customer Care for Nextel Communications, Inc.; Larry Corsa of
Enter.Net, Inc., one of our ISPs; Charles Thomas Day of E-ZNet, Incorporated,
one of our ISPs; Steven DeMar of InfoRamp, Inc., one of our ISPs; Jack Jui of
World Trade Network, Inc., one of our ISPs; John Keown of NuNet, Inc., one of
our ISPs; Dr. Steven Reichenbach of Internet Nebraska Corporation, one of our
ISPs; Martin Prazak, our Chief Executive Officer; Ihsan Essaid, our Chief
Financial Officer; Janet Rogers, Chief Technical Officer; and Roger Aguinaldo,
one of our consultants.
EXECUTIVE COMPENSATION
We were founded in June 1999 and have not yet had any significant
operations. The following table summarizes the accrued compensation payable or
paid to our President and Chief Executive Officer and each of our four most
highly compensated executive officers other than the President and Chief
Executive Officer at closing of this offering.
119
<PAGE> 123
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
NAME AND PRINCIPAL POSITION COMPENSATION
- --------------------------- ------------
SALARY(1)
<S> <C>
Martin D. Prazak............................................ $200,000
President and
Chief Executive Officer
Ihsan M. Essaid............................................. $175,000
Treasurer and
Chief Financial Officer
Paul J. Hart................................................ $150,000
Executive Vice President and
Secretary
Janet M. Rogers............................................. $150,000
Chief Technology Officer
Steven F. DeMar............................................. $150,000
Vice President--Mid-West Region and
Vice President--Sales and Marketing
</TABLE>
- -------------------------
(1) Annual salary represents the annual base salary to be paid to the named
executive officers by espernet.com upon completion of this offering. Each
named executive officer is eligible for a target bonus of 100% of their
annual salary. For information regarding the compensation to be paid to our
executive officers following this offering, see "--Employment Agreements."
120
<PAGE> 124
EMPLOYMENT AGREEMENTS
We have entered into Employment Agreements with the following executive
officers: Martin Prazak, Ihsan Essaid, Paul Hart, Janet Rogers and Steven DeMar.
Each agreement has an initial term of three years and will be automatically
extended for additional one year terms unless we or the employee elect to
terminate the agreement within six months of the end of the initial term or any
subsequent term (except for Mr. DeMar's agreement which has no provision for
extension).
Under these agreements, each employee will receive an initial annual base
salary, subject to increase at the discretion of our board of directors, and an
annual bonus based upon performance targets established by the board of
directors. In addition, upon the closing of this offering, Mr. Prazak and Mr.
Essaid will each receive a bonus of $200,000, Mr. Hart will receive a bonus of
$400,000 and Ms. Rogers will receive a bonus of $75,000. Under these agreements
each employee also will receive options to acquire shares of common stock, at
the offering price, which will vest in three equal annual installments on the
first, second and third anniversaries of the closing of this offering. See
"-- Stock Option Information."
If, during the term 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 payment of base salary to the date
of termination, accrued performance bonus, if any, to the date of termination,
and all employee benefits from the date of termination to the date which is the
later (or, for Mr. DeMar, the earlier) of one year from the date of termination
or the end of the term of the agreement.
Under these agreements, each employee has agreed to preserve the
confidentiality and the proprietary nature of all information relating to
espernet.com, our ISPs and our business during the term of the agreement and
thereafter. In addition, each employee has agreed to non-competition and
non-solicitation provisions that will be in effect during the term of employment
and for one year (or, for Mr. DeMar, for two years) after termination of
employment.
STOCK OPTION INFORMATION
The following table contains information concerning stock options to be
granted to the officers named in the Summary Compensation Table on the closing
date of this offering. No stock appreciation rights were granted to these
individuals. Each of the options listed in the following table will vest in
three equal annual installments on the first, second, and third anniversaries of
the date of grant. Upon a termination of the optionee's employment without cause
or a change in control of the company, any unvested shares will become fully
vested. Each option will have a maximum term of ten years, subject to earlier
termination in the event of the optionee's cessation of employment with us.
121
<PAGE> 125
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE THE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR(1) SHARE(2) DATE 5% 10%
- ---- ----------- -------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Martin D. Prazak....................... 150,000(4) % $ 12/31/09 $ $
Ihsan M. Essaid........................ 125,000(4) % $ 12/31/09 $ $
Paul J. Hart........................... 125,000(4) % $ 12/31/09 $ $
Janet M. Rogers........................ 150,000(4) % $ 12/31/09 $ $
Steven F. DeMar........................ 150,000(4) % $ 12/31/09 $ $
</TABLE>
- -------------------------
(1) The total number of shares of our common stock issuable pursuant to options
granted to employees since our inception is 1,657,500. The grant date for
these options is the date of the closing of this offering.
(2) The exercise price per share of the options is equal to the offering price
of the common stock in this offering.
(3) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option term. These gains are based on assumed
rates of stock price appreciation of 5% and 10%, respectively, compounded
annually from the date the options were granted to the expiration date of
the options, based upon the price per share of the common stock on the date
of the closing of this offering of $ per share. These assumptions are
not intended to forecast future appreciation of our stock price. The
potential realizable value computation does not take into account federal or
state income tax consequences of option exercises or sales of appreciated
stock.
(4) The options will vest in three equal annual increments of 33 1/3% on each of
the first, second, and third anniversaries of the grant date.
THE 1999 STOCK OPTION/
STOCK ISSUANCE PLAN
GENERAL
Our 1999 Stock Option/Stock Issuance Plan, or our Plan, is intended to
promote the interests of espernet.com and our stockholders by providing our
officers and other employees, non-employee directors, consultants and
independent advisors, and those of our subsidiaries, with the opportunity to
acquire a proprietary interest, and to increase this proprietary interest, in
the long-term success of espernet.com. We intend for this proprietary interest
to be an incentive for Plan participants to remain in our service, and the
service of our subsidiaries, and to align their interests more closely with the
interests of our stockholders.
Our Plan provides for the grant of incentive stock options, or ISOs,
non-statutory stock options, or NSOs, and the issuance of shares of our common
stock. A total of 4,000,000 shares of our common stock have been reserved for
issuance under our Plan.
ADMINISTRATION
Our Plan will be administered by our board of directors, although our board
will be able to delegate any or all of its administrative functions to our
Compensation Committee. The board or this Committee, acting as Plan
Administrator, will have full authority to determine which eligible persons will
receive grants under our Plan, the timing of grants, the number of shares
subject to grants, any applicable vesting requirements, the term of any options
granted, and the amount of consideration, if any, to be paid by the participant.
Decisions of the Plan Administrator regarding the interpretation and
administration of our Plan will be binding on all persons having an interest in
our Plan or in any options or stock issued under our Plan.
122
<PAGE> 126
ELIGIBILITY
The class of persons eligible to participate in our Plan will be all
officers and other employees, non-employee directors, consultants and
independent advisors of espernet.com and our subsidiaries. Subject to the
limitations described above, the Plan Administrator will have full authority to
include in our Plan all persons whose participation the Plan Administrator
determines to be in our company's best interest.
STOCK OPTIONS
Options granted under our Plan may be ISOs or NSOs. However, only employees
of espernet.com or our subsidiaries may receive ISOs.
Options granted under our Plan may be for the purchase of immediately fully
vested shares or, instead, for shares which are subject to vesting requirements
established by the Plan Administrator. Options may be granted based on the
participant's period of service with us or our subsidiaries or on the
participant's attainment of specified performance objectives.
The purchase price under each option will be established by the Plan
Administrator, but in no event may the option price of an ISO be less than 100%
of the fair market value of our common stock on the date of grant. The purchase
price for any option granted under our Plan must be paid in full at the time of
exercise. The exercise price and any federal, state or local taxes that are
required to be withheld by the Company may be paid in cash or by check. If our
common stock is then publicly traded, the price and applicable taxes may also be
paid by the surrender of shares of common stock owned by the optionee having a
fair market value on the exercise date equal to the option price, or by a
cashless exercise utilizing the services of a designated brokerage firm.
Options granted under our Plan will not be exercisable more than ten years
from the date of grant. The Plan Administrator may provide, however, that a
particular option will terminate in a shorter period of time.
Each option will be exercisable only by the participant during his or her
lifetime and will be transferable only by will or by the laws of descent and
distribution; except that NSOs may, to the extent provided in a participant's
individual stock option agreement, be transferable by gift to any member of that
participant's immediate family or to a trust for the benefit of that
participant's immediate family members and, if so transferred, may be
exercisable only by that transferee.
STOCK ISSUANCES
Our Plan will provide for the issuance of shares of our common stock to
participants at no cost, in recognition of their past services to us or to our
subsidiaries, or for a purchase price determined by the Plan Administrator. This
price may be less than, equal to or more than the fair market value of our
common stock on the issuance date. The purchase price, if any, will be payable,
as determined by the Plan Administrator, in cash, by check or by a valid
promissory note.
Stock issued under our Plan may be immediately fully vested or subject to
vesting requirements established by the Plan Administrator. Stock may be issued
based on the participant's period of service with our company, including our
subsidiaries, or on the participant's attainment of specified performance
objectives. Any shares issued to a participant will entitle that participant to
full shareholder rights, whether or not the shares are then vested.
RIGHT OF FIRST REFUSAL
Until our common stock is publicly traded, we will have a right of first
refusal with respect to all shares issued under our Plan, whether by outright
issuance or exercise of an option.
AMENDMENT AND TERMINATION
Our board of directors will have the authority to amend our Plan provided
that no amendment may adversely affect the rights and obligations with respect
to outstanding unvested stock issued, or options granted, under our Plan without
the holder's consent.
Our Plan will terminate on the earlier of ten years from the date of its
adoption, the date when all shares reserved under our Plan have been issued, or
the date when all outstanding options terminate in connection with a change in
control of the company.
123
<PAGE> 127
TRANSACTIONS WITH RELATED PARTIES
Espernet.com of New York, Inc. ("Espernet.com NY") was formed in New York
on April 16, 1999. Espernet.com NY issued shares of its common stock to
investors, including some of our executive officers and directors, in a series
of transactions from April 29, 1999 until September 3, 1999.
Our company was formed in Delaware on June 7, 1999. We issued one share of
common stock to Mr. Chinh E. Chu. This is the only outstanding share of our
stock.
We entered into an administrative services agreement with Espernet.com NY,
dated June 8, 1999, in which Espernet.com NY agrees to provide administrative
and financial services to our company through our initial public offering in
consideration for a fee equal to the cost of these services.
We also entered into a stock exchange agreement with Espernet.com NY and
its stockholders, dated September 21, 1999, in which we agreed to acquire 100%
of the outstanding shares of Espernet.com NY in exchange for shares of our
common stock. Under this agreement, Espernet.com NY's stockholders will receive
shares of our common stock in proportion to their share ownership in
Espernet.com NY. The amount of our common stock payable to the stockholders of
Espernet.com NY in this exchange will be equal to the total value of our company
based on the initial public offering price less (a) the total value of shares of
our common stock issued to public investors and (b) the total value of the
shares of our common stock issued to the sellers of the 43 ISPs that we are
acquiring.
This valuation formula was established by agreement among us, Espernet.com
NY and the stockholders of Espernet.com NY. Chinh Chu is our sole stockholder
and, along with Paul Hart, exercises effective control of Espernet.com NY.
Certain information with respect to the interests in the above transactions
of persons who are directors or executive officers of our company is set forth
below:
- Chinh E. Chu co-founded and organized Espernet.com NY in April 1999 and
espernet.com in June 1999. Mr. Chu paid $270,000 in cash for 1,728,000
shares of common stock of Espernet.com NY, after taking into account a
stock dividend of 1,600 shares of common stock per share of Espernet.com
NY given to each stockholder. Espernet.com NY also issued 577,600 shares
of common stock to Mr. Chu in consideration for services rendered which
were valued at $90,250. Upon the closing of this offering, Mr. Chu will
receive shares of our common stock in exchange for his
2,305,600 shares of Espernet.com NY common stock. In addition, upon the
closing of this offering, Mr. Chu will receive options to purchase up to
150,000 shares of our common stock at the public offering price in
consideration of his services to Espernet.com NY and to us.
- Paul J. Hart co-founded and organized Espernet.com NY in April 1999 and
espernet.com in June 1999. Espernet.com NY issued 694,848 shares (after
taking into account the dividend described above) of common stock to Mr.
Hart in consideration for services rendered which were valued at
$108,570. Upon the closing of this offering, Mr. Hart will receive
shares of our common stock in exchange for his 694,848 shares
of Espernet.com NY common stock. In addition, upon the closing of this
offering, Mr. Hart will receive a $400,000 bonus and options to purchase
up to 125,000 shares of our common stock at the public offering price in
consideration of his services to Espernet.com NY and to us. We have also
entered into an employment agreement with Mr. Hart providing for an
annual salary of $150,000 for the next three years and a target bonus of
100% of his annual
124
<PAGE> 128
salary. See "Management--Employment Agreements."
- Martin D. Prazak joined espernet.com in August 1999. Espernet.com NY
issued 159,008 shares (after taking into account the dividend described
above) of common stock to Mr. Prazak in consideration for services to be
rendered which were valued at $24,845. Upon the closing of this offering,
Mr. Prazak will receive shares of our common stock in exchange for
his 159,008 shares of Espernet.com NY common stock. In addition, upon the
closing of this offering, Mr. Prazak will receive $100,000 in deferred
compensation, a $200,000 bonus and options to purchase up to 150,000
shares of our common stock at the public offering price in consideration
of his services to Espernet.com NY and to us. We have also entered into
an employment agreement with Mr. Prazak providing for an annual salary of
$200,000 for the next three years and a target bonus of 100% of his
annual salary. See "Management--Employment Agreements."
- Ihsan M. Essaid joined espernet.com in September 1999. Espernet.com NY
issued 159,008 shares (after taking into account the dividend described
above) of common stock to Mr. Essaid in consideration for services to be
rendered which were valued at $24,845. Upon the closing of this offering,
Mr. Essaid will receive shares of our common stock in exchange for
his 159,008 shares of Espernet.com NY common stock. In addition, upon the
closing of this offering, Mr. Essaid will receive a $200,000 bonus and
options to purchase up to 125,000 shares of our common stock at the
public offering price in consideration of his services to Espernet.com NY
and to us. We have also entered into an employment agreement with Mr.
Essaid providing for an annual salary of $175,000 for the next three
years and a target bonus of 100% of his annual salary. See
"Management--Employment Agreements."
- Janet M. Rogers co-founded and organized InfoRamp, Inc., one of our ISPs,
in 1995, and joined espernet.com in September 1999. Upon the closing of
our acquisition agreement with InfoRamp, Inc. Ms. Rogers will receive
$2,000,000 in cash and shares of our common stock at the public
offering price in exchange for her 600,000 shares of InfoRamp, Inc.
common stock. Upon the closing of this offering, Ms. Rogers will receive
a $75,000 bonus and options to purchase up to 150,000 shares of our
common stock at the public offering price in consideration of her
services to us. We have also entered into an employment agreement with
Ms. Rogers providing for an annual salary of $150,000 for the next three
years and a target bonus of 100% of her annual salary. See
"Management--Employment Agreements."
- Steven F. DeMar co-founded and organized InfoRamp, Inc., one of our ISPs,
in 1995, and joined espernet.com in September 1999. Mr. DeMar will
receive indirectly $5,100,000 in cash and
shares of our common stock at the public offering price in exchange for
1,530,000 shares of InfoRamp, Inc. common stock beneficially owned by
him. Upon the closing of this offering, Mr. DeMar will receive options to
purchase up to 150,000 shares of our common stock at the public offering
price in consideration of his services to the company. We have also
entered into an employment agreement with Mr. DeMar providing for an
annual salary of $150,000 for the next three years and a target bonus of
100% of his annual salary. See "Management--Employment Agreements."
125
<PAGE> 129
PRINCIPAL STOCKHOLDERS
The following table sets forth the number and percentage of outstanding
shares of our common stock that will be owned following this offering, assuming
no 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.
Beneficial ownership is determined in accordance with Rule 13d-3 of the
Securities Exchange Act. A person is deemed to be the beneficial owner of any
shares of common stock if such person has or shares voting power or investment
power with respect to such common stock, or has the right to acquire beneficial
ownership at any time within 60 days of the date of the table. As used herein,
"voting power" is the power to vote or direct the voting of shares. Each of the
stockholders has sole voting and investment power with respect to the shares of
common stock beneficially owned by the stockholder.
<TABLE>
<CAPTION>
SHARES OWNED
AFTER THE OFFERING
NAME AND ADDRESS OF -----------------------
BENEFICIAL OWNERS NUMBER PERCENT
- ------------------- --------- ----------
<S> <C> <C>
Chinh E. Chu................................................
Paul J. Hart................................................
Keith W. Abell..............................................
Martin D. Prazak............................................
Ihsan M. Essaid.............................................
Steven F. DeMar.............................................
Janet M. Rogers.............................................
Kevin J. Bennis.............................................
Bruno Ducharme..............................................
William R. Fields...........................................
Gary R. Martino.............................................
All Executive Officers and Directors as a Group (11
persons)..................................................
</TABLE>
- -------------------------
* Less than one percent.
126
<PAGE> 130
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $0.001 per share, and 20,000,000 shares of preferred stock, par
value $0.001 per share. As of June 30, 1999, there was one share of our common
stock outstanding, held by one holder of record. We do not have any outstanding
shares of preferred stock.
Following this offering, we will have shares of common stock
outstanding, assuming the underwriters do not exercise their over-allotment
option, or shares of common stock outstanding, assuming the
underwriters exercise their over-allotment option in full.
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock. Each
stockholder of record is entitled to one vote for each outstanding share of
common stock owned 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. After the
payment of liquidation preferences to holders of preferred stock, holders of
common stock are entitled to receive, on a pro rata basis, any remaining assets
available for distribution to stockholders in the event of our liquidation,
dissolution or winding up.
Stockholders do not have any preemptive right to become subscribers or
purchasers of additional shares of any class of our capital stock. The
outstanding share of common stock is, 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 any series of preferred stock that our board of directors
designates and issues in the future.
PREFERRED STOCK
Our certificate of incorporation allows our board of directors to issue,
without stockholder approval, preferred stock having rights senior to those of
the common stock. Our board of directors may issue preferred stock in one or
more series, may fix the rights, preferences, privileges and restrictions of any
series of preferred stock (including dividend, conversion and voting rights,
terms of redemption and liquidation preferences) and may fix the number of
shares constituting any series and the designations of these series.
Our issuance of preferred stock may delay or prevent a change in control.
The issuance of preferred stock could also decrease the amount of earnings and
assets available for distribution to the holders of common stock, could
adversely affect the rights and powers, including voting rights, of the common
stock and could have the effect of decreasing the market price of the common
stock.
Following completion of this offering, no shares of preferred stock will be
outstanding. 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 no director will 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 payment of dividends or
127
<PAGE> 131
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. The indemnification provided under our certificate of
incorporation and bylaws includes the right to be paid expenses, as authorized
by the board of directors, in advance of any proceeding for which
indemnification may be obtained, provided that the payment of 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 prepaid amounts if it is ultimately determined
that the director or officer is not entitled to indemnification.
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 or
agent of another corporation, partnership, joint venture, 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, whether or not we are required to indemnify the person
under our bylaws. We intend to purchase director and officer liability insurance
on behalf of our directors and officers.
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 them. In
addition, provisions of Delaware law may hinder or delay an attempted takeover
of our company 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, including attempts that might result in
stockholders receiving a premium over the market price for their shares of
common stock, even if some or a majority of our stockholders believe these
actions to be in their best interest.
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. In addition, vacancies and
newly created directorships resulting from increases 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. These
provisions prevent stockholders from removing incumbent directors without cause
and filling the resulting vacancies with their own nominees.
SPECIAL STOCKHOLDERS' MEETINGS
Under our bylaws, special meetings of stockholders, unless otherwise
prescribed by Delaware law, may be called only by the board of directors or by
our chairman, chief executive officer, or president.
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 "business combinations" with "interested
stockholders" for a period of three years after the date of the transaction in
which the stockholder became interested, unless the business combination is
approved in a prescribed manner. Generally, "business combinations" include
mergers, asset sales and other transactions resulting in a
128
<PAGE> 132
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within the past 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 our company 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.
129
<PAGE> 133
SHARES AVAILABLE FOR FUTURE SALE
Following this offering, we will have shares of common stock
outstanding if the underwriters do not exercise their over-allotment option, or
shares of common stock outstanding if the underwriters exercise their
over-allotment option 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. Sales of these restricted shares 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 has beneficially owned
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 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.
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 has
beneficially owned restricted shares 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.
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 additional shares under the Securities Act after this
offering, these stockholders will be entitled to receive notice of the
registration and to include their shares in the registration. However, 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 1,657,500 shares of common stock at the public offering price. 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
4,000,000 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 1,657,500 shares at the
offering price will be outstanding under our equity compensation plans.
LOCK-UP AGREEMENTS
Each of our stockholders (except investors purchasing shares in this
offering), each member of our senior management and each of our directors has
agreed, pursuant to lock-up agreements entered into with us, that during the
period beginning from the date of this prospectus and continuing and including
the date 180 days after the date of this prospectus they will not directly or
indirectly offer, pledge, sell, contract to sell, grant any option, right or
warrant to purchase, or otherwise dispose of any shares of common stock,
including but not limited to any common stock or securities convertible into or
exercisable or exchangeable
130
<PAGE> 134
for common stock which may be deemed to be beneficially owned in accordance with
the rules and regulations of the Securities and Exchange Commission or enter
into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of common stock, or make any demand for, or
exercise any right with respect to, the registration of common stock or any
securities convertible into or exercisable or exchangeable for common stock,
without the prior written consent of E*OFFERING Corp.
We have entered into stock exchange agreements with the owners of our ISPs;
with ESP Acquisition Corp., a Delaware corporation, and its stockholders (with
respect to our assumption of agreements to purchase four ISPs which ESP
Acquisition Corp. has entered into); and with the stockholders of Espernet.com
NY. Under each of these agreements, each recipient of our capital stock has
agreed that they will not, without our prior written consent, offer, sell,
pledge or otherwise dispose of any shares, or publicly announce an intention to
do so, for a period of one year following this offering. In addition, the
recipients of an aggregate of shares of our common stock under these
agreements have agreed not to sell more than 25% of their shares in any calendar
quarter following the first anniversary of the closing of this offering.
Following the one year lock-up period, shares of common stock will
become eligible for sale, subject to compliance with Rule 144 of the Securities
Act as described above.
131
<PAGE> 135
UNDERWRITING
E*OFFERING Corp., DLJdirect Inc. and WR Hambrecht & Co. are acting as
representatives of the underwriters. Subject to the terms and conditions
contained in an underwriting agreement, we have agreed to sell to each
underwriter, and each underwriter severally has agreed to purchase from us, the
number of shares set forth opposite its name below. The underwriters are
committed to purchase and pay for all of these shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
E*OFFERING Corp. ...............
DLJdirect Inc. .................
WR Hambrecht + Co...............
Total.................
=======
</TABLE>
The representatives have advised us that the underwriters propose to offer
the common stock in part to the public at the public offering price set forth on
the cover of this prospectus and in part to dealers at this price less a
concession not in excess of $ per share. The underwriters may allow,
and the dealers may reallow, a discount not in excess of $ per share to
certain other dealers. After this offering, the public offering price,
concession and discount may change. No such change shall reduce the amount of
proceeds to be received by us as set forth on the cover page of this prospectus.
We have granted to the underwriters an option, exercisable during the
30-day period after the date of this prospectus, to purchase up to
additional shares of common stock at the price set forth on the cover page of
this prospectus, less the underwriting discount. To the extent that the
underwriters exercise this option, each of the underwriters will have a firm
commitment to purchase shares from us in approximately the same proportion as
set forth in the table above. If purchased, these additional shares will be sold
by the underwriters on the same terms as those on which the shares are
being sold.
The underwriting agreement contains covenants of indemnity between the
underwriters and us against certain civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
The following table shows the per share and total underwriting discount
that we will pay to the underwriters. The amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase
additional shares of common stock.
<TABLE>
<CAPTION>
TOTAL TOTAL
WITHOUT OPTION WITH OPTION
PER SHARE EXERCISE EXERCISE
--------- -------------- -----------
<S> <C> <C> <C>
Public offering
price.............. $ $ $
Underwriting
discounts.......... $ $ $
Proceeds, before
expenses, to us.... $ $ $
</TABLE>
We expect to incur expenses of approximately $17,000,000 in connection with
this offering.
The common stock is being offered by the underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain conditions by counsel to the underwriters and certain other conditions.
The underwriters reserve the right to withdraw, cancel or modify this offer and
to reject orders in whole or in part.
Each of our senior officers and directors has agreed with E*OFFERING, for a
period of 180 days after the date of this prospectus, subject to certain
exceptions, not to sell any shares of common stock or any securities convertible
into or exchangeable for shares of common stock without the prior written
132
<PAGE> 136
consent of E*OFFERING. However, E*OFFERING may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject to
lock-up agreements. We have agreed that during the 180-day period after the date
of this prospectus we will not, subject to certain exceptions, without the prior
written consent of E*OFFERING, issue, sell, contract to sell or otherwise
dispose of any shares of common stock, any options or warrants to purchase any
shares of common stock or any securities convertible into, exercisable or
exchangeable for shares of common stock other than the sale of our shares in
this offering, the issuance of common stock upon the exercise of outstanding
options and warrants, and our issuance of options and stock under our 1999 Stock
Option/Stock Issuance Plan.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
E*OFFERING was organized in January 1999. Despite E*OFFERING's recent
inception, the officers of E*OFFERING have significant underwriting and public
offering experience.
WR Hambrecht & Co. is an investment banking firm formed as a limited
liability company in February 1998. In addition to this offering, WR Hambrecht &
Co. has engaged in the business of public and private equity investing and
financial advisory services since its inception. The chairman and chief
executive officer of WR Hambrecht & Co., William R. Hambrecht, has 40 years of
experience in the securities industry.
None of the representatives has any material relationship with us or any of
our officers, directors or controlling persons, except with respect to its
contractual relationship with us pursuant to the underwriting agreement entered
into in connection with this offering.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the 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.
133
<PAGE> 137
EXPERTS
The balance sheet of espernet.com, inc. as of June 30, 1999 has been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements of espernet.com of new york, inc. as of June 30,
1999, and for the period from April 29, 1999 (inception) to June 30, 1999 have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Cumberland Technologies International (d/b/a
PAdotNet) as of December 31, 1998 and 1997, and for each of the years in the
three-year period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Pennsylvania Online Ltd. as of December 31,
1998 and 1997, and for each of the years in the three-years in the period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Innernet, Inc. as of December 31, 1998 and
1997, and for the period from June 10, 1996 (inception) to December 31, 1996 and
for the years ended December 31, 1997 and 1998, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Delanet, Inc. as of December 31, 1998 and 1997,
and for the period from May 17, 1996 (inception) to December 31, 1996 and for
each of the years in the two-year period ended December 31, 1998, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements of Internet Access Services (A Division of Weidner
Associates Inc.) as of December 31, 1998 and 1997, and for the period from July
1996 (inception) to December 31, 1996 and for the years ended December 31, 1997
and 1998, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Southern Maryland Internet, Inc. as of December
31, 1998 and 1997, and for each of the years in the three-years period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of NuNet, Inc. as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing. The
report of KPMG LLP contains an explanatory paragraph that states that NuNet,
Inc. has suffered recurring losses from operations and has a working capital
deficiency and a net capital deficiency that raise substantial doubt
134
<PAGE> 138
about its ability to continue as a going concern. Management's plans in regard
to these matters are 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.
The financial statements of Enter.Net, Inc. as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Prometheus Information Corp. as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG LLP contains an explanatory
paragraph that states that current liabilities exceed currents assets and that
Prometheus Information Corp. has a stockholders' deficit which raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are discussed in note 9 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The financial statements of E-Znet Incorporated as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The combined financial statements of USA Choice Internet Services, Co. and
USA Choice Internet Services Clarion L.L.C. as of December 31, 1998 and 1997,
and for each of the years in the three-years period ended December 31, 1998,
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Crocker Communications Internet, a division of
Crocker Communications, Inc., as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of COL Networks, Inc. as of December 31, 1998 and
1997, and for each of the years in the three-years period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Perigee.net Corporation as of December 31, 1998
and 1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of DuplinNet Corporation as of December 31, 1998
and 1997, and for the period from May 16, 1996 (inception) to December 31, 1996
and for each of the years ended December 31, 1997 and 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of Wavenet, Inc. as of December 31, 1998 and 1997,
and for the period from April 23, 1996 (inception) to
135
<PAGE> 139
December 31, 1996 and for the years ended December 31, 1997 and 1998, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements of The 3rd Door, Inc. as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of InfoRamp, Inc as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Midwest Communications, Inc. of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG LLP contains an explanatory
paragraph which states that Midwest Communications, Inc. has suffered recurring
losses from operations and has a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are described in note 12 to the financial statements.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The financial statements of Alliance Internet Technologies, L.L.C. as of
December 31, 1998, and for the seven-month period ended December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of ComQuest Networks, Inc. as of December 31, 1998
and 1997, and for the period from August 25, 1997 (inception) to December 31,
1997 and for the year ended December 31, 1998, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Fairnet, Inc. as of December 31, 1998 and 1997,
and for the seven-month period from June 1, 1996 (inception) to December 31,
1996 and for the years ended December 31, 1997 and 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of Wisconsin Internet, Inc. as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of NConnect, Inc. as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Netwurx, Inc. as of December 31, 1998 and 1997,
and for the
136
<PAGE> 140
period from May 12, 1997 (inception) to December 31, 1997 and for the year ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Provide.Net as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of The Computer Care Company, Inc. as of December
31, 1998 and 1997, and for each of the years in the three-year period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG LLP contains an
explanatory paragraph that states that current liabilities exceed current assets
and The Computer Care Company, Inc. has a stockholders' deficit which raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are described in note 10 to the financial
statements. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The financial statements of Nethawk of Alma, Inc. as of December 31, 1998
and 1997, and for the years ended, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of The Internet Access Services Division of
Sensible Computer Solutions, Inc. as of December 31, 1998 and 1997, and for the
years then ended, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of www.internet solutions, inc. as of December 31,
1998 and 1997, and for the period from July 1, 1996 (date of inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The financial statements of Copper.net Group as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of NetPlus Communications, Inc. as of December 31,
1998 and 1997, and for the period from August 23, 1996 (date of inception) to
December 31, 1996 and for each of the years in the two-year period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Internet Nebraska Corporation as of December
31, 1998 and 1997, and for each of the years in the three-year period ended
December 31, 1998, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of RapidNet, Inc. of December 31, 1998 and 1997,
and for each of
137
<PAGE> 141
the years in the three-year period ended December 31, 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG LLP contains an explanatory paragraph that states that RapidNet,
Inc. has suffered recurring losses from operations and has a net working capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in note 1
to the financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The financial statements of CSW Net, Inc as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of IOCC.com, LLC as of December 31, 1998 and 1997,
and for each of the years in the three-years period ended December 31, 1998,
have been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Futura, Inc. as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The Statements of Assets Acquired and Liabilities Assumed of Internet
Solutions, Inc. -- ISP Business as of December 31, 1998 and 1997, and Statement
of Revenues and Expenses, Stockholder's Net Investment (deficit) and Cash Flows
for each of the years in the three-year period ended December 31, 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Black Sheep Computing, Inc. -- ISP Business as
of December 31, 1998 and 1997, and for the period October 28, 1996 (inception)
to December 31, 1996 and for the years ended December 31, 1997 and 1998, have
been included herein and in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Intensity Computer Systems, as of December 31,
1998 and 1997, and for the period from June 20, 1997 (inception) to December 31,
1997 and for the year ended December 31, 1998, have been included herein and in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of ECSIS.Net, LLC as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of World Trade Network, Inc. as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31, 1998, have been included herein and in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
138
<PAGE> 142
The financial statements of STIC.NET, Inc. as of December 31, 1998 and
1997, and for each of the years in the three-year period ended December 31,
1998, have been included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The financial statements of NetWest Online, Inc. as of December 31, 1998
and 1997, and for the period from April 26, 1996 (inception) to December 31,
1996 and for the years in the two-year period ended December 31, 1998, have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
VALIDITY OF THE SHARES
The validity of shares of common stock will be passed upon on our behalf by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., Hartford, Connecticut. Legal matters
will be passed upon for the underwriters by Gibson, Dunn & Crutcher LLP, New
York, New York.
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 a registration statement, including exhibits, schedules and
amendments, with the Securities and Exchange Commission. This prospectus is a
part of the registration statement and includes all of the information which we
believe is material to an investor considering whether to make an investment in
our common stock. We refer you to the registration statement for additional
information about espernet.com, our common stock and this offering, including
the full texts of the exhibits, some of which have been summarized in this
prospectus.
Copies of the registration statement, including exhibits, may be examined
without charge in the Securities and Exchange Commission's Public Reference Room
at 450 Fifth Street, N.W. Room 1024, Washington, D.C. 20549, and the Securities
and Exchange Commission's Regional Offices located at 500 West Madison Street,
Suite 1400, Chicago, IL 60601 and at 7 World Trade Center, 13th Floor, New York,
NY 10048 or on the Internet at http://www.sec.gov. You can get information about
the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330. Copies of all or a portion of the
registration statement can be obtained from the Public Reference Section of the
Securities and Exchange Commission upon payment of prescribed fee.
We have established a Web site at http://www.espernet.com. The information
on our Web site is not a part of this prospectus nor is the information on the
Web sites of any of our 43 ISPs.
139
<PAGE> 143
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934 and will be
required to file periodic reports, proxy statements and other information with
the Securities and Exchange Commission.
140
<PAGE> 144
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ESPERNET.COM, INC., UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial
Statements............................................. F-13
Unaudited Pro Forma Combined Balance Sheet................ F-14
Unaudited Pro Forma Combined Statement of Operations...... F-15
Notes to Unaudited Pro Forma Combined Financial
Statements............................................. F-17
ESPERNET.COM, INC.
Independent Auditors' Report.............................. F-42
Balance Sheet............................................. F-43
Notes to Financial Statements............................. F-44
ESPERNET.COM OF NEW YORK, INC.
Independent Auditors' Report.............................. F-50
Balance Sheet............................................. F-51
Statement of Operations................................... F-52
Statement of Stockholders' Equity......................... F-53
Statement of Cash Flows................................... F-54
Notes to Financial Statements............................. F-55
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
Report of KPMG LLP, Independent Auditors.................. F-58
Balance Sheets............................................ F-59
Statements of Operations and Owner's Deficit.............. F-60
Statements of Cash Flows.................................. F-61
Notes to Financial Statements............................. F-62
PENNSYLVANIA ONLINE LTD.
Report of KPMG LLP, Independent Auditors.................. F-66
Balance Sheets............................................ F-67
Statements of Operations.................................. F-68
Statements of Stockholders' Equity (Deficit).............. F-69
Statements of Cash Flows.................................. F-70
Notes to Financial Statements............................. F-71
</TABLE>
F-1
<PAGE> 145
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
INNERNET, INC.
Report of KPMG LLP, Independent Auditors.................. F-78
Balance Sheets............................................ F-79
Statements of Operations.................................. F-80
Statements of Stockholders' Equity........................ F-81
Statements of Cash Flows.................................. F-82
Notes to Financial Statements............................. F-83
DELANET, INC.
Report of KPMG LLP, Independent Auditors.................. F-89
Balance Sheets............................................ F-90
Statements of Operations.................................. F-91
Statements of Stockholders' Deficit....................... F-92
Statements of Cash Flows.................................. F-93
Notes to Financial Statements............................. F-95
INTERNET ACCESS SERVICES (A DIVISION OF WEIDNER ASSOCIATES)
Report of KPMG LLP, Independent Auditors.................. F-103
Balance Sheets............................................ F-104
Statements of Operations and Owner's Deficit.............. F-105
Statements of Cash Flows.................................. F-106
Notes to Financial Statements............................. F-107
SOUTHERN MARYLAND INTERNET, INC.
Report of KPMG LLP, Independent Auditors.................. F-114
Balance Sheets............................................ F-115
Statements of Operations.................................. F-116
Statements of Stockholders' Deficit....................... F-117
Statements of Cash Flows.................................. F-118
Notes to Financial Statements............................. F-119
NUNET, INC.
Report of KPMG LLP, Independent Auditors.................. F-125
Balance Sheets............................................ F-126
Statements of Operations.................................. F-127
Statements of Stockholders' Equity (Deficit).............. F-128
Statements of Cash Flows.................................. F-129
Notes to Financial Statements............................. F-130
</TABLE>
F-2
<PAGE> 146
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
ENTER.NET, INC.
Report of KPMG LLP, Independent Auditors.................. F-138
Balance Sheets............................................ F-139
Statements of Operations.................................. F-140
Statements of Stockholders' Equity (Deficit).............. F-141
Statements of Cash Flows.................................. F-142
Notes to Financial Statements............................. F-143
PROMETHEUS INFORMATION CORP.
Report of KPMG LLP, Independent Auditors.................. F-150
Balance Sheets............................................ F-151
Statements of Operations.................................. F-152
Statements of Stockholders' Deficit....................... F-153
Statements of Cash Flows.................................. F-154
Notes to Financial Statements............................. F-155
E-ZNET INCORPORATED
Report of KPMG LLP, Independent Auditors.................. F-162
Balance Sheets............................................ F-163
Statements of Operations.................................. F-164
Statements of Stockholders' Equity (Deficit).............. F-165
Statements of Cash Flows.................................. F-166
Notes to Financial Statements............................. F-167
USA CHOICE INTERNET SERVICES, CO.
Report of KPMG LLP, Independent Auditors.................. F-177
Combined Balance Sheets................................... F-178
Combined Statements of Operations......................... F-179
Combined Statements of Members' Equity.................... F-180
Combined Statements of Cash Flows......................... F-181
Notes to Combined Financial Statements.................... F-182
</TABLE>
F-3
<PAGE> 147
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
CROCKER COMMUNICATIONS INTERNET (A DIVISION OF CROCKER
COMMUNICATIONS, INC.)
Report of KPMG LLP, Independent Auditors.................. F-190
Balance Sheets............................................ F-191
Statements of Operations.................................. F-192
Statements of Division Equity............................. F-193
Statements of Cash Flows.................................. F-194
Notes to Financial Statements............................. F-195
COL NETWORKS, INC.
Report of KPMG LLP, Independent Auditors.................. F-200
Balance Sheets............................................ F-201
Statements of Operations.................................. F-202
Statements of Stockholders' Equity........................ F-203
Statements of Cash Flows.................................. F-204
Notes to Financial Statements............................. F-205
PERIGEE.NET CORPORATION
Report of KPMG LLP, Independent Auditors.................. F-211
Balance Sheets............................................ F-212
Statements of Operations.................................. F-213
Statements of Stockholders' Equity........................ F-214
Statements of Cash Flows.................................. F-215
Notes to Financial Statements............................. F-216
DUPLINNET CORPORATION
Report of KPMG LLP, Independent Auditors.................. F-222
Balance Sheets............................................ F-223
Statements of Operations.................................. F-224
Statements of Stockholders' Equity........................ F-225
Statements of Cash Flows.................................. F-226
Notes to Financial Statements............................. F-227
</TABLE>
F-4
<PAGE> 148
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
WAVENET, INC.
Report of KPMG LLP, Independent Auditors.................. F-232
Balance Sheets............................................ F-233
Statements of Operations.................................. F-234
Statements of Stockholders' Deficit....................... F-235
Statements of Cash Flows.................................. F-236
Notes to Financial Statements............................. F-237
THE 3RD DOOR, INC.
Report of KPMG LLP, Independent Auditors.................. F-244
Balance Sheets............................................ F-245
Statements of Operations.................................. F-246
Statements of Stockholders' Equity (Deficit).............. F-247
Statements of Cash Flows.................................. F-248
Notes to Financial Statements............................. F-249
INFORAMP, INC.
Report of KPMG LLP, Independent Auditors.................. F-255
Balance Sheets............................................ F-256
Statements of Operations.................................. F-257
Statements of Shareholders' Equity (Deficit).............. F-258
Statements of Cash Flows.................................. F-259
Notes to Financial Statements............................. F-260
MIDWEST COMMUNICATIONS, INC.
Report of KPMG LLP, Independent Auditors.................. F-265
Balance Sheets............................................ F-266
Statements of Operations.................................. F-268
Statements of Stockholders' Deficit....................... F-269
Statements of Cash Flows.................................. F-270
Notes to Financial Statements............................. F-272
</TABLE>
F-5
<PAGE> 149
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
Report of KPMG LLP, Independent Auditors.................. F-281
Balance Sheet............................................. F-282
Statement of Operations................................... F-283
Statement of Members' Equity.............................. F-284
Statement of Cash Flows................................... F-285
Notes to Financial Statements............................. F-286
COMQUEST NETWORKS, INC.
Report of KPMG LLP, Independent Auditors.................. F-292
Balance Sheets............................................ F-293
Statements of Operations.................................. F-294
Statements of Stockholders' Equity........................ F-295
Statements of Cash Flows.................................. F-296
Notes to Financial Statements............................. F-297
FAIRNET, INC.
Report of KPMG LLP, Independent Auditors.................. F-303
Balance Sheets............................................ F-304
Statements of Operations.................................. F-305
Statements of Stockholders' Deficit....................... F-306
Statements of Cash Flows.................................. F-307
Notes to Financial Statements............................. F-308
WISCONSIN INTERNET, INC.
Report of KPMG LLP, Independent Auditors.................. F-315
Balance Sheets............................................ F-316
Statements of Operations.................................. F-317
Statements of Stockholders' Equity (Deficit).............. F-318
Statements of Cash Flows.................................. F-319
Notes to Financial Statements............................. F-320
</TABLE>
F-6
<PAGE> 150
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
NCONNECT, INC.
Report of KPMG LLP, Independent Auditors.................. F-326
Balance Sheets............................................ F-327
Statements of Operations.................................. F-328
Statements of Stockholders' Deficit....................... F-329
Statements of Cash Flows.................................. F-330
Notes to Financial Statements............................. F-331
NETWURX, INC.
Report of KPMG LLP, Independent Auditors.................. F-337
Balance Sheets............................................ F-338
Statements of Operations.................................. F-339
Statements of Stockholders' Deficit....................... F-340
Statements of Cash Flows.................................. F-341
Notes to Financial Statements............................. F-342
PROVIDE.NET
Report of KPMG LLP, Independent Auditors.................. F-349
Balance Sheets............................................ F-350
Statements of Operations.................................. F-351
Statements of Owner's Equity.............................. F-352
Statements of Cash Flows.................................. F-353
Notes to Financial Statements............................. F-354
THE COMPUTER CARE COMPANY, INC.
Report of KPMG LLP, Independent Auditors.................. F-358
Balance Sheets............................................ F-359
Statements of Operations.................................. F-360
Statements of Partners' and Stockholders' Deficit......... F-361
Statements of Cash Flows.................................. F-362
Notes to Financial Statements............................. F-363
</TABLE>
F-7
<PAGE> 151
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
ISP MANAGEMENT, INC.
Unaudited Combined Balance Sheets......................... F-372
Unaudited Combined Statements of Operations............... F-373
Unaudited Combined Statements of Stockholders' Deficit.... F-374
Unaudited Combined Statements of Cash Flows............... F-375
Notes to Unaudited Combined Financial Statements.......... F-376
NETHAWK OF ALMA, INC.
Report of KPMG LLP, Independent Auditors.................. F-378
Balance Sheets............................................ F-379
Statements of Operations.................................. F-380
Statements of Stockholders' Deficit....................... F-381
Statements of Cash Flows.................................. F-382
Notes to Financial Statements............................. F-383
THE INTERNET ACCESS SERVICES DIVISION OF SENSIBLE COMPUTER
SOLUTIONS, INC.
Report of KPMG LLP, Independent Auditors.................. F-389
Balance Sheets............................................ F-390
Statements of Operations.................................. F-391
Statements of Division Deficit............................ F-392
Statements of Cash Flows.................................. F-393
Notes to Financial Statements............................. F-394
WWW.INTERNET SOLUTIONS, INC.
Report of KPMG LLP, Independent Auditors.................. F-400
Balance Sheets............................................ F-401
Statements of Operations.................................. F-402
Statements of Stockholders' Deficit....................... F-403
Statements of Cash Flows.................................. F-404
Notes to Financial Statements............................. F-405
</TABLE>
F-8
<PAGE> 152
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
COPPER.NET GROUP
Report of KPMG LLP, Independent Auditors.................. F-412
Combined Balance Sheets................................... F-413
Combined Statements of Operations......................... F-414
Combined Statements of Stockholders' Deficit.............. F-415
Combined Statements of Cash Flows......................... F-416
Notes to Combined Financial Statements.................... F-418
NETPLUS COMMUNICATIONS, INC.
Report of KPMG LLP, Independent Auditors.................. F-426
Balance Sheets............................................ F-427
Statements of Operations.................................. F-428
Statements of Stockholders' Deficit....................... F-429
Statements of Cash Flows.................................. F-430
Notes to Financial Statements............................. F-431
INTERNET NEBRASKA CORPORATION
Report of KPMG LLP, Independent Auditors.................. F-437
Balance Sheets............................................ F-438
Statements of Operations.................................. F-439
Statements of Stockholders' Equity........................ F-440
Statements of Cash Flows.................................. F-441
Notes to Financial Statements............................. F-442
RAPIDNET, INC. (D/B/A RAPIDNET)
Report of KPMG LLP, Independent Auditors.................. F-448
Balance Sheets............................................ F-449
Statements of Operations.................................. F-450
Statements of Owners' Deficit............................. F-451
Statements of Cash Flows.................................. F-452
Notes to Financial Statements............................. F-453
</TABLE>
F-9
<PAGE> 153
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
CSW NET, INC.
Report of KPMG LLP, Independent Auditors.................. F-461
Balance Sheets............................................ F-462
Statements of Operations.................................. F-463
Statements of Stockholders' Equity (Deficit).............. F-464
Statements of Cash Flows.................................. F-465
Notes to Financial Statements............................. F-466
IOCC.COM, LLC
Report of KPMG LLP, Independent Auditors.................. F-472
Balance Sheets............................................ F-473
Statements of Earnings.................................... F-474
Statements of Members' Equity............................. F-475
Statements of Cash Flows.................................. F-476
Notes to Financial Statements............................. F-477
FUTURA, INC.
Report of KPMG LLP, Independent Auditors.................. F-483
Balance Sheets............................................ F-484
Statements of Operations.................................. F-485
Statements of Stockholders' Equity (Deficit).............. F-486
Statements of Cash Flows.................................. F-487
Notes to Financial Statements............................. F-488
INTERNET SOLUTIONS, INC. -- ISP BUSINESS
Report of KPMG LLP, Independent Auditors.................. F-494
Statements of Assets Acquired and Liabilities Assumed..... F-495
Statements of Revenues and Expenses....................... F-496
Statements of Stockholders' Net Investment (Deficit)...... F-497
Statements of Cash Flows.................................. F-498
Notes to Financial Statements............................. F-499
</TABLE>
F-10
<PAGE> 154
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
BLACK SHEEP COMPUTING, INC. -- ISP BUSINESS
Report of KPMG LLP, Independent Auditors.................. F-503
Balance Sheets............................................ F-504
Statements of Operations.................................. F-505
Statements of Owners' and Stockholders' Equity
(Deficit).............................................. F-506
Statements of Cash Flows.................................. F-507
Notes to Financial Statements............................. F-508
INTENSITY COMPUTER SYSTEMS
Report of KPMG LLP, Independent Auditors.................. F-514
Balance Sheets............................................ F-515
Statements of Operations.................................. F-516
Statements of Owner's and Stockholders' Equity............ F-517
Statements of Cash Flows.................................. F-518
Notes to Financial Statements............................. F-519
ECSIS.NET, LLC
Report of KPMG LLP, Independent Auditors.................. F-522
Balance Sheets............................................ F-523
Statements of Operations.................................. F-524
Statements of Members' Equity............................. F-525
Statements of Cash Flows.................................. F-526
Notes to Financial Statements............................. F-527
WORLD TRADE NETWORK, INC.
Report of KPMG LLP, Independent Auditors.................. F-532
Balance Sheets............................................ F-533
Statements of Operations.................................. F-534
Statements of Stockholders' Equity........................ F-535
Statements of Cash Flows.................................. F-536
Notes to Financial Statements............................. F-537
</TABLE>
F-11
<PAGE> 155
ESPERNET.COM, INC.
INDEX TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
STIC.NET, INC.
Report of KPMG LLP, Independent Auditors.................. F-544
Balance Sheets............................................ F-545
Statements of Operations.................................. F-546
Statements of Stockholders' Equity (Deficit).............. F-547
Statements of Cash Flows.................................. F-548
Notes to Financial Statements............................. F-549
NETWEST ONLINE, INC.
Report of KPMG LLP, Independent Auditors.................. F-555
Balance Sheets............................................ F-556
Statements of Operations.................................. F-557
Statements of Stockholders' Equity (Deficit).............. F-558
Statements of Cash Flows.................................. F-559
Notes to Financial Statements............................. F-560
</TABLE>
F-12
<PAGE> 156
ESPERNET.COM, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Combined Financial Statements give effect
to the acquisition by espernet.com, inc. (the "Company" or "espernet") of the
outstanding capital stock, or certain net assets of 43 Internet service
providers (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 acquirer.
The unaudited Pro Forma Combined As Adjusted Balance Sheet gives effect to
the Transactions and the IPO as if they had occurred on June 30, 1999. The
unaudited Pro Forma Combined Statements of Operations reflect the operating
results of the Company for the six months ended June 30, 1999 and for the year
ended December 31, 1998, and give effect to the Transactions as if they had
occurred on January 1, 1999 and on January 1, 1998, respectively.
The Company preliminarily has analyzed the additional expenses 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 Transactions.
Additionally, the Pro Forma Combined Statements of Operations give effect to
anticipated compensation of the Company's new corporate management.
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 the 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 unaudited Pro Forma Combined Financial Statements should be
read in conjunction with the financial statements and notes thereto included
elsewhere in this Prospectus.
F-13
<PAGE> 157
ESPERNET.COM, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
COMBINED ACQUISITION OFFERING
ESPERNET.COM, INC. ACQUISITIONS ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
(SEE NOTE 1) (SEE NOTES 2 AND 5) (SEE NOTE 3) COMBINED (SEE NOTE 3) AS ADJUSTED
------------------ ------------------- ------------ --------- ------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...... $ 142 $ 1,933 $ -- $ 2,075 $ 29,988 $ 32,063
Accounts receivable, net....... -- 1,935 -- 1,935 -- 1,935
Inventory...................... -- 71 -- 71 -- 71
Prepaid expenses............... -- 81 -- 81 -- 81
Other current assets........... -- 32 -- 32 -- 32
Deferred tax asset............. -- 174 1,741 1,915 -- 1,915
Due from
affiliates/stockholders...... -- 354 -- 354 -- 354
-------- ------- -------- -------- -------- --------
Total current assets....... 142 4,580 1,741 6,463 29,988 36,451
Property and equipment, net.... 3 10,528 -- 10,531 -- 10,531
Goodwill and intangibles,
net.......................... -- -- 132,219 132,219 -- 132,219
Customer list, net............. -- 1,183 63,062 64,245 -- 64,245
Deferred tax asset............. -- 13 458 471 -- 471
Other assets................... -- 237 -- 237 -- 237
-------- ------- -------- -------- -------- --------
Total assets............... $ 145 $16,541 $197,480 $214,166 $ 29,988 $244,154
======== ======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable............... $ -- $ 4,077 $ -- $ 4,077 $ -- $ 4,077
Accrued expenses............... 106 1,738 900 2,744 (1,500) 1,244
Deferred revenue............... -- 5,378 -- 5,378 -- 5,378
Income tax payable............. -- 21 -- 21 -- 21
Line of credit................. -- 266 -- 266 -- 266
Current portion of long-term
debt......................... -- 1,872 -- 1,872 -- 1,872
Current portion of capital
lease obligations............ -- 1,746 -- 1,746 -- 1,746
Deferred tax liability......... -- 5 37 42 -- 42
Other current liabilities...... -- 1,067 -- 1,067 -- 1,067
Due to
affiliates/stockholders...... -- -- 91,012 91,012 (91,012) --
-------- ------- -------- -------- -------- --------
Total current
liabilities.............. 106 16,170 91,949 108,225 (92,512) 15,713
Long-term debt, net of current
portion...................... -- 2,286 -- 2,286 -- 2,286
Capital lease obligations, net
of current portion........... -- 1,565 -- 1,565 -- 1,565
Minority interest.............. -- 15 -- 15 -- 15
Deferred tax liability......... -- 49 21,369 21,418 -- 21,418
-------- ------- -------- -------- -------- --------
Total liabilities.......... 106 20,085 113,318 133,509 (92,512) 40,997
Stockholders' equity
(deficit)
Preferred stock................ -- -- -- -- -- --
Common stock................... 2 413 (409) 6 8 14
Deferred compensation.......... (160) -- -- (160) -- (160)
Additional paid-in capital..... 866 3,210 78,904 82,980 122,492 205,472
Retained earnings (accumulated
deficit)..................... (211) (7,167) 5,667 (1,711) -- (1,711)
Stock subscription
receivable................... (458) -- -- (458) -- (458)
-------- ------- -------- -------- -------- --------
Total stockholders' equity
(deficit)................ 39 (3,544) 84,162 80,657 122,500 203,157
-------- ------- -------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)................ $ 145 $16,541 $197,480 $214,166 $ 29,988 $244,154
======== ======= ======== ======== ======== ========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-14
<PAGE> 158
ESPERNET.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
COMBINED ACQUISITION
ESPERNET.COM, INC. ACQUISITIONS ADJUSTMENTS PRO FORMA
(SEE NOTE 1) (SEE NOTE 6) (SEE NOTE 4) COMBINED
------------------ ------------ ------------ ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Total revenues........................... $ -- $25,393 $ -- $ 25,393
------ ------- -------- --------
COSTS AND EXPENSES:
Cost of Internet services................ -- 11,158 -- 11,158
Selling, general and administrative...... 211 12,029 307 12,547
Depreciation and amortization............ -- 2,166 32,547 34,713
------ ------- -------- --------
Total costs and expenses.............. 211 25,353 32,854 58,418
------ ------- -------- --------
Loss from operations....................... (211) 40 (32,854) (33,025)
Other income (expense)
Interest income.......................... -- 7 -- 7
Interest expense......................... -- (438) -- (438)
Other income (expense), net.............. -- (22) -- (22)
------ ------- -------- --------
Loss before provision (benefit) for income
taxes.................................... (211) (413) (32,854) (33,478)
Benefit for income taxes................... -- 6 4,475 4,481
------ ------- -------- --------
Net loss................................... $ (211) $ (407) $(28,379) $(28,997)
====== ======= ======== ========
EBITDA..................................... -- 2,206 -- 1,688
Pro Forma basic and diluted net loss per
share.................................... $ (2.07)
========
Shares used in the calculation of Pro Forma
basic and diluted net loss per share..... 14,000
========
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-15
<PAGE> 159
ESPERNET.COM, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
COMBINED ACQUISITION
ESPERNET.COM, INC. ACQUISITIONS ADJUSTMENTS PRO FORMA
(SEE NOTE 1) (SEE NOTE 7) (SEE NOTE 4) COMBINED
------------------ ------------ ------------ ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUES:
Total revenues....................... $ -- $34,060 $ -- $34,060
------- ------- -------- -------
COSTS AND EXPENSES:
Cost of Internet services............ -- 15,625 -- 15,625
Selling, general and
administrative.................... -- 16,136 900 17,036
Depreciation and amortization........ -- 2,865 65,094 67,959
------- ------- -------- -------
Total costs and expenses.......... -- 34,626 65,994 100,620
------- ------- -------- -------
Loss from operations................... -- (566) (65,994) (66,560)
Other income (expense)
Interest income...................... -- 15 -- 15
Interest expense..................... -- (725) -- (725)
Other expense, net................... -- (199) -- (199)
------- ------- -------- -------
Loss before provision (benefit) for
income taxes......................... -- (1,475) (65,994) (67,469)
(Provision) benefit for income taxes... -- (15) 9,230 9,215
------- ------- -------- -------
Net loss............................... $ -- $(1,490) $(56,764) $(58,254)
======= ======= ======== =======
EBITDA................................. -- 2,299 -- 1,399
Pro Forma basic and diluted net loss
per share............................ $ (4.16)
=======
Shares used in the calculation of Pro
Forma basic and diluted net loss per
share................................ 14,000
=======
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-16
<PAGE> 160
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(1) GENERAL
Espernet.com New York, Inc., or Espernet.com NY, was formed in New York on
April 16, 1999 and was issued shares of its common stock to investors, including
some of our executive officers and directors, in a series of transactions from
April 29, 1999 until September 3, 1999.
Our company was formed in Delaware on June 7, 1999. We issued one share of
common stock to Mr. Chinh E. Chu, which is the only outstanding share of our
stock.
We entered into an administrative services agreement with Espernet.com NY,
dated June 8, 1999, which provides that Espernet.com NY will provide
administrative and financial services to our company through our initial public
offering in consideration for a fee equal to the cost of these services. We also
entered into a stock exchange agreement with Espernet.com NY and its
shareholders, dated September 21, 1999, in which we agreed to acquire 100% of
the outstanding shares of Espernet.com NY in exchange for shares of our common
stock. Under this agreement, Espernet.com NY's shareholders will receive shares
of our common stock in the exchange in proportion to their share ownership in
Espernet.com NY. The amount of our common stock payable to the shareholders of
Espernet.com NY in exchange for their shares equals the total value of our
company based on the initial public offering price less the total value of
shares issued to public investors and the total value of the shares of our
common stock issued to the sellers of the 43 ISPs that we are acquiring.
The financial statements of our company and Espernet.com NY have been
combined as a single entity in a manner similar to a combination of entities
under common control. The combined financial statements have also been adjusted
to reflect (a) the issuance, subsequent to June 30, 1999, of additional shares
to founders and investors and (b) restricted shares to management and others for
services to be rendered.
BALANCE SHEET
AS OF JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
SHEET AS OF SHARE
JUNE 30, 1999 EXCHANGE COMBINED
ESPERNET Espernet-NY (a) (b) ADJUSTMENT ESPERNET
-------- ------------- ----- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash.................................... $ -- $ 142 $ -- $ -- $ -- $ 142
----- ----- ----- -------- ---- --------
Total current assets................ -- 142 -- -- -- 142
----- ----- ----- -------- ---- --------
Property and equipment, net............. -- 3 3
----- ----- ----- -------- ---- --------
Total assets........................ $ -- $ 145 $ -- $ -- $ -- $ 145
===== ===== ===== ======== ==== ========
</TABLE>
F-17
<PAGE> 161
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
SHEET AS OF SHARE
JUNE 30, 1999 EXCHANGE COMBINED
ESPERNET Espernet-NY (a) (b) ADJUSTMENT ESPERNET
-------- ------------- ----- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Liabilities and stockholders' equity
Accrued expenses........................ $ -- $ 106 $ 106
----- ----- ----- -------- ---- --------
Total current liabilities........... -- 106 -- -- -- 106
Stockholders' equity:
Common stock........................ -- 16 29 18 (61) 2
Additional paid-in capital.......... -- 234 429 142 61 866
Deferred compensation............... -- -- (160) (160)
Accumulated deficit................. -- (211) -- (211)
Stock subscription receivable....... -- -- (458) (458)
----- ----- ----- -------- ---- --------
Total stockholders' equity..... -- 39 -- -- -- 39
----- ----- ----- -------- ---- --------
Total liabilities and stockholders'
equity................................ $ -- $ 145 $ -- $ -- $ -- $ 145
===== ===== ===== ======== ==== ========
</TABLE>
STATEMENT OF OPERATIONS
FOR SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SHARE
ESPERNET- EXCHANGE COMBINED
ESPERNET NY (a) (b) ADJUSTMENT ESPERNET
----------- ----------- --- --- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Selling, general and
administrative.................... $-- $ 211 $-- $-- $ $ 211
--- ----- --- --- --- -----
Loss from operations..................... -- (211) -- -- -- (211)
--- ----- --- --- --- -----
Net loss................................. $-- $(211) $-- $-- $-- $(211)
=== ===== === === === =====
</TABLE>
(a) Reflects 2,928,000 shares issued to founders and investors by Espernet-NY
subsequent to June 30, 1999 for $458.
(b) Reflects 1,832,192 restricted shares issued to management in connection with
the granting of the restricted shares and others by Espernet.com-NY
subsequent to June 30, 1999 for services to be rendered. The Company will
record deferred compensation and will amortize this amount over the related
restriction periods.
(2) ACQUISITION OF ISPS
Concurrent with this IPO, the Company will acquire the outstanding equity
interests in, or certain net assets of the ISPs (the "Transactions"). 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.
F-18
<PAGE> 162
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
For purposes of computing the estimated purchase price for accounting purposes,
the value of shares is determined using the assumed IPO price of $20 per share.
The purchase price will be preliminary allocated to the Company's
historical assets and liabilities based on the carrying values of the acquired
assets and liabilities, as these carrying values are estimated to approximate
fair market value of the assets acquired and liabilities assumed. Additionally,
adjustments have been made for the establishment of a deferred income tax
liability resulting from the Transactions. The allocation of the purchase price
is considered preliminary until such time as the closing of the IPO and
consummation of the Transactions. In accordance with the Transactions
agreements, the final purchase price may be adjusted based upon certain ISP
subscriber and financial information as of the closing date. The Company has
placed a portion of the purchase price in escrow pending receipt of the final
adjustments, which is expected to be finalized no later than sixty days after
the closing of the IPO.
The Company will amortize the intangible assets and goodwill associated
with the Transactions over a period of three years.
<TABLE>
<CAPTION>
NET ASSETS DEFERRED
AS OF TAX
JUNE 30, LIABILITY
SHARES OF 1999 RECORDED
COMMON VALUE OF TOTAL FINANCIAL IN CUSTOMER
CASH STOCK SHARES CONSIDERATION STATEMENTS ACQUISITION LISTS GOODWILL
------- --------- -------- ------------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PAdotNet................. $ 1,649 172,264 $ 3,445 $ 5,094 $ (29) $ 1 $ 1,722 $ 3,400
Pennsylvania Online,
Ltd. .................. 2,371 105,009 2,100 4,471 1 (770) 2,196 3,044
Innernet, Inc. .......... 3,289 107,550 2,151 5,440 81 (564) 2,327 3,596
Delanet, Inc. ........... 2,143 101,563 2,031 4,174 (271) (600) 2,011 3,034
Internet Access Services
(A Division of Weidner
Associates, Inc.)...... 660 50,180 1,004 1,664 (170) (67) 1,020 881
Southern Maryland
Internet, Inc. ........ 1,229 55,000 1,100 2,329 (262) (230) 1,282 1,539
NuNet, Inc.(1) .......... 2,690 345,000 6,900 9,590 (720) (999) 1,633 9,676
Enter.Net, Inc. ......... 7,936 240,000 4,798 12,734 (764) (1,318) 4,828 9,988
Prometheus Information
Corp. ................. 725 11,325 227 952 (209) (88) 316 933
E-Znet Incorporated...... 4,163 231,000 4,620 8,783 320 (1,069) 2,562 6,970
USA Choice Internet
Services, Co. ......... 2,503 38,500 770 3,273 75 378 1,257 1,563
Crocker Communications
Internet .............. 1,321 90,000 1,800 3,121 98 (265) 1,434 1,854
COL Networks, Inc. ...... 3,150 139,205 2,784 5,934 280 (934) 2,649 3,939
Perigee.net
Corporation............ 583 36,225 725 1,308 (19) (218) 497 1,048
DuplinNet Corporation.... 1,802 29,531 591 2,393 156 (318) 396 2,159
WaveNet, Inc. ........... 1,238 20,250 405 1,643 (12) (211) 422 1,444
The 3rd Door, Inc. ...... 899 14,664 293 1,192 40 (166) 366 952
InfoRamp, Inc. .......... 10,911 100,000 2,000 12,911 411 (2,283) 3,848 10,935
MidWest Communications,
Inc. .................. 2,243 125,000 2,500 4,743 (297) (838) 2,470 3,408
</TABLE>
F-19
<PAGE> 163
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NET ASSETS DEFERRED
AS OF TAX
JUNE 30, LIABILITY
SHARES OF 1999 RECORDED
COMMON VALUE OF TOTAL FINANCIAL IN CUSTOMER
CASH STOCK SHARES CONSIDERATION STATEMENTS ACQUISITION LISTS GOODWILL
------- --------- -------- ------------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alliance Internet
Technologies, L.L.C.... $ 1,119 59,977 $ 1,200 $ 2,319 $ 104 $ 24 $ 1,253 $ 938
ComQuest Networks,
Inc. .................. 665 54,210 1,084 1,749 130 (222) 586 1,255
Fairnet, Inc. ........... 330 36,838 737 1,067 (34) (289) 459 931
Wisconsin Internet,
Inc. .................. 1,835 68,850 1,377 3,212 54 (403) 1,001 2,560
NConnect, Inc. .......... 1,592 70,875 1,418 3,010 (341) (418) 1,317 2,452
Netwurx, Inc. ........... 1,186 52,750 1,055 2,241 (184) (250) 977 1,698
Provide.Net.............. 4,444 155,000 3,100 7,544 653 505 2,021 4,365
The Computer Care
Company, Inc. ......... 872 67,438 1,349 2,221 (92) (348) 1,472 1,189
ISP Management, Inc. .... 809 51,750 1,035 1,844 (242) 97 729 1,260
www.internet solutions,
inc. .................. 1,562 -- -- 1,562 (499) (117) 762 1,416
Copper.net Group ........ 1,437 159,491 3,190 4,627 (227) (624) 939 4,539
NetPlus Communications,
Inc. .................. 1,044 -- -- 1,044 (6) (188) 457 781
Internet Nebraska
Corporation............ 2,486 133,815 2,676 5,162 416 (836) 1,614 3,968
RapidNet, Inc. .......... 1,203 92,950 1,859 3,062 (508) (553) 1,565 2,558
CSW Net, Inc. ........... 4,367 205,000 4,100 8,467 (458) (961) 2,460 7,426
IOCC.com, LLC............ 353 27,115 542 895 69 (57) 422 461
Futura, Inc. ............ 713 31,500 630 1,343 (67) (171) 664 917
Internet Solutions,
Inc. .................. 336 20,952 419 755 (17) 11 558 203
Black Sheep Computing,
Inc. -- ISP
Business .............. 880 67,031 1,341 2,221 (170) (79) 668 1,802
Intensity Computer
Systems................ 137 9,284 186 323 16 (78) 227 158
ECSIS.Net, LLC........... 946 -- -- 946 66 (35) 675 240
World Trade Network
Inc. .................. 6,052 471,250 9,425 15,477 53 (2,330) 4,693 13,061
STIC.NET, Inc. .......... 3,487 181,500 3,630 7,117 (364) (889) 2,757 5,613
NetWest Online, Inc...... $ 1,652 76,046 $ 1,521 $ 3,173 $ (5) $ (437) $ 1,550 $ 2,065
------- --------- ------- -------- ------- -------- ------- --------
$91,012 4,105,888 $82,118 $173,130 $(2,944) $(19,207) $63,062 $132,219
======= ========= ======= ======== ======= ======== ======= ========
</TABLE>
- -------------------------
(1) The net assets acquired from the ISP reflect adjustments to the amounts
reported in the June 30, 1999 financial statements to account for the
liabilities not assumed upon the consummation of the Transactions.
F-20
<PAGE> 164
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(3) DETAILS OF PRO FORMA ACQUISITION AND OFFERING ADJUSTMENTS FOR UNAUDITED PRO
FORMA COMBINED AND AS ADJUSTED BALANCE SHEET AS OF JUNE 30, 1999
The following table summarizes unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS PRO FORMA
---------------------------- ACQUISITION
a b C ADJUSTMENTS
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.............................. --
Accounts receivable, net............................... --
Inventory.............................................. --
Prepaid expenses....................................... --
Other current assets................................... --
Deferred tax asset..................................... $ 1,741 $ 1,741
Due from affiliates/stockholders....................... --
-------- ------- ------- --------
Total current assets.............................. -- 1,741 $ -- 1,741
-------- ------- ------- --------
Property and equipment, net............................ --
Goodwill and intangibles, net.......................... $113,012 19,207 132,219
Customer list, net..................................... 63,062 63,062
Deferred tax asset..................................... 458 458
Other assets........................................... --
-------- ------- ------- --------
Total assets...................................... $176,074 $21,406 $ -- 197,480
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable....................................... --
Accrued expenses....................................... $ (600) $ 1,500 $ 900
Deferred revenue....................................... --
Income tax payable..................................... --
Line of credit......................................... --
Current portion of long-term debt...................... --
Current portion of capital lease obligations........... --
Deferred tax liability................................. $ 37 37
Other current liabilities.............................. --
Due to affiliates/stockholders......................... 91,012 91,012
-------- ------- ------- --------
Total current liabilities......................... 90,412 37 1,500 91,949
-------- ------- ------- --------
Long-term debt, net of current portion................. --
Capital lease obligations, net of current portion...... --
Minority interest...................................... --
Deferred tax liability................................. 21,369 21,369
-------- ------- ------- --------
Total liabilities................................. 90,412 21,406 1,500 113,318
-------- ------- ------- --------
Stockholders' equity (deficit)
Preferred stock........................................ --
Common stock........................................... (409) (409)
Deferred compensation.................................. --
Additional paid-in capital............................. 78,904 78,904
Retained earnings (accumulated deficit)................ 7,167 (1,500) 5,667
Stock subscription receivable.......................... --
-------- ------- ------- --------
Total stockholders' equity (deficit).............. 85,662 -- (1,500) 84,162
-------- ------- ------- --------
Total liabilities and stockholders' equity (deficit)... $176,074 $21,406 $ -- $197,480
======== ======= ======= ========
</TABLE>
F-21
<PAGE> 165
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(3) DETAILS OF PRO FORMA ACQUISITION AND OFFERING ADJUSTMENTS FOR UNAUDITED PRO
FORMA COMBINED AND AS ADJUSTED BALANCE SHEET AS OF JUNE 30,
1999 -- (CONTINUED)
<TABLE>
<CAPTION>
OFFERING ADJUSTMENTS
-------------------- OFFERING
d E ADJUSTMENTS
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................. $122,500 $(92,512) $ 29,988
Accounts receivable, net.................................. --
Inventory................................................. --
Prepaid expenses.......................................... --
Other current assets...................................... --
Deferred tax asset........................................ --
Due from affiliates/stockholders.......................... --
-------- -------- --------
Total current assets................................. 122,500 (92,512) 29,988
-------- -------- --------
Property and equipment, net............................... --
Goodwill and intangibles, net............................. --
Customer list, net........................................ --
Deferred tax asset........................................ --
Due from affiliates/stockholders.......................... --
Other assets.............................................. --
-------- -------- --------
Total assets......................................... $122,500 $(92,512) $ 29,988
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable.......................................... --
Accrued expenses.......................................... (1,500) (1,500)
Deferred revenue.......................................... --
Income tax payable........................................ --
Line of credit............................................ --
Current portion of long-term debt......................... --
Current portion of capital lease obligations.............. --
Deferred tax liability.................................... --
Other current liabilities................................. --
Due to affiliates/stockholders............................ (91,012) (91,012)
-------- -------- --------
Total current liabilities............................ -- (92,512) (92,512)
-------- -------- --------
Long-term debt, net of current portion.................... --
Capital lease obligations, net of current portion......... --
Minority interest......................................... --
Deferred tax liability.................................... --
-------- -------- --------
Total liabilities.................................... -- (92,512) (92,512)
-------- -------- --------
Stockholders' equity (deficit)............................
Preferred stock........................................... --
Common stock.............................................. 8 8
Deferred compensation..................................... --
Additional paid-in capital................................ 122,492 122,492
Retained earnings (accumulated deficit)................... --
Stock subscription receivable............................. --
-------- -------- --------
Total stockholders' equity (deficit)................. 122,500 -- 122,500
-------- -------- --------
Total liabilities and stockholders' equity (deficit)...... $122,500 $(92,512) $ 29,988
======== ======== ========
</TABLE>
F-22
<PAGE> 166
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(3) DETAILS OF PRO FORMA ACQUISITION AND OFFERING ADJUSTMENTS FOR UNAUDITED PRO
FORMA COMBINED AND AS ADJUSTED BALANCE SHEET AS OF JUNE 30,
1999 -- (CONTINUED)
(a) Records the purchase of the ISPs by the Company, including
consideration and finders fees of approximately $91.0 million in cash and 4.1
million shares of common stock at an assumed IPO price of $20.00 per share, or
approximately $82 million. The excess of the purchase price over the fair value
of net assets acquired is $195.3 million and was allocated to goodwill, $132.2
million and to customer lists, $63.1 million.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
----------------------
<S> <C>
Cash........................................................ $ 91,012
Value of shares............................................. 82,118
--------
Total consideration......................................... 173,130
Negative net assets acquired as of June 30, 1999............ 2,944
Deferred tax liabilities recorded in acquisition (see Note
3b)....................................................... 19,207
--------
Total excess consideration.................................. $195,281
========
Allocation of excess consideration:
Customer Lists.............................................. $ 63,062
Goodwill.................................................... 132,219
--------
$195,281
========
</TABLE>
(b) Records the net deferred tax liability of $19,200 attributable to the
temporary differences between the financial reporting and tax basis primarily
attributable to customer lists acquired.
(c) Records non-recurring bonuses of $1,500 to the management of
espernet.com, inc. at the consummation of the IPO.
(d) Records the cash proceeds of $150 million from the issuance of 7.5
million shares of the Company's Common Stock net of estimated offering costs.
IPO costs primarily consist of underwriting discounts and commissions,
accounting fees, legal fees and printing expenses.
(e) Records payment of the liability of $92,500 for the cash portion of the
consideration due to the owners of the ISPs in connection with the Transactions
and the non-recurring bonuses.
F-23
<PAGE> 167
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- CONTINUED
(AMOUNTS IN THOUSANDS)
(4) DETAILS OF PRO FORMA ACQUISITION ADJUSTMENTS FOR UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS
For six months ended June 30, 1999:
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS PRO FORMA
---------------------------- ACQUISITION
a b C ADJUSTMENTS
-------- ----- ------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Total revenues............................... $ -- $ -- $ -- $ --
COSTS AND EXPENSES:
Cost of Internet services.................... -- -- -- --
Selling, general and administrative.......... -- 307 -- 307
Depreciation and amortization................ 32,547 -- -- 32,547
-------- ----- ------- --------
Total costs and expenses.................. 32,547 307 -- 32,854
-------- ----- ------- --------
Loss from operations........................... (32,547) (307) -- (32,854)
Other income (expense)
Interest income.............................. -- -- -- --
Interest expense............................. -- -- -- --
Other income (expense), net.................. -- -- -- --
-------- ----- ------- --------
Loss before provision (benefit) for income
taxes........................................ (32,547) (307) -- (32,854)
Provision (benefit) for income taxes........... -- -- (4,475) (4,475)
-------- ----- ------- --------
Net income (loss).............................. $(32,547) $(307) $ 4,475 $(28,379)
======== ===== ======= ========
</TABLE>
F-24
<PAGE> 168
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(4) DETAILS OF PRO FORMA ACQUISITION ADJUSTMENTS FOR UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
For the Year Ended December 31, 1998:
<TABLE>
<CAPTION>
ACQUISITION ADJUSTMENTS PRO FORMA
---------------------------- ACQUISITION
a b C ADJUSTMENTS
-------- ----- ------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Total revenues............................... $ -- $ -- $ -- $ --
COSTS AND EXPENSES:
Cost of Internet services.................... -- -- -- --
Selling, general and administrative.......... -- 900 -- 900
Depreciation and amortization................ 65,094 -- -- 65,094
-------- ----- ------- --------
Total costs and expenses.................. 65,094 900 -- 65,994
-------- ----- ------- --------
Loss from operations........................... (65,094) (900) -- (65,994)
Other income (expense) Interest income......... -- -- -- --
Interest expense............................. -- -- -- --
Other income (expense), net.................. -- -- -- --
-------- ----- ------- --------
Loss before provision (benefit) for income
taxes........................................ (65,094) (900) -- (65,994)
Provision (benefit) for income taxes........... -- -- (9,230) (9,230)
-------- ----- ------- --------
Net income (loss).............................. $(65,094) $(900) $ 9,230 $(56,764)
======== ===== ======= ========
</TABLE>
F-25
<PAGE> 169
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(4) DETAILS OF PRO FORMA ACQUISITION ADJUSTMENTS FOR UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS -- (CONTINUED)
(a) Reflects the amortization of goodwill and customer lists to be recorded
as a result of these transactions over a three-year estimated life for
goodwill related to the ISPs.
(b) Reflects the increase and decrease in salaries to the owners and other
employees of the ISPs pursuant to 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 of the ISPs' and espernet.com's management
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
COMPANY
Pennsylvania Online Ltd. ................................ 99,997 $ 49,997
E-Z Net Incorporated..................................... 51,000 25,500
Perigee.net Corporation.................................. (26,001) 6,999
IOCC.com, LLC............................................ 26,000 4,000
Wisconsin Internet, Inc.................................. 50,860 12,850
ISP Management, Inc...................................... 65,062 19,023
COL Networks, Inc........................................ 1,333 (8,333)
Internet Solutions, Inc.................................. 500 650
World Trade Network Inc.................................. 135,000 47,500
PAdotNet................................................. 48,133 4,127
Enter.Net, Inc. ......................................... (352,000) (255,000)
espernet.com............................................. 800,000 400,000
-------- --------
Total............................................... 899,884 $307,313
======== ========
</TABLE>
The above table does not include non-recurring bonuses of approximately
$1,500 expected to be paid by the Company upon the closing of the IPO.
(c) Reflects the incremental provision (benefit) for federal and state
income taxes assuming all entities were subject to federal and state
income tax and other adjustments for income taxes on S-Corporation
income. The Pro Forma adjusted benefit for income taxes for the year
ended December 31, 1998 and the six months ended June 30, 1999 of
approximately 13% differs from the expected federal benefit based upon
statutory rates of 35% principally because of the amortization of
goodwill (22%).
F-26
<PAGE> 170
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(5) -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET DETAIL OF ACQUISITIONS JUNE
30, 1999
<TABLE>
<CAPTION>
SOUTHERN
PENNSYLVANIA INNERNET, WEIDNER MARYLAND NUNET,
PADOTNET ONLINE LTD. INC. DELANET, INC. ASSOCIATES, INC. INTERNET, INC. INC.
-------- ------------ --------- ------------- ---------------- -------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...... $ 2 $ 20 $241 $ 44 $ 36 $ 26 $ --
Accounts receivable, net....... 1 2 3 176 9 32 108
Inventory...................... -- -- -- -- -- -- --
Prepaid expenses............... -- -- 2 -- -- 1 --
Other current assets........... -- 4 -- -- -- -- --
Deferred tax asset............. -- -- -- -- -- -- --
Due from
affiliates/stockholders....... -- -- 10 -- -- -- --
---- -------- ---- ------- ----- ----- ------
Total current assets........ 3 26 256 220 45 59 108
Property and equipment, net.... 231 220 273 305 90 162 263
Customer list, net............. -- -- -- 55 51 -- 545
Deferred tax asset............. -- -- -- -- -- -- --
Other assets................... -- -- 6 5 -- -- 4
---- -------- ---- ------- ----- ----- ------
Total assets................ $234 $ 246 $535 $ 585 $ 186 $ 221 $ 920
==== ======== ==== ======= ===== ===== ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable............... $196 $ 29 $ 32 $ 46 $ 2 $ 52 $1,557
Accrued expenses............... -- 54 -- 134 5 11 161
Current portion of unearned
revenue....................... 5 46 257 202 43 229 15
Income tax payable............. -- -- -- -- -- -- --
Line of credit................. -- 37 -- -- -- -- --
Current portion of long-term
debt.......................... -- -- 46 10 -- 47 43
Current portion of capital
lease obligations............. -- 64 11 72 7 40 47
Deferred tax liability......... -- -- -- -- -- -- --
Other current liabilities...... 62 -- -- 305 284 -- --
---- -------- ---- ------- ----- ----- ------
Total current liabilities... 263 230 346 769 341 379 1,823
Long-term debt, net of current
portion....................... -- -- 73 17 -- 73 249
Capital lease obligations, net
of current portion............ -- 15 35 70 15 31 168
Minority interest.............. -- -- -- -- -- -- --
Deferred income taxes.......... -- -- -- -- -- -- --
---- -------- ---- ------- ----- ----- ------
Total liabilities........... 263 245 454 856 356 483 2,240
Stockholders' equity
(deficit).....................
Preferred stock................ -- -- -- -- -- -- --
Common stock................... -- 20 5 40 -- 35 135
Additional paid-in capital..... -- -- 45 770 -- -- 5
Retained earnings (accumulated
deficit)...................... (29) (19) 31 (1,081) (170) (297) (1,460)
---- -------- ---- ------- ----- ----- ------
Total stockholders' equity
(deficit).................. (29) 1 81 (271) (170) (262) (1,320)
---- -------- ---- ------- ----- ----- ------
Total liabilities and
stockholders' equity
(deficit)..................... $234 $ 246 $535 $ 585 $ 186 $ 221 $ 920
==== ======== ==== ======= ===== ===== ======
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-27
<PAGE> 171
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(5) -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET DETAIL OF ACQUISITIONS JUNE
30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
PROMETHEUS USA CHOICE CROCKER COL
ENTER.NET, INFORMATION E-ZNET INTERNET COMMUNICATIONS NETWORKS,
INC. CORP. INCORPORATED SERVICES, CO. INTERNET INC.
--------------- ----------- ------------ ------------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ 56 $ 6 $122 $ 81 $ -- $ 66
Accounts receivable, net........... -- 32 149 43 184 26
Inventory.......................... -- -- -- -- -- --
Prepaid expenses................... 1 -- -- -- 1 12
Other current assets............... -- -- 18 -- -- --
Deferred tax asset................. -- -- -- -- -- --
Due from affiliates/stockholders... -- -- -- -- -- 156
------ ---- ---- ---- ---- ----
Total current assets............ 57 38 289 124 185 260
Property and equipment, net........ 496 56 452 195 193 323
Customer list, net................. -- -- 16 120 -- 212
Deferred tax asset................. -- -- 6 -- -- --
Other assets....................... -- 7 50 57 -- --
------ ---- ---- ---- ---- ----
Total assets.................... $ 553 $101 $813 $496 $378 $795
====== ==== ==== ==== ==== ====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ -- $ 88 $ -- $ 56 $ 44 $ --
Accrued expenses................... 131 17 33 34 5 42
Current portion of unearned
revenue........................... 806 86 115 56 230 93
Income tax payable................. -- -- -- -- -- --
Line of credit..................... -- 50 -- -- -- 50
Current portion of long-term
debt.............................. -- 23 14 30 1 54
Current portion of capital lease
obligations....................... 307 15 131 -- -- 25
Deferred tax liability............. -- -- -- -- -- --
Other current liabilities.......... -- 6 13 153 -- 4
------ ---- ---- ---- ---- ----
Total current liabilities....... 1,244 285 306 329 280 268
Long-term debt, net of current
portion........................... -- 4 48 77 -- 231
Capital lease obligations, net of
current portion................... 73 21 139 -- -- 16
Minority interest.................. -- -- -- 15 -- --
Deferred income taxes.............. -- -- -- -- -- --
------ ---- ---- ---- ---- ----
Total liabilities............... 1,317 310 493 421 280 515
Stockholders' equity (deficit).....
Preferred stock.................... -- -- -- -- -- --
Common stock....................... -- -- 1 -- -- --
Additional paid-in capital......... 1 24 377 75 -- 1
Retained earnings (accumulated
deficit).......................... (765) (233) (58) -- 98 279
------ ---- ---- ---- ---- ----
Total stockholders' equity
(deficit)...................... (764) (209) 320 75 98 280
------ ---- ---- ---- ---- ----
Total liabilities and stockholders'
equity (deficit).................. $ 553 $101 $813 $496 $378 $795
====== ==== ==== ==== ==== ====
<CAPTION>
PERIGEE.NET DUPLINET WAVENNET,
CORPORATION CORPORATION INC.
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ -- $ 27 $--
Accounts receivable, net........... 6 -- 8
Inventory.......................... -- -- --
Prepaid expenses................... 1 -- 3
Other current assets............... 1 -- --
Deferred tax asset................. -- -- --
Due from affiliates/stockholders... -- -- --
---- ---- ---
Total current assets............ 8 27 11
Property and equipment, net........ 61 129 66
Customer list, net................. -- -- --
Deferred tax asset................. -- -- --
Other assets....................... -- -- --
---- ---- ---
Total assets.................... $ 69 $156 $77
==== ==== ===
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ 46 $ -- $10
Accrued expenses................... -- -- 10
Current portion of unearned
revenue........................... 25 -- 35
Income tax payable................. -- -- --
Line of credit..................... 11 -- 4
Current portion of long-term
debt.............................. -- -- 3
Current portion of capital lease
obligations....................... -- -- 9
Deferred tax liability............. -- -- --
Other current liabilities.......... 6 -- 12
---- ---- ---
Total current liabilities....... 88 -- 83
Long-term debt, net of current
portion........................... -- -- --
Capital lease obligations, net of
current portion................... -- -- 6
Minority interest.................. -- -- --
Deferred income taxes.............. -- -- --
---- ---- ---
Total liabilities............... 88 -- 89
Stockholders' equity (deficit).....
Preferred stock.................... -- -- --
Common stock....................... -- 10 --
Additional paid-in capital......... 13 79 10
Retained earnings (accumulated
deficit).......................... (32) 67 (22)
---- ---- ---
Total stockholders' equity
(deficit)...................... (19) 156 (12)
---- ---- ---
Total liabilities and stockholders'
equity (deficit).................. $ 69 $156 $77
==== ==== ===
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statement.
F-28
<PAGE> 172
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(5) -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET DETAIL OF ACQUISITIONS JUNE
30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
MIDWEST ALLIANCE INTERNET
THE 3RD INFORAMP, COMMUNICATIONS, TECHNOLOGIES, COMQUEST FAIRNET,
DOOR, INC. INC. INC. L.L.C. NETWORKS, INC. INC.
---------- --------- --------------- ----------------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ 28 $ 297 $ -- $ 45 $ 23 $ 6
Accounts receivable, net........... 9 355 47 91 11 28
Inventory.......................... -- -- -- -- 2 --
Prepaid expenses................... -- -- 2 -- -- --
Other current assets............... -- -- -- -- -- --
Deferred tax asset................. -- -- -- -- -- --
Due from affiliates/stockholders... -- 1 -- -- -- 10
---- ------ ------- ---- ---- ----
Total current assets............ 37 653 49 136 36 44
Property and equipment, net........ 69 432 597 197 112 113
Customer list, net................. -- -- 2 -- 5 --
Deferred tax asset................. 6 -- -- -- -- --
Other assets....................... -- -- 38 -- -- --
---- ------ ------- ---- ---- ----
Total assets.................... $112 $1,085 $ 686 $333 $153 $157
==== ====== ======= ==== ==== ====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ 13 $ 129 $ 420 $159 $ 14 $ 46
Accrued expenses................... 1 82 14 -- 3 13
Current portion of unearned
revenue........................... 19 383 145 -- 4 50
Income tax payable................. 4 -- -- -- -- --
Line of credit..................... -- -- -- -- -- --
Current portion of long-term
debt.............................. -- -- 90 -- -- 5
Current portion of capital lease
obligations....................... 9 -- 125 -- -- 26
Deferred tax liability............. 5 -- -- -- -- --
Other current liabilities.......... -- -- 33 70 2 --
---- ------ ------- ---- ---- ----
Total current liabilities....... 51 594 827 229 23 140
Long-term debt, net of current
portion........................... -- 80 1 -- -- 10
Capital lease obligations, net of
current portion................... 21 -- 155 -- -- 41
Minority interest.................. -- -- -- -- -- --
Deferred income taxes.............. -- -- -- -- -- --
---- ------ ------- ---- ---- ----
Total liabilities............... 72 674 983 229 23 191
Stockholders' equity (deficit).....
Preferred stock.................... -- -- -- -- -- --
Common stock....................... 64 36 -- -- 1 8
Additional paid-in capital......... (51) -- 998 169 -- 43
Retained earnings (accumulated
deficit).......................... 27 375 (1,295) (65) 129 (85)
---- ------ ------- ---- ---- ----
Total stockholders' equity
(deficit)...................... 40 411 (297) 104 130 (34)
---- ------ ------- ---- ---- ----
Total liabilities and stockholders'
equity (deficit).................. $112 $1,085 $ 686 $333 $153 $157
==== ====== ======= ==== ==== ====
<CAPTION>
WISCONSIN NCONNECT, NETWURX,
INTERNET, INC. INC. INC.
-------------- --------- --------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ 77 $ 16 $ 9
Accounts receivable, net........... 66 66 69
Inventory.......................... -- 12 --
Prepaid expenses................... 15 -- --
Other current assets............... -- -- --
Deferred tax asset................. -- -- --
Due from affiliates/stockholders... -- -- --
---- ---- ----
Total current assets............ 158 94 78
Property and equipment, net........ 204 148 174
Customer list, net................. -- -- --
Deferred tax asset................. -- -- --
Other assets....................... -- 6 13
---- ---- ----
Total assets.................... $362 $248 $265
==== ==== ====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ 2 $ 60 $ 97
Accrued expenses................... 12 105 123
Current portion of unearned
revenue........................... 243 310 108
Income tax payable................. -- -- --
Line of credit..................... 50 27 15
Current portion of long-term
debt.............................. -- --
Current portion of capital lease
obligations....................... -- 24 38
Deferred tax liability............. -- -- --
Other current liabilities.......... -- -- --
---- ---- ----
Total current liabilities....... 307 526 381
Long-term debt, net of current
portion........................... -- 16 --
Capital lease obligations, net of
current portion................... -- 47 68
Minority interest.................. -- -- --
Deferred income taxes.............. 1 -- --
---- ---- ----
Total liabilities............... 308 589 449
Stockholders' equity (deficit).....
Preferred stock.................... -- -- --
Common stock....................... -- 20 10
Additional paid-in capital......... 60 -- --
Retained earnings (accumulated
deficit).......................... (6) (361) (194)
---- ---- ----
Total stockholders' equity
(deficit)...................... 54 (341) (184)
---- ---- ----
Total liabilities and stockholders'
equity (deficit).................. $362 $248 $265
==== ==== ====
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-29
<PAGE> 173
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(5) -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET DETAIL OF ACQUISITIONS JUNE
30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
THE
COMPUTER CARE ISP MANAGEMENT, WWW.INTERNET
PROVIDE.NET COMPANY, INC. INC. SOLUTIONS, INC.
----------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ -- $ 58 $ -- $ 88
Accounts receivable, net.................................... 11 63 26 15
Inventory................................................... -- 38 -- --
Prepaid expenses............................................ 6 3 -- 4
Other current assets........................................ -- -- -- 1
Deferred tax asset.......................................... -- 33 -- --
Due from affiliates/stockholders............................ -- -- -- --
---- ---- ----- ----
Total current assets..................................... 17 195 26 108
Property and equipment, net................................. 714 290 156 95
Customer list, net.......................................... -- -- -- --
Deferred tax asset.......................................... -- -- -- --
Other assets................................................ -- -- -- 1
---- ---- ----- ----
Total assets............................................. $731 $485 $ 182 $204
==== ==== ===== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 10 $ 25 $ 77 $ 17
Accrued expenses............................................ -- 30 10 539
Current portion of unearned revenue......................... 68 214 28 70
Income tax payable.......................................... -- -- -- --
Line of credit.............................................. -- -- -- --
Current portion of long-term debt........................... -- 48 34 --
Current portion of capital lease obligations................ -- 151 40 7
Deferred tax liability...................................... -- -- -- --
Other current liabilities................................... -- -- 8 55
---- ---- ----- ----
Total current liabilities................................ 78 468 197 688
Long-term debt, net of current portion...................... -- 14 176 --
Capital lease obligations, net of current portion........... -- 95 51 15
Minority interest........................................... -- -- -- --
Deferred income taxes....................................... -- -- -- --
---- ---- ----- ----
Total liabilities........................................ 78 577 424 703
Stockholders' equity (deficit)..............................
Preferred stock............................................. -- -- -- --
Common stock................................................ -- 10 -- 1
Additional paid-in capital.................................. -- -- 82 --
Retained earnings (accumulated deficit)..................... 653 (102) (324) (500)
---- ---- ----- ----
Total stockholders' equity (deficit)..................... 653 (92) (242) (499)
---- ---- ----- ----
Total liabilities and stockholders' equity (deficit)........ $731 $485 $ 182 $204
==== ==== ===== ====
<CAPTION>
INTERNET
NETPLUS NEBRASKA
COPPER.NET, INC. COMMUNICATIONS, INC. CORPORATION
---------------- -------------------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 34 $ 1 $138
Accounts receivable, net.................................... 2 -- 70
Inventory................................................... -- -- --
Prepaid expenses............................................ 3 -- 2
Other current assets........................................ -- -- --
Deferred tax asset.......................................... -- -- --
Due from affiliates/stockholders............................ 89 -- --
----- ---- ----
Total current assets..................................... 128 1 210
Property and equipment, net................................. 223 142 274
Customer list, net.......................................... -- -- 113
Deferred tax asset.......................................... -- -- --
Other assets................................................ 14 -- --
----- ---- ----
Total assets............................................. $ 365 $143 $597
===== ==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 3 $ 3 $ 36
Accrued expenses............................................ 8 -- 3
Current portion of unearned revenue......................... 281 50 142
Income tax payable.......................................... -- -- --
Line of credit.............................................. -- 22 --
Current portion of long-term debt........................... 62 29 --
Current portion of capital lease obligations................ 35 1 --
Deferred tax liability...................................... -- -- --
Other current liabilities................................... 50 -- --
----- ---- ----
Total current liabilities................................ 439 105 181
Long-term debt, net of current portion...................... 142 44 --
Capital lease obligations, net of current portion........... 11 -- --
Minority interest........................................... -- -- --
Deferred income taxes....................................... -- -- --
----- ---- ----
Total liabilities........................................ 592 149 181
Stockholders' equity (deficit)..............................
Preferred stock............................................. -- -- --
Common stock................................................ 1 10 1
Additional paid-in capital.................................. (1) 42 24
Retained earnings (accumulated deficit)..................... (227) (58) 391
----- ---- ----
Total stockholders' equity (deficit)..................... (227) (6) 416
----- ---- ----
Total liabilities and stockholders' equity (deficit)........ $ 365 $143 $597
===== ==== ====
<CAPTION>
CSW
RAPIDNET, INC. NET, INC.
-------------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 10 $ 21
Accounts receivable, net.................................... 46 19
Inventory................................................... -- --
Prepaid expenses............................................ 5 10
Other current assets........................................ -- --
Deferred tax asset.......................................... -- --
Due from affiliates/stockholders............................ -- --
----- -----
Total current assets..................................... 61 50
Property and equipment, net................................. 317 464
Customer list, net.......................................... 16 --
Deferred tax asset.......................................... -- --
Other assets................................................ -- 8
----- -----
Total assets............................................. $ 394 $ 522
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 109 $ 123
Accrued expenses............................................ 45 46
Current portion of unearned revenue......................... 64 52
Income tax payable.......................................... -- --
Line of credit.............................................. -- --
Current portion of long-term debt........................... 114 398
Current portion of capital lease obligations................ 65 158
Deferred tax liability...................................... -- --
Other current liabilities................................... -- --
----- -----
Total current liabilities................................ 397 777
Long-term debt, net of current portion...................... 441 --
Capital lease obligations, net of current portion........... 64 203
Minority interest........................................... -- --
Deferred income taxes....................................... -- --
----- -----
Total liabilities........................................ 902 980
Stockholders' equity (deficit)..............................
Preferred stock............................................. -- --
Common stock................................................ 1 1
Additional paid-in capital.................................. 3 --
Retained earnings (accumulated deficit)..................... (512) (459)
----- -----
Total stockholders' equity (deficit)..................... (508) (458)
----- -----
Total liabilities and stockholders' equity (deficit)........ $ 394 $ 522
===== =====
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial ]Statements.
F-30
<PAGE> 174
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(5) -- UNAUDITED PRO FORMA COMBINED BALANCE SHEET DETAIL OF ACQUISITIONS JUNE
30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
BLACK SHEEP INTENSITY
IOCC.COM, FUTURA, INTERNET COMPUTING, COMPUTER ECSIS.NET, WORLD TRADE
LLC INC. SOLUTIONS, INC. INC. SYSTEMS LLC NETWORK, INC.
--------- ------- --------------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ 3 $ 4 $ -- $ -- $12 $-- $ 267
Accounts receivable, net........... 11 20 48 -- 1 12 3
Inventory.......................... -- 19 -- -- -- -- --
Prepaid expenses................... -- -- -- -- -- -- 2
Other current assets............... -- 3 -- 5 -- -- --
Deferred tax asset................. -- -- -- -- -- -- 133
Due from affiliates/stockholders... -- -- -- 82 -- -- --
---- ---- ---- ----- --- --- ------
Total current assets............ 14 46 48 87 13 12 405
Property and equipment, net........ 118 117 38 186 29 77 1,017
Customer list, net................. 4 33 -- -- -- -- --
Deferred tax asset................. -- -- -- -- -- -- --
Other assets....................... -- -- -- 7 -- -- 17
---- ---- ---- ----- --- --- ------
Total assets.................... $136 $196 $ 86 $ 280 $42 $89 $1,439
==== ==== ==== ===== === === ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ 3 $152 $ -- $ 45 $-- $19 $ 253
Accrued expenses................... -- 12 8 -- 2 4 --
Current portion of unearned
revenue........................... 11 44 95 113 10 -- 530
Income tax payable................. -- -- -- -- -- -- 17
Line of credit..................... -- -- -- -- -- -- --
Current portion of long-term
debt.............................. 46 24 -- 62 10 -- 45
Current portion of capital lease
obligations....................... 3 5 -- 55 -- -- --
Deferred tax liability............. -- -- -- -- -- -- --
Other current liabilities.......... -- 1 -- -- 2 -- --
---- ---- ---- ----- --- --- ------
Total current liabilities....... 63 238 103 275 24 23 845
Long-term debt, net of current
portion........................... -- 19 -- 35 2 -- 493
Capital lease obligations, net of
current portion................... 4 6 -- 140 -- -- --
Minority interest.................. -- -- -- -- -- -- --
Deferred income taxes.............. -- -- -- -- -- -- 48
---- ---- ---- ----- --- --- ------
Total liabilities............... 67 263 103 450 26 23 1,386
Stockholders' equity (deficit).....
Preferred stock.................... -- -- -- -- -- -- --
Common stock....................... -- -- -- -- -- -- 1
Additional paid-in capital......... -- 29 -- -- -- 66 325
Retained earnings (accumulated
deficit).......................... 69 (96) (17) (170) 16 -- (273)
---- ---- ---- ----- --- --- ------
Total stockholders' equity
(deficit)...................... 69 (67) (17) (170) 16 66 53
---- ---- ---- ----- --- --- ------
Total liabilities and stockholders'
equity (deficit).................. $136 $196 $ 86 $ 280 $42 $89 $1,439
==== ==== ==== ===== === === ======
<CAPTION>
STIC.NET, NETWEST
INC. ONLINE, INC. COMBINED
--------- ------------ --------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......... $ 34 $ 35 $ 1,933
Accounts receivable, net........... -- 67 1,935
Inventory.......................... -- -- 71
Prepaid expenses................... 4 4 81
Other current assets............... -- -- 32
Deferred tax asset................. -- 8 174
Due from affiliates/stockholders... -- 6 354
----- ---- -------
Total current assets............ 38 120 4,580
Property and equipment, net........ 521 189 10,528
Customer list, net................. -- 11 1,183
Deferred tax asset................. -- 1 13
Other assets....................... 4 -- 237
----- ---- -------
Total assets.................... $ 563 $321 $16,541
===== ==== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable................... $ 89 $ 15 $ 4,077
Accrued expenses................... 22 19 1,738
Current portion of unearned
revenue........................... 10 91 5,378
Income tax payable................. -- -- 21
Line of credit..................... -- -- 266
Current portion of long-term
debt.............................. 434 200 1,872
Current portion of capital lease
obligations....................... 276 -- 1,746
Deferred tax liability............. -- -- 5
Other current liabilities.......... -- 1 1,067
----- ---- -------
Total current liabilities....... 831 326 16,170
Long-term debt, net of current
portion........................... 41 -- 2,286
Capital lease obligations, net of
current portion................... 55 -- 1,565
Minority interest.................. -- -- 15
Deferred income taxes.............. -- -- 49
----- ---- -------
Total liabilities............... 927 326 20,085
Stockholders' equity (deficit).....
Preferred stock.................... -- -- --
Common stock....................... 1 1 413
Additional paid-in capital......... -- 21 3,210
Retained earnings (accumulated
deficit).......................... (365) (27) (7,167)
----- ---- -------
Total stockholders' equity
(deficit)...................... (364) (5) (3,544)
----- ---- -------
Total liabilities and stockholders'
equity (deficit).................. $ 563 $321 $16,541
===== ==== =======
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-31
<PAGE> 175
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(6) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PENNSYLVANIA WEIDNER
PADOTNET ONLINE, LTD. INNERNET, INC. DELANET, INC. ASSOCIATES, INC.
-------- ------------ -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity........... $480 $644 $788 $ 666 $387
Enhanced services and other..... 46 -- 1 -- --
---- ---- ---- ------ ----
Total revenues.................. 526 644 789 666 387
COSTS AND EXPENSES:
Cost of Internet services....... 151 145 257 275 133
Selling, general and
administrative................ 226 305 210 856 148
Depreciation and amortization... 72 50 66 59 53
---- ---- ---- ------ ----
Total costs and expenses...... 449 500 533 1,190 334
---- ---- ---- ------ ----
Income (loss) from operations..... 77 144 256 (524) 53
Other income (expense)
Interest income................. -- -- 1 --....... --
Interest expense................ -- (7) (5) (22) (2)
Other income (expense), net..... -- -- -- -- --
---- ---- ---- ------ ----
Loss before provision (benefit)
for income taxes................ 77 137 252 (546) 51
Provision (benefit) for income
taxes........................... -- -- -- -- --
---- ---- ---- ------ ----
Net income (loss)................. $ 77 $137 $252 $ (546) $ 51
==== ==== ==== ====== ====
EBITDA............................ 149 194 322 (465) 106
<CAPTION>
SOUTHERN
MARYLAND INTERNET, NUNET
INC. INC. ENTER.NET INC.
------------------ ------ --------------
<S> <C> <C> <C>
REVENUES:
Internet connectivity........... $407 $ 813 $1,567
Enhanced services and other..... -- 85 6
---- ------ ------
Total revenues.................. 407 898 1,573
COSTS AND EXPENSES:
Cost of Internet services....... 146 430 464
Selling, general and
administrative................ 241 592 1,005
Depreciation and amortization... 45 145 180
---- ------ ------
Total costs and expenses...... 432 1,167 1,649
---- ------ ------
Income (loss) from operations..... (25) (269) (76)
Other income (expense)
Interest income................. -- -- --
Interest expense................ (12) (20) (48)
Other income (expense), net..... -- -- --
---- ------ ------
Loss before provision (benefit)
for income taxes................ (37) (289) (124)
Provision (benefit) for income
taxes........................... -- -- --
---- ------ ------
Net income (loss)................. $(37) $ (289) $ (124)
==== ====== ======
EBITDA............................ 20 (124) 104
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-32
<PAGE> 176
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(6) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
PROMETHEUS USA CHOICE CROCKER
INFORMATION E-ZNET INTERNET SERVICES, COMMUNICATIONS COL PERIGEE.NET
CORP. INCORPORATED CO. INTERNET NETWORKS, INC. CORPORATION
----------- ------------ ------------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity.......... $119 $1,245 $306 $547 $711 $307
Enhanced services and other.... 70 156 78 -- 101 --
---- ------ ---- ---- ---- ----
Total revenues................. 189 1,401 384 547 812 307
COSTS AND EXPENSES:
Cost of Internet services...... 74 572 210 245 423 153
Selling, general and
administrative............... 127 653 95 133 292 74
Depreciation and
amortization................. 21 90 45 47 38 34
---- ------ ---- ---- ---- ----
Total costs and expenses..... 222 1,315 350 425 753 261
---- ------ ---- ---- ---- ----
Income (loss) from operations.... (33) 86 34 122 59 46
Other income (expense)
Interest income................ -- -- -- -- -- --
Interest expense............... (8) (22) (4) (1) (9) (1)
Other income (expense), net.... -- -- (1) -- -- 1
---- ------ ---- ---- ---- ----
Loss before provision (benefit)
for income taxes............... (41) 64 29 121 50 46
---- ------ ---- ---- ---- ----
Provision (benefit) for income
taxes.......................... -- (3) -- -- -- --
---- ------ ---- ---- ---- ----
Net income (loss)................ $(41) $ 67 $ 29 $121 $ 50 $ 46
==== ====== ==== ==== ==== ====
EBITDA........................... (12) 176 79 169 97 80
<CAPTION>
DUPLINNET THE 3RD
CORPORATION WAVENET, INC. DOOR, INC.
----------- ------------- ----------
<S> <C> <C> <C>
REVENUES:
Internet connectivity.......... $156 $212 $214
Enhanced services and other.... -- -- --
---- ---- ----
Total revenues................. 156 212 214
COSTS AND EXPENSES:
Cost of Internet services...... 89 85 84
Selling, general and
administrative............... 27 111 95
Depreciation and
amortization................. 18 11 12
---- ---- ----
Total costs and expenses..... 134 207 191
---- ---- ----
Income (loss) from operations.... 22 5 23
Other income (expense)
Interest income................ -- -- --
Interest expense............... -- (2) (2)
Other income (expense), net.... -- -- --
---- ---- ----
Loss before provision (benefit)
for income taxes............... 22 3 21
---- ---- ----
Provision (benefit) for income
taxes.......................... -- -- 5
---- ---- ----
Net income (loss)................ $ 22 $ 3 $ 16
==== ==== ====
EBITDA........................... 40 16 35
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-33
<PAGE> 177
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(6) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
ALLIANCE
MIDWEST INTERNET COMQUEST
INFORAMP, COMMUNICATIONS, TECHNOLOGIES, NETWORKS, FAIRNET,
INC INC. L.L.C. INC. INC.
-------------- --------------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity.................... $1,645 $ 926 $525 $218 $179
Enhanced services and other.............. -- 10 -- 14 7
------ ------ ---- ---- ----
Total revenues........................... 1,645 936 525 232 186
COSTS AND EXPENSES:
Cost of Internet services................ 703 476 446 64 128
Selling, general and administrative...... 589 1,198 95 87 71
Depreciation and amortization............ 52 84 -- 13 23
------ ------ ---- ---- ----
Total costs and expenses............... 1,344 1,758 541 164 222
------ ------ ---- ---- ----
Income (loss) from operations.............. 301 (822) (16) 68 (36)
Other income (expense)
Interest income.......................... 3 -- -- -- --
Interest expense......................... (4) (26) (5) -- (3)
Other income (expense), net.............. (1) (22) -- -- --
------ ------ ---- ---- ----
Loss before provision (benefit) for income
taxes.................................... 299 (870) (21) 68 (39)
Provision (benefit) for income taxes....... -- -- -- -- --
------ ------ ---- ---- ----
Net income (loss).......................... $ 299 $ (870) $(21) $ 68 $(39)
====== ====== ==== ==== ====
EBITDA..................................... 353 (738) (16) 81 (13)
<CAPTION>
WISCONSIN
INTERNET, NCONNECT, NETWURX,
INC. INC. INC. PROVIDE.NET
------------- --------- -------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Internet connectivity.................... $414 $473 $363 $1,028
Enhanced services and other.............. -- 42 9 --
---- ---- ---- ------
Total revenues........................... 414 515 372 1,028
COSTS AND EXPENSES:
Cost of Internet services................ 274 335 238 471
Selling, general and administrative...... 55 138 138 233
Depreciation and amortization............ 43 60 16 51
---- ---- ---- ------
Total costs and expenses............... 372 533 392 755
---- ---- ---- ------
Income (loss) from operations.............. 42 (18) (20) 273
Other income (expense)
Interest income.......................... 1 -- -- 1
Interest expense......................... -- (2) (13) 0
Other income (expense), net.............. -- -- -- 1
---- ---- ---- ------
Loss before provision (benefit) for income
taxes.................................... 43 (20) (33) 275
Provision (benefit) for income taxes....... 17 -- -- --
---- ---- ---- ------
Net income (loss).......................... $ 26 $(20) $(33) $ 275
==== ==== ==== ======
EBITDA..................................... 85 42 (4) 324
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-34
<PAGE> 178
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(6) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
THE COMPUTER WWW.INTERNET NETPLUS INTERNET
CARE COMPANY, ISP SOLUTIONS, COMMUNICATIONS, NEBRASKA
INC. MANAGEMENT, INC. INC. COPPER.NET GROUP INC. CORPORATION
------------- ---------------- ------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Internet
connectivity....... $440 $ 359 $267 $372 $175 $ 718
Enhanced services and
other.............. 242 -- 12 -- 6 78
---- ----- ---- ---- ---- ------
Total revenues....... 682 359 279 372 181 796
COSTS AND EXPENSES:
Cost of Internet
services........... 335 209 152 170 146 381
Selling, general and
administrative..... 228 163 159 194 19 207
Depreciation and
amortization....... 66 34 44 56 15 53
---- ----- ---- ---- ---- ------
Total costs and
expenses......... 629 406 355 420 180 641
---- ----- ---- ---- ---- ------
Income (loss) from
operations........... 53 (47) (76) (48) 1 155
Other income (expense)
Interest income...... -- -- -- -- -- --
Interest expense..... (10) (21) (5) (10) (3) --
Other income
(expense), net..... -- -- -- -- -- --
---- ----- ---- ---- ---- ------
Loss before provision
(benefit) for income
taxes................ 43 (68) (81) (58) (2) 155
Provision (benefit) for
income taxes......... -- -- -- -- -- --
---- ----- ---- ---- ---- ------
Net income (loss)...... $ 43 $ (68) $(81) $(58) $ (2) $ 155
==== ===== ==== ==== ==== ======
EBITDA................. 119 (13) (32) 8 16 208
<CAPTION>
RAPIDNET, INC. CSW NET, INC. IOCC.COM, LLC
-------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Internet
connectivity....... $609 $1,082 $208
Enhanced services and
other.............. 121 -- --
---- ------ ----
Total revenues....... 730 1,082 208
COSTS AND EXPENSES:
Cost of Internet
services........... 387 477 109
Selling, general and
administrative..... 256 325 54
Depreciation and
amortization....... 37 138 15
---- ------ ----
Total costs and
expenses......... 680 940 178
---- ------ ----
Income (loss) from
operations........... 50 142 30
Other income (expense)
Interest income...... -- -- --
Interest expense..... (36) (57) (1)
Other income
(expense), net..... -- -- --
---- ------ ----
Loss before provision
(benefit) for income
taxes................ 14 85 29
Provision (benefit) for
income taxes......... -- -- --
---- ------ ----
Net income (loss)...... $ 14 $ 85 $ 29
==== ====== ====
EBITDA................. 87 280 45
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-35
<PAGE> 179
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(6) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
INTERNET INTENSITY
FUTURA, SOLUTIONS, BLACK SHEEP COMPUTER ECSIS.NET,
INC. INC. COMPUTING, INC. SYSTEMS LLC
------- ---------- --------------- --------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity............................... $248 $161 $337 $ 79 $281
Enhanced services and other......................... 58 32 -- 37 18
---- ---- ---- ---- ----
Total revenues...................................... 306 193 337 116 299
COSTS AND EXPENSES:
Cost of Internet services........................... 161 77 200 59 124
Selling, general and administrative................. 184 70 88 43 72
Depreciation and amortization....................... 16 9 29 4 10
---- ---- ---- ---- ----
Total costs and expenses.......................... 361 156 317 106 206
---- ---- ---- ---- ----
Income (loss) from operations......................... (55) 37 20 10 93
Other income (expense)
Interest income..................................... -- -- -- -- --
Interest expense.................................... (5) -- (16) (1) --
Other income (expense), net......................... -- -- -- -- --
---- ---- ---- ---- ----
Loss before provision (benefit) for income taxes...... (60) 37 4 9 93
Provision (benefit) for income taxes.................. -- -- -- -- --
---- ---- ---- ---- ----
Net income (loss)..................................... $(60) $ 37 $ 4 $ 9 $ 93
==== ==== ==== ==== ====
EBITDA................................................ (39) 46 49 14 103
<CAPTION>
WORLD TRADE NETWEST
NETWORK, STIC.NET ONLINE,
INC. INC. INC. COMBINED
----------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUES:
Internet connectivity............................... $2,081 $753 $ 585 $24,095
Enhanced services and other......................... -- 69 -- 1,298
------ ---- ----- -------
Total revenues...................................... 2,081 822 585 25,393
COSTS AND EXPENSES:
Cost of Internet services........................... 712 233 155 11,158
Selling, general and administrative................. 1,360 416 397 12,029
Depreciation and amortization....................... 97 170 45 2,166
------ ---- ----- -------
Total costs and expenses.......................... 2,169 819 597 25,353
------ ---- ----- -------
Income (loss) from operations......................... (88) 3 (12) 40
Other income (expense)
Interest income..................................... 1 -- -- 7
Interest expense.................................... (4) (46) (5) (438)
Other income (expense), net......................... -- -- -- (22)
------ ---- ----- -------
Loss before provision (benefit) for income taxes...... (91) (43) (17) (413)
Provision (benefit) for income taxes.................. (22) -- (3) (6)
------ ---- ----- -------
Net income (loss)..................................... $ (69) $(43) $ (14) $ (407)
====== ==== ===== =======
EBITDA................................................ 9 173 33 2,206
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-36
<PAGE> 180
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(7) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PENNSYLVANIA
ONLINE WEIDNER
PADOTNET LTD. INTERNET, INC. DELANET, INC. ASSOCIATES, INC.
-------- ------------ --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity................ $ 527 $ 917 $ 946 $ 716 $ 432
Enhanced services and other.......... 50 -- 12 -- --
------ ------ ----- ------ -----
Total revenues....................... 577 917 958 716 432
COSTS AND EXPENSES:
Cost of Internet services............ 215 278 334 268 175
Selling, general and
administrative..................... 256 570 321 554 193
Depreciation and amortization........ 114 79 97 78 78
------ ------ ----- ------ -----
Total costs and expenses........... 585 927 752 900 446
------ ------ ----- ------ -----
Income (loss) from operations.......... (8) (10) 206 (184) (14)
Other income (expense)
Interest income...................... -- -- 2 -- --
Interest expense..................... -- (13) (28) (24) (5)
Other income (expense), net.......... -- -- 1 -- --
------ ------ ----- ------ -----
Loss before provision (benefit) for
income taxes......................... (8) (23) 181 (208) (19)
Provision (benefit) for income taxes... -- -- -- -- --
------ ------ ----- ------ -----
Net income (loss)...................... $ (8) (23) $ 181 $ (208) $ (19)
====== ====== ===== ====== =====
EBITDA................................. 106 69 303 (106) 64
<CAPTION>
SOUTHERN PROMETHEUS
MARYLAND INFORMATION
INTERNET, INC. NUNET, INC. ENTER.NET, INC. CORP.
-------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Internet connectivity................ $ 539 $1,115 $2,464 $ 312
Enhanced services and other.......... -- 96 25 215
------ ------ ------ ------
Total revenues....................... 539 1,211 2,489 527
COSTS AND EXPENSES:
Cost of Internet services............ 159 734 691 150
Selling, general and
administrative..................... 383 1,256 1,705 259
Depreciation and amortization........ 77 98 302 50
------ ------ ------ ------
Total costs and expenses........... 619 2,088 2,698 459
------ ------ ------ ------
Income (loss) from operations.......... (80) (877) (209) 68
Other income (expense)
Interest income...................... -- -- -- --
Interest expense..................... (21) (15) (81) (20)
Other income (expense), net.......... -- -- -- --
------ ------ ------ ------
Loss before provision (benefit) for
income taxes......................... (101) (892) (290) 48
Provision (benefit) for income taxes... -- -- -- --
------ ------ ------ ------
Net income (loss)...................... $ (101) $ (892) $ (290) $ 48
====== ====== ====== ======
EBITDA................................. (3) (779) 93 118
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-37
<PAGE> 181
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(7) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
USA
CHOICE CROCKER COL
E-ZNET INTERNET COMMUNICATIONS NETWORKS, PERIGEE.NET DUPLINNET
INCORPORATED SERVICES, CO. INTERNET INC. CORPORATION CORPORATION
------------ ------------- -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity.................. $1,988 $287 $847 $798 $497 $201
Enhanced services and other............ 320 59 -- 176 18 --
------ ---- ---- ---- ---- ----
Total revenues......................... 2,308 346 847 974 515 201
COSTS AND EXPENSES:
Cost of Internet services.............. 1,011 212 377 516 271 110
Selling, general and administrative.... 903 62 285 280 165 10
Depreciation and amortization.......... 129 56 75 29 52 28
------ ---- ---- ---- ---- ----
Total costs and expenses............. 2,043 330 737 825 488 148
------ ---- ---- ---- ---- ----
Income (loss) from operations............ 265 16 110 149 27 53
Other income (expense)
Interest income........................ -- -- -- -- -- --
Interest expense....................... (39) (3) (1) (8) (1) --
Other income (expense), net............ -- (26) -- -- (22) --
------ ---- ---- ---- ---- ----
Loss before provision (benefit) for
income taxes........................... 226 (13) 109 141 4 53
Provision (benefit) for income taxes..... -- -- -- -- -- --
------ ---- ---- ---- ---- ----
Net income (loss)........................ $ 226 $(13) $109 $141 $ 4 $ 53
====== ==== ==== ==== ==== ====
EBITDA................................... 394 72 185 178 79 81
<CAPTION>
THE 3RD INFORAMP,
WAVENET, INC. DOOR, INC. INC.
------------- ---------- ---------
<S> <C> <C> <C>
REVENUES:
Internet connectivity.................. $310 $346 $1,635
Enhanced services and other............ -- -- --
---- ---- ------
Total revenues......................... 310 346 1,635
COSTS AND EXPENSES:
Cost of Internet services.............. 137 161 646
Selling, general and administrative.... 157 167 799
Depreciation and amortization.......... 21 13 81
---- ---- ------
Total costs and expenses............. 315 341 1,526
---- ---- ------
Income (loss) from operations............ (5) 5 109
Other income (expense)
Interest income........................ -- -- 4
Interest expense....................... (4) -- (7)
Other income (expense), net............ -- -- 1
---- ---- ------
Loss before provision (benefit) for
income taxes........................... (9) 5 107
Provision (benefit) for income taxes..... -- 1 --
---- ---- ------
Net income (loss)........................ $ (9) $ 4 $ 107
==== ==== ======
EBITDA................................... 16 18 190
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-38
<PAGE> 182
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(7) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
ALLIANCE
MIDWEST INTERNET
COMMUNICATIONS, TECHNOLOGIES, COMQUEST WISCONSIN
INC. L.L.C. NETWORKS, INC. FAIRNET, INC. INTERNET, INC.
--------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity.............. $1,353 $461 $190 $198 $602
Enhanced services and other........ 34 -- 24 8 --
------ ---- ---- ---- ----
Total revenues..................... 1,387 461 214 206 602
COSTS AND EXPENSES:
Cost of Internet services.......... 734 422 72 114 407
Selling, general and
administrative................... 572 76 67 105 121
Depreciation and amortization...... 143 -- 14 17 37
------ ---- ---- ---- ----
Total costs and expenses......... 1,449 498 153 236 565
------ ---- ---- ---- ----
Income (loss) from operations........ (62) (37) 61 (30) 37
Other income (expense)
Interest income.................... -- -- -- -- --
Interest expense................... (60) (7) -- (3) (4)
Other income (expense), net........ (88) -- -- -- (10)
------ ---- ---- ---- ----
Loss before provision (benefit) for
income taxes....................... (210) (44) 61 (33) 23
Provision (benefit) for income
taxes.............................. -- -- -- -- 9
------ ---- ---- ---- ----
Net income (loss).................... $ (210) $(44) $ 61 $(33) $ 14
====== ==== ==== ==== ====
EBITDA............................... 81 (37) 75 (13) 74
<CAPTION>
THE COMPUTER
NCONNECT, NETWURX, CARE COMPANY,
INC. INC. PROVIDE.NET INC.
--------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Internet connectivity.............. $ 580 $ 323 $1,304 $ 607
Enhanced services and other........ 80 14 -- 553
----- ----- ------ ------
Total revenues..................... 660 337 1,304 1,160
COSTS AND EXPENSES:
Cost of Internet services.......... 560 288 678 590
Selling, general and
administrative................... 202 158 278 495
Depreciation and amortization...... 98 22 59 56
----- ----- ------ ------
Total costs and expenses......... 860 468 1,015 1,141
----- ----- ------ ------
Income (loss) from operations........ (200) (131) 289 19
Other income (expense)
Interest income.................... -- -- 1 --
Interest expense................... (18) (16) -- (16)
Other income (expense), net........ (3) -- 18 --
----- ----- ------ ------
Loss before provision (benefit) for
income taxes....................... (221) (147) 308 3
Provision (benefit) for income
taxes.............................. -- -- -- --
----- ----- ------ ------
Net income (loss).................... $(221) $(147) $ 308 $ 3
===== ===== ====== ======
EBITDA............................... (102) (109) 348 75
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-39
<PAGE> 183
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(7) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
SENSIBLE NETPLUS INTERNET
COMPUTER NETHAWK OF WWW.INTERNET COPPER.NET COMMUNICATIONS, NEBRASKA
SOLUTIONS, INC. ALMA, INC. SOLUTIONS, INC. GROUP INC. CORPORATION
--------------- ---------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity.......... $254 $ 275 $ 452 $ 417 $198 $ 915
Enhanced services and other.... 9 -- 18 -- 11 156
---- ------ ----- ------ ---- ------
Total revenues................. 263 275 470 417 209 1,071
COSTS AND EXPENSES:
Cost of Internet services...... 160 155 275 146 164 493
Selling, general and
administrative............... 73 51 242 196 25 241
Depreciation and
amortization................. 37 20 55 46 10 60
---- ------ ----- ------ ---- ------
Total costs and expenses..... 270 226 572 388 199 794
---- ------ ----- ------ ---- ------
Income (loss) from operations.... (7) 49 (102) 29 10 277
Other income (expense)
Interest income................ -- -- -- -- -- --
Interest expense............... (31) (12) (7) (11) (3) --
Other income (expense), net.... -- -- -- -- -- (5)
---- ------ ----- ------ ---- ------
Loss before provision (benefit)
for income taxes............... (38) 37 (109) 18 7 272
Provision (benefit) for income
taxes.......................... -- -- -- -- -- --
---- ------ ----- ------ ---- ------
Net income (loss)................ $(38) $ 37 $(109) $ 18 $ 7 $ 272
==== ====== ===== ====== ==== ======
EBITDA........................... 30 69 (47) 75 20 337
<CAPTION>
RAPIDNET, INC. CSW NET, INC. IOCC.COM, LLC
-------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Internet connectivity.......... $ 942 $1,349 $221
Enhanced services and other.... 402 3 --
------ ------ ----
Total revenues................. 1,344 1,352 221
COSTS AND EXPENSES:
Cost of Internet services...... 769 940 95
Selling, general and
administrative............... 645 509 66
Depreciation and
amortization................. 68 217 14
------ ------ ----
Total costs and expenses..... 1,482 1,666 175
------ ------ ----
Income (loss) from operations.... (138) (314) 46
Other income (expense)
Interest income................ 8 -- --
Interest expense............... (68) (107) (2)
Other income (expense), net.... (1) 57 --
------ ------ ----
Loss before provision (benefit)
for income taxes............... (199) (364) 44
Provision (benefit) for income
taxes.......................... -- -- --
------ ------ ----
Net income (loss)................ $ (199) $ (364) $ 44
====== ====== ====
EBITDA........................... (70) (97) 60
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-40
<PAGE> 184
ESPERNET.COM, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS)
(7) -- UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS DETAIL OF
ACQUISITIONS FOR THE YEAR ENDED DECEMBER 31, 1998 -- (CONTINUED)
<TABLE>
<CAPTION>
INTERNET INTENSITY
SOLUTIONS, BLACKSHEEP COMPUTER ECSIS.NET, WORLD TRADE
FUTURA, INC. INC. COMPUTING, INC. SYSTEMS LLC NETWORK, INC.
------------ ---------- --------------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Internet connectivity................... $261 $296 $ 266 $87 $367 $2,834
Enhanced services and other............. -- 74 -- 84 21 --
---- ---- ----- --- ---- ------
Total revenues.......................... 261 370 266 171 388 2,834
COSTS AND EXPENSES:
Cost of Internet services............... 141 139 183 102 192 811
Selling, general and administrative..... 119 140 175 50 152 1,808
Depreciation and amortization........... 17 23 23 5 17 115
---- ---- ----- --- ---- ------
Total costs and expenses............. 277 302 381 157 361 2,734
---- ---- ----- --- ---- ------
Income (loss) from operations............. (16) 68 (115) 14 27 100
Other income (expense)
Interest income......................... -- -- -- -- -- --
Interest expense........................ (3) -- (14) (2) -- (13)
Other income (expense), net............. 1 -- -- -- -- (122)
---- ---- ----- --- ---- ------
Loss before provision (benefit) for income
taxes................................... (18) 68 (129) 12 27 (35)
Provision (benefit) for income taxes...... -- -- -- -- -- (8)
---- ---- ----- --- ---- ------
Net income (loss)......................... $(18) $ 68 $(129) $12 $ 27 $ (27)
==== ==== ===== === ==== ======
EBITDA.................................... 1 91 (92) 19 44 215
<CAPTION>
STIC.NET, NETWEST
INC. ONLINE, INC. COMBINED
--------- ------------ --------
<S> <C> <C> <C>
REVENUES:
Internet connectivity................... $1,050 $773 $31,452
Enhanced services and other............. 146 -- 2,608
------ ---- -------
Total revenues.......................... 1,196 773 34,060
COSTS AND EXPENSES:
Cost of Internet services............... 347 203 15,625
Selling, general and administrative..... 795 450 16,136
Depreciation and amortization........... 181 54 2,865
------ ---- -------
Total costs and expenses............. 1,323 707 34,626
------ ---- -------
Income (loss) from operations............. (127) 66 (566)
Other income (expense)
Interest income......................... -- -- 15
Interest expense........................ (50) (8) (725)
Other income (expense), net............. -- -- (199)
------ ---- -------
Loss before provision (benefit) for income
taxes................................... (177) 58 (1,475)
Provision (benefit) for income taxes...... -- 13 15
------ ---- -------
Net income (loss)......................... $ (177) $ 45 $(1,490)
====== ==== =======
EBITDA.................................... 54 120 2,299
</TABLE>
See Notes to the Unaudited Pro Forma Combined Financial Statements.
F-41
<PAGE> 185
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheet of espernet.com, inc. as of
June 30, 1999. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement 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 this financial statements is 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 statement referred to above presents fairly,
in all material respects, the financial position of espernet.com, inc. as of
June 30, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 29, 1999
F-42
<PAGE> 186
ESPERNET.COM, INC.
BALANCE SHEET
AS OF JUNE 30, 1999
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 1
---
Total assets........................................... 1
===
STOCKHOLDER'S EQUITY
Stockholder's equity (note 3):
Preferred Stock, $.001 par value. 20,000,000 shares
authorized
Common stock, $.001 par value. 100,000,000 shares
authorized; 1 share issued and outstanding
Additional paid-in capital................................ 1
---
Commitments and contingencies
Total stockholder's equity............................. $ 1
===
</TABLE>
See accompanying notes to financial statements
F-43
<PAGE> 187
ESPERNET.COM, INC
NOTES TO FINANCIAL STATEMENT
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
On June 7, 1999, espernet.com, inc.(the "Company" or "Espernet") was
incorporated in the State of Delaware.
On June 8, 1999, the Company entered into an administrative services
agreement with Espernet.com of New York, Inc. ("Espernet-NY") which provides
that Espernet-NY will supervise and finance the Company's formation and
operations through the Company's initial public offering ("IPO"). Espernet-NY's
principal shareholders include certain executive officers and directors of
Espernet and other investors. In connection with the Company's IPO, the
administrative services agreement requires that Espernet acquire Espernet-NY
through a share exchange and assume all of Espernet-NY's liabilities. Upon
completion of this share exchange, Espernet-NY will become a wholly owned
subsidiary of the Company, and its former shareholders will become holders of
all of the Company's common stock on a pre-IPO basis. This transaction will be
accounted for in a manner similar to a combination of entities under common
control.
The Company was founded for the purpose of acquiring Internet service
providers ("ISPs") operating in markets primarily located in the Mid-Atlantic,
Mid-West and Mid-Southern United States to provide Internet services to
residential, commercial, civic, community, government and school subscribers.
During June, July and August 1999, the Company entered into stock exchange
agreements with 39 Internet service providers ("ISPs") whereby the Company will
acquire either the stock or assets of the ISPs in exchange for cash and common
stock (the "ISP Transactions").
On August 20, 1999, the Company entered into a stock exchange agreement
with ESP Acquisition Corp. ("EAC"), whereby the Company will acquire four
Internet service providers, that have agreed to be acquired by EAC in exchange
for cash and common stock (the "EAC Transactions").
The ISP Transactions and EAC Transactions (collectively referred to as the
"Transactions") are contingent upon the Company's IPO See Note (4).
The Company is dependent upon the IPO to execute the pending Transactions.
There is no assurance that the IPO can be completed in a timely manner or at
all.
In accordance with the Transaction agreements, the Company will purchase
the ISPs using both its common stock and cash raised in the IPO. The anticipated
combined purchase price payable by the Company consists of approximately $91.3
million in cash (including finder's fees) and $82.9 million of common stock
based on IPO price. See Note (4).
Inherent in the Company's business plan are various risks and
uncertainties, including its limited operating history, and the limited history
of the need for Internet access and associated enhanced Internet services. The
Company's future success will be dependent upon its ability to successfully
integrate the ISPs into one Company and provide effective and competitive
Internet services that meet customers' expectations.
F-44
<PAGE> 188
ESPERNET.COM, INC
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
(b) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(d) INTANGIBLE ASSETS
Intangible assets primarily include customer lists acquired in the
Transactions and will be amortized using the straight-line method over three
years.
Goodwill resulting from the Transactions is estimated by management to be
primarily associated with the acquired workforce and technological expertise and
will be amortized on the straight-line basis over three years.
At each balance sheet date, the Company will assess the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected future
operating cash flows in relation to its net investment in each ISP.
(e) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25 and provide pro forma net income (loss) disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to apply the provisions of APB Opinion
No. 25 and provide the Pro Forma disclosure provisions of SFAS No. 123.
(f) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging
F-45
<PAGE> 189
ESPERNET.COM, INC
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
activities. SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company has not yet analyzed the impact of this pronouncement on
its financial statements.
(3) COMMON STOCK
On June 7, 1999, the Company issued one share of common stock to its
founder and investor for $1.
(4) TRANSACTIONS
The Company plans to consummate the Transactions in accordance with the
acquisition agreements negotiated with the current owners of each of the ISPs.
The Transactions will be financed through the cash proceeds from the IPO and
common stock. The combined purchase price payable by the Company consists of
approximately $91.0 million in cash and $82.1 million of common stock. The
following table reflects the consideration to be paid in cash and common shares
and the resulting excess of purchase price over net assets acquired as of June
30, 1999 (amounts in thousands except for share amounts).
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 estimated to approximate fair market value of the
assets acquired and liabilities assumed. The excess of purchase price over such
amounts will be allocated to customer lists and goodwill. Additionally,
adjustments have been made for the establishment of a deferred income tax
liability resulting from the Transaction. The allocation of the purchase price
is considered preliminary until such time as the closing of the IPO and
consummation of the Transactions. In accordance with the Transaction agreements,
the final purchase price may be adjusted based upon certain ISP subscriber and
financial information as of the closing date. The Company has placed a portion
of the purchase price in escrow pending receipt of the final adjustments, which
is expected to be finalized no later than sixty days after the closing of the
IPO.
F-46
<PAGE> 190
ESPERNET.COM, INC
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
The Company will amortize the intangible assets and goodwill associated
with the Transactions over a period of three years.
<TABLE>
<CAPTION>
NET ASSETS
AS OF DEFERRED TAX
SHARES OF VALUE JUNE 30, 1999 LIABILITY
COMMON OF TOTAL FINANCIAL RECORDED IN CUSTOMER
CASH STOCK SHARES CONSIDERATION STATEMENT ACQUISITION LISTS GOODWILL
------- --------- ------- ------------- ------------- ------------ -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PAdotNet............. $ 1,649 172,264 $ 3,445 $ 5,094 $ (29) $ 1 $ 1,722 $ 3,400
Pennsylvania Online,
Ltd. .............. 2,371 105,009 2,100 4,471 1 (770) 2,196 3,044
Innernet, Inc. ...... 3,289 107,550 2,151 5,440 81 (564) 2,327 3,596
Delanet, Inc. ....... 2,143 101,563 2,031 4,174 (271) (600) 2,011 3,034
Weidner Associates,
Inc. .............. 660 50,180 1,004 1,664 (170) (67) 1,020 881
Southern Maryland
Internet, Inc. .... 1,229 55,000 1,100 2,329 (262) (230) 1,282 1,539
NuNet, Inc.(2) ...... 2,690 345,000 6,900 9,590 (720) (999) 1,633 9,676
Enter.Net............ 7,936 240,000 4,798 12,734 (764) (1,318) 4,828 9,988
Prometheus Information
Corp.(1)........... 725 11,325 227 952 (209) (88) 316 933
E-Znet
Incorporated....... 4,163 231,000 4,620 8,783 320 (1,069) 2,562 6,970
USA Choice Internet
Services, Co. ..... 2,503 38,500 770 3,273 75 378 1,257 1,563
Crocker
Communications,
Inc. .............. 1,321 90,000 1,800 3,121 98 (265) 1,434 1,854
COL Networks,
Inc. .............. 3,150 139,205 2,784 5,934 280 (934) 2,649 3,939
Perigee.net
Corporation........ 583 36,225 725 1,308 (19) (218) 497 1,048
DuplinNet
Corporation(1)..... 1,802 29,531 591 2,393 156 (318) 396 2,159
Wavenet, Inc.(1)..... 1,238 20,250 405 1,643 (12) (211) 422 1,444
The 3rd Door,
Inc.(1)............ 899 14,664 293 1,192 40 (166) 366 952
InfoRamp, Inc. ...... 10,911 100,000 2,000 12,911 411 (2,283) 3,848 10,935
MidWest
Communications,
Inc. .............. 2,243 125,000 2,500 4,743 (297) (838) 2,470 3,408
Alliance Internet
Technologies,
LLC................ 1,119 59,977 1,200 2,319 104 24 1,253 938
ComQuest Networks,
Inc. .............. 665 54,210 1,084 1,749 130 (222) 586 1,255
Fairnet, Inc......... 330 36,838 737 1,067 (34) (289) 459 931
Wisconsin Internet,
Inc. .............. 1,835 68,850 1,377 3,212 54 (403) 1,001 2,560
</TABLE>
F-47
<PAGE> 191
ESPERNET.COM, INC
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
<TABLE>
<CAPTION>
NET ASSETS
AS OF DEFERRED TAX
SHARES OF VALUE JUNE 30, 1999 LIABILITY
COMMON OF TOTAL FINANCIAL RECORDED IN CUSTOMER
CASH STOCK SHARES CONSIDERATION STATEMENT ACQUISITION LISTS GOODWILL
------- --------- ------- ------------- ------------- ------------ -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NConnect, Inc........ 1,592 70,875 1,418 3,010 (341) (418) 1,317 2,452
Netwurx, Inc......... $ 1,186 52,750 $ 1,055 $ 2,241 $ (184) $ (250) $ 977 $ 1,698
Provide.Net.......... 4,444 155,000 3,100 7,544 653 505 2,021 4,365
The Computer Care
Company, Inc. ..... 872 67,438 1,349 2,221 (92) (348) 1,472 1,189
ISP Management,
Inc. .............. 809 51,750 1,035 1,844 (242) 97 729 1,260
www.internet
solutions, inc..... 1,562 -- -- 1,562 (499) (117) 762 1,416
Copper.Net Group .... 1,437 159,491 3,190 4,627 (227) (624) 939 4,539
NetPlus
Communications,
Inc. .............. 1,044 -- -- 1,044 (6) (188) 457 781
Internet Nebraska
Corporation........ 2,486 133,815 2,676 5,162 416 (836) 1,614 3,968
RapidNet, Inc. ...... 1,203 92,950 1,859 3,062 (508) (553) 1,565 2,558
CSW Net, Inc. ....... 4,367 205,000 4,100 8,467 (458) (961) 2,460 7,426
IOCC.com, LLC........ 353 27,115 542 895 69 (57) 422 461
Futura, Inc.......... 713 31,500 630 1,343 (67) (171) 664 917
Internet Solutions,
Inc................ 336 20,952 419 755 (17) 11 558 203
Black Sheep
Computing, Inc. ... 880 67,031 1,341 2,221 (170) (79) 668 1,802
Intensity Computer
Systems............ 137 9,284 186 323 16 (78) 227 158
ECSIS.Net, LLC....... 946 -- -- 946 66 (35) 675 240
World Trade Network
Inc................ 6,052 471,250 9,425 15,477 53 (2,330) 4,693 13,061
STIC.NET, Inc........ 3,487 181,500 3,630 7,117 (364) (889) 2,757 5,613
NetWest Online,
Inc................ 1,652 76,046 1,521 3,173 (5) (437) 1,550 2,065
------- --------- ------- -------- ------- -------- ------- --------
$91,012 4,105,888 $82,118 $173,130 $(2,944) $(19,207) $63,062 $132,219
======= ========= ======= ======== ======= ======== ======= ========
</TABLE>
- -------------------------
(1) Acquired through ESP Acquisition Corp.
(2) The net assets acquired from the ISP reflect adjustments to the amounts
reported in the June 30, 1999 financial statements to account for the
liabilities not assumed upon the consummation of the Transactions.
F-48
<PAGE> 192
ESPERNET.COM, INC
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
(5) COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
Pursuant to the Company's share exchange agreement with espernet.com of ny,
the Company will assume employment agreements with certain senior executives
(the "executives") pursuant to which the executives shall receive total annual
salaries of $775 thousand in addition to being eligible for annual performance
bonuses of up to $800 thousand and other fringe benefits. The Company has also
committed to pay these executives as well as other members of management and its
Board of Directors, cash bonuses of approximately $1,500 thousand upon
consummation of the IPO.
F-49
<PAGE> 193
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com of new york, inc.:
We have audited the accompanying balance sheet of espernet.com, of new
york, inc. as of June 30, 1999, and the related statement of operations,
stockholders' equity, and cash flows for the period from April 29, 1999
(inception) to June 30, 1999. 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 espernet.com of new york,
inc. as of June 30, 1999, and the results of its operations and its cash flows
for the period from April 29, 1999 (inception) to June 30, 1999 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 29, 1999
F-50
<PAGE> 194
ESPERNET.COM OF NEW YORK, INC.
BALANCE SHEET
AS OF JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 142
-----
Total current assets................................... 142
Property and equipment, net................................. 3
-----
Total assets........................................... $ 145
=====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses.......................................... $ 106
-----
Total current liabilities.............................. 106
Stockholders' equity (note 3):
Common stock, $.01 par value. 10,000,000 shares
authorized; 1,600,000 shares issued and outstanding.... 16
Additional paid-in capital................................ 234
Accumulated deficit....................................... (211)
-----
Total stockholders' equity............................. 39
-----
Commitments and contingencies
Total liabilities and stockholders' equity............. $ 145
=====
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE> 195
ESPERNET.COM OF NEW YORK, INC.
STATEMENT OF OPERATIONS
PERIOD FROM APRIL 22, 1999 (INCEPTION) TO JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<S> <C>
Costs and expenses:
Selling, general and administrative....................... $ 211
---------
Total costs and expenses............................... 211
---------
Loss from operations before income taxes............... (211)
Income tax provision........................................ --
---------
Net loss............................................... $ (211)
=========
Basic and diluted net loss per common share................. $ (0.13)
=========
Basic and diluted outstanding common shares................. 1,600,000
=========
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE> 196
ESPERNET.COM OF NEW YORK, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM APRIL 22, 1999 TO JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Issuance of common stock................. 1,600,000 $16 $234 $ -- $ 250
Net loss................................. -- -- -- (211) (211)
--------- --- ---- ----- -----
BALANCE AT JUNE 30, 1999................. 1,600,000 $16 $234 $(211) $ 39
========= === ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE> 197
ESPERNET.COM OF NEW YORK, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM APRIL 22, 1999 (INCEPTION) TO JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(211)
Adjustments to reconcile net loss to net cash used by
operating activities:
Accrued expenses....................................... 106
-----
Net cash used by operating activities.................. (105)
-----
Cash flows from investing activities:
Acquisition of property and equipment..................... (3)
-----
Net cash used by investing activities.................. (3)
-----
Cash flows from financing activities:
Issuance of common stock.................................. 250
-----
Net cash provided by financing activities.............. 250
-----
Net increase in cash................................... 142
Cash and cash equivalents:
Beginning of period....................................... --
-----
End of period............................................. $ 142
=====
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE> 198
ESPERNET.COM OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Espernet.com of New York, Inc. was formed on April 22, 1999 under the laws
of New York (the "Company"). On June 7, 1999, the Chairman of Espernet-NY became
the sole shareholder of, espernet.com, inc., a Delaware company ("Espernet-DE").
On June 8, 1999, the Company entered into an administrative services
agreement with Espernet-DE pursuant to which the Company will supervise and
finance Espernet-DE's formation and operations until Espernet-DE's initial
public offering ("IPO"). The Company's principal shareholders include certain
executive officers and directors of Espernet-DE. Concurrently with Espernet-DE's
IPO, the administrative services agreement requires that Espernet-DE acquire the
Company through an exchange of shares whereupon the Company will become a
wholly-owned subsidiary of Espernet-DE, and the Company's former shareholders
will become holders of all of Espernet-DE's common stock on a pre-IPO basis.
Given the non-substantive nature of this exchange this transaction will be
accounted for in a manner similar to a combination of entities under common
control.
(b) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years.
(d) INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(e) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash. As of June 30, 1999, the Company
had concentrations of credit risk in one financial institution in the form of a
money market account in the approximate amount of $142.
F-55
<PAGE> 199
ESPERNET.COM OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1999, the fair value of the Company's financial instruments
approximate their carrying value based on their terms and interest rates.
(f) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
allows entities to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25 and provide Pro Forma net earnings (loss) disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the Pro Forma disclosure provisions of SFAS No. 123.
(g) BASIC AND DILUTED NET LOSS PER COMMON SHARE
The Company accounts for earnings per share in accordance with SFAS No.
128, Computation of Earnings Per Share. In accordance with SFAS No. 128 and the
SEC Staff Accounting Bulletin No. 98, basic earnings per share is computed using
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Pursuant to SEC Staff Accounting Bulletin No. 98,
all options, warrants or other potentially dilutive instruments issued for
nominal consideration, prior to the anticipated effective date of an initial
public offering (including the IPO), are required to be included in the
calculation of basic and diluted net loss per share, as if they were outstanding
for all periods presented. As a result, the Company has included 2,928,000
additional shares of common stock issued after June 30, 1999 in the calculation
of basic and diluted net loss per common share for all periods presented which
relate to common shares issued for nominal consideration.
(h) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133, as
amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not yet analyzed the impact of this pronouncement on its financial
statements.
(2) BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
JUNE 30,
1999
--------
<S> <C>
Computer equipment.......................................... $3
Less accumulated depreciation............................... --
--
Total.................................................. $3
==
</TABLE>
F-56
<PAGE> 200
ESPERNET.COM OF NEW YORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) COMMON STOCK
On April 29, August 13, and September 3, 1999, the Company issued
1,600,000, 1,472,000, and 1,456,000 shares of common stock, respectively, to its
founders and investors for approximately $0.16 per share, or $707,500.
On August 17, 1999, the Company issued approximately 1,832,192 shares of
common stock to certain employees, consultants and members of its board of
directors for services to be provided ("Granted Shares"). The Granted Shares are
subject to forfeiture restrictions which lapse over time provided the respective
individual is still employed by, or providing services to the Company. In
accordance with the issuance of the Granted Shares to employees, the Company
will record deferred compensation for the fair market value of the shares
granted and will amortize this amount over the respective restriction periods.
The Company will recognize the issuance of the Granted Shares to non-employees
in accordance with EITF 96-18 and will record compensation expense for the fair
market value of the shares on the dates that the forfeiture provisions on such
shares lapse.
Effective September 20, 1999, the Company authorized and implemented a
1600-for-1 stock split of all issued and outstanding common stock. Accordingly,
all share and per share amounts in the accompanying financial statements have
been retroactively restated to effect the stock split.
(4) COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND SUCCESS AGREEMENTS
The Company has entered into three-year employment agreements with certain
of its senior executives ("executives") pursuant to which they shall receive
total annual salaries of $775 thousand in addition to being eligible for annual
performance bonuses of up to $800 thousand and other fringe benefits. The
Company has also committed to pay these executives as well as other members of
management and its Board of Directors, cash bonuses of approximately $1,500
thousand, upon consummation of the IPO.
F-57
<PAGE> 201
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Cumberland Technologies
International (d/b/a PAdotNet) as of December 31, 1997 and 1998, and the related
statements of operations and owner's 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 owner. 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 Cumberland Technologies
International (d/b/a PAdotNet) 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
Atlanta, Georgia
September 3, 1999
F-58
<PAGE> 202
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- -- 2
Trade accounts receivable................................. 9 4 1
---- ---- ---
Total current assets................................... 9 4 3
Property and equipment, net (note 2)........................ 168 193 231
---- ---- ---
Total assets........................................... $177 197 234
==== ==== ===
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Cash overdraft............................................ $ 1 5 --
Accounts payable and accrued expenses..................... 153 160 196
Due to owner (note 3)..................................... 98 113 45
Notes payable to related party (note 3)................... 17 17 17
Deferred revenue.......................................... 6 8 5
---- ---- ---
Total current liabilities.............................. 275 303 263
Owner's deficit............................................. (98) (106) (29)
Commitments (note 4)
---- ---- ---
Total liabilities and owner's deficit.................. $177 197 234
==== ==== ===
</TABLE>
See accompanying notes to financial statements.
F-59
<PAGE> 203
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity........................... $133 234 527 231 480
Other........................................... 59 -- 50 -- 46
---- --- ---- ---- ----
Total revenue................................ 192 234 577 231 526
---- --- ---- ---- ----
Costs and expenses:
Cost of Internet services....................... 113 175 215 82 151
Selling, general and administrative............. 54 79 256 98 226
Depreciation and amortization................... 28 64 114 57 72
---- --- ---- ---- ----
Total costs and expenses..................... 195 318 585 237 449
---- --- ---- ---- ----
Income (loss) before income taxes............ (3) (84) (8) (6) 77
Income taxes...................................... -- -- -- -- --
---- --- ---- ---- ----
Net income (loss)............................ $ (3) (84) (8) (6) 77
==== === ==== ==== ====
Pro Forma income taxes (unaudited)................ -- -- -- -- --
==== === ==== ==== ====
Pro Forma net income (loss) (unaudited)........... $ (3) (84) (8) (6) 77
==== === ==== ==== ====
Owner's deficit -- beginning of period............ $(11) (14) (98) (98) (106)
Net income (loss)................................. (3) (84) (8) (6) 77
---- --- ---- ---- ----
Owner's deficit -- end of period.................. $(14) (98) (106) (104) (29)
==== === ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-60
<PAGE> 204
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (3) (84) (8) (6) 77
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 28 64 109 57 64
Changes in operating assets and liabilities:
Trade accounts receivable............................ (5) 3 5 -- 3
Accounts payable..................................... 48 99 7 -- 36
Deferred revenue..................................... 7 (3) 2 -- (3)
---- ---- ---- ---- ----
Net cash provided by operating activities......... 75 79 115 51 177
---- ---- ---- ---- ----
Cash flows from investing activities
Acquisition of property and equipment..................... (82) (149) (134) (70) (102)
---- ---- ---- ---- ----
Cash flows from financing activities:
Increase (decrease) in due to owner....................... 10 48 15 12 (68)
Increase (decrease) in cash overdraft..................... -- 1 4 7 (5)
Borrowing from related party.............................. -- 17 -- -- --
---- ---- ---- ---- ----
Net cash provided by (used in) financing activities.... 10 66 19 19 (73)
---- ---- ---- ---- ----
Net increase (decrease) in cash........................ 3 (4) -- -- 2
Cash:
Beginning of period....................................... 1 4 -- -- --
---- ---- ---- ---- ----
End of period............................................. $ 4 -- -- -- 2
==== ==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-61
<PAGE> 205
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Cumberland Technologies International (d/b/a PAdotNet) (the "Company")
commenced operations on July 1, 1995. The Company is a sole proprietorship and
is primarily in the business of providing Internet services to individuals and
commercial enterprises located in selected high growth secondary markets. The
primary goal of the Company is to become the premier provider of full-service
Internet connectivity in central Pennsylvania.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers' changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations and owner's deficit, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years.
F-62
<PAGE> 206
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
The Company operates as a sole proprietorship, with income taxable and
distributable to the owner without any further tax consequences. Accordingly,
the Company has not been subject to Federal and state corporate income taxes
during the periods reported herein.
The unaudited Pro Forma income tax information included in the statements
of operations is presented in accordance with SFAS 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, 1997 and 1998. The Company incurred
no Pro Forma deferred taxation charges, as there were no significant temporary
differences during the years ended December 31, 1996, 1997 or 1998. Pro forma
deferred tax assets were not recognized for net operating losses incurred by the
Company due to uncertainty as to their ultimate recoverability.
(g) REVENUE RECOGNITION
Revenue related to Internet connectivity services is recognized as the
services are provided and deferred and amortized to operations for amounts
billed relating to future periods. Installation and customer set up fees are
recognized upon completion of the services. Other revenue primarily represents
technical support services and computer hardware sales and is recognized as the
services are provided or the computer hardware is delivered.
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative
expenses and totaled approximately $1, $2, $3, $2 and $1 for the years ended
December 31, 1996, 1997 and 1998 and for the six-month periods ended June 30,
1998 and 1999, respectively.
F-63
<PAGE> 207
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company does not have financial instruments that potentially subject
the Company to significant concentrations of credit risk. The fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
For the years ended December 31, 1996, 1997 and 1998 and for the six month
periods ended June 30, 1998 and 1999, no individual customer represented greater
than 10% of total revenues.
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
enters into long-term telephone contracts on a routine basis with several
telephone vendors to provide internet services to customers.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet analyzed the impact of
this pronouncement on its financial statements.
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and Internet access equipment............ $255 386 487
Furniture and fixtures...................................... 4 7 8
---- --- ---
259 393 495
Less accumulated depreciation and amortization.............. 91 200 264
---- --- ---
Total.................................................. $168 193 231
==== === ===
</TABLE>
F-64
<PAGE> 208
CUMBERLAND TECHNOLOGIES INTERNATIONAL (D/B/A PADOTNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) RELATED PARTY TRANSACTIONS
Due to owner primarily represents personal expenditures made by the owner
on behalf of the Company. The amounts bear no interest and have no specified
repayment terms.
The notes payable to related party consists of amounts due to a relative of
the owner. The notes bear no interest and have no specified repayment terms.
(4) COMMITMENTS
(a) LEASES
The Company leases office space under a lease agreement that expires in
2001. Future minimum annual lease payments under this operating lease as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1999.................................................. $23
2000.................................................. 23
2001.................................................. 23
Thereafter............................................ --
---
Total minimum payments........................... $69
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 was approximately $5, $8, $13, $7
and $12, respectively.
(b) EMPLOYEE BENEFIT PLAN
Effective January 1, 1999, the Company adopted a Savings Incentive Match
Plan for Employees of Small Employers (SIMPLE), which allows eligible employees
to make contributions to Individual Retirement Accounts through salary
reductions.
(5) SUBSEQUENT EVENT
The Company's owner has entered into an agreement whereby he will sell
substantially all of the net assets of the Company to espernet.com, inc.
("espernet.com"). The Company's owner will exchange substantially all of the
assets of the Company for cash and shares of common stock of espernet.com
concurrent with the consummation of the initial public offering of the common
stock of espernet.com.
F-65
<PAGE> 209
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Pennsylvania Online Ltd.
(the Company) as of December 31, 1997 and 1998, and the related statements of
operations, stockholder's 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 Pennsylvania Online Ltd. 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
Philadelphia, PA
August 16, 1999
F-66
<PAGE> 210
PENNSYLVANIA ONLINE LTD.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16 18 20
Accounts receivable, net of allowance for doubtful
accounts of $5 in 1997, $5 in 1998 and $2 in 1999...... 6 5 2
Other current assets...................................... 3 4 4
---- ---- ---
Total current assets................................... 25 27 26
Property and equipment, net................................. 187 195 220
---- ---- ---
Total assets........................................... $212 222 246
==== ==== ===
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 54 102 29
Accrued expenses.......................................... 32 51 54
Line of credit............................................ 20 40 37
Current portion of capital lease obligations.............. 60 74 64
Deferred revenue.......................................... 24 37 46
---- ---- ---
Total current liabilities.............................. 190 304 230
Capital lease obligations, less current portion............. 81 39 15
---- ---- ---
Total liabilities...................................... 271 343 245
Commitments and contingencies (notes 4 and 8)
Stockholder's deficit:
Common stock, no par value, authorized 100 shares, issued
and outstanding 100 shares............................. -- 12 20
Accumulated deficit....................................... (59) (133) (19)
---- ---- ---
Total stockholder's equity (deficit)................... (59) (121) 1
---- ---- ---
Total liabilities and stockholder's equity (deficit)... $212 222 246
==== ==== ===
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE> 211
PENNSYLVANIA ONLINE LTD.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity........................ $254 573 917 413 644
---- --- --- --- ---
Total revenue............................. 254 573 917 413 644
Costs and expenses:
Cost of Internet services.................... 54 151 278 122 145
Selling, general and administrative.......... 157 312 570 229 305
Depreciation and amortization................ 18 59 79 39 50
---- --- --- --- ---
Total costs and expenses.................. 229 522 927 390 500
---- --- --- --- ---
Income (loss) from operations............. 25 51 (10) 23 144
Other income (expenses):
Interest expense............................. (5) (31) (13) (5) (7)
---- --- --- --- ---
Net income (loss)......................... $ 20 20 (23) 18 137
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-68
<PAGE> 212
PENNSYLVANIA ONLINE LTD.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS/
---------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------ ------ ------------ -----
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996...................... 100 $-- $ 14 $ 14
Dividend distribution........................... -- -- (55) (55)
Net income...................................... -- -- 20 20
--- --- ----- -----
BALANCE AT DECEMBER 31, 1996.................... 100 -- (21) (21)
Dividend distribution........................... -- -- (58) (58)
Net income...................................... -- -- 20 20
--- --- ----- -----
BALANCE AT DECEMBER 31, 1997.................... 100 -- (59) (59)
Rent contributed by stockholder................. -- 12 -- 12
Dividend distribution........................... -- -- (51) (51)
Net loss........................................ -- -- (23) (23)
--- --- ----- -----
BALANCE AT DECEMBER 31, 1998.................... 100 12 (133) (121)
Rent contributed by stockholder (unaudited)..... -- 8 -- 8
Dividend distribution (unaudited)............... -- -- (23) (23)
Net income (unaudited).......................... -- -- 137 137
--- --- ----- -----
BALANCE AT JUNE 30, 1999 (unaudited)............ 100 $20 $ (19) $ 1
=== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-69
<PAGE> 213
PENNSYLVANIA ONLINE LTD.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 20 20 (23) 18 137
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 18 59 79 39 50
Non-cash rent expense contributed by
stockholder.................................... -- -- 12 4 8
Write-off of property and equipment.............. -- -- 21 21 --
Changes in operating assets and liabilities:
Accounts receivable............................ (1) (4) 1 4 3
Other current assets........................... (3) -- (1) -- --
Accounts payable............................... 15 39 48 (5) (73)
Accrued expenses............................... 27 (21) 19 5 3
Deferred revenue............................... 13 11 13 7 9
---- --- --- --- ---
Net cash provided by operating
activities................................ 89 104 169 93 137
---- --- --- --- ---
Cash flows from investing activities:
Acquisition of property and equipment and leasehold
improvements..................................... (35) (26) (87) (68) (75)
---- --- --- --- ---
Net cash used by investing activities....... (35) (26) (87) (68) (75)
---- --- --- --- ---
Cash flows from financing activities:
Net borrowings (repayments) from line of credit..... -- 20 20 23 (3)
Repayments of capital lease obligations............. -- (26) (49) (28) (34)
Dividend distributions to stockholder............... (55) (58) (51) (34) (23)
---- --- --- --- ---
Net cash provided by (used in) financing
activities................................ (55) (64) (80) (39) (60)
---- --- --- --- ---
Net increase (decrease) in cash and cash
equivalents............................... (1) 14 2 (14) 2
Cash and cash equivalents:
Beginning period.................................... 3 2 16 16 18
---- --- --- --- ---
End of period....................................... $ 2 16 18 2 20
==== === === === ===
</TABLE>
Supplemental disclosure of cash flow information (in thousands):
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately
$5, $21, $23, and $5 and $7, respectively, for interest.
Non-cash financing activities (in thousands):
The Company entered into various capital leases for computer equipment. These
capital leases obligations resulted in non-cash financing activities
aggregating $167 and $29 for the years ended December 31, 1997 and 1998,
respectively.
See accompanying notes to financial statements.
F-70
<PAGE> 214
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Pennsylvania Online Ltd. (the "Company") was incorporated in the
Commonwealth of Pennsylvania in July 1995 to capitalize on the growing demand
for Internet access services.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for Internet access services. The Company's
future success will be dependent upon its ability to create and provide
effective and competitive Internet services, the continued acceptance of the
Internet and the Company's ability to develop and provide new services that meet
customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis. The competitive conditions could result in
additional pricing programs, an increase in marketing costs, limited ability to
expand its subscriber base and an 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.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholder's equity (deficit), and cash flows for
the six months ended June 30, 1998 and 1999 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-71
<PAGE> 215
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1997 and 1998 and June 30, 1999, were approximately $7, $14 and
$6, respectively.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
(g) INCOME TAXES
Historically, the Company has elected 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
on his personal income tax returns. Accordingly, the Company was not subject to
Federal and state corporate income taxes during the period in which it was an
S-Corp.
The unaudited Pro Forma income tax information included in Note 7 is
presented in accordance with SFAS 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, 1997 and 1998.
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
F-72
<PAGE> 216
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Revenue from consulting services, which has not been material to date, is
recognized as the services are provided.
(i) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs were approximately $8, $40, $10, $0 and $10 for the years
ended December 31, 1996, 1997 and 1998 and for the six month periods ended June
30, 1998 and 1999, respectively.
(j) FINANCIAL INSTRUMENTS, CONCENTRATION OF CREDIT RISK AND BUSINESS RISKS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of December 31, 1997 and 1998 and June 30, 1999, the
Company had concentrations of credit risk in one financial institution in the
form of a money market account in the approximate amount of $7, $14, and $6,
respectively. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base and the relatively minor balances of each individual account. At
December 31, 1997 and 1998 and June 30, 1999, the fair value of the Company's
financial instruments approximate their carrying value based on their terms and
interest rates.
The Company utilizes two communication service providers to provide access
to the Internet backbone. If the Company is unable to continue its relationship
with these communication service providers, it believes that it could shift to
alternative communication service providers without adversely affecting its
operations.
(k) INTERNET SERVICES OPERATING COSTS
Internet services operating costs primarily consist of telecommunications
expenses inherent in providing the Internet services.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging
F-73
<PAGE> 217
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet analyzed the impact of
this pronouncement on its financial statements.
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT COST
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $167, $196 and $196,
respectively.............................................. $213 $251 $326
Furniture and fixtures...................................... 12 22 22
Leasehold improvement....................................... 48 87 87
---- ---- ----
273 360 435
Less accumulated depreciation and amortization, including
amounts related to capital leases of $24, $61 and $82,
respectively.............................................. 86 165 215
---- ---- ----
Total.................................................. $187 $195 $220
==== ==== ====
</TABLE>
ACCRUED EXPENSES (IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued personnel related costs............................. 16 25 20
Accrued taxes............................................... 16 26 34
--- --- ---
$32 $51 $54
=== === ===
</TABLE>
(3) DEBT
The Company has a line of credit payable on demand with a bank that allows
borrowings of up to $50. At December 31, 1997 and 1998 and June 30, 1999 the
amount outstanding was $20, $40 and $37, respectively. Interest is charged at
the prime rate plus 2% (10% at December 31, 1998). The line of credit is secured
by accounts receivable and is cancellable at any time upon written notice from
the bank or the Company.
F-74
<PAGE> 218
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and data communications services under noncancelable operating leases
expiring at various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 79 49
2000........................................................ 37 --
2001........................................................ 6 --
---- --
Total minimum payments................................. 122 49
==
Less amount representing interest........................... 9
----
Present value of net minimum lease payments............ 113
Less current portion........................................ 74
----
$ 39
====
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999 was approximately $27, $85, $32 and
$52, respectively.
(5) CAPITAL STOCK
The Company has authorized and issued 100 shares of no par common stock.
(6) RELATED PARTY TRANSACTIONS
Since April 1998, the Company has occupied office space in a building owned
by the stockholder of the Company. The Company capitalized approximately $26 and
$58 of leasehold improvements during 1997 and 1998, respectively, in connection
with relocating to this building. Prior to this date, the Company operated out
of the residence of the stockholder. No rent expense has been recorded in the
accompanying statements of operations for the years ended December 31, 1996 and
1997 as such amount is not material. No rent payments were made to the
stockholder for the use of the building during 1998 or 1999. However, rent
expense of $12, $4 and $8 was recorded and charged to stockholder's deficit for
the year ended December 31, 1998 and the six months ended June 30, 1998 and
1999, respectively.
F-75
<PAGE> 219
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) INCOME TAXES
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the outstanding stock of the Company and concurrent with the related
initial public offering of espernet.com (note 10) the Company's status as an
S-Corp. under the Code will automatically terminate and federal and state
corporate income tax rates will apply. Based upon the cumulative temporary
differences, the Company would have recognized a net deferred federal and state
income tax benefit and asset of approximately $47 at December 31, 1998, had the
termination of its election to be treated as an S Corporation occurred on
December 31, 1998.
No Pro Forma income tax benefit is reflected in the accompanying statements
of operations for all periods presented as the Company would have provided a
full valuation allowance against the net deferred tax asset had it been a
C-Corp.
The Company has historically made distributions to its stockholder 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 stockholder's individual income tax returns.
(8) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(9) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF YEAR AND EXPENSES WRITE-OFFS OF PERIOD
(IN THOUSANDS) ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts............. $-- 2 -- 2
== == == ==
For the year ended December 31, 1997:
Allowance for doubtful accounts............. $2 3 -- 5
== == == ==
For the year ended December 31, 1998:
Allowance for doubtful accounts............. $5 -- -- 5
== == == ==
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(unaudited).............................. $5 -- 3 2
== == == ==
</TABLE>
F-76
<PAGE> 220
PENNSYLVANIA ONLINE LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(10) SUBSEQUENT EVENT
The Company's owner has entered into an agreement whereby he will sell his
ownership in the Company to espernet.com. The Company's owner will exchange his
ownership in the Company for cash and shares of common stock of espernet.com
concurrent with the consummation of the initial public offering of the common
stock of espernet.com. Upon consummation of the agreement, espernet.com will
become the sole owner of the Company.
F-77
<PAGE> 221
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Innernet, Inc. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
two-year period ended December 31, 1998, and for the period from June 10, 1996
(inception) through December 31, 1996. 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 Innernet, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the two-year period ended December 31, 1998 and for the
period from June 10, 1996 (inception) through December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
August 13, 1999
F-78
<PAGE> 222
INNERNET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 55 201 241
Receivables:
Trade.................................................. 8 1 3
Stockholders........................................... 11 16 10
Prepaid expenses and other................................ 2 7 2
---- --- ---
Total current assets................................. 76 225 256
Property and equipment, net (note 2)........................ 192 242 273
Other assets:
Organization costs, net................................... 1 1 --
Other, net................................................ -- 2 6
---- --- ---
Total assets......................................... $269 470 535
==== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 51 63 32
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................ 25 46 46
Current portion of capital lease obligations (note 4)..... 26 21 11
Deferred revenue.......................................... 124 242 257
---- --- ---
Total current liabilities............................ 226 372 346
Long-term debt, less current portion (note 3)............... 35 82 73
Capital lease obligations, less current portion (note 4).... 28 7 35
---- --- ---
Total liabilities.................................... 289 461 454
Stockholders' equity:
Common stock, $1 par value. Authorized 100,000 shares,
issued and outstanding 5,000 shares.................... 5 5 5
Additional paid-in capital................................ 45 45 45
Retained earnings (accumulated deficit)................... (70) (41) 31
---- --- ---
Total stockholder's equity (deficit)................. (20) 9 81
---- --- ---
Total liabilities and stockholders' equity
(deficit)........................................... $269 470 535
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE> 223
INNERNET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity................. $ 51 377 946 397 788
Enhanced services and other........... 36 40 12 5 1
---- ---- --- --- ---
Total revenue...................... 87 417 958 402 789
Costs and expenses:
Cost of Internet services............. 62 217 334 147 257
Selling, general and administrative... 51 195 321 125 210
Depreciation and amortization......... 7 44 97 51 66
---- ---- --- --- ---
Total costs and expenses........... 120 456 752 323 533
---- ---- --- --- ---
Income (loss) from operations...... (33) (39) 206 79 256
Other income (expenses):
Other income.......................... 1 2 1 -- --
Interest income....................... -- 1 2 1 1
Interest expense...................... -- (2) (28) (1) (5)
---- ---- --- --- ---
Net income (loss).................. $(32) (38) 181 79 252
==== ==== === === ===
Pro Forma income tax expense (benefit)
(unaudited)........................... $ -- -- 12 25 (11)
==== ==== === === ===
Pro Forma net income (see note 8)
(unaudited)........................... $(32) (38) 169 54 263
==== ==== === === ===
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE> 224
INNERNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 10, 1996................... -- $ -- $-- $ -- $ --
Issuance of common stock for cash.......... 5 5 45 -- 50
Net loss................................... -- -- -- (32) (32)
---- ---- --- ----- -----
BALANCE AT DECEMBER 31, 1996............... 5 5 45 (32) 18
Net loss................................... -- -- -- (38) (38)
---- ---- --- ----- -----
BALANCE AT DECEMBER 31, 1997............... 5 5 45 (70) (20)
Distributions.............................. -- -- -- (152) (152)
Net income................................. -- -- -- 181 181
---- ---- --- ----- -----
BALANCE AT DECEMBER 31, 1998............... 5 5 45 (41) 9
Distributions (unaudited).................. -- -- -- (180) (180)
Net income (unaudited)..................... -- -- -- 252 252
---- ---- --- ----- -----
BALANCE AT JUNE 30, 1999 (unaudited)....... 5 $ 5 $45 $ 31 $ 81
==== ==== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 225
INNERNET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(32) (38) 181 79 252
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 7 44 97 51 66
Changes in operating assets and liabilities:
Receivables....................................... (6) (3) 7 3 (2)
Inventories....................................... (12) 12 -- -- --
Prepaid expenses and other current assets......... (1) (1) (5) 2 5
Organizational costs.............................. (1) -- -- -- --
Other assets...................................... -- 1 (2) (12) (4)
Accounts payable.................................. 21 31 12 (51) (31)
Deferred revenue.................................. 43 80 118 31 15
---- ---- ---- --- ----
Net cash provided by operating activities...... 19 126 408 103 301
---- ---- ---- --- ----
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements.... (28) (161) (172) (8) (78)
Receivable from stockholder............................ -- (11) (5) 11 7
---- ---- ---- --- ----
Net cash provided by (used in) investing
activities................................... (28) (172) (177) 3 (71)
---- ---- ---- --- ----
Cash flows from financing activities:
Proceeds from lines of credit and notes payable........ -- 63 94 65 6
Payments to lines of credit and notes payable.......... -- (3) (27) (27) (16)
Distributions to stockholders.......................... -- -- (152) (17) (180)
Proceeds from issuance of common stock, net of issuance
costs............................................... 50 -- -- -- --
---- ---- ---- --- ----
Net cash provided by (used in) financing
activities................................... 50 60 (85) 21 (190)
---- ---- ---- --- ----
Net increase in cash and cash equivalents...... 41 14 146 127 40
Cash and cash equivalents:
Beginning period....................................... -- 41 55 55 201
---- ---- ---- --- ----
End of period.......................................... $ 41 55 201 182 241
==== ==== ==== === ====
</TABLE>
Supplemental disclosure of cash flow information:
During the periods ended December 31, 1996, 1997 and 1998, and during the
six month periods ended June 30, 1998 and 1999, the Company paid approximately
$0, $2, $28, and $1 and $5, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital leases obligations resulted in non-cash financing activities
aggregating $14, $33, $29, $36 and $40 for the years ended December 31, 1996,
1997, and 1998, and for the six month periods ended June 30, 1998 and 1999,
respectively.
See accompanying notes to financial statements.
F-82
<PAGE> 226
INNERNET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Innernet, Inc. (the "Company") was incorporated on April 17, 1996 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users generally within the Franklin County, Pennsylvania
area. The goal of the Company is to be a high quality, high access
telecommunications company from which people have the opportunity to receive
full service Internet connectivity and enhanced Internet services necessary to
be successful. The Company commenced operations on June 10, 1996.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for internet access and enhanced services.
The Company's future success will be dependent upon its ability to create and
provide effective and competitive internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures, relative to June 30, normally included in financial statements
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted. In the opinion of management, all adjustments necessary
for the fair presentation of the financial position and results of operations
and cash flows, have been included in such unaudited financial statements. The
results of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at June 30, 1999 were approximately $50 thousand, in the form of money market
funds.
F-83
<PAGE> 227
INNERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally three years. Property and equipment under capital leases are stated at
the present value of minimum lease payments and are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such a condition exists, the value
of the assets is considered to be impaired and the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying value or fair value, less costs to sell.
(g) ORGANIZATIONAL COSTS
Organizational costs are mostly comprised of legal costs associated with
the incorporation of the business and other miscellaneous costs. These costs are
amortized using the straight-line method over five years. Effective January 1,
1999, the previously unamortized amount of such costs has been expensed.
(h) INCOME TAXES
The Company has elected to be taxed and has operated as an S-Corp and
therefore was exempt from taxation under the provisions of the Internal Revenue
Code (the "Code") and applicable state tax regulations. Under the provisions of
the Code, the shareholders include their prorata share of the Company's income
or loss on their personal income tax returns. Subsequent to June 30, 1999, the
Company intends to convert to a regular C-Corp and become subject to Federal and
state corporate income taxes.
For all periods presented, the unaudited pro forma income tax information
included on the face of the statements of operations and in Note 8 is presented
in accordance with SFAS No. 109, Accounting for Income Taxes, as if the Company
had been subject to Federal and state income taxes during the periods ended
December 31, 1996, 1997 and 1998 and for the period from January 1 to June 30,
1999 and 1998.
(i) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of such services.
F-84
<PAGE> 228
INNERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
(j) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative and
totaled approximately $10, $21 and $28 for the periods ended December 31, 1996,
1997 and 1998, respectively and $18 and $21 for the six month periods ended June
30, 1998 and 1999, respectively.
(k) 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. As
of June 30, 1999, the Company had concentrations of credit risk in one financial
institution in the form of a money market account in the approximate amount of
$50. Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, the
relatively minor balances of each individual account, and the fact that
customers prepay their accounts. At December 31, 1998, 1997 and June 30, 1999,
the fair value of the Company's financial instruments approximate their carrying
value based on their terms and interest rates.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 was
amended by SFAS No. 137 in June 1999 and is effective, as amended, for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company has
not yet analyzed the impact of this pronouncement on its financial statements.
F-85
<PAGE> 229
INNERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT
COST (amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $80, $80 and $102
respectively.............................................. $239 $385 $448
Furniture and fixtures...................................... 4 4 14
Leasehold improvements...................................... -- -- 23
---- ---- ----
243 389 485
Less accumulated depreciation and amortization, including
amounts related to capital leases of $13, $40 and $70,
respectively.............................................. 51 147 212
---- ---- ----
Total.................................................. $192 $242 $273
==== ==== ====
</TABLE>
All property and equipment is depreciated over an estimated useful life of
3 years using the straight line method.
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the following
as of December 31, 1997 and 1998 and June 30, 1999 (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable bearing interest at 8.15% and 8.75% and due in
1999 and 2000, respectively............................... $ 47 $ 80 $ 68
Revolving lines of credit, bearing interest at 8.15%,
annually renewable........................................ $ -- $ 37 41
Other -- Related party note payable (non interest
bearing).................................................. 13 11 10
---- ---- ----
Less current portion........................................ (25) (46) (46)
---- ---- ----
Long-term debt, less current portion................... $ 35 $ 82 $ 73
==== ==== ====
</TABLE>
As of December 31, 1998, the Company had $50 available under its line of
credit agreements. The Company is in compliance with all applicable covenants
for said credit agreements.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2000. Future
F-86
<PAGE> 230
INNERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
minimum annual lease payments under capital and noncancelable operating leases
as of December 31, 1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 29 53
2000........................................................ 10 44
2001........................................................ -- --
---- --
Total minimum payments................................. 39 97
==
Less amount representing interest........................... 11
----
Present value of net minimum lease payments............ 28
Less current portion........................................ (21)
----
$ 7
====
</TABLE>
Rent expense for the periods ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 was $6, $10, $26 and $8, and $27,
respectively.
(5) RELATED PARTY TRANSACTIONS
The Company has the following amounts payable to or receivable from its
stockholders, as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to stockholder (repaid in July 1999)........... $13 $11 $10
--- --- ---
Receivable from stockholder................................. 6 5 5
Receivable from stockholder................................. 5 11 5
--- --- ---
Total amounts receivable from stockholders.................. $11 $16 $10
=== === ===
</TABLE>
Beginning in October 1998, the Company entered into an operating lease
agreement for office space with Master Key Properties L.P., a partnership in
which the Company is a general partner with a 1% interest and the stockholders
of the Company are limited partners. Total rent expense for the year-end 1998
relative to this lease amounted to $9.
(6) LEGAL PROCEEDINGS
The Company is involved in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
F-87
<PAGE> 231
INNERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
(8) PRO FORMA INCOME TAXES
Pro forma income tax expense (benefit) differs from the amounts that would
result from applying the federal statutory rate of 34% to the Company's net loss
after the deduction of distributions to stockholders as compensation for the
respective periods ended, as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected pro forma tax expense (benefit)............ $(11) $(13) $ 10 $ 5 $ 14
State income taxes, net of federal benefit.......... (2) (2) 2 1 2
Increase in valuation allowance..................... 13 15 (1) 19 (28)
Other............................................... -- -- 1 -- 1
---- ---- ---- ---- ----
$ -- $ -- $ 12 $ 25 $(11)
==== ==== ==== ==== ====
</TABLE>
Temporary differences that give rise to the components of pro forma
deferred tax assets, as of December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net operating loss carryforward..................... $ 4 $ -- $ -- $ -- $ --
Other............................................... 9 28 67 47 113
---- ---- ---- ---- ----
Gross deferred tax assets...................... 13 28 67 47 113
Valuation allowance................................. (13) (28) (28) (47) --
---- ---- ---- ---- ----
Net deferred tax asset......................... $ -- $ -- $ 39 $ -- $113
==== ==== ==== ==== ====
</TABLE>
The pro forma net income information assumes that distributions to
shareholders are considered compensation expense for a C-Corp. The valuation
allowance noted above is management's estimation of the recoverability of the
deferred tax asset in future periods.
F-88
<PAGE> 232
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Delanet, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' deficit, and cash flows for each of the years in the two-year
period ended December 31, 1998 and the period from May 17, 1996 (inception)
through December 31, 1996. 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 Delanet, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 1998 and the period from
May 17, 1996 (inception) through December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Orlando, Florida
August 17, 1999
F-89
<PAGE> 233
DELANET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3 -- 44
Trade receivables, net of allowance for doubtful accounts
of $3, $96 and $207, respectively...................... 37 144 176
----- ---- ------
Total current assets................................... 40 144 220
Property and equipment, net................................. 183 248 305
Other assets:
Deposits.................................................. -- 5 5
Intangibles, net of accumulated amortization of $-0-,
$-0- and $5, respectively (note 2)..................... -- 50 55
----- ---- ------
Total assets........................................... $ 223 447 585
===== ==== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 23 20 46
Accrued expenses.......................................... 42 74 134
Loans to shareholders..................................... 279 215 225
RaveNet obligation (note 2)............................... -- 80 80
Current portion of long-term debt (note 4)................ 9 10 10
Current portion of capital lease obligations (note 5)..... 21 50 72
Deferred revenue.......................................... 36 147 202
----- ---- ------
Total current liabilities.............................. 410 596 769
Long-term debt, less current portion (note 4)............... 30 20 17
Capital lease obligations, less current portion (note 5).... 38 52 70
----- ---- ------
Total liabilities...................................... 478 668 856
----- ---- ------
Stockholders' deficit:
Common stock, $.1 par value. Authorized 400,000 shares,
issued and outstanding 91,280 and 198,228 shares....... 9 20 40
Additional paid-in capital................................ 63 294 770
Accumulated deficit....................................... (327) (535) (1,081)
----- ---- ------
Total stockholder's deficit............................ (255) (221) (271)
Commitments (notes 2 and 5).................................
----- ---- ------
Total liabilities and stockholders' deficit............ $ 223 447 585
===== ==== ======
</TABLE>
See accompanying Notes to Financial Statements.
F-90
<PAGE> 234
DELANET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996 SIX MONTHS
INCEPTION YEAR ENDED ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------ -------------
1996 1997 1998 1998 1999
------------ ---- ---- ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $ 6 271 716 189 666
----- ---- ---- --- -----
Total revenue........................... 6 271 716 189 666
----- ---- ---- --- -----
Costs and expenses:
Cost of Internet services.................. 65 191 268 71 275
Selling, general and administrative........ 86 201 554 96 856
Depreciation and amortization.............. 7 40 78 39 59
----- ---- ---- --- -----
Total costs and expenses................ 158 432 900 206 1,190
----- ---- ---- --- -----
Loss from operations.................... (152) (161) (184) (17) (524)
Other expenses:
Interest expense........................... (2) (12) (24) (12) (22)
----- ---- ---- --- -----
Net loss................................ $(154) (173) (208) (29) (546)
===== ==== ==== === =====
Pro Forma income taxes (unaudited)........... $ -- -- -- -- --
===== ==== ==== === =====
Pro Forma net loss (unaudited)............... $(154) (173) (208) (29) (546)
===== ==== ==== === =====
</TABLE>
See accompanying Notes to Financial Statements.
F-91
<PAGE> 235
DELANET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL STOCK
PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
------ ------ ---------- ------------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at May 17, 1996
(inception)........... -- $-- -- -- -- --
Issuance of common stock 91 9 63 (10) -- 62
Net loss................ -- -- -- -- (154) (154)
--- --- --- --- ------ ----
Balance at
December 31, 1996..... 91 9 63 (10) (154) (92)
Stock subscriptions
received.............. -- -- -- 10 -- 10
Net loss................ -- -- -- -- (173) (173)
--- --- --- --- ------ ----
Balance at
December 31, 1997..... 91 9 63 -- (327) (255)
Issuance of common
stock................. 10 1 (1) -- -- --
Issuance of common stock
in settlement of
shareholder loans..... 93 9 223 -- -- 232
Issuance of common stock
in exchange for
services.............. 4 1 9 -- -- 10
Net loss................ -- -- -- -- (208) (208)
--- --- --- --- ------ ----
Balance at
December 31, 1998..... 198 20 294 -- (535) (221)
Issuance of common stock
in settlement of
shareholder loans
(unaudited)........... 198 20 476 -- -- 496
Issuance of common stock
in exchange for
services
(unaudited)........... 2 -- -- -- -- --
Net loss (unaudited).... -- -- -- -- (546) (546)
--- --- --- --- ------ ----
Balance at June 30, 1999
(unaudited)........... 398 $40 770 -- (1,081) (271)
=== === === === ====== ====
</TABLE>
See accompanying Notes to Financial Statements.
F-92
<PAGE> 236
DELANET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
MAY 17, 1996 SIX MONTHS
(INCEPTION) YEAR ENDED ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------- -----------
1996 1997 1998 1998 1999
------------ ----- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(154) (173) (208) (29) (546)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 7 40 78 39 69
Provision for doubtful accounts......................... -- 3 93 5 111
Write off of intangible assets.......................... -- -- 50 -- --
Non-cash contribution of services by shareholders....... -- -- 10 -- 476
Changes in operating assets and liabilities, excluding
effects of business combinations:
Accounts receivables................................. -- (40) (200) 20 (143)
Deposits............................................. -- -- (5) (5) --
Accounts payable..................................... 16 7 (3) (23) 26
Accrued expenses..................................... 11 31 32 25 60
Deferred revenue..................................... -- 36 111 99 55
----- ---- ---- --- ----
Net cash provided by (used in) operating
activities....................................... (120) (96) (42) 131 108
----- ---- ---- --- ----
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements....... (86) (73) (73) (71) (55)
Purchase of intangible assets............................. -- -- (20) -- (10)
----- ---- ---- --- ----
Net cash used by investing activities.............. (86) (73) (93) (71) (65)
----- ---- ---- --- ----
Cash flows from financing activities:
Proceeds from notes payable............................... 50 -- -- -- --
Repayments of notes payable............................... (3) (8) (9) (5) (3)
Proceeds from shareholder loans........................... 101 178 168 -- 30
Repayments of shareholder loans........................... -- -- -- (18) --
Repayments of capital lease obligations................... -- (12) (27) (16) (26)
Proceeds from issuance of common stock, net of issuance
costs................................................... 62 10 -- -- --
----- ---- ---- --- ----
Net cash provided by (used in) financing
activities....................................... 210 168 132 (39) 1
----- ---- ---- --- ----
Net increase (decrease) in cash and cash
equivalents...................................... 4 (1) (3) 21 44
Cash and cash equivalents:
Beginning period.......................................... -- 4 3 3 --
----- ---- ---- --- ----
End of period............................................. $ 4 3 -- 24 44
===== ==== ==== === ====
</TABLE>
F-93
<PAGE> 237
DELANET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
MAY 17, 1996 SIX MONTHS
(INCEPTION) YEAR ENDED ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, ------------- -----------
1996 1997 1998 1998 1999
------------ ----- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 2 16 24 12 22
==== === === === ===
Supplemental disclosures of non-cash investing and financing
activities:
Capital lease obligations incurred for the purchase of
equipment............................................... $ -- 71 70 35 66
==== === === === ===
Notes payable issued for the purchase of intangible
assets.................................................. $ -- -- 80 -- --
==== === === === ===
Supplemental disclosure of non-cash financing activities:
Common stock issued in settlement of shareholder loans.... $ -- -- 232 13 20
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE> 238
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Delanet, Inc. (the "Company") was incorporated on May 17, 1996 under the
laws of the State of Delaware. The Company is an internet service provider
serving the greater Delaware area, including parts of Pennsylvania and New
Jersey.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim balance sheet of the Company as of June 30, 1999, and the
statements of operations, stockholders' deficit, and cash flows for the six
month periods ended June 30, 1999 and 1998 are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position and results of
operations and cash flows, have been included in such unaudited financial
statements. The results of operations for the six months ended June 30, 1999,
are not necessarily indicative of the results to be expected for the entire
year.
(c) 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
through June 30, 1999, of $1,036 since its inception and, as a result, has a
stockholders' deficit of $226 and negative working capital of $237 (excluding
shareholder loans) 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 effort
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 implement a new billing system in
1998 to meet the needs of its subscribers.
F-95
<PAGE> 239
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases is stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board Opinion No. 17, Intangible Assets,
based upon estimated future cash flows. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a five year period.
(h) INCOME TAXES
The Company is considered an S-Corp. for federal income tax purposes. As
such, the Company is not subject to federal or state income taxes directly.
Income or loss of the Company passes through to the individual stockholders.
Unaudited Pro Forma income tax information included in the statements of
operations and Note 7 is presented in accordance with SFAS No. 109, Accounting
for Income Taxes, as if the
F-96
<PAGE> 240
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Company had been subject to Federal and state income taxes for the years ended
December 31, 1996, 1997, and 1998 and for the six months ended June 30, 1998.
(i) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
(j) BARTER TRANSACTIONS
The Company receives certain advertising services in exchange for internet
service. The Company records an expense for the fair value of services received
and recognizes an equal amount of revenue. The Company has recognized revenues
and expenses of $-0-, $-0- and $15 and $7 and $13 for the years ended December
31, 1996, 1997 and 1998, and the six month period ended June 30, 1998 and 1999.
(k) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $22, $4 and $28 and $14 and $29 for the years ended December 31,
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(l) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair value of the Company's financial instruments
approximate their carrying value based on their terms and interest rates.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides
F-97
<PAGE> 241
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. Adoption of SOP 98-1 as of January 1, 1999 did not
have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 was
originally effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133, which defers the effective date of SFAS No. 133 to
June 15, 2000. The Company has not yet analyzed the impact of this pronouncement
on its financial statements.
(2) ACQUISITIONS
On December 23, 1998, the Company entered into a stock purchase agreement
(the "Agreement") with RaveNet Systems, Inc. ("RaveNet") to acquire 100% of the
outstanding common stock of RaveNet in exchange for $20 cash and an obligation
to pay an additional $80 within six months from the date of the Agreement. As of
June 30, 1999, the Company was delinquent on its $80 obligation to the RaveNet
shareholders and was in negotiations to reduce the original purchase price. Any
such reduction will be shown as a reduction in the Company's obligation, as well
as a reduction to the related goodwill.
On June 30, 1999, the Company entered into an asset purchase agreement with
New World Internet Providers, Inc. to acquire equipment and intangible assets
for $10 cash.
(3) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30, ESTIMATED
1997 1998 1999 USEFUL LIVES
---- ---- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $71, $141
and $207, respectively........................ $218 $331 $442 3-5
Furniture and fixtures.......................... 2 22 23 7
Leasehold improvement........................... 10 19 22 3
---- ---- ----
230 372 487
Less accumulated depreciation and amortization,
including amounts related to capital leases of
$10, $41 and $84, respectively................ 47 124 182
---- ---- ----
Total...................................... $183 $248 $305
==== ==== ====
</TABLE>
F-98
<PAGE> 242
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Accrued expenses:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Payroll and payroll taxes....................... $ 37 $ 49 $ 82
Gross receipts tax payable...................... 1 4 4
Penalties and interest.......................... 4 21 48
---- ---- ----
$ 42 $ 74 $134
==== ==== ====
</TABLE>
(4) DEBT
Notes payable and long-term debt consists of the following as of December
31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
10.25% note payable to bank; payable in monthly installments
of $1, including interest, through August 2001; secured by
equipment................................................. $39 $30 $27
Less current portion........................................ 9 10 10
--- --- ---
Long-term debt, less current portion................... $30 $20 $17
=== === ===
</TABLE>
Future minimum debt payments as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................. $10
2000................................................. 10
2001................................................. 10
---
$30
===
</TABLE>
The remaining balance of the note payable was paid in full during August,
1999.
(5) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2001.
F-99
<PAGE> 243
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 74 15
2000........................................................ 40 15
2001........................................................ 12 7
---- --
Total minimum payments................................. 126 37
==
Less amount representing interest........................... 24
----
Present value of net minimum lease payments............ 102
Less current portion........................................ 50
----
$ 52
====
</TABLE>
The Company leases certain operating facilities under operating lease. Rent
expense for the years ended December 31, 1997 and 1998 and the six month periods
ended June 30, 1998 and 1999 was $7, $12 and $6, $14, respectively.
(6) RELATED PARTY TRANSACTIONS
The Company receives certain services and loans from its shareholders.
The Company received non-cash contributions of services from shareholders
in the amount of $79, $159, $169 and $79 and $79 for the years ended December
31, 1996, 1997 and 1998, and for the six month periods ended June 30, 1998 and
1999, respectively. As of December 31, 1997 and 1998 and June 30, 1999,
shareholder loans were $517, $612 and $225, respectively.
During 1998 and 1999, shareholder loans of $232 and $496 were settled
through the issuance of 93 and 198 shares of common stock, respectively.
F-100
<PAGE> 244
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) INCOME TAXES
Pro forma income tax expense differs from the amounts that would result
from applying the federal statutory ratio of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax benefit.................... $(52) $(59) $(71) $(10) $(186)
State income taxes, net of federal
benefit............................... (9) (10) (12) (2) (31)
Change in valuation allowance........... 61 69 83 12 217
---- ---- ---- ---- -----
$ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== =====
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 124 $ 134 $ 321
Accounts receivable....................................... 1 38 46
Deferred revenue.......................................... 14 58 80
----- ----- -----
Gross deferred tax assets.............................. 139 230 447
Deferred tax liabilities:
Property and equipment.................................... (9) (18) (18)
----- ----- -----
Net deferred tax asset................................. 130 212 429
Valuation allowance......................................... (130) (212) (429)
----- ----- -----
Net deferred tax assets................................ $ -- $ -- $ --
===== ===== =====
</TABLE>
At December 31, 1998, the Company has a net operating loss carryforward for
federal and state income tax purposes of approximately $338 which begins to
expire in 2012. Due to the uncertainty regarding the ultimate utilization of the
net operating loss carryforward, no tax benefit for losses has been provided by
the Company in 1997 and 1998, and a valuation allowance has been recorded for
the entire amount of the net deferred tax asset.
F-101
<PAGE> 245
DELANET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(8) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(9) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS END OF
OF YEAR EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts.............. $-- -- -- --
=== === == ===
For the year ended December 31, 1997:
Allowance for doubtful accounts.............. $-- 3 -- 3
=== === == ===
For the year ended December 31, 1998:
Allowance for doubtful accounts.............. $ 3 93 -- 96
=== === == ===
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(unaudited)............................... $96 111 -- 207
=== === == ===
</TABLE>
(10) YEAR 2000
The Year 2000 Issue ("Year 2000") is the result of older computer programs
that use two digits rather than four to reflect dates used in performing
calculations. As a result, these programs may not properly recognize the Year
2000 and errors may result. The Company has performed the necessary Year 2000
modifications or upgrades to most of its hardware and software, and has
performed Year 2000 testing on mission critical hardware and software.
Additional hardware and software modifications or upgrades are expected to be
completed in 1999. The total cost for Year 2000 remediation efforts are not
expected to be material to the Company's operations. The Company has not yet
developed a formal Year 2000 contingency plan. Failure to complete Year 2000
remediation in a timely manner could have a material adverse effect on the
Company's operations.
(11) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-102
<PAGE> 246
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Internet Access Services
(A Division of Weidner Associates Inc.) as of December 31, 1997 and 1998, and
the related statements of operations and owner's deficit, and cash flows for the
period from July 1996 (inception) through 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 Internet Access Services (A
Division of Weidner Associates Inc.) as of December 31, 1997 and 1998, and the
results of its operations and its cash flows for the period from July 1996
(inception) through December 31, 1996 and the years ended December 31, 1997 and
1998 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Philadelphia, Pennsylvania
August 19, 1999
F-103
<PAGE> 247
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14 30 36
Accounts receivable, net of allowance for doubtful
accounts of $1 in 1997, $5 in 1998 and $7 in 1999...... 5 5 9
----- ---- ----
Total current assets................................... 19 35 45
Property and equipment, net................................. 107 88 90
Intangible assets, net of accumulated amortization of $15 in
1997, $27 in 1998, and $34 in 1999........................ 35 58 51
----- ---- ----
Total assets........................................... $ 161 181 186
===== ==== ====
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 24 7 7
Current portion of capital lease obligations.............. 20 26 7
Deferred revenue.......................................... 20 40 43
Due to affiliate (note 3)................................. 251 311 284
----- ---- ----
Total current liabilities.............................. 315 384 341
Capital lease obligations, less current portion............. 48 18 15
----- ---- ----
Total liabilities...................................... 363 402 356
Commitments and contingencies (notes 7 and 9)............... -- -- --
Owner's deficit............................................. (202) (221) (170)
----- ---- ----
Total liabilities and owner's deficit.................. $ 161 181 186
===== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-104
<PAGE> 248
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 1996 YEAR ENDED SIX MONTHS
(INCEPTION) TO DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------ ------------------
1996 1997 1998 1998 1999
-------------- ---- ---- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity..................... $ 51 173 432 164 387
---- ---- ---- ---- ----
Total revenue.......................... 51 173 432 164 387
Costs and expenses:
Cost of Internet services................. 27 129 175 98 133
Selling, general and administrative....... 74 140 193 87 148
Depreciation and amortization............. 6 46 78 36 53
---- ---- ---- ---- ----
Total costs and expenses............... 107 315 446 221 334
---- ---- ---- ---- ----
(Loss) income from operations.......... (56) (142) (14) (57) 53
Other income (expenses):
Interest expense.......................... -- (4) (5) (3) (2)
---- ---- ---- ---- ----
Net (loss) income...................... (56) (146) (19) (60) 51
Owner's deficit at beginning of period...... -- (56) (202) (202) (221)
---- ---- ---- ---- ----
Owner's deficit at end of period............ $(56) (202) (221) (262) (170)
==== ==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-105
<PAGE> 249
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 1996 YEAR ENDED SIX MONTHS
(INCEPTION) TO DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------ -------------------------
1996 1997 1998 1998 1999
-------------- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income............................. $(56) (146) (19) (60) 51
Adjustments to reconcile net (loss) income to
net cash (used by) provided by operating
activities:
Depreciation and amortization............... 6 46 78 36 53
Non-cash rent expense allocated by
affiliate................................. 5 10 -- -- --
Changes in operating assets and liabilities:
Accounts receivable....................... (3) (2) -- (4) (4)
Accounts payable and accrued expenses..... 3 21 (17) -- --
Deferred revenue.......................... -- 20 20 12 3
---- ---- --- --- ---
Net cash provided by (used by)
operating activities................. (45) (51) 62 (16) 103
---- ---- --- --- ---
Cash flows from investing activities:
Acquisition of equipment...................... (13) (47) (33) (8) (48)
Purchase of intangible assets................. (50) -- (35) -- --
---- ---- --- --- ---
Net cash used by investing
activities........................... (63) (47) (68) (8) (48)
---- ---- --- --- ---
Cash flows from financing activities:
Advances from (repayments to) affiliate,
net......................................... 116 120 60 39 (27)
Repayments of capital lease obligations....... -- (16) (38) (18) (22)
---- ---- --- --- ---
Net cash provided by (used by)
financing activities................. 116 104 22 21 (49)
---- ---- --- --- ---
Net increase (decrease) in cash and
cash equivalents..................... 8 6 16 (3) 6
Cash and cash equivalents:
Beginning period.............................. -- 8 14 14 30
---- ---- --- --- ---
End of period................................. $ 8 14 30 11 36
==== ==== === === ===
</TABLE>
Supplemental disclosure of cash flow information (in thousands):
During the years ended December 31, 1997 and 1998, and during the six month
periods ended June 30, 1998 and 1999, the Company paid approximately $4,
$5, and $3 and $2, respectively, for interest.
Non-cash financing activities (in thousands):
The Company entered into various capital leases for computer equipment.
These capital lease obligations resulted in non-cash financing activities
aggregating $84 and $14 for the years ended December 31, 1997 and 1998,
respectively.
See accompanying notes to financial statements.
F-106
<PAGE> 250
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Internet Access Services (the "Company"), a division of Weidner Associates,
Inc. ("Weidner"), is a regional provider of Internet access for Northeastern
Pennsylvania. The goal of the Company is to continue to increase its subscriber
base and geographic coverage.
The accompanying financial statements include the accounts of Internet
Access Services as a division of Weidner, assuming that it had been operated
separately as of July 1996 (inception) and thereafter.
Management assumptions were made in allocating costs from Weidner in order
to present the balance sheets and statement of operations of the Company. The
allocated costs were primarily related to employee salaries that were allocated
based upon the estimated time worked at the Company. Management of the Company
believes that such costs have been reasonably allocated.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for Internet access services. The Company's
future success will be dependent upon its ability to create and provide
effective and competitive Internet services, the continued acceptance of the
Internet and the Company's ability to develop and provide new services that meet
customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis. The competitive conditions could result in
additional pricing programs, an increase in marketing costs, limited 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.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations and owner's deficit, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
F-107
<PAGE> 251
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1996, 1997 and 1998 and June 30, 1999, were approximately $8,
$14, $30 and $36, respectively.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INTANGIBLE ASSETS
Intangible assets include the direct costs incurred for the purchase of
customer bases from other Internet Service Providers "ISPs". Amortization is
provided using the straight-line method over five years commencing when the
customer base is received. Amortization expense was approximately $5, $10 and
$12 for the period from July 1996 (inception) through December 31, 1996 and the
years ended December 31, 1997 and 1998, respectively. Amortization expense was
approximately $5 and $7 for the six month periods ended June 30, 1998 and 1999,
respectively.
F-108
<PAGE> 252
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) INCOME TAXES
The operations of the Company are included in the income tax returns of
Weidner Associates, which is treated as a C-Corp, for all periods presented.
No tax benefit has been allocated to the Company due to the losses at the
Weidner level for which no tax benefit has been provided for financial statement
purposes.
Income taxes are accounted for under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The unaudited Pro Forma income tax information included in Note 6 is
presented in accordance with SFAS No. 109 as if the Company had been subject to
Federal and state income taxes for the period from July 1996 (inception) through
December 31, 1996 and the years ended December 31, 1997 and 1998, on a
stand-alone basis.
(i) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services, which has not been material to date, is
recognized as the services are provided.
(j) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs totaled approximately $4, $5 and $15 and $6 and $12 for the
period from July 1996 (inception) through December 31, 1996 and the years ended
December 31, 1997 and 1998 and for the six month periods ended June 30, 1998 and
1999, respectively.
(k) FINANCIAL INSTRUMENTS, CONCENTRATION OF CREDIT RISK AND BUSINESS RISKS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and the relatively minor balances of each individual
account. At December 31, 1997 and 1998 and June 30, 1999, the fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
F-109
<PAGE> 253
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
For the period July 1996 (inception) through December 31, 1996 and the
years ended December 31, 1997 and 1998 and for periods ended June 30, 1998 and
1999, six vendors represented approximately 20%, 39% and 37%, and 38% an 39% of
the Company's total expenses, respectively.
The Company utilizes several communication service providers to provide
access to the Internet. If the Company is unable to continue its relationship
with these communication service providers, it believes that it could shift to
alternative communication service providers without adversely affecting its
operations.
(l) INTERNET SERVICES OPERATING COSTS
Internet services operating costs primarily consist of telecommunications
expenses inherent in providing the Internet services.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact, of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet completed its analysis of the impact of this
pronouncement on its financial statements.
F-110
<PAGE> 254
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT COST
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $84, $98 and $98,
respectively.............................................. $144 $191 $237
Furniture and fixtures...................................... -- -- 2
---- ---- ----
144 191 239
Less accumulated depreciation and amortization, including
amounts related to capital leases of $13, $42 and $58,
respectively.............................................. (37) (103) (149)
---- ---- ----
Total.................................................. $107 $ 88 $ 90
==== ==== ====
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Professional fees........................................... $ 2 $2 $3
Accrued personnel related costs............................. 22 2 1
Other....................................................... -- 3 3
--- -- --
$24 $7 $7
=== == ==
</TABLE>
(3) DUE TO AFFILIATE
Amounts due to affiliate represent the net cash transfers between the
Company and Weidner resulting from transactions between the Company and Weidner.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2003.
F-111
<PAGE> 255
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $37 23
2000........................................................ 6 14
2001........................................................ 4 14
2002........................................................ -- 14
2003........................................................ -- 14
--- --
Total minimum payments................................. 47 79
==
Less amount representing interest........................... 3
---
Present value of net minimum lease payments............ 44
Less current portion........................................ 26
---
$18
===
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999 was approximately $13,000, $22,000
and $6,000 and $16,000, respectively.
(5) RELATED PARTY TRANSACTIONS
Since July 1996 (inception), the Company has occupied office space in a
building owned by an owner of the Company. No rent payments were made to the
owner for the use of the building during the period from July 1996 (inception)
through December 31, 1996 and the year ended December 31, 1997. However, rent
expense of $5 and $10 was recorded and charged to the due to affiliates account
during the period from July 1996 (inception) through December 31, 1996 and the
year ended December 31, 1997, respectively.
Rent expense to related parties for the year ended December 31, 1998 and
the six month periods ended June 30, 1998 and 1999 was $16, $6, and $12,
respectively.
(6) INCOME TAXES
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the Company and concurrent with the related initial public offering of
espernet.com (note 9), federal and state corporate income tax rates will apply
to the Company.
The historical operations of the Company were included in the income tax
returns of Weidner, which is treated as a C Corp., for all periods presented.
F-112
<PAGE> 256
INTERNET ACCESS SERVICES
(A DIVISION OF WEIDNER ASSOCIATES, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
No Pro Forma income tax benefit is reflected in the accompanying statements
of operations for all periods presented as the Company would have provided a
full valuation allowance against the net deferred tax asset had it been a C
Corp. on a stand-alone basis.
(7) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(8) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF YEAR AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
For the period from July 1996 (inception)
through December 31, 1996:
Allowance for doubtful accounts........... $-- (1) -- (1)
=== == == ==
For the year ended December 31, 1997:
Allowance for doubtful accounts........... $(1) -- -- (1)
=== == == ==
For the year ended December 31, 1998:
Allowance for doubtful accounts........... $(1) (9) 5 (5)
=== == == ==
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(unaudited)............................... $(5) (2) -- (7)
=== == == ==
</TABLE>
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon consummation of the agreement,
espernet.com will become the sole owner of the Company.
F-113
<PAGE> 257
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Southern Maryland
Internet, Inc. as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' 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 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.
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 Southern Maryland Internet,
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
Norfolk, Virginia
August 13, 1999
F-114
<PAGE> 258
SOUTHERN MARYLAND INTERNET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 37 57 26
Trade receivables......................................... 19 25 32
Prepaid expenses and other................................ 1 2 1
----- ---- ----
Total current assets................................... 57 84 59
Property and equipment, net (note 2)........................ 125 153 162
----- ---- ----
Total assets (note 3).................................. $ 182 237 221
===== ==== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 29 64 52
Accrued expenses.......................................... 7 2 11
Current portion of notes payable (note 3)................. 31 43 47
Current portion of capital lease obligations (note 4)..... 21 35 40
Deferred revenue.......................................... 85 198 229
----- ---- ----
Total current liabilities.............................. 173 342 379
Notes payable, less current portion (note 3)................ 90 77 73
Capital lease obligations, less current portion (note 4).... 43 43 31
----- ---- ----
Total liabilities...................................... 306 462 483
Stockholders' deficit:
Common stock, no par value, 100 shares authorized, issued
and outstanding........................................ 35 35 35
Accumulated deficit....................................... (159) (260) (297)
----- ---- ----
Total stockholders' deficit............................ (124) (225) (262)
----- ---- ----
Commitments and contingencies (notes 4 and 7)
Total liabilities and stockholders' deficit............ $ 182 237 221
===== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-115
<PAGE> 259
SOUTHERN MARYLAND INTERNET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $103 311 539 182 407
---- --- ---- --- ---
Total revenue........................... 103 311 539 182 407
Costs and expenses:
Cost of internet services.................. 19 49 159 50 146
Selling, general and administrative........ 159 268 383 171 241
Depreciation and amortization.............. 13 43 77 34 45
---- --- ---- --- ---
Total costs and expenses................ 191 360 619 255 432
---- --- ---- --- ---
Loss from operations.................... (88) (49) (80) (73) (25)
Other income (expenses):
Interest expense........................... (6) (16) (21) (10) (12)
---- --- ---- --- ---
Loss before income taxes................ (94) (65) (101) (83) (37)
Income tax expense (note 5).................. -- -- -- -- --
---- --- ---- --- ---
Net loss................................ $(94) (65) (101) (83) (37)
==== === ==== === ===
</TABLE>
See accompanying notes to financial statements.
F-116
<PAGE> 260
SOUTHERN MARYLAND INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----
<S> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1996........................ -- $-- $ -- $ --
Issuance of common stock for cash............... 100 35 -- 35
Net loss........................................ -- -- (94) (94)
--- --- ----- -----
BALANCE AT DECEMBER 31, 1996.................... 100 35 (94) (59)
Net loss........................................ -- -- (65) (65)
--- --- ----- -----
BALANCE AT DECEMBER 31, 1997.................... 100 35 (159) (124)
Net loss........................................ -- -- (101) (101)
--- --- ----- -----
BALANCE AT DECEMBER 31, 1998.................... 100 35 (260) (225)
Net loss (unaudited)............................ -- -- (37) (37)
--- --- ----- -----
BALANCE AT JUNE 30, 1999(unaudited)............. 100 $35 $(297) $(262)
=== === ===== =====
</TABLE>
See accompanying notes to financial statements.
F-117
<PAGE> 261
SOUTHERN MARYLAND INTERNET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ --------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(94) (65) (101) (83) (37)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 13 43 77 34 45
Changes in operating assets and liabilities:
Trade receivables................................. (9) (11) (6) (35) (7)
Prepaid expenses and other current assets......... (1) -- (1) (1) 1
Accounts payable.................................. 9 20 35 25 (12)
Accrued expenses.................................. 4 3 (5) (7) 9
Deferred revenue.................................. 11 74 113 92 31
---- --- ---- --- ---
Net cash provided by (used in) operating
activities.................................... (67) 64 112 25 30
---- --- ---- --- ---
Cash flows from investing activities:
Acquisition of property and equipment.................. (81) (32) (65) (29) (44)
---- --- ---- --- ---
Net cash used in investing activities........... (81) (32) (65) (29) (44)
---- --- ---- --- ---
Cash flows from financing activities:
Proceeds from notes payable............................ 121 19 30 -- 19
Repayments of notes payable............................ -- (19) (31) (14) (19)
Repayments of capital lease obligations................ -- (3) (26) (12) (17)
Proceeds from issuance of common stock................. 35 -- -- -- --
---- --- ---- --- ---
Net cash provided by (used in) financing
activities.................................... 156 (3) (27) (26) (17)
---- --- ---- --- ---
Net increase (decrease) in cash................. 8 29 20 (30) (31)
Cash:
Beginning of period.................................... -- 8 37 37 57
---- --- ---- --- ---
End of period.......................................... $ 8 37 57 7 26
==== === ==== === ===
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998 and during the
six-month periods ended June 30, 1998 and 1999 (unaudited), the Company paid
approximately $6, $15 and $21, and $10 and $12, respectively, for interest.
Non-cash financing activities: The Company entered into various capital
leases for computer equipment. These capital leases obligations resulted in
non-cash financing activities aggregating $0, $68 and $40, and $22 and $10 for
the years ended December 31, 1996, 1997, and 1998 and for the six-month periods
ended June 30, 1998 and 1999 (unaudited), respectively.
See accompanying notes to financial statements.
F-118
<PAGE> 262
SOUTHERN MARYLAND INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Southern Maryland Internet, Inc. (the "Company") was incorporated on
February 7, 1996 to capitalize on the growing demand for Internet access and
enhanced services by consumers and business users through the phased integration
and growth of Internet service in the southern Maryland geographic region. The
goal of the Company is to become the premier provider of full service Internet
connectivity and enhanced Internet services, including hosting web-sites in this
region. The Company commenced operations on April 1, 1996.
Inherent in the Company's business are various risks and uncertainties,
including the limited history of the need for Internet access and enhanced
services. The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has incurred losses since
inception. The Company's future success will be dependent upon its ability to
raise capital, the continued acceptance of the Internet as well as the Company's
ability to create and provide effective and competitive Internet services that
meet customers' changing requirements. Management's operational and financial
plans to address the above issues include continued focus on increasing its
subscriber base and geographic coverage and obtaining equity or debt financing
as needed.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-119
<PAGE> 263
SOUTHERN MARYLAND INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet connectivity services is recognized as the
services are provided and deferred and amortized to operations for amounts
billed relating to future periods. Installation and customer set up fees are
recognized upon completion of the services.
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
and totaled approximately $14, $13 and $15, and $7 and $9 for the years ended
December 31, 1996, 1997 and 1998 and for the six-month periods ended June 30,
1998 and 1999 (unaudited), respectively.
F-120
<PAGE> 264
SOUTHERN MARYLAND INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) FINANCIAL INSTRUMENTS
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. Fair value is defined in the statement as the amount at which an
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of trade receivables, prepaid expenses and other
assets, accounts payable, accrued expenses and notes payable approximate fair
value due to the short maturity of these instruments.
For each of the years ended December 31, 1996 and 1997 and for the period
ended June 30, 1998 (unaudited), two vendors represented substantially all of
the Company's total internet-related costs. For the year ended December 31, 1998
and for the six-month period ended June 30, 1999 (unaudited), three vendors
represented substantially all of the Company's total internet-related costs. The
Company's reliance on certain vendors can be shifted to alternative sources of
supply for services it sells should such changes be necessary.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 amends SFAS 133 to extend the effective date to
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not yet analyzed the impact of this pronouncement on its financial
statements.
F-121
<PAGE> 265
SOUTHERN MARYLAND INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases stated at
cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment, including amounts
related to capital leases of $68, $104 and $104,
respectively.............................................. $178 279 316
Office equipment, including amounts related to capital
leases of $0, $4 and $15, respectively.................... 1 5 23
Furniture and fixtures...................................... 2 2 2
---- --- ---
181 286 341
Less accumulated depreciation and amortization, including
amounts related to capital leases of $11, $40 and $60,
respectively.............................................. 56 133 179
---- --- ---
Total.................................................. $125 153 162
==== === ===
</TABLE>
(3) NOTES PAYABLE
Notes payable, secured by substantially all of the Company's assets,
consists of the following at December 31, 1997 and 1998 and June 30, 1999
(unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, bearing interest at prime plus 2.25%,
payable in monthly installments of $3, including interest,
with final payment due May 9, 2001........................ $121 90 77
Note payable to bank, up to $50, bearing interest at 10.25%,
payable in monthly installments of $2, including interest,
with final payment due December 22, 2001. The Company has
exercised draws on the note at various times from 1998
through 1999 on an as needed basis........................ -- 30 43
---- --- ---
121 120 120
Less current portion........................................ 31 43 47
---- --- ---
Notes payable, less current portion.................... $ 90 77 73
==== === ===
</TABLE>
The aggregate maturities of notes payable for each of the three years
subsequent to December 31, 1998 are as follows: 1999: $43; 2000: $49; and 2001:
$28.
F-122
<PAGE> 266
SOUTHERN MARYLAND INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) COMMITMENTS
The Company leases certain computer and office equipment under capital
leases and office space under noncancelable operating leases expiring at various
dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 47 10
2000........................................................ 41 11
2001........................................................ 12 3
---- ---
Total minimum payments................................. 100 $24
===
Less amount representing interest........................... 22
====
Present value of net minimum lease payments 78
Less current portion........................................ 35
----
$ 43
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 (unaudited) was $6, $8 and $14,
and $8 and $6, respectively.
The Company has a contract for Internet services which provides for an
early termination penalty. The termination penalty is equal to 50% of the
Internet service fees due for the canceled portion of the service period.
(5) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed expected tax benefit......................... $(32) (22) (34) (28) (13)
Other................................................. (5) (2) (8) (4) (2)
Increase in valuation allowance....................... 37 24 42 32 15
---- --- --- --- ---
$ -- -- -- -- --
==== === === === ===
</TABLE>
F-123
<PAGE> 267
SOUTHERN MARYLAND INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Temporary differences that give rise to the components of deferred tax
assets as of December 31, 1997 and 1998 and June 30, 1999 (unaudited) are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforward............................. $ 23 -- 15
Deferred revenue............................................ 33 76 88
Fixed assets................................................ 4 26 14
Deferred rent............................................... 1 1 1
Valuation allowance......................................... (61) (103) (118)
---- ---- ----
Deferred tax assets.................................... $ -- -- --
==== ==== ====
</TABLE>
A valuation allowance has been recorded to reduce deferred tax assets that
are more likely than not expected to be realized. Management believes that
sufficient uncertainty exists regarding the realizability of these items that a
full valuation allowance is required.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-124
<PAGE> 268
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of NuNet, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' 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 NuNet, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
NuNet, Inc. will continue as a going concern. As discussed in Note 2 to the
financial statements, NuNet, Inc. has suffered recurring losses from operations
and has a working capital deficiency and a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ KPMG LLP
New York, New York
August 20, 1999
F-125
<PAGE> 269
NUNET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1997 1998 1999
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 2 7 --
Receivables:
Trade, net of allowance for doubtful accounts of $6,
$4 and $4, respectively............................. 60 45 108
----- ------ ------
Total current assets................................ 62 52 108
Property and equipment, net................................ 112 227 263
Other assets:
Goodwill, net of accumulated amortization of $5, $12 and
$61, respectively..................................... 20 12 545
Other, net............................................... 4 4 4
----- ------ ------
Total assets........................................ $ 198 295 920
===== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 201 1,102 1,557
Accrued expenses......................................... 36 2 161
Current portion of capital lease obligations (note 4).... 43 71 47
Current portion of note payable (note 8)................. -- -- 43
Deferred revenue......................................... 24 29 15
----- ------ ------
Total current liabilities........................... 304 1,204 1,823
Note payable (note 8)...................................... -- -- 249
Capital lease obligations, less current portion (note 4)... 33 122 168
----- ------ ------
Total liabilities................................... 337 1,326 2,240
Stockholders' deficit (note 5):
Common stock, Class A no par value. Authorized 10,000,000
shares, issued and outstanding 10,000,000 shares...... 135 135 135
Common stock, Class B, no par value. Authorized 1,000,000
shares, issued and outstanding 200,000 shares at June
30, 1999.............................................. -- -- --
Treasury stock, 4,000,000 shares
Class A, no par value at June 30, 1999................ -- -- --
Additional paid-in capital............................... 5 5 5
Retained earnings (accumulated deficit).................. (279) (1,171) (1,460)
----- ------ ------
Total stockholders' deficit......................... (139) (1,031) (1,320)
Contingencies and commitments (notes 4 and 7)
----- ------ ------
Total liabilities and stockholders' deficit......... $ 198 295 920
===== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE> 270
NUNET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $126 453 1,115 452 813
Enhanced services and other................ 27 127 96 115 85
---- ---- ----- ---- ----
Total revenue................................ 153 580 1,211 567 898
Costs and expenses:
Costs of Internet services................. 79 270 734 326 430
Selling, general and administrative........ 125 447 1,256 360 592
Depreciation and amortization.............. 20 60 98 39 145
---- ---- ----- ---- ----
Total costs and expenses..................... 224 777 2,088 725 1,167
---- ---- ----- ---- ----
Loss from operations......................... (71) (197) (877) (158) (269)
Interest expense............................. 3 8 15 1 20
---- ---- ----- ---- ----
Loss before income taxes..................... (74) (205) (892) (159) (289)
Income tax provision......................... -- -- -- -- --
---- ---- ----- ---- ----
Net loss..................................... $(74) (205) (892) (159) (289)
==== ==== ===== ==== ====
Pro Forma income taxes (unaudited)........... $ -- -- -- --
==== ==== ===== ====
Pro Forma net loss(unaudited)................ $(74) (205) 892 159
==== ==== ===== ====
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE> 271
NUNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------- RETAINED
CLASS A ADDITIONAL EARNINGS/
CLASS A CLASS B TREASURY PAID-IN SHAREHOLDER ACCUMULATED
SHARES SHARES SHARES AMOUNT CAPITAL NOTE PAYABLE DEFICIT TOTAL
---------- ------- --------- ------ ---------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31,
1995............... 100 -- -- $-- 10 5 -- 15
Issuance of common
stock for cash..... -- -- -- -- -- -- -- --
Net income/loss...... -- -- -- -- -- -- (74) (74)
---------- ------- --------- -- --- -- ------ ------
BALANCE AT
DECEMBER 31,
1996............... 100 -- -- -- 10 5 (74) (59)
Issuance of common
stock for cash..... 9,900 -- -- -- 125 -- -- 125
Net income/loss...... -- -- -- -- -- -- (205) (205)
---------- ------- --------- -- --- -- ------ ------
BALANCE AT
DECEMBER 31,
1997............... 10,000 -- -- -- 135 5 (279) (139)
Issuance of common
stock for 999 for 1
split.............. 9,990,000 -- -- -- -- -- -- --
Net income/loss...... -- -- -- -- -- -- (892) (892)
---------- ------- --------- -- --- -- ------ ------
BALANCE AT
DECEMBER 31,
1998............... 10,000,000 -- -- -- 135 5 (1,171) (1,031)
Issuance of common
stock for
acquisition
(unaudited)........ -- 200,000 -- -- -- -- -- --
Class A shares
contributed to
treasury
(unaudited)........ (4,000,000) -- 4,000,000 -- -- -- -- --
Net income/loss
(unaudited)........ -- -- -- -- -- -- (289) (289)
---------- ------- --------- -- --- -- ------ ------
BALANCE AT JUNE 30,
1999 (unaudited)... 6,000,000 200,000 4,000,000 $-- 135 5 (1,460) (1,320)
========== ======= ========= == === == ====== ======
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE> 272
NUNET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(74) (205) (892) (159) (289)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.......................... 20 60 98 39 145
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables.......................................... (10) (41) 15 (8) (53)
Prepaid expenses and other current assets............ (4) -- -- -- --
Accounts payable..................................... 78 125 901 187 226
Accrued expenses..................................... 6 30 (34) 12 99
Deferred revenue..................................... 16 7 5 (14) (14)
---- ---- ---- ---- ----
Net cash provided by (used in) operating activities......... 32 (24) 93 57 114
---- ---- ---- ---- ----
Cash flows from investing activities:
Acquisition of equipment.................................. (21) (36) (14) (7) (37)
Other..................................................... -- (25) -- -- --
---- ---- ---- ---- ----
Net cash used by investing activities....................... (21) (61) (14) (7) (37)
---- ---- ---- ---- ----
Cash flows from financing activities:
Repayments of notes payable............................... 5 -- -- -- (27)
Repayments of capital lease obligations................... (11) (43) (74) (34) (57)
Proceeds from issuance of common stock, net of issuance
costs.................................................. -- 125 -- -- --
---- ---- ---- ---- ----
Net cash provided by (used in) financing activities......... (6) 82 (74) (34) (84)
---- ---- ---- ---- ----
Net increase (decrease) in cash and cash equivalents........ 5 (3) 5 16 (7)
Cash and cash equivalents:
Beginning period.......................................... -- 5 2 2 7
---- ---- ---- ---- ----
End of period............................................. $ 5 2 7 18 --
==== ==== ==== ==== ====
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six-month periods
ended June 30, 1998 and 1999, the Company paid approximately $3, $8, $15, $1 and $10,
respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These capital leases
obligations resulted in non-cash financing activities aggregating $130, $0, $191, $96 and
$79 for the years ended December 31, 1996, 1997, and 1998, and for the six-month periods
ended June 30, 1998 and 1999, respectively.
</TABLE>
In March 1999, NuNet, Inc. acquired all the capital stock of U.S. Netway,
Inc. in exchange for 200,000 shares of Class B common stock. In conjunction with
the acquisition assets were acquired and liabilities assumed as described in
note 8 to the financial statements.
See accompanying notes to financial statements.
F-129
<PAGE> 273
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
NuNet, Inc. (the "Company") was incorporated as an S-Corp November 1995 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users through the phased acquisition, integration, and
growth of existing independent Internet service providers in targeted geographic
regions. The Company commenced operations in January 1996.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity (deficit), and cash flows for
the six months ended June 30, 1999 and 1998 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-130
<PAGE> 274
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the double-declining method over the estimated useful lives of the related
assets, generally ranging from three to five years. Property and equipment under
capital leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board Opinion No. 17, Intangible Assets,
based upon estimated fair value. If such assets are impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying value or fair value, less costs to sell.
(g) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a three-year period.
(h) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
For tax years up to December 31, 1998, NuNet operated as a S-Corp, for
income tax purposes and the results of operations of the Company are included in
the individual income tax returns of the shareholders. Accordingly, no provision
for income taxes has been included in the
F-131
<PAGE> 275
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
accompanying consolidated financial statements. NuNet converted to a C-Corp on
January 1, 1999, and became subject to Federal and state corporate income taxes.
For periods prior to the change from its S-Corp status, the unaudited Pro
Forma income tax information included in statements of operations and Note 6 is
presented in accordance with SFAS 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, 1997 and 1998.
(i) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Non-refundable installation and customer set up fees are
recognized upon completion of the services.
(j) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $72, $228, $679, $90 and $159 for the years ended December 31,
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and the relatively minor balances of each individual
account. At December 31, 1997 and 1998 and June 30, 1999, the fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, one vendor represented approximately 35%
of the Company's total purchases. The Company's reliance on certain vendors can
be shifted to alternative sources of supply for products should such changes be
necessary.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use.
F-132
<PAGE> 276
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Adoption of SOP 98-1 as of January 1, 1999 did not have any material impact on
the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the effect of SFAS No. 133 on its financial
statements.
(2) LIQUIDITY AND GOING CONCERN
The Company's financial statements for the period from inception through
December 31, 1998 have been prepared on a going concern basis which contemplates
the realization of assets and the settlement of liabilities in the normal course
of business. The Company has suffered recurring losses from operations and has a
working capital deficiency and a net capital deficiency that raises substantial
doubts about its ability to continue as a going-concern. The Company's
stockholders have entered into an agreement whereby they will sell their shares
of common stock to espernet.com, inc. The Company's working capital,
non-existence of third party borrowing facility and cash flows from operations
may not be sufficient to continue future operations if the acquisition does not
occur. In the event the acquisition is not completed, management's plans include
seeking private financing or a third party borrowing facility to fund future
operations.
(3) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases stated at
cost:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $130, $321 and $400,
respectively........................................... $176 379 491
Furniture and fixtures.................................... 11 13 13
---- --- ---
187 392 504
Less accumulated depreciation and amortization, including
amounts related to capital leases of $54, $128 and
$185, respectively..................................... 75 165 241
---- --- ---
Total............................................. $112 227 263
==== === ===
</TABLE>
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
F-133
<PAGE> 277
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 71 13
2000........................................................ 86 14
2001........................................................ 68 7
2002........................................................ 37 --
2003........................................................ 13 --
Thereafter.................................................. 3 --
---- --
Total minimum payments............................ 278 34
==
Less amount representing interest........................... 85
----
Present value of net minimum lease payments............... 193
Less current portion........................................ 71
----
$122
====
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 were $7, $15, $7, and $15,
respectively.
(5) CAPITAL STOCK
(A) COMMON STOCK
Class A -- The amended and restated articles of incorporation of the
Company provide for one class of 10,000,000 shares of Class A Common Stock
without par value. The holders of shares of Common Stock have one vote per
share. None of the shares has preemptive or cumulative voting rights, is subject
to mandatory redemption, or is liable for assessments or further calls. None of
the shares has any conversion rights. 4,000,000 shares were contributed back to
the Company by the shareholders in March 1999.
Class B -- The amended and restated articles of incorporation of the
Company provide for 1,000,000 shares of Class B Common Stock without par value,
of which 200,000 shares were issued in March of 1999 and are outstanding. The
holders of the Common Stock Class B have no voting rights. None of the shares
has preemptive or cumulative voting rights, is subject to mandatory redemption,
or is liable for assessments or further calls. These shares are convertible to
Class A shares in March 2001.
F-134
<PAGE> 278
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(6) INCOME TAXES
The Company operated as an S-Corp for income tax purposes and the results
of operations of the Company are included in the individual income tax returns
of the shareholders. The following information is presented to provide Pro Forma
income tax benefit for the years ended 1996, 1997 and 1998, assuming the Company
was operating as a C-Corp.
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998 1999
---- ---- ---- -----------
(PRO FORMA) (UNAUDITED)
<S> <C> <C> <C> <C>
Expected tax benefit.................................. $(24) (71) (311) (98)
State income taxes, net of federal benefit............ (2) (7) (29) (19)
Other................................................. -- -- -- 27
---- --- ---- ----
$(26) (78) (340) (90)
==== === ==== ====
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(PRO FORMA) (UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforward............................. $ 89 406 323
Other, net.................................................. 15 38 (16)
----- ---- ----
Gross deferred tax assets.............................. 104 444 307
Valuation allowance......................................... (104) (444) (307)
----- ---- ----
Net deferred tax asset................................. $ -- -- --
===== ==== ====
</TABLE>
At June 30, 1999 the Company has a net operating loss carryforward for tax
purposes of approximately $951, including approximately $729 from loss incurred
at U.S. Netway which was acquired in March 1999 (note 8). Due to the uncertainly
regarding the ultimate utilization of the net operating loss carryforward, no
tax benefit for losses has been provided by the Company in 1999, and a valuation
allowance has been recorded for the entire amount of the deferred asset.
(7) LEGAL PROCEEDINGS
The Company is currently involved in various claims and legal actions
arising in the ordinary course of business. A service provider has commenced
litigation for collection of outstanding charges under various contractual
agreements totaling approximately $1,890. The Company has filed a counter claim
against this service provider claiming breach of contract and excess billing for
services provided of approximately $1,550. The Company has a liability of
approximately $600
F-135
<PAGE> 279
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
recorded in the financial statements at December 31, 1998 to this service
provider. In the opinion of management, the ultimate disposition of this case or
any other matters outstanding will not have a material effect on the Company's
financial position, results of operation or liquidity.
(8) SUBSEQUENT EVENTS
SALE OF COMPANY
The Company's stockholders have entered into an agreement whereby they will
sell the shares of common stock in the Company to espernet.com, inc.
("espernet.com"). The Company's stockholders will exchange their shares in the
Company for cash and shares of common stock of espernet.com concurrent with the
consummation of the initial public offering of the common stock of espernet.com.
Upon consummation of the agreement, espernet.com will become the sole
stockholder of the Company.
ACQUISITION
In March 1999, the Company acquired all the assets and liabilities of US
NetWay for 200,000 shares of the Company's Series B Common Stock. The
acquisition will be accounted for using the purchase method and, accordingly,
the results of operations of US NetWay are included in the Company's financial
statements subsequent to the acquisition. The liabilities assumed of $653
exceeded assets acquired which had an estimated fair market value of $49,
resulting in goodwill of $604, which is being amortized over a three year
period.
Included in the assumed liabilities is a note payable as follows at June
30, 1999:
<TABLE>
<S> <C>
Bank loan, 11% payable in monthly installments of $6,
including interest........................................ $292
less current portion........................................ 43
----
Long term payable $249
====
</TABLE>
The bank loan is secured by substantially all assets of NuNet and US
Netway.
Additionally, the bank loan provides for a $40 letter of credit granted to
a lessor to secure payment under lease terms.
The following unaudited Pro Forma financial information presents the
combined results of operations of the Company and US NetWay as of June 30, 1999
and 1998, and December 31, 1998. The Pro Forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company and US NetWay constituted a single entity during such periods.
F-136
<PAGE> 280
NUNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
PRO FORMA PRO FORMA
NU NET US NETWAY ADJUSTMENTS(A) COMBINED
------ --------- ---------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.............................. $1,211 526 -- 1,737
Cost of Internet services............. 734 356 -- 1,090
Operating expenses.................... 1,354 434 201 1,989
------ ---- ----- ------
Loss from operations.................. $(877) (264) (201) (1,342)
====== ==== ===== ======
SIX MONTHS ENDED
JUNE 30, 1999
Revenues.............................. $ 807 175 -- 982
Cost of Internet services............. 368 140 -- 508
Operating expenses.................... 659 161 33 853
------ ---- ----- ------
Loss from operations.................. $(220) (126) (33) (379)
====== ==== ===== ======
SIX MONTHS ENDED
JUNE 30, 1998
Revenues.............................. 567 150 -- 717
Cost of Internet services............. 326 136 -- 462
Operating expenses.................... 399 227 100 726
------ ---- ----- ------
Loss from operations.................. $(158) (213) (100) (471)
====== ==== ===== ======
</TABLE>
- ---------------
(A) Pro forma goodwill amortization.
F-137
<PAGE> 281
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, Inc.:
We have audited the accompanying balance sheets of Enter.Net, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
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 Enter.Net, 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
Atlanta, Georgia
September 3, 1999
F-138
<PAGE> 282
ENTER.NET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ----- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3 25 56
Prepaid expenses.......................................... 7 1 1
---- ----- -----
Total current assets................................... 10 26 57
Property and equipment, net (note 2)........................ 395 524 496
---- ----- -----
Total assets........................................... $405 550 553
==== ===== =====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accrued expenses (note 2)................................. $ 21 41 13
Accrued management fee (note 4)........................... 83 118 118
Current portion of capital lease obligations (note 3)..... 163 275 307
Deferred revenue.......................................... 314 550 806
---- ----- -----
Total current liabilities.............................. 581 984 1,244
Capital lease obligations, less current portion (note 3).... 90 122 73
---- ----- -----
Total liabilities...................................... 671 1,106 1,317
Stockholders' equity (deficit):
Common stock, no par value; 100 shares authorized, issued
and outstanding........................................ -- -- --
Additional paid-in capital................................ 1 1 1
Accumulated deficit....................................... (267) (557) (765)
---- ----- -----
Total stockholders' deficit............................ (266) (556) (764)
---- ----- -----
Commitments (notes 3 and 5)
---- ----- -----
Total liabilities and stockholders' deficit............ $405 550 553
==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE> 283
ENTER.NET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- --------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.......................... $ 575 1,348 2,464 1,079 1,567
Other.......................................... 37 29 25 12 6
----- ----- ----- ----- -----
Total revenue............................... 612 1,377 2,489 1,091 1,573
----- ----- ----- ----- -----
Costs and expenses:
Cost of Internet services...................... 145 381 691 301 464
Selling, general and administrative (note 4)... 534 965 1,705 713 1,005
Depreciation and amortization.................. 38 174 302 125 180
----- ----- ----- ----- -----
Total costs and expenses.................... 717 1,520 2,698 1,139 1,649
----- ----- ----- ----- -----
Loss from operations........................ (105) (143) (209) (48) (76)
Interest expense................................. (2) (20) (81) (33) (48)
----- ----- ----- ----- -----
Loss before income taxes.................... (107) (163) (290) (81) (124)
Income taxes (note 6)............................ -- -- -- -- --
----- ----- ----- ----- -----
Net loss -- historical...................... $(107) (163) (290) (81) (124)
Pro forma income tax expense (unaudited)......... (2) (7) (3) (17) (60)
----- ----- ----- ----- -----
Pro forma net loss (unaudited)................... $(109) (170) (293) (98) (184)
===== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE> 284
ENTER.NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
---------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995........ -- $-- -- 3 3
Incorporation of the Company........ 100 -- 1 -- 1
Net loss............................ -- -- -- (107) (107)
--- -- -- ---- ----
BALANCE AT DECEMBER 31, 1996........ 100 -- 1 (104) (103)
Net loss............................ -- -- -- (163) (163)
--- -- -- ---- ----
BALANCE AT DECEMBER 31, 1997........ 100 -- 1 (267) (266)
Net loss............................ -- -- -- (290) (290)
--- -- -- ---- ----
BALANCE AT DECEMBER 31, 1998........ 100 -- 1 (557) (556)
Capital distribution (unaudited).... -- -- -- (84) (84)
Net loss (unaudited)................ -- -- -- (124) (124)
--- -- -- ---- ----
BALANCE AT JUNE 30, 1999
(unaudited)....................... 100 $-- 1 (765) (764)
=== == == ==== ====
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE> 285
ENTER.NET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------------------
1996 1997 1998 1998 1999
------ ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................... $(107) (163) (290) (81) (124)
Adjustments to reconcile net loss
to net cash provided by
operating activities:
Depreciation and amortization... 38 174 302 125 180
Changes in operating assets and
liabilities:
Prepaid expenses.............. (7) -- 6 (2) --
Accrued expenses.............. 13 7 20 (13) (28)
Accrued management fee........ 100 (17) 35 39 --
Deferred revenue.............. 119 169 236 127 256
----- ---- ---- --- ----
Net cash provided by
operating activities.... 156 170 309 195 284
----- ---- ---- --- ----
Cash flows used in investing
activities --
Acquisition of property and
equipment....................... (120) (55) (172) (75) (40)
----- ---- ---- --- ----
Cash flows from financing activities:
Repayments of capital lease
obligations..................... (6) (143) (115) (64) (129)
S Corporation distribution......... -- -- -- -- (84)
Proceeds from issuance of common
stock........................... 1 -- -- -- --
----- ---- ---- --- ----
Net cash used in financing
activities.............. (5) (143) (115) (64) (213)
----- ---- ---- --- ----
Net increase (decrease) in
cash.................... 31 (28) 22 56 31
Cash:
Beginning of period................ -- 31 3 3 25
----- ---- ---- --- ----
End of period...................... $ 31 3 25 59 56
===== ==== ==== === ====
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and the six month periods ended
June 30, 1998 and 1999 (unaudited), the Company paid approximately $2, $20, $81, and $33
and $48, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These capital lease
obligations resulted in non-cash financing activities aggregating $131, $271, $259, $119
and $112 for the years ended December 31, 1996, 1997, and 1998, and for the six month
periods ended June 30, 1998 and 1999 (unaudited), respectively.
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE> 286
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Enter.Net, Inc. (the "Company") commenced operations as a sole
proprietorship on April 1, 1995 and was incorporated on March 7, 1996. The
Company is primarily in the business of providing Internet services to
individuals and commercial enterprises located in selected high growth secondary
markets. The primary goal of the Company is to capitalize on the growing demand
for Internet access and enhanced services by consumers and business users
through on-target advertising. The Company's target market is the Commonwealth
of Pennsylvania.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses and the
limited history of the need for internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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-143
<PAGE> 287
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
Prior to March 7, 1996, the Company operated as a sole proprietorship. On
March 7, 1996, the Company incorporated and operated as a C-Corp through
December 31, 1996. Effective January 1, 1997, the Company elected to operate as
a S-Corp pursuant to the Internal Revenue Code for Federal and state income tax
purposes, with income taxable and distributable to the individual stockholders
without any further tax consequences. Accordingly, the Company was not subject
to Federal and state corporate income taxes during the period in which it was a
sole proprietorship or S-Corp.
The unaudited Pro Forma income tax information included in the statements
of operations and in Note 6 is presented in accordance with SFAS No. 109,
Accounting for Income Taxes, as if the Company had been subject to Federal and
state income taxes for all periods presented.
(g) REVENUE RECOGNITION
Fees for Internet services are billed and collected in advance of the
service period. Internet service revenue is deferred and then recognized as the
services are provided. Other revenue consists primarily of customer computer
repairs and is recognized upon completion of the service.
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
F-144
<PAGE> 288
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative
expenses and totaled approximately $58, $150 and $204, for the years ended
December 31, 1996, 1997 and 1998, respectively, and $95 and $ 103 for the six
month periods ended June 30, 1998 and 1999, respectively.
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The Company does not have financial instruments that potentially subject
the Company to concentrations of credit risk. The fair value of the Company's
financial instruments approximate their carrying value based on their terms and
interest rates.
For the years ended December 31, 1996, 1997 and 1998 and for the six month
periods ended June 30, 1998 and 1999, no individual customer represented greater
than 10% of total revenues.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet analyzed the impact of
this pronouncement on its financial statements.
F-145
<PAGE> 289
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT COST
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and Internet access equipment including amounts
related to capital leases of $402, $661 and $773 at
December 31, 1997 and 1998 and June 30, 1999,
respectively.............................................. $609 917 981
Automobiles................................................. -- 36 36
Furniture and fixtures...................................... 1 10 27
---- --- -----
610 963 1,044
Less accumulated depreciation and amortization, including
amounts related to capital leases of $128, $221 and $349
at December 31, 1997 and 1998 and June 30, 1999,
respectively.............................................. 215 439 548
---- --- -----
$395 524 496
==== === =====
</TABLE>
ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Telephone................................................... $ 9 8 7
Profit sharing plan contribution............................ -- 6 --
Money purchase plan contribution............................ -- 16 --
Payroll..................................................... 5 5 --
Other....................................................... 7 6 6
--- -- --
$21 41 13
=== == ==
</TABLE>
F-146
<PAGE> 290
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $275 16
2000........................................................ 161 21
2001........................................................ 17 25
2002........................................................ -- 12
Thereafter.................................................. -- --
---- --
Total minimum payments................................. 453 74
==
Less amount representing interest........................... 56
----
Present value of net minimum lease payments............ 397
Less current portion........................................ 275
----
$122
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 was $12, $14, $21, $8 and $11,
respectively.
(4) RELATED PARTY TRANSACTIONS
The Company pays management fees to its owners based upon the results of
the Company's operations. The total management fee for the years ended December
31, 1996, 1997 and 1998 and the six-month periods ended June 30, 1998 and 1999,
which is included in selling, general and administrative expenses, was $133,
$100, $178, $89 and $0, respectively. Management fees payable were $83 and $118
and $118 as of December 31, 1997 and 1998 and June 30, 1999, respectively.
(5) EMPLOYEE BENEFIT PLANS
The Company has a Profit Sharing Plan and a Money Purchase Plan (the
"Plans") for employees who have completed at least one year of service and who
have attained the age of 21. The effective date of the Profit Sharing Plan was
January 1, 1997 and the effective date of the Money Purchase Plan was January 1,
1998. A participant receives credit for one year of service if he/she completes
at least 1,000 hours of service at any time during the plan year. The entry date
F-147
<PAGE> 291
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
is the earlier of the first day of the Plan year (January 1) or the first day of
the seventh month of the Plan year coinciding with or following the date on
which an employee meets the eligibility requirements. The Company made
contributions to the Profit Sharing Plan of $34 and $60 for the years ended
December 31, 1997 and 1998, respectively, and $0 for both the six months ended
June 30, 1998 and 1999. The Company made contributions to the Money Purchase
Plan of $16 for the year ended December 31, 1998 and $0 for both the six months
ended June 30, 1998 and 1999.
(6) INCOME TAXES
Income tax expense differs from the amounts that would result from applying
the federal statutory rate of 34% as follows (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Expected tax benefit.................................. $(36) (55) (98) (28) (42)
State income taxes, net of federal effect............. (7) (11) (20) (5) (9)
Change in valuation allowance......................... 50 84 122 65 128
Other................................................. (5) (11) (1) (15) (17)
---- --- --- --- ---
Pro forma income tax expense.......................... $ 2 7 3 17 60
==== === === === ===
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows (unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Deferred revenue............................................ $134 242 355
Other, net.................................................. -- 14 29
---- ---- ----
Gross deferred tax assets.............................. 134 256 384
Valuation allowance......................................... (134) (256) (384)
---- ---- ----
Net deferred tax asset................................. $ -- -- --
==== ==== ====
</TABLE>
There were no significant differences between the book and tax basis of
assets at December 31, 1997 and 1998, and June 30, 1999. The significant
difference between the book and tax basis of liabilities related to deferred
revenue which totaled $314, $550 and $806 at December 31, 1997 and 1998, and
June 30, 1999, respectively.
F-148
<PAGE> 292
ENTER.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-149
<PAGE> 293
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Prometheus Information
Corp. as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' 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 Prometheus Information
Corporation, Inc. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, current liabilities exceed current assets and the Company
has a stockholders' deficit which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 9. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Philadelphia, Pennsylvania
August 24, 1999
F-150
<PAGE> 294
PROMETHEUS INFORMATION CORP.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 7 7 6
Trade receivables, net of allowance for doubtful accounts
of $4 in 1997, and $5 in 1998 and as of June 30,
1999 (unaudited)....................................... 15 4 32
---- ---- ----
Total current assets................................... 22 11 38
Property and equipment, net................................. 93 53 56
Other assets, net........................................... 10 8 7
---- ---- ----
Total assets........................................... $125 72 101
==== ==== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 43 45 88
Accrued expenses.......................................... 39 15 17
Line of credit............................................ 50 50 50
Current portion of notes payable to stockholders.......... 41 6 6
Notes payable and current portion of long-term debt....... 28 26 23
Current portion of capital lease obligations.............. 20 9 15
Deferred revenue.......................................... 79 67 86
---- ---- ----
Total current liabilities.............................. 300 218 285
Long-term debt, less current portion........................ 4 -- --
Notes payable to stockholders, less current portion......... 13 7 4
Capital lease obligations, less current portion............. 24 15 21
---- ---- ----
Total liabilities...................................... 341 240 310
Stockholders' deficit:
Common stock, $.1 par value. Authorized 1,000 shares;
issued and outstanding 1,000 shares.................... -- -- --
Additional paid-in capital................................ 24 24 24
Accumulated deficit....................................... (240) (192) (233)
---- ---- ----
Total stockholders' deficit............................ (216) (168) (209)
---- ---- ----
Commitments and contingencies (notes 4, 6 and 9)
Total liabilities and stockholders' deficit............ $125 72 101
==== ==== ====
</TABLE>
See accompanying Notes to Financial Statements.
F-151
<PAGE> 295
PROMETHEUS INFORMATION CORP.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $429 398 312 151 119
Enhanced services and other................ 176 170 215 125 70
---- --- --- --- ---
Total revenue........................... 605 568 527 276 189
Costs and expenses:
Cost of Internet services.................. 207 221 150 78 74
Selling, general and administrative........ 403 367 259 120 127
Depreciation and amortization.............. 47 54 50 28 21
---- --- --- --- ---
Total costs and expenses................ 657 642 459 226 222
---- --- --- --- ---
Income (loss) from operations........... (52) (74) 68 50 (33)
Other expenses:
Interest expense........................... (20) (23) (20) (10) (8)
---- --- --- --- ---
Net income (loss)....................... $(72) (97) 48 40 (41)
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-152
<PAGE> 296
PROMETHEUS INFORMATION CORP.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................ 1,000 $-- 24 (71) (47)
Net loss.................................... -- -- (72) (72)
----- --- -- ---- ----
BALANCE AT DECEMBER 31, 1996................ 1,000 -- 24 (143) (119)
Net loss.................................... -- -- (97) (97)
----- --- -- ---- ----
BALANCE AT DECEMBER 31, 1997................ 1,000 -- 24 (240) (216)
Net income.................................. -- -- 48 48
----- --- -- ---- ----
BALANCE AT DECEMBER 31, 1998................ 1,000 -- 24 (192) (168)
Net loss (unaudited)........................ -- -- (41) (41)
----- --- -- ---- ----
BALANCE AT JUNE 30, 1999 (unaudited)........ 1,000 $-- 24 (233) (209)
===== === == ==== ====
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE> 297
PROMETHEUS INFORMATION CORP.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, ENDED JUNE 30,
------------------ ------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(72) (97) 48 40 (41)
Adjustments to reconcile net income (loss) to net cash
used by operating activities:
Depreciation and amortization.......................... 47 54 50 28 21
(Gain) loss from sale of equipment..................... -- 1 (1) -- --
Changes in operating assets and liabilities:
Receivables.......................................... (1) 17 11 18 (28)
Other assets......................................... (3) (1) 2 -- 1
Accounts payable..................................... 29 4 2 (17) 43
Accrued expenses..................................... (2) 21 (24) (19) 2
Deferred revenue..................................... 29 16 (12) 8 19
---- --- --- --- ---
Net cash provided by operating activities......... 27 15 76 58 17
---- --- --- --- ---
Cash flows from investing activities:
Acquisition of equipment.................................. (22) (21) (12) (5) (5)
Proceeds from sale of equipment........................... -- -- 3 -- --
---- --- --- --- ---
Net cash used in investing activities............. (22) (21) (9) (5) (5)
---- --- --- --- ---
Cash flows from financing activities:
Proceeds from line of credit.............................. 3 -- -- -- --
Proceeds from notes payable to stockholders............... 25 25 -- -- --
Repayments of notes payable to stockholders............... (5) (5) (41) (36) (3)
Repayments of other notes payable......................... (6) (6) (6) (3) (3)
Repayments of capital lease obligations................... (13) (18) (20) (12) (7)
---- --- --- --- ---
Net cash provided by (used in) financing
activities...................................... 4 (4) (67) (51) (13)
---- --- --- --- ---
Net increase (decrease) in cash and cash
equivalents..................................... 9 (10) -- 2 (1)
Cash and cash equivalents:
Beginning period.......................................... 8 17 7 7 7
---- --- --- --- ---
End of period............................................. $ 17 7 7 9 6
==== === === === ===
</TABLE>
Supplemental disclosure of cash flow information (in thousands):
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999 (unaudited), the Company paid
approximately $16, $18, $23, and $13 and $6, respectively, for interest.
Non-cash financing activities (in thousands):
The Company entered into various capital leases for computer equipment.
These capital leases obligations resulted in non-cash financing activities
aggregating $37, $15, $0, and $0 and $19 for the years ended December 31, 1996,
1997, and 1998, and for the six month periods ended June 30, 1998 and 1999
(unaudited), respectively.
See accompanying notes to financial statements.
F-154
<PAGE> 298
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Prometheus Information Corp. (the "Company") was incorporated in June 1994
to provide a variety of Internet related products and services to both
individuals and organizations. The Company offers Internet access in the
metropolitan Philadelphia area through its "FishNet" division, which includes
dial-up services for internet access using high-speed telephone circuits. In
addition, the Company provides web-site design and hosting services, Internet
training and consulting.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for internet access and enhanced services.
The Company's future success will be dependent upon its ability to create and
provide effective and competitive internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim balance sheet of the Company as of June 30, 1999, and the
statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-155
<PAGE> 299
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. The Company had no
cash equivalents at December 31, 1997 and 1998 and June 30, 1999.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years. Equipment under capital leases are
stated at the present value of minimum lease payments and are amortized using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INCOME TAXES
The Company has elected 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 on his personal
income tax returns. Accordingly, the Company is not subject to Federal and state
corporate income taxes.
The unaudited pro forma income tax information included in Note 5 is
presented in accordance with SFAS 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, 1997 and 1998.
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
F-156
<PAGE> 300
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are approximately $49, $6, $4, $1 and $4 for the years
ended December 31, 1996, 1997 and 1998 and for the six-month periods ended June
30, 1998 and 1999, respectively.
(j) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk with respect to trade receivables is limited due to the large number of
customers comprising the Company's customer base and the relatively minor
balances of each individual account. At December 31, 1997 and 1998 and June 30,
1999, the fair value of the Company's financial instruments approximate their
carrying value based on their terms and interest rates.
The Company utilizes two communication service providers to provide access
to the Internet backbone. If the Company is unable to continue its relationship
with these communication service providers, it believes that it could shift to
alternative communication service providers without adversely affecting its
operations.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-157
<PAGE> 301
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $71, $71
and $90, respectively..................................... $181 $190 $213
Furniture and fixtures including amounts related to capital
leases of $15............................................. 26 26 26
---- ---- ----
207 216 239
Less accumulated depreciation and amortization, including
amounts related to capital leases of $38, $62 and $72,
respectively........................................... 114 163 183
---- ---- ----
Total.................................................. $ 93 $ 53 $ 56
==== ==== ====
</TABLE>
Accrued Expenses
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued personnel related costs............................. $19 $ 3 $ 3
Accrued interest.......................................... 14 12 14
Accrued other............................................. 6 -- --
--- --- ---
$39 $15 $17
=== === ===
</TABLE>
(3) DEBT
Note and Line of Credit Payable to Bank
The Company has a line of credit payable on demand with a bank that allows
borrowings of up to $50,000. At December 31, 1997 and 1998, and June 30, 1999,
the amount outstanding was $50,000. Interest is charged at the bank's prime rate
plus 1.75% (9.50% at December 31, 1998). The line of credit is secured by the
Company's assets and guaranteed by the stockholders.
The Company also entered into a promissory note agreement with the bank,
borrowing $25,000 in 1995. Interest was at the bank's commercial rate plus 2%
(9.75% at December 31, 1998) with principal and interest payable monthly to the
note's maturity date of September 1, 1999.
The line of credit agreement includes financial covenants relating to
tangible net worth and a debt-to-worth ratio, which the Company was not in
compliance with at December 31, 1998.
F-158
<PAGE> 302
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Notes Payable to Stockholders
In 1995, the Company borrowed $9 from a stockholder at 14% interest and
payable on demand. In 1996, the Company entered into a note and security
agreement with certain stockholders for $25, with interest at 12.5%, principal
and interest payable monthly. In 1997, the Company borrowed $25 from a
stockholder under a promissory note, with interest at 12.5%.
At December 31, 1997 and 1998, and June 30, 1999, respectively, $53, $12,
and $10 were outstanding under these notes payable to stockholders. Principal
payments of $5, $6 and $1 are due in 1999, 2000 and 2001, respectively.
Other Notes Payable
At December 31, 1997 and 1998, and June 30, 1999, the Company had
promissory notes payable on demand to related parties aggregating $21,600, with
interest rates ranging from 9.0% to 14.0%. These notes are included in notes
payable and current portion of long-term debt on the accompanying balance
sheets.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $12 $29
2000........................................................ 10 29
2001........................................................ 6 19
--- ---
Total minimum payments................................. 28 77
===
Less amount representing interest........................... 4
---
Present value of net minimum lease payments............ 24
Less current portion........................................ 9
---
$15
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 was approximately $30, $30 and
$31, and $15 and $17, respectively.
F-159
<PAGE> 303
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(5) INCOME TAXES
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the outstanding stock of the Company and concurrent with the related
initial public offering of espernet.com (note 8) the Company's status as an
S-Corp. under the Code will automatically terminate and the Company will be
subject to federal and state corporate income taxes. Based upon the cumulative
temporary differences, the Company would have recognized a net deferred federal
and state income tax benefit and asset of approximately $76 at December 31,
1998, had the termination of its election to be treated as an S-Corp. occurred
on December 31, 1998.
No Pro Forma income tax benefit is reflected in the accompanying statements
of operations for all periods presented as the Company would have provided a
full valuation allowance against the net deferred tax asset had it been a
C-Corp.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(7) VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS/ AT END
OF PERIOD AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts............ $-- $16 $12 $4
--- --- --- --
For the year ended December 31, 1997:
Allowance for doubtful accounts............ $ 4 2 2 4
--- --- --- --
For the year ended December 31, 1998:
Allowance for doubtful accounts............ $ 4 6 5 5
--- --- --- --
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(unaudited)............................. $ 5 2 2 5
--- --- --- --
</TABLE>
(8) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon
F-160
<PAGE> 304
PROMETHEUS INFORMATION CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
consummation of the agreement, espernet.com will become the sole owner of the
Company, and the Company will be converted to a C-Corp.
(9) LIQUIDITY
At December 31, 1998, current liabilities exceed current assets by $207 and
stockholders' deficit is $168. At June 30, 1999, current liabilities exceed
current assets by $247 and stockholders' deficit is $209. The Company's ability
to meet its obligations as they come due will be dependent upon generating
sufficient cash flows from continued sales of internet services or successfully
completing a sale of the Company (see note 8). Management believes sales of
Internet services will be sufficient to cover the Company's working capital
needs through December 31, 1999.
F-161
<PAGE> 305
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc:
We have audited the accompanying balance sheets of E-Znet Incorporated as
of December 31, 1998 and 1997, and the related statements of operations,
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 E-Znet Incorporated as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
August 12, 1999
F-162
<PAGE> 306
E-ZNET INCORPORATED
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46 124 122
Receivables (note 4):
Trade, net of allowance for doubtful accounts of $26,
$56 and $66 respectively.............................. 76 141 149
Other current assets (notes 2 and 7)...................... 5 14 18
----- ---- ---
Total current assets............................... 127 279 289
Property and equipment, net (notes 2 and 4)................. 257 423 452
Other assets:
Investment security (note 3).............................. -- 43 50
Intangible assets, net of accumulated amortization of $2
(note 12)............................................... -- -- 16
Deferred income taxes (note 9)............................ -- -- 6
----- ---- ---
Total assets....................................... $ 384 745 813
===== ==== ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accrued expenses (notes 2 and 7).......................... 65 56 33
Notes payable to related parties (note 7)................. 51 21 10
Current portion of long term debt (note 4)................ 18 16 14
Current portion of capital lease obligations (note 5)..... 51 106 131
Deferred revenue.......................................... 70 104 115
Other current liabilities................................. 15 2 3
----- ---- ---
Total current liabilities.......................... 270 305 306
Long-term debt, less current portion (note 4)............... 64 54 48
Capital lease obligations, less current portion (note 5).... 63 133 139
----- ---- ---
Total liabilities.................................. 397 492 493
----- ---- ---
Stockholders' equity (deficit) (note 6):
Common stock, $.001 par value. Authorized 15,000,000
shares, issued and outstanding 617,000 shares in 1997
and 687,000 shares in 1998 and 1999..................... 1 1 1
Additional paid-in capital................................ 337 377 377
Accumulated deficit....................................... (351) (125) (58)
----- ---- ---
Total stockholder's equity (deficit)............... (13) 253 320
----- ---- ---
Commitments and contingency (notes 5 and 11)
Total liabilities and stockholders' equity
(deficit)......................................... $ 384 745 813
===== ==== ===
</TABLE>
See accompanying notes to financial statements.
F-163
<PAGE> 307
E-ZNET INCORPORATED
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- --------------------------
1996 1997 1998 1998 1999
------ ----- ------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity................ $ 422 884 1,988 868 1,245
Enhanced services and other.......... -- 75 320 167 156
----- --- ----- ----- -----
Total revenue..................... 422 959 2,308 1,035 1,401
----- --- ----- ----- -----
Costs and expenses (notes 1(k) and 5):
Cost of Internet services............ 138 387 1,011 420 572
Selling, general and
administrative.................... 397 511 903 389 653
Depreciation and amortization........ 79 74 129 53 90
----- --- ----- ----- -----
Total costs and expenses.......... 614 972 2,043 862 1,315
----- --- ----- ----- -----
Income (loss) from operations..... (192) (13) 265 173 86
Other expenses:
Interest expense..................... (8) (25) (39) (23) (22)
----- --- ----- ----- -----
Income (loss) before income
taxes........................... (200) (38) 226 150 64
Income tax benefit..................... -- -- -- -- 3
----- --- ----- ----- -----
Net income (loss)................. $(200) (38) 226 150 67
===== === ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-164
<PAGE> 308
E-ZNET INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
-------- ------ ---------- ------------ -----
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995.................... 944,000 $1 237 (113) 125
Issuance of common stock for cash................ 34,000 -- 55 -- 55
Contribution of common stock..................... (325,000) -- -- -- --
Net loss......................................... -- -- -- (200) (200)
-------- -- --- ---- ----
BALANCES AT DECEMBER 31, 1996.................... 653,000 1 292 (313) (20)
Issuance of common stock for cash................ 18,000 -- 45 -- 45
Net loss......................................... -- -- -- (38) (38)
-------- -- --- ---- ----
BALANCES AT DECEMBER 31, 1997.................... 671,000 1 337 (351) (13)
Issuance of common stock for cash................ 16,000 -- 40 -- 40
Net income....................................... -- -- -- 226 226
-------- -- --- ---- ----
BALANCES AT DECEMBER 31, 1998.................... 687,000 1 377 (125) 253
Net income (unaudited)........................... -- -- -- 67 67
-------- -- --- ---- ----
BALANCES AT JUNE 30, 1999 (unaudited)............ 687,000 $1 377 (58) 320
======== == === ==== ====
</TABLE>
See accompanying notes to financial statements.
F-165
<PAGE> 309
E-ZNET INCORPORATED
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ -------------------------
1996 1997 1998 1998 1999
------ ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $(200) (38) 226 150 67
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization................ 79 74 129 53 90
Deferred income tax benefit.................. -- -- -- -- (6)
Changes in operating assets and liabilities:
Receivables, net........................... -- (67) (65) (51) (8)
Other current assets....................... (4) (1) (9) (8) (4)
Accrued expenses and other current
liabilities............................. 18 58 (22) (22) (22)
Deferred revenue........................... -- 70 34 10 11
----- --- ---- --- ---
Net cash provided (used) by operating
activities............................ (107) 96 293 132 128
----- --- ---- --- ---
Cash flows from investing activities:
Acquisition of property and equipment........... (56) (70) (79) (68) (21)
Acquisition of intangible assets................ -- -- -- -- (18)
Other........................................... -- -- (43) -- (7)
----- --- ---- --- ---
Net cash used by investing activities... (56) (70) (122) (68) (46)
----- --- ---- --- ---
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and
current portion of long-term debt............ 126 -- 99 29 --
Repayments of long term debt.................... (18) (14) (110) (21) (8)
Repayments of capital lease obligations......... (14) (17) (92) (35) (65)
Payments to related parties..................... (12) (4) (30) (9) (11)
Proceeds from issuance of common stock, net of
issuance costs............................... 55 45 40 40 --
----- --- ---- --- ---
Net cash provided (used) by financing
activities............................ 137 10 (93) 4 (84)
----- --- ---- --- ---
Net increase (decrease) in cash and cash
equivalents........................... (26) 36 78 68 (2)
Cash and cash equivalents:
Beginning period................................ 36 10 46 46 124
----- --- ---- --- ---
End of period................................... $ 10 46 124 114 122
===== === ==== === ===
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $6,
$19, $38, $18 and $27, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital leases obligations resulted in non-cash financing activities
aggregating $81, $77, $216, $71 and $96 for the years ended December 31, 1996,
1997, and 1998, and for the six month periods ended June 30, 1998 and 1999,
respectively.
See accompanying notes to financial statements.
F-166
<PAGE> 310
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
E-Znet Incorporated (the "Company") was incorporated on June 7, 1994 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users and commenced operations in June 1994. The Company
is a provider of wireless, dedicated, and dialup internet services, consulting
services as well as web design and hosting in the western New York area.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, and the
limited history of the need for internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim balance sheet of the Company as of June 30, 1999, and the
statements of operations, stockholders' equity (deficit), and cash flows for the
six months ended June 30, 1999 and 1998 are unaudited. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. The Company
maintains all its cash in bank deposit
F-167
<PAGE> 311
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
accounts which, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts and does not believe it is exposed
to any significant credit risk with respect to these accounts.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the estimated useful lives of the
assets. In instances when the property and equipment transfers ownership at the
end of the lease term or contains a bargain purchase option, such assets are
amortized over the estimated useful lives of the assets.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INTANGIBLE ASSETS
Intangible assets are amortized using the straight-line method over a
period of three years. Intangible assets are periodically reviewed for possible
impairment or when events or changed circumstances may affect the underlying
basis of the assets. On March 11, 1999, the Company purchased the assets of an
internet service provider. The excess of the purchase price over the fair value
of the assets was attributed to customer lists and is being amortized over three
years.
(h) INVESTMENT SECURITY
The Company has a 5% common stock interest in a closely-held company,
Campus Global Net, Inc. ("CGN"). The security does not have a readily
determinable fair value and is therefore carried at cost, adjusted for any
other-than-temporary impairment.
F-168
<PAGE> 312
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(j) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware sales is recognized upon shipment of the
respective products.
(k) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $0, $2, $20, $11 and $15 for the years ended December 31, 1997,
1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(l) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair value of the Company's financial instruments
approximate their carrying value based on their terms and interest rates.
For each of the years ended December 31, 1996, 1997 and 1998 and for the
six month periods ended June 30, 1998 and 1999, three vendors represented
approximately 20% of the Company's total purchases. The Company's reliance on
certain vendors can be shifted to alternative sources of supply for products it
sells should such changes be necessary.
(m) STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize as expense
F-169
<PAGE> 313
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings (loss)
disclosures for employee stock option grants as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SAFS No. 133 is now
effective for all fiscal quarters of fiscal years beginning after June 15, 2000
as FASB deferred the effective date of the statement. The Company has not yet
analyzed the impact of this pronouncement on its financial statements.
(2) BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Other current assets:
Lease deposit............................................. $ 5 9 8
Other..................................................... -- 5 10
----- ---- ----
$ 5 14 18
===== ==== ====
Property and equipment, including equipment under capital
leases, stated at cost:
Internet access and computer equipment including amounts
related to capital leases of $158, $285 and $314,
respectively........................................... $ 426 714 829
Furniture and fixtures.................................... 26 33 35
----- ---- ----
452 747 864
</TABLE>
F-170
<PAGE> 314
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Less accumulated depreciation and amortization, including
amounts related to capital leases of $26, $90 and $157,
respectively........................................... (195) (324) (412)
----- ---- ----
Total.................................................. $ 257 423 452
===== ==== ====
Accrued expenses:
Branch commissions........................................ $ 29 26 --
Employee payroll expenses................................. 21 -- 22
Accrued interest payable (see note 7)..................... 15 16 11
Other..................................................... -- 14 --
----- ---- ----
$ 65 56 33
----- ---- ----
</TABLE>
(3) INVESTMENT SECURITY
During 1998, the Company paid cash of $19 and provided various consulting
services and equipment valued at $24 for the purchase of 43,307 common shares of
CGN. Subsequently during the first six months of 1999 the Company received an
additional 6,693 shares in return for consulting services resulting in a total
of 50,000 shares of common stock held at June 30, 1999.
(4) DEBT
Lines of credit, notes payable and long-term debt consists of the following
as of December 31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to HSBC in equal monthly installments of
$1.129, including interest at the bank's prime rate plus
1.75%, maturing in 2003. This note is guaranteed by the
U.S. Small Business Administration and certain officers of
the Company............................................... $ -- 68 62
Note payable to a bank, refinanced during 1998.............. 82 -- --
Other....................................................... -- 2 --
---- ---- ---
82 70 62
Less current portion........................................ (18) (16) (14)
---- ---- ---
Long-term debt, less current portion................... $ 64 54 48
==== ==== ===
</TABLE>
F-171
<PAGE> 315
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Maturities of long-term debt consist of the following at December 31, 1998:
<TABLE>
<S> <C>
1999............................................... $16.0
2000............................................... 13.5
2001............................................... 13.5
2002............................................... 13.5
2003............................................... 13.5
-----
$70.0
=====
</TABLE>
The Company may borrow up to $32 under a line-of-credit agreement,
renewable on an annual basis. Amounts borrowed bear interest at the bank's prime
rate plus 1.75%. There was no outstanding balance on this line-of-credit at
December 31, 1998. Amounts borrowed under this agreement are collateralized by
accounts receivables and property and equipment of the Company, and are
guaranteed by the U.S. Small Business Administration and certain officers of the
Company.
Cash payments for interest on long-term debt were $10 and $9 for 1998 and
1997, respectively.
(5) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under an operating lease expiring in November 2000.
Future minimum annual lease payments under capital and operating leases as
of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $133 52
2000........................................................ 109 29
2001........................................................ 32 --
---- ---
Total minimum payments................................. 274 $81
==== ===
Less amount representing interest (at rates ranging from
10.0% to 16.0%)........................................... (35)
----
Present value of net minimum lease payments............ 239
Less current portion........................................ (106)
----
$133
====
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999 were $23, $40, $17 and $35,
respectively.
F-172
<PAGE> 316
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(6) CAPITAL STOCK
(a) COMMON STOCK
In a private placement offering, the Company sold 16,000 shares of its
common stock at $2.50 a share for a total of $40 in 1998 and 18,000 shares at
$2.50 for a total of $45 in 1997. The Company closed its private placement
offering on January 31, 1998.
During 1996, three shareholders including two executives of the Company
contributed back 325,000 shares of common stock to the Company as a prerequisite
for the sale of stock to an investor and to more appropriately align the capital
structure.
(b) STOCK OPTIONS
The Company has a non-qualified employee Stock Option Plan and at December
31, 1998 has reserved 150,000 shares of common stock for issuance under the
plan. On April 29, 1999 the Board of Directors voted to amend the Stock Option
Plan to (1) increase the number of authorized shares from 150,000 to 250,000 and
(2) provide that outside advisors and consultants are eligible to participate
under the Plan. The exercise price for options granted under the Plan is
determined at the time options are granted at an amount at least equal to the
then estimated fair value of the stock. Options are exercisable as determined
for each option granted, generally on a pro rata basis over five to ten year
periods. Vesting may accelerate based on performance measures. All options
expire no later than ten years from date of grant.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------ SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE 1997 EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of period....... 25,500 $2.50 86,500 $2.50 92,500 $2.50 123,500 $2.50
------ ------- ------- -------
Options granted............. 61,000 2.50 24,000 2.50 33,000 2.50 -- --
Options canceled............ -- -- (18,000) 2.50 (2,000) 2.50 -- --
------ ------- ------- -------
Options outstanding at end
of period................. 86,500 2.50 92,500 2.50 123,500 2.50 123,500 2.50
====== ======= ======= =======
Options exercisable at
period end................ 43,000 45,400 73,300 73,300
Weighted average fair value
of options granted during
the period................ $2.50 $2.50 $2.50 $2.50
</TABLE>
F-173
<PAGE> 317
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 were $0.68, $0.69 and $0.59. The fair value of options at
the date of grant was estimated using the Black Sholes option-pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 5.0 5.0 5.0
Dividend yield.............................................. -- -- --
Risk-free interest rate..................................... 6.50% 6.60% 5.50%
Expected volatility......................................... -- -- --
</TABLE>
The Company applied APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the Pro Forma amounts indicated
below:
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- -----------
1996 1997 1998 1998 1999
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss):
As reported............................................... $(200) (38) 226 150 67
Pro forma................................................. (219) (44) 218 147 63
</TABLE>
(7) RELATED PARTY TRANSACTIONS
The Company has unsecured demand notes payable to related parties. The
balance due on these notes was $51, $21 and $10 at December 31, 1997 and 1998
and June 30, 1999, respectively. These notes have various interest rates that
range from 6% to 9%. Accrued interest on these loans was $15, $16 and $11 at
December 31, 1997 and 1998 and June 30, 1999, respectively.
(8) EMPLOYEE BENEFIT PLAN
In 1998 the Company established a 401(k) profit sharing plan (the Plan) for
all full time employees of the Company with at least one year of service who are
age 21 or older. Under terms of the Plan, the Company contributes 100% of
participant's deferrals not to exceed 3% of the participant's compensation.
Total Company contributions were $4 during the year 1998 and $0 and $6 for the
six month periods ended June 30, 1998 and 1999, respectively.
F-174
<PAGE> 318
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(9) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998 1999
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected tax expense/(benefit)........................... $(68) (13) 77 22
State income taxes, net of federal benefit............... (12) (5) 14 4
Change in valuation allowance............................ 82 19 (102) (29)
Other.................................................... (2) (1) 11 --
---- --- ---- ---
$ -- -- -- (3)
==== === ==== ===
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1996 1997 1998 1999
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net operating loss carryforward, including
acquisition............................................ $133 142 27 --
Other, net............................................... -- 12 25 29
---- ---- ---- ---
Gross deferred tax assets........................... 133 154 52 29
Valuation allowance...................................... (133) (154) (52) (23)
---- ---- ---- ---
Net deferred tax asset.............................. $ -- -- -- 6
==== ==== ==== ===
</TABLE>
At December 31, 1998, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $63, of which $53 and $10 is
available to offset future federal taxable income, if any, through 2011 and
2012, respectively. As a result of various stock transactions during 1996,
management believes the Company may have undergone an "ownership change" as
defined by Section 382 of the Internal Revenue Code. Accordingly, the
utilization of a portion of the net operating loss carryforward may be limited.
Due to this limitation, and the uncertainty regarding the ultimate utilization
of the net operating loss carryforward, no tax benefit for losses has been
provided by the Company in 1997 and 1998, and a valuation allowance has been
recorded for the entire amount of the deferred tax asset. In 1999, the net
operating loss carryforwards were utilized.
F-175
<PAGE> 319
E-ZNET INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(10) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF YEAR AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts.................. $-- -- -- --
=== == === ==
For the year ended December 31, 1997:
Allowance for doubtful accounts.................. $-- 26 -- 26
=== == === ==
For the year ended December 31, 1998:
Allowance for doubtful accounts.................. $26 45 (15) 56
=== == === ==
For the six months ended June 30, 1999:
Allowance for doubtful accounts (unaudited)...... $56 60 (50) 66
=== == === ==
</TABLE>
(11) CONTINGENCY
The Company is a defendant in various legal proceedings arising in the
normal course of business. In the opinion of management, the outcome of these
proceedings will not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
(12) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-176
<PAGE> 320
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying combined balance sheets of USA Choice
Internet Services, Co. and USA Choice Internet Services Clarion LLC (the
Company) as of December 31, 1997 and 1998, and the related combined statements
of operations, members' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined 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 USA Choice Internet
Service Co. and USA Choice Internet Services Clarion LLC as of December 31, 1997
and 1998, and the results of their operations and their 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
Norfolk, Virginia
August 20, 1999
F-177
<PAGE> 321
USA CHOICE INTERNET SERVICES, CO.
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 33 50 81
Trade receivables......................................... 11 23 43
Prepaid expenses and other................................ 2 1 --
---- --- ---
Total current assets................................... 46 74 124
Property and equipment, net (notes 2 and 3)................. 87 99 195
Other assets:
Goodwill, net of accumulated amortization of $4 at June
30, 1999 (unaudited) (note 7).......................... -- -- 120
Other, net (notes 5 and 7)................................ -- 24 57
---- --- ---
Total assets........................................... $133 197 496
==== === ===
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1 41 56
Accrued expenses.......................................... 1 35 34
Current portion of long-term debt (note 3)................ 5 12 28
Current portion of capital lease.......................... -- -- 2
Note payable to related party (note 7).................... -- -- 153
Deferred revenue.......................................... 18 46 56
---- --- ---
Total current liabilities.............................. 25 134 329
Long-term debt, less current portion (note 3)............... 10 17 66
Capital lease, less current portion......................... -- -- 11
---- --- ---
Total liabilities...................................... 35 151 406
---- --- ---
Minority interest (note 7).................................. -- -- 15
---- --- ---
Members' equity............................................. 98 46 75
---- --- ---
Commitments, contingencies and subsequent event (notes 6 and
8)........................................................
---- --- ---
Total liabilities and members' equity.................. $133 197 496
==== === ===
</TABLE>
See accompanying notes to combined financial statements.
F-178
<PAGE> 322
USA CHOICE INTERNET SERVICES, CO.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity............................... $ 39 168 287 122 306
Enhanced services and other......................... 16 27 59 33 78
---- --- --- --- ---
Total revenue.................................... 55 195 346 155 384
Costs and expenses:
Cost of Internet services........................... 36 137 212 103 210
Selling, general and administrative................. 40 28 62 20 95
Depreciation and amortization....................... 10 30 56 21 45
---- --- --- --- ---
Total costs and expenses......................... 86 195 330 144 350
---- --- --- --- ---
Income (loss) from operations.................... (31) -- 16 11 34
Other income (expenses):
Loss on the disposition of fixed assets............. -- -- (26) -- --
Interest expense.................................... -- -- (3) (1) (4)
---- --- --- --- ---
Total other expense.............................. -- -- (29) (1) (4)
---- --- --- --- ---
Income (loss) before minority interest........... (31) -- (13) 10 30
Minority interest..................................... -- -- -- -- 1
---- --- --- --- ---
Net income (loss)................................ $(31) -- (13) 10 29
==== === === === ===
Pro Forma income tax (expense) benefit (unaudited).... $ -- -- -- -- --
==== === === === ===
Pro Forma net income (loss) (unaudited)............... $(31) -- (13) 10 29
==== === === === ===
</TABLE>
See accompanying notes to combined financial statements.
F-179
<PAGE> 323
USA CHOICE INTERNET SERVICES, CO.
COMBINED STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1995................................ $ --
Capital contribution........................................ 90
Net loss.................................................... (31)
----
BALANCE AT DECEMBER 31, 1996................................ 59
Capital contribution........................................ 49
Capital distribution........................................ (10)
Net income.................................................. --
----
BALANCE AT DECEMBER 31, 1997................................ 98
Capital distribution........................................ (39)
Net loss.................................................... (13)
----
BALANCE AT DECEMBER 31, 1998................................ 46
Net income (unaudited)...................................... 29
----
BALANCE AT JUNE 30, 1999 (unaudited)........................ $ 75
====
</TABLE>
See accompanying notes to combined financial statements.
F-180
<PAGE> 324
USA CHOICE INTERNET SERVICES, CO.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(31) -- (13) 10 29
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 10 30 56 21 45
Loss on disposition of fixed assets..................... -- -- 26 -- --
Minority interest in net income......................... -- -- -- -- 1
Changes in operating assets and liabilities, excluding
effects of business combinations:
Trade receivables.................................... (3) (7) (12) (16) (15)
Prepaid expenses and other........................... (1) (1) 1 2 1
Accounts payable..................................... -- 1 16 6 2
Accrued expenses..................................... 6 (5) 34 11 (8)
Deferred revenue..................................... 5 13 28 7 10
---- --- --- --- ----
Net cash provided by (used in) operating
activities....................................... (14) 31 136 41 65
---- --- --- --- ----
Cash flows from investing activities:
Acquisition of business, net of cash acquired............. -- -- -- -- (143)
Acquisition of property and equipment..................... (68) (60) (94) (20) (38)
---- --- --- --- ----
Net cash used in investing activities.............. (68) (60) (94) (20) (181)
---- --- --- --- ----
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 16 21 15 153
Repayments of long-term debt.............................. -- (1) (7) (2) (6)
Capital distribution...................................... -- (10) (39) (16) --
Capital contribution...................................... 90 49 -- -- --
---- --- --- --- ----
Net cash provided by (used in) financing
activities....................................... 90 54 (25) (3) 147
---- --- --- --- ----
Net increase in cash and cash equivalents.......... 8 25 17 18 31
Cash and cash equivalents:
Beginning of period....................................... -- 8 33 33 50
---- --- --- --- ----
End of period............................................. $ 8 33 50 51 81
==== === === === ====
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999 (unaudited), the Company paid
approximately $0, $0, $3, $1 and $2, respectively, for interest.
Non-cash transactions:
During the year ended 1998, the Company acquired a customer list for $24
and will pay the amount in equal monthly installments in 1999. The amount
payable is recorded in accounts payable. In addition, the Company entered into a
capital lease for $15 in 1999.
See accompanying notes to combined financial statements.
F-181
<PAGE> 325
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
USA Choice Internet Services Co. ("USA Choice") was formed on January 1,
1996 as a limited liability corporation ("LLC") to capitalize on the growing
demand for Internet access and enhanced services by consumers and business
users. USA Choice provides full service Internet connectivity and enhanced
Internet services, including hosting web-sites. USA Choice primarily serves
subscribers in and around Oil City, Pennsylvania. USA Choice commenced
operations in June 1996.
In January 1998, the owners of USA Choice established a new Internet
service provider company, USA Choice Internet Services Clarion LLC ("Clarion"),
to expand the geographic area in which they provide service. Clarion was
established as an LLC in which the owners of USA Choice hold a 50% interest and
an unrelated third party holds the remaining 50% interest. As designated in the
Operating Agreement, Clarion is controlled by the majority stockholder of USA
Choice.
The financial statements as of and for the year ended December 31, 1998
presented herein represent the combined financial statements of USA Choice and
Clarion. The 1996 and 1997 financial statements include only the results of USA
Choice. USA Choice provides certain technical support to Clarion subscribers and
charges Clarion for these services. These amounts have been eliminated in the
combined financial statements. Hereinafter, USA Choice and Clarion will be
referred to collectively as "the Company."
Inherent in the Company's business are various risks and uncertainties
including the limited history of the need for Internet access and enhanced
services. The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's future success will be dependent
upon its ability to raise capital, the continued acceptance of the Internet as
well as the Company's ability to create and provide effective and competitive
Internet services that meet customers' changing requirements. Management's
operational and financial plans to address the above issues include continued
focus on increasing its subscriber base and geographic coverage and obtaining
equity or debt financing as needed.
(b) UNAUDITED COMBINED INTERIM FINANCIAL INFORMATION
The interim combined financial statements of the Company as of June 30,
1999, and the combined statements of operations, members' equity and cash flows
for the six months ended June 30, 1998 and 1999 are unaudited. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments, consisting
only of
F-182
<PAGE> 326
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
normal recurring adjustments necessary for the fair presentation of the combined
financial position and combined results of operations and cash flows, have been
included in such unaudited combined financial statements. The combined results
of operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. There were no cash
equivalents at December 31, 1997 and 1998.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
(g) OTHER ASSETS
Other assets consist of the following items: Goodwill represents the excess
purchase price over the estimated fair value at the date of acquisition of the
net assets acquired and is being
F-183
<PAGE> 327
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
amortized using the straight-line method over a period of five years;
non-compete agreement, which is being amortized using the straight-line method
over a period of three years; and other assets consists of a customer list,
which is being amortized over a period of one year using the straight-line
method (see note 5).
(h) INCOME TAXES
No provision for income taxes has been reflected in the financial
statements as the entity is a limited liability company and all income or losses
are reported on the individual members' income tax returns based on their
ownership interests.
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell substantially all of the assets of the Company and concurrent with the
related initial public offering of espernet.com (as more fully described in note
8), the Company's status as a limited liability corporation under the Code will
automatically terminate and the Company will be subject to federal and state
corporate income taxes.
The unaudited Pro Forma income tax information included in the statements
of operations is presented in accordance with SFAS 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, 1997 and 1998.
No Pro Forma income tax benefit is reflected in the accompanying combined
statements of operations for all periods presented as the Company would have
provided a full valuation allowance against the net deferred tax asset had it
been a C-Corp.
(i) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Enhanced services include installation and customer set up fees
which are recognized upon completion of the services.
(j) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative
expenses and totaled approximately $16, $2 and $10, and $2 and $6 for the years
ended December 31, 1996, 1997 and 1998 and for the six-month periods ended June
30, 1998 and 1999 (unaudited), respectively.
F-184
<PAGE> 328
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. Fair value is defined in the statement as the amount at which an
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of trade receivables, prepaid expenses and other
current assets, accounts payable and accrued expenses approximate fair value due
to the short maturity of these instruments.
The fair value of long-term debt approximates its carrying value based on
the terms and interest rates except for the note payable to an individual.
Note payable to an individual is estimated by discounting the future cash
flows using current rates for similar borrowings. The fair value at December 31,
1998 is estimated to be $19.
For each of the years ended December 31, 1996, 1997 and 1998 and for the
six-month periods ended June 30, 1998 and 1999 (unaudited), three vendors
represented a range of 40% to 50% of the Company's total purchases. The
Company's reliance on certain vendors can be shifted to alternative sources of
supply for products it sells should such changes be necessary.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statement.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 amends SFAS No. 133 to extend the effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not yet analyzed of the impact of this pronouncement on its
financial statements.
F-185
<PAGE> 329
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 and June 30, 1999
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment, including equipment
under capital lease at June 30, 1999 (unaudited) of $15... $128 137 257
Less accumulated depreciation............................... 41 38 62
---- --- ---
Property and equipment, net............................ $ 87 99 195
==== === ===
</TABLE>
(3) DEBT
Notes payable and long-term debt consists of the following as of December
31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, bearing interest at 9.75%, due in
monthly installments and maturing in October 2000; secured
by certain equipment...................................... $15 10 9
Note payable to bank, bearing interest at 9.77%, due in
monthly installments and maturing in May 2001; secured by
certain equipment......................................... -- 10 9
Note payable to bank, bearing interest at 9.75%, due in
monthly installments and maturing in October 2001; secured
by certain equipment...................................... -- 9 7
Note payable to an individual, non-interest bearing, due in
monthly installments and maturing April 2001.............. -- -- 21
Note payable for non-compete, non-interest bearing; due in
equal annual installments through 2001.................... -- -- 48
--- --- ---
15 29 94
Less current portion........................................ (5) (12) (28)
--- --- ---
Long-term debt, less current portion................... $10 17 66
=== === ===
</TABLE>
The aggregate maturities of long-term debt at December 31, 1998 are as
follows: $12 in 1999, $13 in 2000, and $4 in 2001.
F-186
<PAGE> 330
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases certain office space under a non-cancelable operating
lease expiring in 2000.
Future minimum annual lease payments for the non-cancelable operating lease
as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 4
2000........................................................ 2
---
$ 6
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 (unaudited), was $0, $2, and $3,
and $2 and $5, respectively.
(b) TERMINATION PENALTIES
The Company enters into long-term telephone contracts which provide for
early termination penalties. These penalties include a combination of payments
of installation charges and a percentage of fees due under the contract.
(5) ACQUISITION OF CUSTOMER LIST
In December 1998, the Company purchased the customer base of another
Internet service provider which had approximately 392 subscribers. The cost of
the acquisition was approximately $24, which is being amortized over a period of
one year. The Company will pay equal installments of $2 per month for 12 months
to the company from whom they purchased the customer list.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(7) ACQUISITION OF KEYSTONE (UNAUDITED)
In April 1999, Lexstar Communications LLC ("Lexstar"), a company controlled
by the majority member of USA Choice, acquired 510 shares, or 66%, of the stock
of Keystone Internet Access, Inc. ("Keystone") for $153 in cash. The acquisition
was financed by a note payable to a related party. Keystone, which began
operations in September 1995, is a regional provider of Internet access in
Northwest Pennsylvania. Subsequently, Lexstar acquired the remaining 34%
F-187
<PAGE> 331
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
interest from one member for $30 in cash in July 1999. The financial statements
of Keystone have been combined with the financial statements of USA Choice and
Clarion as all three of these entities will be included in the purchase by
espernet.com (see note 8).
The acquisition has been accounted for using the purchase method, and
accordingly, assets and liabilities assumed have been recorded at their
estimated fair values as of April 30, 1999. As a result, Keystone's May and June
results of operations have been included in the unaudited combined financial
statements of the Company for the six months ended June 30, 1999. In addition,
the balance sheet effected for purchase accounting has been included in the
unaudited combined balance sheet at June 30, 1999.
The acquisition cost for the purchase was allocated on the basis of the
estimated fair value of assets acquired and liabilities assumed as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 10
Accounts receivable......................................... 5
Property and equipment...................................... 67
Other assets................................................ 1
Covenant not-to-compete..................................... 63
Goodwill.................................................... 110
Liabilities assumed......................................... (89)
Minority interest........................................... (14)
----
Cost of acquisition.................................... $153
====
</TABLE>
The following unaudited pro forma combined income statement information
combines the historical results of the Company with the historical results of
Keystone for the year ended December 31, 1998 and the six months ended June 30,
1999, as if the transaction was consummated on January 1, 1998.
This unaudited pro forma information does not purport to be indicative of
the results that would have occurred had the transaction taken place at the
beginning of the periods presented or of future results.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
------------ -------------
<S> <C> <C>
Revenue............................................... 711 540
Net income (loss)..................................... (68) 27
</TABLE>
The unaudited pro forma information reflects adjustments related to
additional amortization related to goodwill and a non-compete agreement, in
addition to interest expense related to acquisition debt.
F-188
<PAGE> 332
USA CHOICE INTERNET SERVICES, CO.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(8) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
substantially all of the net assets of the Company to espernet.com. The
Company's owners will exchange substantially all of the assets of the Company
for cash and shares of common stock of espernet.com concurrent with the
consummation of the initial public offering of the common stock of espernet.com.
F-189
<PAGE> 333
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Crocker Communications
Internet, a division of Crocker Communications, Inc., as of December 31, 1997
and 1998, and the related statements of operations, changes in division equity
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 Crocker Communications
Internet, a division of Crocker Communications, 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
Providence, Rhode Island
August 20, 1999
F-190
<PAGE> 334
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful accounts
of approximately $3, $8 and $9 in 1997, 1998 and 1999,
respectively........................................... $ 79 123 184
Prepaid expenses and other assets......................... 2 3 1
---- --- ---
Total current assets.............................. 81 126 185
Property and equipment, net (note 2)........................ 155 216 193
---- --- ---
Total assets...................................... $236 342 378
==== === ===
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accounts payable.......................................... $ 22 52 44
Accrued expenses.......................................... 11 18 5
Current portion of long-term debt (note 3)................ 10 3 1
Deferred revenue.......................................... 143 184 230
---- --- ---
Total current liabilities......................... 186 257 280
Long-term debt, less current portion (note 3)............... 4 -- --
---- --- ---
Total liabilities................................. 190 257 280
Division equity............................................. 46 85 98
---- --- ---
Total liabilities and division equity............. $236 342 378
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-191
<PAGE> 335
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connectivity revenues........... $378 600 847 361 547
---- --- --- --- ---
Costs and expenses:
Cost of Internet services.............. 209 244 377 153 245
Selling, general and administrative.... 164 260 285 133 133
Depreciation........................... 21 34 75 29 47
---- --- --- --- ---
Total costs and expenses.......... 394 538 737 315 425
---- --- --- --- ---
Income (loss) from operations..... (16) 62 110 46 122
Other income (expenses):
Interest expense....................... (6) (4) (1) (1) (1)
Other.................................. (1) -- -- -- --
---- --- --- --- ---
Net income (loss)................. $(23) 58 109 45 121
==== === === === ===
Pro forma income taxes................... $ -- 24 44 18 49
==== === === === ===
Pro forma net income (loss).............. $(23) 34 65 27 72
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-192
<PAGE> 336
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
STATEMENTS OF DIVISION EQUITY
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
DIVISION
EQUITY
--------
<S> <C>
BALANCE AT DECEMBER 31, 1995................................ $ (4)
Net contributions........................................... 35
Net loss.................................................... (23)
-----
BALANCE AT DECEMBER 31, 1996................................ 8
Net distributions........................................... (20)
Net income.................................................. 58
-----
BALANCE AT DECEMBER 31, 1997................................ 46
Net distributions........................................... (70)
Net income.................................................. 109
-----
BALANCE AT DECEMBER 31, 1998................................ 85
Net distributions (unaudited)............................... (108)
Net income (unaudited)...................................... 121
-----
BALANCE AT JUNE 30, 1999 (unaudited)........................ $ 98
=====
</TABLE>
See accompanying notes to financial statements.
F-193
<PAGE> 337
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, ENDED JUNE 30,
-------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss).......................... $(23) 58 109 45 121
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation............................ 21 34 75 29 47
Loss on disposal of fixed assets........ 1 -- -- -- --
Provision for bad debt.................. 3 5 10 3 4
Changes in operating assets and
liabilities:
Trade receivables..................... (53) (27) (54) (32) (64)
Prepaid expenses and other current
assets............................. -- (2) -- -- 2
Accounts payable...................... 6 2 30 25 (8)
Accrued expenses...................... -- 11 7 14 (13)
Deferred revenue...................... 78 55 41 32 46
---- --- ---- --- ----
Net cash provided by operating
activities......................... 33 136 218 116 135
---- --- ---- --- ----
Cash flows from investing activities:
Acquisition of property and equipment...... (61) (92) (138) (57) (25)
Proceeds from sale of property and
equipment............................... 4 -- -- -- --
---- --- ---- --- ----
Net cash used in investing
activities......................... (57) (92) (138) (57) (25)
---- --- ---- --- ----
Cash flows from financing activities:
Proceeds from note payable................. 13 -- 13 13 --
Net contributions (distributions).......... 35 (20) (70) (64) (108)
Repayments of notes payable................ (24) (24) (23) (8) (2)
---- --- ---- --- ----
Net cash provided by (used in)
financing activities............... 24 (44) (80) (59) (110)
---- --- ---- --- ----
Net change in cash and cash
equivalents........................ -- -- -- -- --
Cash at beginning of period................ -- -- -- -- --
---- --- ---- --- ----
Cash at end of period...................... $ -- -- -- -- --
==== === ==== === ====
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $6,
$4 and $1, and $1 and $1, respectively, for interest.
See accompanying Notes to Financial Statements.
F-194
<PAGE> 338
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Crocker Communications, Inc. ("Crocker Communications") was founded in 1963
as a sole proprietorship providing telephone answering services to customers in
northwestern Massachusetts. In November 1994, an Internet service business was
started to capitalize on the growing demand for Internet access and enhanced
services by consumers and business users. The goal of the Internet division of
Crocker Communications is to provide full service Internet connectivity,
including hosting web-sites, for its local area. On August 1, 1997, Crocker
Communications was incorporated as a subchapter S-Corp.
The financial statements herein are intended to present the internet
service business of Crocker Communications (herein referred to as "Crocker
Communications Internet" or the "Company") that is to be acquired by
espernet.com, inc. ("espernet.com") pursuant to a stock exchange agreement and
plan of merger dated August 3, 1999. The acquisition is contingent upon, and
will be completed concurrent with, the initial public offering of espernet.com
common stock. All significant interdivision and affiliated division balances and
transactions have been eliminated. Significant management assumptions were made
in allocating costs from Crocker Communications in order to present the balance
sheets and statements of operations.
The financial statements include expenses which have been allocated to the
Company by Crocker Communications on a specific identification basis plus its
allocated share of the costs associated with resources it shares with Crocker
Communications. Allocations from Crocker Communications for such shared
resources have been made primarily on a proportional cost method based on
related revenues. Management of the Company believes these allocations are
reasonable. 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 accompanying financial statements do not reflect adjustments to the
valuation of assets or for the recognition of liabilities that may be required
as a consequence of the aforementioned transaction.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances and the limited history of the need for Internet access
and enhanced services. The Company's future success will be dependent upon its
ability to create and provide effective and competitive Internet services, the
continued acceptance of the Internet and the Company's ability to develop and
provide new services that meet customers changing requirements, including the
effective use of leading technologies, to continue to enhance its current
services and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
F-195
<PAGE> 339
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity (deficit) and cash flows for
the six months ended June 30, 1998 and 1999 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH
Separate cash accounts are not maintained for the internet and answering
service divisions of Crocker Communications. Consequently, for purpose of
preparation of the accompanying financial statements, net cash generated or used
by Internet operations have been reported as net division contributions/
distributions. Therefore, the net cash balance presented in the accompanying
balance sheets is zero.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
double-declining and straight-line methods over the estimated useful lives of
the related assets, generally three years.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board Opinion No. 17, Intangible Assets,
based upon estimated fair value. If such assets are impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the
F-196
<PAGE> 340
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
assets. Assets to be disposed of are reported at the lower of the carrying value
or fair value, less costs to sell.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $16, $33 and $33, and $17 and $20 for the years ended December 31,
1996, 1997 and 1998 and for the six-month periods ended June 30, 1998 and 1999,
respectively.
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed of the impact of this pronouncement on its
financial statements.
(j) INCOME TAXES
The company has elected S-Corp status under the Internal Revenue Code
effective August 1, 1997. As an S-Corp, the Company is generally not subject to
federal income taxes since its operating results are included in the tax returns
of its individual stockholders. The Company is directly liable for state income
and franchise taxes in certain jurisdictions.
F-197
<PAGE> 341
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The Pro Forma income tax information included in the statements of
operations is presented in accordance SFAS No. 109, Accounting for Income Taxes,
as if the Company had been subject to federal and certain state income taxes for
all periods presented herein.
(2) PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $170 $306 $329
Less accumulated depreciation............................... 15 90 136
---- ---- ----
Total............................................. $155 $216 $193
==== ==== ====
</TABLE>
(3) DEBT
Long-term debt consists of the following as of December 31, 1997 and 1998
and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, bearing interest at 1.5% above prime,
due in 1998............................................... 6 -- --
Note payable to bank, bearing interest at 1.5% above prime,
due in 1999............................................... 8 3 1
---- --- ---
14 3 1
Less current portion........................................ (10) (3) (1)
---- --- ---
Long-term debt, less current portion................. $ 4 $-- $--
==== === ===
</TABLE>
The loans are secured by substantially all the assets of Crocker
Communications, Inc., including the assets of the internet and answering service
divisions. The prime rate at June 30, 1999 was 7.75%.
(4) LEASES
The Company leases office space and certain phone lines under noncancelable
operating leases. Total lease expense for the years ended December 31, 1996,
1997 and 1998 and the six month ended June 30, 1998 and 1999 were approximately
$17, $36, and $36, and $18 and $18, respectively.
F-198
<PAGE> 342
CROCKER COMMUNICATIONS INTERNET
(A DIVISION OF CROCKER COMMUNICATIONS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under these noncancelable operating
leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1999........................................................ $36
2000........................................................ 30
2001........................................................ 15
2002........................................................ --
2003........................................................ --
</TABLE>
In addition, the Company leases phone lines and related operating space
from various providers on a month-to-month basis. Total expense related to these
leases for the years ended December 31, 1996, 1997 and 1998 and the six months
ended June 30, 1998 and 1999 were approximately $37, $71, and $102, and $39 and
$39, respectively.
The Company leases certain office space from the sole shareholder of the
Company on a month to month basis. The annual rental is $5 which the Company
believes approximates fair market value.
(5) EMPLOYEE BENEFIT PLAN
In 1998, the Company established a non-contributory, defined contribution
retirement plan (the "Plan") for all full time employees. The Company may make
discretionary contributions to the Plan on behalf of employees that meet certain
contribution eligibility requirements defined under the terms of the Plan. The
Company contributed approximately $8 on behalf of the employees of its Internet
operations during the year ended December 31, 1998. No contributions were made
for the period ended June 30, 1999.
F-199
<PAGE> 343
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of COL Networks, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholder's equity, 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 COL Networks, 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
Richmond, Virginia
August 13, 1999
F-200
<PAGE> 344
COL NETWORKS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 60 28 66
Receivables:
Trade.................................................. 15 17 26
Stockholder (note 6)................................... 12 117 156
Prepaid expenses.......................................... 1 17 12
---- --- ---
Total current assets................................. 88 179 260
Equipment (including amounts related to capital leases of
$32, $57 and $49, respectively), net of accumulated
depreciation of $13, $42, and $77, respectively (note
5)........................................................ 70 173 323
Goodwill, net of accumulated amortization of $3 at June 30,
1999 (note 3)............................................. -- -- 212
---- --- ---
Total assets......................................... $158 352 795
==== === ===
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accrued expenses (note 2)................................. $ 13 11 42
Accrued interest.......................................... -- -- 4
Line of credit and current portion of long-term debt (note
4)..................................................... -- -- 104
Current portion of capital lease obligations (note 5)..... 9 22 25
Deferred revenue.......................................... 25 60 93
---- --- ---
Total current liabilities............................ 47 93 268
Long-term debt, less current portion (note 4)............... -- -- 231
Capital lease obligations, less current portion (note 5).... 22 29 16
---- --- ---
Total liabilities.................................... 69 122 515
---- --- ---
Stockholder's equity (note 3):
Common stock, no par value, 100,000 shares authorized,
1,000 shares issued and outstanding.................... -- -- --
Additional paid-in capital................................ 1 1 1
Retained earnings......................................... 88 229 279
---- --- ---
Total stockholder's equity........................... 89 230 280
---- --- ---
Commitments and subsequent event (notes 5 and 7)............
---- --- ---
Total liabilities and stockholder's equity........... $158 352 795
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-201
<PAGE> 345
COL NETWORKS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity................ $ 63 320 798 325 711
Enhanced services and other.......... 42 113 176 49 101
---- --- --- --- ---
Total revenue..................... 105 433 974 374 812
Costs and expenses:
Cost of Internet services............ 29 135 356 145 331
Cost of goods sold................... 39 103 160 45 92
Selling, general and
administrative.................... 22 107 280 115 292
Depreciation and amortization........ 3 10 29 10 38
---- --- --- --- ---
Total costs and expenses.......... 93 355 825 315 753
---- --- --- --- ---
Income from operations............ 12 78 149 59 59
Interest expense....................... -- 2 8 4 9
---- --- --- --- ---
Net income........................ $ 12 76 141 55 50
==== === === === ===
Pro Forma income tax expense
(unaudited).......................... $ 1 13 37 8 3
==== === === === ===
Pro Forma net income (unaudited)....... $ 11 63 104 47 47
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-202
<PAGE> 346
COL NETWORKS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1999
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995................ -- $-- -- -- --
Issuance of common stock for cash........... 1,000 -- 1 -- 1
Net income.................................. -- -- -- 12 12
----- -- -- --- ---
Balance at December 31, 1996................ 1,000 -- 1 12 13
Net income.................................. -- -- -- 76 76
----- -- -- --- ---
Balance at December 31, 1997................ 1,000 -- 1 88 89
Net income.................................. -- -- -- 141 141
----- -- -- --- ---
Balance at December 31, 1998................ 1,000 -- 1 229 230
Net income (unaudited)...................... -- -- -- 50 50
----- -- -- --- ---
Balance at June 30, 1999
(unaudited)............................... 1,000 $-- 1 279 280
===== == == === ===
</TABLE>
See accompanying notes to financial statements.
F-203
<PAGE> 347
COL NETWORKS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 12 76 141 55 50
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 3 10 29 10 38
Changes in operating assets and liabilities,
increasing (decreasing) cash flows from operating
activities:
Receivables......................................... (1) (26) (107) (60) (48)
Prepaid expenses.................................... (2) 1 (16) (6) 5
Accrued expenses.................................... 2 11 (2) 1 31
Accrued interest.................................... -- -- -- -- 4
Deferred revenue.................................... 9 16 35 11 33
---- --- ---- --- ----
Net cash provided by operating activities........ 23 88 80 11 113
---- --- ---- --- ----
Cash flows from investing activities:
Acquisition of equipment................................. (22) (26) (94) (20) (40)
Acquisition of business.................................. -- -- -- -- (75)
---- --- ---- --- ----
Net cash used in investing activities............ (22) (26) (94) (20) (115)
---- --- ---- --- ----
Cash flows from financing activities:
Net borrowings under line of credit...................... -- -- -- -- 50
Repayments of capital lease obligations.................. -- (4) (18) (8) (10)
Proceeds from issuance of common stock, net of issuance
costs................................................. 1 -- -- -- --
---- --- ---- --- ----
Net cash provided by (used in) financing
activities..................................... 1 (4) (18) (8) 40
---- --- ---- --- ----
Net increase (decrease) in cash.................. 2 58 (32) (17) 38
Cash:
Beginning period......................................... -- 2 60 60 28
---- --- ---- --- ----
End of period............................................ $ 2 60 28 43 66
==== === ==== === ====
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................. $ -- 2 8 4 5
==== === ==== === ====
Supplemental disclosure of non-cash financing activities:
Equipment acquired under capital lease obligations....... $ -- 35 38 38 --
==== === ==== === ====
Promissory note issued in connection with business
acquisition........................................... $ -- -- -- -- 285
==== === ==== === ====
</TABLE>
See accompanying notes to financial statements.
F-204
<PAGE> 348
COL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
COL Networks, Inc. (the "Company") was incorporated as a Subchapter S-Corp
in the state of North Carolina on March 10, 1998. Prior to incorporation, the
Company was operating as a sole proprietorship formed in 1996. All assets and
liabilities of the sole proprietorship were contributed to the Company upon
incorporation and recorded at historical cost. The Company provides internet
access and other enhanced Internet services primarily to customers in North
Carolina.
Inherent in the Company's business are various risks and uncertainties. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim balance sheet of the Company as of June 30, 1999, and the
statements of operations, stockholder's equity, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Equipment under capital leases is
stated at the present value of minimum lease payments and is amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets.
(d) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment
F-205
<PAGE> 349
COL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
losses to be recorded on long-lived assets used in operations, including
goodwill, when indicators of impairment are present and the undiscounted future
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. In addition, the recoverability of goodwill is further
evaluated under the provisions of Accounting Principles Board Opinion No. 17,
Intangible Assets, based upon estimated fair value. If such assets are impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(e) INCOME TAXES
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the outstanding stock of the Company and concurrent with the related
initial public offering of espernet.com (as more fully described in note 7), the
Company's status as an S Corp. under the Code will automatically terminate and
normal federal and state corporate income tax rates will apply. The Pro Forma
effect is included in the statements of operations.
Future tax rates will be based on espernet.com's effective tax rates.
(f) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
(g) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative and
totaled approximately $1, $3, $9, $4 and $10 for the years ended December 31,
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary disclosures are made in accordance with SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." Fair value is defined
in the statement as the amount at which an instrument could be exchanged in a
current transaction between willing parties.
The carrying amounts of trade receivables, prepaid expenses, accrued
expenses, and the line of credit approximate their fair value due to the short
maturity of these instruments.
F-206
<PAGE> 350
COL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) CONCENTRATION OF CREDIT RISK
The Company relies on local telephone companies and other companies to
provide data communications. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(k) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-207
<PAGE> 351
COL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) ACCRUED EXPENSES
Accrued expenses as of December 31, 1997 and 1998 and June 30, 1999 consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Telephone expenses..................................... $11 $-- $20
Taxes (sales & employee withholding)................... 1 5 7
Operating supplies..................................... 1 -- 2
Hardware............................................... -- 6 13
--- --- ---
$13 $11 $42
=== === ===
</TABLE>
(3) BUSINESS COMBINATION
On April 30, 1999, the Company acquired all the outstanding common stock of
Alphanet South, Inc. ("Alphanet") for $75 in cash and $285 in a promissory note
(the "Note"). Alphanet is based in North Carolina and is engaged in providing a
range of Internet services. The acquisition has been accounted for by the
purchase method and, accordingly, the results of operations of Alphanet have
been included in the Company's financial statements since April 30, 1999. The
excess of the purchase price over the fair value of the net identifiable assets
acquired of $215 has been recorded as goodwill and is being amortized on a
straight-line basis over ten years.
Pursuant to the acquisition of Alphanet, the Company entered into a Stock
Escrow Agreement (the "Escrow Agreement") dated April 29, 1999. The Escrow
Agreement secures the obligations of the Company, as they relate to the Note, by
a pledge and grant of security interest in twenty-five percent of the
outstanding common stock of the Company.
The following unaudited Pro Forma financial information presents the
combined results of operations of the Company and Alphanet as if the acquisition
had occurred as of the beginning of 1997 and 1998, after giving effect to
certain adjustments, including amortization of goodwill, additional depreciation
expense and increased interest expense on debt related to the acquisition. The
Pro Forma financial information does not necessarily reflect the results of
operations that would have occurred had the Company and Alphanet constituted a
single entity during such periods.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1998
---- ------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $883 $1,614
==== ======
Net income.................................................. $ 92 $ 200
==== ======
</TABLE>
F-208
<PAGE> 352
COL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt consists of the following as of June 30, 1999:
<TABLE>
<CAPTION>
JUNE 30,
1999
------------
(UNAUDITED)
<S> <C>
Promissory note payable in annual installments of $70
including interest at 7.75%, final payment due December
31, 2003, secured by a Stock Escrow Agreement (Note 3).... $285
Less current portion........................................ 54
----
Long-term debt, less current portion...................... $231
====
</TABLE>
As of June 30, 1999, the maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ------
<S> <C>
1999........................................................ $54
2000........................................................ 51
2001........................................................ 55
2002........................................................ 60
2003........................................................ 65
</TABLE>
In 1999, the Company entered into a one year financing agreement with a
commercial bank that permits the Company to borrow up to $50 at the bank's prime
rate (8% at June 30, 1999) plus .5% rate of interest, with interest paid
monthly. At June 30, 1999, the outstanding debt associated with this line of
credit was $50. The line of credit is personally guaranteed by the sole
stockholder of the Company.
(5) LEASES
The Company leases certain computer equipment under capital leases, and
office equipment and office space under noncancelable operating leases expiring
at various dates through 2001.
F-209
<PAGE> 353
COL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $28 $10
2000........................................................ 28 2
2001........................................................ 5 --
--- ---
Total minimum payments.................................... 61 $12
===
Less amount representing interest........................... 10
---
Present value of net minimum lease payments............... 51
Less current portion........................................ 22
---
$29
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 were $3, $13, $19, $9 and $40,
respectively.
(6) RELATED PARTY
The Company paid certain personal expenses on behalf of its sole
stockholder resulting in receivables at December 31, 1997 and 1998 and June 30,
1999 of $12, $117 and $156, respectively. These expenses typically include the
payment of personal income taxes, purchase of vehicles for personal use and
purchase of personal investments.
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-210
<PAGE> 354
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Perigee.net Corporation
(the Company) as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity 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 Perigee.net Corporation 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
Norfolk, Virginia
August 6, 1999
F-211
<PAGE> 355
PERIGEE.NET CORPORATION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
DECEMBER 31, 1997 AND 1998 AND JUNE 30, 1999
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Trade receivables......................................... $ 45 18 6
Investments............................................... 9 2 1
Prepaid expenses.......................................... 1 1 1
---- --- ---
Total current assets................................... 55 21 8
Property and equipment, net (note 2)........................ 87 90 61
---- --- ---
Total assets........................................... $142 111 69
==== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 16 40 37
Bank overdraft............................................ 38 4 9
Line of credit (note 3)................................... 35 32 11
Other current liabilities................................. 8 8 6
Deferred revenue.......................................... 15 30 25
---- --- ---
Total liabilities...................................... 112 114 88
Stockholders' equity (deficit):
Common stock, no par value, 100,000 shares authorized,
issued and outstanding at December 31, 1997 and 1998,
and June 30, 1999...................................... -- -- --
Additional paid-in capital................................ 69 32 13
Retained earnings (deficit)............................... (39) (35) (32)
---- --- ---
Total stockholders' equity (deficit)................... 30 (3) (19)
---- --- ---
Commitments and contingencies (notes 4 and 7)...............
---- --- ---
Total liabilities and stockholders' equity (deficit)... $142 111 69
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-212
<PAGE> 356
PERIGEE.NET CORPORATION
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Internet connectivity........................ $ 54 284 497 230 307
Enhanced services and other.................. 50 184 18 12 --
---- --- --- --- ---
Total revenue............................. 104 468 515 242 307
Costs and expenses:
Cost of Internet services.................... 62 215 271 140 153
Selling, general and administrative.......... 65 222 165 78 74
Depreciation................................. 10 35 52 23 34
---- --- --- --- ---
Total costs and expenses.................. 137 472 488 241 261
---- --- --- --- ---
Income (loss) from operations............. (33) (4) 27 1 46
Other income (expenses):
Interest expense............................. (1) (1) (1) (1) (1)
Investment income (loss)..................... (13) 2 (22) (4) (2)
Other........................................ -- (1) -- -- 3
---- --- --- --- ---
Total other expense....................... (14) -- (23) (5) --
---- --- --- --- ---
Net income (loss)......................... $(47) (4) 4 (4) 46
==== === === === ===
Pro forma income tax expense................... $ -- -- -- -- (16)
==== === === === ===
Pro forma net income (loss).................... $(47) (4) 4 (4) 30
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-213
<PAGE> 357
PERIGEE.NET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------- -------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.............. 100,000 $ -- 1 12 13
Capital contribution...................... -- -- 82 -- 82
Capital distribution...................... -- -- (34) -- (34)
Net loss.................................. -- -- -- (47) (47)
------- -------- --- --- ---
BALANCE AT DECEMBER 31, 1996.............. 100,000 -- 49 (35) 14
Capital contribution...................... -- -- 51 -- 51
Capital distribution...................... -- -- (31) -- (31)
Net loss.................................. -- -- -- (4) (4)
------- -------- --- --- ---
BALANCE AT DECEMBER 31, 1997.............. 100,000 -- 69 (39) 30
Capital distribution...................... -- -- (37) -- (37)
Net income................................ -- -- -- 4 4
------- -------- --- --- ---
BALANCE AT DECEMBER 31, 1998.............. 100,000 -- 32 (35) (3)
Capital distribution (unaudited).......... -- -- (19) (43) (62)
Net income (unaudited).................... -- -- -- 46 46
------- -------- --- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)...... 100,000 $ -- 13 (32) (19)
======= ======== === === ===
</TABLE>
See accompanying notes to financial statements.
F-214
<PAGE> 358
PERIGEE.NET CORPORATION
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................. $(47) (4) 4 (4) 46
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation................................... 10 35 52 23 34
Gain on sale of property and equipment......... -- -- -- -- (3)
Changes in operating assets and liabilities,
increasing (decreasing) cash flows from
operating activities:
Trade receivables............................ 5 (28) 27 34 12
Investments.................................. (6) (2) 7 (16) 1
Prepaid expenses............................. 2 -- -- -- --
Accounts payable............................. 9 (8) 24 25 (3)
Other current liabilities.................... 2 7 -- (4) (2)
Deferred revenue............................. 2 12 15 8 (5)
---- --- --- --- ---
Net cash provided by (used in) operating
activities............................. (23) 12 129 66 80
---- --- --- --- ---
Cash flows from investing activities:
Purchase of property and equipment................ (44) (86) (55) (16) (14)
Proceeds from sale of property and equipment...... -- -- -- -- 12
---- --- --- --- ---
Net cash used in investing activities..... (44) (86) (55) (16) (2)
---- --- --- --- ---
Cash flows from financing activities:
Net borrowings (payments) under line of credit.... -- 35 (3) (13) (21)
Bank overdraft.................................... 19 19 (34) (37) 5
Capital distributions............................. (34) (31) (37) -- (62)
Capital contributions............................. 82 51 -- -- --
---- --- --- --- ---
Net cash provided by (used in) financing
activities............................. 67 74 (74) (50) (78)
---- --- --- --- ---
Net increase (decrease) in cash and cash
equivalents............................ -- -- -- -- --
Cash and cash equivalents:
Beginning of period............................... -- -- -- -- --
---- --- --- --- ---
End of period..................................... $ -- -- -- -- --
==== === === === ===
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $1 in
each period, respectively, for interest.
See accompanying notes to financial statements.
F-215
<PAGE> 359
PERIGEE.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Perigee.net Corporation was incorporated on January 6, 1999 to capitalize
on the growing demand for Internet access and enhanced services by consumers and
business users. The Company provides full service Internet connectivity and
enhanced Internet services, including hosting web-sites. The Company primarily
serves subscribers in and around Charlotte, North Carolina.
Prior to January 1, 1999, Perigee.net Corporation operated as Perigee Inc.
Perigee Inc. was incorporated on November 17, 1994 and operated initially
offering information technology consulting services. Perigee Inc. commenced
Internet service operations in April 1996. The net assets of Perigee Inc. were
transferred to Perigee.net Corporation effective January 1, 1999. On August 4,
1999, Perigee Inc. was merged with Perigee.net Corporation and the outstanding
shares in Perigee, Inc. were canceled. The owners of Perigee.net Corporation are
the same as those of Perigee Inc. Hereinafter, Perigee Inc. and Perigee.net
Corporation will be referred to collectively as the "Company" (see note 7).
Inherent in the Company's business are various risks and uncertainties
including the limited history of the need for Internet access and enhanced
services. The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's current liabilities have
exceeded its current assets since inception. The Company's future success will
be dependent upon its ability to raise capital, the continued acceptance of the
Internet as well as the Company's ability to create and provide effective and
competitive Internet services that meet customers' changing requirements.
Management's operational and financial plans to address the above issues include
continued focus on increasing its subscriber base and geographic coverage and
obtaining equity or debt financing as needed.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
F-216
<PAGE> 360
PERIGEE.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. There were no cash
equivalents at December 31, 1997 and 1998.
(e) INVESTMENTS
The Company accounts for its investments using Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities. This standard requires that certain debt and equity
securities be adjusted to market value at the end of each accounting period.
Marketable securities have been classified as trading and are carried at fair
value, with unrealized holding gains and losses reflected in earnings.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years.
(g) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of it long-lived assets under the
provisions of SFAS No. 121, Accounting of the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of. SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations, including
goodwill, when indicators of impairment are present and the undiscounted future
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. If such assets are impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying value or fair value, less cost to sell.
(h) INCOME TAXES
Historically, the Company has elected to be taxed using provisions of
subchapter S of the Internal Revenue Code (the "Code"). Under subchapter S
provisions of the Code, the stockholders include the Company's corporate income
in their personal tax returns. Accordingly,
F-217
<PAGE> 361
PERIGEE.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
the Company was not subject to federal and state corporate income tax during the
periods for which it was an S-Corp.
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the outstanding stock of the Company and concurrent with the related
initial public offering of espernet.com (as more fully described in note 7), the
Company's status as an S-Corp. under the Code will automatically terminate and
the Company will be subject to federal and state corporate income taxes.
The unaudited Pro Forma income tax information included in the statements
of operations is presented in accordance with SFAS 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, 1997 and 1998.
No Pro Forma income tax benefit is reflected in the accompanying statements
of operations as the Company would have provided a full valuation allowance
against the net deferred tax asset had it been a C-Corp.
(i) REVENUE RECOGNITION
Revenue related to Internet connectivity services is recognized as the
services are provided and deferred and amortized to operations for amounts
billed relating to future periods. Installation and customer set up fees are
recognized upon completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
(j) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative
expenses and totaled approximately $21, $65 and $88, and $42 and $41 for the
years ended December 31, 1996, 1997 and 1998 and for the six-month periods ended
June 30, 1998 and 1999 (unaudited), respectively.
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. Fair value is defined in the statement as the amount at which an
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of trade receivables, investments, prepaid expenses,
accounts payable, line of credit and other current liabilities approximate fair
value due to the short maturity of these instruments.
F-218
<PAGE> 362
PERIGEE.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
For each of the years ended December 31, 1996, 1997 and 1998 and for the
six-month periods ended June 30, 1998 and 1999 (unaudited), three vendors ranged
from approximately 40% to 50% of the Company's total purchases. The Company's
reliance on certain vendors can be shifted to alternative sources of supply for
products it sells should such changes be necessary.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 amends SFAS No. 133 to extend the effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not yet analyzed the impact of this pronouncement on its financial
statements.
(2) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 and June 30, 1999
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $133 188 168
Less accumulated depreciation............................... 46 98 107
---- --- ---
Property and equipment, net............................ $ 87 90 61
==== === ===
</TABLE>
(3) LINE OF CREDIT
The Company had available a $35 line of credit at December 31, 1997 and
1998 and June 30, 1999. The line of credit bears interest at the bank's prime
rate plus 2% and is due on demand. The bank's prime rate at December 31, 1998
was 7.75%. The Company had $35, $32 and $11
F-219
<PAGE> 363
PERIGEE.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
outstanding under the line of credit at December 31, 1997 and 1998, and June 30,
1999 (unaudited), respectively. The line of credit is personally guaranteed by
the stockholders of the Company.
(4) COMMITMENTS AND CONTINGENCIES
(a) LEASES
The Company leases a motor vehicle and office space under noncancelable
operating leases expiring at various dates through 2000.
Future minimum annual lease payments under noncancelable operating leases
as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................... $ 9
2000............................................... 4
---
Total minimum payments........................ $13
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 (unaudited) was $1, $15 and $17,
and $9 and $8, respectively. (See note 5 for related party lease information.)
(b) TERMINATION PENALTIES
The Company enters into long-term telephone contracts which provide for
early termination penalties. These penalties include a combination of payments
of installation charges and a percentage of fees due under the contract. The
Company paid approximately $29 of termination fees in the six months ended June
30, 1999 (unaudited).
(5) RELATED PARTY TRANSACTIONS
The Company leases office space from the brother of the Company's president
and majority stockholder. Rent expense for this lease for the years ended
December 31, 1996, 1997 and 1998 and the six-month periods ended June 30, 1998
and 1999 (unaudited) was $1, $10 and $10, and $5 and $5, respectively.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or liquidity.
(7) SUBSEQUENT EVENT
Effective August 4, 1999, each outstanding share of Perigee Inc. was
converted into and exchanged for one share of Perigee.net Corporation. The
financial results reported in 1997 and 1998 represent the results of Perigee
Inc.
F-220
<PAGE> 364
PERIGEE.NET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon consummation of the agreement,
espernet.com will become the sole owner of the Company, and the Company will be
converted to a C-Corp.
F-221
<PAGE> 365
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, Inc.:
We have audited the accompanying balance sheets of DuplinNet Corporation as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, and cash flows for the period May 16, 1996 (inception) to
December 31, 1996 and each of 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 DuplinNet Corporation as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the period May 16, 1996 (inception) to December 31, 1996 and for each of the
years ended December 31, 1997 and 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Charlotte, North Carolina
August 19, 1999
F-222
<PAGE> 366
DUPLINNET CORPORATION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 13 15 27
---- ---- ----
Total current assets................................... 13 15 27
Equipment, net (notes 2 and 3).............................. 68 119 129
---- ---- ----
Total assets........................................... $ 81 134 156
==== ==== ====
STOCKHOLDERS' EQUITY
Stockholders' equity:
Common stock, $100 par value. Authorized 1,000 shares,
issued and outstanding 200 shares in 1998 and 1997 and 100
shares in 1999 (unaudited)................................ 20 20 10
Additional paid-in capital.................................. 69 69 79
(Accumulated deficit) retained earnings..................... (8) 45 67
---- ---- ----
Total stockholders' equity............................. $ 81 134 156
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-223
<PAGE> 367
DUPLINNET CORPORATION
STATEMENTS OF OPERATIONS
(AMOUNT IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
MAY 16, 1996 DECEMBER SIX MONTHS ENDED
(INCEPTION) TO 31, JUNE 30,
DECEMBER 31, ------------ --------------------------
1996 1997 1998 1998 1999
-------------- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connection revenue......... $ 19 88 201 83 156
---- -- --- -- ---
Costs and expenses:
Cost of Internet services......... 32 64 110 42 89
Selling, general and
administrative................. 2 1 10 4 27
Depreciation and amortization..... 4 12 28 13 18
---- -- --- -- ---
Total costs and expenses....... 38 77 148 59 134
---- -- --- -- ---
Net (loss) income.............. $(19) 11 53 24 22
==== == === == ===
Pro Forma income taxes (note
4)(unaudited)..................... $ (4) 2 11 5 5
==== == === == ===
Pro Forma net (loss) income (note 4)
(unaudited)....................... $(15) 9 42 19 17
==== == === == ===
</TABLE>
See accompanying notes to financial statements.
F-224
<PAGE> 368
DUPLINNET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNT IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ------------ -----
<S> <C> <C> <C> <C>
BALANCE AT MAY 16, 1996................... $ -- -- -- --
Issuance of 200 shares of common stock for
$24 cash and $18 equipment.............. 20 22 -- 42
Net loss.................................. -- -- (19) (19)
---- --- --- ----
BALANCE AT DECEMBER 31, 1996.............. 20 22 (19) 23
Stockholders' contribution................ -- 47 -- 47
Net income................................ -- -- 11 11
---- --- --- ----
BALANCE AT DECEMBER 31, 1997.............. 20 69 (8) 81
Net income................................ -- -- 53 53
---- --- --- ----
BALANCE AT DECEMBER 31, 1998.............. 20 69 45 134
Stockholder contribution (note 5)
(unaudited)............................. -- 100 -- 100
Purchase of 100 shares of common stock for
$100 (note 5) (unaudited)............... (10) (90) -- (100)
Net income (unaudited).................... -- -- 22 22
---- --- --- ----
BALANCE AT JUNE 30, 1999
(unaudited)............................. $ 10 79 67 156
==== === === ====
</TABLE>
See accompanying notes to financial statements.
F-225
<PAGE> 369
DUPLINNET CORPORATION
STATEMENTS OF CASH FLOWS
(AMOUNT IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 16, 1996 YEARS ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------ -------------------------
1996 1997 1998 1998 1999
-------------- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income...................... $(19) 11 53 24 22
Adjustments to reconcile net (loss)
income to net cash provided by (used
in) operating activities:
Depreciation and amortization....... 4 12 28 13 18
Increase (decrease) in trade
accounts payable.................. 25 (25) -- -- --
---- --- --- --- ----
Net cash provided by (used in)
operating activities........... 10 (2) 81 37 40
---- --- --- --- ----
Cash flows from investing activities:
Purchase of equipment.................. (22) (13) (79) (63) (28)
---- --- --- --- ----
Net cash used in investing
activities..................... (22) (13) (79) (63) (28)
---- --- --- --- ----
Cash flows from financing activities:
Contributions from stockholders........ 24 16 -- -- --
Proceeds from stockholder
contribution........................ -- -- 23 23 100
Purchase of common stock............... -- -- -- -- (100)
Payments of stockholder loans.......... -- -- (23) -- --
---- --- --- --- ----
Net cash provided by financing
activities..................... 24 16 -- 23 --
---- --- --- --- ----
Net increase (decrease) in cash.......... 12 1 2 (3) 12
Cash at beginning of period.............. -- 12 13 13 15
---- --- --- --- ----
Cash at end of period.................... $ 12 13 15 10 27
==== === === === ====
Non-cash investing and financing activities:
During the period from May 16, 1996 (inception) to December 31, 1996 and the year ended December
31, 1997, the stockholders contributed $18 and $31, respectively, of equipment to the Company.
</TABLE>
See accompanying notes to financial statements.
F-226
<PAGE> 370
DUPLINNET CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNT IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
DuplinNet Corporation (the "Company") is a locally-owned and operated
internet service provider located in Kenansville, North Carolina. The Company
was incorporated on May 16, 1996 and provides dial-up internet access for home
or business.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of the need for
internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
internet services, the continued acceptance of the internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using an
accelerated method over the estimated useful lives of the related assets, which
has been estimated to be five years.
F-227
<PAGE> 371
DUPLINNET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the discounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. In addition, the recoverability of
intangible assets is further evaluated under the provisions of Accounting
Principles Board Opinion No. 17, Intangible Assets, based upon estimated fair
value. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
(f) INCOME TAXES
The Company elected on January 1, 1997 to be treated as an S-Corp under the
provisions of the Internal Revenue Code. Under these provisions, the Company is
not liable for federal or state income taxes. Instead, the shareholders are
liable for individual federal and state income taxes on their respective shares
of the Company's taxable income. Accordingly, there is no provision for income
taxes recorded in the Company's financial statements.
The unaudited proforma income tax information included in the statements of
operations and Note 4 is presented in accordance with SFAS 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, 1998 and 1997 and for the period from May
16, 1996 (inception) to December 31, 1996.
SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Activation fee revenue is recognized at the point that the
customer has the ability to obtain Internet Services from the Company.
(h) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
and totaled approximately $2 for the period May 16, 1996 (inception) to December
31, 1996, $0 and $7 for the years ended December 31, 1997 and 1998,
respectively, and $7 for the six months ending June 30, 1999.
F-228
<PAGE> 372
DUPLINNET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 established accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) RELATED PARTY TRANSACTIONS
The Company rents its office space on a month-to-month basis from a
stockholder of the Company. Rent expense for 1996, 1997 and 1998 was $0, $0 and
$1, respectively.
The Company purchases computer equipment from Global Systems, Inc., which
is owned and operated by a stockholder. Equipment purchases from Global Systems,
Inc. for the period May 16, 1996 (inception) to December 31, 1996 and for the
years ended December 31, 1997 and 1998 were $0, $13, and $72, respectively.
No salary expense is included in the financial statements for the period
from May 16, 1996 (inception) to December 31, 1996 and for the years ended
December 31, 1997 and 1998 as the stockholders employed by the Company did not
receive any salary.
(3) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Computer equipment.......................................... $84 163 191
Less accumulated depreciation............................... 16 44 62
--- --- ---
$68 119 129
=== === ===
</TABLE>
F-229
<PAGE> 373
DUPLINNET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) INCOME TAXES (UNAUDITED)
The following displays the pro-forma income tax effects as if the Company
had been treated as a taxable Corporation for the respective periods.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1996 1997 1998 1999
---- ----- ---- --------
<S> <C> <C> <C> <C>
Current:
Federal.................................................. $-- -- 1 4
State and local.......................................... -- -- -- 2
--- -- -- --
Total current......................................... -- -- 1 6
--- -- -- --
Deferred:
Federal.................................................. (3) 1 7 (1)
State and local.......................................... (1) 1 3 --
--- -- -- --
Total deferred........................................ (4) 2 10 (1)
--- -- -- --
Total income tax expense.............................. $(4) 2 11 5
=== == == ==
</TABLE>
A reconciliation of income taxes computed using the statutory rates to
income tax expense follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1996 1997 1998 1999
---- ---- ---- --------
<S> <C> <C> <C> <C>
Statutory income tax rate.................................. 15% 15% 25% 15%
Income taxes at statutory tax rate......................... $(3) 2 13 3
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal income tax
benefit............................................... (1) -- 2 2
Benefit of lower tax bracket............................. -- -- (4) --
--- -- -- --
Income tax expense......................................... $(4) 2 11 5
=== == == ==
</TABLE>
F-230
<PAGE> 374
DUPLINNET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating losses...................................... $ 5 -- --
Deferred tax liabilities:
Equipment................................................. (3) (8) (7)
--- -- --
Total net deferred tax (liabilities) assets............ $ 2 (8) (7)
=== == ==
</TABLE>
(5) SUBSEQUENT EVENTS
In June 1999, the Company received a contribution of $100 from a
stockholder which was used to repurchase 100 shares of common stock from the
other stockholder.
The Company's owner has entered into an agreement whereby he will sell his
ownership in the Company to espernet.com, inc. ("espernet.com"). The Company's
owner will exchange his ownership in the Company for cash and shares of common
stock of espernet.com concurrent with the consummation of the initial public
offering of the common stock of espernet.com. Upon consummation of the
agreement, espernet.com will become the sole owner of the Company, and the
Company will be converted to a C-Corp.
F-231
<PAGE> 375
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of WaveNet, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' deficit, and cash flows for the period April 23, 1996 (inception)
to December 31, 1996 and for each of 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 WaveNet, Inc. as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period April 23, 1996 (inception) to December 31, 1996 and for each of the years
ended December 31, 1997 and 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Charlotte, North Carolina
August 19, 1999
F-232
<PAGE> 376
WAVENET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- 7 --
Trade receivables......................................... 1 3 8
Prepaid expenses.......................................... 4 8 3
---- ---- ---
Total current assets................................... 5 18 11
Equipment, net (notes 3 and 5).............................. 72 70 66
---- ---- ---
Total assets........................................... $ 77 88 77
==== ==== ===
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 10 11 10
Accrued expenses.......................................... 5 3 10
Line of credit and current portion of long-term debt (note
5)..................................................... 14 20 7
Capital lease obligations (note 4)........................ 9 9 9
Deferred revenue.......................................... 9 30 35
Due to stockholders (note 2).............................. 8 20 12
---- ---- ---
Total current liabilities.............................. 55 93 83
Capital lease obligations, less current portion (note 4).... 20 10 6
Long-term debt, less current portion (note 5)............... 8 -- --
---- ---- ---
Total liabilities...................................... 83 103 89
==== ==== ===
Stockholders' deficit:
Common stock, $1 par value, authorized 400 shares, issued
and outstanding 400 shares as of December 31, 1997 and
1998 and June 30, 1999................................. -- -- --
Additional paid-in capital................................ 10 10 10
Accumulated deficit....................................... (16) (25) (22)
---- ---- ---
Total stockholders' deficit............................ (6) (15) (12)
---- ---- ---
Total liabilities and stockholders' deficit............ $ 77 88 77
==== ==== ===
</TABLE>
See accompanying notes to financial statements.
F-233
<PAGE> 377
WAVENET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 23, 1996
(INCEPTION) TO YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
-------------- ------------ --------------------------
1996 1997 1998 1998 1999
-------------- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connection
revenue........................... $ 27 163 310 134 212
---- --- --- --- ---
Costs and expenses:
Cost of Internet services......... 21 68 137 61 85
Selling, general and
administrative................. 13 87 157 65 111
Depreciation and amortization..... 2 10 21 11 11
---- --- --- --- ---
Total costs and expenses....... 36 165 315 137 207
---- --- --- --- ---
Income (loss) from operations..... (9) (2) (5) (3) 5
Interest expense.................... 2 3 4 3 2
---- --- --- --- ---
Net income (loss).............. $(11) (5) (9) (6) 3
==== === === === ===
Pro Forma income taxes (note 6)
(unaudited)....................... $ -- -- -- -- --
==== === === === ===
Pro Forma net income (loss) (note 6)
(unaudited)....................... $(11) (5) (9) (6) 3
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-234
<PAGE> 378
WAVENET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -----
<S> <C> <C> <C> <C>
BALANCE AT APRIL 23, 1996....................... $-- -- -- --
Issuance of 400 shares of common stock.......... -- -- -- --
Stockholders' contribution of $5 cash and $5
equipment..................................... -- 10 -- 10
Net loss........................................ -- -- (11) (11)
-- -- --- ---
BALANCE AT DECEMBER 31, 1996.................... -- 10 (11) (1)
Net loss........................................ -- -- (5) (5)
-- -- --- ---
BALANCE AT DECEMBER 31, 1997.................... -- 10 (16) (6)
Net loss........................................ -- -- (9) (9)
-- -- --- ---
BALANCE AT DECEMBER 31, 1998.................... -- 10 (25) (15)
Net income (unaudited).......................... -- -- 3 3
-- -- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)............ $-- 10 (22) (12)
== == === ===
</TABLE>
See accompanying notes to financial statements.
F-235
<PAGE> 379
WAVENET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 23, 1996
(INCEPTION) TO YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
-------------- ------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $(11) (5) (9) (6) 3
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...... 2 10 21 11 11
Changes in assets and liabilities:
Trade receivables................ -- (1) (2) (3) (5)
Prepaid expenses................. (17) 12 (4) 2 5
Accounts payable and accrued
expenses...................... 1 9 (1) 4 6
Deferred revenue................. 3 6 21 (1) 5
---- --- --- --- ---
Net cash provided by (used in)
operating activities........ (22) 31 26 7 25
---- --- --- --- ---
Cash flows from investing activities:
Purchases of equipment................ (18) (23) (19) (20) (7)
---- --- --- --- ---
Net cash used in investing
activities.................. (18) (23) (19) (20) (7)
---- --- --- --- ---
Cash flows from financing activities:
Proceeds from line of credit and notes
payable............................ 25 11 15 15 --
Payments of notes payable............. (2) (12) (17) (9) (13)
Proceeds from stockholder loans....... 13 5 22 16 --
Payments of stockholder loans......... -- (10) (10) (4) (8)
Principal payments on capital lease
obligations........................ -- (3) (10) (5) (4)
Contributions from stockholders....... 5 -- -- -- --
---- --- --- --- ---
Net cash provided by (used in)
financing activities........ 41 (9) -- 13 (25)
---- --- --- --- ---
Net increase (decrease) in cash......... 1 (1) 7 -- (7)
Cash at beginning of period............. -- 1 -- -- 7
---- --- --- --- ---
Cash at end of period................... $ 1 -- 7 -- --
==== === === === ===
Supplemental disclosure of cash flow information:
During the period April 23, 1996 (inception) to December 31, 1996 and during the years ended
December 31, 1997 and 1998 and during the six-month periods ended June 30, 1998 and 1999
(unaudited), the Company paid $1, $2, $2, $2 and $2, respectively, for interest.
Non-cash investing and financing activities:
During the year ended December 31, 1997, the Company entered into two capital leases for
equipment aggregating $31.
During 1996, the stockholders contributed $5 of equipment to the Company.
</TABLE>
See accompanying notes to financial statements.
F-236
<PAGE> 380
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
WaveNet, Inc. (the "Company") is a locally owned and operated internet
service provider located in Jacksonville, North Carolina. The Company was
incorporated on April 23, 1996 and provides dial-up Internet access for home or
business.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of the need for
Internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
Internet services, the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using an
accelerated method over the estimated useful lives of the related assets, which
is estimated to be five years.
F-237
<PAGE> 381
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121 ("SFAS"),
Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the discounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. In addition, the recoverability of
intangible assets is further evaluated under the provisions of Accounting
Principles Bulletin ("APB") Opinion No. 17, Intangible Assets, based upon
estimated fair value. If such assets are impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying value or fair value, less costs to sell.
(f) INCOME TAXES
The Company has elected to be treated as an S-Corp. under the provisions of
the Internal Revenue Code. Under these provisions, the Company is not liable for
federal or state income taxes. Instead, the shareholders are liable for
individual federal and state income taxes on their respective shares of the
Company's taxable income. Accordingly, there is no provision for income taxes
recorded in the Company's financial statements.
The unaudited proforma income tax information included in the statements of
operations and Note 6 is presented in accordance with SFAS 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, 1998 and 1997 and for the period from
April 23, 1996 (inception) to December 31, 1996.
SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operation for amounts billed relating to
future periods. Activation fee revenue is recognized at the point that the
customer has the ability to obtain Internet Services from the Company.
(h) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
and totaled approximately $1 for the period April 23, 1996 (inception) to
December 31, 1996, $4 and $2 for the years ended December 31, 1997 and 1998,
respectively, and $5 for the six months ending June 30, 1999.
F-238
<PAGE> 382
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998, the fair value of the Company's financial instruments including the line
of credit and long-term debt approximate their carrying value based on their
terms and interest rates.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) RELATED PARTY TRANSACTIONS
From time to time, the Company's stockholders purchase equipment and pay
expenses on behalf of the Company. The stockholders deem these transactions to
be temporary non-interest bearing loans to the Company, which are secured by the
stockholders' underlying interests in the Company. Amounts are reimbursed to the
stockholders when cash is available to the Company. The net effect of these
stockholder transactions is recorded as "Due to stockholders" in the
accompanying balance sheets.
F-239
<PAGE> 383
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment.......................................... $53 72 79
Equipment under capital leases.............................. 31 31 31
--- --- ---
84 103 110
Less accumulated depreciation and amortization.............. (12) (33) (44)
--- --- ---
$72 70 66
=== === ===
</TABLE>
Accumulated amortization of assets held under capital leases is $1, $7 and
$11 at December 31, 1997 and 1998 and June 30, 1999, respectively.
(4) LEASE COMMITMENTS
At December 31, 1998, future minimum annual lease commitments under
non-cancelable capital lease obligations for computer equipment are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $11
2000...................................................... 7
2001...................................................... 2
2002...................................................... 2
2003 and beyond........................................... --
---
Total minimum lease payments................................ 22
Less amount representing interest........................... (3)
---
Present value of net minimum lease payments................. 19
Less current maturities of capital lease obligations........ (9)
---
$10
===
</TABLE>
F-240
<PAGE> 384
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(5) LINE OF CREDIT AND LONG-TERM DEBT
Line of credit and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998 JUNE 30, 1999
---- ---- -------------
<S> <C> <C> <C>
First Citizen capital line reserve of $10 expiring January
5, 2000, interest at 10.00% at December 31, 1998, payable
monthly, secured by equipment of the Company.............. $ 2 6 6
First Citizens working capital loan, interest at 8.50% at
December 31, 1998, payable monthly, paid in full April 8,
1999, secured by an investment of a stockholder........... -- 6 --
First Citizens equipment purchase loan, interest at 9.66% at
December 31, 1998, payable monthly, paid in full February
22, 1999, secured by equipment of the Company............. 5 2 --
First Citizens small business loan, interest at 8.80% at
December 31, 1998, $1 payable monthly, due July 20, 1999,
secured by the personal vehicle of a stockholder and
equipment of the Company.................................. 15 6 1
---- ---- ----
22 20 7
Less current maturities..................................... (14) (20) (7)
---- ---- ----
Total long term debt, less current portion.................. $ 8 -- --
==== ==== ====
</TABLE>
F-241
<PAGE> 385
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(6) INCOME TAXES (UNAUDITED)
The following displays the Pro Forma income tax effects as if the Company
had been treated as a taxable Corporation for the respective periods.
A reconciliation of income taxes computed using the statutory rates to
income tax expense follows:
<TABLE>
<CAPTION>
APRIL 23, 1996
(INCEPTION)
TO YEARS ENDED
DECEMBER 31, DECEMBER 31,
-------------- ------------ SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
-------------- ---- ---- ----------------
<S> <C> <C> <C> <C>
Statutory income tax rate.................. 15% 15% 15% 15%
Income taxes at statutory tax rate......... $(2) (1) (1) 1
Increase (decrease) in taxes resulting
from:
State and local income taxes, net of
federal income tax benefit............ (1) -- (1) --
Change in valuation allowance......... 3 1 2 (1)
--- -- -- --
Income tax expense (benefit)............... $-- -- -- --
=== == == ==
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryovers............................. $4 9 7
Accrual vs cash method of accounting...................... 2 -- --
-- -- --
Total gross deferred tax assets........................ 6 9 7
Less valuation allowance............................... 4 6 5
-- -- --
Net deferred tax assets................................ 2 3 2
Deferred tax liabilities:
Equipment, principally due to differences in
depreciation........................................... 2 3 2
-- -- --
Total net deferred tax assets.......................... $-- -- --
== == ==
</TABLE>
The net change in the total valuation allowance for the period April 23,
1996 (inception) to December 31, 1996 and for the years ended December 31, 1997
and 1998 and the six month period ended June 30, 1999 was an increase (decrease)
of $3, $1, $2 and $(1), respectively. In assessing
F-242
<PAGE> 386
WAVENET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which the
temporary differences become deductible.
(7) SUBSEQUENT EVENTS
In July, 1999, the Company entered into an agreement to borrow $25 from a
bank The note bears interest at 8.75%, requires monthly principal and interest
payments of $1 through July 6, 2002 and is secured by equipment.
The Company's owners have entered into an agreement whereby they will sell
their ownership in the company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-243
<PAGE> 387
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com,inc.:
We have audited the accompanying balance sheets of The 3rd Door, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity, 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 The 3rd Door, 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
Charlotte, North Carolina
August 20, 1999
F-244
<PAGE> 388
THE 3RD DOOR, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 25 21 28
Trade receivables, less allowance for doubtful accounts of
$5 in 1997, $7 in 1998, and $11 at June 30, 1999....... 2 5 9
---- ---- ----
Total current assets................................... 27 26 37
Equipment, net (note 2)..................................... 31 33 69
Deferred income taxes (note 7).............................. 3 5 6
---- ---- ----
Total assets........................................... $ 61 64 112
==== ==== ====
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable (note 4)................................. $ 24 11 13
Accrued expenses.......................................... 1 -- 1
Current portion of capital lease obligations (note 8)..... -- -- 9
Deferred income taxes (note 7)............................ 1 3 5
Accrued income taxes payable.............................. -- -- 4
Deferred revenue.......................................... 15 26 19
---- ---- ----
Total current liabilities.............................. 41 40 51
---- ---- ----
Capital lease obligations, less current portion (note 8).... -- -- 21
---- ---- ----
Total liabilities...................................... 41 40 72
---- ---- ----
Stockholders' equity:
Common stock, $1 par value. Authorized 100,000 shares,
issued and outstanding 63,500 shares in 1997, 1998 and
1999................................................... 64 64 64
Stock subscription receivable (note 6).................... (51) (51) (51)
Retained earnings......................................... 7 11 27
---- ---- ----
Total stockholders' equity............................. 20 24 40
---- ---- ----
Total liabilities and stockholders' equity............. $ 61 64 112
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-245
<PAGE> 389
THE 3RD DOOR, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1999
-------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connecting revenue.............. $75 254 346 161 214
--- --- --- --- ---
Costs and expenses:
Cost of internet services.............. 43 118 161 81 84
Selling, general, and administrative
(note 4)............................ 23 102 167 65 95
Depreciation and amortization.......... 5 14 13 8 12
--- --- --- --- ---
Total costs and expenses............ 71 234 341 154 191
--- --- --- --- ---
Income from operations.............. 4 20 5 7 23
Other expenses:
Interest expense....................... -- -- -- -- (2)
--- --- --- --- ---
Income before income taxes.......... 4 20 5 7 21
Income taxes (note 7).................... -- 1 1 1 5
--- --- --- --- ---
Net income............................... $ 4 19 4 6 16
=== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-246
<PAGE> 390
THE 3RD DOOR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
STOCK RETAINED
COMMON SUBSCRIPTION EARNINGS
STOCK RECEIVABLE (DEFICIT) TOTAL
------ ------------ --------- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................... $64 (51) (16) (3)
Net income..................................... -- -- 4 4
--- --- --- ---
BALANCE AT DECEMBER 31, 1996................... 64 (51) (12) 1
Net income..................................... -- -- 19 19
--- --- --- ---
BALANCE AT DECEMBER 31, 1997................... 64 (51) 7 20
Net income..................................... -- -- 4 4
--- --- --- ---
BALANCE AT DECEMBER 31, 1998................... 64 (51) 11 24
Net income (unaudited)......................... -- -- 16 16
--- --- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)........... $64 (51) 27 40
=== === === ===
</TABLE>
See accompanying notes to financial statements.
F-247
<PAGE> 391
THE 3RD DOOR, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1998
-------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 4 19 4 6 16
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation of equipment........... 5 14 13 8 12
Deferred income taxes............... (1) (1) -- 1 1
(Increase) decrease in trade
receivables....................... (4) 3 (3) (3) (4)
Increase (decrease) in accounts
payable........................... 9 9 (13) (6) 2
Increase (decrease) in deferred
revenue........................... 12 (11) 11 1 (7)
(Decrease) increase in accrued
expenses.......................... 1 -- (1) -- 1
Increase in other assets............ -- -- -- (2) --
Increase in accrued income taxes
payable........................... -- -- -- -- 4
---- --- --- --- ---
Net cash provided by operating
activities..................... 26 33 11 5 25
---- --- --- --- ---
Cash flows from investing activities:
Purchase of equipment.................. (24) (13) (15) (10) (14)
---- --- --- --- ---
Net cash used in investing
activities..................... (24) (13) (15) (10) (14)
---- --- --- --- ---
Cash flows from financing activities:
Repayments of capital lease
obligations......................... -- -- -- -- (4)
---- --- --- --- ---
Net cash used in financing
activities..................... -- -- -- -- (4)
---- --- --- --- ---
Net increase (decrease) in cash.......... 2 20 (4) (5) 7
Cash at beginning of period.............. 3 5 25 25 21
---- --- --- --- ---
Cash at end of period.................... $ 5 25 21 20 28
==== === === === ===
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997, 1998 and during the unaudited six month
periods ended June 30, 1998 and 1999, the Company paid approximately $1, $1, $2, $2, and $0
for income taxes, respectively.
During the unaudited six month period ended June 30, 1999, the Company paid approximately $2
for interest.
Non-cash financing activities:
The Company entered into a capital lease for computer equipment in 1999. This capital lease
obligation resulted in non-cash financing activities aggregating $34 for the unaudited six
months ended June 30, 1999.
</TABLE>
See accompanying notes to financial statements.
F-248
<PAGE> 392
THE 3RD DOOR, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNT IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The 3rd Door, Inc. (the "Company") is a locally owned and operated Internet
service provider located in Roanoke Rapids, North Carolina. The Company was
incorporated on April 13, 1995 and provides dial-up Internet access for home or
business.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of the need for
Internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
Internet services, the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally three years. Equipment under capital leases
F-249
<PAGE> 393
THE 3RD DOOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
is stated at the present value of minimum lease payments and is amortized using
the straight-line method over lease term of three years.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the discounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Assets to be disposed of are reported at
the lower of the carrying value or fair value, less costs to sell.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods.
(h) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
and totaled approximately $4, $3, $10, $5 and $4 for the years ended December
31, 1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and
1999, respectively.
(i) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and the six months ended June 30, 1998 and 1999, the fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
F-250
<PAGE> 394
THE 3RD DOOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ -----------
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment, including equipment,
including amounts related to capital leases of $34 at June
30, 1999.................................................. $55 70 118
Less accumulated depreciation, including amounts related to
capital leases of $5 at June 30, 1999..................... 24 37 49
--- --- ---
$31 33 69
=== === ===
</TABLE>
(3) LINE OF CREDIT
The Company has a $10 unsecured line of credit available bearing interest
at 11.50%. There are no outstanding borrowings as of December 31, 1997 and 1998,
or the six months ended June 30, 1999.
(4) RELATED PARTY TRANSACTIONS
The Company rents its office space on a month-to-month basis for $400 per
month from a related party. In 1998, the Company paid a related party $6 for
accounting services and another related party $12 for use of equipment,
supplies, and other miscellaneous training expenses. At
F-251
<PAGE> 395
THE 3RD DOOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
December 31, 1997, and 1998 and June 30, 1999, amounts outstanding to the
related party for the purchase of equipment and other services was $13, $0 and
$0, respectively.
(5) LEASES
In addition to the related party lease in note 4, the Company rents a
building on a month-to-month basis for $275 per month in Virginia.
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 was $4, $7, $9, $4, and $6,
respectively.
(6) STOCKHOLDERS' EQUITY
The Company issued 51,000 shares of common stock in exchange for a
non-interest bearing note from the owner of the Company. The note is to be paid
in annual installments, beginning in April 1995. No payments have been made to
date. Such note is shown as a stock subscription receivable in stockholders'
equity.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------- SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
---- ---- ---- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.......................................... $ 1 1 1 3
State and local.................................. -- 1 -- 1
--- -- -- --
Total current................................. 1 2 1 4
--- -- -- --
Deferred:
Federal.......................................... (1) (1) -- 1
State and local.................................. -- -- -- --
--- -- -- --
Total deferred................................ (1) (1) -- 1
--- -- -- --
Total income tax expense...................... $-- 1 1 5
=== == == ==
</TABLE>
F-252
<PAGE> 396
THE 3RD DOOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
A reconciliation of income taxes computed using the statutory rates to
income tax expense follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------- SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
---- ---- ---- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory income tax rate.......................... 15% 15% 15% 15%
Income taxes at statutory tax rate................. $ 1 3 1 3
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal
income tax benefit............................ (1) 1 -- 2
Effect of rate differences on deferred taxes..... (3) -- -- --
Change in valuation allowance.................... 3 (3) -- --
--- -- -- --
Income tax expense................................. $-- 1 1 5
=== == == ==
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Property, plant and equipment primarily due to
depreciation and capital leases for book purposes
treated as operating leases for tax purposes........... $3 5 6
-- -- --
Total gross deferred tax assets........................ 3 5 6
Less valuation allowance............................... -- -- --
-- -- --
Net deferred tax assets................................ 3 5 6
-- -- --
Deferred tax liabilities:
Other..................................................... 1 3 5
-- -- --
Total gross deferred tax liabilities................... 1 3 5
-- -- --
Total net deferred tax assets.......................... $2 2 1
== == ==
</TABLE>
F-253
<PAGE> 397
THE 3RD DOOR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(8) SUBSEQUENT EVENTS
In March, 1999, the Company entered into a long-term capital lease for
equipment with total future minimum lease payments of approximately $43 with a
present value of $30.
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-254
<PAGE> 398
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of InfoRamp, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
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 InfoRamp, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 18, 1999
F-255
<PAGE> 399
INFORAMP, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 41 -- 297
Receivables:
Trade, including unbilled revenue of $19, $102 and
$152, respectively.................................... 48 279 355
Other, from related party.............................. 1 1 1
---- --- -----
Total current assets................................. 90 280 653
Property and equipment, net................................. 246 347 432
---- --- -----
Total assets......................................... $336 627 1,085
==== === =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $ -- 6 --
Accounts payable.......................................... 88 45 129
Accrued expenses, including $26, $50 and $58 due to
related party, respectively............................ 41 81 82
Deferred revenue.......................................... 122 303 383
---- --- -----
Total current liabilities............................ 251 435 594
Long-term debt.............................................. 80 80 80
---- --- -----
Total liabilities.................................... 331 515 674
Shareholders' equity:
Voting common stock, no par value, authorized 100,000
shares, issued and outstanding 30,000 shares at
December 31, 1997 and 1998 and June 30, 1999........... 36 36 36
Non-voting common stock, no par value. Authorized
10,000,000 shares, issued and outstanding 2,970,000
shares at June 30, 1999................................ -- -- --
Retained earnings (accumulated deficit)................... (31) 76 375
---- --- -----
Total shareholders' equity........................... 5 112 411
---- --- -----
Total liabilities and shareholders' equity........... $336 627 1,085
==== === =====
</TABLE>
See accompanying notes to financial statements.
F-256
<PAGE> 400
INFORAMP, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales of Internet services...................... $388 778 1,635 669 1,645
Costs and expenses:
Cost of Internet services..................... 142 285 646 247 703
Selling, general and administrative, including
$52, $42, $54, $27, and $27, respectively,
of related party fees...................... 220 377 799 352 589
Depreciation.................................. 34 49 81 40 52
---- --- ----- --- -----
Total costs and expenses................... 396 711 1,526 639 1,344
---- --- ----- --- -----
Income (loss) from operations.............. (8) 67 109 30 301
Other income (expenses):
Interest income............................... -- 1 4 2 3
Interest expense.............................. (7) (7) (7) (4) (4)
Gain (loss) on disposition of equipment....... -- (18) 1 4 (1)
---- --- ----- --- -----
(7) (24) (2) 2 (2)
---- --- ----- --- -----
Net income (loss).......................... $(15) 43 107 32 299
==== === ===== === =====
</TABLE>
See accompanying notes to financial statements.
F-257
<PAGE> 401
INFORAMP, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
VOTING NON-VOTING RETAINED
COMMON STOCK COMMON STOCK EARNINGS
---------------- ------------------- (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT) TOTAL
------ ------ --------- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..... 30,000 $36 -- $-- $(59) $(23)
Net loss......................... (15) (15)
------ --- --------- --- ---- ----
BALANCE AT DECEMBER 31, 1996..... 30,000 36 -- -- (74) (38)
Net income....................... 43 43
------ --- --------- --- ---- ----
BALANCE AT DECEMBER 31, 1997..... 30,000 36 -- -- (31) 5
Net income....................... 107 107
------ --- --------- --- ---- ----
BALANCE AT DECEMBER 31, 1998..... 30,000 36 -- -- 76 112
Stock dividend distribution
(unaudited).................... 2,970,000 --
Net income (unaudited)........... 299 299
------ --- --------- --- ---- ----
BALANCE AT JUNE 30, 1999
(unaudited).................... 30,000 $36 2,970,000 $-- $375 $411
====== === ========= === ==== ====
</TABLE>
See accompanying notes to financial statements.
F-258
<PAGE> 402
INFORAMP, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- --------------------------
1996 1997 1998 1998 1999
----- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ (15) 43 107 32 299
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation................................. 34 49 81 40 52
Loss on disposition of equipment............. -- 18 (1) (4) 1
Changes in operating assets and liabilities:
Receivables................................ 8 (42) (231) (32) (76)
Other current assets....................... -- (1) -- -- --
Accounts payable........................... 41 47 (43) (19) 84
Accrued expenses........................... (4) 27 40 19 1
Deferred revenue........................... 45 71 181 92 80
----- ---- ---- ---- ----
Net cash provided by operating
activities........................... 109 212 134 128 441
----- ---- ---- ---- ----
Cash flows from investing activities:
Acquisition of equipment and leasehold
improvements................................. (123) (176) (187) (108) (151)
Proceeds from disposition of equipment.......... -- 6 6 6 13
----- ---- ---- ---- ----
Net cash used by investing activities... (123) (170) (181) (102) (138)
----- ---- ---- ---- ----
Net increase (decrease) in cash......... (14) 42 (47) 26 303
Cash:
Beginning period................................ 13 (1) 41 41 (6)
----- ---- ---- ---- ----
End of period................................... $ (1) 41 (6) 67 297
===== ==== ==== ==== ====
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $3,
$3, $7, $3 and $5, respectively, for interest.
See accompanying notes to financial statements.
F-259
<PAGE> 403
INFORAMP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
InfoRamp, Inc. (the "Company") was incorporated on April 25, 1995 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users through the phased acquisition, integration, and
growth of existing independent Internet service providers in targeted geographic
regions. The goal of the Company is to become the premier national provider of
full service Internet connectivity and enhanced Internet services. The Company
commenced operations in May of 1995.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for Internet access and enhanced services.
The Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet, and the Company's ability to innovate, develop, and provide new
services that meet customers changing requirements, including the effective use
of leading technologies, to continue to enhance its current services, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, shareholders' equity (deficit), and cash flows for
the six months ended June 30, 1999 and 1998 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-260
<PAGE> 404
INFORAMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years for computer equipment and seven
years for furniture and fixtures. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(g) INCOME TAXES
The Company operates as an S-Corp under the Internal Revenue Code and
therefore, was not subject to Federal and State corporate income taxes. Under
the S-Corp provision of the Code, the shareholders of the Company include their
share of the Company's income on their personal income tax returns. Accordingly,
these financial statements contain no provision or benefit and no assets or
liabilities for Federal or State income taxes.
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided. Amounts invoiced in advance are deferred and amortized into revenue
over the life of the service agreement. Domain registration revenues are
recognized as billed in the period under contract. Domain revenues were
insignificant to the Company's total revenue for the years ended December 31,
1996, 1997, and 1998 and the six month periods ended June 30, 1998 and 1999.
F-261
<PAGE> 405
INFORAMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) SALES AND MARKETING COSTS
Selling expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general, and administrative
expenses and totaled approximately $58, $24, $56, $23 and $18 for the years
ended December 31, 1996, 1997 and 1998 and for the six month periods ended June
30, 1998 and 1999, respectively.
(j) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
At December 31, 1997 and 1998 and June 30, 1999, the fair value of the
Company's accounts receivable, accounts payable, and accrued expenses
approximate their carrying value based on the short term nature of these
financial instruments.
During the fourth quarter of 1997, the Company began selling access ports
on a wholesale basis to a national on line service provider. The agreement
between the Company and this service provider was renewed in July of 1999 and
has a two year term which is automatically renewable. There is no guarantee as
to the volume of business between the Company and this service provider. For the
years ended December 31, 1997 and 1998 and for the six month periods ended June
30, 1998 and 1999, 3%, 28%, 16% and 53%, respectively, of sales were to this
service provider. This service provider represented approximately 55%, 84% and
89% of accounts receivable at December 31, 1997 and 1998 and June 30, 1999,
respectively.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-262
<PAGE> 406
INFORAMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -------------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $314 $449 $570
Furniture and fixtures...................................... 2 6 6
Leasehold improvements...................................... 10 22 22
---- ---- ----
326 477 598
Less accumulated depreciation............................... 80 130 166
---- ---- ----
Total.................................................. $246 $347 $432
==== ==== ====
</TABLE>
(3) NONMONETARY TRANSACTIONS
The company offers free Internet services to certain businesses in rural
areas of Illinois in exchange for use of space to house its equipment. The
accounting for these transactions was based on the value of rent paid by the
Company to house its equipment under a similar agreement for which cash was
surrendered.
(4) RELATED PARTY TRANSACTIONS
The Company had $80 of long term debt to two of its shareholders at
December 31, 1997 and 1998 and June 30, 1999. The notes mature on January 1,
2002 and accrue interest at a rate of 9% per annum. Interest is payable on each
calendar quarter.
The Company paid a management fee to Cellular Dynamics, Inc., a company
owned by the President of InfoRamp, Inc., during 1996, 1997, 1998, and the six
months ended June 30, 1999 for services related to bookkeeping, payroll, and
other miscellaneous management services.
During 1996, 1997, and a portion of 1998, the Company subleased office
space in Cicero, Illinois from Cellular Dynamics, Inc., a company owned by the
President of the Company. The Company paid $1 and $3 in 1997 and 1998,
respectively, to Cellular Dynamics, Inc. for the use of this office space.
In March of 1998, the Company entered into a lease agreement in which it
paid $2 of rent expense per month to the President of the Company for the use of
its office space in Chicago, Illinois. The lease was amended as of January 1,
1999 to increase the monthly rent expense to $4. This lease expires in 2002.
F-263
<PAGE> 407
INFORAMP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(5) LEASES
The Company leases office space (as discussed in Note (4)) and space to
house its Internet access equipment in Chicago. Total future minimum lease
payments under noncancelable lease obligations are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 42
2000........................................................ 42
2001........................................................ 42
2002........................................................ 42
----
Total minimum payments................................. $168
</TABLE>
Rent expense amounted to approximately $4, $43, $58, $28, and $40 for the
years ended December 31, 1996, 1997, and 1998 and the six month periods ended
June 30, 1998 and 1999, respectively, including expenses related to the
nonmonetary transactions discussed at Note (3).
(6) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-264
<PAGE> 408
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Midwest Communications,
Inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' 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 Midwest Communications, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 12. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Birmingham, Alabama
August 20, 1999, except
as to Note 13 which is as of September 9, 1999
F-265
<PAGE> 409
MIDWEST COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 1)........................ $ 8 -- --
Trade receivables net of allowance for doubtful accounts
of $11, $17 and $5 in 1997 and 1998 and June 30, 1999,
respectively........................................... 82 69 47
Prepaid expenses.......................................... 4 12 2
----- ---- ------
Total current assets................................... 94 81 49
Property and equipment, net (notes 1 and 2)................. 298 566 597
Other assets (notes 1 and 2)................................ 1 2 38
Goodwill (notes 1 and 10)................................... -- 2 2
----- ---- ------
Total assets........................................... $ 393 651 686
===== ==== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 163 410 420
Accrued expenses (note 2)................................. 17 42 14
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................ 95 108 90
Current portion of capital lease obligations (note 4)..... 11 94 125
Notes payable to shareholders (note 6).................... -- -- 33
Deferred revenue (note 1)................................. 110 139 145
----- ---- ------
Total current liabilities.............................. 396 793 827
Long-term debt, less current portion (note 3)............... 90 36 1
Notes payable to shareholders (note 6)...................... 33 33 --
Capital lease obligations, less current portion (note 4).... 5 132 155
----- ---- ------
Total liabilities...................................... 524 994 983
</TABLE>
F-266
<PAGE> 410
MIDWEST COMMUNICATIONS, INC.
BALANCE SHEETS (continued)
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Stockholders' deficit (note 5):
Preferred stock, no par value. Authorized 15,000,000
shares, no shares issued and outstanding at December
31, 1997, 1998, and June 30, 1999...................... -- -- --
Common stock, no par value. Authorized 100,000,000 shares,
issued and outstanding 3,746,500 shares at December 31,
1997 and 1998, and 4,702,500 at June 30, 1999.......... -- -- --
Additional paid-in capital................................ 84 84 1,000
Treasury stock, at cost................................... -- (2) (2)
Accumulated deficit....................................... (215) (425) (1,295)
----- ---- ------
Total stockholders' deficit............................ (131) (343) (297)
----- ---- ------
Commitments and contingencies (note 4)
----- ---- ------
Total liabilities and stockholders' deficit............ $ 393 651 686
===== ==== ======
</TABLE>
See accompanying notes to financial statements.
F-267
<PAGE> 411
MIDWEST COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- --------------------------
1996 1997 1998 1998 1999
------ ----- ------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity................ $ 509 933 1,353 646 926
Enhanced services and other.......... 23 38 34 25 10
----- --- ----- ---- -----
Total revenue..................... 532 971 1,387 671 936
Costs and expenses:
Cost of Internet services............ 269 386 734 295 476
Selling, general and
administrative.................... 356 515 572 245 1,198
Depreciation and amortization........ 40 76 143 71 84
----- --- ----- ---- -----
Total costs and expenses.......... 665 977 1,449 611 1,758
----- --- ----- ---- -----
Income (loss) from operations..... (133) (6) (62) 60 (822)
Other income (expenses):
Other income (expenses).............. -- 13 (88) (135) (22)
Interest expense..................... (17) (28) (60) (15) (26)
----- --- ----- ---- -----
Loss before income taxes.......... (150) (21) (210) (90) (870)
Income tax provision (note 7).......... -- -- -- -- --
----- --- ----- ---- -----
Net loss.......................... $(150) (21) (210) (90) (870)
===== === ===== ==== =====
</TABLE>
See accompanying notes to financial statements.
F-268
<PAGE> 412
MIDWEST COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL TREASURY ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL STOCK DEFICIT TOTAL
--------- ------ --------------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... 500 $ 35 -- -- (44) (9)
Common stock issued for
compensation.................. 148 15 -- -- -- 15
Net loss........................ -- -- -- -- (150) (150)
--------- ---- ----- -- ------ ----
Balance at December 31, 1996.... 648 50 -- -- (194) (144)
Common stock issued for
compensation.................. 100 10 -- -- -- 10
Conversion to no par value
stock......................... -- (60) 60 -- -- --
Stock split (5,000 for 1)....... 3,738,862 -- -- -- -- --
Issuance of common stock........ 6,890 -- 24 -- -- 24
Net loss........................ -- -- -- -- (21) (21)
--------- ---- ----- -- ------ ----
Balance at December 31, 1997.... 3,746,500 -- 84 -- (215) (131)
Acquisition of treasury stock,
at cost....................... -- -- -- (2) -- (2)
Net loss........................ -- -- (210) (210)
--------- ---- ----- -- ------ ----
Balance at December 31, 1998.... 3,746,500 -- 84 (2) (425) (343)
Common stock issued for
compensation (unaudited)...... 956,000 -- 916 -- -- 916
Net loss (unaudited)............ -- -- -- -- (870) (870)
--------- ---- ----- -- ------ ----
Balance at June 30, 1999
(unaudited)................... 4,702,500 $ -- 1,000 (2) (1,295) (297)
========= ==== ===== == ====== ====
</TABLE>
See accompanying notes to financial statements.
F-269
<PAGE> 413
MIDWEST COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(150) $ (21) $(210) $(90) $(870)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 40 76 143 71 84
Common stock issued for compensation........... 15 10 -- -- 916
Changes in operating assets and liabilities,
excluding effects of business combinations:
Trade receivables........................... (14) (60) 13 9 22
Prepaid expenses............................ (3) -- (8) 3 10
Other assets................................ -- -- -- -- (36)
Accounts payable............................ 33 86 242 117 10
Accrued expenses............................ 21 (9) 25 20 (28)
Deferred revenue............................ 63 44 29 9 6
----- ----- ----- ---- -----
Net cash provided by operating
activities.............................. 5 126 234 139 114
----- ----- ----- ---- -----
Cash flows from investing activities:
Net cash paid in acquisitions.................... -- -- (7) -- --
Acquisition of property and equipment............ (167) (125) (86) (60) (14)
----- ----- ----- ---- -----
Net cash used in investing activities..... (167) (125) (93) (60) (14)
----- ----- ----- ---- -----
Cash flows from financing activities:
Proceeds from notes payable and current portion
of long-term debt.............................. 191 -- 50 50 --
Repayments of notes payable...................... (20) (22) (124) (39) (44)
Net borrowings on lines of credit................ 5 21 (7) (2) (9)
Repayments of capital lease obligations.......... -- (9) (66) (21) (47)
Proceeds from issuance of common stock, net of
issuance costs................................. -- 2 -- -- --
Acquisition of treasury stock.................... -- -- (2) -- --
----- ----- ----- ---- -----
Net cash provided by (used in) financing
activities.............................. 176 (8) (149) (12) (100)
----- ----- ----- ---- -----
Net increase (decrease) in cash and cash
equivalents............................. 14 (7) (8) 67 --
Beginning of period................................ 1 15 8 8 --
----- ----- ----- ---- -----
End of period...................................... $ 15 8 -- 75 --
===== ===== ===== ==== =====
</TABLE>
F-270
<PAGE> 414
MIDWEST COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (continued)
DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $12,
$27, $51, $14 and $25, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for equipment. These
capital lease obligations resulted in non-cash financing activities aggregating
$0, $25, $276, $276 and $101 for the years ended December 31, 1996, 1997, and
1998, and for the six month periods ended June 30, 1998 and 1999, respectively.
During 1997, several shareholders converted $22 of long-term debt to 4,400
shares of common stock. The conversion increased additional paid-in capital by
$22 as of December 31, 1997.
Non-cash investing activities:
During 1998, the Company acquired the net assets of another internet
service provider. Net cash paid by the Company amounted to $7 and $0 for the
year ended December 31, 1998 and the six month period ended June 30, 1998,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Fair value of assets acquired............................ $ 52 52
Liabilities assumed...................................... (45) (45)
Consideration payable to seller.......................... -- (7)
---- ---
Net cash paid....................................... $ 7 --
==== ===
</TABLE>
See accompanying Notes to Financial Statements.
F-271
<PAGE> 415
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Midwest Communications, Inc. (the "Company") was incorporated on April 12,
1995 to capitalize on the growing demand for Internet access and enhanced
services by consumers and business users through the phased acquisition,
integration, and growth of existing independent Internet service providers in
targeted geographic regions. The goal of the Company is to become the premier
national provider of full service Internet connectivity and enhanced Internet
services, including hosting web-sites. The Company commenced operations in
April, 1995.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses and the
limited history of the need for Internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-272
<PAGE> 416
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1997 and 1998 and June 30, 1999, were approximately $8, $0 and
$0, respectively.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Bulletin ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a ten-year period. Other
intangible assets are amortized using the straight-line method over periods
ranging from three to seven years.
(h) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-273
<PAGE> 417
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
(j) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general, and administrative and
totaled approximately $33, $74, $3, $2 and $1 for the years ended December 31,
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair value of the Company's financial instruments
approximate their carrying value based on their terms and interest rates.
For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, three vendors represented approximately
75% of the Company's total purchases. The Company's reliance on certain vendors
can be shifted to alternative sources of supply for products it sells should
such changes be necessary.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137,
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is
F-274
<PAGE> 418
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $25, $302 and $403,
respectively.............................................. $388 $790 $901
Furniture and fixtures...................................... 12 19 20
Leasehold improvement....................................... 10 10 10
Vehicles.................................................... 11 11 11
---- ---- ----
421 830 942
Less accumulated depreciation and amortization, including
amounts related to capital leases of $5, $49 and $81,
respectively.............................................. 123 264 345
---- ---- ----
Total.................................................. $298 $566 $597
==== ==== ====
</TABLE>
Other Assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deposits.................................................... $-- $1 $37
Organization costs.......................................... 1 1 1
--- -- ---
$ 1 $2 $38
=== == ===
</TABLE>
Accrued Expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Interest.................................................... $ 7 $ 9 $11
Employee commissions and expenses........................... 7 23 2
Other....................................................... 3 10 1
--- --- ---
$17 $42 $14
=== === ===
</TABLE>
F-275
<PAGE> 419
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the following
as of December 31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving lines of credit, bearing interest at rates ranging
from 8.75% to 10.25%, due in 1999......................... $ 18 $ 25 $ 9
Notes payable and long-term debt............................ 167 119 82
---- ---- ---
Less current portion........................................ 95 108 90
---- ---- ---
Long-term debt, less current portion................... $ 90 $ 36 $ 1
==== ==== ===
</TABLE>
Borrowings under lines of credit and notes payable are collateralized by
certain property and equipment and various guarantees by shareholders.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $126 $39
2000........................................................ 115 20
2001........................................................ 33 12
2002........................................................ -- 4
---- ---
Total minimum payments................................. 274 $75
---- ---
Less amount representing interest........................... 48
----
Present value of net minimum lease payments............ 226
Less current portion........................................ 94
----
$132
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 were $22, $36, $50 $22, and $29,
respectively.
F-276
<PAGE> 420
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(5) CAPITAL STOCK
(a) COMMON STOCK
On January 17, 1997, the Company amended its articles of incorporation and
authorized 100,000,000 shares of common stock, each without par value.
(b) PREFERRED STOCK
On January 17, 1997, the Company amended its articles of incorporation
authorized 15,000,000 shares of preferred stock, consisting of three series,
designated respectively Series A, Series B, and Series C. Each series of stock
consists of 5,000,000 shares. As of the date of authorization, the relative
rights and preferences of each series had not been fixed or determined by the
Board of Directors.
(6) RELATED PARTY TRANSACTIONS
The following is a summary of transactions with shareholders.
(a) DUE TO SHAREHOLDERS
Notes payable to shareholders consists of $33 for the years ended December
31, 1997 and 1998 and June 30, 1999. Amounts due to shareholders bear interest
at 9 percent and are payable on April 12, 2000. Interest expense related to
amounts due to shareholders totaled approximately $5, $5 and $3 and $1 and $2
for the years ended December 31, 1996, 1997 and 1998 and for the six-month
periods ended June 30, 1998 and 1999, respectively.
(b) OPERATING LEASE
The Company has entered into an operating lease agreement with a
shareholder for the rental of office space. The lease term will terminate on
October 31, 1999, or earlier with two months notice given by either party to
terminate the lease. Rent expense for the years ended December 31, 1996, 1997
and 1998 and the six-month periods ended June 30, 1998 and 1999 were $6, $12,
$12, $6 and $6, respectively.
F-277
<PAGE> 421
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 15% as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected tax benefit.................................. $(23) $ (3) $(32) $(130)
State income taxes, net of federal benefit............ (7) (1) (11) (44)
Change in valuation allowance......................... 30 4 43 174
---- ---- ---- -----
$ -- $ -- $ -- $ --
==== ==== ==== =====
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998 1999
---- ---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net operating loss carryforward....................... $ 43 $ 49 $ 97 $ 282
Other, net............................................ (4) (6) (10) (12)
---- ---- ---- -----
39 43 87 270
Valuation allowance................................... (39) (43) (87) (270)
---- ---- ---- -----
Net deferred tax asset........................... $ -- $ -- $ -- $ --
==== ==== ==== =====
</TABLE>
At December 31, 1998 and June 30, 1999, the Company has a net operating
loss carryforward for federal income tax purposes of approximately $464 and
$1,348 (unaudited), respectively, which is available to offset future federal
taxable income, if any, through 2019. Due to the uncertainty regarding the
ultimate utilization of the net operating loss carryforward, no tax benefit for
losses has been provided by the Company in 1996, 1997, 1998, and 1999, and a
valuation allowance has been recorded for the entire amount of the deferred tax
asset.
(8) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
F-278
<PAGE> 422
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(9) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS END OF
OF YEAR EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts............... $ 3 $ 1 $-- $ 4
=== === === ===
For the year ended December 31, 1997:
Allowance for doubtful accounts............... $ 4 $ 7 $-- $11
=== === === ===
For the year ended December 31, 1998:
Allowance for doubtful accounts............... $11 $ 9 $ 3 $17
=== === === ===
For the six months ended June 30, 1999:
Allowance for doubtful accounts (unaudited)... $17 $-- $12 $ 5
=== === === ===
</TABLE>
(10) BUSINESS COMBINATION
During 1998, the Company acquired the internet equipment and subscriber
accounts of Axis.Net, Inc. and assumed a note payable. The acquisition was
accounted for under the purchase method. The acquisition agreement requires the
Company to pay Axis.Net, Inc. an amount equal to 40% of collected revenue for a
24 month period beginning in March, 1998. Amounts paid in 1998 totaled $7.
Goodwill of $2 resulted from the transaction and is being amortized
straight-line over ten years. Any future payments will be accounted for as
adjustments to the purchase price in the periods in which such payments are
made. The Pro Forma results of operations for 1998 and 1997, as though the
acquisition had occurred at the beginning of the years, are not materially
different from the historical results of operations.
(11) SUBSEQUENT EVENTS
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
(12) COMMON STOCK COMPENSATION (UNAUDITED)
On May 15, 1999, the Company issued 956,000 shares of common stock to
employees and certain shareholders for past employment and other services.
Accordingly, the Company has recorded compensation expense of $916 in the six
months ended June 30, 1999, which approximated the fair value of the shares
issued.
F-279
<PAGE> 423
MIDWEST COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(13) GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the years ended December 31, 1996, 1997, and 1998 and the six
month period ended June 30, 1999, the Company incurred losses of $150, $21,
$210, and $870, respectively. On November 27, 1998, the Company filed for
Chapter 11 bankruptcy protection. Subsequent to this filing, the Company
obtained financing from one of its shareholders sufficient to satisfy its
creditors. On September 9, 1999 the bankruptcy court dismissed the Chapter 11
proceeding. These factors among others may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time.
As discussed in Note 11 to the financial statements, the Company's
stockholders have entered into an agreement to sell their shares in the Company
to espernet.com. Management believes that this transaction will improve the
Company's operating efficiencies and increase the availability of equity
capital. However, consummation of the transaction is dependent on events beyond
management's control.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional financing,
and ultimately to attain profitability.
F-280
<PAGE> 424
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheet of Alliance Internet
Technologies, L.L.C., as of December 31, 1998, and the related statements of
operations, members' equity, and cash flows for the seven-month 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 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 Alliance Internet
Technologies, L.L.C., as of December 31, 1998, and the results of its operations
and its cash flows for the seven-month period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
August 20, 1999
Minneapolis, Minnesota
F-281
<PAGE> 425
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 33 45
Trade accounts receivable, net of allowance for doubtful
accounts of $7 and $7, respectively.................... 50 91
Other current assets...................................... 15 --
---- ---
Total current assets................................... 98 136
Property and equipment, net................................. 159 197
---- ---
Total assets........................................... $257 333
==== ===
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 56 159
Current portion of notes payable to members............... 58 68
Deferred revenue.......................................... 20 --
Other current liabilities................................. 2 2
---- ---
Total current liabilities.............................. 136 229
Notes payable to members, less current portion.............. 34 --
---- ---
Total liabilities...................................... 170 229
Members' equity:
Capital contributions..................................... 169 169
Deferred compensation..................................... (38) --
Accumulated deficit....................................... (44) (65)
---- ---
Total members' equity.................................. 87 104
---- ---
Total liabilities and members' equity.................. $257 333
==== ===
</TABLE>
See accompanying notes to financial statements.
F-282
<PAGE> 426
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
STATEMENT OF OPERATIONS
SEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
(AMOUNT IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenue..................................................... $461 525
Costs and expenses:
Cost of Internet services................................. 422 446
Selling, general and administrative....................... 76 95
---- ---
Total costs and expenses............................... 498 541
---- ---
Loss from operations................................... (37) (16)
Interest expense............................................ (7) (5)
---- ---
Net loss............................................... $(44) (21)
==== ===
Pro Forma income tax (expense) benefit (unaudited).......... $ -- --
---- ---
Pro Forma net loss (unaudited).............................. $(44) (21)
==== ===
</TABLE>
See accompanying notes to financial statements.
F-283
<PAGE> 427
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
STATEMENT OF MEMBERS' EQUITY
SEVEN-MONTH PERIOD ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS' CAPITAL
----------------
SHARES AMOUNT COMPENSATION DEFICIT TOTAL
------ ------ ------------ ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 1, 1998.................... -- $ -- -- -- --
Capital contribution..................... 800 76 -- -- 76
Deferred compensation related to issuance
of stock.............................. 200 93 (93) -- --
Amortization of deferred compensation.... -- -- 55 -- 55
Net loss................................. -- -- -- (44) (44)
----- ---- --- --- ---
BALANCE AT DECEMBER 31, 1998............... 1,000 169 (38) (44) 87
Amortization of deferred compensation
(unaudited)........................... -- -- 38 -- 38
Net loss (unaudited)..................... -- -- -- (21) (21)
----- ---- --- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)....... 1,000 $169 -- (65) 104
===== ==== === === ===
</TABLE>
See accompanying notes to financial statements.
F-284
<PAGE> 428
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
STATEMENT OF CASH FLOWS
SEVEN-MONTH ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN-MONTHS SIX-MONTHS
PERIOD ENDED PERIOD ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(44) (21)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 27 46
Non-cash compensation expense.......................... 55 38
Changes in operating assets and liabilities:
Accounts receivable.................................. (50) (41)
Other receivables.................................... (15) 15
Accounts payable..................................... 56 104
Deferred revenue..................................... 20 (20)
Other current liabilities............................ 2 (1)
---- ---
Net cash provided by operating activities......... 51 120
---- ---
Cash flows from investing activities:
Acquisition of property and equipment..................... (59) (83)
---- ---
Net cash used in investing activities............. (59) (83)
---- ---
Cash flows from financing activities:
Repayments of notes payable to members.................... (35) (25)
Capital contributions..................................... 76 --
---- ---
Net cash provided by (used in) financing
activities...................................... 41 (25)
---- ---
Net increase in cash.............................. 33 12
Cash -- beginning of period................................. -- 33
---- ---
Cash -- end of period....................................... $ 33 45
==== ===
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 7 5
==== ===
Supplemental disclosure of non-cash investing and financing
activity:
Obligations incurred for the acquisition of equipment..... $127 --
==== ===
</TABLE>
See accompanying notes to financial statements.
F-285
<PAGE> 429
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Alliance Internet Technologies, L.L.C. (the "Company"), a limited liability
company, was formed on May 29, 1998, by DP Consultants, Inc. ("DPC"), Oberlander
Communications Systems, Inc. ("OCS"), Gene Pflederer and Ken Kirchgessner, to
capitalize on the growing demands for Internet access and enhanced services by
consumers and business users in central Illinois regions. Upon formation of the
Company, DPC, OCS, Mr. Pflederer and Mr. Kirchgessner received a forty percent,
a forty percent, a ten percent and a ten percent ownership interest,
respectively. The goal of the Company is to become the premier national provider
of full service Internet connectivity and enhanced Internet services, including
hosting web-sites. The Company commenced operations in June 1, 1998, and
expensed its start-up costs and organization costs as incurred in accordance
with the American Institute of Certified Public Accountants Statement of
Position 98-5, Reporting on the Costs of Start-up Activities.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, members' equity, and cash flows for the six-month
period ended June 30, 1999 and one-month period ended June 30, 1998 are
unaudited. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the financial position and results of operations and cash
flows, have been included in such unaudited financial statements. The results of
operations for the six-month period ended June 30, 1999, are not necessarily
indicative of the results to be expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on an
accelerated basis which approximates the straight-line method over the estimated
useful lives of the related assets, generally ranging from three to seven years.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the assets or the term of the lease, whichever is
shorter.
F-286
<PAGE> 430
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
management believes that there is no impairment of long-lived assets.
(f) INCOME TAXES
Under provisions of the Internal Revenue Code, a limited liability
corporation is not subject to income taxes. Income taxes are the responsibility
of the respective members. Accordingly, no provision has been recorded in the
financial statements.
(g) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and is deferred and amortized to operations for amounts billed relating
to future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from hardware and software sales is recognized upon shipment of the
respective products. Hardware sales revenues and cost of revenues for the
seven-month period ended December 31, 1998 was $24 and $24, respectively.
(h) ADVERTISING EXPENSE
Advertising expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs. The Company expenses
the cost of advertising and promoting its services as incurred. Such costs are
included in selling general and administrative expenses and totaled
approximately $40, $4 and $58 for the seven-month period ended December 31,
1998, for the one-month period ended June 30, 1998, and the six-month period
ended June 30, 1999, respectively.
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. However,
concentrations of credit risk with respect to accounts receivables are limited
due to the large number of customers comprising the Company's customer base and
the relatively minor balances of each individual account. For the seven-month
period ended December 31, 1998, there was no revenue from one individual account
that exceeded 2% of the total revenue. At December 31, 1998, and June 30, 1999,
the fair value of the Company's financial instruments approximate their carrying
value based on their terms and interest rates.
F-287
<PAGE> 431
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ARE UNAUDITED)
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued statement
FASB No. 133, Accounting for Derivative Instruments and Hedging Activities,
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. In June
1999, the Financial Accounting Standards Board issued statement FASB No. 137,
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133, which deferred the effective date to
June 15, 2000. The Company has not yet analyzed the impact of this pronouncement
on its financial statements.
(2) LIQUIDITY
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for Internet access and enhanced services.
The Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
The Operating Agreement of the Company, effective as of May 29, 1998,
defines the responsibilities of its members with respect to additional capital
contributions necessary to meet the operating cash flow needs of the Company. As
additional capital contributions are required by the Company, each member is
required to contribute an amount equal to each members' pro-rata share, the
proportion of each members' interest to total membership interests, of the total
capital contribution required.
F-288
<PAGE> 432
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ARE UNAUDITED)
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Internet access and computer equipment...................... $228 305
Furniture and fixtures...................................... -- 4
Leasehold improvements...................................... -- 2
---- ----
228 311
Less accumulated depreciation............................... (69) (114)
---- ----
Total..................................................... $159 197
==== ====
</TABLE>
(4) NOTES PAYABLE TO MEMBERS
Notes payable to members consists of the following as of December 31, 1998,
and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to DPC, principal and interest payable
monthly, bearing interest at 10%, due June 1,
2000. ............................................... $41 30
Note payable to OCS, principal and interest payable
monthly, bearing interest at 10%, due June 1,
2000. ............................................... 51 38
--- --
92 68
Less current portion................................... 58 68
--- --
Long-term debt, less current portion................. $34 --
=== ==
</TABLE>
Total interest paid to DPC and OCS for the seven-month period ended
December 31, 1998, was $3 and $4, respectively.
(5) OTHER CURRENT ASSETS
The Company and DPC formed an agreement whereby, from time to time, the
Company would purchase certain accounts receivable of DPC at fair value. As of
December 31, 1998, the aggregate amount of outstanding accounts receivable
purchased from DPC was $15. DPC guaranteed the full payment of accounts
receivable to the Company.
F-289
<PAGE> 433
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ARE UNAUDITED)
(6) RELATED PARTY TRANSACTIONS
At inception of the Company, the Company purchased from DPC and OCS
Internet property and equipment for $83 and $70, respectively.
Included in accounts receivable were amounts receivable from DPC and OCS of
$2 and $1, respectively, at December 31, 1998, for shared advertising and
Internet services.
Included in accounts payable were amounts payable to DPC and OCS of $19 and
$11, respectively, at December 31, 1998, mostly for labor subcontracts and
collection of receivables.
Included in revenues were amounts received during seven months ended
December 31, 1998, from DPC and OCS for $7 each for Internet services.
Included in Internet services operating costs were amounts paid during
seven months ended December 31, 1998, to DPC and OCS for $68 and $73,
respectively, primarily for labor subcontracts.
Included in selling, general and administrative expenses were amounts paid
during seven-months ended December 31, 1998, to DPC and OCS of $8 and $5,
respectively, for office rent and office supplies.
(7) STOCK BASED COMPENSATION
The Company accounts for its employee stock based compensation using the
intrinsic value method. At inception, stock with a fair value of $93 was issued
to two officers of the Company for services to be rendered over a twelve-month
period. As of December 31, 1998, deferred compensation of $38 was reflected as a
contra-equity balance. For the seven-month period ended December 31, 1998, the
Company recorded $55 of compensation expense. For the six-month period ended
June 30, 1999, the Company recorded $38 of compensation expense.
(8) BARTER
The Company entered into certain barter transactions in which the Company
exchanges facility rental charges for providing internet access to certain
communities. Under these arrangements, the Company incurs no expense for the
facilities rental. However, when customers wish to access the internet using the
local point of presence, they are charged normal subscription rates and revenues
are recognized over the subscription term, which is generally month-to-month.
(9) COMMITMENTS
The Company is a party to various non-cancelable telecommunication service
agreements, with terms ranging from twelve months to sixty months. The Company
is also a party to various cancelable telecommunications service agreements with
terms of one month. For the seven-month period ended December 31, 1998 the
Company incurred total costs related to telecommunications service agreements of
$190.
F-290
<PAGE> 434
ALLIANCE INTERNET TECHNOLOGIES, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1999 ARE UNAUDITED)
Minimum commitments under non-cancelable network service agreements are as
follows for the years ended December 31. Commitments arising under
non-cancelable network service agreements entered into from December 31, 1998
through June 30, 1999 are included in the amounts shown below.
<TABLE>
<S> <C>
1999........................................................ $ 308
2000........................................................ 345
2001........................................................ 273
2002........................................................ 138
2003 and thereafter......................................... 102
------
$1,166
======
</TABLE>
(10) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc, ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
(11) PROFORMA INCOME TAXES (UNAUDITED)
The unaudited Pro Forma income tax information included in the statement of
operations is presented in accordance with SFAS No. 109, Accounting for Income
Taxes, as if the Company has been subject to federal and state income taxes for
the seven-month period ended December 31, 1998 and the six-month period ended
June 30, 1999. The Pro Forma income tax information assumed a cash-basis C-Corp
with a combined federal and state effective tax rate of 39 percent and resulted
in no Pro Forma income tax expense or benefit for the seven-month period ended
December 31, 1998 and the six-month period ended June 30, 1999, respectively,
after valuation allowance and utilization of the net operating loss
carryforward.
F-291
<PAGE> 435
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of ComQuest Networks, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
stockholder's equity, and cash flows for the period August 25, 1997 (inception)
to December 31, 1997 and 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 financial position of ComQuest Networks, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period August 25, 1997 (inception) to December 31, 1997 and the
year ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Charlotte, North Carolina
July 30, 1999
F-292
<PAGE> 436
COMQUEST NETWORKS, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3 17 23
Trade receivables......................................... 2 9 11
Inventories............................................... -- 2 2
--- -- ---
Total current assets................................... 5 28 36
Equipment and furniture, net (note 3)....................... 10 41 112
Other assets:
Intangible asset, net of accumulated amortization of $1 as
of June 30, 1999....................................... -- 5 5
--- -- ---
Total assets........................................... $15 74 153
=== == ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $-- 7 14
Accrued expenses.......................................... -- 2 3
Deferred revenue.......................................... -- 3 4
Due to stockholders (note 4).............................. 14 -- 2
--- -- ---
Total liabilities...................................... 14 12 23
Stockholders' equity:
Common stock, no par value, authorized 1,000 shares,
issued and outstanding 1,000 shares as of December 31,
1997 and 1998 and June 30, 1999........................ 1 1 1
Retained earnings......................................... -- 61 129
--- -- ---
Total stockholders' equity............................. 1 62 130
--- -- ---
Total liabilities and stockholders' equity............. $15 74 153
=== == ===
</TABLE>
See accompanying notes to financial statements.
F-293
<PAGE> 437
COMQUEST NETWORKS, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 25, 1997 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
--------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity............... $19 190 49 218
Enhanced services and other......... 4 24 25 14
--- --- -- ---
Total revenue.................... 23 214 74 232
Costs and expenses:
Cost of Internet services........... 13 72 29 64
Selling, general and
administrative................... 5 67 23 87
Depreciation and amortization....... 5 14 3 13
--- --- -- ---
Total costs and expenses......... 23 153 55 164
--- --- -- ---
Net income....................... $-- 61 19 68
=== === == ===
Unaudited:
Pro Forma income taxes (note 5)
(unaudited)...................... $-- 13 -- 16
=== === == ===
Pro Forma net income (unaudited).... $-- 48 19 52
=== === == ===
</TABLE>
See accompanying notes to financial statements.
F-294
<PAGE> 438
COMQUEST NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ -------- -----
<S> <C> <C> <C>
BALANCE AT AUGUST 25, 1997.................................. $-- -- --
Issuance of 1,000 shares of common stock.................... 1 -- 1
Net income.................................................. -- -- --
--- --- ---
BALANCE AT DECEMBER 31, 1997................................ 1 -- 1
Net income.................................................. -- 61 61
--- --- ---
BALANCE AT DECEMBER 31, 1998................................ 1 61 62
Net income (unaudited)...................................... -- 68 68
--- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)........................ $ 1 129 130
=== === ===
</TABLE>
See accompanying notes to financial statements.
F-295
<PAGE> 439
COMQUEST NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 25, 1997 SIX MONTHS
(INCEPTION) TO YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
--------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ -- 61 19 68
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation of equipment and
furniture......................... 5 14 3 13
Amortization of intangible assets... -- 1 -- --
Increase in trade accounts
receivable........................ (2) (7) (5) (2)
Increase in inventories............. -- (2) -- --
Increase in trade accounts
payable........................... -- 7 5 7
Increase in deferred revenue........ -- 3 1 1
Increase in accrued expenses........ -- 2 -- 1
---- --- --- ---
Net cash provided by operating
activities..................... 3 79 23 88
---- --- --- ---
Cash flows from investing activities:
Purchase of equipment and furniture.... (15) (45) (10) (84)
Increase in intangible assets.......... -- (6) -- --
---- --- --- ---
Net cash used in investing
activities..................... (15) (51) (10) (84)
---- --- --- ---
Cash flows from financing activities:
Proceeds from stockholder loans........ 14 -- -- 21
Payments of stockholder loans.......... -- (14) (6) (19)
Proceeds from issuance of common
stock............................... 1 -- -- --
---- --- --- ---
Net cash (used in) provided by
financing activities........... 15 (14) (6) 2
---- --- --- ---
Net increase in cash and cash
equivalents............................ 3 14 7 6
Cash and cash equivalents at beginning of
period................................. -- 3 3 17
---- --- --- ---
Cash and cash equivalents at end of
period................................. $ 3 17 10 23
==== === === ===
</TABLE>
See accompanying notes to financial statements.
F-296
<PAGE> 440
COMQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
ComQuest Networks, Inc. (the "Company") is a locally owned and operated
internet service provider located in Logansport, Indiana. The Company was
incorporated on August 25, 1997 and provides dial-up Internet access for home or
business.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history and the limited history of the need for
Internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
Internet services, the continued acceptance of the internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity, and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents.
F-297
<PAGE> 441
COMQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) INVENTORIES
Inventories are stated at the lower of historical cost or market.
Inventories consist primarily of resale computer equipment.
(f) EQUIPMENT AND FURNITURE
Equipment and furniture are stated at cost. Depreciation is calculated
using an accelerated method over the estimated useful lives of the related
assets, generally ranging from five to seven years.
(g) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets to Be Disposed Of. SFAS No.
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the discounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. In addition, the recoverability of
intangible assets is further evaluated under the provisions of Accounting
Principles Board Opinion No. 17, Intangible Assets, based upon estimated fair
value. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
(h) INTANGIBLE ASSETS
Intangible assets are carried at cost less accumulated amortization and are
amortized on a straight line basis over the estimated useful life. Intangible
assets consists of purchased customer service agreements and are amortized over
fifteen years.
(i) INCOME TAXES
The Company has elected to be treated as an S-Corp under the provisions of
the Internal Revenue Code. Under these provisions, the Company is not liable for
federal or state income taxes. Instead, the shareholders are liable for
individual federal and state income taxes on their respective shares of the
Company's taxable income. Accordingly, there is no provision for income taxes
recorded in the Company's financial statements.
The unaudited proforma income tax information included in the statements of
operations and Note 5 is presented in accordance with SFAS No. 109, Accounting
for Income Taxes, as if the Company had been subject to Federal and state income
taxes for the period from August 25, 1997 (inception) to December 31, 1997 and
for the year ended December 31, 1998.
F-298
<PAGE> 442
COMQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
SFAS No. 109 requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(j) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Activation fee revenue is recognized at the point that the
customer has the ability to obtain Internet services from the Company.
(k) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
and totaled approximately $0 for the period August 25, 1997 (inception) to
December 31, 1997 and $13 for the year ending December 31, 1998.
(l) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998, the fair value of the Company's financial instruments approximate their
carrying value based on their terms and interest rates.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
F-299
<PAGE> 443
COMQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
2000. The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) RELATED PARTY TRANSACTIONS
The Company rents its office space on a month-to-month basis from SPI
Group, which is owned and operated by two of the Company's stockholders. Rent
expense for 1997 and 1998 was $0 and $3 respectively.
(3) EQUIPMENT AND FURNITURE
Equipment and furniture consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment..................................... $15 56 137
Furniture.............................................. -- 4 7
--- --- ---
15 60 144
Less accumulated depreciation.......................... (5) (19) (32)
--- --- ---
$10 41 112
=== === ===
</TABLE>
(4) NOTES PAYABLE TO STOCKHOLDERS
Loans totaling $14 were granted to the Company during 1997 by the Company's
stockholders. These loans, which were repaid in 1998, did not contain interest
terms and were effectively secured by the stockholders' underlying interests in
the Company.
Subsequent to December 31, 1998, additional loans were granted to the
Company by the Company's stockholders. These loans, which are evidenced by
Promissory Notes, include normal commercial covenants and are secured by the
stockholders' underlying interests in the Company.
(5) INCOME TAXES (UNAUDITED)
The following displays the Pro Forma income tax effects as if the Company
had been treated as a taxable Corporation for the respective periods.
F-300
<PAGE> 444
COMQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Proforma income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Current:
Federal.................................................. $-- 9 11
State and local.......................................... -- 5 6
-- -- --
Total current............................................ -- 14 17
-- -- --
Deferred:
Federal.................................................. -- (1) (1)
State and local.......................................... -- -- --
-- -- --
Total deferred........................................... -- (1) (1)
-- -- --
Total income tax expense................................... $-- 13 16
== == ==
</TABLE>
A reconciliation of proforma income taxes computed using the statutory
rates to income tax expense follows:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Statutory income tax rate................................. 15% 25% 25%
Income taxes at statutory tax rate........................ $-- 15 17
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal income tax
benefit.............................................. -- 3 4
Benefit of lower tax bracket............................ -- (5) (5)
--- -- --
Income tax expense........................................ $-- 13 16
=== == ==
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the proforma deferred tax assets and deferred tax liabilities at
December 31, 1997, December 31, 1998 and June 30, 1999 are presented below:
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Deferred tax assets:
Revenue included in income for income tax purposes but
deferred for financial statement purposes............. $-- 1 2
-- -- --
</TABLE>
F-301
<PAGE> 445
COMQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Total gross deferred tax assets....................... -- 1 2
Less valuation allowance.............................. -- -- --
-- -- --
Net deferred tax assets............................... -- 1 2
-- -- --
Deferred tax liabilities:
Total gross deferred tax liabilities.................. -- -- --
-- -- --
Total net deferred tax (liabilities) assets........... $-- 1 2
== == ==
</TABLE>
(6) SUBSEQUENT EVENTS (UNAUDITED)
During 1999, one of the Company's stockholders acquired all of the shares
previously held by two other stockholders.
The Company's owner has entered into an agreement whereby he will sell his
ownership in the Company to espernet.com, inc. ("espernet.com"). The Company's
owner will exchange his ownership in the Company for cash and shares of common
stock of espernet.com concurrent with the consummation of the initial public
offering of the common stock of espernet.com. Upon consummation of the
agreement, espernet.com will become the sole owner of the Company, and the
Company will be converted to a C-Corp.
F-302
<PAGE> 446
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Fairnet, Inc. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the years ended December
31, 1998 and 1997 and the seven-month period from June 1, 1996 (inception) to
December 31, 1996. 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 Fairnet, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 and the seven-month period from June 1,
1996 (inception) to December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
St. Louis, Missouri
August 13, 1999
F-303
<PAGE> 447
FAIRNET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3 3 6
Trade receivables......................................... 12 24 28
Due from affiliate........................................ -- -- 10
---- --- ---
Total current assets................................... 15 27 44
Property and equipment, net................................. 33 104 113
---- --- ---
Total assets........................................... $ 48 131 157
==== === ===
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 4 17 46
Accrued payroll expenses.................................. 6 18 13
Due to affiliate.......................................... 12 13 --
Current portion of long-term debt (note 3)................ -- 5 5
Current portion of capital lease obligations (note 4)..... -- 25 26
Deferred revenue.......................................... 31 42 50
---- --- ---
Total current liabilities.............................. 53 120 140
Long-term debt, less current portion (note 3)............... -- 13 10
Capital lease obligations, less current portion (note 4).... -- 36 41
---- --- ---
Total liabilities...................................... 53 169 191
---- --- ---
Stockholders' deficit (note 5):
Common stock, no par value, stated value $76; authorized
1,000 shares, issued and outstanding 100 shares........ 8 8 8
Additional paid-in capital................................ -- -- 43
Accumulated deficit....................................... (13) (46) (85)
---- --- ---
Total stockholders' deficit............................ (5) (38) (34)
---- --- ---
Total liabilities and stockholders' deficit............ $ 48 131 157
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-304
<PAGE> 448
FAIRNET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD FROM
JUNE 1, 1996 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.............. $ 6 91 198 84 179
Enhanced services and
other........................... 2 3 8 5 7
---- -- --- -- ---
Total revenue................... 8 94 206 89 186
---- -- --- -- ---
Costs and expenses:
Cost of Internet services.......... 8 51 114 48 128
Selling, general and
administrative.................. 10 37 105 27 71
Depreciation....................... 2 7 17 5 23
---- -- --- -- ---
Total costs and expenses........ 20 95 236 80 222
---- -- --- -- ---
Income (loss) from operations... (12) (1) (30) 9 (36)
Interest expense..................... -- -- (3) -- (3)
---- -- --- -- ---
Income (loss) before income tax
provision..................... (12) (1) (33) 9 (39)
Income tax (expense) benefit......... -- -- -- -- --
---- -- --- -- ---
Net income (loss)............... $(12) (1) (33) 9 (39)
==== == === == ===
</TABLE>
See accompanying notes to financial statements.
F-305
<PAGE> 449
FAIRNET, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT JUNE 1, 1996............. -- $-- -- -- --
Issuance of common stock for cash... 100 8 -- -- 8
Net loss............................ -- -- -- (12) (12)
--- --- -- --- ---
BALANCE AT DECEMBER 31, 1996........ 100 8 -- (12) (4)
Net loss............................ -- -- -- (1) (1)
--- --- -- --- ---
BALANCE AT DECEMBER 31, 1997........ 100 8 -- (13) (5)
Net loss............................ -- -- -- (33) (33)
--- --- -- --- ---
BALANCE AT DECEMBER 31, 1998........ 100 8 -- (46) (38)
Net loss (unaudited)................ -- -- -- (39) (39)
Additional paid-in capital
(unaudited)....................... -- -- 43 -- 43
--- --- -- --- ---
BALANCE AT JUNE 30, 1999
(unaudited)....................... 100 $ 8 43 (85) (34)
=== === == === ===
</TABLE>
See accompanying notes to financial statements.
F-306
<PAGE> 450
FAIRNET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD FROM
JUNE 1, 1996 YEAR ENDED SIX MONTHS ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------- -------------------------
1996 1997 1998 1998 1999
-------------- ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $(12) (1) (33) 9 (39)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 2 7 17 5 23
Deferred revenue................... 17 14 11 (8) 8
Changes in operating assets and
liabilities:
Trade receivables................ (2) (10) (12) -- (4)
Accounts payable................. 2 2 13 2 29
Accrued payroll expenses......... 1 5 12 4 (5)
---- --- --- --- ---
Net cash provided by operating
activities.................. 8 17 8 12 12
---- --- --- --- ---
Cash flows from investing activities --
acquisition of equipment and leasehold
improvements.......................... (24) (18) (19) (10) (11)
---- --- --- --- ---
Cash flows from financing activities:
Proceeds from notes payable........... -- -- 19 -- --
Repayments of notes payable........... -- -- (1) -- (3)
Repayments of capital lease
obligations........................ -- -- (8) -- (15)
Proceeds from (payments to)
affiliate.......................... 11 1 1 (4) (23)
Additional paid-in capital............ -- -- -- -- 43
Proceeds from issuance of common
stock.............................. 8 -- -- -- --
---- --- --- --- ---
Net cash provided by (used in)
financing activities........ 19 1 11 (4) 2
---- --- --- --- ---
Net increase (decrease) in
cash and cash equivalents... 3 -- -- (2) 3
Cash and cash equivalents:
Beginning period...................... -- 3 3 3 3
---- --- --- --- ---
End of period......................... $ 3 3 3 1 6
==== === === === ===
Supplemental disclosure of cash flow information:
During the six-month period June 30, 1999, the Company paid approximately $1 for interest
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These capital lease
obligations resulted in non-cash financing activities aggregating $69 and $21 for the year
ended December 31, 1998 and the six months ended June 30, 1999, respectively.
</TABLE>
See accompanying notes to financial statements.
F-307
<PAGE> 451
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS
SEVEN-MONTH PERIOD FROM JUNE 1, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND YEARS
ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Fairnet, Inc. (the "Company") was incorporated in 1996 to provide Internet
service to areas of Northwest Indiana that were either not being served or
underserved by other Internet service providers. The main objectives of the
Company are growth and adding POPs (points of presence) to additional areas
adjoining the existing Company service areas. The Company provides full service
internet connectivity and enhanced internet services.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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-308
<PAGE> 452
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows estimated to be generated by those assets are less than the assets'
carrying amount. If such assets are impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying value or fair value, less costs to sell.
(f) INCOME TAXES
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set-up fees are recognized upon
completion of the services.
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising, and other general sales and marketing costs. The Company expenses
the cost of advertising and promoting its services as incurred. Such costs are
included in sales and marketing and totaled approximately $2, $1, and $2 and $1
and $1 for the seven-month period ended December 31, 1996, the years ended
December 31, 1997 and 1998, and the six-month periods ended June 30, 1998 and
1999, respectively.
F-309
<PAGE> 453
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, stated at
cost consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment, including amounts
related to capital leases of $-0-, $69, and $90,
respectively.............................................. $42 130 162
Less accumulated depreciation and amortization, including
amounts related to capital leases of $-0-, $7, and $23,
respectively.............................................. 9 26 49
--- --- ---
Total.................................................. $33 104 113
=== === ===
</TABLE>
F-310
<PAGE> 454
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) DEBT
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured notes payable, bearing interest at 9%, payable in
equal monthly installments through 2002................... $-- 18 15
Less current portion........................................ -- 5 5
--- -- --
Long-term debt, less current portion................... $-- 13 10
=== == ==
</TABLE>
The aggregate estimated amounts of long-term debt maturing after December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 5
2000........................................................ 5
2001........................................................ 5
2002........................................................ 3
2003........................................................ --
---
$18
===
</TABLE>
(4) LEASES
The Company leases certain computer and office equipment under capital
leases and noncancelable operating leases, expiring at various dates through
2002.
F-311
<PAGE> 455
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $30 118
2000........................................................ 29 124
2001........................................................ 9 111
2002........................................................ -- 5
2003........................................................ -- --
--- ---
Total minimum payments................................. 68 358
===
Less amount representing interest........................... 7
---
Present value of net minimum lease payment............. 61
Less current portion........................................ 25
---
$36
===
</TABLE>
Rent expense for the seven-month period ended December 31, 1996, the years
ended December 31, 1997 and 1998, and the six-month periods ended June 30, 1998
and 1999 were $1, $1, $1, and $1, $3, respectively. This rent expense was paid
to a related party with common ownership and control.
(5) COMMON STOCK
The Company has authorized 1,000 common stock shares with no par value. The
Company has issued and outstanding 100 shares at a stated value of $76 per
share.
(6) RELATED-PARTY TRANSACTIONS
In addition to the rent expenses discussed in note 4, the Company has an
amount due to (from) a related party with common ownership and control. These
advances are used by the Company's management to provide operating funds when
needed for the Company to reduce financial institution borrowings to a minimum.
Also, the stockholders of the Company contributed additional paid-in capital of
$43 during the six-month period ended June 30, 1999.
F-312
<PAGE> 456
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) INCOME TAXES
The Company has generated net operating losses since inception.
Accordingly, no income tax expense or benefit has been recognized. Income tax
(expense) benefit differs from the amounts that would result from applying the
federal statutory rate of 15% as follows:
<TABLE>
<CAPTION>
SEVEN-MONTH
PERIOD FROM SIX MONTHS
JUNE 1, 1996 YEAR ENDED ENDED
(INCEPTION) TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------- ---------------
1996 1997 1998 1998 1999
-------------- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax benefit (expense)............ $ 2 -- 5 (1) 6
State income taxes, net of federal
benefit................................. 1 -- 2 -- 2
Change in valuation allowance............. (3) -- (7) 1 (8)
--- -- -- -- --
$-- -- -- -- --
=== == == == ==
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $-- 3 --
Deferred revenue.......................................... 6 9 11
Other, net................................................ -- -- 13
--- --- ---
6 12 24
Less valuation allowance.................................. (3) (10) (18)
--- --- ---
Total deferred tax assets.............................. 3 2 6
Deferred tax liabilities -- property and equipment.......... (3) (2) (6)
--- --- ---
Net deferred tax position.............................. $-- -- --
=== === ===
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997 was
$3. The net change in the total valuation allowance for the years ended December
31, 1997 and 1998 and the six-month unaudited period ended June 30, 1999 was $0,
$7, and $8, respectively.
F-313
<PAGE> 457
FAIRNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(8) CONTINUED OPERATIONS AND LIQUIDITY
The Company has experienced losses from operations since inception,
including a loss of approximately $33 in 1998. Accordingly, the three
stockholders of the Company that constitute 100% of the ownership of the Company
have agreed to fund operations and capital expenditures through August 1, 2000,
if so required.
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-314
<PAGE> 458
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Wisconsin Internet, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
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 Wisconsin Internet, 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
Chicago, Illinois
August 13, 1999
F-315
<PAGE> 459
WISCONSIN INTERNET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 9 38 77
Receivables:
Trade, net of allowance for doubtful accounts of $3, $4
and $4 at December 31, 1997 and 1998 and June 30,
1999, respectively.................................... 27 46 66
Related party notes.................................... 4 -- --
Other.................................................. -- 3 --
Current deferred tax asset, net........................... 34 28 --
Prepaid expenses and other................................ -- 3 15
---- --- ---
Total current assets................................. 74 118 158
Property and equipment, net................................. 82 145 204
---- --- ---
Total assets......................................... $156 263 362
==== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 2 2 2
Taxes payable............................................. 2 -- --
Accrued expenses.......................................... 13 16 12
Line of credit............................................ -- -- 50
Current portion of note payable to stockholder............ 4 5 --
Capital lease obligations................................. 5 -- --
Deferred revenue.......................................... 101 200 243
---- --- ---
Total current liabilities............................ 127 223 307
Noncurrent deferred tax liability, net...................... 9 12 1
Note payable to stockholder, less current portion........... 6 -- --
---- --- ---
Total liabilities.................................... 142 235 308
Stockholders' equity (deficit):
Common stock, no par value. Authorized 9,000 shares,
issued and outstanding 2,000 shares.................... -- -- --
Additional paid-in capital................................ 60 60 60
Retained earnings/accumulated deficit..................... (46) (32) (6)
---- --- ---
Total stockholder's equity (deficit)................. 14 28 54
---- --- ---
Total liabilities and stockholders' equity
(deficit)........................................... $156 263 362
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-316
<PAGE> 460
WISCONSIN INTERNET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
------------------------ -------------------------
1996 1997 1998 1998 1999
------- ------ ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.................... $ 97 355 602 274 414
------- ------ ----- ----- -----
Total revenue.............................. 97 355 602 274 414
Costs and expenses:
Cost of Internet services................ 90 279 407 185 274
Selling, general and administrative,
including $0, $33, $36, $18 and $28,
respectively, from a related party.... 22 87 121 55 55
Depreciation and amortization............ 8 15 37 15 43
------- ------ ----- ----- -----
Total costs and expenses................... 120 381 565 255 372
------- ------ ----- ----- -----
Income (loss) from operations.............. (23) (26) 37 19 42
Other income (expenses):
Interest income.......................... -- -- -- -- 1
Loss on disposal of fixed assets......... -- (4) (10) -- --
Interest expense......................... (4) (6) (4) (3) --
------- ------ ----- ----- -----
Income (loss) before income taxes.......... (27) (36) 23 16 43
Income tax benefit (expense)............... 14 9 (9) (6) (17)
------- ------ ----- ----- -----
Net income (loss).......................... $ (13) (27) 14 10 26
======= ====== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-317
<PAGE> 461
WISCONSIN INTERNET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995................. 1,000 $-- -- (6) (6)
Net loss..................................... -- -- -- (13) (13)
----- -- -- --- ---
BALANCE AT DECEMBER 31, 1996................. 1,000 -- -- (19) (19)
Issuance of common stock in exchange for cash
and equipment.............................. 1,000 -- 60 -- 60
Net loss..................................... -- -- -- (27) (27)
----- -- -- --- ---
BALANCE AT DECEMBER 31, 1997................. 2,000 -- 60 (46) 14
Net income................................... 14 14
----- -- -- --- ---
BALANCE AT DECEMBER 31, 1998................. 2,000 -- 60 (32) 28
Net income (unaudited)....................... 26 26
----- -- -- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)......... 2,000 $-- 60 (6) 54
===== == == === ===
</TABLE>
See accompanying notes to financial statements.
F-318
<PAGE> 462
WISCONSIN INTERNET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(13) (27) 14 10 26
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 8 15 37 15 43
Deferred income taxes.................................. (14) (11) 9 13 17
Changes in assets and liabilities:
Receivables.......................................... (27) -- (19) (20) (17)
Prepaid expenses and other current assets............ (3) 3 (6) -- (12)
Accounts payable..................................... 19 (19) -- -- --
Accrued expenses..................................... -- 13 3 (6) (4)
Income taxes payable................................. -- 2 (2) (2) --
Deferred revenue..................................... 64 37 99 77 43
---- --- ---- --- ----
Net cash provided by operating activities................... 34 13 135 87 96
---- --- ---- --- ----
Cash flows from investing activities:
Capital expenditures...................................... (14) (60) (110) (90) (102)
Other..................................................... 1 (5) 14 4 --
---- --- ---- --- ----
Net cash used in investing activities....................... (13) (65) (96) (86) (102)
---- --- ---- --- ----
Cash flows from financing activities:
Proceeds from lines of credit and note payable............ -- 35 48 48 50
Repayments of note payable................................ (17) (29) (53) (14) (5)
Repayments of capital lease obligations................... (4) (5) (5) (3) --
Proceeds from issuance of common stock.................... -- 59 -- -- --
---- --- ---- --- ----
Net cash provided by (used in) financing activities......... (21) 60 (10) 31 45
---- --- ---- --- ----
Net change in cash.......................................... -- 8 29 32 39
Cash at beginning of period................................. 1 1 9 9 38
---- --- ---- --- ----
Cash at end of period....................................... $ 1 9 38 41 77
==== === ==== === ====
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 4 4 4 3 --
Income taxes paid......................................... -- -- 1 -- --
Supplemental disclosures of noncash items:
Equipment donated......................................... -- 1 -- -- --
==== === ==== === ====
</TABLE>
See accompanying notes to financial statements.
F-319
<PAGE> 463
WISCONSIN INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Wisconsin Internet, Inc. (the "Company") was incorporated on June 1, 1995
to capitalize on the growing demand for Internet access and enhanced services by
consumers and business users. The goal of the Company is to become the premier
provider of full service Internet connectivity and enhanced Internet services,
including hosting web-sites in southeastern Wisconsin. The Company commenced
operations in June of 1995.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity (deficit), and cash flows for
the six months ended June 30, 1999 and 1998 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five
F-320
<PAGE> 464
WISCONSIN INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
years. Property and equipment under capital leases are stated at the present
value of minimum lease payments and are amortized using the straight-line method
over the estimated useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell. The Company has determined that as of December 31, 1998, there has been no
impairment in the carrying value of the long-lived assets.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Since inception, the Company had
historically filed its federal and state income tax returns using the cash basis
method of accounting. During 1998, the Company elected to file its federal and
state income tax returns using the accrual method of accounting.
(g) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Domain registration revenues are recognized as billed in the
period under contract. Domain revenues were insignificant to the Company's total
revenue for the years ended December 31, 1996, 1997 and 1998 and the six month
periods ended June 30, 1998 and 1999.
(h) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
At December 31, 1997 and 1998 and June 30, 1999, the fair value of the
Company's accounts receivable, accounts payable, and accrued expenses
approximate their carrying value based on short term nature of these financial
instruments.
For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, three vendors represented approximately
80% of the Company's total
F-321
<PAGE> 465
WISCONSIN INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
purchases. The Company's reliance on certain vendors can be shifted to
alternative sources of supply for products it sells should such changes be
necessary.
(2) PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following as of December 31,
1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $12 as of
December 31, 1997 and 1998.......................... $ 96 $186 $286
Furniture and fixtures................................ 9 11 11
---- ---- ----
105 197 297
Less accumulated depreciation and amortization,
including amounts related to capital leases of $6,
$8 and $9, respectively............................. 23 52 93
---- ---- ----
Total............................................ $ 82 $145 $204
==== ==== ====
</TABLE>
(3) DEBT
Lines of credit and note payable consists of the following as of December
31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving line of credit, bearing interest at 8.5%, due
December, 1999....................................... $-- $-- $50
Other.................................................. 10 5 --
-- -- ---
10 5 50
Less current portion................................... 4 5 50
-- -- ---
Long-term debt, less current portion................. $6 $-- $--
== == ===
</TABLE>
On January 24, 1997, the Company issued a $13 promissory note to a
stockholder (as discussed in Note (8)). The note bears interest at a rate of
8.5% per annum and is payable in 36 equal installments commencing on February
24, 1997. The interest expense related to this note
F-322
<PAGE> 466
WISCONSIN INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
amounted to $1 in both 1997 and 1998. The note is personally guaranteed by
another stockholder of the Company.
At December 31, 1998, the Company maintained a $100 revolving line of
credit bearing interest at a fixed rate of 8.5% per annum. The line of credit is
secured by substantially all of the Company's assets. No amount was outstanding
under this line of credit as of December 31, 1998, and a balance $50 was
outstanding as of June 30, 1999. The outstanding balance is due in full with
accrued interest on December 3, 1999.
(4) COMMITMENTS AND CONTINGENCIES
The Company leases certain office space and usage and access rights to
telecommunication wires under operating leases, expiring at various dates
through 2002. The telecommunication wire leases are cancelable, although a
penalty will be incurred if the leases are terminated early. The future minimum
lease payments indicated below do not include costs such as property taxes,
maintenance, and insurance.
Total future minimum annual lease payments under the operating leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999........................................................ $105
2000........................................................ 25
2001........................................................ 15
2002........................................................ 1
2003........................................................ --
----
Total minimum payments................................. 146
</TABLE>
During 1997 and 1998, the Company leased its corporate office space from
M&H Property, a related party to the Company (as discussed in Note (8)). Rent
expense for the years ended December 31, 1996, 1997 and 1998 and the six month
periods ended June 30, 1998 and 1999 were $6, $33, $36, $18 and $28,
respectively.
(5) CAPITAL STOCK
As of December 31, 1996, the Company had issued 1,000 shares of common
stock to its sole stockholder for no consideration. On January 24, 1997, an
individual purchased 1,000 shares of common stock for $59 in cash and $1 in
donated equipment. The equipment was recorded at its fair market value at the
time of donation.
F-323
<PAGE> 467
WISCONSIN INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(6) EMPLOYEE BENEFIT PLAN
In October 1998, the Company established a SIMPLE Plan for all full time
employees of the Company. The Company may make discretionary contributions to
the Plan on behalf of employees that meet certain contribution eligibility
requirements defined under the terms of the Plan. The Company elected to make a
contribution of $3 for the year ended December 31, 1998. The contribution was
properly accrued at December 31, 1998, and was subsequently paid during 1999.
(7) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
For the year ended December 31, 1996
Federal............................................. $-- $(11) $(11)
State............................................... -- (3) (3)
--- ---- ----
-- (14) (14)
=== ==== ====
For the year ended December 31, 1997
Federal............................................. 2 $ (6) (4)
State............................................... -- (5) (5)
--- ---- ----
2 (11) (9)
=== ==== ====
For the year ended December 31, 1998
Federal............................................. -- 7 7
State............................................... -- 2 2
--- ---- ----
$-- $ 9 $ 9
=== ==== ====
</TABLE>
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected tax benefit........................................ $ (9) $(8) $7
State income taxes, net of federal benefit.................. (2) (3) 2
Other....................................................... (3) 2 --
Current year impact of accounting method change and
differences in book income................................ -- -- --
---- --- --
$(14) $(9) $9
==== === ==
</TABLE>
F-324
<PAGE> 468
WISCONSIN INTERNET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Accrual to cash basis adjustment............................ $34 $28
--- ---
Gross deferred tax assets................................. 34 28
Depreciation................................................ 9 12
--- ---
Gross deferred tax liability.............................. 9 12
--- ---
Net deferred tax asset (liability)........................ $25 $16
=== ===
</TABLE>
Since inception, the Company had historically filed its federal and state
income tax returns using the cash basis method of accounting. During 1998, the
Company elected to file its federal and state income tax returns using the
accrual method of accounting. At December 31, 1997, the Company did not provide
a valuation allowance related to its deferred tax assets. Based upon
management's assessment, it was more likely than not that the deferred tax
assets would be realized upon election of the accrual method accounting for tax
purposes during 1998.
(8) RELATED PARTY TRANSACTIONS
On January 24, 1997, the Company issued a $13 promissory note to a
stockholder. The note bears interest at a rate of 8.5% per annum and is payable
in 36 equal installments commencing on February 24, 1997. The interest expense
related to this note amounted to $1 in both 1997 and 1998. The note is
personally guaranteed by another stockholder.
During 1997 and 1998, the Company leased its corporate office space from
M&H Property, a partnership entered into between the two stockholders. The
monthly rental payments made to M&H Property were $3, $3 and $5 during 1997 and
1998 and effective February 1, 1999, respectively. Rent paid to M&H Property for
the years ended December 31, 1997 and 1998 and the six month periods ended June
30, 1998 and 1999 amounted to $33, $36, $18 and $28, respectively.
On May 28, 1999, the Company sold certain general office equipment to M&H
Property at its fair market value on the date of the transaction of $8.
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-325
<PAGE> 469
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, Inc.:
We have audited the accompanying balance sheets of NConnect, Inc. (the
"Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' 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 NConnect, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 27, 1999
F-326
<PAGE> 470
NCONNECT, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5 11 16
Receivables:
Trade.................................................. 47 46 66
Other.................................................. -- 4 --
Inventory................................................. 6 6 12
---- ---- ----
Total current assets................................. 58 67 94
Property and equipment, net................................. 164 154 148
Other assets................................................ -- -- 6
---- ---- ----
Total assets......................................... $222 221 248
==== ==== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 53 107 60
Accrued expenses.......................................... 10 68 105
Current portion of lines of credit and notes payable...... 30 27 27
Current portion of capital lease obligations.............. 27 34 24
Deferred revenue.......................................... 124 252 310
---- ---- ----
Total current liabilities............................ 244 488 526
Lines of credit and notes payable, less current portion..... 48 36 16
Capital lease obligations, less current portion............. 30 18 47
---- ---- ----
Total liabilities.................................... 322 542 589
Stockholders' deficit:
Common stock, no par value. Authorized 9,000 shares,
issued and outstanding 200 shares...................... 20 20 20
Accumulated deficit....................................... (120) (341) (361)
---- ---- ----
Total stockholders' deficit.......................... (100) (321) (341)
---- ---- ----
Commitments (note 8)........................................ -- -- --
---- ---- ----
Total liabilities and stockholders' deficit.......... $222 221 248
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-327
<PAGE> 471
NCONNECT, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.......................... $131 369 580 233 473
Enhanced services and other.................... 6 66 80 56 42
---- --- ---- --- ---
Total revenue............................... 137 435 660 289 515
Costs and expenses:
Cost of Internet services...................... 89 295 560 231 335
Selling, general and administrative............ 56 120 202 87 138
Depreciation and amortization.................. 22 62 98 48 60
---- --- ---- --- ---
Total costs and expenses.................... 167 477 860 366 533
---- --- ---- --- ---
Loss from operations........................ (30) (42) (200) (77) (18)
Other income (expenses):
Interest expense............................... (3) (8) (18) (4) (2)
Other.......................................... -- -- (3) -- --
---- --- ---- --- ---
Loss before income taxes.................... (33) (50) (221) (81) (20)
Provision for income taxes..................... -- -- -- -- --
---- --- ---- --- ---
Net loss.................................... $(33) (50) (221) (81) (20)
==== === ==== === ===
</TABLE>
See accompanying notes to financial statements.
F-328
<PAGE> 472
NCONNECT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..................... 200 $20 (37) (17)
Net loss......................................... -- -- (33) (33)
--- --- ---- ----
BALANCE AT DECEMBER 31, 1996..................... 200 20 (70) (50)
Net loss......................................... -- -- (50) (50)
--- --- ---- ----
BALANCE AT DECEMBER 31, 1997..................... 200 20 (120) (100)
Net loss......................................... -- -- (221) (221)
--- --- ---- ----
BALANCE AT DECEMBER 31, 1998..................... 200 20 (341) (321)
Net loss (unaudited)............................. -- -- (20) (20)
--- --- ---- ----
BALANCE AT JUNE 30, 1999 (unaudited)............. 200 $20 (361) (341)
=== === ==== ====
</TABLE>
See accompanying notes to financial statements.
F-329
<PAGE> 473
NCONNECT, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(33) (50) (221) (81) (20)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 22 62 98 48 60
Changes in operating assets and liabilities:
Receivables.......................................... (14) (31) 1 2 (20)
Inventory............................................ 9 (5) -- (4) (6)
Other assets......................................... -- -- -- (4) (6)
Accounts payable..................................... 1 44 54 26 (47)
Accrued expenses..................................... 1 1 58 (4) 36
Deferred revenue..................................... 44 80 128 77 58
---- --- ---- --- ---
Net cash provided by operating activities......... 30 101 118 60 55
---- --- ---- --- ---
Cash flows from investing activities:
Acquisition of property and equipment..................... (98) (81) (47) (11) (3)
---- --- ---- --- ---
Net cash used in investing activities............. (98) (81) (47) (11) (3)
---- --- ---- --- ---
Cash flows from financing activities:
Proceeds from notes payable............................... 7 9 -- -- --
Net proceeds (payments) on lines of credit................ 68 (7) (12) (17) (19)
Repayments of notes payable............................... -- (1) (18) (18) --
Repayments of capital lease obligations................... -- (23) (35) (18) (28)
---- --- ---- --- ---
Net cash provided by (used in) financing
activities...................................... 75 (22) (65) (53) (47)
---- --- ---- --- ---
Net increase (decrease) in cash................... 7 (2) 6 (4) 5
Cash:
Beginning of period....................................... -- 7 5 5 11
---- --- ---- --- ---
End of period............................................. $ 7 5 11 1 16
==== === ==== === ===
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $3,
$8, $18, $3 and $2, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital lease obligations resulted in non-cash financing activities
aggregating $0, $68, $28, $28 and $51 for the years ended December 31, 1996,
1997, and 1998, and for the six month periods ended June 30, 1998 and 1999,
respectively.
See accompanying Notes to Financial Statements.
F-330
<PAGE> 474
NCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
NConnect, Inc. (the "Company") was incorporated on October 23, 1995 to
provide full service Internet connectivity and enhanced Internet services,
including hosting websites, to customers in the greater Wisconsin area. The
Company commenced operations in November 1995.
The Company has incurred significant losses since inception and expects to
incur a loss in 1999. Should the Company be unable to generate significant
revenue and realize cash flows from operations in the near term, the Company
will require additional equity or debt financing to meet working capital needs
and to fund operating losses. Although management believes the Company will
obtain such financing, there can be no assurances that such financing will be
available in the future at terms acceptable to the Company.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers' changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of and for the six
months ended June 30, 1998 and June 30, 1999 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-331
<PAGE> 475
NCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years. Property and equipment under
capital leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Bulletin ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
F-332
<PAGE> 476
NCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative and
totaled approximately $21, $52, $121, $40 and $36 for the years ended December
31, 1996, 1997 and 1998 and for the six-month periods ended June 30, 1998 and
1999, respectively.
(i) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair value of the Company's financial instruments
which include receivables, accounts payable, lines of credit, notes payable and
capital lease obligations approximate their carrying value based on their terms
and interest rates.
For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, one vendor represented approximately 70%
of the Company's total purchases. The Company's reliance on certain vendors can
be shifted to alternative sources of supply for products it sells should such
changes be necessary.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-333
<PAGE> 477
NCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $68, $96 and $147,
respectively.............................................. $241 $313 $353
Office equipment............................................ 21 39 42
Leasehold improvements...................................... 3 1 12
---- ---- ----
265 353 407
Less accumulated depreciation and amortization, including
amounts related to capital leases of $11, $40 and $64,
respectively.............................................. 101 199 259
---- ---- ----
Total.................................................. $164 $154 $148
==== ==== ====
</TABLE>
(3) LINES OF CREDIT AND NOTES PAYABLE
The Company has issued non-interest bearing notes payable to stockholders.
These notes do not have maturity dates, and as such, have been classified as
current liabilities. Additionally, the Company established revolving lines of
credit, due in 2001 and 2006, with two financial institutions totaling $55
during 1997. Monthly payments due on the lines of credit aggregate $1.5 until
November 2001 and $.3 from December 2001 through March 2006. Lines of credit and
notes payable consists of the following as of December 31, 1997 and 1998 and
June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving lines of credit, bearing interest at 9.75% or 2%
above prime............................................... $60 $50 $30
Notes payable to related parties............................ 18 13 13
--- --- ---
Less current portion........................................ 30 27 27
--- --- ---
Lines of credit and notes payable, less current
portion............................................... $48 $36 $16
=== === ===
</TABLE>
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2003.
F-334
<PAGE> 478
NCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $36 22
2000........................................................ 16 24
2001........................................................ 2 22
2002........................................................ -- 21
2003........................................................ -- 18
--- ---
Total minimum payments................................. 54 107
===
Less amount representing interest........................... 2
---
Present value of net minimum lease payments............ 52
Less current portion........................................ 34
---
18
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 was $5, $10, $10, $5 and $15,
respectively.
(5) CAPITAL STOCK
The Company has 200 shares of no par common stock issued and outstanding.
(6) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the Federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Expected tax benefit........................................ $(17) $(75) $(7)
State income taxes, net of Federal benefit.................. (2) (12) (1)
Cash versus accrual income tax return differences........... 19 87 8
---- ---- ---
Income tax benefit..................................... $ -- $ -- $--
==== ==== ===
</TABLE>
F-335
<PAGE> 479
NCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Temporary differences that give rise to the components of deferred income
taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets --
deferred revenue and accrued expenses..................... $ 52 $111 $ 120
---- ---- -----
Gross deferred tax assets.............................. 52 111 120
Valuation allowance......................................... (32) (93) (100)
---- ---- -----
Net deferred tax asset................................. $ 20 $ 18 $ 20
==== ==== =====
Deferred tax liabilities --
depreciation and amortization............................. $(20) $(18) $ (20)
---- ---- -----
Gross deferred tax liabilities......................... (20) (18) (20)
---- ---- -----
Net deferred income taxes.............................. $ -- $ -- $ --
==== ==== =====
</TABLE>
Due to the uncertainty regarding the ultimate utilization of the net
deferred tax assets, no tax benefit has been provided by the Company in 1997,
1998 or 1999, and a valuation allowance has been recorded for certain of the
deferred tax assets.
(7) COMMITMENTS
The Company has entered into connectivity agreements with certain providers
in order to secure competitive rates. The terms average 5 years and early
termination could result in penalties.
(8) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. (espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-336
<PAGE> 480
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Netwurx, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1998 and
the period from May 12, 1997 (inception) to 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 Netwurx, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for the
year ended December 31, 1998 and the period from May 12, 1997 (inception) to
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
August 20, 1999
F-337
<PAGE> 481
NETWURX, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5 1 9
Accounts receivable -- trade.............................. 11 38 69
Prepaid expenses and other................................ -- 5 --
--- ---- ----
Total current assets................................... 16 44 78
Note receivable -- related party............................ -- 2 13
Property and equipment, net (note 2)........................ 68 102 174
--- ---- ----
Total assets........................................... $84 148 265
=== ==== ====
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft............................................ $-- 2 --
Accounts payable.......................................... -- 23 97
Accrued expenses.......................................... 7 82 123
Line of credit and notes payable.......................... 3 -- 15
Current portion of capital lease obligations.............. 16 38 38
Deferred revenue.......................................... 24 112 108
--- ---- ----
Total current liabilities.............................. 50 257 381
Capital lease obligations, less current portion............. 38 42 68
--- ---- ----
Total liabilities...................................... 88 299 449
--- ---- ----
Stockholders' deficit:
Common stock, no par value. Authorized 100 shares, issued
and outstanding 100 shares............................. 10 10 10
Accumulated deficit....................................... (14) (161) (194)
--- ---- ----
Total stockholders' deficit............................ (4) (151) (184)
--- ---- ----
Commitments (note 8)
Total liabilities and stockholders' deficit............ $84 148 265
=== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-338
<PAGE> 482
NETWURX, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 12, 1997 SIX MONTHS ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1997 1998 1998 1999
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity........... $ 57 323 130 363
Enhanced services and other..... 6 14 2 9
---- ---- --- ---
Total revenue................ 63 337 132 372
---- ---- --- ---
Costs and expenses:
Cost of Internet services....... 30 288 103 238
Selling, general, and
administrative............... 39 158 45 138
Depreciation and amortization... 5 22 9 16
---- ---- --- ---
Total costs and expenses..... 74 468 157 392
---- ---- --- ---
Loss from operations......... (11) (131) (25) (20)
Other expenses -- interest
expense......................... 3 16 8 13
---- ---- --- ---
Loss before income taxes..... (14) (147) (33) (33)
Income tax provision.............. -- -- -- --
---- ---- --- ---
Net loss..................... $(14) (147) (33) (33)
==== ==== === ===
</TABLE>
See accompanying notes to financial statements.
F-339
<PAGE> 483
NETWURX, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----
<S> <C> <C> <C> <C>
BALANCE AT MAY 12, 1997 (INCEPTION).............. -- $-- -- --
Issuance of common stock for cash................ 100 10 -- 10
Net loss......................................... -- -- (14) (14)
--- --- ---- ----
BALANCE AT DECEMBER 31, 1997..................... 100 10 (14) (4)
Net loss......................................... -- -- (147) (147)
--- --- ---- ----
BALANCE AT DECEMBER 31, 1998..................... 100 10 (161) (151)
Net loss (unaudited)............................. -- -- (33) (33)
--- --- ---- ----
BALANCE AT JUNE 30, 1999 (unaudited)............. 100 $10 (194) (184)
=== === ==== ====
</TABLE>
See accompanying notes to financial statements.
F-340
<PAGE> 484
NETWURX, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 12, 1997 SIX MONTHS ENDED
(INCEPTION TO) YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(14) (147) (33) (33)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization...... 5 22 9 16
Changes in operating assets and
liabilities:
Receivables...................... (11) (29) (10) (42)
Prepaid expenses and other
current assets................ -- (5) -- 5
Accounts payable................. -- 23 (2) 72
Accrued expenses................. 7 75 30 40
Deferred revenue................. 24 89 32 (4)
---- ---- --- ---
Net cash provided by operating
activities.................. 11 28 26 54
---- ---- --- ---
Cash flows from investing activities --
acquisition of property and
equipment............................. (11) -- -- (33)
---- ---- --- ---
Net cash used in investing
activities.................. (11) -- -- (33)
---- ---- --- ---
Cash flows from financing activities:
Increase (decrease) in bank
overdraft.......................... -- 2 -- (2)
Proceeds from line of credit and notes
payable............................ 8 14 6 15
Repayments of notes payable........... (5) (17) (9) --
Repayments of capital lease
obligations........................ (8) (31) (21) (26)
Proceeds from issuance of common
stock, net of issuance costs....... 10 -- -- --
---- ---- --- ---
Net cash provided by (used in)
financing activities........ 5 (32) (24) (13)
---- ---- --- ---
Net increase (decrease) in
cash........................ 5 (4) 2 8
Cash:
Beginning of period................... -- 5 5 1
---- ---- --- ---
End of period......................... $ 5 1 7 9
==== ==== === ===
Supplemental disclosure of cash flow information:
During the period from May 12, 1997 (inception) to December 31, 1997, the year ended December 31,
1998, and the six-month periods ended June 30, 1998 and 1999, the Company paid approximately
$3, $15, $8, and $13, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These capital lease
obligations resulted in non-cash financing activities aggregating $62, $56, $35, and $54 for
the period from May 12, 1997 (inception) to December 31, 1997, the year ended December 31,
1998, and for the six-month periods ended June 30, 1998 and 1999, respectively.
</TABLE>
See accompanying notes to financial statements.
F-341
<PAGE> 485
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Netwurx, Inc. (the "Company") was incorporated on May 12, 1997 to provide
full service Internet connectivity and enhanced Internet services, including
hosting web-sites, to customers in the greater Wisconsin area. The Company
commenced operations in May 1997.
The Company has incurred significant losses since inception and expects to
incur a loss in 1999. Should the Company be unable to generate significant
revenue and realize cash flows from operations in the near term, the Company
will require additional equity or debt financing to meet working capital needs
and to fund operating losses. Although management believes the Company will
obtain such financing, there can be no assurances that such financing will be
available in the future at terms acceptable to the Company.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers' changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of and for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-342
<PAGE> 486
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years. Equipment under capital leases are
stated at the present value of future minimum lease payments and are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets. Leasehold improvements are amortized using
the straight-line method over the estimated useful lives of the assets or the
term of the lease, whichever is shorter.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board Opinion No. 17, Intangible Assets,
based upon estimated fair value. If such assets are impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying value or fair value, less costs to sell.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
F-343
<PAGE> 487
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising, and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general, and administrative and
totaled approximately $6, $53, $17 and $51 for the period from May 12, 1997
(inception) to December 31, 1997, the year ended December 31, 1998 and for the
six-month periods ended June 30, 1998 and 1999, respectively.
(i) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair value of the Company's financial instruments,
which include receivables, accounts payable, line of credit, notes payable and
capital lease obligations approximate their carrying value based on their terms
and interest rates.
For each of the years ended December 31, 1997 and 1998 and for periods
ended June 30, 1998 and 1999, one vendor represented approximately 70% of the
Company's total purchases of phone and other connectivity services. The
Company's reliance on certain vendors can be shifted to alternative sources of
supply for products it sells should such changes be necessary.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-344
<PAGE> 488
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES,
STATED AT COST
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $62, $118, and $173,
respectively.............................................. $72 129 217
Furniture and fixtures...................................... 1 1 1
--- --- ---
73 130 218
Less accumulated depreciation and amortization, including
amounts related to capital leases of $4, $20, and $35,
respectively.............................................. 5 28 44
--- --- ---
Total.................................................. $68 102 174
=== === ===
</TABLE>
ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued expenses:
Connectivity charges...................................... $ 3 73 101
Sales taxes............................................... 1 3 10
Other..................................................... 3 7 12
--- -- ---
$ 7 83 123
=== == ===
</TABLE>
F-345
<PAGE> 489
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) LINE OF CREDIT AND NOTES PAYABLE
The Company has issued non-interest bearing notes payable to stockholders.
These notes do not have maturity dates, and as such have been classified as
current liabilities. Additionally, the Company established a revolving line of
credit in June 1999. The terms of the agreement provide for total borrowings of
$15. As of June 30, 1999, no amounts were available. Notes payable and revolving
line of credit consist of the following as of December 31, 1997 and 1998 and
June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revolving line of credit, bearing interest at 10.25% or 2.5%
above prime, due in 2000.................................. $-- -- 15
Notes payable to stockholders............................... 3 -- --
--- -- ---
Total.................................................. $ 3 -- 15
=== == ===
</TABLE>
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $ 56 $25
2000........................................................ 46 31
2001........................................................ 6 24
2002........................................................ -- 8
---- ---
Total minimum payments................................. 108 $88
===
Less amount representing interest........................... 28
----
Present value of net minimum lease payments............ 80
Less current portion........................................ 38
----
$ 42
====
</TABLE>
F-346
<PAGE> 490
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Rent expense for the period from May 12, 1997 (inception) to December 31,
1997, the year ended December 31, 1998, and the six-month periods ended June 30,
1998 and 1999 were $5, $8, $3, and $10, respectively.
(5) CAPITAL STOCK
The Company has authorized and issued 100 shares of no par value common
stock.
(6) RELATED PARTY TRANSACTIONS
The Company has outstanding non-interest bearing notes receivable from
stockholders. These notes are included as noncurrent receivables in the
accompanying balance sheets as there are no formal repayment terms.
Included in selling, general, and administrative expenses for 1998 is
approximately $21 of subcontracted labor that was performed by a company that is
owned by one of the stockholders.
(7) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the Federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 12, 1997
(INCEPTION) TO YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
-------------- ------------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
Expected tax benefit....................... $(5) (50) (11)
State income taxes, net of Federal
benefit.................................. (1) (8) (2)
Cash versus accrual income tax return
differences.............................. 6 58 13
--- --- ---
Income tax benefit.................... $-- -- --
=== === ===
</TABLE>
F-347
<PAGE> 491
NETWURX, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Temporary differences that give rise to the components of deferred tax
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets -- deferred revenue and accrued
expenses.................................................. $12 75 92
--- --- ---
Gross deferred tax assets.............................. 12 75 92
Valuation allowance......................................... (6) (64) (77)
--- --- ---
Net deferred tax asset................................. 6 11 15
--- --- ---
Deferred tax liabilities -- depreciation and amortization... (6) (11) (15)
--- --- ---
Gross deferred tax liabilities......................... (6) (11) (15)
--- --- ---
Net deferred income taxes.............................. $-- -- --
=== === ===
</TABLE>
Due to the uncertainty regarding the ultimate utilization of the net
deferred tax assets, no tax benefit has been provided by the Company in 1997,
1998, and 1999, and a valuation allowance has been recorded for certain of the
deferred tax assets.
(8) COMMITMENTS
The Company has entered into long-term connectivity agreements with certain
vendors in order to secure competitive rates. The terms average 5 years, and
early termination could result in penalties.
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon consummation of the agreement,
espernet.com will become the sole owner of the Company.
F-348
<PAGE> 492
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Provide.Net as of
December 31, 1998 and 1997, and the related statements of operations, owner's
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 Provide.Net as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
September 13, 1999
F-349
<PAGE> 493
PROVIDE.NET
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $2, $7, and $5 at December 31, 1997 and
1998 and June 30, 1999, respectively................... $ 7 17 11
Prepaid expenses and other................................ 1 74 6
---- --- ---
Total current assets.............................. 8 91 17
Property and equipment, net................................. 472 521 714
---- --- ---
Total assets...................................... $480 612 731
==== === ===
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 24 42 10
Accrued expenses.......................................... 2 3 --
Deferred revenue.......................................... 78 164 68
---- --- ---
Total liabilities................................. 104 209 78
Owner's equity.............................................. 376 403 653
---- --- ---
Total liabilities and owner's equity.............. $480 612 731
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-350
<PAGE> 494
PROVIDE.NET
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------
1996 1997 1998 1998 1999
------ ----- ------ ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity........................... $ 34 478 1,304 617 1,028
----- ---- ----- --- -----
Total revenue................................ 34 478 1,304 617 1,028
Costs and expenses:
Cost of Internet services....................... 126 369 678 268 471
Selling, general and administrative............. 34 172 278 118 233
Depreciation.................................... 15 39 59 30 51
----- ---- ----- --- -----
Total costs and expenses..................... 175 580 1,015 416 755
----- ---- ----- --- -----
Income (loss) from operations................ (141) (102) 289 201 273
----- ---- ----- --- -----
Other income:
Management fee.................................. 11 15 18 5 1
Interest income................................. -- -- 1 -- 1
----- ---- ----- --- -----
Income (loss) before income taxes................. (130) (87) 308 206 275
----- ---- ----- --- -----
Income tax provision.............................. -- -- -- -- --
----- ---- ----- --- -----
Net income (loss)................................. $(130) (87) 308 206 275
----- ---- ----- --- -----
Pro Forma income taxes (unaudited)................ $ (52) (35) 123 82 109
===== ==== ===== === =====
Pro Forma net income (loss) (unaudited)........... $ (78) (52) 185 124 166
===== ==== ===== === =====
</TABLE>
See accompanying notes to financial statements.
F-351
<PAGE> 495
PROVIDE.NET
STATEMENTS OF OWNER'S EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
OWNER'S
EQUITY
-------
<S> <C>
BALANCE AT FEBRUARY 1, 1996................................. $ --
Net loss.................................................... (130)
Contributions from owner.................................... 516
-----
BALANCE AT DECEMBER 31, 1996................................ 386
Net loss.................................................... (87)
Contributions from owner.................................... 77
-----
BALANCE AT DECEMBER 31, 1997................................ 376
Net income.................................................. 308
Distributions to owner...................................... (281)
-----
BALANCE AT DECEMBER 31, 1998................................ 403
Net income (unaudited)...................................... 281
Distributions to owner (unaudited).......................... (31)
-----
BALANCE AT JUNE 30, 1999 (unaudited)........................ $ 653
=====
</TABLE>
See accompanying notes to financial statements.
F-352
<PAGE> 496
PROVIDE.NET
STATEMENT OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $(130) (87) 308 206 281
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation....................................... 15 39 59 30 51
Changes in operating assets and liabilities:
Accounts receivable............................. (1) (6) (10) -- 6
Prepaid expenses and other current assets....... (5) 4 (73) -- 68
Accounts payable................................ 13 11 18 (24) (32)
Accrued expenses................................ -- 2 1 (2) (3)
Deferred revenue................................ 27 50 86 (29) (96)
----- --- ---- ---- ----
Net cash provided by (used in) operating
activities.................................. (81) 13 389 181 275
----- --- ---- ---- ----
Cash flows from investing activities:
Acquisition of property, plant and equipment......... (435) (90) (108) (45) (244)
----- --- ---- ---- ----
Net cash used in investing activities......... (435) (90) (108) (45) (244)
----- --- ---- ---- ----
Cash flows from financing activities:
Contributions (distributions) from (to) owner........ 516 77 (281) (136) (31)
----- --- ---- ---- ----
Net cash provided by (used in) financing activities.... 516 77 (281) (136) (31)
----- --- ---- ---- ----
Net change in cash............................ -- -- -- -- --
----- --- ---- ---- ----
Cash at beginning and end of period.................... $ -- -- -- -- --
===== === ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-353
<PAGE> 497
PROVIDE.NET
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Provide.Net (the "Company") began operations on February 1, 1996 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users. The goal of the Company is to become the premier
provider of full service Internet connectivity and enhanced Internet services,
including hosting websites in the vicinity of Ypsilanti, Michigan and Ann Arbor,
Michigan.
Provide.Net is the Internet Service Provider ("ISP") business unit of a
sole proprietorship, which began operations 15 years ago as a computer hardware
business. The sole proprietorship includes the operations of the ISP business
(Provide.Net) and the hardware retail business (Sunset Systems).
Based upon the terms of the stock exchange agreement (see note 4),
espernet.com, inc. ("espernet.com") will acquire certain assets and assume
certain liabilities related to Provide.Net. As a result, the financial
statements have been presented to reflect only those assets, liabilities,
revenues and expenses related to the ISP business unit which is being acquired.
From the Company's inception until June 30, 1999, the sole proprietor
provided funding for working capital. All cash generated from and cash required
to support the Company's operations was deposited and received through the sole
proprietor's operating cash accounts. As a result, there are no separate bank
accounts or records for these transactions. Accordingly, the amounts represented
by the caption "Contributions (distributions) from owner" in the Company's
statement of cash flows represents the net effect of all cash transactions
between the Company and the owner from inception to June 30, 1999.
The financial statements include expenses that have been allocated to the
Company by the sole proprietor on a specific identification basis plus its
allocated share of the costs associated with resources it shares with Sunset
Systems. Allocations from the sole proprietor for such shared resources have
been made primarily on a specific identification basis. Management believes
these allocations are reasonable. 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.
(b) RISKS AND UNCERTAINTIES
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the
F-354
<PAGE> 498
PROVIDE.NET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
continued acceptance of the Internet and the Company's ability to develop and
provide new services that meet customers changing requirements, including the
effective use of leading technologies, to continue to enhance its current
services, and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
(c) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operation and cash flows for the six months ended June 30,
1999 and 1998 are unaudited. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the financial position and results of
operations and cash flows, have been included in such unaudited financial
statements. The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the entire year.
(d) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets. The following estimated useful lives are used for financial
statement purposes:
<TABLE>
<S> <C>
Building.................................................... 39 years
Internet access and computer equipment...................... 5-7 years
Furniture and fixtures...................................... 7-10 years
</TABLE>
(g) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the
F-355
<PAGE> 499
PROVIDE.NET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
assets. Assets to be disposed of are reported at the lower of the carrying value
or fair value, less costs to sell. The Company has determined that as of
December 31, 1998, there has been no impairment in the carrying value of the
long-lived assets.
(h) INCOME TAXES
The Company operates as sole proprietorship under the Internal Revenue Code
and therefore, was not subject to Federal and state corporate income taxes.
Under the sole proprietorship provision of the Code, the owners of the Company
include the Company's income on their personal income tax returns. Accordingly,
these financial statements contain no provision or benefit and no assets or
liabilities for Federal or state income taxes.
(i) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Domain registration revenues are recognized as billed in the
period under contract. Domain registration revenues were insignificant to the
Company's total revenue for the years ended December 31, 1996, 1997 and 1998 and
the six month periods ending June 30, 1998 and 1999.
(j) MANAGEMENT FEES
The management fee represents compensation received from Sunset Systems.
The management fee has been established to reimburse Provide.Net for the costs
incurred in connection with the operations of the facilities, such as rent,
repairs and maintenance, utilities, and property taxes.
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
At December 31, 1997 and 1998 and June 30, 1999, the fair value of the
Company's accounts receivable, accounts payable, and accrued expense approximate
their carrying value based on short term nature of these financial instruments.
For each of the years ended December 31, 1996, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999, two vendors represented
approximately 72%, 60%, 56%, 53% and 52%, respectively, of the Company's total
expenditures. The Company's reliance on certain vendors can be shifted to
alternative sources of supply for products it sells should such changes be
necessary.
F-356
<PAGE> 500
PROVIDE.NET
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was comprised of the following as of December
31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land........................................................ $ 74 $ 74 $ 74
Building.................................................... 246 246 246
Internet access and computer equipment...................... 206 298 536
Furniture and fixtures...................................... -- 16 22
---- ---- ----
526 634 878
---- ---- ----
Less accumulated depreciation............................... 54 113 164
---- ---- ----
Total.................................................. $472 $521 $714
==== ==== ====
</TABLE>
(3) COMMITMENTS AND CONTINGENCIES
The Company leases certain usage and access rights to telecommunication
wires under operating leases, expiring at various dates through 2002. The
telecommunication wire leases are cancelable, although a penalty will be
incurred if the leases are terminated early.
Total future minimum lease commitments under existing lease agreements at
December 31, 1998 are not disclosed as these agreements have been replaced by
new lease agreements during 1999. Therefore, total future minimum annual lease
payments under operating leases as of June 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
July 1, 1999 through December 31, 1999...................... $ 300
2000........................................................ 600
2001........................................................ 600
2002........................................................ 600
2003........................................................ 600
Thereafter.................................................. 125
------
Total minimum payments................................. $2,825
======
</TABLE>
(4) SUBSEQUENT EVENT
The Company's owner has entered into an agreement whereby he will sell
substantially all of the net assets of the Company to espernet.com. The
Company's owner will exchange substantially all of the assets of the Company for
cash and shares of common stock of espernet.com concurrent with the consummation
of the initial public offering of the common stock of espernet.com.
F-357
<PAGE> 501
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of The Computer Care
Company, Inc. as of December 31, 1997 and 1998, and the related statements of
operations, partners' and stockholders' 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 The Computer Care Company,
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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, current liabilities exceed current assets and the Company
has a stockholders' deficit which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 10. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
August 13, 1999
Charlotte, NC
F-358
<PAGE> 502
THE COMPUTER CARE COMPANY, INC
BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 27 82 58
Trade receivables (notes 3 and 8)......................... 23 48 63
Inventory (notes 3 and 8)................................. 31 48 38
Deferred income taxes (note 6)............................ -- 17 33
Prepaid expenses and other................................ 2 2 3
---- --- ---
Total current assets................................... 83 197 195
Property and equipment, net (notes 2, 3, 4, and 8).......... 103 163 290
---- --- ---
Total assets........................................... $186 360 485
==== === ===
LIABILITIES, PARTNERS' AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 25 38 25
Accrued expenses.......................................... 14 22 30
Notes payable and current portion of long-term debt (notes
3 and 8)............................................... 28 49 48
Current portion of capital lease obligations (notes 4 and
8)..................................................... 21 57 151
Deferred revenue.......................................... 91 171 214
---- --- ---
Total current liabilities.............................. 179 337 468
Deferred income taxes (note 6).............................. -- 2 --
Long-term debt, less current portion (notes 3 and 8)........ 53 51 14
Capital lease obligations, less current portion (notes 4 and
8)........................................................ 19 55 95
---- --- ---
Total liabilities...................................... 251 445 577
---- --- ---
Partners' deficit........................................... (65) -- --
Stockholders' deficit:
Common stock, $1 par value; authorized 60,000 shares,
issued and outstanding 10,000 shares in 1998 and
1999................................................... -- 10 10
Accumulated deficit....................................... -- (90) (47)
Due from related parties (note 9)......................... -- (5) (55)
---- --- ---
Total partners' and stockholders' deficit.............. (65) (85) (92)
---- --- ---
Commitments (notes 4, 5 and 7)..............................
---- --- ---
Total liabilities, partners' and stockholders'
deficit............................................... $186 360 485
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-359
<PAGE> 503
THE COMPUTER CARE COMPANY, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity......................... $124 331 607 276 440
Retail and service income..................... 482 561 553 201 242
---- --- ----- --- ---
Total revenue.............................. 606 892 1,160 477 682
---- --- ----- --- ---
Costs and expenses:
Cost of Internet services..................... 46 91 199 84 168
Retail and service costs...................... 351 395 391 130 167
Selling, general and administrative........... 222 382 495 238 228
Depreciation.................................. 14 37 56 28 66
---- --- ----- --- ---
Total costs and expenses................... 633 905 1,141 480 629
---- --- ----- --- ---
Income (loss) from operations.............. (27) (13) 19 (3) 53
Interest expense................................ 6 10 16 6 10
---- --- ----- --- ---
Income (loss) before income taxes.......... (33) (23) 3 (9) 43
Income tax expense (note 6)..................... -- -- -- -- --
---- --- ----- --- ---
Net income (loss).......................... $(33) (23) 3 (9) 43
==== === ===== === ===
Unaudited:
Pro Forma income taxes (note 6)............... $ -- -- -- -- --
==== === ===== === ===
Pro Forma net income (loss) (note 6).......... $(33) (23) 3 (9) 43
==== === ===== === ===
</TABLE>
See accompanying notes to financial statements.
F-360
<PAGE> 504
THE COMPUTER CARE COMPANY, INC.
STATEMENTS OF PARTNERS' AND STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DUE FROM
PARTNERS' COMMON ACCUMULATED RELATED
DEFICIT STOCK DEFICIT PARTIES TOTAL
--------- ------ ----------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995......... $ 5 $-- $ -- $ -- $ 5
Partner contribution................. 1 -- -- -- 1
Net loss............................. (33) -- -- -- (33)
---- --- ---- ---- ----
Balance at December 31, 1996......... (27) -- -- -- (27)
Partner distribution................. (15) -- -- -- (15)
Net loss............................. (23) -- -- -- (23)
---- --- ---- ---- ----
Balance at December 31, 1997......... (65) -- -- -- (65)
Issuance of 10,000 shares of common
stock in exchange for partners'
interest........................... 65 10 (75) -- --
Dividend distribution................ -- -- (18) -- (18)
Advances to related parties (note
9)................................. -- -- -- (5) (5)
Net income........................... -- -- 3 -- 3
---- --- ---- ---- ----
Balance at December 31, 1998......... $ -- 10 (90) (5) (85)
====
Advances to related parties (note 9)
(unaudited)........................ -- -- (50) (50)
Net income (unaudited)............... -- 43 -- 43
--- ---- ---- ----
Balance at June 30, 1999
(unaudited)........................ $10 $(47) $(55) $(92)
=== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-361
<PAGE> 505
THE COMPUTER CARE COMPANY, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $(33) (23) 3 (9) 43
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization...................... 14 37 56 28 66
Deferred income taxes.............................. -- -- (15) (4) (18)
Changes in operating assets and liabilities:
Trade receivables............................... (18) 17 (25) (26) (15)
Inventory....................................... (3) 4 (17) (24) 10
Prepaid expenses and other...................... 2 -- -- -- (1)
Accounts payable................................ 19 (35) 13 29 (13)
Accrued expenses................................ (9) 11 8 3 8
Deferred revenue................................ 27 57 80 33 43
---- --- --- --- ----
Net cash (used in) provided by operating
activities.................................. (1) 68 103 30 123
---- --- --- --- ----
Cash flows from investing activities:
Acquisition of equipment and leasehold
improvements....................................... (43) (34) (10) (2) (5)
---- --- --- --- ----
Net cash used in investing activities......... (43) (34) (10) (2) (5)
---- --- --- --- ----
Cash flows from financing activities:
Proceeds from notes payable, third parties........... 38 30 -- -- 62
Proceeds from notes payable, related parties......... 10 -- 18 16 --
Repayments of notes payable, third parties........... -- -- (17) (8) (73)
Repayments of notes payable, related parties......... (17) (28) -- -- (27)
Repayments of capital lease obligations.............. (2) (13) (34) (11) (54)
Partner contribution................................. 1 -- -- -- --
Stockholder distribution............................. -- -- -- (16) --
Advances to related parties.......................... -- -- (5) -- (50)
---- --- --- --- ----
Net cash provided by (used in) financing
activities.................................. 30 (11) (38) (19) (142)
---- --- --- --- ----
Net increase (decrease) in cash and cash
equivalents................................. (14) 23 55 9 (24)
Cash and cash equivalents:
Beginning of period.................................. 18 4 27 27 82
---- --- --- --- ----
End of period........................................ $ 4 27 82 36 58
==== === === === ====
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the
unaudited six month periods ended June 30, 1998 and 1999, the Company paid
approximately $6, $10, $16, $6 and $10, respectively, for interest and
approximately $0, $0, $14, $0 and $7, respectively for income taxes.
Non-cash investing and financing activities:
The Company entered into various capital leases for computer equipment.
These capital lease obligations resulted in non-cash financing activities
aggregating $0, $49, $106, $0 and $188 for the years ended December 31, 1996,
1997, and 1998, and for the unaudited six month periods ended June 30, 1998 and
1999, respectively.
The Company distributed partnership earnings which were loaned back to the
Company by the stockholders aggregating $15 and $18 for the years ended December
31, 1997 and 1998, respectively.
The Company issued 10,000 shares of common stock in exchange for partners'
interest of $(65) during the year ended December 31, 1998.
See accompanying notes to financial statements.
F-362
<PAGE> 506
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The Computer Care Company, Inc. (the "Company") was established on August
15, 1992 as a partnership to sell and service computers and computer software.
On that date the Company began its operations through an acquisition of the
assets of a computer retail store. During 1995, the Company began to capitalize
on the growing demand for Internet access and enhanced services by providing
Internet service to its retail and service customers in Lenawee County, Michigan
and surrounding areas. On January 1, 1998, the partnership was converted to a
corporation with the issuance of 10,000 shares of common stock to the partners
in exchange for the partners' interests.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, partners' and stockholders' deficit and cash flows
for the six months ended June 30, 1998 and 1999 are unaudited. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-363
<PAGE> 507
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1997 and 1998 and June 30, 1999, were approximately $10, $18 and
$36, respectively.
(e) INVENTORY
Inventory, consisting of computers and accessories, is valued at the lower
of cost or market using the first-in, first-out method.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the double declining balance method over the estimated useful lives of the
related assets, generally ranging from five to seven years. Property and
equipment under capital leases are stated at the present value of minimum lease
payments and are amortized using the double declining balance method over the
shorter of the lease term or the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.
(g) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(h) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
In tax years prior to 1998, the Company 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 include their share of the Company's
F-364
<PAGE> 508
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
income on their personal income tax returns. Accordingly, the Company 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 January 1, 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 6 is presented in accordance with SFAS No. 109, as if the
Company had been subject to federal and state income taxes for the years ended
December 31, 1996 and 1997.
(i) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon delivery
of the respective products.
(j) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising for the Internet subscribers and the retail store and other general
sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included selling, general and administrative and
totaled approximately $34, $31 and $41 and $21 and $33 for the years ended
December 31, 1996, 1997 and 1998 and for the six month periods ended June 30,
1998 (unaudited) and 1999, respectively.
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. As of December 31, 1997 and 1998 and June 30, 1999, the
Company had concentrations of credit risk in one financial institution in the
form of a money market account in the approximate amount of $0, $17 and $20,
respectively. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base and the relatively minor balances of each individual account. At
December 31, 1997 and 1998 and June 30, 1999, the fair value of the Company's
financial instruments including the long-term debt approximate their carrying
value based on their terms and interest rates.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is
F-365
<PAGE> 509
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
internal-use software and on accounting for the proceeds of computer software
originally developed or obtained for internal use and then subsequently sold to
the public. It also provides guidance on capitalization of the costs incurred
for computer software developed or obtained for internal use. Adoption of SOP
98-1 as of January 1, 1999, did not have any material impact on the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $28, $134 and
$321, respectively.................................. $149 264 456
Furniture and fixtures................................ 6 7 8
Automobiles........................................... 10 10 10
Leasehold improvement................................. 2 2 2
---- ---- ----
167 283 476
Less accumulated depreciation and amortization,
including amounts related to capital leases of $6,
$36 and $91, respectively........................... (64) (120) (186)
---- ---- ----
Total....................................... $103 163 290
==== ==== ====
</TABLE>
F-366
<PAGE> 510
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) NOTE PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable, related parties
Note payable, stockholder, bearing interest at 8.00%, due
January 1, 2000........................................... $15 $ 15 $15
Note payable, stockholder, bearing interest at 8.00%, due
January 1, 2000, paid in full on May 22, 1999............. -- 20 --
Note payable, stockholder, bearing interest at 8.00%, due
January 1, 2000........................................... -- 10 10
Note payable, stockholder, bearing interest at 8.00%, due
January 1, 2000........................................... -- 6 6
Note payable, bearing interest at 8.00%, paid in full on
June 28, 1999............................................. 7 7 --
Notes payable, third parties
Note payable to bank, bearing interest at 9.25%, due in
monthly installments of $1 through February 5, 1999,
secured by inventory, trade receivables and equipment..... 48 35 29
Note payable, bearing interest at 8.00%, paid in full on
June 28, 1999............................................. 5 5 --
Other....................................................... 6 2 2
--- ---- ---
81 100 62
Less current portion........................................ 28 49 48
--- ---- ---
Long-term debt, less current portion.............. $53 $ 51 $14
=== ==== ===
</TABLE>
Long-term debt as of December 31, 1998 is due in future years as follows:
<TABLE>
<S> <C>
1999................................................ $ 49
2000................................................ 51
----
$100
====
</TABLE>
F-367
<PAGE> 511
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 62 $16
2000........................................................ 52 --
2001........................................................ 12 --
---- ---
Total minimum payments................................. 126 $16
===
Less amount representing interest and taxes................. 14
----
Present value of net minimum lease payments............ 112
Less current portion........................................ 57
----
$ 55
====
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999 were $26, $25, $13 and $12,
respectively.
(5) EMPLOYEE BENEFIT PLAN
In 1998, the Company established a 401(k) Plan (the "Plan") for all full
time employees of the Company. The Company makes matching contributions to the
Plan on behalf of employees that meet certain contribution eligibility
requirements defined under the terms of the Plan. The Company made contributions
to the Plan during the year ended December 31, 1998 and the period June 30, 1999
of approximately $2 and $2, respectively.
(6) INCOME TAXES
In the following tables, the 1996 and 1997 amounts are unaudited Pro Forma
income tax effects as if the Company had been treated as a taxable corporation
for 1996 and 1997.
F-368
<PAGE> 512
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1996 1997 1998 1999
---- ---- ---- ----------
(UNAUDITED PROFORMA)
<S> <C> <C> <C> <C>
Current:
Federal......................................... $-- $ 5 $ 13 $ 16
State and local................................. -- 1 2 2
--- --- ---- ----
-- 6 15 18
--- --- ---- ----
Deferred:
Federal......................................... -- (5) (13) (17)
State and local................................. -- (1) (2) (1)
--- --- ---- ----
-- (6) (15) (18)
--- --- ---- ----
Total income tax expense..................... $-- $-- $ -- $ --
=== === ==== ====
</TABLE>
A reconciliation of income taxes computed using the statutory rates to
income tax expense follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------ JUNE 30,
1996 1997 1998 1999
---- ---- ---- ----------
(UNAUDITED PROFORMA)
<S> <C> <C> <C> <C>
Statutory income tax rate......................... 15% 15% 15% 15%
Income taxes at statutory tax rate................ $(5) $(4) $ 1 $ 7
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal
income tax benefit........................... (1) -- (1) 1
Effect of rate differences on deferred taxes.... -- -- (30) (19)
Change in valuation allowance................... 6 4 30 11
--- --- ---- ----
Income tax expense................................ $-- $-- $ -- $ --
=== === ==== ====
</TABLE>
F-369
<PAGE> 513
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1998 and June 30, 1999 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1997 1998 1999
--------- ---- --------
(UNAUDITED PRO FORMA)
<S> <C> <C> <C>
Deferred tax assets:
Revenue included in income for income tax purposes but
deferred for financial statement purposes.............. $16 46 68
Other..................................................... -- 1 6
--- -- --
Total gross deferred tax assets........................ 16 47 74
Less valuation allowance............................... 10 30 41
--- -- --
Net deferred tax assets................................ 6 17 33
--- -- --
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation........................................... -- 2 --
--- -- --
Total gross deferred tax liabilities................... -- 2 --
--- -- --
Total net deferred tax assets............................. $ 6 15 33
=== == ==
</TABLE>
The net change in the total valuation allowance for the year ended December
31, 1998 and the six month period ended June 30, 1999 was an increase of $30 and
$11, respectively. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible.
(7) COMMITMENTS
The Company entered into a long-term contract in January 1998 to receive
internet network services. This contract expires in January 2001. Additionally,
the Company entered into two additional internet network contracts in March 1999
and May 1999, which expire in March 2002 and May 2002, respectively. These
contracts require the Company to pay monthly service fees of approximately $2,
$3 and $2, respectively, through the contract term.
(8) SUBSEQUENT EVENTS
In 1999, the Company refinanced the long-term outstanding indebtedness with
its bank at December 31, 1998 with a $32 note dated May 5, 1999, bearing 8.375%
annual interest, maturing on March 5, 2001. This note was refinanced on May 11,
1999 with a $30 note to a different bank,
F-370
<PAGE> 514
THE COMPUTER CARE COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
bearing 8.250% interest, due in monthly installments of $1 through March 11,
2001. The note is guaranteed by the stockholders and secured by inventory, trade
receivables and equipment.
The Company entered into four long-term capital lease contracts for
Internet service equipment during the first two quarters of 1999 with total
future minimum lease payments of approximately $216 with a present value of
approximately $188.
In 1999, the Company entered into a line of credit agreement with available
borrowing of $50. The line of credit bears interest at 8.75%, is guaranteed by
the stockholders and is secured by inventory, trade receivables and equipment.
No amounts were outstanding as of June 30, 1999.
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
(9) DUE FROM RELATED PARTIES
Beginning in 1998, the Company advanced funds to two start-up entities
which are owned by the shareholders of the Company and have recorded these
advances as due from related parties. The ultimate repayment of these advances
is uncertain at this time, accordingly the due from related parties of $5 at
December 31, 1998 and $55 at June 30, 1999 have been presented as an increase to
stockholders' deficit in the accompanying balance sheets.
(10) LIQUIDITY
At December 31, 1998 current liabilities exceed current assets by $140 and
stockholders' deficit is $85. At June 30, 1999 current liabilities exceed
current assets by $273 and stockholders deficit is $92. Additionally, the
Company has entered into several capital lease agreements in the first two
quarters of 1999 (see note 8) and made $50 of cash advances to related parties
in 1999 (see note 9). The Company's ability to meet its obligations as they come
due will be dependent upon generating sufficient cash flows from continued sales
of internet services. Management plans to continue the Company's growth in sales
of internet services and believes sales of internet services will be sufficient
to cover the Company's working capital needs. Additionally, the Company has
obtained a $50 line of credit in 1999 for working capital needs (see note 8).
F-371
<PAGE> 515
ISP MANAGEMENT, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 (PRO FORMA) AND JUNE 30, 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(PRO FORMA) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 14 --
Trade receivables......................................... 23 26
----- ----
Total current assets................................... 37 26
Property and equipment, net................................. 162 156
----- ----
Total assets........................................... $ 199 182
===== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable.......................... $ 21 34
Current portion of notes payable -- related parties....... 13 8
Accounts payable.......................................... 67 74
Bank overdraft............................................ 2 3
Accrued expenses.......................................... 13 10
Current portion of capital lease obligations.............. 43 40
Deferred revenue.......................................... 31 28
----- ----
Total current liabilities.............................. 190 197
Notes payable............................................... 78 93
Note payable -- related parties............................. 37 45
Stockholders' loan.......................................... -- 38
Capital lease obligations, less current portion............. 68 51
----- ----
Total liabilities...................................... 373 424
Stockholders' deficit:
Nethawk common stock, no par value. Authorized 50,000
shares, 100 shares issued and 49,900 shares
outstanding............................................ -- --
ISP common stock, $1 par value. Authorized 60,000 shares,
400 shares issued and 59,600 outstanding at June 30,
1999................................................... -- --
Additional paid-in capital................................ 82 82
Accumulated deficit....................................... (256) (324)
----- ----
Total stockholders' deficit............................ (174) (242)
----- ----
Total liabilities and stockholders' deficit................. $ 199 182
===== ====
</TABLE>
See accompanying notes to financial statements.
F-372
<PAGE> 516
ISP MANAGEMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (PRO FORMA) AND 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1998 1999
---------- -----------
(UNAUDITED (UNAUDITED)
PRO FORMA)
<S> <C> <C>
Revenue:
Internet connectivity..................................... $220 359
---- ---
Costs and expenses:
Cost of Internet services................................. 113 209
Selling, general and administrative....................... 61 163
Depreciation.............................................. 29 34
---- ---
Total costs and expenses............................... 203 406
---- ---
Income (loss) from operations.......................... 17 (47)
Interest expense............................................ (25) (21)
---- ---
Net loss............................................... $ (8) (68)
==== ===
Pro Forma income tax (expense) benefit (unaudited).......... $ -- --
==== ===
Pro Forma net loss (unaudited).............................. $ (8) (68)
==== ===
</TABLE>
See accompanying notes to financial statements.
F-373
<PAGE> 517
ISP MANAGEMENT, INC.
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ----------- -----
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998............................ $82 (256) (174)
Net loss................................................ -- (68) (68)
--- ---- ----
BALANCE AT JUNE 30, 1999................................ $82 (324) (242)
=== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-374
<PAGE> 518
ISP MANAGEMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 (PRO FORMA) AND 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1999
----------- -----------
(UNAUDITED (UNAUDITED)
PRO FORMA)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (8) (68)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation............................................ 29 34
Loss on disposal of fixed assets........................ -- 2
Changes in operating assets and liabilities:
Trade receivables.................................... (4) (2)
Accounts payable..................................... 8 7
Accrued expenses..................................... 3 (4)
Deferred revenue..................................... 12 (3)
---- ---
Net cash provided by (used in) operating
activities....................................... 40 (34)
---- ---
Cash flows from investing activities:
Acquisition of property and equipment..................... (31) (30)
---- ---
Net cash used in investing activities.............. (31) (30)
---- ---
Cash flows from financing activities:
Borrowings from stockholders.............................. -- 38
Repayments of stockholders' loans......................... (8) --
Proceeds from notes payable............................... -- 41
Repayments of notes payable............................... (7) (13)
Borrowings from related parties........................... 40 7
Repayments of related party notes payable................. (1) (3)
Repayments of capital lease obligations................... (18) (21)
Change in bank overdraft.................................. (9) 1
---- ---
Net cash provided by (used in) financing
activities....................................... (3) 50
---- ---
Net increase (decrease) in cash.................... 6 (14)
Cash:
Beginning of period....................................... 1 14
---- ---
End of period............................................. $ 7 --
==== ===
</TABLE>
Supplemental disclosure of cash flow information:
During the six-month periods ended June 30, 1998 and 1999, the Company paid
approximately $25 and $21, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment,
furniture and fixtures. These capital lease obligations resulted in
non-cash financing activities aggregating $36 for the six-month period
ended June 30, 1998.
See accompanying notes to financial statements.
F-375
<PAGE> 519
ISP MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Nethawk of Alma, Inc. ("Nethawk") was incorporated in October 1996 and
began full scale Internet access services on January 1, 1997 in central
Michigan. Business activity from October 1996 through December 31, 1996 was
insignificant.
The Internet Access Services Division of Sensible Computer Solutions, Inc.
("Sensible" or the "Division") began operations in January 1997. Sensible is a
division of Sensible Computer Solutions, Inc., which was incorporated in
November 1996 and began operations in network administration and consulting in
central Michigan. Only the operations related to the Division are included in
the accompanying financial statements. The selling, general and administrative
expenses were allocated to the Division as a percentage of total revenue. The
two founding owners of the Division contributed $60 during 1997 for the purpose
of funding the operations of the Division.
The combined accounts of Nethawk and Sensible are hereinafter referred to
as the Company.
ISP Management, Inc. ("ISP") was incorporated in January 1999 for the
purpose of combining the operations of Nethawk and Sensible to capitalize on the
growing demand for Internet access and enhanced services by consumers and
business users. Nethawk and Sensible centralized their billing operations and
continued to use their respective company names. The goal of the Company through
ISP is to become the premier provider of full-service Internet connectivity in
central Michigan.
ISP is owned 50% by the stockholders of Sensible Computer Solutions, Inc.
and 50% by the majority stockholders of Nethawk. The owners of ISP contributed
$400 cash for outstanding shares. Although the parties have the intent to
transfer all Internet-related assets and liabilities of Nethawk and Sensible to
ISP, the legal transfer of all Internet-related assets and liabilities has not
yet occurred. As such, the accompanying financial statements are presented as a
continuation of the two combined predecessor entities as of and for the
six-month period ended June 30, 1999.
(b) UNAUDITED FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
The Pro Forma information as of December 31, 1998 and for the six months
ended June 30, 1998 in the accompanying financial statements includes the
accounts of Nethawk and Sensible.
F-376
<PAGE> 520
ISP MANAGEMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
JUNE 30, 1999 (UNAUDITED)
(2) SUBSEQUENT EVENT
During 1999, ISP's stockholders entered into an agreement whereby they will
sell their shares in ISP to espernet.com, inc. ISP's stockholders will exchange
their shares in ISP for cash and shares of common stock of espernet.com, inc.
concurrently with the consummation of the initial public offering of common
stock of espernet.com, inc. The cash consideration will be adjusted for the
following: 1) net current assets adjustment; 2) long-term debt adjustment; 3)
subscriber adjustment; 4) churn-rate adjustment; and 5) an accounts receivable
adjustment, as defined in the Stock Exchange Agreement. The sale of the Company
is contingent on the initial public offering of espernet.com, inc.
F-377
<PAGE> 521
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Nethawk of Alma, Inc. as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 Nethawk of Alma, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Norfolk, Virginia
August 20, 1999
F-378
<PAGE> 522
NETHAWK OF ALMA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1 $14
Trade receivables......................................... 6 11
----- ---
Total current assets................................... 7 25
Property and equipment, net (note 2)........................ 17 56
----- ---
Total assets (note 3).................................. $ 24 81
===== ===
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable (note 3)................. $ 13 $18
Accounts payable.......................................... 1 4
Accrued expenses.......................................... 6 7
Current portion of capital lease obligations (note 5)..... 7 17
Stockholders' loan (note 4)............................... 18 --
Deferred revenue.......................................... 4 15
----- ---
Total current liabilities.............................. 49 61
Notes payable (note 3)...................................... 64 65
Capital lease obligations, less current portion (note 5).... 11 18
----- ---
Total liabilities...................................... 124 144
Stockholders' deficit:
Common stock, no par value. Authorized 50,000 shares, 100
shares issued and 49,900 shares outstanding............ -- --
Additional paid-in capital................................ 22 22
Accumulated deficit....................................... (122) (85)
----- ---
Total stockholders' deficit............................ (100) (63)
----- ---
Commitments, contingencies and subsequent events (notes 1,
5, 6 and 7)............................................... -- --
Total liabilities and stockholders' deficit............ $ 24 81
===== ===
</TABLE>
See accompanying notes to financial statements.
F-379
<PAGE> 523
NETHAWK OF ALMA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
Revenue:
Internet connectivity..................................... $ 85 275
----- ---
Total revenue.......................................... 85 275
Costs and expenses:
Cost of Internet services................................. 146 155
Selling, general and administrative....................... 43 51
Depreciation and amortization............................. 8 20
----- ---
Total costs and expenses............................... 197 226
----- ---
Income (loss) from operations.......................... (112) 49
Interest expense............................................ (10) (12)
----- ---
Net income (loss)...................................... $(122) 37
===== ===
Pro Forma income tax (expense) benefit (unaudited).......... $ -- --
===== ===
Pro Forma net income (loss) (unaudited)..................... $(122) 37
===== ===
</TABLE>
See accompanying notes to financial statements.
F-380
<PAGE> 524
NETHAWK OF ALMA, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARES)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............ -- $-- -- -- --
Issuance of common stock................ 100 -- -- -- --
Capital contributions................... -- -- 22 -- 22
Net loss................................ -- -- -- (122) (122)
--- -- -- ---- ----
BALANCE AT DECEMBER 31, 1997............ 100 -- 22 (122) (100)
Net income.............................. -- -- -- 37 37
--- -- -- ---- ----
BALANCE AT DECEMBER 31, 1998............ 100 $-- 22 (85) (63)
=== == == ==== ====
</TABLE>
See accompanying notes to financial statements.
F-381
<PAGE> 525
NETHAWK OF ALMA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(122) 37
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 8 20
Changes in operating assets and liabilities:
Trade receivables.................................... (6) (5)
Accounts payable..................................... 1 3
Accrued expenses..................................... 6 1
Deferred revenue..................................... 4 11
----- ----
Net cash provided by (used in) operating
activities........................................ (109) 67
----- ----
Cash flows from investing activities:
Acquisition of property and equipment..................... -- (30)
----- ----
Net cash used in investing activities............. -- (30)
----- ----
Cash flows from financing activities:
Borrowings from stockholders.............................. 18 --
Repayments of stockholders' loans......................... -- (18)
Proceeds from notes payable............................... 85 20
Repayments of notes payable............................... (8) (14)
Repayments of capital lease obligations................... (7) (12)
Capital contributions..................................... 22 --
----- ----
Net cash provided by (used in) financing
activities........................................ 110 (24)
----- ----
Net increase in cash.............................. 1 13
Cash:
Beginning of period....................................... -- 1
----- ----
End of period............................................. $ 1 14
===== ====
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997 and 1998, the Company paid
approximately $10 and $12, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment,
furniture and fixtures. These capital lease obligations resulted in
non-cash financing activities aggregating $25 and $29 for the years ended
December 31, 1997 and 1998, respectively.
</TABLE>
See accompanying notes to financial statements.
F-382
<PAGE> 526
NETHAWK OF ALMA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Nethawk of Alma, Inc. ("Nethawk" or the "Company") was incorporated in
October 1996 and began full scale Internet access services on January 1, 1997 in
central Michigan. Business activity from October 1996 through December 31, 1996
was insignificant.
Inherent in the Company's business are various risks and uncertainties,
including the limited history of the need for Internet access and enhanced
services. The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company's current liabilities have
exceeded its current assets since inception. The Company's future success will
be dependent upon its ability to raise capital, the continued acceptance of the
Internet, as well as the Company's ability to create and provide effective and
competitive Internet services that meet customers' changing requirements.
Management's operational and financial plans to address the above issues include
continued focus on increasing its subscriber base and geographic coverage and
obtaining equity or debt financing as needed.
(b) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the lesser of the fair value of the equipment at the
inception of the lease, or the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets.
(d) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed
F-383
<PAGE> 527
NETHAWK OF ALMA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying value or fair value, less costs to sell.
(e) BARTERING ARRANGEMENTS
The Company participates in bartering arrangements whereby the Company
exchanges Internet access services for unrelated services from third parties.
The Company does not pay or receive any fees for the exchanged services.
However, as these arrangements are for dissimilar services and represent a
culmination of an earnings process, the arrangements are appropriately reflected
in the operations of the Company. Revenue includes barter amounts of $11 and $26
for the years ended December 31, 1997 and 1998, respectively.
(f) INCOME TAXES
Historically, the Company has elected to be taxed using provisions of
subchapter S of the Internal Revenue Code (the "Code"). Under subchapter S
provisions of the Code, the stockholders include the Company's corporate income
in their personal tax returns. Accordingly, the Company was not subject to
federal and state corporate income taxes during the periods for which it was an
S corporation.
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the outstanding stock of the Company and concurrent with the related
initial public offering of espernet.com (as more fully described in note 7), the
Company's status as an S-Corp under the Internal Revenue Code will automatically
terminate and the Company will be subject to federal and state corporate income
taxes. The Pro Forma effect is included in the statements of operations.
The unaudited Pro Forma income tax information included in the statements
of operations is presented in accordance with SFAS 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, 1997 and 1998.
No Pro Forma income tax benefit is reflected in the accompanying statements
of operations as the Company would have provided a full valuation allowance
against the net deferred tax asset had it been a C-Corp.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
F-384
<PAGE> 528
NETHAWK OF ALMA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative
expenses and totaled approximately $10 and $24 for the years ended December 31,
1997 and 1998, respectively.
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISKS
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. Fair value is defined in the statement as the amount at which an
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of trade receivables, accounts payable, accrued
expenses, notes payable, and stockholders' loan approximate fair value due to
the short maturity of these instruments.
For each of the years ended December 31, 1997 and 1998, three vendors
represented between 65% to 75% of the Company's total purchases. The Company's
reliance on certain vendors can be shifted to alternative sources of supply for
products it sells should such changes be necessary.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 amends SFAS No. 133 to extend the effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not yet analyzed of the impact of this pronouncement on its
financial statements.
F-385
<PAGE> 529
NETHAWK OF ALMA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Internet access and computer equipment, including amounts
related to capital leases of $25 and $53, respectively.... $25 72
Furniture and fixtures...................................... -- 1
Automobile.................................................. -- 7
Leasehold improvements...................................... -- 4
--- --
25 84
Less accumulated depreciation and amortization, including
amounts related to capital leases of $7 and $24,
respectively.............................................. 8 28
--- --
Total.................................................. $17 56
=== ==
</TABLE>
(3) NOTES PAYABLE
Notes payable consist of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Note payable to bank, bearing interest at prime plus 2.5%,
payable in monthly installments of $2, including interest,
with final payment due in November 2001; collateralized by
substantially all assets, paid in full in 1998............ $77 --
Note payable to bank, bearing interest at 8.5%, payable in
monthly installments of $2, including interest, with final
payment due in December 2002; collateralized by
substantially all assets.................................. -- 83
--- --
77 83
Less current portion........................................ 13 18
--- --
Long-term debt, less current portion................... $64 65
=== ==
</TABLE>
The aggregate maturities of notes payable for each of the four years
subsequent to December 31, 1998 are as follows: 1999: $18, 2000: $20, 2001: $22
and 2002: $23.
(4) RELATED PARTY TRANSACTIONS
The majority owners of Nethawk loaned amounts totaling $18 to the Company
during 1997. The loans were repaid without interest in 1998.
F-386
<PAGE> 530
NETHAWK OF ALMA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS
The Company leases office space on a month-to-month basis. The Company also
leases certain computer and office equipment under capital leases, expiring at
various dates through 2001.
Future minimum annual lease payments under capital leases as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $24
2000........................................................ 16
2001........................................................ 5
---
Total minimum payments................................. 45
Less amount representing interest........................... 10
---
Present value of net minimum lease payments............ 35
Less current portion........................................ 17
---
$18
===
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 was
approximately $4 and $13, respectively.
The Company enters into long-term telephone contracts, which provide for
early termination penalties. These penalties include a combination of payments
of installation charges and a percentage of fees due under the contract. To
date, the Company has not paid any termination fees in conjunction with these
contracts.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(7) SUBSEQUENT EVENTS
The Internet Access Services Division of Sensible Computer Solutions, Inc.
("Sensible"), an unrelated company, began operations in January 1997. Sensible
is a division of Sensible Computer Solutions, Inc. which was incorporated in
November 1996 and began operations in network administration and consulting. ISP
Management, Inc. ("ISP") was incorporated in January 1999 for the purpose of
combining the operations of Nethawk and Sensible to capitalize on the growing
demand for Internet access and enhanced services by consumers and business
users. Nethawk and Sensible centralized their billing operations and continued
to use their respective company names. The goal of the combined companies
through ISP is to become the premier provider of full-service Internet
connectivity in central Michigan.
F-387
<PAGE> 531
NETHAWK OF ALMA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ISP is owned 50% by the stockholders of Sensible and 50% by the majority
stockholders of Nethawk. The owners of ISP contributed $400 cash for outstanding
shares. Although the parties have the intent to transfer all Internet-related
assets and liabilities of Nethawk and Sensible to ISP, the legal transfer of all
Internet-related assets and liabilities has not yet occurred.
During 1999, ISP's stockholders entered into an agreement whereby they will
sell their shares in ISP to espernet.com. ISP's stockholders will exchange their
shares in ISP for cash and shares of common stock of espernet.com concurrently
with the consummation of the initial public offering of common stock of
espernet.com. The cash consideration will be adjusted for the following: 1) net
current assets adjustment; 2) long-term debt adjustment; 3) subscriber
adjustment; 4) churn-rate adjustment; and 5) an accounts receivable adjustment,
as defined in the Stock Exchange Agreement. The sale of ISP is contingent on the
initial public offering of espernet.com.
F-388
<PAGE> 532
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of The Internet Access
Services Division of Sensible Computer Solutions, Inc. (the "Company") as of
December 31, 1997 and 1998, and the related statements of operations, division
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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 The Internet Access Services
Division of Sensible Computer Solutions, Inc. as of December 31, 1997 and 1998,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Norfolk, Virginia
August 20, 1999
F-389
<PAGE> 533
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
ASSETS
Current assets:
Trade receivables......................................... $ 8 12
----- ----
Total current assets.............................. 8 12
Property and equipment, net (note 2)........................ 97 106
----- ----
Total assets...................................... $ 105 118
===== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of notes payable (note 3)................. $ -- 3
Current portion of notes payable -- related parties (note
4)..................................................... 6 13
Accounts payable.......................................... 54 63
Bank overdraft............................................ 9 2
Accrued expenses.......................................... 2 6
Current portion of capital lease obligations (note 5)..... 20 26
Deferred revenue.......................................... 5 16
----- ----
Total current liabilities......................... 96 129
Notes payable (note 3)...................................... -- 13
Notes payable -- related parties (note 4)................... 16 37
Capital lease obligations, less current portion (note 5).... 66 50
----- ----
Total liabilities................................. 178 229
Division deficit:
Contributed capital....................................... 60 60
Accumulated deficit....................................... (133) (171)
----- ----
Total division deficit............................ (73) (111)
----- ----
Commitments, contingencies and subsequent events (notes 1,
5, 6 and 7)............................................... -- --
----- ----
Total liabilities and division deficit............ $ 105 118
===== ====
</TABLE>
See accompanying notes to financial statements.
F-390
<PAGE> 534
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
Revenue:
Internet connectivity..................................... $ 116 254
Enhanced services and other............................... 1 9
----- ---
Total revenue..................................... 117 263
Costs and expenses:
Cost of Internet services................................. 130 160
Selling, general and administrative....................... 81 73
Depreciation and amortization............................. 27 37
----- ---
Total costs and expenses.......................... 238 270
----- ---
Loss from operations.............................. (121) (7)
Other income (expense):
Interest expense.......................................... (13) (31)
Other income (expense).................................... 1 --
----- ---
Total other expense............................... (12) (31)
----- ---
Net loss.......................................... $(133) (38)
===== ===
Pro Forma income tax (expense) benefit (unaudited).......... $ -- --
===== ===
Pro Forma net loss (unaudited).............................. $(133) (38)
===== ===
</TABLE>
See accompanying notes to financial statements.
F-391
<PAGE> 535
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
STATEMENTS OF DIVISION DEFICIT
YEARS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- -----
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996........................... $-- -- --
Capital contribution................................... 60 -- 60
Net loss............................................... -- (133) (133)
--- ---- ----
BALANCE AT DECEMBER 31, 1997........................... 60 (133) (73)
Net loss............................................... -- (38) (38)
--- ---- ----
BALANCE AT DECEMBER 31, 1998........................... $60 (171) (111)
=== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-392
<PAGE> 536
THE INTERNET ACCESS SERVICES DIVISION OF SENSIBLE COMPUTER SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1997 1998
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(133) (38)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 27 37
Changes in operating assets and liabilities:
Trade receivables.................................... (8) (4)
Accounts payable..................................... 54 9
Accrued expenses..................................... 2 4
Deferred revenue..................................... 5 11
----- ---
Net cash provided by (used in) operating
activities........................................ (53) 19
----- ---
Cash flows from investing activities:
Acquisition of property and equipment..................... (23) (32)
----- ---
Net cash used in investing activities............. (23) (32)
----- ---
Cash flows from financing activities:
Proceeds from notes payable............................... -- 16
Borrowings from related parties........................... 23 40
Repayments of related party notes payable................. (1) (12)
Repayments of capital lease obligations................... (15) (24)
Change in bank overdraft.................................. 9 (7)
Capital contribution...................................... 60 --
----- ---
Net cash provided by financing activities......... 76 13
----- ---
Net increase (decrease) in cash................... -- --
Cash:
Beginning of period....................................... -- --
----- ---
End of period............................................. $ -- --
===== ===
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997 and 1998, the Company paid
approximately $13 and $31, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment,
furniture and fixtures. These capital lease obligations resulted in
non-cash financing activities aggregating $101 and $14 for the years
ended December 31, 1997 and 1998, respectively.
</TABLE>
See accompanying notes to financial statements.
F-393
<PAGE> 537
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The Internet Access Services Division of Sensible Computer Solutions, Inc.
(the "Company" or the "Division") began operations in January 1997. The Company
is a division of Sensible Computer Solutions, Inc., which was incorporated in
November 1996 and began operations in network administration and consulting in
central Michigan. Only the operations related to the Division are included in
the accompanying financial statements. The selling, general and administrative
expenses were allocated to the Division based on a percentage of total revenue.
The two founding owners contributed $60 during 1997 for the purpose of funding
the operations of the Division.
Inherent in the Company's business are various risks and uncertainties,
including the limited history of the need for Internet access and enhanced
services. The financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has incurred losses since
inception. The Company's future success will be dependent upon its ability to
raise capital, the continued acceptance of the Internet, as well as the
Company's ability to create and provide effective and competitive Internet
services that meet customers' changing requirements. Management's operational
and financial plans to address the above issues include continued focus on
increasing its subscriber base and geographic coverage and obtaining equity or
debt financing as needed.
(b) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the lesser of the fair value of the equipment at the
inception of the lease, or the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets.
(d) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of
F-394
<PAGE> 538
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121
requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the undiscounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(e) INCOME TAXES
Historically, the Company has elected to be taxed using provisions of
subchapter S of the Internal Revenue Code (the "Code"). Under subchapter S
provisions of the Code, the stockholders include the Company's corporate income
in their personal tax returns. Accordingly, the Company was not subject to
federal and state corporate income taxes during the periods for which it was an
S-Corp.
Upon consummation of an agreement with espernet.com, inc. ("espernet.com")
to sell the outstanding stock of the Company and concurrent with the related
initial public offering of espernet.com (as more fully described in note 7), the
Company's status as an S-Corp. under the Internal Revenue Code will
automatically terminate and the Company will be subject to federal and state
corporate income taxes. The Pro Forma effect is included in the statements of
operations.
The unaudited Pro Forma income tax information included in the statements
of operations is presented in accordance with SFAS No. 109, Accounting for
Income Taxes, as if the Company was a stand-alone entity and had been subject to
federal and state income taxes for the years ended December 31, 1997 and 1998.
No Pro Forma income tax benefit is reflected in the accompanying statements
of operations as the Company would have provided a full valuation allowance
against the net deferred tax asset had it been a C-Corp.
(f) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services. Revenue from enhanced services is recognized as the
services are provided.
(g) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative
expenses and totaled approximately $7 and $12 for the years ended December 31,
1997 and 1998, respectively.
F-395
<PAGE> 539
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(h) FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The following summary disclosures are made in accordance with the
provisions of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. Fair value is defined in the statement as the amount at which an
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of trade receivables, accounts payable, accrued
expenses, notes payable and notes payable to related parties approximate fair
value due to the short maturity of these instruments.
For each of the years ended December 31, 1997 and 1998, three vendors
represented between 65% to 75% of the Company's total purchases. The Company's
reliance on certain vendors can be shifted to alternative sources of supply for
products it sells should such changes be necessary.
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 amends SFAS No. 133 to extend the effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not yet analyzed of the impact of this pronouncement on its
financial statements.
F-396
<PAGE> 540
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Internet access and computer equipment, including amounts
related to capital leases of $95 and $110, respectively... $109 155
Furniture and fixtures, all amounts related to capital
leases.................................................... 6 6
Leasehold improvements...................................... 9 9
---- ---
124 170
Less accumulated depreciation and amortization, including
amounts related to capital leases of $21 and $50,
respectively.............................................. 27 64
---- ---
$ 97 106
==== ===
</TABLE>
(3) NOTES PAYABLE
Notes payable as of December 31, 1998 consist of equipment financing
agreements of $16, bearing interest at rates varying from 9.9% to 10.9%, payable
in monthly installments of less than $1, including interest, with final payments
due between November 2002 and December 2003.
The aggregate maturities of notes payable for each of the five years
subsequent to December 31, 1998 are as follows: 1999: $3, 2000: $3, 2001: $3,
2002: $4 and 2003: $3.
(4) RELATED PARTY TRANSACTIONS
Related party debt consists of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1998
---- ----
<S> <C> <C>
Related party note payable from a relative of the
stockholders, non-interest bearing, payable in monthly
installments of approximately $0.5........................ $22 16
Related party note payable from a relative of the
stockholders, bearing interest at 5.875%, payable in
quarterly installments of $2 including interest, due in
January 2003.............................................. -- 34
--- ---
22 50
Less current portion........................................ 6 13
--- ---
Long-term debt, less current portion...................... $16 $37
=== ===
</TABLE>
The aggregate maturities of notes payable for each of the five years
subsequent to December 31, 1998 are as follows: 1999: $13, 2000: $17, 2001: $10,
2002: $9 and 2003: $1.
F-397
<PAGE> 541
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(5) COMMITMENTS
The Company leases office space on a month-to-month basis. The Company also
leases certain computer and office equipment under capital leases, expiring at
various dates through 2002.
Future minimum annual lease payments under capital leases as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $40
2000........................................................ 30
2001........................................................ 23
2002........................................................ 11
---
Total minimum payments............................ 104
Less amount representing interest........................... 28
---
Present value of net minimum lease payments............... 76
Less current portion........................................ 26
---
$50
===
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 was
approximately $8 and $8, respectively.
The Company enters into long-term telephone contracts, which provide for
early termination penalties. These penalties include a combination of payments
of installation charges and a percentage of fees due under the contract. To
date, the Company has not paid any termination fees in conjunction with these
contracts.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(7) SUBSEQUENT EVENTS
Nethawk of Alma, Inc. ("Nethawk"), an unrelated company, was incorporated
in October 1996 and began full scale Internet access services on January 1,
1997. ISP Management, Inc. ("ISP") was incorporated in January 1999 for the
purpose of combining the operations of Nethawk and the Company to capitalize on
the growing demand for Internet access and enhanced services by consumers and
business users. Nethawk and the Company centralized their billing operations and
continued to use their respective company names. The goal of the combined
companies through ISP is to become the premier provider of full-service Internet
connectivity in central Michigan.
F-398
<PAGE> 542
THE INTERNET ACCESS SERVICES DIVISION OF
SENSIBLE COMPUTER SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ISP is owned 50% by the stockholders of the Company and 50% by the majority
stockholders of Nethawk. The owners of ISP contributed $400 cash for outstanding
shares. Although the parties have the intent to transfer all Internet-related
assets and liabilities of Nethawk and the Company to ISP, the legal transfer of
all Internet-related assets and liabilities has not yet occurred.
During 1999, ISP's stockholders entered into an agreement whereby they will
sell their shares in ISP to espernet.com. ISP's stockholders will exchange their
shares in ISP for cash and shares of common stock of espernet.com concurrently
with the consummation of the initial public offering of common stock of
espernet.com. The cash consideration will be adjusted for the following: 1) net
current assets adjustment; 2) long-term debt adjustment; 3) subscriber
adjustment; 4) churn-rate adjustment; and 5) an accounts receivable adjustment,
as defined in the Stock Exchange Agreement. The sale of ISP is contingent on the
initial public offering of espernet.com.
F-399
<PAGE> 543
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of www.internet solutions,
inc. as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' deficit, and cash flows for the years ended December 31, 1998 and
1997 and the period from July 1, 1996 (date of inception) to December 31, 1996.
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 www.internet solutions, inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years ended December 31, 1998 and 1997 and the period from July 1,
1996 (date of inception) to December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Cincinnati, Ohio
August 13, 1999
F-400
<PAGE> 544
WWW.INTERNET SOLUTIONS, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 21 51 88
Receivables:
Trade receivables, net of allowance for doubtful
accounts (note 8)................................... 10 21 15
Subscription receivable (note 5)...................... -- 1 1
Prepaid expenses......................................... 8 10 4
----- ---- ----
Total current assets............................. 39 83 108
Property and equipment, net (notes 2, 4 and 7)............. 73 109 95
Subscription receivable (note 5)........................... 1 -- --
Other assets............................................... -- -- 1
----- ---- ----
Total assets..................................... $ 113 192 204
===== ==== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable......................................... $ -- 1 17
Accrued expenses (notes 2, 3 and 6)...................... 311 466 539
Due to related party (note 7)............................ 36 37 30
Stockholder notes payable (note 3)....................... 45 45 25
Current portion of capital lease obligations (note 4).... -- -- 7
Deferred revenue......................................... 30 61 70
----- ---- ----
Total current liabilities........................ 422 610 688
Capital lease obligations, less current portion (note 4)... -- -- 15
----- ---- ----
Total liabilities................................ 422 610 703
----- ---- ----
Stockholders' deficit:
Common stock, no par value. Authorized 850 shares, issued
and outstanding 400 shares............................ -- -- --
Common stock subscribed (note 5)......................... 1 1 1
Accumulated deficit...................................... (310) (419) (500)
----- ---- ----
Total stockholders' deficit...................... (309) (418) (499)
Commitments (notes 4 and 6) -- -- --
----- ---- ----
Total liabilities and stockholders' deficit...... $ 113 192 204
===== ==== ====
</TABLE>
See accompanying Notes to Financial Statements.
F-401
<PAGE> 545
WWW.INTERNET SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------ --------------------------
1996 1997 1998 1998 1999
------ ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity................ $ 23 153 452 195 267
Enhanced services and other.......... 3 11 18 9 12
----- ---- ---- --- ---
Total revenue..................... 26 164 470 204 279
----- ---- ---- --- ---
Costs and expenses:
Cost of Internet services............ 60 153 275 125 152
Selling, general and
administrative.................... 100 146 242 102 159
Depreciation and amortization........ 4 30 55 26 44
----- ---- ---- --- ---
Total costs and expenses.......... 164 329 572 253 355
----- ---- ---- --- ---
Loss from operations.............. (138) (165) (102) (49) (76)
----- ---- ---- --- ---
Other income (expenses):
Interest expense..................... -- (7) (7) (3) (5)
----- ---- ---- --- ---
Net loss.......................... $(138) (172) (109) (52) (81)
===== ==== ==== === ===
Pro Forma income taxes (unaudited)..... $ -- -- -- -- --
===== ==== ==== === ===
Pro Forma net loss (unaudited)......... $(138) (172) (109) (52) (81)
===== ==== ==== === ===
</TABLE>
See accompanying Notes to Financial Statements.
F-402
<PAGE> 546
WWW.INTERNET SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK COMMON
--------------- STOCK ACCUMULATED
SHARES AMOUNT SUBSCRIBED DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995........... -- $-- -- -- --
Common stock subscribed................. 400 -- 1 -- 1
Net loss................................ -- -- -- (138) (138)
--- -- -- ---- ----
BALANCES AT DECEMBER 31, 1996........... 400 -- 1 (138) (137)
Net loss................................ -- -- -- (172) (172)
--- -- -- ---- ----
BALANCES AT DECEMBER 31, 1997........... 400 -- 1 (310) (309)
Net loss................................ -- -- -- (109) (109)
--- -- -- ---- ----
BALANCES AT DECEMBER 31, 1998........... 400 -- 1 (419) (418)
Net loss (unaudited).................... -- -- -- (81) (81)
--- -- -- ---- ----
BALANCES AT JUNE 30, 1999 (unaudited)... 400 $-- 1 (500) (499)
=== == == ==== ====
</TABLE>
See accompanying Notes to Financial Statements.
F-403
<PAGE> 547
WWW.INTERNET SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------------
1996 1997 1998 1998 1999
----- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(138) (172) (109) (52) (81)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 4 30 55 26 44
Changes in operating assets and liabilities:
Trade receivables............................. (2) (8) (11) (7) 6
Prepaid expenses.............................. -- (8) (2) 8 6
Other assets.................................. -- -- -- -- (1)
Accounts payable.............................. -- -- 1 1 16
Accrued expenses.............................. 154 157 155 80 73
Due to related party.......................... 29 7 1 (23) (7)
Deferred revenue.............................. -- 30 31 18 9
----- ---- ---- --- ---
Net cash provided by operating activities... 47 36 121 51 65
----- ---- ---- --- ---
Cash flows from investing activities:
Acquisition of equipment........................... (55) (52) (91) (33) (5)
----- ---- ---- --- ---
Net cash used by investing activities....... (55) (52) (91) (33) (5)
----- ---- ---- --- ---
Cash flows from financing activities:
Proceeds from notes payable to stockholders........ 45 -- -- -- --
Repayments of notes payable to stockholders........ -- -- -- -- (20)
Repayments of capital lease obligations............ -- -- -- -- (3)
----- ---- ---- --- ---
Net cash provided (used) by financing
activities................................ 45 -- -- -- (23)
----- ---- ---- --- ---
Net increase (decrease) in cash and cash
equivalents............................... 37 (16) 30 18 37
Cash and cash equivalents:
Beginning period................................... -- 37 21 21 51
----- ---- ---- --- ---
End of period...................................... $ 37 21 51 39 88
===== ==== ==== === ===
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately $-0-,
$-0-, $-0-, -0- and $7, respectively, for interest.
Non-cash financing activities:
The Company entered into a capital leases for computer equipment. This
capital lease obligation resulted in non-cash financing activities aggregating
$25 for the six month period ended June 30, 1999.
See accompanying Notes to Financial Statements.
F-404
<PAGE> 548
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
www.internet solutions, inc. (the "Company") was incorporated on June 26,
1996 to capitalize on the growing demand for Internet access and enhanced
services by consumers and business users. The Company is a provider of dedicated
and dial up access, consulting, design, layout and setup of Internet web sites,
as well as domain name hosting and site hosting services. The Company commenced
operations on July 1, 1996. The Company provides services in the greater
Cincinnati, Northern Kentucky and Southeastern Indiana area.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim balance sheet of the Company as of June 30, 1999, and the
statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-405
<PAGE> 549
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. The Company
maintains all its cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and does not believe it is exposed to any significant credit risk with
respect to these accounts.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
(g) INCOME TAXES
The Company, with the consent of its stockholders, has elected to be taxed
as an S-Corp under the provisions of Section 1362 of the Internal Revenue Code.
The stockholders are personally liable for their proportionate share of the
company's federal and state taxable income; therefore, no provision or liability
for income taxes is reflected in the financial statements.
If the Company had operated as a C-Corp since inception, the Company would
have recorded gross deferred tax assets for years ended December 1997 and 1998
and for the six months ended June 30, 1999 of $135, $193, and $222. However, due
to operating losses incurred, there would have been a corresponding valuation
allowance of $135, $193, and $222.
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided.
F-406
<PAGE> 550
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $1, $2 and $7 and $1 and $6 for 1996, 1997 and 1998 and for the
six month periods ended June 30, 1998 and 1999, respectively.
(j) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair value of the Company's financial instruments
approximate their carrying value based on their terms and interest rates.
For each of the periods ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, two vendors represented approximately 43%,
73%, 61%, 58% and 42%, respectively, of the Company's total purchases. The
Company's reliance on certain vendors can be shifted to alternative sources of
supply for products it sells should such changes be necessary.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-407
<PAGE> 551
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases, stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $0, $0 and $25,
respectively.............................................. $107 198 227
Furniture and fixtures.................................... 1 1 1
---- --- ----
108 199 228
Less accumulated depreciation and amortization, including
amounts related to capital leases of $0, $0 and $3,
respectively.............................................. (35) (90) (133)
---- --- ----
Total.................................................. $ 73 109 95
==== === ====
</TABLE>
Accrued Expenses
<TABLE>
<S> <C> <C> <C>
Internet connectivity expenses.............................. $ -- 12 20
Employee payroll expenses................................... 3 3 5
Accrued interest on stockholders notes...................... 7 14 10
Deferred compensation (note 6).............................. 301 435 501
Other....................................................... -- 2 3
---- --- ----
$311 466 539
==== === ====
</TABLE>
(3) NOTES PAYABLE TO STOCKHOLDERS
On July 1, 1996, the Company issued promissory notes to four stockholders
of the Company due December 31, 1998 with interest accruing beginning January 1,
1997 and interest payable monthly beginning January 31, 1997 at an annual rate
of 15%. The notes become due on demand if not paid by December 31, 1998.
Subsequent to issuance of the notes, the shareholders elected to defer monthly
interest payments until the notes are retired.
On March 12, 1999, two of the notes were retired and principal and accrued
interest was paid by the Company. As of June 30, 1999, two notes are outstanding
with a principal amount of $25 and accrued interest of $10.
(4) LEASES
As of December 31, 1998 the Company was leasing office space under an
operating lease agreement on a month to month commitment.
F-408
<PAGE> 552
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Subsequent to December 31, 1998, the Company entered into noncancelable
leases for certain computer equipment under capital lease, and office space
under an operating lease expiring at various dates through January 2002.
Future minimum annual lease payments under capital and operating leases as
of June 30, 1999 (unaudited) are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 5 20
2000........................................................ 11 25
2001........................................................ 11 18
2002........................................................ 1 3
--- ---
Total minimum payments...................................... 28 $66
===
Less amount representing interest (at 20%).................. (6)
---
Present value of net minimum lease payments............... 22
Less current portion........................................ (7)
---
$15
===
</TABLE>
Rent expense for 1996, 1997 and 1998 and for the six month periods ended
June 30, 1998 and 1999 were $2, $4, $7, $3 and $8, respectively.
(5) COMMON STOCK
The shareholders of the Company entered into a stock subscription agreement
on July 2, 1996. Each shareholder agreed to pay cash or other property or
services valued by the Board of Directors in the amount of $1.00 per share of
common stock subscribed. Subsequent to December 31, 1998 in August of 1999, all
shareholders paid cash for the amount of common stock subscribed. Accordingly,
the receivable has been classified as an asset.
(6) COMMITMENTS
(a) DEFERRED COMPENSATION
Since the inception of the Company, it was determined by the shareholders
that three of the five shareholders, Rick Cummins, Randall Stotler, and John
Troher, who are involved in the business operations of the Company would not be
compensated for their services until it was agreed upon by the majority of the
shareholders that the financial position of the Company could support
reimbursement. A schedule has been maintained by the Company for each of the
shareholder's estimated earned salary based on an estimated annual salary
multiplied by the estimated hours devoted to the business. The shareholders have
agreed that the amounts included on this schedule will be payable only in the
event of a corporate transaction such as an IPO or a
F-409
<PAGE> 553
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
sale of the Company which provides sufficient proceeds to fund the obligation.
The amount of the obligation has been included in accrued expenses in the
financial statements. Compensation expense for 1996, 1997 and 1998 and for the
six month periods ended June 30, 1998 and 1999 were $134, $167, $134, $67 and
$66, respectively.
(b) LONG-TERM SERVICE AGREEMENTS
The Company has entered into certain long-term service agreements with
third party communications companies for use of phone lines and access to the
internet expiring at various dates through 2001.
Future estimated minimum annual payments under these service agreements as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................ $173
2000................................................ 156
2001................................................ 11
----
Total minimum payments.............................. $340
====
</TABLE>
Internet connectivity expense for 1996, 1997 and 1998 and for the six month
periods ended June 30, 1998 and 1999 were $19, $41, $225, $87 and $81,
respectively.
(7) RELATED PARTY TRANSACTIONS
The Company's Vice President and shareholder owns a computer reseller and
network consulting company. www.internet solutions, inc. purchases the majority
of its computer equipment from this company. Equipment purchases from the
related party for 1996, 1997 and 1998 and for the six month periods ended June
30, 1998 and 1999 were $52, $52, $66, $-0- and $-0-, respectively.
The total amount due to the related party was $36, $37 and $30 at December
31, 1997 and 1998 and June 30, 1999, respectively.
F-410
<PAGE> 554
WWW.INTERNET SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(8) ALLOWANCE FOR TRADE ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF YEAR AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts............. $-- 1 -- 1
=== == === ==
For the year ended December 31, 1997:
Allowance for doubtful accounts............. $ 1 5 (4) 2
=== == === ==
For the year ended December 31, 1998:
Allowance for doubtful accounts............. $ 2 17 (15) 4
=== == === ==
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(unaudited).............................. $ 4 14 (14) 4
=== == === ==
</TABLE>
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-411
<PAGE> 555
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying combined balance sheets of the Copper.net
Group (as defined in note 1) as of December 31, 1998 and 1997, and the related
combined statements of operations, stockholders' 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 Group'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 combined financial position of the
Copper.net Group as of December 31, 1998 and 1997, and the results of their
operations and their 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
Columbus, Ohio
August 18, 1999
F-412
<PAGE> 556
COPPER.NET GROUP
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- 23 34
Receivables:
Trade.................................................. -- 9 2
Related party (note 5)................................. -- -- 89
Prepaid expenses.......................................... 1 2 3
---- ---- ----
Total current assets.............................. 1 34 128
Property and equipment, net (notes 2, 3 and 4).............. 76 180 223
Receivable from stockholder (note 5)........................ -- 4 14
---- ---- ----
Total assets...................................... $ 77 218 365
==== ==== ====
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade.................................................. $ 15 5 3
Related party (note 5)................................. 30 2 --
Accrued expenses (note 2)................................. 4 7 8
Notes payable to related party (note 5)................... 6 -- 50
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................ 9 30 62
Current portion of capital lease obligations (note 4)..... 15 36 35
Deferred revenue.......................................... 57 170 281
---- ---- ----
Total current liabilities......................... 136 250 439
Long-term debt, less current portion (note 3)............... 5 66 142
Capital lease obligations, less current portion (note 4).... 24 28 11
---- ---- ----
Total liabilities................................. 165 344 592
---- ---- ----
Stockholders' deficit (note 1a):
Common stock, no par value; authorized 850 shares, issued
and outstanding 200 shares............................. 1 1 1
Common stock subscribed................................... (1) (1) (1)
Accumulated deficit....................................... (88) (126) (227)
---- ---- ----
Total stockholders' deficit....................... (88) (126) (227)
---- ---- ----
Commitments (notes 4 and 7)
Total liabilities and stockholders' deficit....... $ 77 218 365
==== ==== ====
</TABLE>
See accompanying notes to combined financial statements.
F-413
<PAGE> 557
COPPER.NET GROUP
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connectivity revenue................ $ 62 180 417 178 372
Costs and expenses (notes 1(i), 4, 5 and 7):
Cost of Internet services.................. 56 136 146 69 170
Selling, general and administrative........ 5 56 196 90 194
Depreciation and amortization.............. 13 26 46 15 56
---- --- --- --- ---
Total costs and expenses................ 74 218 388 174 420
---- --- --- --- ---
Income (loss) from operations........... (12) (38) 29 4 (48)
Interest expense (note 5).................... 2 6 11 4 10
---- --- --- --- ---
Income (loss) before income taxes....... (14) (44) 18 -- (58)
Income tax provision (note 6)................ -- -- -- -- --
---- --- --- --- ---
Net income (loss)....................... $(14) (44) 18 -- (58)
==== === === === ===
Pro Forma income taxes (note 6)(unaudited)... $ -- -- -- -- --
==== === === === ===
Pro Forma net income (loss)(unaudited)....... $(14) (44) 18 -- (58)
==== === === === ===
</TABLE>
See accompanying notes to combined financial statements.
F-414
<PAGE> 558
COPPER.NET GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON
STOCK ACCUMULATED
SHARES AMOUNT SUBSCRIBED DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995........... -- $-- -- (11) (11)
Net loss................................ -- -- -- (14) (14)
--- --- -- ---- ----
BALANCES AT DECEMBER 31, 1996........... -- -- -- (25) (25)
Issuance of common stock in connection
with incorporation (note 1a).......... 200 1 (1) -- --
Net loss................................ -- -- -- (44) (44)
Distribution to stockholders............ -- -- -- (19) (19)
--- --- -- ---- ----
BALANCES AT DECEMBER 31, 1997........... 200 1 (1) (88) (88)
Net income.............................. -- -- -- 18 18
Distribution to stockholders............ -- -- -- (56) (56)
--- --- -- ---- ----
BALANCES AT DECEMBER 31, 1998........... 200 1 (1) (126) (126)
Net loss (unaudited).................... -- -- -- (58) (58)
Distribution to stockholders
(unaudited)........................... -- -- -- (43) (43)
--- --- -- ---- ----
BALANCES AT JUNE 30, 1999 (unaudited)... 200 $ 1 (1) (227) (227)
=== === == ==== ====
</TABLE>
See accompanying notes to combined financial statements.
F-415
<PAGE> 559
COPPER.NET GROUP
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
-------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(14) (44) 18 -- (58)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 13 26 46 15 56
Changes in operating assets and liabilities:
Receivables................................... -- -- (9) (6) 7
Prepaid expenses.............................. -- (1) (1) (1) (1)
Accounts payable.............................. 12 29 (38) (5) (4)
Accrued expenses.............................. -- 4 3 (2) 1
Deferred revenue.............................. 14 43 113 53 111
---- --- ---- --- ----
Net cash provided by operating
activities.............................. 25 57 132 54 112
---- --- ---- --- ----
Cash flows from investing activities:
Acquisition of equipment and leasehold
improvements.................................... (22) (29) (114) (14) (99)
Proceeds from sale of equipment.................... -- -- 3 3 --
Proceeds from sale-and-leaseback transaction....... -- -- 16 16 --
---- --- ---- --- ----
Net cash provided (used) by investing
activities.............................. (22) (29) (95) 5 (99)
---- --- ---- --- ----
Cash flows from financing activities:
Proceeds from notes payable and long-term debt..... -- 7 91 -- 125
Repayments of notes payable and long term debt..... (2) (2) (9) (8) (17)
Distributions and loans to related party........... -- (19) (60) (25) (142)
Proceeds from notes payable to related party....... -- -- -- -- 50
Repayments of notes payable to related party....... -- (4) (6) (3) --
Repayments of capital lease obligations............ (1) (10) (30) (11) (18)
---- --- ---- --- ----
Net cash used by financing activities...... (3) (28) (14) (47) (2)
---- --- ---- --- ----
Net increase in cash and cash
equivalents............................. -- -- 23 12 11
Cash and cash equivalents:
Beginning period................................... -- -- -- -- 23
---- --- ---- --- ----
End of period...................................... $ -- -- 23 12 34
==== === ==== === ====
</TABLE>
F-416
<PAGE> 560
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Group paid approximately $2, $6,
$11, $4 and $10, respectively, for interest.
Non-cash financing activities:
The Group entered into various capital leases for computer equipment. These
capital leases obligations resulted in non-cash financing activities aggregating
$15, $35, $39, $20 and $0 for the years ended December 31, 1996, 1997, and 1998
and for the six month periods ended June 30, 1998 and 1999, respectively.
See accompanying notes to combined financial statements.
F-417
<PAGE> 561
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements present the combined financial
position, results of operations and cash flows of Copper.net, Inc. and ECR
Internet Services, Inc. -- Internet Service Provider Division (collectively, the
"Group"), as the entities are operating under common control. Copper.net, Inc.
("Copper.net") commenced pre-incorporation operations in 1997, while ECR
Internet Services, Inc. ("ECR") commenced pre-incorporation operations in 1995.
Only the internet service provider assets, liabilities and results operations of
ECR are presented due to the pending sale described in note 8.
In preparing the financial statements of the Group, management has
allocated certain assets, liabilities, revenue and expense based upon the
characteristics of the accounts and the business divisions to which they relate.
Expenses which are not directly related to a particular division are allocated
based upon revenue or payroll expense of the division which, in the opinion of
management, represents a reasonable and appropriate method of allocation.
The Group was incorporated on December 22, 1997 to capitalize on the
growing demand for Internet access and enhanced services by consumers and
business users. The Group is a provider of dial up Internet access operating
primarily in Ohio.
Inherent in the Group's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for Internet access and enhanced services.
The Group's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet and the Group's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Group as of June 30, 1999, and the
statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
F-418
<PAGE> 562
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) CASH AND CASH EQUIVALENTS
The Group considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. The Group
maintains all of its cash in a bank checking account.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
an accelerated method over the estimated useful lives of the related assets,
generally five years. Property and equipment under capital leases are stated at
the present value of minimum lease payments and are amortized using an
accelerated method over the shorter of the lease term or the estimated useful
lives of the assets. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Group evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INCOME TAXES
The Group accounts for income taxes as a C-Corp. under the provisions of
SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-419
<PAGE> 563
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
When the Group are not C-Corp. (operating as S-Corp or unincorporated sole
proprietorships), the stockholders are personally liable for their proportionate
share of the Group's federal and state taxable income; therefore, no provision
or liability for federal and state is reflected in such years.
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods.
(i) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Group expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $1, $14, $41, $19 and $50 for the years ended December 31, 1996,
1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(j) CONCENTRATION OF CREDIT RISKS
For each of the years ended December 31, 1996, 1997 and 1998 and for the
six month periods ended June 30, 1998 and 1999, three vendors represented
approximately 0%, 51.0%, 42.2%, 42.9% and 40.5%, respectively, of the Group's
total purchases. The Group's reliance on certain vendors can be shifted to
alternative sources of supply for products it sells, should such change be
necessary.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Group's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-420
<PAGE> 564
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases, stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $64, $81 and $81,
respectively.............................................. $107 257 356
Furniture and fixtures...................................... 2 2 2
Leasehold improvement....................................... 9 9 9
---- --- ----
118 268 367
Less accumulated depreciation and amortization, including
amounts related to capital leases of $21, $47 and $51,
respectively.............................................. 42 88 144
---- --- ----
Total.................................................. $ 76 180 223
==== === ====
</TABLE>
Accrued Expenses
<TABLE>
<S> <C> <C> <C>
Employee payroll expenses $ 3 4 3
Other 1 3 5
---- --- ----
$ 4 7 8
==== === ====
</TABLE>
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the following
as of December 31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, fixed interest rate of 9.75%, payable
in monthly installments through December 2001. ........... $-- 91 79
Note payable to bank, variable interest rate at Prime plus
2%, payable in monthly installments through May 2003. .... 14 5 125
--- -- ---
14 96 204
Less current portion........................................ 9 30 62
--- -- ---
Long-term debt, less current portion................... $ 5 66 142
=== == ===
</TABLE>
F-421
<PAGE> 565
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
On November 4, 1998, the Group entered into a variable rate revolving line
of credit agreement with a bank. The line of credit, which expires November 4,
1999, permits the Group to borrow up to $15 at an interest rate of Prime plus
2%. At December 31, 1998 and June 30, 1999, the Group had no outstanding balance
on the line of credit. The line of credit is secured by all equipment.
Substantially all of the Group's equipment serves as collateral for the
outstanding debt. Additionally, $84 of the notes payable at June 30, 1999 are
guaranteed by a stockholder.
As described in note 8, the Group entered into significant additional notes
payable agreements subsequent to December 31, 1998.
(4) LEASES
The Group entered into a $16 sale-leaseback transaction for certain
computer equipment in May 1998. The lease agreement includes a bargain purchase
option and was, therefore, classified as a capital lease. There was no gain/loss
on the sale-leaseback.
The Group also leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2003.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $44 13
2000........................................................ 24 13
2001........................................................ 7 13
2002........................................................ -- 11
2003........................................................ -- 7
--- --
Total minimum payments 75 57
==
Less amount representing interest 11
---
Present value of net minimum lease payments 64
Less current portion 36
---
$28
===
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 were $3, $6, $13, $7 and $7,
respectively.
F-422
<PAGE> 566
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(5) RELATED PARTY TRANSACTIONS
The Group advanced amounts to a stockholder totaling $4 and $14 at December
31, 1997 and 1998, respectively. The receivable from stockholder is classified
as long-term as it is not expected to be repaid within one year.
The Group had a non-trade receivable from a related party amounting to $89
at June 30, 1999. Additionally, the Group had accounts payable to a related
party of $30 and $2 at December 31, 1997 and 1998, respectively.
At December 31, 1996 and 1997, the Group had a note payable to a relative
of one of the stockholders. The note, which was repaid in 1998, charged interest
at 8 percent per year. Interest expense on the note was $1 for the years ended
December 31, 1996 and 1997, respectively.
At June 30, 1999, the Group had an unsecured note payable with a relative
of one of the stockholders. The note, which charges interest at 15%, is due on
demand. Interest expense on the note amounted to $1 for the six months ended
June 30, 1999.
The President, a 50% stockholder of the Group, did not receive a salary for
the years ended December 31, 1996, 1997 and 1998. For the period ended June 30,
1999, the President's salary amounted to $6.
The Group leases office space from one of the stockholders on a
month-to-month basis. Rent expense was $6 for the years ended December 31, 1996,
1997 and 1998 and $3 for the six month periods ended June 30, 1998 and 1999.
(6) INCOME TAXES
In tax years prior to December 31, 1997, the Group operated as
unincorporated sole proprietorships. As such, the sole proprietor included the
Group's income (loss) on his personal income tax return. Accordingly, Group was
not subject to Federal and state corporate income taxes during the period it was
unincorporated as sole proprietorships.
Copper.net Group converted to a C-Corp on December 22, 1997, and became
subject to Federal and state corporate income taxes. On January 1, 1999,
Copper.net, Group elected to change its corporate status to an S-Corp under the
provisions of Section 1362 of the Internal Revenue Code. Accordingly, Copper.net
may be subject to built-in gains tax arising prior to its S election.
ECR Internet Services elected to be taxed as an S-Corp since its
incorporation on December 22, 1997.
F-423
<PAGE> 567
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
The Group's income (loss) before income taxes for the year ended December
31, 1998 is:
<TABLE>
<CAPTION>
1998
----
<S> <C>
S-Corp ............................................. $ 71
C-Corp ............................................. (53)
----
$ 18
====
</TABLE>
Income tax benefit, on taxable C-Corp results of operations, for the year
ended December 31, 1998 differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<S> <C>
Expected tax benefit................................ $ 18
State income taxes, net of federal benefit.......... 3
Change in valuation allowance....................... (21)
----
$ --
====
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward, including
acquisition....................................... $ 21
Valuation allowance................................. (21)
----
Net deferred tax asset $ --
====
</TABLE>
At December 31, 1998, the Group has a net operating loss carryforward for
federal income tax purposes of approximately $53, which would have been
available to offset future federal taxable income, if any, through 2018. Due to
the uncertainty regarding the ultimate utilization of the net operating loss
carryforward, no tax benefit for losses has been provided by the Group in 1998,
and a valuation allowance has been recorded for the entire amount of the
deferred tax asset.
If the Group had operated as a C Corporation since its inception, the Group
would have in recorded gross deferred tax assets for the years ended December
31, 1997 and 1998 and for the six months ended June 30, 1999 of $30, $22 and
$47, respectively. However, due to operation losses incurred, there would have
been a corresponding valuation allowance of $30, $22 and $47.
(7) COMMITMENTS
The Group has entered into certain long-term service agreements with local
phone companies and Tier 1 Internet service providers for use of phone line and
access to the internet through 2004.
F-424
<PAGE> 568
COPPER.NET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future minimum annual payments under these service agreements as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................ $198
2000................................................ 201
2001................................................ 192
2002................................................ 177
2003................................................ 158
</TABLE>
Expense relating to these service agreements for the years ended December
31, 1996, 1997 and 1998 and the six month periods ended June 30, 1998 and 1999
were $37, $48, $107, $48 and $115, respectively.
(8) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
Subsequent to December 31, 1998, the Group entered into several additional
notes payable agreements with banks. The aggregate maturities of long-term debt
and notes payable to banks for each of the five years subsequent to June 30,
1999 and thereafter are:
<TABLE>
<S> <C>
2000................................................. $59
2001................................................. 60
2002................................................. 46
2003................................................. 38
</TABLE>
F-425
<PAGE> 569
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, Inc.:
We have audited the accompanying balance sheets of NetPlus Communications,
Inc. (the "Company") as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' deficit, and cash flows for the period
August 23, 1996 (date of inception) through December 31, 1996 and each of the
years in the two-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 NetPlus Communications, Inc.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the period August 23, 1996 (date of inception) through December 31,
1996 and each of the years in the two-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Columbus, Ohio
August 13, 1999
F-426
<PAGE> 570
NETPLUS COMMUNICATIONS, INC.
BALANCE SHEETS
(AMOUNT IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets --
Cash and cash equivalents................................. $14 11 1
Property and equipment, net (note 2, 3 and 4)............... 41 84 142
--- --- ---
Total assets........................................... $55 95 143
=== === ===
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 6 5 3
Lines of credit, notes payable and current portion of
long-term debt (note 3)................................ 27 34 51
Current portion of capital lease obligations (note 4)..... 8 6 1
Deferred revenue.......................................... 12 26 50
--- --- ---
Total current liabilities.............................. 53 71 105
Long-term debt, less current portion (note 3)............... 6 27 44
Capital lease obligations, less current portion (note 4).... 7 1 --
--- --- ---
Total liabilities...................................... 66 99 149
Stockholders' deficit:
Common stock, no par value; authorized, issued and
outstanding 850 shares................................. 10 10 10
Additional paid-in capital................................ 42 42 42
Accumulated deficit....................................... (63) (56) (58)
--- --- ---
Total stockholder's deficit............................ (11) (4) (6)
--- --- ---
Commitments (note 4 and 5)..................................
--- --- ---
Total liabilities and stockholders' deficit............ $55 95 143
=== === ===
</TABLE>
See accompanying notes to financial statements.
F-427
<PAGE> 571
NETPLUS COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 23- YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------ -------------- -------------------------
1996 1997 1998 1998 1999
------------ ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity............... $ 6 85 198 90 175
Enhanced services and other......... 8 2 11 9 6
---- --- --- -- ---
Total revenue.................... 14 87 209 99 181
Costs and expenses (notes 1(i), 2, 4,
5 and 6):
Cost of Internet services........... 17 67 164 76 146
Selling, general and
administrative................... 12 15 25 12 19
Stock compensation to
shareholders..................... -- 42 -- -- --
Depreciation and amortization....... 1 8 10 5 15
---- --- --- -- ---
Total costs and expenses......... 30 132 199 93 180
---- --- --- -- ---
Income (loss) from operations.... (16) (45) 10 6 1
Other income (expenses):
Interest expense.................... -- (2) (3) (1) (3)
---- --- --- -- ---
Net income (loss)................ $(16) (47) 7 5 (2)
==== === === == ===
Pro Forma income taxes (unaudited).... $ -- -- -- -- --
==== === === == ===
Pro Forma net income (loss)(note 1(g))
(unaudited)......................... $(16) (47) 7 5 (2)
==== === === == ===
</TABLE>
See accompanying notes to financial statements.
F-428
<PAGE> 572
NETPLUS COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCES AT AUGUST 23, 1996................. -- $-- -- -- --
Issuance of common stock at formation of
Company................................... 400 -- -- -- --
Net loss.................................... -- -- -- (16) (16)
--- --- -- --- ---
BALANCES AT DECEMBER 31, 1996............... 400 -- -- (16) (16)
Issuance of common stock to shareholders
(note 6).................................. 365 -- 42 -- 42
Issuance of common stock for cash........... 85 10 -- -- 10
Net loss.................................... -- -- -- (47) (47)
--- --- -- --- ---
BALANCES AT DECEMBER 31, 1997............... 850 10 42 (63) (11)
Net income.................................. -- -- -- 7 7
--- --- -- --- ---
BALANCES AT DECEMBER 31, 1998............... 850 10 42 (56) (4)
Net loss (unaudited)........................ -- -- -- (2) (2)
--- --- -- --- ---
BALANCES AT JUNE 30, 1999 (unaudited)....... 850 $10 42 (58) (6)
=== === == === ===
</TABLE>
See accompanying notes to financial statements.
F-429
<PAGE> 573
NETPLUS COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 23- YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------ ------------ -------------------------
1996 1997 1998 1998 1999
------------ ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $(16) (47) 7 5 (2)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization........... 1 8 10 5 15
Stock compensation to shareholders...... -- 42 -- -- --
Changes in operating assets and
liabilities:
Accounts payable and accrued
expenses........................... -- 6 (1) -- (2)
Deferred revenue...................... 2 11 14 7 24
---- --- --- --- ---
Net cash provided (used) by
operating activities............. (13) 20 30 17 35
---- --- --- --- ---
Cash flows from investing activities:
Acquisition of property and equipment...... (3) (11) (53) (20) (73)
---- --- --- --- ---
Cash flows from financing activities:
Proceeds from lines of credit, notes
payable and current portion of long-term
debt.................................... 19 3 33 12 42
Repayments of notes payable................ -- (1) (5) (2) (8)
Repayments of capital lease obligations.... (2) (8) (8) (4) (6)
Proceeds from issuance of common stock, net
of issuance costs....................... -- 10 -- -- --
---- --- --- --- ---
Net cash provided by financing
activities....................... 17 4 20 6 28
---- --- --- --- ---
Net increase (decrease) in cash and
cash equivalents................. 1 13 (3) 3 (10)
Cash and cash equivalents:
Beginning period........................... -- 1 14 14 11
---- --- --- --- ---
End of period.............................. $ 1 14 11 17 1
==== === === === ===
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six
month periods ended June 30, 1998 and 1999, the Company paid approximately
$0, $0, $2, $1 and $3, respectively, for interest.
See accompanying notes to financial statements.
F-430
<PAGE> 574
NETPLUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
NetPlus Communications, Inc. (the "Company") was incorporated on August 23,
1996 to capitalize on the growing demand for Internet access and enhanced
services by consumers and business users. The Company is a provider of dial up
access, consulting, design, layout and setup of Internet web sites, as well as
site hosting services. The Company commenced operations in August of 1996 and
serviced primarily the Perry County, Ohio area through year end 1998. Since year
end 1998, the Company has commenced operations in other local communities that
include Newark and Zanesville, Ohio.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim balance sheet of the Company as of June 30, 1999, and the
statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-431
<PAGE> 575
NETPLUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. The Company
maintains all its cash in a bank checking account.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INCOME TAXES
The Company, with the consent of its stockholders, has elected to be taxed
as an S-Corp. under the provisions of Section 1362 of the Internal Revenue Code.
The stockholders are personally liable for their proportionate share of the
company's federal and state taxable income; therefore, no provision or liability
for income taxes is reflected in the financial statements.
If the Company had operated as C-Corp since inception, the Company would
have recorded gross deferred tax assets for years ended December 31, 1997 and
1998 and for the six months ended June 30, 1999 of $28, $25, and $26. However,
due to operating losses incurred, there would have been a corresponding
valuation allowance of $28, $25, and $26.
F-432
<PAGE> 576
NETPLUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts received relating
to future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided.
(i) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $2, $6, $3 and $3 for the years ended December 31, 1997 and 1998
and for the six month periods ended June 30, 1998 and 1999, respectively.
(j) CONCENTRATION OF CREDIT RISK
For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, three vendors represented approximately
16%, 38%, 48%, 45%, and 51% of the Company's total purchases. The Company's
reliance on certain vendors can be shifted to alternative sources of supply for
products it sells should such changes be necessary.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-433
<PAGE> 577
NETPLUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES, STATED AT COST
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $22, $25 and $25,
respectively.............................................. $47 100 173
Furniture and fixtures...................................... 3 3 3
--- --- ---
50 103 176
Less accumulated depreciation and amortization, including
amounts related to capital leases of $6, $11 and $15,
respectively.............................................. (9) (19) (34)
--- --- ---
Total.................................................. $41 84 142
=== === ===
</TABLE>
(3) DEBT
Lines of credit, notes payable and long-term debt consists of the following
as of December 31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to bank, fixed interest rates ranging from
9.5% to 10.5%, payable in monthly installments including
interest, payable at various dates through June 2002...... $11 39 73
Revolving line of credit, bearing interest at 2% above
prime, renewable annually in November with a maximum
borrowing of $25.......................................... 22 22 22
--- -- --
33 61 95
Less current portion........................................ 27 34 51
--- -- --
Long-term debt, less current portion...................... $ 6 27 44
=== == ==
</TABLE>
Certain of the notes payable to bank are secured by equipment with a net
book value of $21 at December 31, 1998 and $39 at June 30, 1999.
F-434
<PAGE> 578
NETPLUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Aggregate maturities related to the Company's long-term debt at December
31, 1998 and June 30, 1999 for the next five years are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 JUNE 30, 1999
- ----------------- -------------
<S> <C>
1999 - $12 2000 - $29
2000 - 14 2001 - 25
2001 - 12 2002 - 19
2002 - 1 2003 - 0
2003 - 0 2004 - 0
</TABLE>
(4) LEASES
The Company leases computer and office equipment under capital leases which
expire in 1999.
Future minimum annual lease payments under these capital leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASE
-------
<S> <C>
1999........................................................ $8
--
Total minimum payments.................................... 8
Less amount representing interest at 10%.................... 1
--
Present value of net minimum lease payments............... 7
Less current portion........................................ 6
--
$1
==
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 were $1, $3, $3, $1 and $2,
respectively.
(5) COMMITMENTS
The Company has entered into certain long-term service agreements with
local phone companies and Tier 1 Internet service providers for use of phone
line and access to the Internet through 2004.
F-435
<PAGE> 579
NETPLUS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Future estimated minimum annual payments under these service agreements as
of December 31, 1998 for the following five years are as follows:
<TABLE>
<S> <C>
1999........................................................ $172
2000........................................................ 205
2001........................................................ 195
2002........................................................ 175
2003........................................................ 180
</TABLE>
Expenses relating to these service agreements for the periods ended
December 31, 1996, 1997, and 1998 and June 30, 1998 and 1999 were $5, $34, $95,
$42, and $91.
(6) STOCK COMPENSATION TO SHAREHOLDERS
In December of 1997, the shareholder's of the Company issued and
distributed to themselves 365 shares of the Company's remaining common stock for
no asset consideration. This transaction has been recorded as stock compensation
to shareholders, with an offset to additional paid-in capital for financial
reporting purposes. The amount of expense was based on the price paid for the
sale of stock in September, 1997.
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-436
<PAGE> 580
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Internet Nebraska
Corporation as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity 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 Internet Nebraska
Corporation 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
August 13, 1999
Omaha, Nebraska
F-437
<PAGE> 581
INTERNET NEBRASKA CORPORATION
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 70 23 138
Receivables --
Trade, including unbilled revenues, net of allowance
for doubtful accounts of $3, $5 and $6,
respectively.......................................... 24 62 70
Prepaid expenses and inventory............................ 1 1 2
---- --- ---
Total current assets................................. 95 86 210
Property and equipment, net................................. 149 242 274
Other assets -- customer list, net of accumulated
amortization of $4 in 1998 and $15 at June 30, 1999....... -- 124 113
---- --- ---
Total assets......................................... $244 452 597
==== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4 3 36
Accrued expenses.......................................... 3 7 3
Deferred revenue.......................................... 77 118 142
---- --- ---
Total current liabilities............................ 84 128 181
---- --- ---
Stockholders' equity:
Common stock, $1 par value, authorized 10,000 shares,
issued and outstanding 1,140 at December 31, 1997 and
1998................................................... 1 1 1
Additional paid-in capital................................ 24 24 24
Retained earnings......................................... 135 299 391
---- --- ---
Total stockholders' equity........................... 160 324 416
Commitments and contingencies (notes 5 and 6)
---- --- ---
Total liabilities and stockholders' equity........... $244 452 597
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-438
<PAGE> 582
INTERNET NEBRASKA CORPORATION
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
--------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenue:
Internet connectivity.................... $226 528 915 408 718
Enhanced services and other.............. 50 80 156 65 78
---- --- ----- --- ---
Total operating revenue............... 276 608 1,071 473 796
---- --- ----- --- ---
Costs and expenses:
Cost of Internet services................ 93 242 493 201 381
Selling, general and administrative...... 109 194 241 112 207
Depreciation and amortization............ 18 35 60 28 53
---- --- ----- --- ---
Total costs and expenses.............. 220 471 794 341 641
---- --- ----- --- ---
Operating income...................... 56 137 277 132 155
---- --- ----- --- ---
Other income (expenses):
Other income............................. 1 2 2 -- --
Interest expense......................... (1) (1) -- -- --
Loss on disposal of property and
equipment............................. -- -- (7) -- --
---- --- ----- --- ---
Net other income (expense)............ -- 1 (5) -- --
---- --- ----- --- ---
Net income............................ $ 56 138 272 132 155
==== === ===== === ===
Pro Forma income taxes (unaudited)......... $ 12 44 103 50 60
==== === ===== === ===
Pro Forma net income (unaudited)........... $ 44 94 169 82 95
==== === ===== === ===
</TABLE>
See accompanying notes to financial statements.
F-439
<PAGE> 583
INTERNET NEBRASKA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995.................... 1 $1 -- 10 11
Contributions of capital........................ -- -- 8 -- 8
Net income...................................... -- -- -- 56 56
-- -- -- ---- ----
Balance at December 31, 1996.................... 1 1 8 66 75
Issuance of common stock for cash............... -- -- 16 -- 16
Net income...................................... -- -- -- 138 138
Dividend distributions.......................... -- -- -- (69) (69)
-- -- -- ---- ----
Balance at December 31, 1997.................... 1 1 24 135 160
Net income...................................... -- -- -- 272 272
Dividend distributions.......................... -- -- -- (108) (108)
-- -- -- ---- ----
Balance at December 31, 1998.................... 1 1 24 299 324
Net income (unaudited).......................... -- -- -- 155 155
Dividend distribution (unaudited)............... -- -- -- (63) (63)
-- -- -- ---- ----
Balance at June 30, 1999 (unaudited)............ 1 $1 24 391 416
== == == ==== ====
</TABLE>
See accompanying notes to financial statements.
F-440
<PAGE> 584
INTERNET NEBRASKA CORPORATION
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 56 138 272 132 155
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 18 35 60 28 53
Loss on disposal of property and equipment............. -- -- 7 -- --
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables.......................................... (13) (11) (33) (18) (8)
Prepaid expenses and inventory....................... 2 (2) -- 1 (1)
Accounts payable..................................... 4 (1) (1) 5 34
Accrued expenses..................................... 3 2 4 (2) (4)
Deferred revenue..................................... 25 36 22 20 24
---- --- ---- --- ---
Net cash provided by operating activities......... 95 197 331 166 253
---- --- ---- --- ---
Cash flows from investing activities:
Acquisition of property and equipment..................... (88) (74) (138) (56) (75)
Acquisition of business................................... -- -- (139) -- --
Proceeds from disposal of property and equipment.......... -- -- 7
---- --- ---- --- ---
Net cash used in investing activities............. (88) (74) (270) (56) (75)
---- --- ---- --- ---
Cash flows from financing activities:
Proceeds from note payable to shareholder................. -- 12 -- -- --
Repayments of note payable to shareholder................. (12) (20) -- -- --
Dividend paid............................................. -- (70) (108) (85) (63)
Proceeds from issuance of common stock.................... 8 16 -- -- --
---- --- ---- --- ---
Net cash used in financing activities............. (4) (62) (108) (85) (63)
---- --- ---- --- ---
Net increase (decrease) in cash and cash
equivalents..................................... 3 61 (47) 25 115
Cash and cash equivalents, beginning of year................ 6 9 70 70 23
---- --- ---- --- ---
Cash and cash equivalents, end of year...................... $ 9 70 23 95 138
==== === ==== === ===
</TABLE>
Supplemental disclosures of cash flow information:
During the years ended December 31, 1996 and 1997, and during the six month
periods ended June 30, 1998 and 1999, the Company paid approximately $1 for
interest.
During the year ended December 31, 1998, the Company acquired the business of
TCG Computer Services (TCG) for cash consideration of approximately $139
and liabilities assumed of approximately $18. The Company also acquired
accounts receivable of $5 and property and equipment of $24.
See accompanying notes to financial statements.
F-441
<PAGE> 585
INTERNET NEBRASKA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Internet Nebraska Corporation (the "Company") was incorporated as a
Nebraska corporation on August 4, 1994 to capitalize on the growing demand for
Internet access and enhanced services by consumers and business users. The
Company operates in a single segment. The substantial majority of the Company's
revenues are derived from customers located in the immediate Lincoln, Nebraska
area and the State of Nebraska.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, potential entrants to the Internet
services industry, and the limited history of the need for Internet access and
enhanced services. The Company's future success will be dependent upon its
ability to create and provide effective and competitive Internet services, the
continued acceptance of the Internet, and the Company's ability to develop and
provide new services that meet customers changing requirements, including the
effective use of leading technologies, to continue to enhance its current
services, and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity and cash flows for the six
months ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-442
<PAGE> 586
INTERNET NEBRASKA CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INTANGIBLE ASSETS
The Company's customer list is amortized using the straight-line method
over a 5-year period.
(g) INCOME TAXES
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S-Corp. In lieu of corporation income taxes, the
shareholders of an S-Corp are taxed on their proportionate share of the
Company's taxable income. Therefore, no provision or liability for federal or
state income taxes has been included in these financial statements for the
three-year period ending December 31, 1998.
As discussed in note 7, the Company has entered into a definitive agreement
with a third party for the sale of the Company's common stock by its
shareholders. Upon the sale of the Company's common stock to a corporation, the
Company's S-Corp status will automatically terminate under the provisions of the
Internal Revenue Code.
The unaudited pro forma income tax information is included in the statement
of operations as a voluntary disclosure, as if the Company had been subject to
federal and state income taxes for each of the years in the three-year period
ending December 31, 1998 and for the six-month periods ending June 30, 1998 and
1999. Pro forma income tax expense has been calculated using an estimated
effective tax rate of 21%, 32% and 38% in December 31, 1996, 1997, and 1998,
respectively. The effective tax rate for the six-month periods ended June 30,
1998 and 1999 is 38% and 39%, respectively.
F-443
<PAGE> 587
INTERNET NEBRASKA CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized using the completed contract
method. The Company's accounting records do not support the preparation of
reliable estimates of the extent of progress to completion for individual
contracts necessary to support the use of percentage-of-completion accounting.
Revenue from hardware and software sales is recognized upon shipment of the
respective products.
(i) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. However, the accounts
receivable of the Company are geographically concentrated in the immediate
Lincoln, Nebraska area and the State of Nebraska.
At December 31, 1998, the fair value of the Company's cash, accounts
receivable, accounts payable, accrued expenses, and deferred revenues
approximate their carrying value due to the short-term nature of these financial
instruments.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. SOP 98-1 is effective for the Company's
fiscal year 1999. Adoption of SOP 98-1 as of January 1, 1999 did not have any
material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet analyzed the impact of
this pronouncement on its financial statements.
F-444
<PAGE> 588
INTERNET NEBRASKA CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) ACQUISITION
On November 12, 1998, the Company acquired the business of TCG Computer
Services ("TCG") for cash consideration of approximately $139 and liabilities
assumed of approximately $18. TCG, organized as a sole proprietorship, is an
Internet service provider doing business in Hastings, Nebraska. The acquisition
of TCG has been accounted for using the purchase method of accounting and,
accordingly, the results of operations of the Company include the results of TCG
since the date of acquisition. Assets acquired and liabilities assumed have been
recorded at their estimated fair values. The Company allocated the purchase
price to the assets acquired and liabilities assumed as shown below:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Accounts receivable......................................... $ 5
Property and equipment...................................... 24
Customer list............................................... 128
Unearned revenue............................................ 18
</TABLE>
The customer list will be amortized over an estimated useful life of 5
years using the straight-line method.
The following unaudited Pro Forma information presents the results of
operations of the Company as if the acquisition of TCG had occurred on January
1, 1997:
<TABLE>
<CAPTION>
1997 1998
---- -----
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $772 1,346
==== =====
Net income.................................................. $112 278
==== =====
</TABLE>
These unaudited Pro Forma results have been prepared for comparative
purposes only and include certain adjustments for the additional amortization
expense as a result of the acquired customer lists and goodwill. They do not
purport to be indicative of the results of operations which actually would have
occurred on the date indicated, or which may result in the future.
F-445
<PAGE> 589
INTERNET NEBRASKA CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) PROPERTY AND EQUIPMENT
Property and equipment is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and compute equipment.................. $205 347 421
Furniture and fixtures................................. 5 7 6
---- --- ---
210 354 427
Less accumulated depreciation and amortization......... 61 112 153
---- --- ---
Net property and equipment........................... $149 242 274
==== === ===
</TABLE>
(4) RELATED PARTY TRANSACTIONS
The Company leases office space from a relative of one of the Company's
shareholders on a month-by-month basis. The amount of rent expense incurred
under this arrangement was approximately $4 per year in 1996, 1997 and 1998,
respectively, and $2 for each of the six-month periods ended June 30, 1998 and
1999.
In 1995 and 1996, the Company had an advance from a shareholder bearing
interest at 8%. Interest expense on the advance was approximately $1 in 1996 and
1997. The advance was repaid in its entirety in 1997.
(5) COMMITMENT
The Company has entered into an agreement with a local competitive exchange
carrier that provides the Company with access to their telecommunications
network through September 28, 2001. The agreement provides for annual aggregate
payments of $10 in 1999, $10 in 2000, and $7 in 2001 by the Company for periodic
network access charges. However, the agreement may be cancelled at the
discretion of the Company after September 28, 1999. Upon cancellation, the
Company would be required to pay a cancellation fee equal to 15% of the
remaining service cost payments plus deferred billings related to the
installation of the access lines. If cancelled on September 28, 1999, the
cancellation fee would be approximately $5.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations, or liquidity.
F-446
<PAGE> 590
INTERNET NEBRASKA CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-447
<PAGE> 591
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Rapid.Net, Inc. as of
December 31, 1997 and 1998 and the related statements of operations, owners'
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 Rapid.Net, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ KPMG LLP
Lincoln, Nebraska
August 6, 1999
F-448
<PAGE> 592
RAPIDNET, INC.
(D/B/A RAPIDNET)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSET
Current assets:
Cash and cash equivalents................................. $ -- 14 10
Receivables:
Trade, net of allowance for doubtful accounts of $5 in
1997 and 1998........................................ 84 69 46
Receivable from life insurance policy.................. 250 -- --
Other.................................................. 1 -- --
Prepaid expenses and other................................ 7 3 5
----- ---- ----
Total current assets................................. 342 86 61
Property and equipment, net................................. 240 296 317
Customer lists, net of accumulated amortization of $3 and
$9, respectively.......................................... 25 19 16
----- ---- ----
Total assets......................................... $ 607 401 394
===== ==== ====
LIABILITIES AND OWNERS' DEFICIT
Current liabilities:
Cash overdraft............................................ $ 11 -- --
Lines of credit, notes payable, and current portion of
long-term debt......................................... 643 184 114
Current portion of capital lease obligations.............. 26 58 65
Accounts payable.......................................... 134 186 109
Accrued expenses, including advance to stockholder of $20
in 1998................................................ 24 50 45
Deferred revenue.......................................... 36 57 64
----- ---- ----
Total current liabilities............................ 874 535 397
Long-term debt, less current portion........................ 37 317 441
Capital lease obligations, less current portion............. 41 62 64
----- ---- ----
Total liabilities.................................... 952 914 902
----- ---- ----
Owners' deficit:
Common stock, $1 par value; authorized 100,000 shares,
issued and outstanding 1,002 shares at December 31,
1998................................................... -- 1 1
Additional paid-in capital................................ -- 3 3
Members' equity accounts.................................. 53 -- --
Accumulated deficit....................................... (398) (517) (512)
----- ---- ----
Total owners' deficit................................ (345) (513) (508)
Commitments.................................................
----- ---- ----
Total liabilities and owners' deficit................ $ 607 401 394
===== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-449
<PAGE> 593
RAPIDNET, INC.
(D/B/A RAPIDNET)
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- -------------------------
1996 1997 1998 1998 1999
----- ---- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity................... $ 208 573 942 450 609
Enhanced services and other............. 31 113 402 191 121
----- ---- ----- --- ---
Total revenue........................ 239 686 1,344 641 730
----- ---- ----- --- ---
Costs and expenses:
Cost of Internet services............... 138 326 422 167 325
Enhanced services and other costs of
services............................. 20 64 347 131 62
Selling, general, and administrative.... 308 467 645 339 256
Depreciation and amortization........... 17 48 68 41 37
----- ---- ----- --- ---
Total costs and expenses............. 483 905 1,482 678 680
----- ---- ----- --- ---
Operating income (loss).............. (244) (219) (138) (37) 50
----- ---- ----- --- ---
Other income (expense):
Gain from proceeds of key man insurance
policy............................... -- 250 -- -- --
Loss on disposal of property and
equipment............................ (1) -- (1) -- --
Interest income......................... -- -- 8 8 --
Interest expense........................ (24) (56) (68) (28) (36)
----- ---- ----- --- ---
Net other income (expense)........... (25) 194 (61) (20) (36)
----- ---- ----- --- ---
Net income (loss).................... $(269) (25) (199) (57) 14
===== ==== ===== === ===
Pro Forma income taxes (unaudited)........ $ -- -- -- -- 2
===== ==== ===== === ===
Pro Forma net income (loss) (unaudited)... $(269) (25) (199) (57) 12
===== ==== ===== === ===
</TABLE>
See accompanying notes to financial statements.
F-450
<PAGE> 594
RAPIDNET, INC.
(D/B/A RAPIDNET)
STATEMENTS OF OWNERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL MEMBERS' ACCUMU- TOTAL
--------------- PAID-IN EQUITY LATED OWNERS'
SHARES AMOUNT CAPITAL ACCOUNTS DEFICIT DEFICIT
------ ------ ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995..... -- $ -- -- 4 (104) (100)
Net loss......................... -- -- -- -- (269) (269)
----- ------ ------ ---- ---- ----
Balance at December 31, 1996..... -- -- -- 4 (373) (369)
Net loss......................... -- -- -- -- (25) (25)
Return of capital related to
acquisition of related
business....................... -- -- -- (40) -- (40)
Capital contributions by
members........................ -- -- -- 304 -- 304
Reacquisition of members' equity
interests, net................. -- -- -- (215) -- (215)
----- ------ ------ ---- ---- ----
Balance at December 31, 1997..... -- -- -- 53 (398) (345)
Net loss......................... -- -- -- -- (199) (199)
Return of capital related to
acquisition of related
business....................... -- -- -- (10) -- (10)
Contribution of capital made in
connection with the conversion
from a limited liability
company to an S-Corp. ......... 1,002 1 3 (43) 80 41
----- ------ ------ ---- ---- ----
Balance at December 31, 1998..... 1,002 1 3 -- (517) (513)
Net income (unaudited)........... -- -- -- -- 14 14
Return of capital related to
acquisition of related business
(unaudited).................... -- -- -- -- (9) (9)
----- ------ ------ ---- ---- ----
Balance at June 30, 1999
(unaudited).................... 1,002 $ 1 3 -- (512) (508)
===== ====== ====== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-451
<PAGE> 595
RAPIDNET, INC.
(D/B/A RAPIDNET)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------- -------------------------
1996 1997 1998 1998 1999
----- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(269) (25) (199) (57) 14
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 17 50 72 44 39
Gain from insurance policy........................... -- (250) -- -- --
Loss on disposal of property and equipment........... 1 -- 1 -- --
Changes in operating assets and liabilities,
excluding effects of business combinations:
Receivables....................................... (21) (67) (3) (29) 23
Prepaid expenses and other........................ -- (6) 4 3 (2)
Accounts payable.................................. 50 23 63 47 (77)
Accrued expenses.................................. 2 19 27 21 (5)
Deferred revenue.................................. 20 16 21 12 7
----- ---- ---- ---- ---
Net cash provided by (used in) operating
activities.................................... (200) (240) (14) 41 (1)
----- ---- ---- ---- ---
Cash flows from investing activities:
Acquisition of property and equipment.................. (85) (95) (5) -- (9)
Proceeds from disposal of property and equipment....... 2 -- -- -- 6
Proceeds from life insurance policy.................... -- -- 250 250 --
Acquisition of customer list........................... -- (27) -- -- --
----- ---- ---- ---- ---
Net cash provided by (used in) investing
activities.................................... (83) (122) 245 250 (3)
----- ---- ---- ---- ---
Cash flows from financing activities:
Net change in cash overdraft........................... 7 (1) (6) (6) --
Proceeds from lines of credit and long-term debt....... 228 401 153 195 165
Proceeds from related party notes payable.............. 42 27 1 33 --
Repayment of lines of credit and long-term debt........ (10) (132) (308) (340) (87)
Repayment of related party notes payable............... (3) (8) (5) (56) (34)
Repayment of capital lease obligations................. $ (4) (14) (83) (53) (44)
Dividend to shareholders............................... -- -- (10) -- --
Contributions of owners' capital....................... -- 304 41 -- --
Reacquisitions of owners' interests.................... -- (215) -- -- --
----- ---- ---- ---- ---
Net cash provided by (used in) financing
activities.................................... 260 362 (217) (227) --
----- ---- ---- ---- ---
Net increase (decrease) in cash................. (23) -- 14 64 (4)
Cash, beginning of period................................ 23 -- -- -- 14
----- ---- ---- ---- ---
Cash, end of period...................................... $ -- -- 14 64 10
===== ==== ==== ==== ===
Supplemental disclosures -- cash paid for interest....... $ 24 56 68 28 36
===== ==== ==== ==== ===
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
The Company acquired property and equipment by entering into capital lease
obligations of $34, $51, and $136 in 1996, 1997, and 1998, respectively,
and by entering into capital lease obligations.
The Company refinanced notes payable of $325 and $325 in 1997 and 1998,
respectively.
In 1997 and 1998, the Company acquired a related company through a payment to
shareholders of $10 in cash and the assumption of net liabilities of $40.
See accompanying notes to financial statements.
F-452
<PAGE> 596
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
RapidNet, L.L.C. ("RapidNet") was initially formed as a South Dakota
limited liability company under an operating agreement between its equity
members dated September 20, 1995. On April 15, 1998, RapidNet, Inc. was formed
as a South Dakota corporation in connection with the conversion of RapidNet's
legal form of organization from a limited liability company to an S-Corp. The
accompanying financial statements include the accounts of RapidNet, Inc. and its
predecessor company, RapidNet L.L.C. (collectively, the "Company").
As discussed in note 2, the Company acquired the business of Technical
Skills Development through the purchase of its assets from two of the Company's
three common stockholders. The accompanying financial statements have been
restated to include the accounts of Technical Skills Development beginning with
the date that common control of the Company and Technical Skills Development was
obtained, which was September 30, 1997.
The Company was formed to capitalize on the growing demand for internet
access and enhanced services by consumers and business users. The Company
operates in a single business segment. Substantially all of the Company's
revenues are derived from customers located in the immediate Rapid City area.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon connectivity providers, and the limited history of the need for internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the internet, and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses of $269, $4, and $195 in 1996, 1997,
and 1998, respectively. The Company has also accumulated a net working capital
deficit of $449 and accumulated owners' deficits of $507 at December 31, 1998.
Going forward, significant amounts of cash will be required to pay the Company's
obligations as they become due. The Company's success in sustaining its
operations is, in part, dependent upon either management's ability to
successfully extend or renegotiate the terms of its existing debt arrangements
or to successfully complete a sale of the Company (see note 8).
F-453
<PAGE> 597
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(c) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, owners' deficit, and cash flows for the six months
ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(d) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years. Property and equipment under
capital leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(f) INTANGIBLE ASSETS
The Company's acquisition of a customer list is amortized using the
straight-line method over a five-year period.
(g) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount.
F-454
<PAGE> 598
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(i) INCOME TAXES
From January 1, 1996 to April 15, 1998, the Company was organized as a
South Dakota limited liability company. As a limited liability company, the
taxable income or loss of the Company is allocated to its member-owners based
upon the provisions of the limited liability company operating agreement. The
resultant tax benefit or liability is the responsibility of the Company's
owner-members rather than that of the Company. Effective with its conversion to
a corporate form of organization on April 15, 1998, the Company elected under
the Internal Revenue Code to be an S-Corp with the consent of its shareholders.
In lieu of corporation income taxes, the shareholders of an S-Corp are taxed on
their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal or state income taxes has been included in
these financial statements for the three-year period ending December 31, 1998.
As discussed in note 7, the Company has entered into a definitive agreement
with a third party for the sale of the Company's stock by its shareholders. Upon
the sale of the Company's common stock to a corporation, the Company's S-Corp
status will automatically terminate under the provisions of the Internal Revenue
Code.
For periods prior to the revocation of its partnership status, the
unaudited Pro Forma income tax information is included in the statements of
operations as a voluntary disclosure, as if the Company had been subject to
federal and state income taxes for each of the years in the three-year period
ending December 31, 1998 and for the six-month periods ending June 30, 1998 and
1999.
(j) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are
provided. Revenue from hardware and software sales is recognized upon shipment
of the respective products.
F-455
<PAGE> 599
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(k) 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.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. However, the accounts
receivable of the Company are geographically concentrated in the immediate Rapid
City, South Dakota area.
At December 31, 1998, the fair value of the Company's cash, accounts
receivable, accounts payable, accrued expenses, and deferred revenues
approximate their carrying value based on their terms and interest rates. The
fair value of the Company's capital lease obligations and long-term debt is
estimated by discounting the future cash flows of each instrument at rates
currently offered to the Company for similar debt instruments of comparable
matures. At December 31, 1998, the fair value of these long-term instruments
approximated their carrying values.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet analyzed the impact of
this pronouncement on its financial statements.
(2) ACQUISITION OF RELATED COMPANY
On January 1, 1998, the Company acquired the business of a related company,
Technical Skills Development, L.L.C. (d/b/a, and referred to as, "PC
Associates"), through an acquisition of its net assets. In consideration for the
net assets of PC Associates, the Company paid cash of $10 and assumed net
liabilities of approximately $40 at September 30, 1997 to the shareholders of PC
Associates. The accompanying financial statements have been restated to include
the accounts of PC Associates beginning on September 30, 1997.
The equity members of PC Associates consisted of two people who, as a
group, have controlled approximately two-thirds of the voting equity interests
of the Company since
F-456
<PAGE> 600
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
September 1997. Consequently, the acquisition of PC Associates has been
accounted for as a transfer of net assets between entities under common control.
Assets and liabilities transferred between PC Associates and the Company have
been recorded at historical costs in a manner similar to a pooling of interests
("as-if pooling-of-interests accounting"). The assumption of net liabilities and
distribution of cash of $50 has been accounted for as returns of capital in the
statements of owners' deficit.
(3) PROPERTY AND EQUIPMENT
Property and equipment is shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment................................... $ 24 29 28
Computer equipment and software.................... 258 223 228
Equipment acquired under capital leases............ 84 167 220
----- ---- ----
366 419 476
Less accumulated depreciation and amortization..... (126) (123) (159)
----- ---- ----
Total.............................................. $ 240 296 317
===== ==== ====
</TABLE>
(4) DEBT
Lines of credit, notes payable, and long-term debt consists of the
following as of December 31, 1997 and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Small Business Administration guaranteed loans:
American State Bank, 10.75%, dated August 28, 1998,
due December 24, 2000, secured by equipment,
accounts receivable and customer lists........... $ -- 10 8
American State Bank, 9.25%, dated May 16, 1996, due
May 16, 2003, secured by equipment, accounts
receivable, and customer lists................... -- 332 315
American State Bank, 9.75%, dated May 16, 1996, due
May 16, 2003, secured by equipment, inventory and
accounts receivable.............................. 136 19 17
</TABLE>
F-457
<PAGE> 601
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
American State Bank, 8.75%, dated June 7, 1999, due
June 7, 2002, secured by equipment, accounts
receivable and customer lists.................... -- -- 165
Revolving line of credit, American State Bank,
10.75%, dated October 6, 1995, due April 1998,
secured by fixed assets, accounts receivable, and
customer lists, expired April 1998............... 318 -- --
---- ---- ----
Total............................................ 454 361 505
---- ---- ----
Note payable to stockholders and former equity
members:
Revolving line of credit with shareholder, repaid
April 3, 1998, unsecured......................... 62 -- --
Demand notes payable, 10.38%, unsecured............. -- 51 --
Demand notes payable, noninterest bearing,
unsecured........................................ 164 89 50
---- ---- ----
Total............................................ 226 140 50
---- ---- ----
Total long-term and revolving debt............... 680 501 555
Less current portion.................................. 643 184 114
---- ---- ----
Long-term debt, less current portion............. $ 37 317 441
==== ==== ====
</TABLE>
In June 1999, the Company originated a loan for $165 with American State
Bank bearing interest at 8.75% and maturing June 2002. The new loan is secured
by fixed assets, receivables, and customer lists. Proceeds from the loan were
used to retire capital lease obligations of approximately $10 and notes payable
to stockholders and former equity members of approximately $84.
The demand notes payable to shareholders are non-interest bearing, except
for a note payable of $51 payable to a company that is owned by one of the
Company's shareholders. The note payable bears interest at Wall Street prime
plus 2% (10.38% at December 31, 1998). Interest is payable in January 2000.
Interest expense incurred on these notes payable was $5 in 1998 and $3 and $4
for the six-month periods ended June 30, 1998 and 1999, respectively.
The demand notes payable stockholders and former equity members are payable
at which time the Company has sufficient funds available or upon certain
triggering events, such as a change-in-control of the Company. Accordingly, all
of the notes payable to shareholders are classified as current liabilities.
Future minimum maturities of long-term debt, including demand notes payable
to shareholders, are as follows. All amounts are presented in thousands.
F-458
<PAGE> 602
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
<TABLE>
<S> <C>
1999........................................................ $184
2000........................................................ 48
2001........................................................ 264
2002........................................................ 5
2003 and thereafter......................................... --
</TABLE>
(5) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 74 $48
2000........................................................ 53 43
2001........................................................ 16 --
---- ---
Total minimum payments................................. 143 $91
===
Less amount representing interest........................... 23
----
Present value of net minimum lease payments............ 120
Less current portion........................................ 58
----
$ 62
====
</TABLE>
Rent expense under operating leases was approximately $7, $14 and $45, for
1996, 1997, and 1998, respectively, and $18 and $23 for the six month periods
ended June 30, 1998 and 1999, respectively.
(6) CAPITAL STOCK
The Company's common stockholders have entered into buy-sell agreements
which affect the transferability of their shares of common stock to third
parties. Under the buy-sell agreements, the other existing stockholders are
provided the first option to purchase the shares in proportion to their relative
ownership percentage when a stockholder announces an intention to sell his or
her common stock. If the other stockholders do not exercise the right to
purchase the stock, the Company has a second option to purchase the shares
offered for sale. If neither the existing shareholders nor the Company exercise
their options, the selling stockholder is permitted to sell the shares to a
third party. In the event of a death of a stockholder, the buy-sell agreement
also
F-459
<PAGE> 603
RAPIDNET, INC.
(D/B/A RAPIDNET)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
provides the Company with the first option to purchase the shares. The buy-sell
agreements provide for an initial purchase price of the stock to be set at
$748.50, although the stockholders may revise the purchase price from time to
time for changes in the estimated fair value of the common stock.
(7) INCOME TAXES
For 1996, 1997, 1998, and for the six-month period ended June 30, 1998, the
Company has not reported any Pro Forma income tax benefits arising from its net
operating losses due to the uncertain recoverability of such benefits. For the
six-month period ended June 30, 1999, the Company has reported Pro Forma income
tax expenses using an assumed statutory tax rate of 15%.
(8) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-460
<PAGE> 604
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of CSW Net, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholder's 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 CSW Net, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Little Rock, Arkansas
August 18, 1999
F-461
<PAGE> 605
CSW NET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 12 4 21
Receivables:
Trade.................................................. 12 23 19
Affiliate.............................................. 341 230 --
Other.................................................. 1 -- --
Prepaid expenses and other................................ -- 10 10
---- ----- ----
Total current assets................................. 366 267 50
Equipment, at cost, net..................................... 405 484 464
Other assets, net........................................... -- 8 8
---- ----- ----
Total assets......................................... $771 759 522
==== ===== ====
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.......................... $146 398 398
Current portion of capital lease obligations.............. 56 149 158
Accounts payable.......................................... 161 189 123
Accrued expenses.......................................... 16 56 46
Deferred revenue.......................................... 22 34 52
---- ----- ----
Total current liabilities............................ 401 826 777
Notes payable, less current portion......................... 27 -- --
Capital lease obligations, less current portion............. 128 203 203
---- ----- ----
Total liabilities.................................... 556 1,029 980
---- ----- ----
Stockholder's equity (deficit):
Common stock, $.001 par value, authorized, issued and
outstanding 1,000 shares............................... 1 1 1
Retained earnings (accumulated deficit)................... 214 (271) (459)
---- ----- ----
Total stockholder's equity (deficit)................. 215 (270) (458)
---- ----- ----
Total liabilities and stockholder's equity
(deficit)......................................... $771 759 522
==== ===== ====
</TABLE>
See accompanying notes to financial statements.
F-462
<PAGE> 606
CSW NET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ----- ----- ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity............................... $760 1,188 1,349 610 1,082
Other............................................... 15 8 3 -- --
---- ----- ----- ---- -----
Total revenue.................................... 775 1,196 1,352 610 1,082
---- ----- ----- ---- -----
Costs and expenses:
Cost of Internet services........................... 512 502 940 468 477
Selling, general and administrative................. 186 293 509 265 325
Depreciation and amortization....................... 48 90 217 108 138
---- ----- ----- ---- -----
Total costs and expenses......................... 746 885 1,666 841 940
---- ----- ----- ---- -----
Income (loss) from operations.................... 29 311 (314) (231) 142
Other income (expenses):
Interest expense.................................... (7) (35) (107) (45) (57)
Business interruption insurance proceeds............ -- -- 57 28 --
---- ----- ----- ---- -----
Other income (expense)........................... (7) (35) (50) (17) (57)
---- ----- ----- ---- -----
Net income (loss)................................ $ 22 276 (364) (248) 85
==== ===== ===== ==== =====
Pro Forma income taxes (unaudited).................... $ 5 102 (88) (73) 6
==== ===== ===== ==== =====
Pro Forma net income (loss) (unaudited)............... $ 17 174 (276) (175) 79
==== ===== ===== ==== =====
</TABLE>
See accompanying notes to financial statements.
F-463
<PAGE> 607
CSW NET, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
EARNINGS
COMMON (ACCUMULATED
STOCK DEFICIT) TOTAL
------ ------------ -----
<S> <C> <C> <C>
Balances at December 31, 1995........................... $1 $ (27) $ (26)
Distributions to stockholder............................ -- (10) (10)
Net income.............................................. -- 22 22
-- ----- -----
Balances at December 31, 1996........................... 1 (15) (14)
Distributions to stockholder............................ -- (47) (47)
Net income.............................................. -- 276 276
-- ----- -----
Balances at December 31, 1997........................... 1 214 215
Distributions to stockholder............................ -- (121) (121)
Net loss................................................ -- (364) (364)
-- ----- -----
Balances at December 31, 1998........................... 1 (271) (270)
Distribution of affiliate receivables to stockholder
(unaudited)........................................... -- (269) (269)
Distributions to stockholder (unaudited)................ -- (4) (4)
Net income (unaudited).................................. -- 85 85
-- ----- -----
Balances at June 30, 1999 (unaudited)................... $1 $(459) $(458)
== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-464
<PAGE> 608
CSW NET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1996 1997 1998 1998 1999
------ ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 22 276 (364) (248) 85
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization................. 48 90 217 108 138
Changes in operating assets and liabilities:
Receivables................................. (1) (12) (10) (7) 4
Prepaid expenses and other current assets... 1 -- (10) (10) --
Accounts payable............................ 143 17 28 42 (66)
Accrued expenses............................ 16 (2) 40 21 (10)
Deferred revenue............................ 8 14 12 (11) 18
----- ---- ---- ---- ----
Net cash provided (used) by operating
activities............................... 237 383 (87) (105) 169
----- ---- ---- ---- ----
Cash flows from investing activities:
Acquisition of equipment......................... (124) (57) (10) (7) (37)
Other............................................ -- -- (8) (6) --
----- ---- ---- ---- ----
Net cash used by investing activities....... (124) (57) (18) (13) (37)
----- ---- ---- ---- ----
Cash flows from financing activities:
Advances from (to) affiliate..................... (306) (192) 111 39 (39)
Proceeds from notes payable...................... 233 -- 472 472 --
Repayments of notes payable...................... (13) (50) (247) (246) --
Repayments of capital lease obligations.......... (15) (27) (118) (56) (72)
Distributions to stockholder..................... (10) (47) (121) (103) (4)
----- ---- ---- ---- ----
Net cash provided (used) by financing
activities............................... (111) (316) 97 106 (115)
----- ---- ---- ---- ----
Net increase (decrease) in cash............. 2 10 (8) (12) 17
Cash at beginning of period........................ -- 2 12 12 4
----- ---- ---- ---- ----
Cash at end of period.............................. $ 2 12 4 -- 21
===== ==== ==== ==== ====
Supplemental disclosure of cash flow information:
Cash paid for interest........................... $ 7 35 107 45 57
Non-cash investing and financing activities:
Equipment acquired through capital lease...... 55 130 286 286 81
Equipment acquired from affiliate............. 137 -- -- -- --
Distribution of affiliate receivables to
stockholder................................. -- -- -- -- 269
===== ==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-465
<PAGE> 609
CSW NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
CSW Net, Inc. (the "Company") was incorporated in the state of Arkansas on
May 11, 1995 to capitalize on the growing demand for Internet access through the
acquisition, integration, and growth of independent Internet service providers
located primarily in Arkansas.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, operating losses, dependence upon
strategic alliances, and the limited history of the Internet. The Company's
future success will be dependent upon: its ability to obtain adequate financing;
its ability to create and provide effective and competitive Internet services;
the continued acceptance of the Internet and the Company's ability to develop
and provide new services that meet customers' changing requirements, including
the effective use of leading technologies; its ability to continue to enhance
its current services; and its ability to influence and respond to emerging
industry standards and other technological changes on a timely and cost-
effective basis.
At June 30, 1999, the Company had a working capital deficit of $727 and a
stockholder's deficit of $457. As discussed in the paragraph below, the Company
has entered into an agreement to sell all outstanding capital stock of the
Company to espernet.com, inc. ("espernet.com") Should this agreement not be
consummated, the Company will have to continue to get renewals or extensions on
its loans or seek alternative sources of financing to continue its operations.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
for the six months ended June 30, 1998 and 1999 are unaudited. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments necessary for the fair presentation of the
financial position and results of operations and cash flows have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date
F-466
<PAGE> 610
CSW NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(d) EQUIPMENT
Depreciation of equipment is calculated using the straight-line method over
the estimated useful lives of the related assets, generally five years.
Equipment under capital leases is stated at the lesser of the fair value of the
equipment or the present value of minimum lease payments and is amortized using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) BARTER TRANSACTIONS
The Company provides Internet access to certain third parties in exchange
for advertising and the use of those third party's facilities for Internet
access equipment. These transactions are reported at the estimated fair value of
the service received by the Company. Barter revenues and expenses are recorded
as such services are provided/incurred by the Company. Included in the Company's
statements of operations are barter transactions of approximately $2, $2, and
$22, respectively, for the years ended December 31, 1996, 1997 and 1998, and
approximately $9 and $14 for the six months ended June 30, 1998 and 1999,
respectively.
(g) INCOME TAXES
The Company has elected to be treated as a corporation taxed under
Subchapter S of the Internal Revenue Code (the "Code") for Federal and state
income tax purposes. Under Subchapter S, income of the Company is taxed at the
individual stockholder level rather than at the corporate level.
The unaudited pro forma income tax information included in the statements
of earnings reflects the estimated impact of recognizing income tax expense as
if the Company had been subject to Federal and state income taxes. The unaudited
pro forma income tax information is computed by multiplying the Company's
reported net income, adjusted for certain nondeductible expenses under the Code,
by the applicable Federal and state income tax rates.
F-467
<PAGE> 611
CSW NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) REVENUE RECOGNITION
Revenue related to Internet services is recognized ratably over the
subscription period (generally one to 12 months). Substantially all Internet
subscriptions are billed monthly, quarterly or annually. Unearned portions of
Internet subscription revenue are deferred.
(i) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $5, $1 and $6 for the years ended December, 31, 1996, 1997 and
1998, respectively, and $2 and $6 for the six month periods ended June 30, 1998
and 1999, respectively.
(j) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair values of the Company's financial instruments
approximate their carrying values based on their terms and interest rates.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-468
<PAGE> 612
CSW NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $233, $470 and $551,
respectively.............................................. $551 799 899
Less accumulated depreciation and amortization, including
amounts related to capital leases of $55, $159 and $234,
respectively.............................................. 146 315 435
---- --- ---
Total.................................................. $405 484 464
==== === ===
</TABLE>
ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Employee commissions and expenses........................... $13 50 29
Other....................................................... 3 6 17
--- --- ---
$16 56 46
=== === ===
</TABLE>
(3) NOTES PAYABLE
Notes payable consist of borrowings under a line of credit agreement and
installment notes.
In September 1996, as amended, the Company entered into an agreement with a
bank whereby the Company borrowed $33. Borrowings outstanding under this note,
which have been periodically renewed by the Company, were $26 at December 31,
1997, at December 31, 1998 and at June 30, 1999, bear interest at 9.0%, and are
unsecured. All borrowings are due in September 1999.
In May 1998, as amended, the Company also entered into an agreement with
the bank discussed above whereby the Company borrowed $60. Borrowings
outstanding under this note, which have been periodically renewed by the
Company, amounted to $60 at December 31, 1998 and at June 30, 1999 and bear
interest at 9.0%. All borrowings under this agreement are due in September 1999
and are secured by all business assets of the Company.
In June 1998, as amended, the Company entered into a separate agreement
with the same bank whereby the Company borrowed $312 to repay other borrowings
and for working capital. Borrowings under this note, which have been
periodically renewed by the Company, were $312 at December 31, 1998 and at June
30, 1999, bear interest, payable monthly, at 9.0%, are due in September 1999,
and are secured by certain real estate owned by the Company's stockholder.
F-469
<PAGE> 613
CSW NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
In February 1998, the Company entered into a revolving line of credit
agreement with another bank whereby the Company may borrow up to $50 through
February 1999. Borrowings under this line of credit agreement bear interest,
payable monthly, at 9.5% and are secured by all business assets of the Company.
There were no borrowings outstanding under this line of credit agreement at, or
subsequent to, December 31, 1998.
In January 1998, the Company entered into a note payable with an individual
whereby the Company borrowed $50. All borrowings under this note bear interest
at 10.0% and were repaid by the Company during 1998.
(4) LEASES
The Company leases certain computer and communication equipment under
capital leases, and certain computer equipment and office space under
noncancelable operating leases expiring at various dates through 2002.
Amortization of assets under capital leases is included with depreciation
expense. Future minimum annual lease payments under capital and noncancelable
operating leases (with initial lease terms in excess of one year) as of December
31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $183 58
2000........................................................ 183 88
2001........................................................ 33 57
2002........................................................ 5 5
---- ----
Total minimum payments...................................... 404 $208
====
Less amount representing interest........................... 52
----
Present value of net minimum lease payments................. 352
Less current portion........................................ 149
----
$203
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six-month periods ended June 30, 1998 and 1999 was approximately $48, $22, $68,
$17 and $39, respectively.
(5) RELATED PARTY TRANSACTIONS
The Company is affiliated through common ownership with CSW Computers, Inc.
("Computers"). During the years ended December 31, 1996, 1997 and 1998 and the
six-month
F-470
<PAGE> 614
CSW NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
periods ended June 30, 1998 and 1999, the Company engaged in the following
transactions with Computers:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------
1996 1997 1998 1998 1999
----- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Receivable (payable) at beginning of period......... $ (20) 149 341 341 230
Cash advance to (from) Computers.................... 306 192 (111) (40) 39
Distribution of receivable to stockholder........... -- -- -- -- (269)
Equipment acquired from Computers................... (137) -- -- -- --
----- --- ---- --- ----
Receivable at end of period......................... $ 149 341 230 301 --
===== === ==== === ====
</TABLE>
(6) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon consummation of the agreement,
espernet.com will become the sole owner of the Company, and the Company will be
converted to a C-Corp.
F-471
<PAGE> 615
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of IOCC.com, LLC as of
December 31, 1998 and 1997, and the related statements of earnings, members'
equity, 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 IOCC.com, LLC as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Little Rock, Arkansas
August 10, 1999
F-472
<PAGE> 616
IOCC.com, LLC
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $21 3 3
Trade accounts receivable................................. 4 5 11
Prepaid expenses.......................................... -- 2 --
--- --- ---
Total current assets................................... 25 10 14
Equipment, at cost, net..................................... 45 98 118
Other assets, net of accumulated amortization of $1 in 1997,
$1 in 1998 and $1 in 1999................................. 4 4 4
--- --- ---
Total assets........................................... $74 112 136
=== === ===
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1 12 3
Current portion of notes payable.......................... 23 44 46
Current portion of capital lease obligations.............. -- -- 3
Deferred revenue.......................................... -- 2 11
--- --- ---
Total current liabilities.............................. 24 58 63
Notes payable, less current portion......................... -- 2 --
Capital lease obligations, less current portion............. -- -- 4
--- --- ---
Total liabilities...................................... 24 60 67
Members' equity............................................. 50 52 69
--- --- ---
Total liabilities and members' equity.................. $74 112 136
=== === ===
</TABLE>
See accompanying notes to financial statements.
F-473
<PAGE> 617
IOCC.COM, LLC
STATEMENTS OF EARNINGS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connectivity revenue.................... $43 125 221 95 208
--- --- --- -- ---
Costs and expenses:
Cost of Internet services...................... 30 51 95 34 109
Selling, general and administrative............ 4 21 66 28 54
Depreciation and amortization.................. 6 11 14 7 15
--- --- --- -- ---
Total costs and expenses.................... 40 83 175 69 178
--- --- --- -- ---
Income from operations...................... 3 42 46 26 30
Interest expense................................. (1) (2) (2) (2) (1)
--- --- --- -- ---
Net income.................................. $ 2 40 44 24 29
=== === === == ===
Pro Forma income taxes (unaudited)............... $-- 8 9 5 6
=== === === == ===
Pro Forma net income (unaudited)................. $ 2 32 35 19 23
=== === === == ===
</TABLE>
See accompanying notes to financial statements.
F-474
<PAGE> 618
IOCC.COM, LLC
STATEMENTS OF MEMBERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS'
EQUITY
--------
<S> <C>
Balance at December 31, 1995................................ $ 19
Member distributions........................................ (4)
Net income.................................................. 2
----
Balance at December 31, 1996................................ 17
Member distributions........................................ (7)
Net income.................................................. 40
----
Balance at December 31, 1997................................ 50
Member distributions........................................ (42)
Net income.................................................. 44
----
Balance at December 31, 1998................................ 52
Member distributions (unaudited)............................ (12)
Net income (unaudited)...................................... 29
----
Balance at June 30, 1999 (unaudited)........................ $ 69
====
</TABLE>
See accompanying notes to financial statements.
F-475
<PAGE> 619
IOCC.COM, LLC
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................... $ 2 40 44 24 29
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 6 11 14 7 15
Changes in operating assets and liabilities:
Receivables.................................... (1) -- (1) 1 (6)
Prepaid expenses............................... -- -- (2) -- 2
Accounts payable............................... (5) (3) 11 (1) (9)
Deferred revenue............................... -- -- 2 -- 9
---- --- --- --- ---
Net cash provided by operating activities... 2 48 68 31 40
---- --- --- --- ---
Cash flows used by investing activities -- acquisition
of computer equipment............................... (15) (29) (67) (11) (28)
---- --- --- --- ---
Cash flows from financing activities:
Proceeds from notes payable......................... 20 15 40 8 12
Repayments of notes payable......................... (4) (7) (17) (6) (12)
Member distributions................................ (4) (7) (42) (5) (12)
---- --- --- --- ---
Net cash provided (used) by financing
activities............................... 12 1 (19) (3) (12)
---- --- --- --- ---
Net increase (decrease) in cash............. (1) 20 (18) 17 --
Cash at beginning of period........................... 2 1 21 21 3
---- --- --- --- ---
Cash at end of period................................. $ 1 21 3 38 3
==== === === === ===
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 1 2 2 1 --
Non-cash investing and financing
activity -- equipment acquired through capital
lease............................................ -- -- -- -- 8
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-476
<PAGE> 620
IOCC.COM, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
IOCC.com, LLC (the "Company") was incorporated in the state of Arkansas on
December 28, 1995 to capitalize on the growing demand for Internet access
through the acquisition, integration, and growth of existing independent
Internet service providers located primarily in southwest Arkansas.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the Internet. The Company's future success will be
dependent upon: its ability to create and provide effective and competitive
internet services; the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies; its ability
to continue to enhance its current services and its ability to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of earnings, members' equity, and cash flows for the six months
ended June 30, 1998 and 1999 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) EQUIPMENT
Depreciation of equipment is calculated using the straight-line method over
the estimated useful lives of the related assets, generally five years.
Equipment under capital leases is stated at the lesser of the fair value of the
equipment or present value of minimum lease payments and is
F-477
<PAGE> 621
IOCC.COM, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) OTHER ASSETS
Other assets consist of capitalized franchise costs which are amortized
using the straight-line method over 15 years.
(g) BARTER TRANSACTIONS
The Company provides Internet access to certain third parties in exchange
for the use of those third parties' facilities for Internet access equipment.
These transactions are reported at the estimated fair value of the Internet
service provided by the Company. Barter revenues and expenses are recorded as
such services are provided/incurred by the Company. Included in the Company's
statements of earnings are barter transactions of $2 and $21, respectively, for
the years ended December 31, 1997 and 1998 (none in 1996), and $10 and $16 for
the six months ended June 30, 1998 and 1999, respectively.
(h) INCOME TAXES
The Company operates as a limited liability company, and therefore is
exempt from taxation under the provisions of the Internal Revenue Code (the
"Code"). Under the provisions of the Code, the members of the Company include
their share of the Company's income on their personal income tax returns.
Accordingly, the Company is not subject to Federal and state corporate income
taxes.
The unaudited pro forma income tax information included in the statements
of earnings reflects the estimated impact of recognizing income tax expense as
if the Company had been subject to Federal and state income taxes. The unaudited
pro forma income tax information is computed by multiplying the Company's
reported net income, adjusted for certain nondeductible expenses under the Code
and the treatment of member distributions as deductible expenses, by the
applicable Federal and state income tax rates.
F-478
<PAGE> 622
IOCC.COM, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) REVENUE RECOGNITION
Revenue related to Internet services is recognized ratably over the
subscription period (generally one to 12 months). Substantially all Internet
subscriptions are billed monthly, quarterly or annually. Unearned portions of
internet subscription revenue are deferred.
(j) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administration
expenses in the accompanying statements of earnings and totaled $3, $1 and $3
for the years ended December 31, 1996, 1997 and 1998, respectively, and $2 and
$2 for the six month periods ended June 30, 1998 and 1999, respectively.
(k) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair values of the Company's financial instruments
approximate their carrying values based on their terms and interest rates.
(l) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-479
<PAGE> 623
IOCC.COM, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $62 129 165
Less accumulated depreciation............................. 17 31 47
--- --- ---
Total.................................................. $45 98 118
=== === ===
</TABLE>
(3) NOTES PAYABLE
Notes payable consist of borrowings under a line of credit agreement and
installment notes.
In January 1998, the Company entered into an agreement with a bank whereby
the Company borrowed $20 to repay certain existing obligations to the bank and
to purchase computer equipment. Borrowings outstanding under this note were $14
at December 31, 1998 and $8 at June 30, 1999, and bear interest at 9.0%. All
borrowings are due on demand, or if no demand is made, in 36 monthly
installments of $0.9 through January 2001, and are secured by all business
assets of the Company and personal guarantees of the Company's members.
In December 1998, the Company entered into a revolving line of credit
agreement with the bank discussed above whereby the Company may borrow up to
$20. Borrowings under this line of credit agreement amounted to $3 at December
31, 1998 and $15 at June 30, 1999 and bear interest, due monthly at 9.5%. All
borrowings under this line of audit agreement are due on demand, or if no demand
is made, in December 2003, and are secured by all business assets of the Company
and personal guarantees of the Company's members.
Also, in December 1998, the Company entered into a separate agreement with
the same bank whereby the Company borrowed $20 to acquire computer equipment.
Borrowings under this note were $20 at December 31, 1998 and $18 at June 30,
1999, bear interest at the bank's prime rate (7.75% at December 31, 1998) plus
1%, are due on demand, or if no demand is made, in 60 monthly installments of
$0.4 through December 2003, and are secured by certain equipment of the Company.
Due to the demand feature, all borrowings under the notes discussed above
are classified as current liabilities.
In December 1998, the Company entered into a note payable with an
individual whereby the Company borrowed $11. All borrowings under this note, $9
at December 31, 1998 and $5 at June 30, 1999, bear interest at 7% and are due in
monthly installments of $0.6, with any unpaid amounts due December 2000.
F-480
<PAGE> 624
IOCC.COM, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) LEASES
The Company leases certain communication equipment under noncancelable
operating leases expiring at various dates through 2002. Future minimum annual
lease payments as of December 31, 1998 are as follows: 1999, $51; 2000, $54;
2001, $38; and 2002, $5.
Rent expense for the years ended December 31, 1997 and 1998 (none in 1996)
and the six month periods ended June 30, 1998 and 1999 was approximately $4,
$38, $15 and $38, respectively.
During April 1999, the Company entered into a capital lease for computer
equipment that requires the Company to pay monthly installments of $0.3 for 36
months beginning May 1999. At June 30, 1999 the gross amount of equipment and
related amortization recorded under this lease was as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... $ 8
Less accumulated amortization............................... 1
---
$ 7
===
</TABLE>
(5) RELATED PARTY TRANSACTIONS
The following transactions occurred between the Company and certain related
parties:
(a) EQUIPMENT PURCHASES
For the years ending December 31, 1996, 1997 and 1998 and for the six-month
periods ended June 30, 1998 and 1999, the Company purchased equipment in the
amounts of $15, $5, $2, $2 and $2, respectively, from a vendor related to the
Company through common ownership.
(b) OTHER
For the years ending December 31, 1997 and 1998 (none in 1996) and for the
six-month periods ended June 30, 1998 and 1999, the Company paid management and
accounting fees of approximately $15, $28, $5 and $13, respectively, to certain
companies who are related to the Company through common ownership.
(6) ACQUISITION
On December 31, 1998, the Company acquired the assets and customers of
another Internet service provider for cash of $25. In determining the
acquisition price, the Company did an evaluation of the assets being acquired.
Historical financial statements of the business acquired are not available to
the Company, and, accordingly Pro Forma information reflecting results of
operations of the combined businesses prior to the acquisition have not been
presented.
F-481
<PAGE> 625
IOCC.COM, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-482
<PAGE> 626
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Futura, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
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 Futura, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Little Rock, Arkansas
August 18, 1999
F-483
<PAGE> 627
FUTURA, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 8 7 4
Trade accounts receivable................................. 3 5 20
Inventory................................................. -- 6 19
Other current assets...................................... -- 3 3
--- --- ---
Total current assets................................... 11 21 46
Property and equipment, at cost, net........................ 49 72 117
Intangibles, net of accumulated amortization of $2 in
1999...................................................... -- -- 33
--- --- ---
Total assets........................................... $60 93 196
=== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $18 63 152
Accrued expenses.......................................... -- 1 12
Shareholder advances...................................... 1 1 1
Current portion of notes payable.......................... 7 -- 24
Current portion of capital lease obligations.............. -- 5 5
Deferred revenue.......................................... 16 22 44
--- --- ---
Total current liabilities.............................. 42 92 238
Notes payable, less current portion......................... 7 -- 19
Capital lease obligations, less current portion............. -- 8 6
--- --- ---
Total liabilities...................................... 49 100 263
--- --- ---
Stockholders' equity (deficit):
Common stock, no par value, 600,000 shares authorized,
none issued............................................ -- -- --
Additional paid-in capital................................ 29 29 29
Accumulated deficit....................................... (18) (36) (96)
--- --- ---
Total stockholders' equity (deficit)................... 11 (7) (67)
Commitments
--- --- ---
Total liabilities and stockholders' equity (deficit)... $60 93 196
=== === ===
</TABLE>
See accompanying notes to financial statements.
F-484
<PAGE> 628
FUTURA, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connectivity revenue.................... $50 107 261 104 248
Computer sales................................... -- -- -- -- 58
--- --- --- --- ---
Total revenue............................... 50 107 261 104 306
--- --- --- --- ---
Costs and expenses:
Cost of Internet services...................... 31 86 141 67 127
Cost of goods sold............................. -- -- -- -- 34
Selling, general and administrative............ 11 16 119 34 184
Depreciation and amortization.................. 6 10 17 7 16
--- --- --- --- ---
Total costs and expenses.................... 48 112 277 108 361
--- --- --- --- ---
Income (loss) from operations............... 2 (5) (16) (4) (55)
--- --- --- --- ---
Other income (expenses):
Interest expense............................... (2) (3) (3) (1) (5)
Other, net..................................... -- -- 1 -- --
--- --- --- --- ---
Other income (expense)...................... (2) (3) (2) (1) (5)
--- --- --- --- ---
Net income (loss)........................... $-- (8) (18) (5) (60)
=== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-485
<PAGE> 629
FUTURA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- -----
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1995................ $-- 14 (10) 4
Contributed capital.......................... -- 15 -- 15
Net loss..................................... -- -- -- --
--- -- --- ---
BALANCES AT DECEMBER 31, 1996................ -- 29 (10) 19
Net loss..................................... -- -- (8) (8)
--- -- --- ---
BALANCES AT DECEMBER 31, 1997................ -- 29 (18) 11
Net income................................... -- -- (18) (18)
--- -- --- ---
BALANCES AT DECEMBER 31, 1998................ -- 29 (36) (7)
Net loss (unaudited)......................... -- -- (60) (60)
--- -- --- ---
BALANCES AT JUNE 30, 1999 (unaudited)........ $-- 29 (96) (67)
=== == === ===
</TABLE>
See accompanying notes to financial statements.
F-486
<PAGE> 630
FUTURA, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $-- (8) (18) (5) (60)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 6 10 17 7 16
Changes in operating assets and liabilities:
Receivables.................................... (4) 1 (2) 4 (15)
Inventories.................................... -- -- (6) -- (13)
Other current assets........................... -- -- (3) -- --
Accounts payable and accrued expenses.......... 2 (3) 46 2 100
Deferred revenue............................... 2 15 6 (1) 22
---- ---- ---- ---- ----
Net cash provided by operating activities... 6 15 40 7 50
---- ---- ---- ---- ----
Cash flows used by investing activities:
Acquisition of computer equipment................... (16) (28) (25) (8) (59)
Acquisition of customer list........................ -- -- -- -- (7)
---- ---- ---- ---- ----
Net cash used by investing activities....... (16) (28) (25) (8) (66)
---- ---- ---- ---- ----
Cash flows from financing activities:
Proceeds from notes payable......................... -- 17 -- -- 20
Repayments of notes payable......................... -- (3) (14) (3) (5)
Repayments of capital lease obligation.............. -- -- (2) -- (2)
Contributions from shareholders..................... 15 -- -- -- --
---- ---- ---- ---- ----
Net cash provided (used) by financing
activities................................ 15 14 (16) (3) 13
---- ---- ---- ---- ----
Net increase (decrease) in cash............. 5 1 (1) (4) (3)
Cash at beginning of period........................... 2 7 8 8 7
---- ---- ---- ---- ----
Cash at end of period................................. $ 7 8 7 4 4
==== ==== ==== ==== ====
Supplemental disclosure of cash flow information:
Cash paid for interest.............................. $ 2 3 4 1 5
Non-cash investing and financing activity:
Equipment acquired through capital lease......... -- -- 15 -- --
Customer list acquired through note payable...... -- -- -- -- 28
==== ==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-487
<PAGE> 631
FUTURA INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Futura, Inc. (the "Company") was incorporated in the State of Arkansas on
September 1, 1995 to capitalize on the growing demand for Internet access
through the acquisition, integration, and growth of existing independent
Internet service providers located primarily in central Arkansas.
At June 30, 1999, the Company had a working capital deficit of $192 and a
stockholder's deficit of $67. As discussed in note 6, the Company has entered
into an agreement to sell all outstanding capital stock of the Company to
espernet.com, inc. ("espernet.com"). Should this agreement not be consummated,
the Company will have to seek alternative sources of financing to continue its
operations and meet its obligations when they become due.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the Internet. The Company's future success will be
dependent upon: its ability to create and provide effective and competitive
Internet services; the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies; its ability
to continue to enhance its current services and its ability to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
for the six months ended June 30, 1999 and 1998 are unaudited. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) 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 statement
carrying amounts of existing assets and liabilities and their respective tax
bases. 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.
F-488
<PAGE> 632
FUTURA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) REVENUE RECOGNITION
Revenue related to Internet services is recognized ratably over the
subscription period (generally one to 12 months). Substantially all Internet
subscriptions are billed monthly, semi-annually or annually. Unearned portions
of Internet subscription revenue are deferred. Revenue related to computer sales
is recognized upon delivery.
(e) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administration
expenses in the accompanying statements of earnings and totaled approximately $3
for the year ended December 31, 1998 (none for 1996 and 1997), and $3 for the
six month period ended June 30, 1999 (none for June 30, 1998).
(f) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and the
relatively minor balances of each individual account. At December 31, 1997 and
1998 and June 30, 1999, the fair values of the Company's financial instruments
approximate their carrying values based on their terms and interest rates.
(g) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(h) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
F-489
<PAGE> 633
FUTURA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) INTANGIBLE ASSETS
Intangible assets represent the amounts paid for acquiring rights to
customers (note 3) from another Internet service provider and are being
amortized using the straight-line method over five years.
(j) EQUIPMENT
Depreciation of equipment is calculated using the straight-line method over
the estimated useful lives of the assets, generally five years.
(k) BARTER TRANSACTIONS
The Company provides Internet access to certain third parties in exchange
for the use of those third parties' facilities to set up customer Internet
access equipment, install telephone lines, etc. These transactions are reported
at the estimated fair value of the Internet service provided by the Company.
Barter revenues and expenses are recorded as such services are provided/incurred
by the Company. Included in the Company's statements of earnings are barter
transactions of approximately $2, $2 and $3, respectively, for the years ended
December 31, 1996, 1997 and 1998, and approximately $1 and $2 for the six months
ended June 30, 1998 and 1999, respectively.
(l) INVENTORIES
Inventories are stated at the lower of average cost or market and consist
primarily of computer supplies and equipment.
(m) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-490
<PAGE> 634
FUTURA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $66 106 158
Furniture and fixtures...................................... -- -- 7
--- --- ---
Total assets........................................... 66 106 165
Less accumulated depreciation............................... 17 34 48
--- --- ---
Total.................................................. $49 72 117
=== === ===
</TABLE>
(3) NOTES PAYABLE
In May 1997, the Company entered into an agreement with a related party
whereby the Company borrowed $17 to purchase computer equipment. The Company
agreed to make monthly payments equal to required payments under the related
party's note with a bank. Borrowings outstanding under this note were $14 at
December 31, 1997 bearing interest at 10%. All borrowings were repaid during
1998.
In April 1999, the Company purchased a reseller's rights and interest in
its contracts and all accounts receivable accruing thereunder after March 31,
1999, for a total purchase price of $35, with $7 payable to the seller
concurrently with the execution of the agreement and the remaining $28 due in
twelve equal monthly installments. Borrowings outstanding at June 30, 1999 were
$23 bearing interest at 8%.
In the first quarter of 1999, the Company borrowed $20 from a related party
to finance the Company's new cafe (Cyberhouse). The Company agreed to pay the
remaining monthly payments on the related party's note with a bank. Borrowings
outstanding at June 30, 1999 were $20 due in monthly installments including
interest at 9.5%, with any unpaid amounts due December 2003.
(4) LEASES
The Company leases office space under a noncancelable operating lease
expiring in 2001. Rent expense for the years ended December 31, 1996, 1997 and
1998 and the six month periods ended June 30, 1998 and 1999 was approximately
$2, $3, $12, $5 and $18, respectively.
F-491
<PAGE> 635
FUTURA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
During July 1998, the Company entered into a capital lease for computer
equipment that requires the Company to pay monthly installments for 36 months
beginning August 1998. At December 31, 1998 and June 30, 1999 the gross amount
of equipment and related amortization, which is included in property and
equipment, recorded under this lease was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment.......................................... $15 15
Less accumulated amortization............................... 1 3
--- --
$14 12
=== ==
</TABLE>
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $ 6 20
2000........................................................ 6 8
2001........................................................ 3 2
--- ---
Total minimum payments...................................... 15 $30
===
Less amount representing interest........................... 2
---
Present value of net minimum lease payments................. 13
Less current portion........................................ 5
---
$ 8
===
</TABLE>
(5) INCOME TAXES
At December 31, 1998, the Company has net operating loss carryforwards for
Federal income tax purposes of approximately $46, which are available to offset
future federal taxable income, if any, through 2013. Due to the uncertainty
regarding the ultimate utilization of the net operating loss carryforwards, a
valuation allowance has been recorded for the entire amount of the net deferred
tax asset.
F-492
<PAGE> 636
FUTURA INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Temporary differences that give rise to the components of deferred income
taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 9 18 42
Valuation allowance....................................... (6) (14) (37)
--- --- ---
Total deferred tax assets.............................. 3 4 5
--- --- ---
Deferred tax liabilities -- property and equipment,
principally due to differences in depreciation............ 3 4 5
--- --- ---
$-- -- --
=== === ===
</TABLE>
(6) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon consummation of the agreement,
espernet.com will become the sole owner of the Company.
F-493
<PAGE> 637
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying statements of assets acquired and
liabilities assumed of Internet Solutions, Inc. -- ISP Business as of December
31, 1998 and 1997, and the related statements of revenues and expenses,
stockholder's net investment (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 assets acquired and liabilities assumed of
Internet Solutions, Inc. -- ISP Business as of December 31, 1998 and 1997, and
its revenues and expenses, changes in stockholder's net investment (deficit),
and 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
Little Rock, Arkansas
August 19, 1999
F-494
<PAGE> 638
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
STATEMENTS OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets -- trade receivables, net of allowance for
doubtful accounts of $1 in 1997, $2 in 1998 and $2 in
1999...................................................... $ 2 61 48
Property and equipment, net................................. 66 60 38
--- --- ---
Total assets........................................... $68 121 86
=== === ===
LIABILITIES AND STOCKHOLDER'S
NET INVESTMENT (DEFICIT) IN ISP BUSINESS
Current liabilities:
Accounts payable.......................................... $10 6 --
Accrued expenses.......................................... 2 1 8
Deferred revenue.......................................... 19 84 95
--- --- ---
Total current liabilities.............................. 31 91 103
Stockholder's net investment (deficit) in ISP business...... 37 30 (17)
Commitments.................................................
--- --- ---
Total liabilities and stockholder's net investment
(deficit)............................................. $68 121 86
=== === ===
</TABLE>
See accompanying notes to financial statements.
F-495
<PAGE> 639
INTERNET SOLUTIONS, INC.
- ISP BUSINESS -
STATEMENTS OF REVENUES AND EXPENSES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
---------------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity......................... $ 86 242 296 138 161
Enhanced internet services.................... 21 34 74 32 32
---- --- --- --- ---
Total revenue.............................. 107 276 370 170 193
---- --- --- --- ---
Costs and expenses:
Cost of Internet services..................... 61 117 139 71 77
Selling, general and administrative........... 46 100 140 65 70
Depreciation and amortization................. 12 17 23 11 9
---- --- --- --- ---
Total costs and expenses................... 119 234 302 147 156
---- --- --- --- ---
Revenues over (under) expenses............. $(12) 42 68 23 37
==== === === === ===
Pro Forma income taxes (unaudited).............. $ -- 6 15 4 8
==== === === === ===
Pro Forma net income (unaudited)................ $(12) 36 53 19 29
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-496
<PAGE> 640
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
STATEMENTS OF STOCKHOLDER'S NET INVESTMENT (DEFICIT)
(AMOUNTS IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1995................................ $ --
Net advances from stockholder............................... 81
Excess of expenses over revenues............................ (12)
----
BALANCE AT DECEMBER 31, 1996................................ 69
Net payments to stockholder................................. (74)
Excess of revenues over expenses............................ 42
----
BALANCE AT DECEMBER 31, 1997................................ 37
Net payments to stockholder................................. (75)
Excess of revenues over expenses............................ 68
----
BALANCE AT DECEMBER 31, 1998................................ 30
Net payments to stockholder (unaudited)..................... (84)
Excess of revenues over expenses (unaudited)................ 37
----
BALANCE AT JUNE 30, 1999 (unaudited)........................ $(17)
====
</TABLE>
See accompanying notes to financial statements.
F-497
<PAGE> 641
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Revenues over (under) expenses................. $(12) 42 68 23 37
Adjustments to reconcile revenues over (under)
expenses to net cash provided (used) by
operating activities:
Depreciation................................ 12 17 23 11 9
Changes in operating assets and liabilities:
Receivables............................... (12) 10 (58) (4) 13
Accounts payable.......................... 1 9 (4) 7 (6)
Accrued expenses.......................... -- 2 (2) 1 7
Deferred revenue.......................... 3 16 65 11 11
---- --- --- --- ---
Net cash provided (used) by operating
activities.......................... (8) 96 92 49 71
---- --- --- --- ---
Cash flows from investing activities -- purchase
of equipment................................... (73) (26) (29) (22) (10)
---- --- --- --- ---
Cash flows from financing activities -- net
advances from (payments to) stockholder........ 81 (70) (63) (27) (61)
---- --- --- --- ---
Net increase in cash and cash
equivalents......................... -- -- -- -- --
Cash and cash equivalents:
Beginning period............................... -- -- -- -- --
---- --- --- --- ---
End of period.................................. $ -- -- -- -- --
==== === === === ===
Supplemental disclosure of cash flow
information -- transfer of equipment to
stockholder.................................... $ -- 4 12 14 23
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-498
<PAGE> 642
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Internet Solutions, Inc. (the "Company") was incorporated on October 25,
1995 to capitalize on the growing demand for Internet access and enhanced
services by consumers and business. The Company maintained three divisions: (1)
networking and integration, including hardware and standard software products,
(2) custom programming and (3) full service Internet connectivity and enhanced
Internet services such as web hosting, web design and support to business and
residential customers ("ISP Business"). The Company commenced operations in
January 1996.
The accompanying financial statements have been prepared using the
Company's historical basis in the assets and liabilities, and the financial
statements reflect the assets, liabilities, revenues, expenses, and cash flows
of the ISP Business as a component of the Company. Management believes the
statements of revenues and expenses include a reasonable allocation of costs
incurred by the Company on behalf of the ISP Business.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statements
have been included in such unaudited financial statements. The revenues in
excess of expenses for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally five years.
F-499
<PAGE> 643
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
(f) REVENUE RECOGNITION
Subscription revenue related to Internet services is recognized ratably
over the subscription period. Unearned portions of subscription revenues are
deferred. Revenue from consulting services is recognized as the services are
provided.
(g) ADVERTISING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $0.4, $1 and $3 and $2 and $1 for the years ended December 31,
1996, 1997 and 1998 and for the six-month periods ended June 30, 1998 and 1999,
respectively.
(h) INCOME TAXES
Pro Forma income taxes have been computed based upon the excess
(deficiency) of revenues over expenses as if the ISP Business were a stand-alone
company.
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-500
<PAGE> 644
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT AND ACCRUED EXPENSES
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Internet access and computer equipment..................... $93 94 55
Less accumulated depreciation and amortization............. 27 34 17
--- -- --
Total................................................. $66 60 38
=== == ==
</TABLE>
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Payroll taxes.............................................. $-- 1 1
Employee salaries.......................................... 2 -- 7
--- -- --
$ 2 1 8
=== == ==
</TABLE>
(3) LEASES
The Company leases office space with the father of the Company's sole
stockholder under a noncancelable operating lease which expires June 30, 2002.
Allocated rent expense for the years ended December 31, 1996, 1997 and 1998 and
the six-month periods ended June 30, 1998 and 1999 were $2, $6, $11, $5 and $5,
respectively.
Future minimum annual lease payments based upon the current allocation
percentage under the noncancelable operating lease as of December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999........................................................ $11
2000........................................................ 11
2001........................................................ 11
2002........................................................ 5
---
$38
===
</TABLE>
F-501
<PAGE> 645
INTERNET SOLUTIONS, INC.
-ISP BUSINESS-
NOTES TO FINANCIAL STATEMENT -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) RELATED PARTY TRANSACTIONS
The Company utilizes a central cash management system. Accordingly, cash
transactions between the Company's ISP Business and its other businesses are
included in the stockholder's net investment account as net cash advances
from/payments to stockholder in the Statements of Stockholder's Net Investment.
These transactions do not bear interest and therefore, no interest charge is
reflected in the accompanying statements of revenues and expenses. An analysis
of the intercompany activity included in the stockholder's net investment
account follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Purchase of equipment................................ $ 26 29 10
Transfer of equipment................................ (4) (12) (23)
Other net payments................................... (92) (80) (48)
---- ---- ---
Net payments....................................... $(70) (63) (61)
==== ==== ===
</TABLE>
The Company's debt is collateralized in part by the assets of the ISP
business.
(5) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AND DEDUCTIONS AT END
OF YEAR EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996............. $-- 1 -- 1
=== === === ===
Year ended December 31, 1997............. $ 1 3 3 1
=== === === ===
Year ended December 31, 1998............. $ 1 1 -- 2
=== === === ===
Six months ended June 30, 1999
(unaudited)............................ $ 2 2 2 2
=== === === ===
</TABLE>
(6) SUBSEQUENT EVENT
The Company's owner has entered into an agreement whereby it will sell
substantially all of the new assets of the Company to espernet.com, inc.
("espernet.com"). The Company's owner will exchange substantially all of the
assets of the Company for cash and shares of common stock of espernet.com
concurrent with the consummation of the initial public offering of the common
stock of espernet.com.
F-502
<PAGE> 646
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Black Sheep Computing,
Inc. -- ISP Business as of December 31, 1997 and 1998, and the related
statements of operations, owner's and stockholder's equity (deficit), and cash
flows for the period from October 28, 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.
As more fully discussed in note 6, Black Sheep Computing, Inc. -- ISP
Business is involved in a billing dispute with a supplier. Management of the
Company is unable to estimate a range of possible loss, if any, related to this
dispute.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Black Sheep Computing,
Inc. -- ISP Business as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period from October 28 1996 (inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Little Rock, Arkansas
August 24, 1999
F-503
<PAGE> 647
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- 10 --
Receivable from affiliate................................. 24 -- 82
Current portion of net investment in sales-type leases.... 4 5
---- ---- ----
Total current assets................................... 24 14 87
Property and equipment, net................................. 13 132 186
Net investment in sales-type leases, less current portion... -- 7 7
---- ---- ----
Total assets........................................... $ 37 153 280
==== ==== ====
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable.......................... $ 20 18 62
Current portion of capital lease obligations.............. -- 34 55
Accounts payable.......................................... 10 36 45
Accrued expenses.......................................... 1 -- --
Payable to affiliate...................................... -- 52 --
Deferred revenue.......................................... 19 72 113
---- ---- ----
Total current liabilities.............................. 50 212 275
Notes payable, less current portion......................... 32 24 35
Capital lease obligations, less current portion............. -- 91 140
---- ---- ----
Total liabilities...................................... 82 327 450
Stockholder's equity (deficit):
Common stock, without par value; 2 shares authorized,
issued and outstanding at stated value................. -- -- --
Accumulated deficit....................................... (45) (174) (170)
---- ---- ----
Total stockholder's equity (deficit)................... (45) (174) (170)
Commitments and contingencies...............................
---- ---- ----
Total liabilities and stockholder's equity (deficit)... $ 37 153 280
==== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-504
<PAGE> 648
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Internet connectivity revenue......................... $ 1 95 266 113 337
--- --- ---- --- ---
Costs and expenses:
Cost of Internet services........................... 3 69 183 68 200
Selling, general and administrative................. 1 64 175 81 88
Depreciation and amortization....................... -- 3 23 8 29
--- --- ---- --- ---
Total costs and expenses......................... 4 136 381 157 317
--- --- ---- --- ---
Income (loss) from operations.................... (3) (41) (115) (44) 20
Interest expense...................................... -- 1 14 5 16
--- --- ---- --- ---
Net income (loss)................................ $(3) (42) (129) (49) 4
=== === ==== === ===
</TABLE>
See accompanying notes to financial statements.
F-505
<PAGE> 649
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
STATEMENTS OF OWNER'S AND STOCKHOLDER'S EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDER'S EQUITY (DEFICIT)
OWNER'S ------------------------------
EQUITY COMMON ACCUMULATED
(DEFICIT) STOCK DEFICIT TOTAL
--------- ------ ----------- -----
<S> <C> <C> <C> <C>
Capital contribution........................... $ -- -- -- --
Net loss....................................... (3) -- -- --
---- -- ---- ----
Balance at December 31, 1996................... (3) -- -- --
Net loss for the four-month period ended April
30, 1997..................................... (7) -- -- --
Issuance of stock upon incorporation........... 10 -- (10) (10)
Net loss for the eight-month period ended
December 31, 1997............................ -- -- (35) (35)
---- -- ---- ----
Balances at December 31, 1997.................. -- -- (45) (45)
Net loss....................................... -- -- (129) (129)
---- -- ---- ----
Balances at December 31, 1998.................. -- -- (174) (174)
Net income (unaudited)......................... -- -- 4 4
---- -- ---- ----
Balances at June 30, 1999 (unaudited).......... $ -- -- (170) (170)
==== == ==== ====
</TABLE>
See accompanying notes to financial statements.
F-506
<PAGE> 650
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $(3) (42) (129) (49) 4
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization......................... -- 3 23 8 29
Changes in operating assets and liabilities:
Receivable from/payable to affiliate................ (8) (30) 61 56 (133)
Accounts payable.................................... 2 9 26 10 9
Accrued expenses.................................... -- 1 (1) (1) --
Deferred revenue.................................... -- 18 54 (14) 41
--- ---- ---- ---- -----
Net cash provided (used) by operating
activities.................................... (9) (41) 34 10 (50)
--- ---- ---- ---- -----
Cash flows used by investing activities -- acquisition of
equipment................................................ (2) -- -- -- --
--- ---- ---- ---- -----
Cash flows from financing activities:
Proceeds from notes payable.............................. 12 40 -- -- 70
Collections on sales-type leases......................... -- -- -- -- 2
Repayments of notes payable.............................. -- -- (10) (6) (15)
Repayments of capital lease obligations.................. -- -- (14) (3) (17)
Capital contribution..................................... -- -- -- -- --
--- ---- ---- ---- -----
Net cash provided (used) by financing
activities.................................... 12 40 (24) (9) 40
--- ---- ---- ---- -----
Net increase (decrease) in cash.................. 1 (1) 10 1 (10)
Cash at beginning of period................................ -- 1 -- -- 10
--- ---- ---- ---- -----
Cash at end of period...................................... $ 1 -- 10 1 --
=== ==== ==== ==== =====
Supplemental cash flow information:
Cash paid during the year for interest................... $-- -- 14 5 16
Noncash investing and financing activities:
Equipment purchased by affiliate...................... -- 14 15 9 --
Equipment acquired through capital lease.............. -- -- 138 42 87
Equipment subleased................................... -- -- 11 -- 4
=== ==== ==== ==== =====
</TABLE>
See accompanying notes to financial statements.
F-507
<PAGE> 651
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
Black Sheep Computing, Inc. (the "Company") began operations in 1992 as a
sole proprietorship and was incorporated on May 5, 1997. The Company maintained
two divisions (1) computer sales, repairs and consulting services relating to
computer hardware, software and networks and (2) dial up Internet access and
support to residential and business subscribers ("ISP Business"). The ISP
Business commenced operations on October 28, 1996 (inception).
At June 30, 1999, the Company had a working capital deficit of
approximately $188 and a stockholder's deficit of approximately $170. As
discussed in note 6, the Company has entered into an agreement to sell all
outstanding capital stock of the Company to espernet.com, inc. ("espernet.com")
Should this agreement not be consummated, the Company will have to continue to
get renewals or extensions on its loans or seek alternative sources of financing
to continue its operations.
Since the stockholder of BSC is retaining a significant portion of the
Company's other operations, the Company is presenting financial statements for
its ISP Business being acquired by espernet.com. The accompanying financial
statements have been prepared using the Company's historical basis in the assets
and liabilities. The financial statements reflect the assets, liabilities,
revenues, expenses and cash flows of the ISP Business as a component of the
Company and may not be indicative of such items subsequent to the acquisition by
espernet.com. Management believes the statements of operations include a
reasonable allocation of costs incurred by the Company on behalf of the ISP
Business.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements as of June 30, 1999 and for the six months
ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial statement have
been included in such unaudited financial statements. The results of operations
for the six months ended June 30, 1999 are not necessarily indicative of the
results to be expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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-508
<PAGE> 652
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally five years. Equipment under capital leases is stated at the lesser of
the fair value of the equipment or the present value of minimum lease payments
and is amortized using the straight-line method over the shorter of the lease
term or the estimated useful lives of the assets.
(e) REVENUE RECOGNITION
Subscription revenue related to Internet services is recognized ratably
over the subscription period. Unearned portions of subscription revenues are
deferred.
(f) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled $10 and $36
for the years ended December 31, 1997 and 1998, respectively, and $18 and $16
for the six month periods ended June 30, 1998 and 1999, respectively. There were
no advertising expenses during 1996.
(g) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
(h) 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 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. 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. The ISP Business has net operating losses and the Company has
not recognized deferred tax benefits attributable to these net operating losses
because realization of such benefits is not more likely than not.
F-509
<PAGE> 653
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $128 and $211 as of December
31, 1998 and June 30, 1999, respectively.................. $16 156 240
Less accumulated depreciation and amortization, including
amounts related to capital leases of $16 and $36 as of
December 31, 1998 and June 30, 1999, respectively......... 3 24 54
--- --- ---
Total.................................................. $13 132 186
=== === ===
</TABLE>
F-510
<PAGE> 654
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(3) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, related party.............. $12 10 --
Note payable, bank....................... 40 32 --
Note payable, bank....................... -- -- 47
Note payable, bank....................... -- -- 50
--- -- --
Total notes payable................. 52 42 97
Less current portion..................... 20 18 62
--- -- --
Notes payable, less current
portion........................... $32 24 35
=== == ==
</TABLE>
In October 1996, the Company entered into an agreement with a relative of
the stockholder whereby the Company borrowed $12. The note is non-interest
bearing, unsecured, and does not have a due date and has been classified as
current in the accompanying balance sheets.
In November 1997, the Company entered into an agreement with a bank whereby
the Company borrowed $40. Borrowings under this note are due in quarterly
installments of $2 plus interest at 10% and are secured by equipment.
In January 1999, the Company entered into a separate agreement with the
same bank whereby the Company borrowed $52 to repay other borrowings and for
working capital. Borrowings under this note are payable in monthly installments
of $1 including interest at 9.5% and are secured by equipment.
In June 1999, the Company entered into a separate agreement with the same
bank whereby the Company borrowed $50 for working capital. Borrowings under this
note are due October 15, 1999 and bear interest, payable at maturity, at 9.5%
and are secured by receivable from affiliate and equipment.
(4) LEASES
The Company leases certain computer and communication equipment under
capital leases and office space under a noncancelable operating lease expiring
in 2000.
F-511
<PAGE> 655
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Amortization of assets under capital leases is included with depreciation
expense. Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1999........................................................ $ 54 5
2000........................................................ 54 4
2001........................................................ 39 --
2002........................................................ 12 --
2003........................................................ 7 --
---- --
Total minimum payments...................................... 166 $9
==
Less amount representing interest........................... 41
----
Present value of net minimum lease payments................. 125
Less current portion........................................ 34
----
$ 91
====
</TABLE>
The Company subleased certain computer and communication equipment under
sales-type leases expiring in 2001. The future minimum rentals to be received
under noncancelable subleases for each of the three years ending December 31,
2001 are $4.
Rent expense for the periods ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 was approximately $0.4, $5, $5,
$2 and $2, respectively.
F-512
<PAGE> 656
BLACK SHEEP COMPUTING, INC.
- ISP BUSINESS -
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(5) RELATED PARTY TRANSACTIONS
The Company utilizes a central cash management system. Accordingly, cash
transactions between the Company's ISP Business and its other business are
included in the receivable from/ payable to affiliate accounts. These
transactions do not bear interest and therefore, no interest charge is reflected
in the accompanying statements of operations. An analysis of the intercompany
activity follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, SIX MONTHS
-------------- ENDED JUNE 30,
1997 1998 1999
---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C>
Receivable from (payable to) affiliate at beginning
of period......................................... $ 8 24 (52)
Purchase of Internet access and computer
equipment......................................... (14) (15) --
Affiliate operating expenses paid by Company........ -- 114 91
Subscription receivables collected by affiliate..... 39 1 70
Computer revenues collected by the Company.......... -- (137) --
Operating expenses paid by affiliate................ (20) -- --
Other net payments.................................. 11 (39) (27)
---- ---- ---
Receivable from (payable to) affiliate at end of
period............................................ $ 24 (52) 82
==== ==== ===
</TABLE>
(6) CONTINGENCIES
The Company is involved in a billing dispute with GTE for $80 relating to
certain unlimited use phone lines maintained by the Company in remote locations.
GTE canceled these unlimited use agreements and billed on a per call basis
without prior notice. The Company intends to vigorously contest the demand for
payment. At August 4, 1999, the dispute had not progressed sufficiently for
management to estimate a range of possible loss, if any.
(7) SUBSEQUENT EVENT
The Company's owner has entered into an agreement whereby he will sell his
ownership in the Company to espernet.com. The Company's owner will exchange his
ownership in the Company for cash and shares of common stock of espernet.com
concurrent with the consummation of the initial public offering of the common
stock of espernet.com. Upon consummation of the agreement, espernet.com will
become the sole owner of the Company.
F-513
<PAGE> 657
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of Intensity Computer
Systems (the "Company") as of December 31, 1998 and 1997, and the related
statements of operations, owner's and stockholders' equity, and cash flows for
the period from June 20, 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 financial position of Intensity Computer Systems
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the period from June 20, 1997 (inception) to December 31, 1997 and for
the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Little Rock, Arkansas
August 18, 1999
F-514
<PAGE> 658
INTENSITY COMPUTER SYSTEMS
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 7 14 12
Trade accounts receivable................................. -- 1 1
--- -- --
Total current assets................................... 7 15 13
Equipment, at cost, net..................................... 20 22 29
--- -- --
Total assets........................................... $27 37 42
=== == ==
LIABILITIES AND OWNER'S AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related party............................ $-- 2 2
Current portion of notes payable.......................... 29 9 10
Accounts payable.......................................... 1 -- --
Accrued expenses.......................................... 1 2 2
Deferred revenue.......................................... 1 7 10
--- -- --
Total current liabilities.............................. 32 20 24
Long-term debt, less current portion........................ -- 10 2
--- -- --
Total liabilities...................................... 32 30 26
Owner's and stockholders' equity:
Owner's equity (deficit).................................. (5) -- --
Common stock, no par value, authorized, issued and
outstanding 100 shares................................. -- -- --
Retained earnings......................................... -- 7 16
--- -- --
Total owner's and stockholders' equity................. (5) 7 16
Commitments
--- -- --
Total liabilities and owner's and stockholders'
equity................................................ $27 37 42
=== == ==
</TABLE>
See accompanying notes to financial statements.
F-515
<PAGE> 659
INTENSITY COMPUTER SYSTEMS
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
JUNE 20, 1997 ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------
1997 1998 1998 1999
-------------- -------------- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Internet connectivity.................. 4 87 37 79
Computer sales......................... 4 84 23 37
---- --- -- ---
Total revenue.................. 8 171 60 116
---- --- -- ---
Costs and expenses:
Cost of Internet services.............. 13 42 23 34
Computer costs of sales................ 2 60 19 25
Selling, general and administrative.... 12 50 20 43
Depreciation and amortization.......... 1 5 2 4
---- --- -- ---
Total costs and expenses....... 28 157 64 106
---- --- -- ---
Income (loss) from
operations.................. (20) 14 (4) 10
Interest expense......................... 1 2 1 1
---- --- -- ---
Net income (loss).............. $(21) 12 (5) 9
==== === == ===
</TABLE>
See accompanying notes to financial statements.
F-516
<PAGE> 660
INTENSITY COMPUTER SYSTEMS
STATEMENTS OF OWNER'S AND STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
OWNER'S ---------------------------
EQUITY COMMON RETAINED
(DEFICIT) STOCK EARNINGS TOTAL
--------- ------ -------- -----
<S> <C> <C> <C> <C>
Capital contributions............................. $ 16 -- -- --
Net loss.......................................... (21) -- -- --
---- --- -- --
BALANCES AT DECEMBER 31, 1997..................... (5) -- -- --
Issuance of stock upon incorporation.............. 5 -- (5) (5)
Net income........................................ -- -- 12 12
---- --- -- --
BALANCES AT DECEMBER 31, 1998..................... -- -- 7 7
Net income (unaudited)............................ -- -- 9 9
---- --- -- --
BALANCES AT JUNE 30, 1999 (unaudited)............. $ -- -- 16 16
==== === == ==
</TABLE>
See accompanying notes to financial statements.
F-517
<PAGE> 661
INTENSITY COMPUTER SYSTEMS
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
JUNE 20, 1997 ENDED
(INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------
1997 1998 1998 1999
-------------- ------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(21) 12 (5) 9
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation and amortization.............. 1 5 2 4
Changes in operating assets and
liabilities:
Inventory................................ -- -- (13) --
Receivables.............................. -- -- -- --
Accounts payable and accrued expenses.... 2 (1) -- --
Deferred revenue......................... 1 6 3 2
---- --- --- ---
Net cash provided (used) by operating
activities......................... (17) 22 (13) 15
---- --- --- ---
Cash flows from investing
activities -- acquisition of computer
equipment..................................... (21) (7) (6) (10)
---- --- --- ---
Cash flows from financing activities:
Proceeds from notes payable................... 29 13 13 --
Proceeds from related party debt.............. -- 2 2 --
Repayments of notes payable................... -- (23) -- (7)
Capital contributions......................... 16 -- -- --
---- --- --- ---
Net cash provided (used) by financing
activities......................... 45 (8) 15 (7)
---- --- --- ---
Net increase (decrease) in cash....... 7 7 (4) (2)
Cash:
Beginning of period........................... -- 7 7 14
---- --- --- ---
End of period................................. $ 7 14 3 12
==== === === ===
Supplemental disclosure for cash flow
information -- cash paid for interest......... $ -- 3 -- --
==== === === ===
</TABLE>
See accompanying notes to financial statements.
F-518
<PAGE> 662
INTENSITY COMPUTER SYSTEMS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(a) ORGANIZATION AND BASIS OF PRESENTATION
Intensity Computer Systems (the "Company") began operations in the State of
Arkansas in June 1997 as a sole proprietorship and incorporated as a Subchapter
S-Corp. on January 23, 1998. During 1999, the original shareholder of the
Company transferred his stock to his parents in satisfaction of personal
obligations to his parents. The Company's main focus is to provide internet
service and computer sales in Northwest Arkansas.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the Internet. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
Internet services, the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies to continue to
enhance the Company's current services and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
for the six months ended June 30, 1999 and 1998 are unaudited. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) EQUIPMENT
Depreciation of equipment is calculated using the straight-line method over
the estimated useful lives of the related assets, generally five years.
F-519
<PAGE> 663
INTENSITY COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
The Company operated as a sole proprietorship in 1997 and as a Subchapter
S-Corp. subsequent to incorporation and therefore is exempt from taxation under
the provisions of the Internal Revenue Code (the "Code"). Under the provisions
of the Code, the owner/shareholder of the Company includes the Company's income
on his personal income tax returns. Accordingly, the Company is not subject to
Federal and state corporate income taxes.
Pro forma income tax information as if the Company had been subject to
Federal and state income taxes has not been reflected in the accompanying
statements due to the net operating losses generated in 1997 which would have
offset any pro forma tax expense for 1998 and 1999.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized ratably over the
subscription period (generally one to 12 months). Substantially all Internet
subscriptions are billed monthly, quarterly or annually. Unearned portions of
Internet subscription revenue are deferred. Revenue from sales of computer
equipment is recognized upon delivery. Computer equipment sales are made only
upon special orders from customers and, accordingly, no inventory is maintained.
(h) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administration
expenses in the accompanying statements of operations and totaled approximately
$3 and $5 for the years ended December 31, 1997 and 1998, respectively, and $2
and $3 for the six-month periods ended December 31, 1998 and 1999, respectively.
(i) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for
F-520
<PAGE> 664
INTENSITY COMPUTER SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
internal use. Adoption of SOP 98-1 as of January 1, 1999 did not have any
material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment................. $21 28 39
Less accumulated depreciation.......................... 1 6 10
--- -- ---
Total............................................. $20 22 29
=== == ===
</TABLE>
(3) NOTES PAYABLE
In July 1997, the Company entered into an agreement with a bank whereby the
Company had a line of credit of up to $29 to purchase certain computer
equipment. In August 1998, the Company refinanced the line of credit with an
installment loan payable in monthly installments of $0.9, including interest at
9%. The note is secured by equipment. Aggregate maturities of this loan in years
subsequent to December 31, 1998 are: 1999 -- $9 and 2000 -- $10.
In 1998, the Company also borrowed $2 from the parents of the original sole
stockholder. The note plus accrued interest at 7% is payable on demand.
(4) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-521
<PAGE> 665
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of ECSIS.Net, LLC as of
December 31, 1998 and 1997, and the related statements of operations, members'
equity, and cash flows for each of the years in the three-year period ended
December 31, 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 ECSIS.Net, LLC as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Atlanta, Georgia
August 13, 1999
F-522
<PAGE> 666
ECSIS.NET, LLC
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Receivables:
Trade, net of allowance for doubtful accounts of $1 and
$2, respectively...................................... $ 6 9 12
Property and equipment, net (note 2)........................ 51 69 77
--- -- ---
Total assets......................................... $57 78 89
=== == ===
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6 15 19
Accrued expenses (note 2)................................. 9 4 4
--- -- ---
Total liabilities.................................... 15 19 23
Members' equity............................................. 42 59 66
--- -- ---
Commitments (notes 3, 4 and 5)..............................
--- -- ---
Total liabilities and members' equity................ $57 78 89
=== == ===
</TABLE>
See accompanying notes to financial statements.
F-523
<PAGE> 667
ECSIS.NET, LLC
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity...................... $ 73 139 367 157 281
Enhanced services and other................ 4 8 21 10 18
---- --- --- --- ---
Total revenue........................... 77 147 388 167 299
Costs and expenses (note 3):
Cost of Internet services.................. 68 104 192 119 124
Selling, general and administrative........ 74 123 152 68 72
Depreciation and amortization.............. 10 13 17 8 10
---- --- --- --- ---
Total costs and expenses................ 152 240 361 195 206
---- --- --- --- ---
Income (loss) from operations and before
income taxes.......................... (75) (93) 27 (28) 93
Income tax provision......................... -- -- -- -- --
---- --- --- --- ---
Net income (loss)....................... $(75) (93) 27 (28) 93
==== === === === ===
Pro Forma income taxes (unaudited)........... $ -- -- 3 -- 1
---- --- --- --- ---
Pro Forma net income (unaudited)............. $(75) (93) 24 (28) 92
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-524
<PAGE> 668
ECSIS.NET, LLC
STATEMENTS OF MEMBERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MEMBERS'
EQUITY
--------
<S> <C>
BALANCE AT DECEMBER 31, 1995................................ $ 42
Members' contributions...................................... 75
Net loss.................................................... (75)
----
BALANCE AT DECEMBER 31, 1996................................ 42
Members' contributions...................................... 93
Net loss.................................................... (93)
----
BALANCE AT DECEMBER 31, 1997................................ 42
Members' withdrawals........................................ (10)
Net income.................................................. 27
----
BALANCE AT DECEMBER 31, 1998................................ 59
Members' withdrawals (unaudited)............................ (86)
Net income (unaudited)...................................... 93
----
BALANCE AT JUNE 30, 1999 (unaudited)........................ $ 66
====
</TABLE>
See accompanying notes to financial statements.
F-525
<PAGE> 669
ECSIS.NET, LLC
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- -------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income........................ $(75) (93) 27 (28) 93
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization......... 10 13 17 8 10
Loss on sale of equipment............. -- -- 10 -- --
Changes in operating assets and
liabilities
Receivables......................... (3) (3) (3) (2) (3)
Accounts payable.................... 1 3 10 47 4
Accrued expenses.................... -- 8 (5) -- --
---- --- --- --- ---
Net cash (used in) provided by
operating activities.......... (67) (72) 56 25 104
---- --- --- --- ---
Cash flows from investing activities:
Acquisition of equipment................. (8) (21) (46) (48) (17)
Other.................................... -- -- -- -- (1)
---- --- --- --- ---
Net cash used in investing
activities.................... (8) (21) (46) (48) (18)
---- --- --- --- ---
Cash flows from financing activities:
Proceeds from members' contributions..... 75 93 -- 23 --
Members' withdrawals..................... -- -- (10) -- (86)
---- --- --- --- ---
Net cash provided by (used in)
financing activities.......... 75 93 (10) 23 (86)
---- --- --- --- ---
Net increase in cash and cash
equivalents................... -- -- -- -- --
Cash and cash equivalents:
Beginning period......................... -- -- -- -- --
---- --- --- --- ---
End of period............................ $ -- -- -- -- --
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-526
<PAGE> 670
ECSIS.NET, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
ECSIS.Net, LLC (the "Company") was incorporated on January 27, 1997 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users in North West Tennessee. Prior to its
incorporation, the Company operated as a division of ECS, LLC, an affiliate
company. ECSIS.Net commenced operations in December 1995.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances and key vendors and the limited history of the need for
Internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
Internet services, the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis. The Company's reliance on certain vendors can be shifted
to alternative sources of supply for products it sells should such changes be
necessary. For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, three vendors represented approximately
80% of the Company's total purchases.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, members' equity, and cash flows for the six months
ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-527
<PAGE> 671
ECSIS.NET, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from five to seven years.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
The Company operates as a Limited Liability Corporation ("LLC"), and
therefore is exempt from taxation according to the partnership provisions of the
Internal Revenue Code (the "Code"). Under the partnership provisions of the
Code, the members of the LLC include their share of the LLC's income on their
personal income tax returns. Accordingly, the Company was not subject to Federal
and state corporate income taxes during the periods reported herein.
The unaudited pro forma income tax information included in statements of
operations is presented in accordance with SFAS No. 19, 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 1998. The pro forma income tax
information assumed a graduated C-Corp. effective tax rate of 15% and resulted
in pro forma income tax charge of $3 and $1 for the periods ended December 31,
1998 and June 30, 1999, respectively. Members' withdrawals were reclassified as
compensation expense in the pro forma income tax calculation.
The Company incurred no deferred taxation charges, as there were no
significant timing differences during the periods ended December 31, 1998, 1997
or 1996. Deferred tax assets were not recognized for net operating losses
incurred by the Company due to uncertainty as to their ultimate recoveriblity.
(g) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided.
F-528
<PAGE> 672
ECSIS.NET, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $2, $11 and $4 and $1 and $2 for the years ended December 31,
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(i) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and the relatively minor balances of each individual
account. At December 31, 1997 and 1998 and June 30, 1999, the fair value of the
Company's financial instruments approximate their carrying value based on their
terms and interest rates.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-529
<PAGE> 673
ECSIS.NET, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $77 $113 $130
Less accumulated depreciation............................... 26 44 53
--- ---- ----
Total..................................................... $51 $ 69 $ 77
=== ==== ====
</TABLE>
Accrued expenses
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Sales tax payable........................................... 2 3 4
Other....................................................... 7 1 --
-- -- --
$9 $4 $4
== == ==
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company is party to a management agreement with ECS, LLC ("ECS"), an
affiliate company, whereby ECS provides employee services and operating overhead
to the Company. These costs were $252, $120, and $73, for the years ended
December 31, 1998, 1997 and 1996, respectively, and were allocated upon the
characteristics of the accounts and the business divisions to which they relate.
Expenses which are not directly related to a particular division are allocated
based upon revenue or payroll expense of the division which, in the opinion of
management, represents a reasonable and appropriate method of allocation.
(4) SUBSEQUENT EVENTS
On July 26, 1999, the Company entered into Option Agreements ("Agreements")
with two regional point-of-presence ("POPs") internet service providers whereby
the Company has an unqualified option to purchase the POPs subscriber accounts
and certain network equipment. Upon the Company exercising its options, the
closing of the respective transactions will take place three days subsequent to
the transaction mentioned below.
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com
F-530
<PAGE> 674
ECSIS.NET, LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
concurrent with the consummation of the agreement, espernet.com will become the
sole owner of the Company, and the Company will be converted to a C-Corp.
(5) YEAR 2000
In 1998, the Company began to identify, assess, and remediate "Year 2000"
issues within each of its significant computer programs and certain equipment
which contain microprocessors. Systems which have been determined not to be Year
2000 compliance. The Company anticipates that by October 1999, conversion,
implementation, and testing activities will be completed.
At this time, the Company's management does not believe that Year 2000
issues will have a material impact on the Company's operations, liquidity or
financial position.
(6) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF YEAR AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1996:
Allowance for doubtful accounts............. $-- 2 2 --
=== === === ===
For the year ended December 31, 1997:
Allowance for doubtful accounts............. $-- 3 2 1
=== === === ===
For the year ended December 31, 1998:
Allowance for doubtful accounts............. $-- 6 4 2
=== === === ===
For the six months ended June 30, 1999:
Allowance for doubtful accounts
(unaudited).............................. $-- -- -- --
=== === === ===
</TABLE>
F-531
<PAGE> 675
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of World Trade Network,
Inc. (the Company) as of December 31, 1998 and 1997, and the related statements
of operations, stockholders' equity, 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 World Trade Network, Inc. as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New Orleans, Louisiana
August 31, 1999
F-532
<PAGE> 676
WORLD TRADE NETWORK, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................... $ -- -- 267
Accounts receivable....................................... -- 3 3
Prepaid expenses.......................................... -- -- 2
Deferred tax asset........................................ 41 106 133
---- ---- -----
Total current assets................................... 41 109 405
Deposits.................................................... 4 13 17
Property and equipment, net (note 2)........................ 331 645 1,017
---- ---- -----
Total assets........................................... $376 767 1,439
==== ==== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $ 56 14 --
Accounts payable.......................................... 79 148 253
Income tax payable........................................ 2 17 17
Current portion of long-term debt (note 3)................ -- -- 45
Deferred revenue.......................................... 164 423 530
---- ---- -----
Total current liabilities.............................. 301 602 845
Deferred tax liability...................................... 1 43 48
Long-term debt, less current portion (note 3)............... -- -- 493
---- ---- -----
Total liabilities...................................... 302 645 1,386
---- ---- -----
Stockholders' equity:
Common stock (note 5)..................................... 1 1 1
Additional paid-in capital................................ 250 325 325
Accumulated deficit....................................... (177) (204) (273)
---- ---- -----
Total stockholders' equity............................. 74 122 53
---- ---- -----
Commitments (notes 4 and 8)................................. -- -- --
---- ---- -----
Total liabilities and stockholders' equity............. $376 767 1,439
==== ==== =====
</TABLE>
See accompanying notes to financial statements.
F-533
<PAGE> 677
WORLD TRADE NETWORK, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- --------------------------
1996 1997 1998 1998 1999
---- ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue -- internet connectivity..... $356 1,289 2,834 1,116 2,081
---- ----- ----- ----- -----
Costs and expenses:
Cost of Internet services.......... 107 401 811 386 712
Selling, general and
administrative.................. 282 884 1,808 626 1,360
Depreciation and amortization...... 11 47 115 40 97
---- ----- ----- ----- -----
Total costs and expenses........ 400 1,332 2,734 1,052 2,169
---- ----- ----- ----- -----
Income (loss) from operations... (44) (43) 100 64 (88)
Other income (expense):
Loss on disposal of equipment...... -- (50) (122) -- --
Interest income.................... -- -- -- -- 1
Interest expense................... -- (16) (13) (9) (4)
---- ----- ----- ----- -----
Income (loss) before income
taxes......................... (44) (109) (35) 55 (91)
Income taxes (note 7)................ (11) (27) (8) 13 (22)
---- ----- ----- ----- -----
Net income (loss)............... $(33) (82) (27) 42 (69)
==== ===== ===== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-534
<PAGE> 678
WORLD TRADE NETWORK, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995........ 100 $1 80 (62) 19
Capital contribution................ -- -- 50 -- 50
Net loss............................ -- -- -- (33) (33)
--- -- --- ---- ---
BALANCE AT DECEMBER 31, 1996........ 100 1 130 (95) 36
Capital contribution................ -- -- 120 -- 120
Net loss............................ -- -- -- (82) (82)
--- -- --- ---- ---
BALANCE AT DECEMBER 31, 1997........ 100 1 250 (177) 74
Capital contribution................ -- -- 75 -- 75
Net loss............................ -- -- -- (27) (27)
--- -- --- ---- ---
BALANCE AT DECEMBER 31, 1998........ 100 1 325 (204) 122
Net loss (unaudited)................ -- -- -- (69) (69)
--- -- --- ---- ---
BALANCE AT JUNE 30, 1999
(unaudited)....................... 100 $1 325 (273) 53
=== == === ==== ===
</TABLE>
See accompanying notes to financial statements.
F-535
<PAGE> 679
WORLD TRADE NETWORK, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, ENDED JUNE 30,
-------------------- --------------------------
1996 1997 1998 1998 1999
---- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................... $(33) (82) (27) 42 (69)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 11 47 115 40 97
Loss on disposal of equipment..... -- 50 122 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. -- -- (3) -- --
Deposits........................ (1) 2 (9) (6) (6)
Deferred taxes.................. (13) (27) (23) (2) (22)
Accounts payable................ 22 55 69 88 105
Income tax payable.............. 2 -- 15 15 --
Deferred revenue................ 57 108 259 151 107
---- ---- ---- ---- ----
Net cash provided by
operating activities....... 45 153 518 328 212
---- ---- ---- ---- ----
Cash flows from investing
activities -- acquisition of property
and equipment........................ (66) (348) (551) (235) (469)
---- ---- ---- ---- ----
Cash flows from financing activities:
Bank overdraft....................... (10) 56 (42) (56) (14)
Proceeds from long-term debt......... -- -- -- -- 538
Capital contributions................ 50 120 75 -- --
---- ---- ---- ---- ----
Net cash provided by
financing activities....... 40 176 33 (56) 524
---- ---- ---- ---- ----
Net increase (decrease) in
cash....................... 19 (19) -- 37 267
Cash:
Beginning of period.................. -- 19 -- -- --
---- ---- ---- ---- ----
End of period........................ $ 19 -- -- 37 267
==== ==== ==== ==== ====
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six month periods
ended June 30, 1998 and 1999, the Company paid approximately $0, $16, $13, $9, and $3,
respectively, for interest. Interest expense for the years ended December 31, 1996, 1997
and 1998 is primarily related to trade payables.
During the year ended December 31, 1997, the Company paid $8 for income taxes.
</TABLE>
See accompanying notes to financial statements.
F-536
<PAGE> 680
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
World Trade Network, Inc. (the "Company") was incorporated in the State of
Texas on May 1, 1995 to capitalize on the growing demand for Internet access
services by consumers and business users. The Company commenced providing
Internet access services in November 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.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the Internet. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
Internet services, the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers' changing
requirements, including the effective use of leading technologies to continue to
enhance the Company's current services and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
On August 2, 1999, the Company entered into an agreement ("Agreement") with
espernet.com, inc. ("espernet.com") whereby espernet.com agreed to acquire 100%
of the common stock of the Company. This transaction is contingent upon the
successful completion of an initial public offering of Espernet's common stock
pursuant to an effective registration statement under the Securities Act of
1933. The purchase price will consist of cash of $5,075 and espernet.com common
stock having a value of $9,425 based upon the initial public offering price. The
cash portion of the purchase price is subject to certain downward adjustments as
defined in the agreement.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' equity (deficit), and cash flows for
the six months ended June 30, 1999 and 1998 are unaudited. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of management, all adjustments, consisting only of
normal
F-537
<PAGE> 681
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
recurring adjustments, necessary for the fair presentation of the financial
position and results of operations and cash flows, have been included in such
unaudited financial statements. The results of operations for the six months
ended June 30, 1999 are not necessarily indicative of the results to be expected
for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years.
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121 ("SFAS"),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized ratably over the
subscription period (generally one to 12 months). Substantially all Internet
subscriptions are billed monthly, quarterly or annually. Unearned portions of
Internet subscription revenue are deferred.
F-538
<PAGE> 682
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
in the accompanying statements of operations and totaled $19, $93 and $275 for
the years ended December 31, 1996, 1997 and 1998, respectively, and $71 and $384
for the six month periods ended June 30, 1998 and 1999, respectively.
(i) 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. Management believes the Company's reliance on
certain vendors can be shifted to alternative sources of supply, if necessary.
(j) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
F-539
<PAGE> 683
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $375 750 1,204
Furniture and fixtures...................................... -- 24 39
---- ---- -----
375 774 1,243
Less accumulated depreciation and amortization.............. 44 129 226
---- ---- -----
Total.................................................. $331 645 1,017
==== ==== =====
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consists of the following as of June 30, 1999 (unaudited):
<TABLE>
<S> <C>
Note payable to bank, secured by property and equipment,
payable in 60 monthly installments of principal and
interest of $5, maturing April 2004, annual interest at
8%........................................................ $238
Note payable to bank, payable in 60 monthly installments of
principal and interest of $6, maturing June 2004, annual
interest at 8.75%......................................... 300
----
538
Less current portion........................................ 45
----
$493
====
</TABLE>
Schedule maturities of long-term debt are $45, $99, $107, $116 and $126 in
1999, 2000, 2001, 2002 and 2003, respectively.
The notes payable are guaranteed by the Company's stockholder and an
affiliated corporation.
As of June 30, 1999, the Company has an unused working capital line of
credit of $50. The working capital line of credit expires April 2000. Amounts
outstanding under the working capital line of credit bear interest at the bank's
prime rate plus 1%.
F-540
<PAGE> 684
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(4) LEASES
The Company leases office space under non-cancelable operating leases
expiring at various dates through 2003.
Future minimum annual lease payments under non-cancelable operating leases
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1999.................................................... $222
2000.................................................... 229
2001.................................................... 206
2002.................................................... 130
2003.................................................... 5
----
$792
====
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 and the
six month periods ended June 30, 1998 and 1999 was $8, $48, $107, $44 and $105,
respectively.
(5) COMMON STOCK
The Company is authorized to issue 10,000 shares, par value $0.01 per
share, of Class "A" Voting Common Stock and 100,000 shares, par value $0.01 per
share, of Class "B" Voting Common Stock. Each share of Class "A" Voting Common
Stock has ten voting rights. Each share of Class "B" Voting Common Stock has one
voting right. There were 100 shares of Class "A" Common Stock outstanding at
December 31, 1997 and 1998 and June 30, 1999.
(6) RELATED PARTY TRANSACTIONS
An affiliated corporation, owned 100% by the stockholder of the Company,
paid payroll expenses and rent for the years 1996, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999. The amounts of payments were $83,
$347, $946, $387 and $650, respectively. The amounts are included in selling,
general and administrative expense and accounts payable in the accompanying
financial statements.
F-541
<PAGE> 685
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(7) INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED
31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current............................................... $ 2 -- 15 15 --
Deferred.............................................. (13) (27) (23) (2) (22)
---- --- --- -- ---
$(11) (27) (8) 13 (22)
==== === === == ===
</TABLE>
Income tax expense (benefit) differs from the amounts that would result
from applying the Federal statutory rate as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER ENDED
31, JUNE 30,
-------------------- ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax expense (benefit)........................ $(11) (27) (9) 14 (23)
Other................................................. -- -- 1 (1) 1
---- --- -- -- ---
$(11) (27) (8) 13 (22)
==== === == == ===
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $10 -- 17
Deferred revenue.......................................... 41 106 133
--- --- ---
Deferred tax assets.................................... 51 106 150
Deferred tax liabilities -- depreciation.................... (11) (43) (65)
--- --- ---
Net deferred tax asset................................. $40 63 85
=== === ===
</TABLE>
There was no valuation allowance for deferred tax assets at December 31,
1997 and 1998 and June 30, 1999. Management believes that the deferred tax
assets will more likely than not be
F-542
<PAGE> 686
WORLD TRADE NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
realized through future operating results and the reversal of taxable temporary
differences during the carryforward period.
(8) COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operations or liquidity.
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com. The Company's owners will
exchange their ownership in the Company for cash and shares of common stock of
espernet.com concurrent with the consummation of the initial public offering of
the common stock of espernet.com. Upon consummation of the agreement,
espernet.com will become the sole owner of the Company.
F-543
<PAGE> 687
INDEPENDENT AUDITORS' REPORT
The Board of Directors.:
espernet.com, inc.:
We have audited the accompanying balance sheets of STIC.NET, Inc. as of
December 31, 1998 and 1997, and the related statements of operations,
stockholder's 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 STIC.NET, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
Atlanta, Georgia
August 20, 1999
F-544
<PAGE> 688
STIC.NET, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
1997 1998 1999
----- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 59 9 34
Prepaid expenses and other current assets................ 7 4 4
----- ---- ----
Total current assets.................................. 66 13 38
Property, equipment and capital leases, net (note 2)....... 278 559 521
Other assets, net.......................................... 10 6 4
----- ---- ----
Total assets.......................................... $ 354 578 563
===== ==== ====
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable......................................... $ 19 81 89
Accrued expenses......................................... 14 31 22
Current portion of long-term debt (note 3)............... -- 396 434
Current portion of capital lease obligations (note 4).... 10 111 276
Deferred income.......................................... 6 10 10
----- ---- ----
Total current liabilities............................. 49 629 831
Long-term debt, less current portion (note 3).............. 427 49 41
Capital lease obligations, less current portion (note 4)... 22 221 55
----- ---- ----
Total liabilities..................................... 498 899 927
Stockholder's deficit:
Common stock, $1 par value. Authorized 1,000 shares,
issued and outstanding 1,000 shares................... 1 1 1
Accumulated deficit...................................... (145) (322) (365)
----- ---- ----
Total stockholder's deficit........................... (144) (321) (364)
----- ---- ----
Total liabilities and stockholder's deficit........... $ 354 578 563
===== ==== ====
</TABLE>
See accompanying notes to financial statements.
F-545
<PAGE> 689
STIC.NET, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ----------------
1996 1997 1998 1998 1999
---- ---- ----- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet connectivity.......................... $454 619 1,050 472 753
Enhanced services and other.................... 21 87 146 75 69
---- --- ----- --- ---
Total revenue............................... 475 706 1,196 547 822
Costs and expenses:
Cost of Internet services...................... 210 199 347 142 233
Selling, general and administrative............ 245 430 795 351 416
Depreciation and amortization.................. 49 74 181 94 170
---- --- ----- --- ---
Total costs and expenses.................... 504 703 1,323 587 819
---- --- ----- --- ---
Income (loss) from operations............... (29) 3 (127) (40) 3
Other income (expenses):
Other income................................... 6 10 -- -- --
Interest expense............................... (16) (31) (50) (25) (46)
---- --- ----- --- ---
Loss before income taxes.................... (39) (18) (177) (65) (43)
Income tax provision............................. -- -- -- -- --
---- --- ----- --- ---
Net loss.................................... $(39) (18) (177) (65) (43)
==== === ===== === ===
Pro Forma income taxes (unaudited)............... $ -- -- -- -- --
==== === ===== === ===
Pro Forma net income (unaudited)................. $(39) (18) (177) (65) (43)
==== === ===== === ===
</TABLE>
See accompanying notes to financial statements.
F-546
<PAGE> 690
STIC.NET, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ ------ ----------- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995..................... 1,000 $ 1 (88) (87)
Net loss......................................... (39) (39)
----- --- ---- ----
BALANCE AT DECEMBER 31, 1996..................... 1,000 1 (127) (126)
Net loss......................................... (18) (18)
----- --- ---- ----
BALANCE AT DECEMBER 31, 1997..................... 1,000 1 (145) (144)
Net loss......................................... (177) (177)
----- --- ---- ----
BALANCE AT DECEMBER 31, 1998..................... 1,000 1 (322) (321)
Net loss (unaudited)............................. (43) (43)
----- --- ---- ----
BALANCE AT JUNE 30, 1999 (unaudited)............. 1,000 $ 1 (365) (364)
===== === ==== ====
</TABLE>
See accompanying notes to financial statements.
F-547
<PAGE> 691
STIC.NET, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------- ----------------
1996 1997 1998 1998 1999
----- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (39) (18) (177) (65) (43)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization............... 49 74 181 94 170
Loss on disposal of fixed assets............ -- 7 -- -- --
Changes in operating assets and liabilities,
excluding effects of business
combinations:
Prepaid expenses and other current
assets................................. 5 (5) 3 (59) --
Accounts payable and accrued expenses..... 8 16 79 13 (1)
Deferred revenue.......................... -- 6 4 -- --
----- ---- ---- --- ----
Net cash provided by operations........ 23 80 90 (17) 126
----- ---- ---- --- ----
Cash flows from investing activities:
Acquisition of equipment....................... (121) (141) (57) -- (6)
----- ---- ---- --- ----
Net cash used by investing
activities........................... (121) (141) (57) -- (6)
----- ---- ---- --- ----
Cash flows from financing activities:
Proceeds from long term debt................... 105 122 18 -- 30
Repayment of capital lease obligations......... (3) (8) (101) (40) (125)
----- ---- ---- --- ----
Net cash provided by (used by)
financing activities................. 102 114 (83) (40) (95)
----- ---- ---- --- ----
Net increase (decrease) in cash and
cash equivalents..................... 4 53 (50) (57) 25
Cash and cash equivalents:
Beginning period............................... 2 6 59 59 9
----- ---- ---- --- ----
End of period.................................. $ 6 59 9 2 34
===== ==== ==== === ====
Supplemental disclosure of cash flow information:
During the years ended December 31, 1996, 1997 and 1998, and during the six month periods
ended June 30, 1998 and 1999, the Company paid approximately $7, $33, and $33 and $78
and $16, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment. These capital
leases obligations resulted in non-cash financing activities aggregating $34, $6, $310,
$45 and $110 for the years ended December 31, 1996, 1997, and 1998, and for the six
month periods ended June 30, 1998 and 1999, respectively.
</TABLE>
See accompanying notes to financial statements.
F-548
<PAGE> 692
STIC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
STIC.NET, Inc. (the "Company") was incorporated on July 5, 1995 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users. The Company commenced operations in May 1995.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
For each of the years ended December 31, 1996, 1997 and 1998 and for
periods ended June 30, 1998 and 1999, two vendors represented approximately 78%,
96%, 86% and 84% and 88%, respectively, of the Company's total purchases. The
Company's reliance on certain vendors can be shifted to alternative sources of
supply for products it sells should such changes be necessary.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
the statements of operations, stockholders' deficit, and cash flows for the six
months ended June 30, 1999 and 1998 are unaudited. Certain information and note
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the financial position and
results of operations and cash flows, have been included in such unaudited
financial statements. The results of operations for the six months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-549
<PAGE> 693
STIC.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(d) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash and cash
equivalents at December 31, 1997 and 1998 and June 30, 1999, were approximately
$59, $9, and $34, respectively.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(f) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of Accounting Principles Board ("APB") Opinion No. 17, Intangible
Assets, based upon estimated fair value. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(g) INCOME TAXES
The Company operates as an S Corp and therefore is exempt from taxation
according to the provisions of the Internal Revenue Code (the "Code"). Under the
provisions of the Code, the results of operations and the related income taxes
become the responsibility of the Company's stockholder. Accordingly, the Company
was not subject to Federal and state corporate income taxes during the periods
reported herein.
The unaudited Pro Forma income tax information included in statements of
operations is presented in accordance with SFAS 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 1998. The Company incurred no Pro
Forma deferred taxation charges, as there were no significant timing differences
during the periods ended December 31, 1998, 1997 or 1996. Pro forma deferred tax
assets were not recognized for net operating losses incurred by the Company due
to uncertainty as to their ultimate recoverability.
F-550
<PAGE> 694
STIC.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(h) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from hardware and software sales is recognized upon shipment of the
respective products.
(i) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $9, $6, and $17, and $3, and $19, for the years ended December 31,
1996, 1997 and 1998 and for the six month periods ended June 30, 1998 and 1999,
respectively.
(j) FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. At December 31, 1997 and 1998 and June 30, 1999, the fair
value of the Company's financial instruments approximate their carrying value
based on their terms and interest rates.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The Company has not yet
analyzed the impact of this pronouncement on its financial statements.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of FASB Statement No. 133. SFAS No. 137 defers
the effective date of SFAS No. 133 for one year.
F-551
<PAGE> 695
STIC.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
SFAS No. 133, as amended, is now effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
----- ----- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $43, $444 and $568,
respectively.............................................. $ 316 $ 752 $ 879
Vehicles.................................................... 89 89 89
Furniture and fixtures...................................... 8 20 23
----- ----- -----
413 861 991
Less accumulated depreciation and amortization, including
amounts related to capital leases of $12, $125 and $263,
respectively.............................................. (135) (302) (470)
----- ----- -----
Total.................................................. $ 278 $ 559 $ 521
===== ===== =====
</TABLE>
(3) DEBT AND RELATED PARTY TRANSACTIONS
Long-term debt consists of the following as of December 31, 1997 and 1998
and June 30, 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-term notes payable..................................... $427 445 475
---- ---- ----
Less current portion........................................ -- 396 434
---- ---- ----
Long-term debt, less current portion................... $427 $ 49 $ 41
==== ==== ====
</TABLE>
Included in current and long-term debt are notes payable to a relative of
the Company's president and stockholder amounting to $396 and $367 for the years
ended December 31, 1997 and 1998, respectively. These notes bear interest at 8%
with discretionary periodic payments and final maturity on June 1, 1999 and
August 1, 2000. Related party interest expense with respect to these notes was
$16, $28, $30, $15 and $16 for the years ended December 31, 1996, 1997 and 1998
and the six month periods ended June 30, 1998 and 1999 respectively.
The Company also has a note payable to Primus Automotive Financial Services
amounts to $49 and $60 for the years ended December 31, 1997 and 1998,
respectively. This note bears
F-552
<PAGE> 696
STIC.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
interest at 11.5% and is repayable in monthly installments of $1. The note
matures August 2000 with a final payment of $35.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2003.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
------- ---------
<S> <C> <C>
1999........................................................ $187 47
2000........................................................ 159 48
2001........................................................ 37 8
2002........................................................ 32 --
2003........................................................ 25 --
---- ---
Total minimum payments................................. 440 103
===
Less amount representing interest........................... 108
----
Present value of net minimum lease payments............ 332
Less current portion........................................ 111
----
$221
====
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and the six
month periods ended June 30, 1998 and 1999 were $34, and $35, and $18, and $20
respectively.
Future minimum payments under non-cancelable contracts for data
communication line rentals and internet services total $363 during 1999 and $89
in 2000.
(5) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the "Plan") for all full time employees of
the Company. The Company may make discretionary contributions to the Plan on
behalf of employees that meet certain contribution eligibility requirements
defined under the terms of the Plan. The Company did not make any contributions
to the Plan during the years ended December 31, 1997 and 1998 and the periods
June 30, 1998 and 1999.
F-553
<PAGE> 697
STIC.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(6) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company, and
the Company will be converted to a C-Corp.
F-554
<PAGE> 698
INDEPENDENT AUDITORS' REPORT
The Board of Directors
espernet.com, inc.:
We have audited the accompanying balance sheets of NetWest Online, Inc. as
of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the period from April 26,
1996 (inception) to December 31, 1996 and for each of the years in the two-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 NetWest Online, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the period from April 26, 1996 (inception) to December 31, 1996 and for each
of the years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
New Orleans, Louisiana
August 26, 1999
F-555
<PAGE> 699
NETWEST ONLINE, INC.
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 23 50 35
Receivables:
Trade, net of allowance for doubtful accounts of $12,
$31 and $31, respectively............................. 19 50 67
Affiliates............................................. -- 12 6
Deferred income taxes..................................... 9 9 8
Prepaid expenses and other................................ 5 6 4
---- --- ---
Total current assets................................... 56 127 120
Equipment, net.............................................. 71 124 189
Other assets:
Intangibles, net of accumulated amortization of $0, $0,
and $0, respectively................................... -- -- 11
Organization costs, net................................... 1 -- --
Deferred income taxes..................................... 8 -- 1
---- --- ---
Total assets........................................... $136 251 321
==== === ===
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank overdraft............................................ $ -- 63 --
Accounts payable.......................................... 13 22 15
Accrued liabilities....................................... 8 12 19
Payable to affiliates..................................... 3 4 1
Notes payable............................................. 110 60 200
Deferred revenue.......................................... 38 78 91
---- --- ---
Total current liabilities.............................. 172 239 326
Deferred income taxes....................................... -- 3 --
---- --- ---
Total liabilities...................................... 172 242 326
---- --- ---
Stockholders' equity (deficit):
Common stock, $1 par value, authorized 1,000,000 shares,
issued and outstanding 1,002 shares.................... 1 1 1
Additional paid-in capital................................ 21 21 21
Accumulated deficit....................................... (58) (13) (27)
---- --- ---
Total stockholder's equity (deficit)................... (36) 9 (5)
Commitments and contingencies
---- --- ---
Total liabilities and stockholders' equity (deficit)... $136 251 321
==== === ===
</TABLE>
See accompanying notes to financial statements.
F-556
<PAGE> 700
NETWEST ONLINE, INC.
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED SIX MONTHS ENDED
APRIL 26, 1996 DECEMBER 31, JUNE 30,
TO DECEMBER 31, ------------ -------------------------
1996 1997 1998 1998 1999
--------------- ---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue -- Internet connectivity...... $ 71 386 773 305 585
---- --- --- --- ---
Costs and expenses:
Cost of Internet services........... 29 108 203 85 155
Selling, general and
administrative................... 116 235 450 152 397
Depreciation and amortization....... 12 44 54 21 45
---- --- --- --- ---
Total costs and expenses......... 157 387 707 258 597
---- --- --- --- ---
Income (loss) from operations.... (86) (1) 66 47 (12)
Other income (expenses):
Litigation settlement............... -- 42 -- -- --
Loss on disposal of equipment....... -- (9) -- -- --
Interest expense.................... (5) (16) (8) (4) (5)
---- --- --- --- ---
Income (loss) before income
taxes.......................... (91) 16 58 43 (17)
Income tax expense (benefit).......... (22) 5 13 12 (3)
---- --- --- --- ---
Net income (loss)................ $(69) 11 45 31 (14)
==== === === === ===
</TABLE>
See accompanying notes to financial statements.
F-557
<PAGE> 701
NETWEST ONLINE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 26, 1996 (INCEPTION)........ -- $-- -- -- --
Issuance of common stock..................... 1,000 1 14 -- 15
Contributed capital -- free rent............. -- -- 4 -- 4
Net loss..................................... -- -- -- (69) (69)
----- --- -- --- ---
BALANCE AT DECEMBER 31, 1996................. 1,000 1 18 (69) (50)
Contributed capital -- free rent............. -- -- 3 -- 3
Net income................................... -- -- -- 11 11
----- --- -- --- ---
BALANCE AT DECEMBER 31, 1997................. 1,000 1 21 (58) (36)
Net income................................... -- -- -- 45 45
----- --- -- --- ---
BALANCE AT DECEMBER 31, 1998................. 1,000 1 21 (13) 9
Net loss (unaudited)......................... -- -- -- (14) (14)
----- --- -- --- ---
BALANCE AT JUNE 30, 1999 (unaudited)......... 1,000 $ 1 21 (27) (5)
===== === == === ===
</TABLE>
See accompanying notes to financial statements.
F-558
<PAGE> 702
NETWEST ONLINE, INC.
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM YEARS ENDED SIX MONTHS ENDED
APRIL 26, 1996 DECEMBER 31, JUNE 30,
TO DECEMBER 31, ------------- -------------------------
1996 1997 1998 1998 1999
---------------- ----- ----- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................... $(69) 11 45 31 (14)
Adjustments to reconcile net income (loss)
to net cash provided (used) by
operating activities:
Depreciation and amortization.......... 12 44 54 21 44
Loss on disposal of equipment.......... -- 8 -- -- --
Changes in operating assets and
liabilities:
Accounts receivables................. (1) (19) (31) (10) (17)
Due from affiliate................... -- -- (12) -- 6
Prepaid expenses and other current
assets............................ -- (5) -- 3 2
Deferred income taxes................ (21) 5 11 -- (3)
Accounts payable..................... 4 9 9 -- (7)
Accrued expenses..................... 7 1 5 16 7
Due to affiliate..................... 1 2 1 5 (3)
Deferred revenue..................... 22 17 39 13 13
---- --- ---- --- ----
Net cash provided (used) by
operating activities............ (45) 73 121 79 28
---- --- ---- --- ----
Cash flows from investing activities:
Acquisition of assets..................... (76) (79) (108) (32) (109)
Other..................................... (1) -- -- -- (11)
Proceeds from disposal of assets.......... -- 19 1 1 --
---- --- ---- --- ----
Net cash used by investing
activities...................... (77) (60) (107) (31) (120)
---- --- ---- --- ----
Cash flows from financing activities:
Bank overdraft............................ -- -- 63 -- (63)
Proceeds from notes payable............... 121 65 -- -- 158
Repayments of notes payable............... (10) (66) (50) (38) (18)
Contributed capital -- free rent.......... 4 3 -- -- --
Proceeds from issuance of common stock.... 15 -- -- -- --
---- --- ---- --- ----
Net cash provided (used) by
financing activities............ 130 2 13 (38) 77
---- --- ---- --- ----
Net increase (decrease) in cash... 8 15 27 10 (15)
Cash:
Beginning period.......................... -- 8 23 23 50
---- --- ---- --- ----
End of period............................. $ 8 23 50 33 35
==== === ==== === ====
Supplemental disclosures of cash flow information:
During the period/years ended December 31, 1996, 1997 and 1998, and during the six month periods ended
June 30, 1998 and 1999, the Company paid approximately $5, $16, $8, $5 and $5, respectively, for
interest.
During the period/years ended December 31, 1996, 1997 and 1998, and during the six month periods ended
June 30, 1998 and 1999, the Company paid approximately $0, $0, $2, $12, and $0, respectively, for
taxes.
</TABLE>
See accompanying notes to financial statements.
F-559
<PAGE> 703
NETWEST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(AMOUNTS IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BASIS OF PRESENTATION
NetWest Online, Inc. ("NetWest" or the "Company") was incorporated in the
state of Texas on April 26, 1996 to capitalize on the growing demand for
Internet access and enhanced services by consumers and business users.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers' changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(b) UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements of the Company as of June 30, 1999, and
for the six months ended June 30, 1999 and 1998 are unaudited. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for the fair presentation of the
financial position and results of operations and cash flows, have been included
in such unaudited financial statements. The results of operations for the six
months ended June 30, 1999 are not necessarily indicative of the results to be
expected for the entire year.
(c) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
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.
(d) EQUIPMENT
Equipment is stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years.
F-560
<PAGE> 704
NETWEST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(e) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(f) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) REVENUE RECOGNITION
Revenue related to Internet services is recognized ratably over the
subscription period (generally one to 12 months). Substantially all Internet
subscriptions are billed monthly, quarterly or annually. Unearned portions of
Internet subscription revenue are deferred.
(h) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general and administrative expense
in the accompanying statements of operations and totaled approximately $34, $55
and $122 for the period/years ended December 31, 1996, 1997 and 1998,
respectively, and $37 and $134 for the six month periods ended June 30, 1998 and
1999, respectively.
(i) BARTER TRANSACTIONS
The Company provides Internet access to certain third parties in exchange
for advertisements on local television and radio stations. These transactions
are reported at the estimated fair value of the Internet service provided by the
Company. Barter revenues and expenses are recorded as such services are
provided/incurred by the Company. Included in the Company's statements of
operations are barter transactions of approximately $27, $47 and $82,
respectively, for the period/years ended December 31, 1996, 1997 and 1998, and
approximately $23 and $94 for the six months ended June 30, 1998 and 1999,
respectively.
F-561
<PAGE> 705
NETWEST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(j) SOURCE OF SUPPLIES
For the years ended December 31, 1997 and 1998 and for the six months ended
June 30, 1998 and 1999, three vendors represented approximately 39%, 30%, 35%
and 29%, respectively, of the Company's total purchases. The Company's reliance
on certain vendors can be shifted to alternative sources of supply for products
it sells should such changes be necessary.
(k) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. Adoption of SOP 98-1 as of January 1,
1999 did not have any material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not yet analyzed the impact of this pronouncement on its
financial statements.
(2) EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Internet access and computer equipment...................... $105 205 315
Furniture and fixtures...................................... 8 13 13
---- --- ---
113 218 328
Less accumulated depreciation............................... 42 94 139
---- --- ---
Total.................................................. $ 71 124 189
==== === ===
</TABLE>
(3) NOTES PAYABLE
In July 1997, the Company entered into an agreement with a bank whereby the
Company borrowed $91 to repay certain existing obligations to the bank.
Borrowings outstanding under this note were $84 and $60 at December 31, 1997 and
1998 and $47 at June 30, 1999, and bear interest at prime plus .75% (8.5% at
December 31, 1998). All borrowings are due on demand, or if no
F-562
<PAGE> 706
NETWEST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
demand is made, in 42 monthly installments of $3 through February 2001, and are
secured by equipment of the Company.
In 1997, the Company entered into two agreements with the bank discussed
above whereby the Company borrowed $15 and $12. Borrowings amounted to $14 and
$12 at December 31, 1997, respectively. These notes bore interest at prime plus
.75%. All borrowings were due on demand. These notes were paid off during 1998.
Due to the demand feature, all borrowings under the notes discussed above
are classified as current liabilities.
Although the notes are due on demand, the Company has a history of
refinancing the notes annually. Management believes the Company will be able to
refinance the notes or other sources of capital will be required.
(4) LEASES
The Company leases office space from a related party under noncancelable
operating leases with a related party expiring at various dates through 2000.
Future minimum annual lease payments as of December 31, 1998 are as follows:
1999, $15 and 2000, $3.
For the years ended December 31, 1997 and 1998 and for the six month
periods ended June 30, 1998 and 1999, rent expense was $4, $10, $4 and $8,
respectively.
(5) RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996, 1997 and 1998 and for the six-month
periods ended June 30, 1998 and 1999, the Company paid fees of approximately
$34, $97, $140, $46 and $58, respectively, to certain companies who are related
to the Company through common ownership for management and accounting services.
(6) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations consists of:
<TABLE>
<CAPTION>
SIX
MONTHS
PERIOD FROM YEAR ENDED ENDED
APRIL 26, 1996 DECEMBER 31, JUNE 30,
TO DECEMBER 31, ------------- -----------
1996 1997 1998 1998 1999
--------------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Current............................................ $ -- -- 2 1 --
Deferred........................................... (22) 5 11 11 (3)
---- -- -- -- --
Total......................................... $(22) 5 13 12 (3)
==== == == == ==
</TABLE>
F-563
<PAGE> 707
NETWEST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
Income tax (benefit) expense differs from the amounts that would result
from applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 26, 1996 DECEMBER 31, JUNE 30,
TO DECEMBER 31, ------------- -----------
1996 1997 1998 1998 1999
--------------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Expected tax expense (benefit)..................... $(22) 5 15 11 (3)
Other.............................................. -- -- (2) 1 --
---- -- -- -- --
$(22) 5 13 12 (3)
==== == == == ==
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 9 -- 4
Deferred revenue.......................................... 10 19 23
Allowance for doubtful accounts........................... 3 8 5
--- --- ---
Deferred tax assets.................................... 22 27 32
--- --- ---
Deferred tax liabilities:
Depreciation.............................................. (1) (3) (3)
Accrual to cash conversion................................ (4) (18) (20)
--- --- ---
Deferred liabilities................................... (5) (21) (23)
--- --- ---
Net deferred tax asset................................. $17 6 9
=== === ===
</TABLE>
There was no valuation allowance for deferred tax assets at December 31,
1997 and 1998 and June 30, 1999. Management believes that the deferred tax
assets will more likely than not be realized through future operating results
and the reversal of taxable temporary differences in the carryforward period.
(7) LITIGATION SETTLEMENT
The Company was a plaintiff in litigation with a franchisor in regards to
the franchisor's nonperformance of contract terms. This litigation was settled
in 1997 and the Company was awarded $42, as recorded in other income on the
statement of operations.
F-564
<PAGE> 708
NETWEST ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 ARE UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(9) SUBSEQUENT EVENT
The Company's owners have entered into an agreement whereby they will sell
their ownership in the Company to espernet.com, inc. ("espernet.com"). The
Company's owners will exchange their ownership in the Company for cash and
shares of common stock of espernet.com concurrent with the consummation of the
initial public offering of the common stock of espernet.com. Upon consummation
of the agreement, espernet.com will become the sole owner of the Company.
F-565
<PAGE> 709
SHARES
[ESPERNET.COM LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
E*OFFERING DLJDIRECT INC.
---------------------------
WR HAMBRECHT + CO
, 1999
We have not authorized any dealer, salesperson or other person to give you
written information other that this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering or when selling
previously unsold allotments or subscriptions.
<PAGE> 710
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......... $ 47,955
NASD filing fee............................................. $ 17,750
Nasdaq National Market listing fee.......................... $ 90,000
Accounting fees and expenses................................ $ 8,300,000
Legal fees and expenses..................................... $ 3,000,000
Printing and engraving expenses............................. $ 1,160,000
Blue Sky fees and expenses.................................. $ 8,500
Transfer agent and registrar fees........................... $ 3,500
Miscellaneous expenses...................................... $ 4,372,295
Total............................................. $17,000,000
</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"). 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 obtained in advance of its final
disposition, provided that the payment of these expenses (including attorneys'
fees) incurred by a director or officer in advance of the final disposition of a
proceeding may be made only upon delivery to 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.
As permitted by the DGCL, the Registrant's certificate of incorporation
provides that directors of the Registrant will not be liable to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to 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 purchases or redemptions 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 or agent of another corporation, partnership,
joint venture, 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, whether or not the Registrant would be required to
indemnify the person against such liability under the provisions of the
Registrant's bylaws. The Registrant intends to purchase director and officer
liability insurance on behalf of its directors and officers.
<PAGE> 711
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is information regarding the shares of capital stock that
the Registrant has issued or agreed to issue in the last three years. Each of
these transactions was or will be effected without registration under the
Securities Act of 1933, as amended. The Registrant believes that each of these
transactions is exempt from the registration requirements of the Securities Act
under the exemption from registration contained in Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act based on the private nature
of the transactions, the financial sophistication of the purchasers and the
investment representations made by the purchasers.
(a) On August 8, 1999, the Registrant sold one share of its common
stock, $.001 par value per share, to Chinh Chu for an aggregate
consideration of $1.00.
(b) Prior to filing this registration statement, the Registrant agreed
to issue approximately shares of its common stock to 172 persons
in exchange for all the stock, limited liability company interests, other
equity interests or assets of the 43 ISPs the Registrant will acquire upon
completion of its initial public offering. These equity interests to be
acquired by the Registrant in exchange for these shares have been valued at
a total of approximately $ by the Registrant.
(c) Prior to filing this registration statement, the Registrant agreed
to issue approximately shares of its common stock to the 28
stockholders of Espernet.com of New York, Inc. in exchange for all of their
stock in Espernet.com of New York, Inc. This transaction will be
consummated simultaneously with the closing of the Registrant's initial
public offering.
Each of the foregoing transactions was effected without the use of an
underwriter.
<PAGE> 712
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..............................
3.1 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.2 Amended and Restated Bylaws of the Registrant...............
*4.1 Form of Common Stock Certificate............................
*5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. ..........
10.1 Stock Exchange Agreement as amended by the Letter Amendment
to Stock Exchange Agreement (InfoRamp, Inc.)................
10.2 Stock Exchange Agreement (World Trade Network, Inc.)........
10.3 Stock Exchange Agreement (Enter Net, Inc.)..................
10.4 Stock Exchange Agreement (Espernet.com of New York, Inc.)
10.5 Employment Agreement between the Registrant and Martin D.
Prazak......................................................
10.6 Employment Agreement between the Registrant and Ihsan M.
Essaid......................................................
10.7 Employment Agreement between the Registrant and Paul T.
Hart........................................................
10.8 Employment Agreement between the Registrant and Janet M.
Rogers......................................................
10.9 Employment Agreement between the Registrant and Steven F.
DeMar.......................................................
10.10 Administrative Services Agreement between the Registrant and
Espernet.com, Inc. of New York..............................
*10.11 Registration Rights Agreement among the Registrant and
certain stockholders of the Registrant......................
*10.12 espernet.com, inc. 1999 Stock Option/Stock Issuance Plan....
10.13 Co-Branding and Marketing Agreement between the Registrant
and LookSmart, Ltd. ........................................
*10.14 Research in Motion Agreement................................
21.1 Subsidiaries of the Registrant..............................
</TABLE>
<PAGE> 713
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
23.1 Consent of KPMG LLP, Independent Auditors (espernet.com,
inc., Espernet.com of New York, Inc., Cumberland
Technologies International (d/b/a PAdotNET), Pennsylvania
Online Ltd., Innernet, Inc., Delanet, Inc., Internet Access
Services (A Division of Weidner Associates, Inc.), Southern
Maryland Internet, Inc., NuNet, Inc., Enter.Net, Inc.,
Prometheus Information Corp., E-Znet Incorporated, USA
Choice Internet Services, Co., Crocker Communications
Internet (A Division of Crocker Communications,
Incorporated), COL Networks, Inc., Perigee.net Corporation,
DuplinNet Corporation, WaveNet, Inc., The 3rd Door, Inc.,
InfoRamp, Inc., Midwest Communications, Inc., Alliance
Internet Technologies, L.L.C., ComQuest Networks, Inc.,
Fairnet, Inc., Wisconsin Internet, Inc., NConnect, Inc.,
Netwurx, Inc., Provide.Net, The Computer Care Company, Inc.,
ISP Management, Inc., Nethawk of Alma, Inc., The Internet
Access Services Division of Sensible Computer Solutions,
Inc., www.internet solutions, inc., Copper.net Group,
NetPlus Communications, Inc., Internet Nebraska Corporation,
RapidNet, Inc., d/b/a Rapid Net CSW Net, Inc., IOCC.com,
LLC, Futura, Inc., Internet Solutions, Inc.--ISP Business,
Black Sheep Computing, Inc.--ISP Business, Intensity
Computer Systems, ECSIS.Net, LLC, World Trade Network, Inc.,
STIC.NET, Inc., NetWest Online Inc.)
*23.47 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included
in Exhibit 5.1).............................................
27.1 Financial Data Schedule.....................................
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 714
(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.
<PAGE> 715
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned in the city of New York, New York on September 30,
1999.
espernet.com, inc.
By: /s/ MARTIN D. PRAZAK
-------------------------------------
Martin D. Prazak
President and Chief Executive
Officer
We, the undersigned officers and directors of espernet.com, inc., in the
city of New York, New York hereby severally constitute and appoint Martin D.
Prazak and Paul J. Hart our true and lawful attorneys with full power of
substitution together, and each of them singly, to sign for us and in our names
in the capacities indicated below, the Registration Statement on Form S-1 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and generally to do all such things in our names and on
our behalf in our capacities as officers and directors to enable espernet.com,
inc. to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys, or
any one of them, to said Registration Statement and any and all amendments
thereto.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below, in the City of New York, New York, on September 30,
1999.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ CHINH E. CHU Chairman of the Board of Directors and
- --------------------------------------------------- Director
Chinh E. Chu
/s/ MARTIN D. PRAZAK President, Chief Executive Officer and
- --------------------------------------------------- Director
Martin D. Prazak
/s/ IHSAN M. ESSAID Chief Financial Officer, Treasurer and
- --------------------------------------------------- Director
Ihsan M. Essaid
/s/ PAUL J. HART Executive Vice President, Secretary and
- --------------------------------------------------- Director
Paul J. Hart
</TABLE>
<PAGE> 716
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement..............................
3.1 Amended and Restated Certificate of Incorporation of the
Registrant..................................................
3.2 Amended and Restated Bylaws of the Registrant...............
*4.1 Form of Common Stock Certificate............................
*5.1 Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P. ..........
10.1 Stock Exchange Agreement as amended by the Letter Amendment
to Stock Exchange Agreement (InfoRamp, Inc.)................
10.2 Stock Exchange Agreement (World Trade Network, Inc.)........
10.3 Stock Exchange Agreement (Enter Net, Inc.)..................
10.4 Stock Exchange Agreement (Espernet.com of New York, Inc.)
10.5 Employment Agreement between the Registrant and Martin D.
Prazak......................................................
10.6 Employment Agreement between the Registrant and Ihsan M.
Essaid......................................................
10.7 Employment Agreement between the Registrant and Paul T.
Hart........................................................
10.8 Employment Agreement between the Registrant and Janet M.
Rogers......................................................
10.9 Employment Agreement between the Registrant and Steven F.
DeMar.......................................................
10.10 Administrative Services Agreement between the Registrant and
Espernet.com, Inc. of New York..............................
*10.11 Registration Rights Agreement among the Registrant and
certain stockholders of the Registrant......................
*10.12 espernet.com, inc. 1999 Stock Option/Stock Issuance Plan....
10.13 Co-Branding and Marketing Agreement between the Registrant
and LookSmart, Ltd. ........................................
*10.14 Research in Motion Agreement................................
21.1 Subsidiaries of the Registrant..............................
</TABLE>
<PAGE> 717
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
23.1 Consent of KPMG LLP, Independent Auditors (espernet.com,
inc., Espernet.com of New York, Inc., Cumberland
Technologies International (d/b/a PAdotNET), Pennsylvania
Online Ltd., Innernet, Inc., Delanet, Inc., Internet Access
Services (A Division of Weidner Associates, Inc.), Southern
Maryland Internet, Inc., NuNet, Inc., Enter.Net, Inc.,
Prometheus Information Corp., E-Znet Incorporated, USA
Choice Internet Services, Co., Crocker Communications
Internet (A Division of Crocker Communications,
Incorporated), COL Networks, Inc., Perigee.net Corporation,
DuplinNet Corporation, WaveNet, Inc., The 3rd Door, Inc.,
InfoRamp, Inc., Midwest Communications, Inc., Alliance
Internet Technologies, L.L.C., ComQuest Networks, Inc.,
Fairnet, Inc., Wisconsin Internet, Inc., NConnect, Inc.,
Netwurx, Inc., Provide.Net, The Computer Care Company, Inc.,
ISP Management, Inc., Nethawk of Alma, Inc., The Internet
Access Services Division of Sensible Computer Solutions,
Inc., www.internet solutions, inc., Copper.net Group,
NetPlus Communications, Inc., Internet Nebraska Corporation,
RapidNet, Inc., d/b/a Rapid Net CSW Net, Inc., IOCC.com,
LLC, Futura, Inc., Internet Solutions, Inc.--ISP Business,
Black Sheep Computing, Inc.--ISP Business, Intensity
Computer Systems, ECSIS.Net, LLC, World Trade Network, Inc.,
STIC.NET, Inc., NetWest Online Inc.)
*23.47 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P. (included
in Exhibit 5.1).............................................
27.1 Financial Data Schedule.....................................
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ESPERNET.COM, INC.
ESPERNET.COM, INC., a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is espernet.com, inc. The date of filing of
its original Certificate of Incorporation with the Secretary of State of the
State of Delaware was June 7, 1999 (the "Original Certificate").
2. This Amended and Restated Certificate of Incorporation amends, restates
and integrates the provisions of the Original Certificate, as heretofore
amended.
3. This Amended and Restated Certificate of Incorporation was proposed and
declared advisable by unanimous written consent of the Corporation's Board of
Directors and was duly adopted by unanimous written consent of the stockholders,
in accordance with the provisions of Sections 245, 242 and 228 of the General
Corporation Law of the State of Delaware.
4. The text of the Original Certificate is amended and restated in its
entirety to provide as herein set forth in full:
ARTICLE 1. NAME
The name of the corporation (the "Corporation") is espernet.com,
inc.
ARTICLE 2. REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE 3. PURPOSES AND POWERS
The nature of the business or purposes to be conducted or promoted
by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
<PAGE> 2
ARTICLE 4. CAPITAL STOCK
4.1 AUTHORIZED SHARES
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Hundred Twenty Million
(120,000,000) shares of capital stock consisting of One Hundred Million
(100,000,000) shares of common stock, par value $.001 per share (the "Common
Stock"), and Twenty Million (20,000,000) shares of preferred stock, par value
$.001 per shares (the "Preferred Stock")
4.2 VOTING RIGHTS
Whenever the Corporation shall be authorized to issue only one class
of stock, each outstanding share shall entitle the holder thereof to notice of,
and the right to vote at, any meeting of stockholders. Whenever the Corporation
shall be authorized to issue more than one class of stock, no outstanding share
of any class of stock which is denied voting power under the provisions of this
Certificate of Incorporation, any amendment thereto, or in the resolution or
resolutions providing for the issuance of such stock adopted by the Board of
Directors pursuant to the authority expressly granted herein, shall entitle the
holder thereof to the right to vote at any meeting of stockholders except as the
provisions of paragraph (2) of subsection (b) of section 242 of the General
Corporation Law of the State of Delaware shall otherwise require; provided,
however, no share of any such class which is otherwise denied voting power shall
entitle the holder thereof to vote upon the increase or decrease in the number
of authorized shares of said class.
4.3 STOCK ISSUANCE
From time to time the Corporation may issue its authorized shares
for such consideration per share (with respect to shares having a par value, not
less than the par value thereof), either in money or money's worth of property
or services, and for such other consideration, whether greater or less, now or
from time to time hereafter permitted by law, as may be fixed by the Board of
Directors; and all shares so issued shall be fully paid and nonassessable.
4.4 NO PREEMPTIVE RIGHTS
No holder of any shares of any class shall as such holder have any
preemptive right to subscribe for or purchase any other shares or securities of
any class, whether now or hereafter authorized, which at any time may be offered
for sale or sold by the Corporation.
4.5 STOCKHOLDER MEETINGS; BOOKS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
<PAGE> 3
4.6 COMMON STOCK
4.6.1 RELATIVE RIGHTS
The Common Stock shall be subject to all of the rights, privileges,
preferences and priorities of the Preferred Stock as set forth in the
certificate of designations filed to establish the respective series of
Preferred Stock. Each share of Common Stock shall have the same relative rights
as and be identical in all respects to all the other shares of Common Stock.
4.6.2 VOTING RIGHTS
The holder of each share of Common Stock shall have the right to one
vote, and shall be entitled to notice of any shareholders' meeting in accordance
with the Bylaws of this Corporation, and shall be entitled to vote upon such
matters and in such manner as may be provided by law on all matters submitted to
a vote at any meeting of shareholders.
4.6.3 DIVIDEND RIGHTS
Subject to the rights of holders of shares of all classes of stock
at the time outstanding having prior rights as to dividends, the holders of the
Common Stock shall be entitled to receive, when and as declared by the Board of
Directors, out of any funds of the Corporation legally available therefor, such
dividends as may be declared from time to time by the Board of Directors.
4.6.4 DISSOLUTION RIGHTS
Subject to the rights of holders of shares of all classes of stock
at the time outstanding having prior rights thereto, the holder of the Common
Stock shall be entitled to receive the net assets of the Corporation upon
dissolution.
4.7 PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more
series to have such terms as stated or expressed herein and in the resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors of the Corporation as hereinafter provided. Any shares of Preferred
Stock which may be redeemed, purchased or acquired by the Corporation may be
reissued except as otherwise provided by law. Different series of Preferred
Stock shall not be construed to constitute different classes of shares for the
purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide
<PAGE> 4
that such series shall be superior or rank equally or be junior to the Preferred
Stock of any other series to the extent permitted by law. Except as otherwise
provided in this Certificate of Incorporation, no vote of the holders of the
Preferred Stock or Common Stock shall be a prerequisite to the designation or
issuance of any shares of any series of the Preferred Stock authorized by and
complying with the conditions of this Certificate of Incorporation, the right to
have such vote being expressly waived by all present and future holders of the
capital stock of the Corporation.
ARTICLE 5. DIRECTORS
5.1 GENERAL
The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors.
5.2 NUMBER; ELECTION, CLASSES AND TERM
The number of directors which shall constitute the whole Board of
Directors shall be fixed by, or in the manner provided in, the Bylaws. The
phrase "whole Board" and the phrase "total number of directors" shall be deemed
to have the same meaning, to wit, the total number of directors which the
Corporation would have if there were no vacancies. Elections of directors need
not be by written ballot unless the Bylaws of the Corporation shall so provide.
The Board of Directors shall be divided into three classes, designated Class A,
Class B and Class C. Each class shall consist, as nearly as possible, of
one-third of the total number of directors constituting the entire Board of
Directors. The terms of directors shall be staggered so that the term of the
initial Class A directors shall terminate on the date of the 2000 annual meeting
of stockholders; the term of the initial Class B directors shall terminate on
the date of the 2001 annual meeting of stockholders; and the term of the initial
Class C directors shall terminate on the date of the 2002 annual meeting of
stockholders. At each annual meeting of stockholders beginning in 2000,
successors to the class of directors whose term expires at the annual meeting
shall be elected for a three-year term, with each director to hold office until
his or her successor shall have been duly elected and qualified. The directors
of the class whose terms then expire shall be elected by stockholders at each
annual meeting of stockholders or as otherwise provided in the Bylaws. The
directors chosen at any annual meeting shall hold office, except as hereinafter
provided, until the third annual meeting of stockholders following their
election and until the election and qualification of their successors.
ARTICLE 6. LIMITATION OF LIABILITY
6.1 GENERAL
The personal liability of the directors of the corporation is hereby
eliminated to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented. If the General
Corporation Law of the State of Delaware hereafter is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Corporation, in addition to the limitation on
personal liability provided herein, shall be limited to the fullest extent
permitted by the amended General Corporation Law of the State of Delaware. Any
repeal or modification of this Article, or the adoption of any provision of this
<PAGE> 5
Certificate of Incorporation inconsistent with this Article, by the stockholders
of the Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal, modification or adoption of an inconsistent
provision.
The Corporation shall, to the fullest extent permitted by the
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person. If the General Corporation Law of the State of Delaware hereafter is
amended to authorize a broader scope of indemnification by the Corporation, then
the indemnification provisions provided for herein shall be extended to the
fullest extent permitted by the amended General Corporation Law of the State of
Delaware. Any repeal or modification of this Article, or the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
by the stockholders of the Corporation shall be prospective only and shall not
adversely affect the rights of those persons whom the Corporation had the power
to indemnify prior to such, repeal, modification or adoption of an inconsistent
provision.
ARTICLE 7. SECTION 203
The Corporation expressly elects to be governed by Section 203 of
the Delaware General Corporation Law.
ARTICLE 8. AMENDMENT
From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 6
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate
of Incorporation to be signed by the Executive Vice President of the Corporation
this 17th day of September, 1999.
/s/ Paul Hart
-------------------------------------
Paul Hart
Executive Vice President
<PAGE> 1
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
ESPERNET.COM, INC.
ARTICLE I: IDENTIFICATION
Section 1.1 Name. The name of the Corporation is "espernet.com,
inc."
Section 1.2 Seal. Upon the seal of the Corporation shall appear the
name of the Corporation and the state and year of incorporation, and the words
"Corporate Seal."
Section 1.3 Offices. The registered office of the Corporation shall
be in the City of Wilmington, County of New Castle, State of Delaware. The
Corporation may also have other offices at such other places, either within or
without the State of Delaware, as the Board may determine or as the activities
of the Corporation may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
Section 2.1 Place of Meetings. Meetings of the stockholders shall
be held at such place, either within or without the State of Delaware, as may
be fixed from time to time by the Board of Directors and stated in the notice
of the meeting or in a duly executed waiver of notice thereof.
Section 2.2 Annual Meeting. An annual meeting of the stockholders
for the election of directors and the transaction of such other business as may
properly come before the meeting, shall be held each year on such date in the
first six months of the Corporation's fiscal year as shall be designated by the
chief executive officer and/or president, or in the absence of such
designation, on the first Tuesday of the seventh month of the fiscal year, if
not a legal holiday, and if a legal holiday, then on the next succeeding
business day, or on such other date and time as shall be designated from time
to time by the Board of Directors.
Section 2.3 Special Meeting. Special meetings of the stockholders
may be called by the Board of Directors, the Chairman of the Board or the chief
executive officer and/or president and shall be called by the chief executive
officer and/or president or secretary at the request in writing of a majority
of the Board of Directors. Such request shall state the purpose or purposes of
the proposed meeting.
Section 2.4 Notice and Waiver. Written notice of each meeting of
stockholders, stating the place, day and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not less than ten nor more than sixty days
<PAGE> 2
prior to each meeting, to each stockholder of record entitled to vote at such
meeting by leaving such notice with him personally or by transmitting such
notice with confirmed delivery (including, by telex, cable or other form of
recorded communication, provided that delivery of such notice in written form
is confirmed in a writing) to his residence or usual place of business, or by
depositing such notice in the mail in a postage prepaid envelope addressed to
him at his post office address as it appears on the corporate records of the
Corporation. Notice of any meeting of stockholders may be waived in writing by
all stockholders entitled to vote at such meeting. Attendance at a meeting by
any stockholder shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
Section 2.5 Stockholder List. The officer who has charge of the stock
ledger of the Corporation shall, at least ten days before each meeting of
stockholders, prepare a complete alphabetically addressed list of the
stockholders entitled to vote at the meeting, with the number of shares held by
each. Said 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 within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall be available for inspection at the meeting.
Section 2.6 Conduct of Meeting. The Chairman of the Board shall preside
as chairman at all meetings of the stockholders. The chairman shall conduct
each such meeting in a businesslike and fair manner, but shall not be obligated
to follow any technical, formal or parliamentary rules or principles or
procedure. The chairman's rulings on procedural matters shall be conclusive and
binding on all stockholders unless at the time of a ruling a request for a vote
is made to the stockholders entitled to vote and which are represented in
person or by proxy at the meeting, in which case the decision of a majority of
such stockholders shall be conclusive and binding. Without limiting the
generality of the foregoing, the chairman shall have all the powers usually
vested in the chairman of a meeting of stockholders.
Section 2.7 Quorum and Required Vote. The holders of a majority of the
stock entitled to vote, represented in person or by proxy, shall constitute a
quorum at a meeting of stockholders except as otherwise specially provided by
these Bylaws, by the Certificate of Incorporation or by statute. The
affirmative vote, at a meeting of stockholders duly held and at which a quorum
is present, of a majority of the voting power of the shares represented at such
meeting which are entitled to vote on the subject matter shall be the act of
the stockholders, except as is otherwise specially provided by a Bylaw, by the
Certificate of Incorporation or by statute. If less than a majority of such
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice of
the adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the
-2-
<PAGE> 3
adjournment, a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 2.8 Voting. Unless otherwise provided in the Certificate of
Incorporation, each holder of voting stock shall be entitled to vote in person
or by proxy at each meeting and he shall have one vote for each share of voting
stock registered in his name. However, no proxy shall be voted three years
after the date thereof, unless the proxy provides for a longer period.
Section 2.9 Action Without a Meeting. Any action which may be taken at
a meeting of stockholders may be taken without a meeting, if consent in
writing, setting forth such action, is signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous consent shall be
given to those stockholders who have not so consented.
ARTICLE III: DIRECTORS
Section 3.1 Powers. The business and affairs of the Corporation shall
be managed by or under the direction of its Board of Directors. The Board shall
exercise all of the powers and duties conferred by law except as provided by
the Certificate of Incorporation or these Bylaws
Section 3.2 Number, Election And Term. The number of directors of the
Corporation shall be no less than three and no more than twenty. Within the
limits specified above, the number of directors constituting the Board of
Directors of the Corporation shall be fixed from time to time by or pursuant to
a resolution passed by the Board of Directors. The Board of Directors shall be
divided into three classes, designated Class A, Class B and Class C. Each class
shall consist, as nearly as possible, of one-third of the total number of
directors constituting the entire Board of Directors. The terms of directors
shall be staggered so that the term of the initial Class A directors shall
terminate on the date of the 2000 annual meeting of stockholders, the term of
the initial Class B directors shall terminate on the date of the 2001 annual
meeting of stockholders, and the term of the initial Class C directors shall
terminate on the date of the 2002 annual meeting of stockholders. At each
annual meeting of stockholders beginning in 2000, successors to the class of
directors whose term expires at the annual meeting shall be elected for a
three-year term, with each director to hold office until his or her successor
shall has been duly elected and qualified.
The directors of the class whose terms then expire shall be elected by
stockholders at each annual meeting of stockholders or as otherwise provided in
Article II, Section 2.2. The directors chosen at any annual meeting shall hold
office, except as hereinafter provided, until the third annual meeting of
stockholders following their election and until the election and qualification
of their successors.
The Chairman of the Board shall be elected by the vote of a majority
of the whole Board of Directors. The Chairman of the Board shall preside at
meetings of stockholders and directors, discharging all duties incumbent upon a
presiding officer, and shall perform such other duties as the Bylaws provide
and as the Board of Directors may prescribe.
-3-
<PAGE> 4
Section 3.3 Regular Meetings. A regular meeting of a newly elected Board of
Directors shall be held without other notice than this Bylaw, immediately after,
and at the same place as, the annual meeting of stockholders. Other regular
meetings of the Board of Directors may be held without notice at such time and
place as the Board may from time to time determine.
Section 3.4 Other Meetings. Other meetings of the Board may be called by
the Chairman of the Board or the chief executive officer and/or president on two
days' notice to each director, either personally, or by telephone, telex,
telegram or other form of recorded communication, or by mail. Said notice may be
waived by a written waiver signed by any director who does not receive notice of
such meeting. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
Section 3.5 Quorum. At all meetings of the Board, a majority of directors
shall constitute a quorum for the transaction of business. The act of a majority
of the directors present at a meeting at which a quorum is present shall be the
act of the Board of Directors unless a greater number is specifically required
by the Bylaws, by the Certificate of Incorporation or by statute. A meeting may
be adjourned by less than a quorum if a quorum is not present at the meeting. A
director may participate at a meeting of the Board of Directors by means of a
conference telephone or similar communications equipment provided such equipment
enables all directors at the meeting to hear one another.
Section 3.6 Committees of Directors
(a) General. The Board of Directors may, by resolution or resolutions
adopted by the affirmative vote of a majority of the Board of Directors,
designate one or more committees, including but not limited to, an Executive
Committee, an Audit Committee and a Compensation Committee, each committee to
consist of two or more Directors, which to the extent provided in said
resolution or resolutions shall have and may exercise the powers and authority
of the Board of Directors in the management of the business and affairs of the
Corporation; provided, however, that no such committee shall have the power to
(i) elect Directors, (ii) alter, amend, or repeal these Bylaws or any resolution
of the Board relating to such committee, (iii) appoint any member of such
committee, (iv) declare any dividend or make any other distribution to the
stockholders of the Corporation or (v) take any other actions which may lawfully
be taken only by the full Board of Directors. Such committee or committees shall
have such name or names as may be determined from time to time by resolutions
adopted by the Board of Directors.
(b) Committee Procedure. (i) Except as otherwise provided by these Bylaws,
each committee shall adopt its own rules governing the time, place and method of
holding its meetings and the conduct of its proceedings and shall meet as
provided by such rules or by resolution of the Board of Directors. Unless
otherwise provided by these Bylaws or any such rules or resolutions, notice of
the time and place of each meeting of a committee shall be given to each member
of such committee as provided in Section 3.4 of the Bylaws with respect to
notices of special meetings of the Board of Directors.
-4-
<PAGE> 5
(ii) Each committee shall keep regular minutes of its proceedings and
report the same to the Board of Directors when required.
(iii) Any member of any committee, other than a member thereof
serving ex-officio, may be removed from such committee either with or without
cause, at any time, by resolution adopted by the affirmative vote of a majority
of the Board of Directors at any meeting thereof. Any vacancy in any committee
shall be filled by the Board of Directors in the manner prescribed by these
Bylaws for the original appointment of the members of such committee.
(c) Executive Committee. There may be an Executive Committee to consist of
two or more directors. The Board of Directors shall elect the members of the
Executive Committee by vote of a majority of the whole Board of Directors and
one member of the Executive Committee shall be elected as chairman by the vote
of a majority of the whole Board of Directors. The members of the Executive
Committee shall be elected annually at the Board's organizational meeting or as
soon thereafter as possible.
When the Board of Directors is not in session, the Executive Committee
shall have and may exercise all the powers of the Board of Directors in the
management of the business and affairs of the Corporation as permitted by
Delaware law in all cases, except those expressly prohibited by Delaware law or
these Bylaws to be exercised by committee. The members of the Executive
Committee shall act only as a Committee and individual members shall have no
power as such.
The Executive Committee shall have full power to act as the Nominating
Committee, which, when acting as such, shall have the power and duty to make
recommendations to the Board of Directors as to suitable nominees for election
to the Board of Directors by the stockholders or by the remaining members of
the Board of Directors, to fill newly created directorships and to fill any
vacancies which shall occur.
When acting as the Nominating Committee, it shall have the power to meet
with and consider suggestions from such other members of the Board of
Directors, stockholders, members of management, consultants and other persons,
firms or corporations as they deem necessary or advisable in the premise to
assist them in making such recommendations.
(d) Compensation Committee. There shall be a Compensation Committee to
consist of two or more directors, all of whom shall be "non-employee directors"
within the meaning ascribed thereto under Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 as amended from time to time and interpreted by
the Securities and Exchange Commission and "outside directors" within the
meaning ascribed thereto under 162(m) of the Internal Revenue Code as amended
from time to time and interpreted by the Internal Revenue Service. The Board of
Directors shall elect the members of the Compensation Committee by vote of a
majority of the whole Board of Directors, and one member of the Compensation
Committee shall be elected its chairman by the vote of a majority of the whole
Board of Directors. The members of the Compensation Committee shall be elected
annually at the Board's meeting or as soon thereafter as possible. The
Compensation Committee shall have the power to authorize and determine all
salaries for the officers and supervisory employees of the Corporation; to
administer the incentive
-5-
<PAGE> 6
compensation plans of the Corporation in accordance with the powers and
authority granted in such plans; to determine any incentive allowances to be
made to officers and staff of the Corporation; to administer all stock option
plans, stock purchase plans and other equity ownership, compensation, retirement
and benefit plans of the Corporation; to approve the performance based
compensation of individuals pursuant to 162(m) of the Internal Revenue Code; and
to authorize and determine all other matters relating to the compensation or
benefits of the Corporation.
(e) Audit Committee. There shall be an Audit Committee to consist of two or
more directors, a majority of whom shall be "non-employee directors" within the
meaning ascribed thereto under Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 as amended from time to time and interpreted by the
Securities and Exchange commission and "outside directors" within the meaning
ascribed thereto under 162(m) if the Internal Revenue Code as amended from time
to time and interpreted by the Internal Revenue Service. The Board of Directors
shall elect the members of the Audit Committee by vote of a majority of the
whole Board of Directors and one member of the Audit Committee shall be elected
as Chairman by a vote of a majority of the whole Board of Directors. The members
of the Audit Committee shall be appointed by the Board of Directors to serve
staggered three year terms.
The Audit Committee shall have the power and the duty to meet with and
consider suggestions from members of management and of the Corporation's
internal audit staff, as well as with the Corporation's independent accountants,
concerning the financial operations of the Corporation. The Audit Committee
shall additionally have the power to review audited financial statements of the
Corporation and consider and recommend the employment of, and approve the fee
arrangement with, independent accountants for both audit functions and for
advisory and other consulting services.
Section 3.7 Action Without Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors, or of any committee thereof, may
be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and such written consent is filed with
the minutes of proceedings of the Board or committee.
Section 3.8 Resignation and Removal. Unless otherwise provided in any
contract with the Corporation, any director may resign or be removed at any
time. A director who intends to resign shall give written notice to the chief
executive officer or to the secretary. Removal of a director, with or without
cause, may be effected by the affirmative vote of the holders of a majority of
the stock entitled to vote.
Section 3.9 Vacancies. Any vacancy occurring in the Board of Directors,
including a vacancy resulting from an increase in the number of directors, may
be filled by the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board. A director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor and until his
successor is duly elected and qualified.
-6-
<PAGE> 7
Section 3.10 Compensation. The directors may be reimbursed for any expenses
incurred by them in attendance at any meeting of the Board of Directors or of
any of its committees. Every director may be paid a stated salary as director
and/or a fixed sum for attendance at each meeting at which he is present. No
payments or reimbursements described herein shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
ARTICLE IV: OFFICERS
Section 4.1 Election. A chief executive officer and/or president, a
secretary, one or more vice-presidents, chief financial officer and/or
treasurer and other officers and assistant officers shall be elected by the
Board of Directors to hold office until their successors are elected and
qualified or until their earlier removal or resignation. More than two offices
may be held by the same person.
Section 4.2 Chief Executive Officer and/or President. The powers and
duties of the chief executive officer and/or president shall include executive
and operational management of the Corporation, subject to the control of the
Board, and responsibility for carrying out all orders and directions of the
Board. The chief executive officer and/or president shall report to the Board
of Directors.
Section 4.3 Vice President. Vice presidents, if and when any shall be
elected, shall have such powers and perform such duties as the chief executive
officer and/or president or the Board may from time to time assign and shall
perform such other duties as may be prescribed by these Bylaws. At the request
of the chief executive officer and/or president, or in case of his absence or
inability to act, the vice president, so appointed, shall perform the duties of
the chief executive officer and/or president, and when so acting, shall have
all the powers of, and be subject to all the restrictions upon, the chief
executive officer and/or president.
Section 4.4 Secretary. The secretary shall keep true and complete
records of the proceedings of the meetings of the stockholders, the Board of
Directors and any committees of directors and shall file any written consents
of the stockholders, the Board of Directors and any committees of directors
with these records. It shall be the duty of the secretary to be custodian of
the records and of the seal of the Corporation. The secretary shall also attend
to the giving of all notices and shall perform such other duties as the Bylaws
may provide or the Board of Directors may assign.
Section 4.5 Assistant Secretary. If one shall be elected, the
assistant secretary shall have such powers and perform such duties as the chief
executive officer and/or president, secretary or the Board may from time to time
assign and shall perform such other duties as may be prescribed by these Bylaws.
At the request of the secretary, or in case of his absence or inability to act,
the assistant secretary shall perform the duties of the secretary and, when so
acting, shall have all the powers of, and be subject to all the restrictions
upon, the secretary.
Section 4.6 Chief Financial Officer and/or Treasurer. The chief
financial officer and/or treasurer shall keep correct and complete records of
account showing accurately at all
-7-
<PAGE> 8
times the financial condition of the Corporation. The chief financial officer
and/or treasurer shall also act as legal custodian of all moneys, notes,
securities, and other valuables that may from time to time come into the
possession of the Corporation, and shall promptly deposit all funds of the
Corporation coming into his hands in the bank or other depository designated by
the Board of Directors and shall keep this bank account in the name of the
Corporation. Whenever requested by the Board of Directors, the chief financial
officer and/or treasurer shall furnish a statement of the financial condition of
the Corporation and shall perform such other duties as the Bylaws may provide
and the Board of Directors may assign.
Section 4.7 Assistant Treasurer. If one shall be elected, the assistant
treasurer shall have such powers and perform such duties as the chief executive
officer and/or president, chief financial officer and/or treasurer or Board of
Directors may from time to time assign and shall perform such other duties as
may be prescribed by these Bylaws. At the request of the chief financial officer
and/or treasurer, or in case of his absence or inability to act, the assistant
treasurer shall perform the duties of the chief financial officer and/or
treasurer and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the chief financial officer and/or treasurer.
Section 4.8 Other Officers. Such other officers as are appointed shall
exercise such duties and have such powers as the Board of Directors may assign.
Section 4.9 Transfer of Authority. In case of the absence of any officer of
the Corporation or for any other reason that the Board of Directors may deem
sufficient, the Board of Directors may transfer the powers or duties of that
officer to any other officer or to any director or employee of the Corporation,
provided that a majority of the entire Board approves.
Section 4.10 Resignation and Removal. Unless otherwise provided in any
contract with the Corporation, any officer may resign or be removed at any time.
An officer who intends to resign shall give written notice to the chief
executive officer or to the secretary. Removal of an officer, with or without
cause, may be effected by the Board of Directors.
Section 4.11 Vacancies. A vacancy occurring in any office may be filled for
the unexpired portion of the term of office by the Board of Directors.
ARTICLE V: CAPITAL STOCK
Section 5.1 Consideration and Payment. The capital stock may be issued for
such consideration, not less than the par value of any such stock expressed in
dollars, as shall be fixed by the Board of Directors. Payment of such
consideration may be made, in whole or in part, in money, other tangible or
intangible property, labor or services performed. No certificate shall be issued
for any share until the share is fully paid.
Section 5.2 Stock Certificate. Every holder of the capital stock of the
Corporation shall be entitled to a certificate signed by, or in the name of the
Corporation, by the chairman and vice-chairman, if any, or the president, if
any, or a vice president and by the secretary or an assistant secretary or the
chief financial officer, or the treasurer or an assistant treasurer. Any of
-8-
<PAGE> 9
or all the signatures on the certificate may be a facsimile. Upon each such
certificate shall appear such legend or legends as may be required by law or by
any contract or agreement to which the Corporation is a party. No certificate
shall be valid without such signatures or legends as are required hereby.
Section 5.3 Lost Certificate. Whenever a person shall request the
issuance of a certificate of stock to replace a certificate alleged to have
been lost by theft, destruction or otherwise, the Board of Directors shall
require that such person make an affidavit to the fact of such loss before the
Board shall authorize the requested issuance. Before issuing a new certificate
the Board may also require a bond of indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost.
Section 5.4 Transfer of Stock. The Corporation or its transfer agent shall
register a transfer of a stock certificate, issue a new certificate and cancel
the old certificate upon presentation for transfer of a stock certificate duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer if there has been compliance with any applicable tax law
relating to the collection of taxes and after the Corporation or its agent has
discharged any duty to inquire into any adverse claims of which the Corporation
or agent has notice. Notwithstanding the foregoing, no such transfer shall be
effected by the Corporation or its transfer agent if such transfer is prohibited
by law, by the Certificate of Incorporation or a Bylaw of the Corporation or by
any contract or agreement to which the Corporation is a party.
ARTICLE VI: DIVIDENDS AND RESERVES
Section 6.1 Dividends. Subject to any limitations or conditions contained
in the Certificate of Incorporation, dividends may be declared by a resolution
duly adopted by the Board of Directors and may be paid in cash, property or in
shares of the capital stock of the Corporation.
Section 6.2 Reserves. Before payment of any dividend, the Board of
Directors may set aside out of any funds available for dividends such sum or
sums as the Board, in its absolute discretion, deems proper as a reserve fund
to meet contingencies or for equalizing dividends or to repair or maintain
property or to serve such other purposes conducive to the interests of the
Corporation.
ARTICLE VII: SPECIFIC CORPORATE ACTIONS
Section 7.1 All checks, drafts, notes, bonds, bills of exchange, and
orders for the payment of money of the Corporation; all deeds, mortgages and
other written contracts and agreements to which the Corporation shall be a
party, and all assignments or endorsements of stock certificates, registered
bonds or other securities owned by the Corporation shall be signed by any
officer of the Corporation and, if required by law, attested by the secretary or
an assistant secretary, unless otherwise directed by the Board of Directors or
otherwise required by statute.
-9-
<PAGE> 10
ARTICLE VIII: CORPORATE SEAL
The corporate seal shall be in such form as the Board of
Directors shall prescribe.
ARTICLE IX: FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall
be subject to change, by the Board of Directors.
ARTICLE X: INDEMNIFICATION
Section 10.1. The Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he 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 or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 10.2. The Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he 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 or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
-10-
<PAGE> 11
Section 10.3. To the extent that a director, officer, employee
or agent of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Subsections 11.1 and
11.2, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 10.4. Any indemnification under Subsections 11.1 and
11.2 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in Subsections 11.1 and
11.2. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
Section 10.5. Expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding as authorized by the
Board of Directors in the specific case upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount. He
shall not repay the amount if it shall be ultimately determined that he is
entitled to be indemnified by this section.
Section 10.6 The indemnification provided by this section
shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 10.7. The Corporation is authorized, according to the
discretion of the Board of Directors, 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 or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation must indemnify him against such liability under
the provisions of this section.
Section 10.8. For purposes of this section, references to "the
Corporation" shall include, in addition to the Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture,
-11-
<PAGE> 12
trust or other enterprise, shall stand in the same position under the provisions
of this section with respect to the resulting corporation as he would have with
respect to such constituent corporation if its separate existence had continued.
ARTICLE XI: CONTROL OVER BYLAWS
Subject to the provisions of the Certificate of Incorporation
and the provisions of the General Corporation Law, the power to amend, alter, or
repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of
Directors or by the stockholders.
-12-
<PAGE> 1
Exhibit 10.1
espernet.com, inc.
383 West 12th Street
New York, New York 10014
212.989.5386 212.989.4717(fax)
August 31, 1999
Mr. Steven DeMar
Via Fax No. 312.587.7267
Dear Steve:
This will confirm our agreement with you as the Transferor's
Representative of the agreement between espernet.com and Inforamp, Inc., and
others, dated June 30, 1999, to confirm and amend the agreement as follows:
1. The date by which espernet.com must file its S.E.C. Registration Statement
(S1), provided for in Section 15.1 of the agreement is September 30, 1999.
2. The date by which espernet.com must have completed its IPO is the last day
of February, 2000.
3. In the event Inforamp's contract for WebTV is terminated, espernet.com will
nonetheless consummate the agreement, but the purchase price shall be
reduced to $9 million ($7 million cash, $2 million stock), and espernet.com
may not avoid its obligation to so close by asserting that the loss of the
WebTV contract constitutes a change described in Section 4.8, a breach of
operations described in Section 7.2, a material adverse change described in
Section 9.3, or otherwise.
4. In consideration for the extension set forth in paragraph 2 above,
espernet.com will pay Inforamp an additional $25 per each of its then
subscribers on the Closing Date if the IPO occurs in January, 2000, or an
additional $50 per each of its then subscribers on the Closing Date if the
IPO occurs in February, 2000. Moreover, notwithstanding any other provision
of the agreement, and in addition to any provision in the agreement
providing for capital expenditures by Inforamp, if the IPO occurs after
January 1, 2000. Inforamp may spend up to an additional $50,000 in January,
and if the IPO occurs after February 1, 2000, an additional $50,000 in
February without suffering an adjustment to the purchase price as a result
of such expenditures; provided, however, that such expenditures shall be
made with the intent of growing Inforamp's business and shall be subject to
the reasonable approval of espernet.com.
5. The definition of Long Term Company Debt shall exclude contracts for
telephone or connectivity services.
Please indicate your assent to the within by signing a copy of this letter
and returning it to the undersigned.
Sincerely,
/s/ Paul Hart
Paul Hart
President
/s/ Steven F. DeMar
- -------------------------------
Steven DeMar,
Transferor's Representative
<PAGE> 2
EXHIBIT 10.1
- --------------------------------------------------------------------------------
STOCK EXCHANGE AGREEMENT
by and among
ESPERNET.COM, INC.
(a Delaware corporation)
and
THE STOCKHOLDERS OF
INFORAMP, INC.
(an Illinois corporation)
JUNE 30, 1999
- --------------------------------------------------------------------------------
<PAGE> 3
STOCK EXCHANGE AGREEMENT
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. DEFINITIONS............................................................................................. 1
2. THE EXCHANGE OF SHARES.................................................................................. 9
2.1 Basic Transaction.............................................................................. 9
2.2 Transfer Consideration......................................................................... 10
2.3 Adjustments to Cash Portion of the Transfer Consideration...................................... 11
2.4 Access to Information.......................................................................... 12
2.5 Escrow Agreement............................................................................... 13
3. CLOSING................................................................................................. 13
3.1 Location, Date................................................................................. 13
3.2 Deliveries..................................................................................... 13
3.3 Transferors' Representative.................................................................... 14
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS....................................................... 15
4.1 Corporate Status............................................................................... 15
4.2 Authorization.................................................................................. 15
4.3 Consents and Approvals......................................................................... 15
4.4 Capitalization and Stock Ownership............................................................. 16
4.5 Subsidiaries................................................................................... 16
4.6 Corporate Records.............................................................................. 16
4.7 Financial Statements........................................................................... 16
4.8 Title to Assets and Related Matters............................................................ 17
4.9 Owned Real Property............................................................................ 17
4.10 Leased Real Property........................................................................... 17
4.11 Certain Personal Property...................................................................... 17
4.12 Non-Real Estate Leases......................................................................... 18
4.13 Accounts Receivable............................................................................ 18
4.14 Liabilities.................................................................................... 18
4.15 Taxes.......................................................................................... 18
4.16 Legal Proceedings and Compliance with Law...................................................... 19
4.17 Contracts...................................................................................... 20
4.18 Insurance...................................................................................... 22
4.19 Intellectual Property and Software Products.................................................... 22
4.20 Employees...................................................................................... 23
4.21 Employee Relations............................................................................. 24
4.22 ERISA.......................................................................................... 24
4.23 Guaranties..................................................................................... 24
4.24 Certain Business Relationships with the Company................................................ 24
4.25 Systems........................................................................................ 25
4.26 Subscribers.................................................................................... 25
4.27 Previous Sales; Warranties..................................................................... 25
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
4.28 Absence of Certain Changes..................................................................... 26
4.29 Finder's Fees.................................................................................. 26
4.30 Additional Information......................................................................... 27
4.31 Securities Matters............................................................................. 27
4.32 Trusts......................................................................................... 28
4.33 Accuracy of Information........................................................................ 29
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER.......................................................... 29
5.1 Corporate...................................................................................... 29
5.2 Authorization.................................................................................. 29
5.3 Consents and Approvals......................................................................... 29
5.4 Capitalization and Stock Ownership............................................................. 29
5.5 Legal Proceedings.............................................................................. 29
5.6 Finder's Fees.................................................................................. 30
5.7 Section 351.................................................................................... 30
6. TAXES................................................................................................... 30
6.1 Transferors Tax Preparation.................................................................... 30
6.2 Tax Preparation................................................................................ 30
6.3 Cooperation on Tax Matters..................................................................... 30
6.4 Miscellaneous Tax Obligations.................................................................. 30
7. COVENANTS OF THE COMPANY AND THE TRANSFERORS............................................................ 31
7.1 Payment of Expenses............................................................................ 31
7.2 Operation of Business Prior to the Closing..................................................... 31
7.3 Preservation of Business....................................................................... 32
7.4 Access......................................................................................... 32
7.5 Notice of Developments......................................................................... 32
7.6 Exclusivity.................................................................................... 32
7.7 [RESERVED]..................................................................................... 33
7.8 Audits......................................................................................... 33
7.9 Due Diligence.................................................................................. 33
7.10 Schedules...................................................................................... 33
8. COVENANTS OF THE ACQUIRER............................................................................... 33
8.1 Payment of Expenses............................................................................ 33
8.2 Tax-Free Exchange.............................................................................. 33
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER..................................................... 34
9.1 Representations and Warranties; Performance of Obligations..................................... 34
9.2 No Litigation.................................................................................. 34
9.3 No Material Adverse Change..................................................................... 34
9.4 Due Diligence Review Complete.................................................................. 34
9.5 Consents and Approvals......................................................................... 34
9.6 Financial Statements........................................................................... 34
9.7 IPO............................................................................................ 35
</TABLE>
ii
<PAGE> 5
<TABLE>
<S> <C>
9.8 Documents to Be Delivered by the Transferors................................................... 35
9.9 [RESERVED]..................................................................................... 36
9.10 Financial Condition............................................................................ 36
9.11 Schedules...................................................................................... 36
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFERORS.................................. 36
10.1 Representations and Warranties; Performance of Obligations..................................... 36
10.2 No Litigation.................................................................................. 37
10.3 Consents and Approvals......................................................................... 37
10.4 WebTV Contract................................................................................. 37
10.6 Documents to Be Delivered by the Acquirer...................................................... 37
10.7 IPO............................................................................................ 38
11. POST-CLOSING COVENANTS.................................................................................. 38
11.1 General........................................................................................ 38
11.2 Transition..................................................................................... 38
11.3 Restrictions on Transfer of Acquirer Common Stock.............................................. 38
11.4 No. 338 Election............................................................................... 39
12.1 By the Transferors............................................................................. 39
12.2 By the Acquirer................................................................................ 39
12.3 Procedure for Claims........................................................................... 39
12.4 Claims Period.................................................................................. 40
12.5 Third Party Claims............................................................................. 41
12.6 Limitation on Indemnification.................................................................. 41
13. DISPUTE RESOLUTION...................................................................................... 41
13.1 Good-Faith Negotiations........................................................................ 41
13.2 Arbitration.................................................................................... 42
13.3 WAIVER OF JURY TRIAL........................................................................... 42
13.4 No Punitive Damages............................................................................ 42
14. COMPETITION AND CONFIDENTIALITY BY THE TRANSFERORS...................................................... 42
14.1 Restricted Period.............................................................................. 42
14.2 Confidentiality................................................................................ 43
14.3 Affiliates..................................................................................... 43
14.4 Injunctive Relief.............................................................................. 43
15. TERMINATION............................................................................................. 44
15.1 Termination of Agreement....................................................................... 44
15.2 Effect of Termination.......................................................................... 44
16. MISCELLANEOUS........................................................................................... 45
16.1 Press Releases and Announcements............................................................... 45
16.2 No Third-party Beneficiaries................................................................... 45
16.3 Contents of Agreement.......................................................................... 45
16.4 Amendment, Parties in Interest, Assignment, Etc................................................ 45
</TABLE>
iii
<PAGE> 6
<TABLE>
<S> <C>
16.5 Interpretation................................................................................. 45
16.6 Incorporation of Exhibits, Annexes, And Schedules.............................................. 45
16.7 Remedies and Set-Off........................................................................... 46
16.8 Notices........................................................................................ 46
16.9 Governing Law.................................................................................. 47
16.10 Expenses....................................................................................... 47
16.11 Counterparts................................................................................... 47
</TABLE>
iv
<PAGE> 7
Annexes
Annex I Transferor List of Company
Annex II Cash Portion of the Transfer Consideration
Annex III Stock Portion of the Transfer Consideration
Annex IV [RESERVED]
Annex V Allocation Summary
Exhibits
Exhibit A Form of Officer's/Transferor's Certificate of Company
Exhibit B Form of Secretary's Certificate of Company
Exhibit C Form of Escrow Agreement
Exhibit D Form of Opinion of Transferors' Counsel
Exhibit E [RESERVED]
Exhibit F Form of Employment Agreement
Exhibit G Form of Officer's Certificate of the Acquirer
Exhibit H Form of Secretary's Certificate of the Acquirer
Exhibit I Form of Equity Subscription Agreement
Exhibit J Form of Joinder to Registration Agreement
Exhibit K [RESERVED]
Exhibit L Form of Trustee's Certificate
Schedules
Schedule 2.3(a) Accounting Policies
Schedule 4.4 Capitalization and Stock Ownership
Schedule 4.7 Financial Statements
Schedule 4.10 Real Property
Schedule 4.11 Certain Personal Property
Schedule 4.13 Accounts Receivable
Schedule 4.16 Legal Proceedings and Compliance with Law
Schedule 4.17 Contracts
Schedule 4.18 Insurance
Schedule 4.19 Intellectual Property and Software Products
Schedule 4.20 List of Company Employees
Schedule 4.24 Certain Business Relationships with the Company
Schedule 4.25 Systems
Schedule 4.26 Subscribers
Schedule 4.30 Additional Information
Schedule 11.2 Transition
v
<PAGE> 8
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (this "Agreement") is made as of June 30,
1999, by and among ESPERNET.COM, INC., a Delaware corporation (the "Acquirer"),
and Andrea DeMar, an individual resident in Chicago, Illinois, Lawrence E.
DeMar, an individual resident in Winnetka, Illinois, Janet Rogers, an individual
resident in Oak Park, Illinois, the Steven Trust, a trust established under the
laws of Illinois, and the Larry Trust, a trust established under the laws of
Illinois (Andrea DeMar, Lawrence E. DeMar, Janet Rogers, the Steven Trust and
the Larry Trust are each a "Transferor" and collectively the "Transferors"). The
Acquirer and the Transferors are sometimes referred to herein individually as a
"Party" and collectively as the "Parties." Certain other terms are used herein
as defined below in Section 1 or elsewhere in this Agreement.
RECITALS
A. The Transferors in the aggregate are the owners of all of the issued
and outstanding shares of the capital stock (the "Company Shares") of Inforamp,
Inc., an Illinois corporation (the "Company").
A. The Company is engaged in the business of providing Internet access
and services, web hosting, and Internet related services and support.
C. This Agreement contemplates a transaction in which the Transferors
will exchange their respective Company Shares for the right to receive the
Transfer Consideration (as hereinafter defined).
D. This Agreement further contemplates that the aforementioned
transaction will occur in conjunction with certain related transactions,
consisting of the IPO (as hereinafter defined) and the transfer of certain other
businesses by their respective owners to the Acquirer (the "Related
Transactions"), and the Parties intend that the receipt of the Acquirer Common
Stock (as hereinafter defined) will be tax-free under Section 351 of the Code
(as hereinafter defined).
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
receipt and sufficiency of which is hereby acknowledged, the Parties hereto,
intending to be legally bound, hereby agree as follows:
1. DEFINITIONS.
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
<PAGE> 9
"Accounts Receivable" means, as of any date any trade accounts
receivable, notes receivable, bid or performance deposits, employee advances and
other miscellaneous receivables included in the Assets of the Company.
"Acquirer" is defined above in the preamble.
"Acquirer Common Stock" means the common stock, $0.001 par value, of
the Acquirer.
"Acquirer's Independent Public Accountant" means the "Big-Five"
accounting firm engaged by the Acquirer to perform the audits required under
this Agreement.
"Action" is defined in Section 12.5.
"Affiliated Group" means any affiliated group within the meaning of
Code Sec. 1504 (or any similar group defined under a similar provision of state,
local or foreign law).
"Affiliates" means, with respect to a particular party, persons or
entities controlling, controlled by or under common control with that party, as
well as any officers, directors and majority-owned entities of that party and of
its other Affiliates. As used in this definition, the term "control" means
either (i) the possession, directly or indirectly, of the power to direct or to
cause the direction of the management of the affairs of a Person or the conduct
of the business of a Person, or (ii) the holding of a direct or indirect equity
or voting interest of fifty percent (50%) or more in the Person.
"Agreement" means this Agreement and the annexes, exhibits and
schedules hereto.
"Allocation Summary" means the summary of Transferors and their
respective allocation of the Transfer Consideration attached hereto as ANNEX V.
"Assets" means, with respect to a particular Person, all of the assets,
properties, goodwill and rights of every kind and description, real and
personal, tangible and intangible, that are owned or possessed by such Person.
"Association" is defined in Section 13.2.
"Balance Sheet Date" is defined in Section 4.7.
"Benefit Plans" means all "employee benefit plans" of the Company, as
defined in Section 3(3) of ERISA.
"Business" means, with respect to a particular Person, the entire
business, operations, and facilities of such Person.
"Cash Portion of the Transfer Consideration" is defined in Section
2.2(b) and set forth on ANNEX II.
-2-
<PAGE> 10
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Churn Rate" means the percentage obtained by dividing the number of
Retail Subscribers that cancel or do not renew their Subscriber Contracts during
a quarter by the average number of Retail Subscribers during that quarter.
Average monthly churn rate is calculated as the quarter's churn rate divided by
three.
"Claim Notice" is defined in Section 12.3.
"Claim Response" is defined in Section 12.3.
"Closing" is defined in Section 3.1.
"Closing Date" is defined in Section 3. 1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Period" is defined in Section 2.3(f)(i).
"Company" is defined above in the RECITALS.
"Company Balance Sheet" is defined in Section 4.7.
"Company Common Stock" means the common stock, no par value, of the
Company.
"Company Financial Statements" is defined in Section 4.7.
"Company Long-Term Debt" means all long-term Liabilities of the Company
as determined in accordance with GAAP consistently applied, the current portion
of any long-term Liabilities and the aggregate amount of any Real Estate Leases
and Non-Real Estate Leases with terms in excess of one year.
"Company Net Current Assets" means current Assets (excluding Accounts
Receivable (i) disputed, (ii) subject to pending or Threatened litigation, or
(iii) aged over 60 days) less current Liabilities (including any prepaid or
discounted subscriber contract but, excluding the current portion of long-term
debt) of the Company, plus an amount equal to all capital expenditures made by
the Company between the Balance Sheet Date and two business days prior to the
Closing Date up to Thirty Thousand ($30,000) per month each as determined in
accordance with GAAP on an accrual basis of accounting.
"Company Shares" is defined above in the RECITALS.
"Company Software" is defined in Section 4.19(e).
-3-
<PAGE> 11
"Confidential Information" means information, including any formula,
pattern, compilation, program, device, method, technique or process that (a)
derives independent economic value, actual or potential, from not being
generally known to the public or to other Persons who can obtain economic value
from its disclosure or use; and (b) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. Without limiting the
foregoing, "Confidential Information" includes lists or descriptions of any
customers, referral sources or organizations; financial statements, cost reports
or other financial information; Contract proposals, or bidding information;
business plans and training and operations methods and manuals; personnel
records; fee structure; and management systems, policies or procedures,
including related forms and manuals.
"Consents" means any consent, waiver, approval, order or authorization
of, or registration, declaration or filing with or notice to, any governmental
authority or other Person.
"Contract" means any written or oral contract, agreement, lease,
instrument or other commitment that is binding on any Person or its property
under applicable law.
"Court Order" means any judgment, decree, injunction, order or ruling
of any federal, state, local or foreign court or governmental or regulatory body
or authority that is binding on any person or its property under applicable law.
"Damages" is defined in Section 12.1.
"Deductible Amount" is defined in Section 12.3(c).
"Default" means (a) a breach, default or violation, (b) the occurrence
of an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or (c) with respect to any
Contract, the occurrence of an event that with or without the passage of time or
the giving of notice, or both, would give rise to a right of termination,
renegotiation or acceleration or a right to receive damages or a payment of
penalties.
"Disputed Amount" is defined in Section 2.3(g).
"Employment Agreements" means the Employment Agreement between the
Acquirer and each of Steven DeMar and Janet Rogers, substantially in the form of
EXHIBIT F hereto and entered into as of the Closing Date.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"Equity Subscription Agreement" means the Equity Subscription Agreement
between each Transferor and the Acquirer, substantially in the form of EXHIBIT I
hereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
-4-
<PAGE> 12
"Escrow Agreement" means the Escrow Agreement by and among the Escrow
Agent, the Acquirer and the Transferors, substantially in the form of EXHIBIT C
hereto.
"Escrow Agent" means Chicago Title and Trust Company, or other
reputable bank or trust company selected by the Acquirer.
"Escrow Funds" is defined in Section 2.5.
"Escrow Period" is defined in Section 2.5.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" is defined in Section 12.4.
"GAAP" means generally accepted accounting principles.
"Governmental Permit" is defined in Section 4.16(b).
"Force Majeure" shall mean any event or circumstance which is beyond
the control of a Party including, without limitation, any delay in obtaining all
required approvals from any governmental authority, strikes, lockouts, picketing
(legal or illegal), acts of God or the public enemy, governmental restrictions
or actions, fire or other casualty, accidents, unavailability of
telecommunications, fuel, power, supplies or materials, unusual adverse weather
conditions, acts or omissions of any labor, telecommunication or material
contractor or the passage or application of any Law or moratorium of any
governmental authority which is not now in effect which has the effect of
preventing the carrying on by the Company of its Business.
"Indemnified Party" is defined in Sections 12.1 and 12.2.
"Indemnitor" is defined in Section 12.3.
"Intellectual Property" means all (a) trademarks, service marks, trade
dress, logos, trade names, and corporate names and registrations and
applications for registration thereof, (b) copyrights and registrations and
applications for registration thereof, (c) computer software, data, and
documentation, (d) trade secrets and confidential Business information
(including formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information, (e) courseware, classroom items and training materials, (f) other
proprietary rights, and (g) copies and tangible embodiments thereof (in whatever
form or medium).
"IPO" means the first underwritten public offering of the Acquirer
Common Stock pursuant to an effective registration statement under the
Securities Act that will result in an aggregate post-IPO
-5-
<PAGE> 13
market capitalization of the Acquirer of at least $100 million (determined by
multiplying the outstanding shares of the Acquirer Common Stock by the IPO
offering price).
"Knowledge" means:
(a) An individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(i) such individual is actually aware of such fact or
other matter; or
(ii) a prudent individual could be expected to
discover or otherwise become aware of such fact or other matter in the course of
discharging his employment duties.
(b) A Person (other than an individual) will be deemed to have
"Knowledge" of a particular fact or other matter if any individual who is
serving, as a director, officer, partner or manager (or in any similar capacity)
has, or at any time had, Knowledge of such fact or other matter.
(c) Unless otherwise expressly set forth herein, all
references herein to the "Knowledge" of the Transferors and/or the Company shall
be to the "Knowledge" of Steven DeMar, Lawrence E. DeMar, Andrea DeMar and Janet
Rogers.
"LLGM" means LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the
Acquirer.
"Law" means any statute, law, ordinance, regulation, order or rule of
any federal, state, local, foreign or other governmental agency or body or of
any other type of regulatory body, including those covering environmental,
energy, safety, health, transportation, bribery, record keeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control matters
in effect on the date of this Agreement.
"Liability" means any direct or indirect liability, indebtedness,
obligation, claim, loss, damage, deficiency, guaranty or endorsement of or by
any person, absolute or contingent, accrued or unaccrued, due or to become due,
liquidated or unliquidated.
"Licensed Software" is defined in Section 4.19(d).
"Liquidated Claim Notice" is defined in Section 12.3.
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
"Material Adverse Effect" means, with respect to a particular Person, a
material adverse effect on the Business, Assets, financial condition, results of
operations, products, competitive position, customers or customer relations of
such Person, determined on a consolidated basis, and when used with respect to
representations, warranties or conditions, means the aggregate effect of all
similar situations unless the context indicates otherwise.
-6-
<PAGE> 14
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Outage" means any loss of service to any Business or Systems of the
Company, including but not limited to network access, e-mail, web, news or other
services, except as may be caused by Force Majeure.
"Owned Software" is defined in Section 4.19(c).
"Party" is defined above in the preamble.
"Person" means any natural person, corporation, limited liability
company, partnership, proprietorship, association, trust or other legal entity.
"Prime Rate" is defined in Section 12.3(b).
"POPs" is defined in Section 4.25.
"Real Estate Lease" is defined in Section 4.10.
"Real Property" is defined in Section 4.10.
"Receivable Shortfall" is defined in Section 2.3(f)(ii).
"Registration Agreement" means the joinder to the Registration
Agreement between each Transferor and the Acquirer, substantially in the form of
EXHIBIT J hereto.
"Registration Statement" means the Acquirer's registration statement on
Form S-1 once filed with and deemed effective by the SEC in connection with the
IPO.
"Related Transaction" is defined above in the preamble.
"Response Period" is defined in Section 12.3.
"Required Subscribers" means the number of Retail Subscribers equal to
the product of (i) 8,831 multiplied by (ii) a 20% annual growth rate pro rated
for the period commencing on April 30, 1999 and ending on the Closing Date.
"Restricted Party" is defined in Section 14.1.
"Restricted Period" is defined in Section 14.1.
"Restricted Territory" is defined in Section 14.1.
"Retail Subscriber" means any customers of the Company who (a) are
currently connected to and receiving Internet related services from the
Company's Systems; (b) are being charged or have
-7-
<PAGE> 15
pre-paid the Company's standard retail rates (which rates are set forth on
SCHEDULE 4.26) pursuant to the Company's standard form Subscriber Contracts or
applications for service attached hereto on SCHEDULE 4.26; (c) have paid such
stated rates in full for at least one full month; (d) are not two or more months
delinquent in the payment of any invoice from the Company; (e) have not, in the
preceding two months, been given a waiver or forgiveness of service charges; (f)
have not received any inducement to become connected to the Company's Systems or
to receive or pay for services (other than pursuant to the Company's customary
marketing practices); and (g) have not notified the Company in writing of their
intention to cancel service.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Portion of the Transfer Consideration" is defined in Section
2.2(b) and set forth on ANNEX III.
"Subscriber" means any Retail Subscriber or any Wholesale Subscriber.
"Subscriber Contract" means any Contract whereby the Company provides
services to a Subscriber.
"Systems" means the infrastructure used to provide Internet access and
related services, including network components, communications facilities,
servers, services and service platforms (including for e-mail, news, DNS, web,
authentication and other services), firewalls, power plants, data processing
platforms, MIS systems, office automation systems and internal LAN network
management systems which exist on the date of this Agreement and as may be
thereafter modified in the ordinary course of business.
"Taxes" means all taxes, duties, charges, fees, levies or other
assessments imposed by any taxing authority (i.e. whether federal, state, local,
municipal or foreign) including, without limitation, all net income, gross
income, gross receipts, value-added, excise, withholding, social security,
personal property, real estate, sale, use, ad valorem, license, lease, service,
severance, stamp, transfer, payroll, employment, unemployment, disability,
severance, customs, duties, alternative, windfall profits, add-on minimum,
estimated and franchise taxes or other similar governmental charge or imposition
(including any interest, penalties or additions attributable to or imposed on or
with respect to any such tax).
"Tax Return" means any federal, foreign, state and local governmental
tax return, declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
"Threatened" means a claim, Litigation, dispute, action, or other
matter will be deemed to have been "Threatened" if any demand or statement has
been made in writing, or any notice has been given in writing, that would lead a
prudent Person to conclude that such a claim, Litigation, dispute, action, or
other matter is likely to be asserted, commenced, taken, or otherwise pursued in
the future.
-8-
<PAGE> 16
"Transaction Documents" means this Agreement, the Escrow Agreement, the
Equity Subscription Agreement, the Registration Agreement, the Employment
Agreements, and each of the other documents contemplated by this Agreement.
"Transactions" means the transactions contemplated by the Transaction
Documents.
"Transfer" is defined in Section 11.3.
"Transfer Consideration" is defined in Section 2.2(d).
"Transferors" is defined above in the preamble.
"Transferors' Representative" is defined in Section 3.3(a).
"Treasury Regulations" means the regulations, including temporary and
proposed regulations, promulgated by the Treasury Department under the Code.
"Unliquidated Claim" is defined in Section 12.3.
"Year 2000 Compliant" means that all software, hardware, firmware, and
systems (a) include Year 2000 date data century recognition, calculations which
accommodate same century and multi-century formulas and date values, correct
date sort ordering (if date sorting is an included function), and date data
interface values that reflect the century; (b) will not cause an abnormal abend
or abort within the application on account of the date data properly entered
into the application or result in the generation of incorrect values or invalid
outputs involving such date; and (c) provide that all date related user
interface functionalities and data fields include the indication of the correct
century.
"Wholesale Subscriber" means any customers of a third-party service
provider who (a) are currently connected to and receiving Internet related
services from the Company's Systems; (b) are being charged or have pre-paid,
directly or indirectly through a third-party service provider, the Company's
standard wholesale rates (which rates are set forth on SCHEDULE 4.26) pursuant
to the Company's standard form Subscriber Contracts or a specific Subscriber
Contract attached hereto on SCHEDULE 4.26; (c) have paid such stated rates in
full for at least one full month; (d) are not two or more months delinquent in
the payment of any invoice from the Company; (e) have not, in the preceding two
months, been given a waiver or forgiveness of service charges; (f) have not
received any inducement to become connected to the Company's Systems or to
receive or pay for services (other than pursuant to the Company's customary
marketing practices); and (g) have not notified the Company in writing of their
intention to cancel service.
2. THE EXCHANGE OF SHARES.
2.1 BASIC TRANSACTION. On and subject to the terms and conditions of
this Agreement, the Acquirer agrees to exchange with the Transferors, and each
Transferor agrees to exchange with the Acquirer, all of the Company Shares for
the consideration specified below in this Section 2.
-9-
<PAGE> 17
2.2 TRANSFER CONSIDERATION.
(a) Generally. The Transfer Consideration exchanged for
Company Shares shall be composed of (i) the Cash Portion of the Transfer
Consideration and (ii) the Stock Portion of the Transfer Consideration.
(b) Transfer Consideration Adjustments. The Acquirer agrees to
pay to the Transferors the aggregate the sum of (i) $10,000,000.00 in U.S.
currency pursuant to ANNEX II, to be adjusted (A) downward by the aggregate
amount of all adjustments made pursuant to Section 2.3, and (B) upward by the
amount of cash paid in lieu of any fractional shares which would otherwise be
issued in accordance with this Agreement (the "Cash Portion of the Transfer
Consideration"); and (ii) $2,000,000.00 worth of Acquirer Common Stock,
consisting of an aggregate number of shares of Acquirer Common Stock pursuant to
ANNEX III, valued at the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the final prospectus immediately prior to
the effectiveness of the Registration Statement (the "Stock Portion of the
Transfer Consideration"); in exchange for all of the Company Shares to be
purchased by the Acquirer pursuant to the terms hereof; provided, however, that
the Cash Portion of the Transfer Consideration and the Stock Portion of the
Transfer Consideration may be altered by the Parties prior to the Closing Date
by mutual written agreement.
(c) Escrow Payments. At the Closing Date, $1,000,000.00 of the
Cash Portion of the Transfer Consideration will be paid in cash by wire transfer
of funds to the Escrow Agent by the Acquirer to be held in escrow pursuant to
Section 2.5 and shall be available to support the Transferors' indemnification
obligations specified in Section 12.
(d) Payment. The balance of the Cash Portion of the Transfer
Consideration shall be paid by the Acquirer to the Transferors at the Closing by
delivery of cash or by wire transfer of funds in the amounts set forth on the
Allocation Summary. The Acquirer Common Stock comprising the Stock Portion of
the Transfer Consideration shall be issued on the Closing Date by the Acquirer
and delivered to the Transferors within seven (7) business days after the
Closing in the amounts set forth on the Allocation Summary next to such
Transferor's name. The sum of the Cash Portion of the Transfer Consideration and
the Stock Portion of the Transfer Consideration shall be referred to as the
"Transfer Consideration." Each of (i) the Cash Portion of the Transfer
Consideration and (ii) the Stock Portion of the Transfer Consideration shall be
allocated among the Transferors in dollar amounts set forth on the Allocation
Summary attached hereto as ANNEX V. Cash will be paid in lieu of any fractional
shares which would otherwise be issued in accordance with this Agreement.
(e) Surrender of Certificates. The aggregate Transfer
Consideration (less the Escrow Funds) will be payable and issuable upon the
surrender of the certificates and other documentation specified in Section 3.2.
As to each Transferor who properly surrenders such certificates and other
documentation, the Acquirer will pay and deliver to such Transferor such
Transferor's Transfer Consideration (less the Escrow Funds). If payment is to be
made to a Person other than the Person in whose name a certificate surrendered
is registered, it shall be a condition of payment that the certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the Person requesting such payment shall pay any transfer or similar
Taxes
-10-
<PAGE> 18
required by reason of the payment to a Person other than a Transferor or shall
establish to the satisfaction of the Acquirer that such Tax has been paid or is
not applicable.
(f) Restricted Stock. None of the Acquirer Common Stock issued
in connection with this Agreement will be registered under the Securities Act.
Each certificate for such the Acquirer Common Stock shall bear a legend
describing the foregoing restrictions. However, notwithstanding anything in this
Section 2.2(f) to the contrary, in the event that any other Person contributing
stock or assets to the Acquirer in connection with the Related Transactions
receives in exchange Acquirer Common Stock which in whole or in part is
registered, has registration rights, or any agreement relating to future
registration, then such rights shall be automatically applied to the Acquirer
Common Stock.
2.3 ADJUSTMENTS TO CASH PORTION OF THE TRANSFER CONSIDERATION.
(a) Net Current Assets Adjustment. The Cash Portion of the
Transfer Consideration shall be adjusted (i) downward dollar for dollar by the
amount that the Company Net Current Assets on the Closing Date is less than the
greater of (A) the Company Net Current Assets on the Company Balance Sheet, or
(B) zero dollars ($0); and (ii) upward dollar for dollar by the amount that the
Company Net Current Assets on the Closing Date is more than the greater of (x)
the Company Net Current Assets on the Company Balance Sheet, or (y) zero dollars
($0). The Company Net Current Assets shall be determined by Acquirer's
Independent Public Accountants in good faith and consistent with the accounting
policies set forth on Schedule 2.3(a) within two business days prior to the
Closing Date.
(b) Long-Term Debt Adjustment. The Cash Portion of the
Transfer Consideration shall be adjusted downward on a dollar for dollar basis
by the amount of the Company Long-Term Debt outstanding on the Closing Date. The
Company Long-Term Debt shall be determined by Acquirer's Independent Public
Accountants in good faith and consistent with the accounting policies set forth
on Schedule 2.3(a), but within two business days prior to the Closing Date.
(c) Subscriber Adjustment. The Cash Portion of the Transfer
Consideration shall be adjusted downward $652.00 per each Retail Subscriber by
which the number of Retail Subscribers on the Closing is less than the number of
Required Subscribers. The number of Retail Subscribers shall be determined by
Acquirer's Independent Public Accountants in good faith within two business days
prior to the Closing Date.
(d) Churn Rate Adjustment. The Cash Portion of the Transfer
Consideration shall be adjusted downward $12,000 per each 1/10 of one percent by
which the average monthly Churn Rate for the six-month period ending on the
Closing Date is greater than 3.0%. The average monthly Churn Rate for the
six-month period ending on the Closing Date shall be determined by Acquirer's
Independent Public Accountants in good faith within two business days prior to
the Closing Date.
(e) [RESERVED]
-11-
<PAGE> 19
(f) Accounts Receivable Adjustment.
(i) Shortfall. The Acquirer and the Transferors agree
that the Cash Portion of the Transfer Consideration shall be adjusted to the
extent that the Accounts Receivable have not been collected by the Acquirer
within sixty (60) days following the Closing Date; provided, however, that
Accounts Receivable that as of the Closing Date are (A) disputed, (B) subject to
pending Litigation or Threatened Litigation, or (C) older than sixty (60) days,
shall be treated as having a value of zero dollars ($0) for purposes of this
Section 2.3, but any amounts collected on these accounts shall be credited
towards the Acquirer's collection of the Accounts Receivable. The "Collection
Period" shall refer to the period beginning on the Closing Date and continuing
until the expiration of sixty (60) days thereafter.
(ii) Adjustment to Purchase Price. Within sixty (60)
days following the end of the Collection Period, the Acquirer shall prepare and
furnish to the Transferors' Representative a statement setting forth the
Accounts Receivable and all payments made thereon, calculated as of the end of
the Collection Period, and the amount, if any, owing from the Transferors to the
Acquirer pursuant to Section 2.3 ("Receivable Shortfall"). The Acquirer shall
first set-off any Receivable Shortfall from the Escrow Funds, and, to the extent
the amount of the Receivable Shortfall exceeds the amount of the remaining
Escrow Funds, the Transferors shall be jointly and severally liable to pay the
difference to the Acquirer within ten (10) days after receipt of written demand
therefor.
(iii) Collection of Accounts Receivable. Between the
Closing Date and the end of the Collection Period, the Acquirer shall cause the
Company to use its reasonable best efforts consistent with the Company's usual
and customary collection practices to collect the Accounts Receivable; provided,
however, that the Company shall not be obligated to resort to Litigation.
(g) Disputed Amounts. Any determination to be made by the
Acquirer's Independent Public Accountant in good faith shall be preliminarily
submitted to the Transferors' Representative for concurrence. In the event that
the Transferor's Representative in good faith disagrees with the determination
made by the Acquirer's Independent Public Accountant and the amount in dispute
exceeds $25,000 (the total amount in dispute, the "Disputed Amount"), the
Disputed Amount shall be deposited with the Escrow Funds, and such dispute shall
be resolved pursuant to the provisions of Article 13.
2.4 ACCESS TO INFORMATION. In connection with the determination of the
adjustments to the Cash Portion of the Transfer Consideration described in
Section 2.3, the Company and the Transferors' Representative shall (a) provide
Acquirer's Independent Public Accountants reasonable access to the books and
records of the Company, in whatever form maintained, (b) cause employees of the
Company to cooperate with Acquirer's Independent Public Accountants, (c) provide
all information reasonably requested, all after receiving reasonable notice from
Acquirer's Independent Public Accountants and reaching agreement as to mutually
convenient times for Acquirer's Independent Public Accountants review; and (d)
provide access to the work papers and other materials and documents used or
produced in connection with the preparation of the Company Financial Statements.
-12-
<PAGE> 20
2.5 ESCROW AGREEMENT. Pursuant to the Escrow Agreement to be entered
into among the Transferors, the Acquirer and the Escrow Agent, the Acquirer
shall deliver $1,000,000.00 of the Cash Portion of the Transfer Consideration to
the Escrow Agent by wire transfer in immediately available funds at the Closing.
Such monies (which, together with all interest accrued thereon which may be due
to the Party to whom such funds are ultimately paid in accordance with the terms
of the Escrow Agreement, are hereinafter referred to as the "Escrow Funds")
shall be held pursuant to the terms of the Escrow Agreement for payment from
such Escrow Funds of the amounts, if any, owing by the Transferors to the
Acquirer pursuant to the indemnification provisions of Section 12 below,
together with accrued interest thereon. Pursuant to the terms of the Escrow
Agreement, the Escrow Funds shall be used to satisfy any such owed amounts. At
the conclusion of the period ending on the first anniversary of the Closing Date
(such period being referred to herein as the "Escrow Period"), such remaining
portion of the Escrow Funds not theretofore paid to the Acquirer in accordance
with the terms of the Escrow Agreement or subject to a pending good faith claim
under the Escrow Agreement and this Agreement shall be disbursed to the
Transferors together with accrued interest thereon. The Transferors and the
Acquirer agree that each will execute and deliver such reasonable instruments
and documents as are furnished by any other Party to enable such furnishing
Party to receive those portions of the Escrow Funds to which the furnishing
Party is entitled under the provisions of the Escrow Agreement and this
Agreement.
3. CLOSING.
3.1 LOCATION, DATE. The closing for the Transactions (the "Closing") is
being held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., in New
York, New York, or at such other location as the Parties hereto may agree,
commencing at 9:00 a.m. local time simultaneously with the closing of the IPO
and the Related Transactions or such other date as the Acquirer and the
Transferors may mutually determine (the "Closing Date").
3.2 DELIVERIES.
(a) At the Closing, the Acquirer shall pay by wire transfer or
certified or bank checks of immediately available funds the Cash Portion of the
Transfer Consideration in accordance with Section 2;
(b) At the Closing, the Acquirer shall issue and, within seven
(7) business days after the Closing Date, the Acquirer shall deliver, or shall
cause to be delivered by its transfer agent, certificates for the Acquirer
Common Stock representing the Stock Portion of the Transfer Consideration in
accordance with Section 2; and
(c) At least three (3) business days prior to the Closing, (i)
the Transferors will deliver to LLGM the various certificates, instruments, and
documents referred to in Section 9 below, (ii) the Acquirer will deliver to LLGM
the various certificates, instruments, and documents referred to in Section 10
below, and (iii) each of the Transferors will deliver to LLGM the certificates
representing all of its Company Shares, duly endorsed in blank or accompanied by
duly executed assignment documents. LLGM shall hold all such certificates,
documents and instruments in escrow pending consummation of the Closing. The
escrow shall be for the convenience of the Acquirer to
-13-
<PAGE> 21
effectuate the Closing, and any delivery made by the Transferors shall be
promptly returned to them in the event the Closing does not occur on or prior to
the Expiration Date.
3.3 TRANSFERORS' REPRESENTATIVE.
(a) In order to administer efficiently (i) the execution and
implementation of this Agreement by the Transferors, (ii) the waiver of any
condition to the obligations of the Transferors to consummate the Transactions
and (iii) the settlement of any dispute with respect to this Agreement, the
Transferors entered into an agreement to designate, and do hereby designate and
irrevocably appoint Steven DeMar as their representative and attorney-in-fact
for all purposes under this Agreement (the "Transferors' Representative").
(b) The Transferors have authorized and do hereby authorize the
Transferors' Representative (i) to take all action necessary in connection with
the implementation of this Agreement on behalf of the Transferors, the waiver of
any condition to the obligations of the Transferors to consummate the
Transactions, or the settlement of any dispute, (ii) to give and receive all
notices required to be given under this Agreement and (iii) to take any and all
additional action as is contemplated to be taken by or on behalf of the
Transferors by the terms of this Agreement.
(c) In the event that the then acting Transferors' Representative dies,
becomes legally incapacitated or resigns from such position, the Transferors
have authorized and do hereby authorize first Lawrence E. DeMar and thereafter
Janet Rogers to fill such vacancy and shall be deemed to be the Transferors'
Representative for all purposes of this Agreement; however, no change in the
Transferors' Representative shall be effective until the Acquirer is given
notice of it by the Transferors.
(d) All decisions and actions by the Transferors' Representative shall
be binding upon all of the Transferors, and no individual Transferor shall have
the right to object, dissent, protest or otherwise contest the same, in the
absence of fraud, gross negligence or willful misconduct of the Transferors'
Representative.
(e) By their execution of this Agreement, the Transferors agree that:
(i) the Acquirer shall be able to rely conclusively on the instructions and
decisions of the Transferors' Representative as to any actions required or
permitted to be taken by the Transferors or the Transferors' Representative
hereunder, and no Party hereunder shall have any cause of action against the
Acquirer for action taken by the Acquirer in reliance upon the instructions or
decisions of the Transferors Representative; (ii) all actions, decisions and
instruction of the Transferors' Representative shall be conclusive and binding
upon all of the Transferors; no Transferor shall have any cause of action
against the Acquirer for any action taken or omitted to be taken, given by the
Transferors' Representative; and no Transferor shall have any cause of action
against the Transferors' Representative for any action taken, decision made or
instruction given by the Transferors' Representative under this Agreement,
except for fraud, gross negligence or willful breach of this Agreement by the
Transferors' Representative; (iii) the Transferors' Representative shall be
deemed to fulfill any fiduciary obligation to the Transferors so long as no
Transferor is adversely affected by any action or failure to act of the
Transferors' Representative in a disproportionate measure compared to any other
Transferor; (iv) remedies available at law for any breach of the provisions of
this Section are inadequate;
-14-
<PAGE> 22
therefore, the Acquirer shall be entitled to temporary and permanent injunctive
relief without the necessity of proving damages if the Acquirer brings an action
to enforce the provisions of this Section; (v) the provisions of this Section
3.3 are independent and severable, shall constitute an irrevocable power of
attorney, coupled with an interest and surviving death of the Transferors,
granted by the Transferors to the Transferors' Representative and shall be
binding upon the executors, heirs, legal representatives and successors of each
Transferor; and (vi) all fees and expenses incurred by the Transferors'
Representative shall be paid ratably by the Transferors.
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS.
Except as otherwise provided in Section 4.4(b), the Transferors hereby
jointly and severally represent and warrant to the Acquirer as follows:
4.1 CORPORATE STATUS. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Illinois
and is qualified to do business as a foreign corporation in any jurisdiction
where it is required to be so qualified, except where the failure to qualify
would not have a Material Adverse Effect on the Company. The Charter Documents
and bylaws of the Company that have been delivered to the Acquirer are in full
force and effect and are effective under applicable Laws and the Company is not
in violation of any of the provisions thereof.
4.2 AUTHORIZATION. The Company has the requisite power and authority to
own its Assets and to carry on its Business as currently conducted. The
Transferors entered into an agreement dated as of June 29, 1999, and have duly
approved the terms of this Agreement, the Transactions and the appointment of
the Transferors' Representative to act on their behalf in accordance with the
terms of Section 3.3. Each Transferor has duly executed and delivered each
Transaction Document to which he, she or it is a Party, and each Transaction
Document constitutes a valid and binding obligation of such Party, enforceable
against each Transferor and the Company in accordance with its terms; except to
the extent that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting the rights of creditors generally or contrary to public policy, except
as enforcement hereof is subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or in equity), and
except to the extent that provisions indemnifying a Party against Liability for
his, her or its own wrongful or negligent acts may be unenforceable.
4.3 CONSENTS AND APPROVALS. Neither the execution and delivery by each
Transferor of the Transaction Documents to which he, she or it is a Party, nor
the performance of the Transactions to be performed by such Party, will require
any Consent, constitute a Default or cause any payment obligation (other than a
payment obligation arising pursuant to a court-ordered decree of divorce or an
agreement or instrument entered into or given in connection with a divorce
proceeding or similar matter) to arise under (a) any Law or Court Order to which
any Transferor or the Company is subject, (b) the Charter Documents or bylaws of
the Company or (c) any Contract, Government Permit or other document to which
the Company is a party or by which the properties or other Assets of the Company
may be subject.
-15-
<PAGE> 23
4.4 CAPITALIZATION AND STOCK OWNERSHIP.
(a) The total authorized capital stock of the Company consists
of (i) 100,000 shares of voting Company Common Stock, 30,000 shares of which are
issued and outstanding, and (ii) 10,000,000 shares of non-voting Company Common
Stock, 2,970,000 shares of which are issued and outstanding. No shares are
subject to or reserved for issuance pursuant to vested options, unvested
options, future option grants, or unexercised warrants. The Transferors are not
a party to (or have otherwise terminated) any voting trust, proxy, or other
agreement or understanding with respect to the voting of any capital stock of
the Company.
(b) Each Transferor, severally but not jointly, represents and
warrants, only with respect to the Company Shares of such Transferor as set
forth beside his, her or its name on SCHEDULE 4.4, that (i) such Transferor is
the sole record and beneficial owner of the number of shares of Company Common
Stock as set forth beside his, her or its name on SCHEDULE 4.4, and (ii) such
Transferor owns all of such Company Common Stock free and clear of any
Encumbrances (other than restrictions on transfer imposed by applicable federal
and state securities laws and security interests disclosed on SCHEDULE 4.4, each
of which shall be removed at Closing).
(c) There are no existing options, warrants, calls,
commitments or other rights of any character (including conversion or preemptive
rights) relating to the acquisition of any issued or unissued capital stock or
other securities of the Company. There are no outstanding or authorized option,
stock appreciation, phantom stock, or similar rights with respect to the
Company. All of the Company Shares are duly and validly authorized and issued,
fully paid and non-assessable. The Company has complied with all applicable Laws
in connection with the issuance of the Company Shares, and none of the Company
Shares were issued in violation of any Contract binding upon the Company. Upon
completion of the Transactions at the Closing, the Acquirer shall receive valid
title to all of the Company Shares, free and clear of all Encumbrances.
4.5 SUBSIDIARIES. The Company does not own, directly or indirectly, any
subsidiary, any interest or investment (whether equity or debt) in any
corporation, partnership, business, trust, joint venture or other legal entity.
4.6 CORPORATE RECORDS. The minute books of the Company contain
complete, correct and current copies of its Charter Documents and bylaws and of
all minutes of meetings, resolutions and other proceedings of its Board of
Directors and stockholders. The stock record book of the Company is complete,
correct and current.
4.7 FINANCIAL STATEMENTS. The Transferors have delivered to the
Acquirer correct and complete copies of the financial statements of the Company
consisting of a balance sheet of the Company as of April 30, 1999, and the
related income statement and statement of cash flows for the five months then
ended. The Transferors have also delivered to the Acquirer correct and complete
copies of the financial statements consisting of a balance sheet of the Company
as of December 31, 1996, 1997 and 1998, and the related income statement and
statement of cash flows for the years then ended. All such financial statements
are referred to herein collectively as the "Company Financial Statements" and
appear on SCHEDULE 4.7. The Company Financial Statements are consistent with the
books and records of the Company, and there have not been any material
-16-
<PAGE> 24
transactions that have not been recorded in the accounting records underlying
such Company Financial Statements. The Company Financial Statements have been
prepared on an accrual basis in accordance in all material respects with GAAP
applied consistently with past practices (except as specifically set forth on
SCHEDULE 4.7), and the Company Financial Statements present accurately the
financial position and Assets and Liabilities of the Company as of the dates
thereof, and the results of its operations for the periods then ended in all
material respects, subject, in all cases of interim financial statements, to
normal recurring year-end adjustments and the absence of notes. The balance
sheet of the Company as of April 30, 1999 that is included in the Company
Financial Statements is referred to herein as the "Company Balance Sheet," and
the date thereof is referred to as the "Balance Sheet Date."
4.8 TITLE TO ASSETS AND RELATED MATTERS. The Company has good and
marketable title to, valid leasehold interests in, or valid licenses to use, all
of its Assets, free from any Encumbrances. The use of the Assets is not subject
to any Encumbrances, and such use does not materially encroach on the property
or rights of anyone else. All Real Property and tangible personal property
(other than inventory) of the Company are suitable for the purposes for which
they are used by the Company given its current operations, in good working
condition and reasonable repair, free from any known defects.
4.9 OWNED REAL PROPERTY. The Company does not own nor does it have any
interest in any real property or improvements thereon (other than the Real
Estate Leases disclosed in SCHEDULE 4.10, and the leasehold improvements related
to same) nor does the Company have any options, agreements or Contracts under
which it has the right or obligation to acquire any interest in any real
property or improvements.
4.10 LEASED REAL PROPERTY. SCHEDULE 4.10 lists by street address all
real estate used by the Company in the operation of its Business as well as any
other real estate that is in the possession of or leased by the Company and the
improvements (including buildings and other structures) located on such real
estate (collectively, the "Real Property"), and lists any leases under which any
such Real Property is possessed (the "Real Estate Leases"). SCHEDULE 4.10 also
describes any other real estate previously owned, leased or otherwise operated
by the Company or any predecessor thereof and the time periods of any such
ownership, lease or operation. To the Knowledge of the Transferors, the Real
Property complies with all applicable zoning Laws. To the Knowledge of the
Transferors, the Company has obtained all licenses and rights-of-way from
governmental entities or private parties that are necessary to ensure vehicular
and pedestrian ingress and egress to and from any Real Property.
None of the Real Estate Leases are for a term in excess of one year.
4.11 CERTAIN PERSONAL PROPERTY. SCHEDULE 4.11 lists all tangible
personal property of the Company and describes and specifies the location of all
such items of tangible personal property that were included in the Company
Balance Sheet. Since the Balance Sheet Date, the Company has not acquired any
items of tangible personal property (other than necessary in the ordinary course
of the Company's Business). All of such tangible personal property (a) is in
operating condition, reasonable wear and tear excepted, (b) is usable in the
ordinary course of the Company's Business, and (c) to the Knowledge of the
Transferors, conforms with any applicable Laws relating to its construction, use
and operation. Except for those items subject to the Non-Real Estate Leases
(defined below) and the assets listed on Schedule 4.11 as being the personal
property to be transferred to officers of the
-17-
<PAGE> 25
Company prior to closing, no Person other than the Company owns any vehicles,
equipment or other tangible Assets located on the Real Property that are used by
the Company in its Business (other than immaterial items of personal property
owned by the Company's employees) or that are necessary for the operation of its
Business.
4.12 NON-REAL ESTATE LEASES. The Company does not lease any Assets or
property (other than Real Property) that are used in the operation of the
Company's Business.
4.13 ACCOUNTS RECEIVABLE. All Accounts Receivable of the Company that
are reflected on the Company Balance Sheet represent or will represent valid
obligations arising from sales actually made or services actually performed in
the ordinary course of business. Except for those Accounts Receivable of the
Company in excess of 60 days from the date of creation as set forth on SCHEDULE
4.13, all of the Accounts Receivable included in the Assets of the Company are
collectible within 60 days from the respective dates of sale. None of the
Transferors knows of any facts or circumstances (other than general economic
conditions) that are likely to result in any material increase in the
uncollectibility of such Accounts Receivable. SCHEDULE 4.13 contains a complete
and accurate list of all Accounts Receivable as of the date provided therein,
which list sets forth the aging of such Accounts Receivable.
4.14 LIABILITIES. The Company has no Liabilities, and none of the
Assets of the Company is subject to any Liabilities, except (a) Liabilities set
forth on the Company Balance Sheet or incurred in the ordinary course (none of
which relates to any breach of contract, breach of warranty, tort, infringement,
or violation of Law or arose out of any charge, complaint, action, suit,
proceeding, hearing, investigation, claim or demand) since the Balance Sheet
Date that, individually or in the aggregate, are not material to the Business or
the Assets of the Company or (b) Liabilities of the Company under any Contracts
specifically disclosed on any Schedule (or not required to be disclosed because
of the term or amount involved) that were not required under GAAP to have been
specifically disclosed or reserved for on the Company Balance Sheet.
4.15 TAXES. With respect to the Company and any affiliated predecessor
entities, (i) all reports, returns, statements (including estimated reports,
returns, or statements), and other similar filings scheduled to be filed on or
before the Closing Date (the "Tax Returns") with respect to any Taxes, have been
or will be timely filed with the appropriate governmental agencies in all
jurisdictions in which such Tax Returns are required to be filed, and all such
Tax Returns correctly reflect the Liability for Taxes for the periods,
properties, or events covered thereby; (ii) all Taxes payable with respect to
the Tax Returns referred to in the preceding clause, and all Taxes accruable or
otherwise attributable to events occurring prior to the Closing Date, whether
disputed or not, whether or not shown on any Tax Return, and whether or not
currently due or payable, will have been paid in full prior to the Closing Date;
(iii) the Transferors have no Knowledge of any unassessed Tax deficiencies or of
any audits or investigations pending or Threatened with respect to any Taxes;
(iv) no Tax Returns for the fiscal year ending on or before December 31, 1995,
have been examined by the Internal Revenue Service and/or other state or local
taxing authority, and no assessment with respect to such returns has been made;
(v) no issues have been raised in any examination by any taxing authority which,
by application of similar principles, reasonably could be expected to result in
a proposed deficiency for any other period not so examined; (vi) there is in
effect no extension for the filing of any Tax Return and no extension or waiver
of the application of any statute of limitations
-18-
<PAGE> 26
of any jurisdiction regarding the assessment or collection of any Tax has been
given; (vii) no notice has been received from any Tax authority in any
jurisdiction in which any such entity does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction; (viii) there are no liens for
Taxes upon any Asset except for liens for current Taxes not yet due; (ix) all
deposits required by law to be made with respect to employees' withholding and
other payroll, employment, or other withholding Taxes, including the portions of
such Taxes imposed upon the employer have been timely made; (x) except as
contemplated by this Agreement, none of the Transferors has transferred legal or
beneficial ownership of any of the Acquirer Common Stock to be received by the
Transferors as part of the Stock Portion of the Transfer Consideration, and
there is no agreement or intention on the part of any of the Transferors to
transfer any of the Acquirer Common Stock for at least one year from the Closing
Date; (xi) there are no agreements in place relating to the allocating or
sharing of the payment of, or Liability for, Taxes for any period; (xii) the
Company is not a party to any joint venture, partnership or other arrangement or
Contract that could be treated as a partnership for federal income Tax purposes;
(xiii) the Company has not waived any statue of limitations in respect of Taxes
which waiver is currently in effect; (xiv) the Company is not a party to any
"closing agreement," as described in Section 7121 of the Code or any
corresponding provision of state or local Tax law, and there are no Tax rulings
or requests for Tax rulings with respect to the Company; (xv) the Company has
not filed a consent under Code Sec. 341(f) concerning collapsible corporations;
(xvi) the Company has not made any payments, is not obligated to make any
payments, and is not a party to any agreement that under certain circumstances
could obligate it to make any payments that, under any circumstances, will not
be deductible to the Company under Code Sec. 280G; (xvii) the Company is not and
has never been a United States real property holding corporation within the
meaning of Code Sec. 897(c)(2); (xviii) the Company has disclosed on its federal
income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code Sec.
6662; (xix) the Company has never been (nor has any Liability for unpaid Taxes
because it once was) a member of an Affiliated Group filing a consolidated
federal income Tax Return and has never incurred any Liability for the Taxes of
any Person under Treasury Regulations (S)1.1502-6 (or any similar provision of
Law); and (xx) the Company has never incurred any Liability for the Taxes of any
Person as a transferee or successor, by contract, or otherwise; (xxi) the
Company has been a validly electing S corporation within the meaning of Sections
1361 and 1362 of the Code at all times during its existence and the Company will
be an S corporation up to and including the Closing Date; (xxii) the Company
would not be liable for any Tax under Section 1374 of the Code if its Assets
were sold for their fair market value as of the Closing Date; and (xxiii) the
Company has not, in the past ten years, (A) acquired assets from another
corporation in a transaction in which the Company's Tax basis for the acquired
assets was determined, in whole or part, by reference to the Tax basis of the
acquired assets (or any other property) in the hands of the transferor or (B)
acquired the stock of any corporation which is a qualified subchapter S
subsidiary.
4.16 LEGAL PROCEEDINGS AND COMPLIANCE WITH LAW.
(a) Except as disclosed on SCHEDULE 4.16, there is no
Litigation that is pending or to the Transferor's Knowledge, Threatened against
the Company. There has been no Default by the Company under any Laws applicable
to the Company, and the Company has not received any notices from any
governmental entity regarding any alleged Defaults under any Laws. There has
been no Default with respect to any Court Order applicable to the Company.
-19-
<PAGE> 27
(b) The Company has (i) obtained and is in full compliance
with all governmental permits, licenses, registrations, certificates of
occupancy, approvals and other authorizations (the "Governmental Permits"), all
of which are listed in SCHEDULE 4.16 along with their respective expiration
dates, that are required for the complete operation of the Business of the
Company as currently operated, (ii) all of the Governmental Permits are
currently valid and in full force and (iii) filed such timely and complete
renewal applications as may be required with respect to its Governmental
Permits. Further, no revocation, cancellation or withdrawal thereof has been
Threatened.
(c) The Company has filed in a timely manner all reports,
documents, and other materials it was required to file (and the information
contained therein was correct and complete in all respects) under all applicable
Laws (including rules and regulations thereunder).
(d) The Company has possession of all records and documents it
was required to retain under all applicable Laws (including rules and
regulations thereunder).
4.17 CONTRACTS.
(a) SCHEDULE 4.17(A) lists each Contract of the following
types to which the Company is a party, or by which it is bound, as of the date
hereof, except for any Contract that may be terminated by the Company on not
more than 30 days' notice without any Liability:
(i) Contracts with any current or former stockholder,
director, officer, employee, partner or consultant of the Company or
any Affiliate thereof;
(ii) Contracts for the future purchase of, or payment
for, supplies or products, or for the lease of any Asset from or the
performance of services by a third party;
(iii) Contracts to sell or supply products or to
perform services;
(iv) Contracts to lease to or to operate for any
other party any Asset (other than Real Estate Leases and Non-Real
Estate Leases identified on other Schedules);
(v) Any notes, debentures, bonds, conditional sale
agreements, equipment trust agreements, letter of credit agreements,
reimbursement agreements, loan agreements or other Contracts for the
borrowing or lending of money (including loans to or from the
Transferors or any officers, directors, partners, stockholders or
Affiliates of the Company or any members of their immediate families),
agreements or arrangements for a line of credit or for a guarantee of,
or other undertaking in connection with, the indebtedness of any other
Person;
(vi) Any Contracts under which any Encumbrances exist
with respect to any Assets;
(vii) Any Subscriber Contracts for each of the fiscal
years ended December 31, 1996, 1997 and 1998, and for the current
fiscal year; and
-20-
<PAGE> 28
(viii) Any formal or informal partnering arrangement
with any merchant or service or web content provider or Affiliate;
(ix) Any Contract with any local exchange carrier,
competitive local exchange carrier, competitive access provider or
other telecommunications carrier;
(x) Any peering, transit or other Contract with any
Internet service provider, online company or similar entity;
(xi) Any written Contract requiring confidentiality
or non-competition other than agreements with customers, employees or
subcontractors in the ordinary course of business; or
(xii) Any other Contracts (other than those described
in any of (i) through (xi) above) not made in the ordinary course of
business.
(b) The Transferor' Representative has delivered to the
Acquirer or made available for review by the Acquirer a correct and complete
copy of each written Contract listed in SCHEDULE 4.17(A) (as amended to date).
Except as set forth on SCHEDULE 4.17(A), (i) each of the Contracts set forth on
SCHEDULE 4.17(A) is legal, valid, binding and enforceable in accordance with its
terms, and is in full force and effect, and will continue to be legal, valid,
binding and enforceable in accordance with its terms, and will be in full force
and effect on identical terms immediately following the Closing; (ii) the
Company is not in Default under any Contract (including any Real Estate Leases
and Non-Real Estate Leases), which Default could result in a Liability on the
part of the Company; (iii) the Company has not received any communication from,
or given any communication to, any other party indicating that the Company or
such other party, as the case may be, is in Default under any Contract where
such Default could have a Material Adverse Effect. To the Knowledge of the
Transferors, (x) none of the other parties in any such Contract to which the
Company is a party is in Default thereunder; (y) no unfulfilled Subscriber
Contract obligating the Company to perform services will result in a loss to the
Company upon completion of performance; and (z) the Company has not been
notified that any of its Subscribers intend either to dispute charges under or
to terminate early a Subscriber Contract.
(c) SCHEDULE 4.17(C) sets forth a complete and accurate
description of each proposed Contract to which the Company is proposed to be a
party, or by which it is proposed to be bound, as of the date hereof, currently
being negotiated with a possible customer. Notwithstanding the foregoing, the
Transferors make no representations or warranties concerning such proposed
Contracts or the likelihood that the parties thereto will enter into such
proposed Contracts.
(d) SCHEDULE 4.17(D) sets forth a complete and accurate
description of each request for proposal for a Contract with a possible customer
to which the Company is proposed to be a party, or by which it is proposed to be
bound, as of the date hereof, that the Company has pending, or that is currently
being acted upon or considered by the Company. Notwithstanding the foregoing,
the Transferors make no representations or warranties concerning such proposals
or the likelihood that the parties receiving such proposals will accept such
proposals.
-21-
<PAGE> 29
4.18 INSURANCE. SCHEDULE 4.18 lists all policies or binders of
insurance held by or on behalf of the Company, specifying with respect to each
policy the insurer, the amount of the coverage offered under the terms of the
policy, the type of insurance, the risks insured, the expiration date, the
policy number and any pending claims thereunder. There is no Default with
respect to any such policy or binder nor, to the Transferor's Knowledge, has
there been any failure to give any notice or present any claim under any such
policy or binder in a timely fashion or in the manner or detail required by the
policy or binder. There is no notice of non-renewal or cancellation with respect
to, or disallowance of any claim under, any such policy or binder that has been
received by the Company. The Company has been covered during the past three (3)
years by insurance in scope and amount customary and reasonable for the Business
in which it has engaged during the aforementioned period. The Company currently
does not have and has never had any self-insurance arrangements.
4.19 INTELLECTUAL PROPERTY AND SOFTWARE PRODUCTS.
(a) SCHEDULE 4.19 contains a description of all Intellectual
Property owned or used by the Company. SCHEDULE 4.19 separately discloses all
Intellectual Property under license. All Intellectual Property developed by any
Person for use by the Company was developed pursuant to valid work-for-hire
Contracts and such Intellectual Property is not subject to any license or
royalty payments. No Intellectual Property rights not described on SCHEDULE 4.19
are necessary in connection with the conduct of the Business. Except as
disclosed in SCHEDULE 4.19, the Company owns the entire right, title and
interest in and to, and has the exclusive perpetual royalty-free right to use,
the Intellectual Property, free and clear of all Encumbrances. There are no
pending or, to the Knowledge of the Transferors, Threatened claims against the
Company by any Person with respect to any of the items, or their use, listed in
SCHEDULE 4.19. To the Knowledge of the Transferors, no Person is infringing upon
nor has any Person misappropriated the Intellectual Property and, except as
disclosed in SCHEDULE 4.19, the Company is not infringing upon the Intellectual
Property rights of any other Person.
(b) The Company uses commercially reasonable efforts and
procedures to maintain the proprietary nature of, and owns and has the
unrestricted right to use all, trade secrets, including know-how, inventions,
designs, processes, computer software and documentation for such software and
technical data required for or incident to the development, manufacture,
operation and sale of all products and services sold or proposed to be sold by
the Company, free and clear of any Encumbrances, including, without limitation,
all claims of current and former employees, consultants, officers, directors and
shareholders.
(c) SCHEDULE 4.19 contains a complete and accurate list of all
computer software owned by the Company (the "Owned Software"). The Company has
exclusive title to the Owned Software, free and clear of all claims, including
claims or rights of employees, agents, consultants, customers, licensees or
other parties involved in the development, creation, marketing, maintenance,
enhancement or licensing of such computer software. Except as disclosed in
SCHEDULE 4.19, the Owned Software is not dependent on any Licensed Software (as
defined in paragraph (d) below) in order to fully operate in the manner in which
it is intended.
(d) SCHEDULE 4.19 contains a complete and accurate list of all
software under which the Company is a licensee, lessee or otherwise has obtained
the right to use such software (the
-22-
<PAGE> 30
"Licensed Software"). SCHEDULE 4.19 also sets forth a list of all license fees,
rents, royalties or other charges that the Company is required or obligated to
pay with respect to the Licensed Software. The Company is in full compliance
with all material provisions of any license, lease or other similar agreement
pursuant to which it has rights to use the Licensed Software and has proof of
purchase of each item of Licensed Software. Except as disclosed in SCHEDULE
4.19, none of the Licensed Software has been incorporated into or made a part of
any Owned Software or any other Licensed Software. The Company has not published
or disclosed any Licensed Software to any other party.
(e) The Owned Software and Licensed Software (collectively,
the "Company Software") constitute all software currently used in or necessary
for the conduct of the Business as currently conducted. SCHEDULE 4.19 identifies
all Contracts pursuant to which computer programming services for the Company
were performed. The Transactions will not cause a breach or default under any
license, lease or similar agreement relating to the Company Software or
materially impair the Company's ability to use the Company Software after the
Closing Date in the same manner as such computer software is currently used by
the Company. The Company is not infringing any intellectual property rights of
any other Person with respect to the Company Software, and no other Person is
infringing any intellectual property rights of the Company with respect to the
Company Software or is claiming any right, title or interest in the Company
Software or any infringement by the Company of any intellectual property right
which such other Person may possess.
(f) SCHEDULE 4.19 lists and separately identifies all
Contracts pursuant to which the Company has been granted rights to market
software owned by third parties, and lists and separately identifies all
Contracts pursuant to which the Company has granted marketing rights in the
Company Software to third parties.
(g) The Company has not taken or failed to take any actions
under the law of any applicable foreign jurisdictions where the Company has
marketed or licensed the Company Software that would restrict or limit the
ability of the Company to protect, or prevent it from protecting, its ownership
interests in, confidentiality rights of, and rights to market, license, modify
or enhance, the Company Software.
(h) All Company Software is Year 2000 Compliant. All date
processing by the Company Software will include four digit year format and
recognize and correctly process dates for leap years.
(i) No current or former employee of the Company and no other
Person owns or has any proprietary, financial or other interest, direct or
indirect, in whole or in part, and including any right to royalties or other
compensation, in any of the Intellectual Property listed on SCHEDULE 4.19, or in
any application therefor.
4.20 EMPLOYEES.
(a) SCHEDULE 4.20 contains a complete and correct list of the
names and salaries, bonus and other cash compensation of all employees and
officers of the Company, including, without limitation, all temporary, for-hire,
or outsourced employees engaged by the Company during the current calendar year.
The Company does not have any written or oral Contracts of employment with
-23-
<PAGE> 31
any employee of the Company which are not terminable "at will" without Liability
to the Company. Any and all employees of the Company are employee(s) "at will"
and the Company or any employee(s) are free to terminate the employment
relationship at any time for any reason without any Liability. All written
Contracts of employment with any employee of the Company are listed on SCHEDULE
4.17(A).
(b) Neither the execution and delivery of this Agreement nor
the consummation of the Transactions will (i) result in any payment to be made
by the Company (including, without limitation, severance, unemployment
compensation, golden parachute (as defined in Code Section 280G or otherwise))
becoming due to any employee or former employee, officer or director, or (ii)
increase or vest any benefits payable under any Benefit Plan.
(c) Any amount that could be received (whether in cash or
property or the vesting of property) as a result of any of the Transactions by
any employee, officer or director of the Company who is a "disqualified
individual" (as such term is defined in Treasury Regulation Section 1.280G-1)
under any employment, severance or termination agreement, other compensation
arrangement or Benefit Plan currently in effect would not be characterized as an
"excess parachute payment" (as such term is defined in Section 280(b)(1) of the
Code).
4.21 EMPLOYEE RELATIONS. The Company is not (a) a party to any
collective bargaining agreement, (b) a party to, involved in, Threatened by, any
labor dispute or unfair labor practice charge, or (c) currently negotiating any
collective bargaining agreement, and the Company has not experienced any work
stoppage during the last three years. The Company has not committed any unfair
labor practice.
4.22 ERISA. Except for the employee Blue Cross Blue Shield health
insurance plan, there are no Benefit Plans sponsored or maintained by the
Company or under which the Company may be obligated. The Company does not
sponsor or maintain any Benefit Plan that is intended to be qualified under
Section 401 (a) of the Code. The Company does not sponsor a defined benefit plan
subject to Title IV of ERISA, nor does the Company have a current or contingent
obligation to contribute to any multiemployer plan (as defined in Section 3(37)
of ERISA), and neither the Company nor any of its predecessors, if any, have
ever contributed to a multiemployer plan. The Company has no Liability with
respect to any employee benefit plan (as defined in Section 3(3) of ERISA).
4.23 GUARANTIES. The Company has not agreed to be a guarantor nor has
it otherwise agreed to be liable for any Liability or obligation (including
indebtedness) of any other person other than such potential Liabilities as may
exist on the Closing Date to which the Company is subject based on the acts or
omissions of its employees, subcontractors and other agents performing services
for the Company in the ordinary course of business (of which the Transferors
have no Knowledge of any claim for actual Liability therefor).
4.24 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY. Except as set
forth in SCHEDULE 4.24, neither the Transferors nor their Affiliates have been
involved in any business arrangement or relationship with the Company within the
past twelve (12) months other than service
-24-
<PAGE> 32
relationships in the ordinary course of business, and neither the Transferors
nor their Affiliates owns any material property or right, tangible or
intangible, which is used in the Business of the Company.
4.25 SYSTEMS. Except as set forth in SCHEDULE 4.25, (a) all of the
Systems services and platform servers are running, or peaking, at no higher than
95% of capacity, (b) all of the Systems' services are replicated in a redundant
manner across available platform servers, (c) the primary network hub is secure,
conforms to equipment manufacturers' recommended environmental parameters, and
contains an uninterrupted power supply with a battery back-up of at least 15
minutes, (d) the average Subscriber blockage rate for dial-in Subscribers is no
greater than 2.0% of Subscriber attempts across the overall network
infrastructure, other than local carrier access blockage not within the
Company's control, (e) the configuration diagrams provided to the Acquirer
reasonably represent the redundant network facilities between major backbone
locations, and between remote physical points of presence ("POPs") and major
network concentration points, (f) the existing power plant at the Company's main
location is equipped with an uninterrupted power supply with a battery back-up
of at least 60 minutes, (g) all deployed dial-in modem, modem shelf and
corresponding technology conform to applicable industry standards necessary to
support the proposed V90 standard, (h) all Systems owned, leased by, or licensed
to or by the Company are Year 2000 Compliant, (i) the Company utilizes an IP
address allocation scheme that conforms to industry standards, and (j) at the
Closing, the Company will have access to the quantity of IP addresses sufficient
to support the Company's Subscriber base as currently existing and as currently
contemplated to exist as of September 30, 1999.
4.26 SUBSCRIBERS. SCHEDULE 4.26 sets forth (a) a copy of each standard
form Subscriber Contract or applications for service, including electronic
versions; (b) the number of Wholesale Subscribers and Retail Subscribers served
by the Company by type of business (i.e., segregated by the following
categories, if applicable to the Company: (i) dial-up, (ii) dedicated access,
(iii) web hosting, and (iv) other businesses) as of April 30, 1999 and the
Company's standard rates for such Subscribers for each type of business; (c) for
the period commencing February 1, 1998 the Company's monthly Churn Rate
(consisting of (i) cancellations of month-to-month service and/or long-term
subscription or service Contracts prior to expiration (ii) terminations of any
such Contracts, and (iii) non-renewal of any such Contracts upon expiration) by
business type during each full calendar month prior to the date hereof; and (d)
as of April 30, 1999, detail as to the amount of prepaid subscription or service
Contracts and the amount of unearned revenue for all Subscriber Contracts with a
remaining term of (i) less than or equal to 90 days, (ii) greater than 90 days
and less than or equal to one year, (iii) greater than one year and less than or
equal to two years, (iv) greater than two years and less than or equal to three
years and (v) greater than three years. The Company has used its reasonable
commercial business efforts to maintain and currently maintains, good working
relationships with all of its Subscribers as a whole. None of such Subscribers
has given the Company notice terminating, canceling or threatening to terminate
or cancel any Contract or relationship with the Company.
4.27 PREVIOUS SALES; WARRANTIES. Except for such defects and other
breaches that would not have a Material Adverse Effect, all goods sold or
distributed and all services performed by the Company were of merchantable
quality, and the Company has not breached any express or implied warranties
offered by it in connection with the sale or distribution of such goods or
services.
-25-
<PAGE> 33
4.28 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, the
Company has conducted its Business in the ordinary course and there has not been
with respect to the Company:
(a) any change in the terms of the Subscriber Contracts,
including, without limitation, fees, terms, services, discounts, and
prepayments;
(b) any material Contract, lease, sublease, license or
sublicense (or series or related contracts, leases, subleases, licenses and
sublicenses) outside the ordinary course of business;
(c) any employment Contract or collective bargaining
agreement, written or oral, or modified the terms of any existing such Contract
or agreement with any of its full-time staff employees other than in the
ordinary course of business;
(d) a change in its Business that has had a Material Adverse
Effect;
(e) any distribution or payment declared or made in respect of
its capital stock by way of dividends, purchase or redemption of shares or
otherwise;
(f) any increase in the compensation payable or to become
payable to any director, officer, employee or agent, except for increases for
non-officer employees made in the ordinary course of business, nor any other
change in any employment or consulting arrangement;
(g) any sale, assignment or transfer of Assets, or any
additions to or transactions involving any Assets, other than those made in the
ordinary course of business;
(h) any change in its Articles of Incorporation or bylaws;
(i) any commitments or agreements on the part of the Company
to incur any Liability outside the ordinary course of business or make any
capital expenditures which in the aggregate would be in excess of $30,000 per
month, including without limitation, any Contracts to provide services or
products outside the ordinary course of business;
(j) the creation or assumption of any mortgage, pledge, or
other Encumbrance upon any of the Company's Assets;
(k) and to the Knowledge of the Transferors, a breach of a
Contract to which the Company is a party, or an amendment or termination of a
Contract or Governmental Permit to which the Company is a party;
(l) a waiver or release of any claim or right or cancellation
of any debt held; or
(m) a payment to any Affiliate of the Company other than in
the ordinary course of business.
4.29 FINDER'S FEES. No Person retained by any Transferor or the Company
is or will be entitled to any commission or finder's or similar fee in
connection with the Transactions.
-26-
<PAGE> 34
4.30 ADDITIONAL INFORMATION. SCHEDULE 4.30 accurately lists the
following:
(a) the names of all officers and directors of the Company,
all of which directors shall have tendered their resignations as directors,
effective as of the Closing;
(b) the names and addresses of every bank or other financial
institution in which the Company maintains an account (whether checking, saving
or otherwise), lock box or safe deposit box, and the account numbers and names
of Persons having signing authority or other access thereto;
(c) the names of all Persons authorized to borrow money or
incur or guarantee indebtedness on behalf of the Company;
(d) the names of any Persons holding powers of attorney from
the Company and a summary statement of the terms thereof; and
(e) all names under which the Company has conducted any
Business or which it has otherwise used at any time during the past five years.
4.31 SECURITIES MATTERS.
(a) The Transferors are experienced in evaluating and
investing in high-technology companies such as Acquirer. The Transferors are
capable of evaluating the risks and merits of their investment in Acquirer and
have the capacity to protect their own interests.
(b) The Transferors are acquiring the Acquirer Common Stock
solely for their own account and not with a view to, or for resale in connection
with, any distribution thereof, except in compliance with the Securities Act and
applicable state securities laws, and the Transferors have no present intention
of selling or distributing the Acquirer Common Stock except in compliance with
the Securities Act and applicable state securities laws. The Transferors
acknowledge that as of the date of this Agreement the Acquirer Common Stock has
not been registered under the Securities Act.
(c) The Transferors are aware of the applicable limitations
under the Securities Act relating to a subsequent sale, transfer, pledge,
mortgage, hypothecation, assignment or other encumbrance of the Acquirer Common
Stock. The Transferors further acknowledge that the Acquirer Common Stock must
be held indefinitely unless it is subsequently registered under the Securities
Act and applicable state securities laws or an exemption from such registration
is available. The Transferors are aware of the provisions of Rule 144
promulgated under the Securities Act which permits limited resale of shares
acquired in a private placement subject to the satisfaction of certain
conditions, including, among other things, the resale occurring not less than
one year after a party has purchased and paid for the security to be sold.
(d) The Transferors acknowledge that the Acquirer has provided
them with adequate access to financial and other information concerning the
Acquirer and the Acquirer Common Stock, and that the Transferors have had the
opportunity to ask questions of and receive answers from the Acquirer concerning
the Acquirer Common Stock and to obtain therefrom any
-27-
<PAGE> 35
additional information necessary to make an informed decision regarding the
acquisition of the Acquirer Common Stock.
(e) Each of the Transferors is an "accredited investor" as
that term is defined in Rule 501(a) under the Securities Act. None of the
Transferors has been organized for the specific purpose of acquiring the
Acquirer Common Stock.
(f) The Transferors will not sell, transfer, pledge, donate,
assign, mortgage, hypothecate or otherwise encumber the Acquirer Common Stock
unless the Acquirer Common Stock is registered under the Securities Act or the
Acquirer is given an opinion of counsel (which may be an opinion of counsel to
the Acquirer), reasonably acceptable to the Acquirer, that such registration is
not required under the Securities Act.
(g) The Transferors realize that the Acquirer is relying on
the validity of the Transferors' representations and agreements contained herein
and in the other Transaction Documents in issuing the Acquirer Common Stock to
the Transferors without registration under the Securities Act.
4.32 TRUSTS.
(a) The Steven Trust was duly created under the Laws of the
State of Illinois pursuant to that certain Declaration of Trust dated as of May
20, 1999, by and between Andrea DeMar, as Grantor, and Lawrence E. DeMar, in his
fiduciary capacity as Trustee. The Larry Trust was duly created under the Laws
of the State of Illinois pursuant to that certain Declaration of Trust dated as
of June 8, 1999, by and between Lawrence E. DeMar, as Grantor, and North Star
Trust Company, Chicago, Illinois in its fiduciary capacity as Trustee.
(b) Lawrence E. DeMar is now acting as the Trustee of the
Steven Trust (the "Steven Trustee"), having been duly appointed as Trustee in
accordance with the terms of the Steven Trust and the Laws of the State of
Illinois. North Star Trust Company is now acting as the Trustee of the Larry
Trust (the "Larry Trustee"), having been duly appointed as Trustee in accordance
with the terms of the Larry Trust and the Laws of the State of Illinois.
(c) The Steven Trustee is duly authorized by the Steven Trust
to consent to the Transaction and has the right, power, legal capacity, and
authority to enter into this Agreement on behalf of the Steven Trust. The Larry
Trustee is duly authorized by the Larry Trust to consent to the Transaction and
has the right, power, legal capacity, and authority to enter into this Agreement
on behalf of the Larry Trust.
(d) The Steven Trustee and the Larry Trustee hereby consent to
the Transaction.
(e) The assets of the Steven Trust are more than sufficient
for the payment in full of all of the expenses for administering the Steven
Trust, all taxes for which the Steven Trust is liable, and any other liabilities
of the Steven Trust. The assets of the Larry Trust are more than sufficient for
the payment in full of all of the expenses for administering the Larry Trust,
all taxes for which the Larry Trust is liable, and any other liabilities of the
Larry Trust.
-28-
<PAGE> 36
4.33 ACCURACY OF INFORMATION. No representation or warranty by any
Transferor in any Transaction Document, and no information contained herein or
therein or in any document delivered pursuant hereto or thereto, including the
Company Financial Statements and the Schedules hereto, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements contained herein or therein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER.
The Acquirer hereby represents and warrants to the Transferors as
follows:
5.1 CORPORATE. The Acquirer is a corporation duly organized, validly
existing and in good standing under the Laws of the jurisdiction of its
incorporation.
5.2 AUTHORIZATION. The Acquirer has the requisite power and authority
to execute and deliver the Transaction Documents to which it is a Party and to
perform the Transactions performed or to be performed by it. Such execution,
delivery and performance by the Acquirer has been duly authorized by all
necessary corporate action. The Acquirer has duly executed and delivered this
Agreement and each Transaction Document to which the Acquirer is a party and
this Agreement and each Transaction Document constitutes a valid and binding
obligation of the Acquirer, enforceable against the Acquirer in accordance with
its terms; except to the extent that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting the rights of creditors generally or contrary to public
policy, except as enforcement hereof is subject to general principles of equity
(regardless of whether such enforcement is considered in a proceeding at law or
in equity), and except to the extent that provisions indemnifying a Party
against Liability for his, her or its own wrongful or negligent acts may be
unenforceable.
5.3 CONSENTS AND APPROVALS. Neither the execution and delivery by the
Acquirer of the Transaction Documents to which it is a Party, nor the
performance of the Transactions by the Acquirer, will require any Consent, or
constitute a Default or cause any payment obligation to arise under (a) any Law
or Court Order to which the Acquirer is subject, (b) the Charter Documents or
bylaws of the Acquirer or (c) any Contract, Governmental Permit or other
document to which the Acquirer is a party or by which the properties or other
Assets of the Acquirer may be subject.
5.4 CAPITALIZATION AND STOCK OWNERSHIP. The total authorized capital
stock of the Acquirer consists of 100,000,000 shares of Common Stock, $0.001 par
value, no shares of which are issued and outstanding as of June 7, 1999. When
issued at the Closing, all issued and outstanding shares of Common Stock of the
Acquirer will be duly authorized, validly issued, fully paid and non-assessable.
5.5 LEGAL PROCEEDINGS. There is no Litigation that is pending or, to
the Acquirer's Knowledge, Threatened against the Acquirer, except where such
Litigation is not expected to have a Material Adverse Effect. There has been no
Default by the Acquirer under any Laws applicable to the Acquirer, and the
Acquirer has not received any notices from any governmental entity regarding any
alleged Defaults under any Laws. There has been no Default with respect to any
Court Order applicable to the Acquirer.
-29-
<PAGE> 37
5.6 FINDER'S FEES. Acquirer shall pay at the Closing all commissions,
finder's or similar fees in connection with the Transactions for any Person
retained by the Acquirer in such capacity.
5.7 SECTION 351. Immediately after the Closing, the Transferors,
together with (a) the Transferors of all Businesses acquired by the Acquirer in
connection with the IPO, (b) all of the purchasers of the Acquirer's Common
Stock in the IPO, and (c) all other Transferors of the Property to the Acquirer
in exchange for the Acquirer Common Stock in connection with the IPO, shall
possess at least eighty (80%) percent of the total combined voting power of all
classes of Acquirer Common Stock entitled to vote and at least eighty (80%)
percent of the total number of shares of all other classes of stock of the
Acquirer.
6. TAXES.
The following provisions shall govern the allocation of
responsibility for certain Tax matters following the Closing Date:
6.1 TRANSFERORS TAX PREPARATION. The Transferors shall prepare or cause
to be prepared and file or cause to be filed, within the time and in the manner
provided by law, all Tax Returns of the Company for all periods ending on or
before the Closing Date that are due after the Closing Date, including all
necessary short period or interim federal and state Tax returns. Transferors
shall pay on or before the due date of such Tax Returns the amount of all Taxes
shown as due on such Tax Returns. Such Tax Returns shall be prepared and filed
in accordance with applicable law and in a manner consistent with past practices
and shall be subject to review and reasonable approval by the Acquirer. To the
extent reasonably requested by the Transferors or required by law, the Acquirer
and the Company shall participate in the filing of any Tax Returns filed
pursuant to this paragraph.
6.2 TAX PREPARATION. The Company shall prepare or cause to be prepared
and file or cause to be filed any Tax Returns for Tax periods which begin on the
Closing Date and end after the Closing Date.
6.3 COOPERATION ON TAX MATTERS. The Acquirer and the Company on one
hand and the Transferors on the other hand shall (a) cooperate fully, as
reasonably requested, in connection with the preparation and filing of Tax
Returns pursuant to this Section 6 and any audit, litigation or other proceeding
with respect to Taxes; (b) make available to the other, as reasonably requested,
all information, records or documents with respect to Tax matters pertinent to
the Company for all periods ending prior to or including the Closing Date; and
(c) preserve information, records or documents relating to Tax matters pertinent
to the Company that is in their possession or under their control until the
expiration of any applicable statute of limitations or extensions thereof.
6.4 MISCELLANEOUS TAX OBLIGATIONS. The Transferors shall timely pay all
transfer, documentary, sales, use, stamp, registration and other Taxes and fees
arising from or relating to the Transactions, and the Transferors shall, at
their own expense, file all necessary Tax Returns and other documentation with
respect to all such transfer, documentary, sales, use, stamp, registration, and
other Taxes and fees. If required by applicable law, the Acquirer and the
Company will join in the execution of any such Tax Returns and other
documentation.
-30-
<PAGE> 38
7. COVENANTS OF THE COMPANY AND THE TRANSFERORS.
7.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date, the
Transferors shall pay the expenses incurred by them in connection with the
Transactions, including any amounts that may be due from the Transferors to
their lawyers, accountants, consultants, investment bankers, brokers, finders,
and other advisors.
7.2 OPERATION OF BUSINESS PRIOR TO THE CLOSING. Except as contemplated
hereby and elsewhere in this Agreement, or as may be incidental to or in
furtherance of the Transactions, or as may have been set forth herein or in the
Schedules, the Company will not (and the Transferors will not cause or permit
the Company to) engage in any practice, take any action, embark on any course of
inaction, or enter into any transaction outside the ordinary course of business.
Without limiting the generality of the foregoing, from the date hereof to the
Closing:
(a) the Company will not adopt or propose any change in its
articles of incorporation or bylaws;
(b) the Company will not merge or consolidate with any other
Person or acquire a material amount of Assets of any other Person without the
written permission of the Acquirer;
(c) the Company will not sell, lease, license or otherwise
dispose of any material Assets or property except (i) pursuant to existing
Contracts or commitments, (ii) in the ordinary course of business, and (iii) as
consented to in writing by the Acquirer;
(d) except as otherwise provided for in this Agreement, the
Company will not issue, sell, purchase, repurchase, redeem or otherwise acquire
any Company securities;
(e) except with the prior written consent of the Acquirer, the
Company shall not make any Tax election that would have a Material Adverse
Effect on the Company;
(f) the Company and the Transferors will timely file all Tax
Returns due on or before the Closing Date and pay (or reserve for) all Taxes due
and payable with respect to those periods;
(g) the Company and the Transferors will not revoke the
Company's election to be taxed as an S corporation within the meaning of
Sections 1361 and 1362 of the Code;
(h) the Company and the Transferors will not take or allow any
action, other than the transfer of the Company Shares pursuant to this
Agreement, that would result in the termination of the Company's status as a
validly electing S corporation within the meaning of Sections 1361 and 1362 of
the Code;
(i) the Company will not do any of the items described in
Section 4.28; and
(j) the Company will not agree or commit to do any of the
foregoing.
-31-
<PAGE> 39
7.3 PRESERVATION OF BUSINESS. Except as contemplated hereby, or as may
be incidental to or in furtherance of the Transactions, or as may have been set
forth herein or in the Schedules, the Transferors will cause the Company to use
reasonable commercial efforts to keep its Business and properties substantially
intact, including its present operations, physical facilities, working
conditions, and relationships with lessors, licensors, suppliers, Subscribers,
any other customers, and employees.
7.4 ACCESS.
(a) Only in the event that neither the Acquirer nor the
Transferors exercise their right to terminate this Agreement as provided in
Section 15 herein, the Transferors will cause the Company to permit the
Acquirer's representatives access at reasonable times, and in a manner so as not
to interfere with the normal Business operations of the Company, to the
headquarters of the Company and to all books, records, Contracts, Tax records,
and documents of or pertaining to the Company; provided, however, that the
Acquirer shall direct all requests for information and material only through the
Transferors' Representative, unless otherwise agreed to by the Acquirer and the
Transferors' Representative in writing.
(b) The Acquirer shall proceed to arrange with the Transferors
a mutually agreeable time and place at which the Acquirer may conduct interviews
with key employees and/or customers of the Company mutually agreed to by the
Acquirer and the Transferors' Representative.
7.5 NOTICE OF DEVELOPMENTS. Any of the Transferors or Transferors'
Representative will give prompt written notice to the Acquirer after the Company
or any of the Transferors obtains Knowledge of any material development
affecting the Assets, Liabilities, Business, financial condition, operations, or
results of operations of the Company including but not limited to (a) any
development affecting the ability of the Company to consummate the Transactions,
(b) any Outage affecting more than 1% of all Subscribers lasting for 3 hours
more (c) any loss of any material Subscriber or any material equipment or other
supplier to the Company or (d) any event which causes a representation, warranty
or covenant to become untrue. A disclosure by any Party pursuant to this Section
7.5 shall be deemed to amend or supplement the representations, warranties,
covenants or Schedules but not to prevent or cure any misrepresentation, breach
of warranty, and/or breach of covenant which was not true when made.
7.6 EXCLUSIVITY. Through the Closing Date, only in the event that
neither the Acquirer nor the Transferors exercise their right to terminate this
Agreement as provided in Section 15 herein, Transferors will not (and the
Transferors will not cause or permit the Company to) (a) solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
any (i) liquidation, dissolution, or recapitalization, (ii) share exchange or
consolidation, (iii) acquisition or purchase of securities or Assets or (iv)
similar transaction or business combination involving the acquisition of the
Company, or (b) participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner any effort or attempt by any Person to do or seek any of the
foregoing. The Transferors will notify the Acquirer immediately if any entity or
person makes any such proposal, offer, inquiry, or contact with respect to any
of the foregoing and shall provide the identity of such entity or Person as well
as any other relevant details regarding the contact.
-32-
<PAGE> 40
7.7 [RESERVED]
7.8 AUDITS. Prior to the Closing and at Acquirer's expense, the
Transferors shall use their commercially reasonable efforts to cooperate with
Acquirer's Independent Public Accountant in their preparation of an unqualified
and unmodified audit report, without limitation as to the scope of the audit, on
the Company Financial Statements of the Company as of December 31, 1998,
December 31, 1997 and December 31, 1996. The Transferors and any of the officers
or directors of the Company, in their capacities as officers and directors of
the Company, shall provide all management letters, reports or representations
reasonably requested by such auditors in connection with such audits, and in
connection with audits of the Company for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996.
7.9 DUE DILIGENCE. The Company covenants that within 5 days of the date
hereof, it will provide the Acquirer with substantial due diligence material
concerning the Company, and the Acquirer covenants that within 21 days of the
receipt of such due diligence material to either (i) request further due
diligence material from the Company, which request will begin the time period
response and review provisions of this Section 7.9 anew; or (ii) notify the
Company of its intention whether or not to terminate this Agreement; provided,
however, that termination pursuant to this Section 7.9 will not be deemed a
breach of this Agreement. Notwithstanding anything in this Section 7.9 to the
contrary, the due diligence period shall terminate 30 days after the date of the
Agreement.
7.10 SCHEDULES. The Transferors covenant that within 14 days of the
date hereof, it will provide the Acquirer with completed Schedules as required
by this Agreement, and the Acquirer covenants that within 21 days of the receipt
of such Schedules to either (i) request additions, revisions and/or deletions
from such Schedules, which additions, revisions and/or deletions shall be made
by the Transferors within 3 days of receipt of Acquirer's request, provided that
if Transferors elect not to make the requested additions, revisions and/or
deletions, the Acquirer make elect to terminate this Agreement and notify the
Transferors in writing, or (ii) notify the Company in writing of its intention
not to terminate this Agreement thereby accepting and confirming that none of
the information as it is set forth in the Schedules constitute a breach of this
Agreement. Notwithstanding anything in this Section 7.10 to the contrary, all
actions required to be taken by each party shall be taken within 35 business
days after the date of this agreement, and if not so taken, this Agreement will
automatically terminate; provided, however, that termination pursuant to this
Section 7.10 will not be deemed a breach of this Agreement.
8. COVENANTS OF THE ACQUIRER.
8.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date, the
Acquirer shall pay the expenses incurred by it in connection with the
Transactions, including any amounts that may be due from the Acquirer to its
lawyers, accountants, consultants, investment bankers, brokers, finders, and
other advisors, or in connection with the registration and issuance of the
Acquirer Stock.
8.2 TAX-FREE EXCHANGE. The Parties agree that this transaction will
occur in conjunction with the Related Transactions, and the Parties intend that
the receipt of the Acquirer Common Stock
-33-
<PAGE> 41
by the Transferors and by the parties involved in the Related Transactions will
be tax-free under Section 351 of the Code.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER.
All obligations of the Acquirer to consummate the Transactions are
subject to the satisfaction (or waiver by the Acquirer) prior thereto of each of
the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All of
the representations and warranties of the Transferors and the Company contained
in this Agreement shall be true, correct and complete in all material respects
on and as of the Closing Date or such other date specified with the same effect
as though such representations and warranties had been made on and as of such
date; all of the terms, covenants, agreements and conditions of this Agreement
to be complied with, performed or satisfied by the Company and the Transferors
on or before the Closing Date shall have been duly complied with, performed or
satisfied; and the Acquirer shall have received a Transferors' certificate and
an officer's certificate, each dated the Closing Date, signed by each Transferor
and an officer of the Company, respectively, to the foregoing effects.
9.2 NO LITIGATION. No Litigation shall have been instituted or
Threatened to restrain or prohibit the Transactions, or limiting or restricting
the Acquirer's conduct or operation of the Business of the Company (or its own
Business) following the Closing. There shall be no Litigation of any nature
pending or Threatened against the Acquirer or the Company, their respective
properties or any of their officers or directors, that could have a Material
Adverse Effect on the Business, Assets, Liabilities, financial condition,
results of operations or prospects of the Company or the Acquirer.
9.3 NO MATERIAL ADVERSE CHANGE. There shall have been no changes in the
Business, operations, affairs, prospects, properties, Assets, existing and
potential Liabilities, obligations, profits or condition (financial or
otherwise) of the Company since the Balance Sheet Date which, taken as a whole,
has a Material Adverse Effect on the Business, Assets, Liabilities, financial
condition, results of operations of the Company; and the Acquirer shall have
received a certificate, dated the Closing Date, signed by each Transferor and an
officer of the Company to such effect.
9.4 DUE DILIGENCE REVIEW COMPLETE. The Acquirer shall be fully
satisfied, in its sole discretion, with the results of its due diligence review
of the Company and the Transferors, including the Acquirer's review of, and
other due diligence investigations with respect to, the Business, operations,
affairs, properties, Assets, existing and potential Liabilities, obligations,
profits and condition (financial and otherwise) of the Company within 35 days of
the date of this Agreement.
9.5 CONSENTS AND APPROVALS. All Consents relating to the consummation
of the Transactions by the Company and the Transferors shall have been obtained.
9.6 FINANCIAL STATEMENTS. The Acquirer shall have received the Company
Financial Statements and such Company Financial Statements must, in the
reasonable opinion of Acquirer's Independent Public Accountants, be suitable or
readily adaptable for incorporation in the Registration Statement, and any
prospectus and annual and periodic reports to be filed by the Acquirer with the
-34-
<PAGE> 42
SEC relating to the IPO, which determination as to suitability must be made
within 35 days of the date of this Agreement.
9.7 IPO. The Registration Statement filed by the Acquirer with the SEC
in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
9.8 DOCUMENTS TO BE DELIVERED BY THE TRANSFERORS. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Company and the
Transferors:
(a) Officers/Transferors Certificate. An Officers/Transferors
Certificate substantially in the form of the certificate attached as EXHIBIT A
hereto.
(b) Secretary's Certificate. A Secretary's Certificate, dated
as of the Closing Date, substantially in the form of the certificate attached as
EXHIBIT B hereto, signed by the Secretary of the Company in which the Secretary
certifies that the following documents are attached to such certificate: (a) the
Articles of Incorporation of the Company, certified by the Secretary of State of
the State of Illinois as of a date in close proximity to the Closing Date; (b) a
correct and complete copy of the bylaws of the Company; (c) a certificate of
good standing for the Company issued by the Secretary of State of the State of
Illinois on a date in close proximity to the Closing Date; (d) complete and
correct copies of all resolutions of the Board of Directors of the Company; (e)
complete and correct copies of resolutions of the Transferors approving the
Transactions; and (f) original signatures of the incumbent officers of the
Company next to their respective titles.
(c) Trustee Certificates. A notarized Trust Certificate for
each of the Steven Trust and the Larry Trust, in the form and substance set
forth as EXHIBIT L attached hereto, in which the Notary certifies that the
provisions contained in the Certificate (which evidence the trustee's authority
to enter into the transaction contemplated herein) are true and correct copies
of such provisions in the respective trust agreement.
(d) Tax Clearance Certificate. A Tax Clearance Certificate of
the Company, certified by the Secretary of State of the State of Illinois as of
a date in close proximity to the Closing Date.
(e) Resignations. The resignations, effective as of the
Closing, of each officer and director of the Company.
(f) Company Shares. Certificates of the Company Shares, duly
endorsed in blank or accompanied by duly executed assignment documents by the
respective Transferors, representing one hundred percent (100%) of the issued
and outstanding capital stock of the Company and all of such Company Shares
shall be free and clear of any Encumbrances of any nature whatsoever.
(g) Escrow Agreement. An Escrow Agreement in the form and
substance set forth as EXHIBIT C attached hereto.
-35-
<PAGE> 43
(h) Opinion of Transferors' Counsel. An opinion from Katz,
Randall & Weinberg, Chicago, Illinois, dated the Closing Date, in the form and
substance set forth as EXHIBIT D attached hereto.
(i) Employment Agreements. An Employment Agreement for each of
Steven DeMar and Janet Rogers in the form and substance attached hereto as
EXHIBIT F.
(j) Subscription Agreement Joinder. A joinder to the Equity
Subscription Agreement for each of the Transferors in the form of EXHIBIT I
hereto.
(k) Registration Agreement Joinder. A joinder to the
Registration Agreement for each of the Transferors in the form and substance set
forth as EXHIBIT J attached hereto.
(l) Ancillary Documents. Any other Transaction Documents to
which they are a Party.
9.9 [RESERVED]
9.10 FINANCIAL CONDITION. Each of the following shall be true and
complete as of the Closing Date:
(a) The Company shall use its best efforts to ensure the
release within a reasonable time after Closing, of all Encumbrances securing
debts of the Company which have been paid in full prior to or at the Closing and
all Uniform Commercial Code financing statements covering such paid debts shall
be terminated within such reasonable time;
(b) no unsatisfied liens for the failure to pay Taxes of any
nature whatsoever shall exist against the Company, or against or in any way
affecting any Company Share; and
(c) the Transferors' Representative and the Company shall have
caused all of the Company's officers, directors and/or key employees of the
Company to have repaid in full all debts and other obligations, if any, owed to
the Company.
9.11 SCHEDULES. Within 35 business days from the date of this
Agreement, the Acquirer shall have received, and approved in writing the
Schedules required by this Agreement.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFERORS.
All obligations of the Company and the Transferors to consummate the
Transactions are subject to the satisfaction (or waiver by the Transferors to
which the condition relates) prior thereto of each of the following conditions:
10.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All of
the representations and warranties of the Acquirer contained in this Agreement
shall be true, correct and complete in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date; all of the terms, covenants,
-36-
<PAGE> 44
agreements and conditions of this Agreement to be complied with, performed or
satisfied by the Acquirer on or before the Closing Date shall have been duly
complied with, performed or satisfied; and the Company and Transferors shall
have received a certificate, dated the Closing Date, signed by an officer of the
Acquirer to the foregoing effects.
10.2 NO LITIGATION. No Litigation shall have been instituted or
Threatened to restrain or prohibit the Transactions.
10.3 CONSENTS AND APPROVALS. All Consents relating to the consummation
of the Transactions by the Acquirer shall have been obtained.
10.4 WEBTV CONTRACT. The Contract between WebTV and the Company, dated
July 17, 1997 (the "WebTV Contract"), shall be in full force and effect and the
Company shall not have received any written communication from WebTV exercising
WebTV's rights to cancel the WebTV Contract.
10.5 RECEIPT OF ACQUIRER'S SHARES AND CASH PORTION OF THE TRANSFER
CONSIDERATION. The Transferors shall receive the Cash Portion of the Transfer
Consideration. The Transferors shall receive the Acquirer Common Stock
representing the Stock Portion of the Transfer Consideration within seven (7)
business days after the Closing.
10.6 DOCUMENTS TO BE DELIVERED BY THE ACQUIRER. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Acquirer and
immediately made available for inspection by the Transferors' Representative:
(a) Officer's Certificate. An Officers Certificate
substantially in the form of the certificate attached as EXHIBIT G hereto.
(b) Secretary's Certificate. A Secretary's Certificate, dated
as of the Closing Date, substantially in the form of the certificate attached as
EXHIBIT H hereto, signed by the Secretary of the Acquirer in which the Secretary
certifies that the following documents are attached to such certificate: (a) the
Certificate of Incorporation of the Acquirer, certified by the Secretary of
State of the State of Delaware as of a date in close proximity to the Closing
Date; (b) a correct and complete copy of the bylaws of the Company; (c) a
certificate of good standing for the Acquirer issued by the Secretary of State
of the State of Delaware on a date in close proximity to the Closing Date; (d)
complete and correct copies of all resolutions of the Board of Directors of the
Acquirer; (e) complete and correct copies of resolutions of the Acquirer
approving the Transactions; and (f) original signatures of the incumbent
officers of the Acquirer next to their respective titles.
(c) Escrow Agreement. An Escrow Agreement in the form and
substance set forth as EXHIBIT C attached hereto.
(d) Employment Agreements. An Employment Agreement for each of
Steven DeMar and Janet Rogers in the form and substance attached hereto as
EXHIBIT F.
-37-
<PAGE> 45
(e) Subscription Agreement Joinder. A joinder to the Equity
Subscription Agreement for each of the Transferors in the form of EXHIBIT I
hereto.
(f) Registration Agreement Joinder. A joinder to the
Registration Agreement for each of the Transferors in the form and substance set
forth as EXHIBIT J attached hereto.
(g) Ancillary Documents. Any other Transaction Documents to
which they are a Party.
10.7 IPO. The Registration Statement filed by the Acquirer with the SEC
in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
11. POST-CLOSING COVENANTS.
11.1 GENERAL. In case at any time after the Closing any further action
is necessary or desirable to carry out the purposes of this Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Section 12
below). The Transferors acknowledge and agree that, from and after the Closing,
the Acquirer and/or Company will be entitled to possession of all documents,
books, records, agreements, and financial data of any sort relating to the
Company; provided, however, that the Transferors may retain any copies of the
foregoing as shall be necessary to comply with applicable Tax and other Laws,
regulations and ordinances.
11.2 TRANSITION. Except as set forth on SCHEDULE 11.2, the Transferors
will not take any action that primarily is designed or intended to have the
effect of discouraging any lessor, licensor, Subscriber, supplier, or other
business associate of the Company from maintaining the same business
relationships with the Company after the Closing for a period of twenty-four
(24) months thereafter as it maintained with the Company prior to the Closing.
11.3 RESTRICTIONS ON TRANSFER OF ACQUIRER COMMON STOCK. The Transferors
shall not directly or indirectly, sell, transfer any beneficial interest in,
pledge, hypothecate or otherwise dispose, or offer to sell, transfer any
beneficial interest in, pledge, hypothecate or otherwise dispose (collectively
"Transfer"), any shares of Acquirer Common Stock constituting the Stock Portion
of the Transfer Consideration during the 12-month period following the Closing
Date. The Transferors shall not, individually or in the aggregate, Transfer more
than twenty-five percent (25%) of the shares of Acquirer Common Stock issued as
part of the Stock Portion of the Transfer Consideration on the Closing Date
during any calendar quarter following the one-year anniversary of the Closing
Date. However, notwithstanding anything in this Section 11.3 to the contrary, in
the event that any other Person contributing stock or assets to the Acquirer in
connection with the Related Transactions in exchange for Acquirer Common Stock
is permitted to Transfer the Stock Portion of Transfer Consideration received by
such Person sooner than set forth above, then the Acquirer shall notify the
Transferors, and the Transferors shall be permitted to Transfer their stock at
such earlier times.
-38-
<PAGE> 46
11.4 NO. 338 ELECTION. No election under Section 338 of the Code shall
be made with respect to the Company.
12. INDEMNIFICATION.
12.1 BY THE TRANSFERORS. From and after the Closing Date, to the extent
provided in this Section 12, each of the Transferors shall, jointly and
severally, indemnify and hold harmless the Acquirer and the Company, and its
successors and assigns, and its officers and directors (each, an "Indemnified
Party") from and against any Liabilities, claims, demands, judgments, losses,
costs, damages or expenses whatsoever (including attorneys', consultants' and
other professional fees and disbursements of every kind, nature and description
incurred by such Indemnified Party in connection therewith) (collectively,
"Damages") that such Indemnified Party may sustain, suffer or incur and that
result from, arise out of or relate to (a) any breach of any representation,
warranty, covenant or agreement of the Transferors or the Company contained in
this Agreement, whether or not involving a third-party claim, or (b) any
Litigation affecting the Company that arose from any matter or state of facts
existing prior to the Closing, regardless of whether it is disclosed in the
Schedules to this Agreement.
12.2 BY THE ACQUIRER. From and after the Closing Date, to the extent
provided in this Section 12, the Acquirer shall indemnify and hold harmless the
Transferors, their heirs, legal representatives, successors and assigns (each,
an "Indemnified Party") from and against any Damages that such Indemnified Party
may sustain, suffer or incur and that result from, arise out of or relate to any
breach of any representation, warranty, covenant or agreement of the Acquirer
contained in this Agreement, whether or not involving a third-party claim.
12.3 PROCEDURE FOR CLAIMS.
(a) An Indemnified Party that desires to seek indemnification
under any part of this Section 12 shall give notice (a "Claim Notice") to each
Party responsible or alleged to be responsible for indemnification hereunder (an
"Indemnitor") prior to any applicable Expiration Date specified below. Such
notice shall briefly explain the nature of the claim and shall specify the
amount thereof. If the matter to which a claim relates shall not have been
resolved as of the date of the Claim Notice, the Indemnified Party shall
estimate the amount of the claim in the Claim Notice, but also specify therein
that the claim has not yet been liquidated (an "Unliquidated Claim"). If an
Indemnified Party gives a Claim Notice for an Unliquidated Claim, the
Indemnified Party shall also give a second Claim Notice (the "Liquidated Claim
Notice") within 60 days after the matter giving rise to the claim becomes
finally resolved, and the Second Claim Notice shall specify the amount of the
claim. Each Indemnitor to which a Claim Notice is given shall respond to any
Indemnified Party that has given a Claim Notice (a "Claim Response") within 20
days (the "Response Period") after the later of (i) the date that the Claim
Notice is given or (ii) if a Claim Notice is first given with respect to an
Unliquidated Claim, the date on which the Liquidated Claim Notice is given. Any
Claim Notice or Claim Response shall be given in accordance with the notice
requirements hereunder, and any Claim Response shall specify whether or not the
Indemnitor giving the Claim Response disputes the claim described in the Claim
Notice. If any Indemnitor fails to give a Claim Response within the Response
Period, such Indemnitor shall be deemed not to dispute the claim described in
the related Claim Notice. If any Indemnitor elects not to dispute a claim
described in a Claim Notice, whether by failing
-39-
<PAGE> 47
to give a timely Claim Response or otherwise, then the amount of such claim
shall be conclusively deemed to be an obligation of such Indemnitor.
(b) If any Indemnitor shall be obligated to indemnify an
Indemnified Party hereunder, such Indemnitor shall pay to such Indemnified Party
within 30 days after the last day of the Response Period the amount to which
such Indemnified Party shall be entitled. If the Acquirer shall be the
Indemnified Party, it shall first seek payment of the Damages under the Escrow
Agreement, but only to the extent that Escrow Funds are then being held by the
Escrow Agent and are not subject to other claims for indemnification. To the
extent that the Escrow Funds are unavailable or insufficient to cover the
Damages, the Acquirer shall seek indemnification directly from the Transferors,
jointly and severally, for the payment of any remaining Damages. If a Transferor
shall be the Indemnified Party, he, she or it shall seek indemnification
directly from the Acquirer. If there shall be a dispute as to the amount or
manner of indemnification under this Section 12, the Indemnified Party shall
seek arbitration under Section 13 to the extent that the Indemnified Party seeks
to recover Damages from any Indemnitor. If any Indemnified Party fails to
receive all or part of any indemnification obligation when due, then such
Indemnified Party shall also be entitled to receive from the applicable
Indemnitor or the Escrow Agent, if applicable, interest on the unpaid amount for
each day during which the obligation remains unpaid at an annual rate equal to
the applicable short term federal rate for federal income Tax purposes in effect
on the date of expiration of said 30-day period ("Prime Rate"), and the Prime
Rate in effect on the first business day of each calendar quarter shall apply to
the amount of the unpaid obligation during such calendar quarter.
(c) Notwithstanding any other provision of this Section 12,
(i) an Indemnified Party shall be entitled to indemnification hereunder only
when the aggregate of all Damages to such Indemnified Party exceeds $25,000.00
(the "Deductible Amount") and then such Indemnified Party shall be entitled to
indemnification for its Damages in excess of the Deductible Amount and (ii) no
Indemnitor as a group shall be liable under this Section 12 for any amount in
excess of $6,000,000.00, except that any Damages based on a breach of
representations and warranties with respect to Tax matters or Litigation matters
shall not be counted against or subject to such maximum limitation. In addition,
the limitations of this paragraph (c), however, shall not apply to (x) the
Company's or Transferors' representations and warranties in Section 4.2, 4.4,
4.5, 4.8, 4.15, 4.16 or Section 6, (y) damages arising out of common law fraud
in connection with the Transactions or (z) any covenants or agreements to be
performed after Closing.
(d) If the existence of an obligation for the payment of money
to a third party (other than fines or other payments to any governmental entity
that relate to matters that affect the ongoing operation of the Business to
which the fines or other payments relate) causes any representation or warranty
of an Indemnitor in this Agreement to be untrue, then, if such Indemnitor
satisfies such obligation to such third party in full, such Indemnitor shall not
be required to indemnify any Indemnified Party for any Damages resulting from
such breach of the representation or warranty.
12.4 CLAIMS PERIOD. Any claim for indemnification under this Section 12
shall be made by giving a Claim Notice under Section 12.3 on or before the
applicable "Expiration Date" specified below in this Section 12.4, or the claim
under this Section 12 shall be invalid. The following claims shall have the
following respective "Expiration Dates": (a) the first anniversary of the
Closing Date--any claims that are not specified in any of the succeeding
clauses; (b) the date on which the applicable
-40-
<PAGE> 48
statute of limitations expires--any claim for Damages related to a breach of any
representations or warranties in Sections 4.2, 4.5, 4.15, or Section 6; and (c)
indefinitely--any claim for Damages related to (i) a breach of any
representations or warranties in Sections 4.4, 4.8 and 4.16 and (ii) a breach of
any representation or warranty that was untrue when made with an intent to
mislead or defraud. If more than one of such Expiration Dates applies to a
particular claim, the latest of such Expiration Dates shall be the controlling
Expiration Date for such claim. So long as an Indemnified Party in good faith
gives a Claim Notice for an Unliquidated Claim on or before the applicable
Expiration Date, such Indemnified Party shall be entitled to pursue its rights
to indemnification regardless of the date on which such Indemnified Party gives
the related Liquidated Claim Notice.
12.5 THIRD PARTY CLAIMS. An Indemnified Party that desires to seek
indemnification under any part of this Section 12 with respect to any actions,
suits or other administrative or judicial proceedings (each, an "Action") that
may be instituted by a third party shall give each Indemnitor prompt notice of a
third party's institution of such Action. After such notice, any Indemnitor may,
or if so requested by such Indemnified Party, any Indemnitor shall, participate
in such Action or assume the defense thereof, with counsel satisfactory to such
Indemnified Party; provided, however, that such Indemnified Party shall have the
right to participate at its own expense in the defense of such Action; and
provided, further, that the Indemnitor shall not consent to the entry of any
judgment or enter into any settlement, except with the written consent of such
Indemnified Party (which consent shall not be unreasonably withheld), that (a)
fails to include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all Liability in respect
of any such Action or (b) grants the claimant or plaintiff any injunctive relief
against the Indemnified Party. Any failure to give prompt notice under this
Section 12.5 shall not bar an Indemnified Party's right to claim indemnification
under this Section 12, except to the extent that an Indemnitor shall have been
harmed by such failure.
12.6 LIMITATION ON INDEMNIFICATION.
(a) Notwithstanding any provision of this Agreement to the
contrary:
(i) Attorney, consultant and other professional fees
and disbursements incurred by an Indemnified Party in connection with
this Section 12 shall be based only on time actually spent which shall
be charged at no more than such professional's standard hourly rate,
and only one law firm, accounting firm and other professional firm
shall be paid on any claim regardless of the number of Indemnified
Parties involved in such claim.
(ii) The amount of any costs, expenses and other
disbursements incurred by any Indemnified Party in connection with this
Section 12 shall be only the actual out-of-pocket amounts actually paid
by such Indemnified Party.
13. DISPUTE RESOLUTION.
13.1 GOOD-FAITH NEGOTIATIONS. If after the Closing any dispute arises
under Section 12 with respect to a claim for Damages or with respect to a
Disputed Amount that is not settled promptly in the ordinary course of business,
the Parties shall seek to resolve any such dispute between them, first, by
negotiating promptly with each other in good faith in face-to-face negotiations.
If the
-41-
<PAGE> 49
Parties are unable to resolve such dispute between them within twenty (20)
business days (or such period as the Parties shall otherwise agree) through
these face-to-face negotiations, then any such dispute shall be resolved in the
manner set forth in Section 13.2.
13.2 ARBITRATION. If the Parties do not resolve a dispute under Section
13.1, the dispute shall be settled by arbitration conducted on a confidential
basis, under the U.S. Arbitration Act, if applicable, and the then current
Commercial Arbitration Rules of the American Arbitration Association (the
"Association") strictly in accordance with the terms of this Agreement and the
substantive law of the State of New York. The arbitration shall be conducted at
the Association's regional office located in the New York, New York area by
three arbitrators, at least one of whom shall be knowledgeable regarding
businesses engaged in providing services via the Internet, one of whom shall be
an attorney and one of whom shall be a member of a "Big Five" accounting firm
familiar with Businesses engaged in providing services via the Internet.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither Party shall institute a proceeding hereunder
unless at least 60 days prior thereto such Party shall have given written notice
to the other Party of its intent to do so. In any award, the arbitrators shall
assess the arbitration costs and expenses, including attorneys fees of the
Parties, in a manner deemed equitable by the arbitrators, taking into account
the arbitration decision.
13.3 WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT, WHICH HAS NOT BEEN RESOLVED BY NEGOTIATION AS
PROVIDED HEREIN AND AS TO WHICH LEGAL ACTION NEVERTHELESS OCCURS, EACH PARTY
HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY EACH PARTY HERETO
AND EACH PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR ANY PERSON ACTING
ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT TO INDUCE
THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE
PARTIES EACH FURTHER ACKNOWLEDGE THAT IT HAS BEEN REPRESENTED OR HAS HAD THE
OPPORTUNITY TO BE REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING
OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND
THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. THE PARTIES
EACH FURTHER ACKNOWLEDGE THAT IT HAS READ AND UNDERSTOOD THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION.
13.4 NO PUNITIVE DAMAGES. The Parties to this Agreement agree to waive
any right to seek punitive damages.
14. COMPETITION AND CONFIDENTIALITY BY THE TRANSFERORS.
14.1 RESTRICTED PERIOD. Neither the Transferors nor their respective
Affiliates as provided in Section 14.3 (each a "Restricted Party") shall, at any
time within the Restricted Period (defined below), directly or indirectly, (i)
own, manage, control, participate in, consult with, render services for, or in
any manner engage in any activity or Business competing with the ISP Business of
the Acquirer or the Company (as of the Closing Date) within the Restricted
Territory (as defined below),
-42-
<PAGE> 50
(ii) solicit from the Company any known Subscriber or other customer of the
Company for services provided by the Company to a Customer on or before the
Closing, (iii) request or advise any known Subscriber or other customer of the
Company to withdraw, curtail or cancel such Subscriber's or others customer's
Business with the Company, or (iv) solicit for employment any person employed by
the Company after the Closing at any time within the two (2) year period
immediately preceding such solicitation; provided, however, that no owner of
less than five percent (5%) of the outstanding stock of any publicly traded
corporation shall be deemed to engage solely by reason thereof in any of that
corporation's Businesses. For purposes of this Agreement, the Parties have
agreed to allocate $50,000 of the Cash Portion of the Transfer Consideration to
the covenant not to compete contained in this Section 14.1; provided, however,
that such allocation will not otherwise affect any other sections of this
Agreement. In addition, no Restricted Party during the Restricted Period shall
contact any of the employees of the Acquirer for the purpose of hiring or
retaining any of such employees for employment, consulting or similar purposes.
The term "Restricted Period" means the period beginning on the Closing Date and
ending on the third anniversary of the Closing Date. The "Restricted Territory"
means the area comprising the entire United States of America.
14.2 CONFIDENTIALITY. For an indefinite period after the Closing, no
Restricted Party shall divulge, communicate or use in any way, any Confidential
Information or trade secrets of the Business of the Acquirer or the Company.
Each Restricted Party shall, and shall cause its subsidiaries, Affiliates,
officers, directors, employees, accountants, counsel, financial advisors and
other representatives and agents, to treat and hold as such all of the
Confidential Information, refrain from disclosing or using any of the
Confidential Information except in connection with this Agreement and the
Transactions, and except as otherwise permitted hereunder or as may be required
by law, deliver promptly to the Acquirer or the Company or destroy, at the
request and option of the Acquirer or the Company, all tangible embodiments (and
all copies) of the Confidential Information which are in the possession of such
Restricted Party. In the event that any Restricted Party is requested or
required (by request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar legal process)
to disclose any Confidential Information, such Restricted Party will notify the
Acquirer or the Company promptly of the request or requirement so that the
Acquirer or the Company may seek an appropriate protective order or waive
compliance with the provisions of this Section 14.2. If, in the absence of a
protective order or the receipt of a waiver hereunder, any Restricted Party is
compelled to disclose any Confidential Information or else stand liable for
contempt, such Restricted Party may disclose the Confidential Information;
provided, however, that such Restricted Party shall use its reasonable efforts
to obtain, at the reasonable request of the Acquirer or the Company, an order or
other assurance that confidential treatment will be accorded to such portion of
the Confidential Information required to be disclosed as the Acquirer or the
Company shall reasonably designate.
14.3 AFFILIATES. The terms of this Section 14 shall apply to each
Transferor and any Affiliate of his or hers to the same extent as if they were
parties hereto, and each Transferor shall take whatever actions may be necessary
to cause his or her Affiliates to adhere to the terms of this Section 14.
14.4 INJUNCTIVE RELIEF. In the event of any breach or Threatened breach
by any Restricted Party of any provision of this Section 14, the Acquirer shall
be entitled to injunctive or other equitable relief, restraining such Party from
using or disclosing any Confidential Information in whole or in part,
-43-
<PAGE> 51
or from engaging in conduct that would constitute a breach of the obligations of
a Restricted Party under this Section 14. Such relief shall be in addition to
and not in lieu of any other remedies that may be available, including an action
for the recovery of damages. In the event of Litigation involving this Section
14, if a court of competent jurisdiction determines that the scope of this
Section 14 is too broad in any respect, then the scope shall be deemed to be
reduced or narrowed to such scope as is found lawful and reasonable by such
court. Each Transferor acknowledges, however, that this Section 14 has been
negotiated by the Parties and that the geographical and time limitations, as
well as the limitation on activities, are reasonable in light of the
circumstances pertaining to the Business of the Acquirer and the Company.
15. TERMINATION
15.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
as provided below:
(a) the Acquirer and the Transferors may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(b) the Acquirer may terminate this Agreement by giving
written notice to the Transferors at any time prior to the Closing in the event
the Transferors are in breach of any representation, warranty, or covenant
contained in this Agreement in any material respect and such breach has not been
cured within ten (10) days of written notice thereof or in the event any matter
disclosed pursuant to Section 7.5 has or may have a Material Adverse Effect and
notice of termination is given by the Acquirer within ten (10) days of such
disclosure;
(c) the Transferors may terminate this Agreement by giving
written notice to the Acquirer at any time prior to the Closing in the event the
Acquirer is in breach of any representation, warranty, or covenant contained in
this Agreement in any material respect and such breach has not been cured within
ten (10) days of written notice thereof;
(d) this Agreement will terminate if the Closing shall not
have occurred on or before September 15, 1999; provided, however, that in the
event the Acquirer has filed a Registration Statement with the SEC and either
(i) the Acquirer's lead underwriter informs the Acquirer that a public offering
of stock is not advisable or (ii) the Registration Statement has not been
declared effective but the Acquirer is using reasonable efforts to have the
Registration Statement declared effective, then this Agreement shall terminate
if the Closing has not occurred on or before December 31, 1999.
(e) Nothing contained in this Section 15.1 shall alter,
affect, modify or restrict any Parties' rights to rely on and/or seek
indemnification for a breach of any of the representations and warranties and/or
conditions or covenants of any of the Parties contained in this Agreement.
15.2 EFFECT OF TERMINATION. Except as provided in Section 14.2, if
either the Acquirer or the Transferors terminate this Agreement pursuant to
Section 15.1 above, all obligations of the Parties hereunder shall terminate
without any Liability of any Party to any other Party.
-44-
<PAGE> 52
16. MISCELLANEOUS.
16.1 PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by
applicable securities laws or stock exchange requirements, no Party shall issue
any press release or public announcement relating to the subject matter of this
Agreement prior to, at or about the Closing without the prior written approval
of the Acquirer and the Transferors' Representative, which written approval will
not be unreasonably withheld by each party; provided, however, that any Party
may make any public disclosure it believes in good faith is required by law or
regulation (in which case the disclosing Party will advise the other Parties
prior to making the disclosure).
16.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns.
16.3 CONTENTS OF AGREEMENT. This Agreement, together with the other
Transaction Documents, sets forth the entire understanding of the Parties hereto
with respect to the Transactions and supersedes all prior agreements or
understandings among the Parties regarding those matters.
16.4 AMENDMENT, PARTIES IN INTEREST, ASSIGNMENT, ETC. This Agreement
may be amended, modified or supplemented only by a written instrument duly
executed by each of the Parties hereto. If any provision of this Agreement shall
for any reason be held to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other
provision hereof, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective heirs, legal representatives, successors and permitted assigns
of the Parties hereto. No Party hereto shall assign this Agreement or any right,
benefit or obligation hereunder; provided, however, that the Acquirer may assign
any or all of its rights, benefits or obligations herein to any Affiliate. Any
term or provision of this Agreement may be waived at any time by the Party
entitled to the benefit thereof by a written instrument duly executed by such
Party. The Parties hereto shall execute and deliver any and all documents and
take any and all other actions that may be deemed reasonably necessary by their
respective counsel to complete the Transactions.
16.5 INTERPRETATION. Unless the context of this Agreement clearly
requires otherwise, (a) references to the plural include the singular, the
singular the plural, the part the whole, (b) references to any gender include
all genders, (c) "or" has the inclusive meaning frequently identified with the
phrase "and/or," (d) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to" and (e) references to "hereunder" or
"herein" relate to this Agreement. The section and other headings contained in
this Agreement are for reference purposes only and shall not control or affect
the construction of this Agreement or the interpretation thereof in early
respect. Annex, section, subsection, schedule and exhibit references are to this
Agreement unless otherwise specified. Each accounting term used herein that is
not specifically defined herein shall have the meaning given to it under GAAP.
16.6 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
-45-
<PAGE> 53
16.7 REMEDIES AND SET-OFF.
(a) The remedies provided by Section 12 shall constitute the
exclusive remedies for the matters covered thereby. With respect to any matters
not covered by such Section, any Party hereto shall be entitled to such rights
and remedies as such Party may have at law or in equity or otherwise for any
breach of this Agreement, including the right to seek specific performance,
rescission or restitution, none of which rights or remedies shall be affected or
diminished by the remedies provided hereunder.
(b) The Acquirer shall be entitled to a set-off against the
Escrow Funds for any, damages, losses, costs or expenses which are incurred by
the Acquirer or the Company and for which the Transferors have indemnified the
Acquirer pursuant to the terms of this Agreement, and for any Cash Portion of
the Transfer Consideration adjustment made pursuant to Section 2. The Acquirer
shall give the Transferors written notice of any claimed set-off.
Notwithstanding any provision of this Agreement to the contrary, after the
Acquirer has given written notice of a claimed set-off, the Acquirer may give
unilateral written notice to the Escrow Agent to release Escrow Funds in the
amount of the claimed set-off, which written notice Transferors hereby
acknowledge to be sufficient to authorize the Escrow Agent to release Escrow
Funds as directed by the Acquirer, unless the Transferors' Representative sends
an objection notice to the Escrow Agent within the prescribed period set forth
in Section 2(b) of the Escrow Agreement.
16.8 NOTICES. All notices that are required or permitted hereunder
shall be in writing and shall be sufficient if personally delivered or sent by
mail, facsimile or Federal Express (or other reputable delivery or courier
service). Any notices shall be deemed given upon the earlier of (a) the date
when received, (b) the third day after the date when sent by registered or
certified mail, (c) the day when sent by facsimile, (d) the day after the date
when sent by Federal Express (or other reputable delivery or courier service),
to the address or fax number set forth below, unless such address or fax number
is changed by notice to the other Party hereto:
If to the Acquirer:
espernet.com, inc.
383 West 12th Street
New York, New York 10014
Attention: Paul Hart, President
Fax: (212) 989-4717
with a required copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Goodwin Square
225 Asylum Street, 13th Floor
Hartford, Connecticut 06103
Attention: John J. Altorelli, Esq.
Fax: (860) 293-3555
-46-
<PAGE> 54
If to the Transferors or Transferors' Representative:
Steven DeMar
825 West Armitage
Chicago, IL 60614
Fax: _____________
with a required copy to:
Katz, Randall & Weinberg
333 West Wacker Drive
Chicago, IL 60606-1136
Attention: Steven Jay Katz, Esq.
Fax: (312) 807- 3903
16.9 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW
YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
16.10 EXPENSES. Each of the Parties and the Company will bear his, her
or its own costs and expenses (including legal fees and expenses and investment
banking fees) incurred in connection with this Agreement and the Transactions.
16.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more parties
hereto, and an executed copy of this Agreement may be delivered by one or more
parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such Party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes as of the date first written above. At the request of
any Party hereto, all Parties hereto agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
[SIGNATURE PAGE FOLLOWS]
-47-
<PAGE> 55
IN WITNESS WHEREOF, this Stock Exchange Agreement has been executed by
the Parties hereto as of the day and year first written above.
ESPERNET.COM, INC.
By: /s/ Paul Hart
--------------------------------------
Name: Paul Hart
Title: President
INFORAMP, INC.
By: /s/ Steven DeMar
--------------------------------------
Name: Steven Demar
Title: President
TRANSFERORS' REPRESENTATIVE
/s/ Steven Demar
-------------------------------------------
Steven DeMar
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
<PAGE> 56
ANNEX I
STOCKHOLDER LIST
<TABLE>
<CAPTION>
NAME SHARES OF OWNERSHIP SHARES OF OWNERSHIP TOTAL TOTAL
OF VOTING PERCEN- COMPANY PERCEN- SHARES %
STOCKHOLDER COMPANY TAGE NON-VOTING TAGE
COMMON VOTING COMMON NON-
STOCK STOCK VOTING
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Andrea 15,300 51% -0- -0- 15,300 0.51%
DeMar
Lawrence E. 8,700 29% -0- -0- 8,700 0.29%
DeMar
Janet Rogers 6,000 20% 594,000 20% 600,000 20.00%
Steven Trust -0- -0- 1,514,700 51% 1,514,700 50.49%
Larry Trust -0- -0- 861,300 29% 861,300 28.71%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 30,000 100.0% 2,970,000 100.0% 3,000,000 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 57
ANNEX II
CASH PORTION OF THE TRANSFER CONSIDERATION(1)
<TABLE>
<S> <C>
Gross Aggregate Cash Portion of the Transfer Consideration: $ 10,000,000.00
Less Adjustments:
Net Current Assets $_______________
Debt $_______________
Subscriber $_______________
Churn Rate $_______________ $_______________
Less Escrowed Amount:
(10% of the Cash Portion of the Transfer Consideration)(2) $ 1,000,000.00
Net Aggregate Cash Portion of the Transfer Consideration: $_______________
Divided by the Number of Outstanding
Shares of Company Common Stock / 3,000,000
CASH PORTION OF THE TRANSFER CONSIDERATION
PER SHARE OF COMPANY COMMON STOCK: $_______________
</TABLE>
- --------
(1) This Annex shall be completed on or prior to the Closing Date, upon
determination of the adjustments to the Cash Portion of the Transfer
Consideration.
(2) The Accounts Receivable adjustment shall be set-off against the Escrow
Funds.
<PAGE> 58
ANNEX III
STOCK PORTION OF THE TRANSFER CONSIDERATION(3)
<TABLE>
<S> <C>
Aggregate Dollar Value of Stock Portion of the Transfer Consideration: $ 2,000,000.00
Divided by the Number of Outstanding
Shares of Company Common Stock / 3,000,000
Divided by the midpoint of the IPO offering price
per share of the Acquirer Common Stock as set forth /
the Registration Statement ________________
STOCK PORTION OF THE TRANSFER CONSIDERATION
PER SHARE OF COMPANY COMMON STOCK: $_______________
</TABLE>
- --------
(3) This Annex shall be completed on or prior to the Closing Date, upon
determination of the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the Registration Statement.
<PAGE> 59
ANNEX IV
[RESERVED]
<PAGE> 60
ANNEX V
ALLOCATION SUMMARY(4)
<TABLE>
<CAPTION>
COMPANY SHARE OWNERSHIP TRANSFER CONSIDERATION
- -----------------------------------------------------------------------------------------------------------------------------------
NAME SHARES OF OWNER- SHARES OF OWNER- TOTAL TOTAL CASH STOCK
OF COMPANY SHIP COMPANY SHIP SHARES OWNER PORTION PORTION ESCROW
TRANSFERORS VOTING % NON % SHIP OF THE OF THE FUNDS
COMMON VOTING VOTING NON- TRANSFER TRANSFER
STOCK COMMON VOTING CONSIDER CONSIDER
STOCK ATION ATION
(NET (NET
CASH CASH
AMOUNT) AMOUNT)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Andrea 15,300 51% -0- 15,300 0.51% $ 5,100
DeMar
Lawrence E. 8,700 29% -0- 8.,700 0.29% $ 2,900
DeMar
Janet Rogers 6,000 20% 594,000 20% 600,000 20.00% $ 200,000
Steven Trust 1,514,700 51% 1,514,700 50.49% $ 504,900
Larry Trust 861,300 29% 861.300 28.71% $ 287,100
TOTAL 30,000 100.0% 2,970,000 100.0% 3,000,000 100.00% $1,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOCATION OF CASH PORTION OF THE TRANSFER CONSIDERATION
<TABLE>
<CAPTION>
CASH PORTION OF THE
TRANSFER
NUMBER OF CONSIDERATION PER
EXCHANGED SHARE OF COMPANY TOTAL CASH
TRANSFEROR SHARES X 83.7% COMMON STOCK RECEIVED
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrea DeMar 15,300 12,806.1
Lawrence E. DeMar 8,700 7,281.9
Janet Rogers 600,000 502,200
Steven Trust 1,514,700 1,267,803.9
Larry Trust 861,300 720908.1
TOTAL 3,000,000 2,511,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(4) This Annex shall be completed on or prior to the Closing Date, upon
determination of the adjustments to the Cash Portion of the Transfer
Consideration and the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the Registration Statement.
<PAGE> 61
ANNEX V CONTINUED
ALLOCATION OF STOCK PORTION OF THE TRANSFER CONSIDERATION
<TABLE>
<CAPTION>
STOCK PORTION OF
TRANSFER
NUMBER OF CONSIDERATION PER
EXCHANGED SHARE OF COMPANY TOTAL STOCK
TRANSFEROR SHARES X 16.7% COMMON STOCK RECEIVED
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Andrea DeMar 15,300 2,555.1
Lawrence E. DeMar 8,700 1,452.9
Janet Rogers 600,000 100,200.0
Steven Trust 1,514,700 252,954.9
Larry Trust 861,300 143,837.1
TOTAL 3,000,000 501,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 10.2
- --------------------------------------------------------------------------------
STOCK EXCHANGE AGREEMENT
by and among
ESPERNET.COM, INC.
(a Delaware corporation)
WORLD TRADE NETWORK, INC.
(a Texas corporation)
and
JACK C. JUI
AUGUST 13, 1999
- --------------------------------------------------------------------------------
<PAGE> 2
STOCK EXCHANGE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<C> <S>
1. DEFINITIONS .......................................................... 1
2. THE EXCHANGE OF SHARES ............................................... 9
2.1 Basic Transaction .............................................. 9
2.2 Transfer Consideration ......................................... 9
2.3 Adjustments to Cash Portion of the Transfer Consideration ...... 10
2.4 Access to Information .......................................... 11
2.5 Escrow Agreement ............................................... 12
3. CLOSING .............................................................. 12
3.1 Location, Date ................................................. 12
3.2 Deliveries ..................................................... 12
3.3 [RESERVED] ..................................................... 13
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFEROR ..................... 13
4.1 Corporate Status ............................................... 13
4.2 Authorization .................................................. 13
4.3 Consents and Approvals ......................................... 13
4.4 Capitalization and Stock Ownership ............................. 14
4.5 Subsidiaries ................................................... 14
4.6 Corporate Records .............................................. 14
4.7 Financial Statements ........................................... 14
4.8 Title to Assets and Related Matters ............................ 15
4.9 Owned Real Property ............................................ 15
4.10 Leased Real Property ........................................... 15
4.11 Certain Personal Property ...................................... 15
4.12 Non-Real Estate Leases ......................................... 16
4.13 Accounts Receivable ............................................ 16
4.14 Liabilities .................................................... 16
4.15 Taxes .......................................................... 16
4.16 Legal Proceedings and Compliance with Law ...................... 17
4.17 Contracts ...................................................... 18
4.18 Insurance ...................................................... 19
4.19 Intellectual Property and Software Products .................... 20
4.20 Employees ...................................................... 21
4.21 Employee Relations ............................................. 22
4.22 ERISA .......................................................... 22
4.23 Guaranties ..................................................... 22
4.24 Certain Business Relationships with the Company ................ 22
4.25 Systems ........................................................ 22
4.26 Subscribers .................................................... 23
4.27 Previous Sales; Warranties ..................................... 23
4.28 Absence of Certain Changes ..................................... 23
4.29 Finder's Fees .................................................. 24
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
4.30 Additional Information ......................................... 24
4.31 Securities Matters ............................................. 25
4.32 Accuracy of Information ........................................ 26
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER ....................... 26
5.1 Corporate ...................................................... 26
5.2 Authorization .................................................. 26
5.3 Consents and Approvals ......................................... 26
5.4 Capitalization and Stock Ownership ............................. 27
5.5 Legal Proceedings .............................................. 27
5.6 Finder's Fees .................................................. 27
5.7 Section 351 .................................................... 27
6. TAXES ................................................................ 27
6.1 Transferor's Tax Preparation ................................... 27
6.2 Tax Preparation ................................................ 27
6.3 Cooperation on Tax Matters ..................................... 28
6.4 Miscellaneous Tax Obligations .................................. 28
7. COVENANTS OF THE COMPANY AND THE TRANSFEROR .......................... 28
7.1 Payment of Expenses ............................................ 28
7.2 Operation of Business Prior to the Closing ..................... 28
7.3 Preservation of Business ....................................... 29
7.4 Access ......................................................... 29
7.5 Notice of Developments ......................................... 29
7.6 Exclusivity .................................................... 30
7.7 [RESERVED] ..................................................... 30
7.8 Audits ......................................................... 30
7.9 Due Diligence .................................................. 30
7.10 Schedules ...................................................... 30
8. COVENANTS OF THE ACQUIRER ............................................ 31
8.1 Payment of Expenses ............................................ 31
8.2 Tax-Free Exchange .............................................. 31
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER .................. 31
9.1 Representations and Warranties; Performance of Obligations ..... 31
9.2 No Litigation .................................................. 31
9.3 No Material Adverse Change ..................................... 31
9.4 Due Diligence Review Complete .................................. 32
9.5 Consents and Approvals ......................................... 32
9.6 Financial Statements ........................................... 32
9.7 IPO ............................................................ 32
9.8 Documents to Be Delivered by the Transferor .................... 32
9.9 [RESERVED] ..................................................... 33
9.10 [RESERVED] ..................................................... 33
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
9.11 Financial Condition ............................................ 33
9.12 Schedules ...................................................... 33
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
TRANSFEROR .......................................................... 34
10.1 Representations and Warranties; Performance of Obligations ..... 34
10.2 No Litigation .................................................. 34
10.3 Consents and Approvals ......................................... 34
10.4 [RESERVED] ..................................................... 34
10.5 Receipt of Acquirer's Shares And Cash Portion of The Transfer
Consideration................................................... 34
10.6 Documents to Be Delivered by the Acquirer ...................... 34
10.7 IPO ............................................................ 35
11. POST-CLOSING COVENANTS .............................................. 35
11.1 General ........................................................ 35
11.2 Transition ..................................................... 35
11.3 Restrictions on Transfer of Acquirer Common Stock .............. 35
12. INDEMNIFICATION ..................................................... 36
12.1 By the Transferor .............................................. 36
12.2 By the Acquirer ................................................ 36
12.3 Procedure for Claims ........................................... 36
12.4 Claims Period .................................................. 37
12.5 Third Party Claims ............................................. 38
12.6 Limitation on Indemnification .................................. 38
13. DISPUTE RESOLUTION .................................................. 38
13.1 Good-Faith Negotiations ........................................ 38
13.2 Arbitration .................................................... 39
13.3 WAIVER OF JURY TRIAL ........................................... 39
13.4 No Punitive Damages ............................................ 39
14. COMPETITION AND CONFIDENTIALITY BY THE TRANSFEROR ................... 39
14.1 Restricted Period .............................................. 39
14.2 Confidentiality ................................................ 40
14.3 Affiliates ..................................................... 40
14.4 Injunctive Relief .............................................. 40
15. TERMINATION ......................................................... 41
15.1 Termination of Agreement ....................................... 41
15.2 Effect of Termination .......................................... 41
16. MISCELLANEOUS ....................................................... 42
16.1 Press Releases and Announcements ............................... 42
16.2 No Third-party Beneficiaries ................................... 42
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
16.3 Contents of Agreement.......................................... 42
16.4 Amendment, Parties in Interest, Assignment, Etc................ 42
16.5 Interpretation................................................. 42
16.6 Incorporation of Exhibits, Annexes, and Schedules.............. 42
16.7 Remedies and Set-Off........................................... 43
16.8 Notices........................................................ 43
16.9 Governing Law.................................................. 44
16.10 Expenses....................................................... 44
16.11 Counterparts................................................... 44
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
Annexes
- -------
Annex I Transferor List of Company
Annex II Cash Portion of the Transfer Consideration
Annex III Stock Portion of the Transfer Consideration
Annex IV [RESERVED]
Annex V Allocation Summary
Exhibits
- --------
Exhibit A Form of Officer's/Transferor's Certificate of Company
Exhibit B Form of Secretary's Certificate of Company
Exhibit C Form of Escrow Agreement
Exhibit D Form of Opinion of Transferor's Counsel
Exhibit E Form of Cancellation Agreement
Exhibit F Employment Agreements
Exhibit G Form of Officer's Certificate of the Acquirer
Exhibit H Form of Secretary's Certificate of the Acquirer
Exhibit I Form of Equity Subscription Agreement
Exhibit J Form of Joinder to Registration Agreement
Exhibit K [RESERVED]
Schedules
- ---------
Schedule 4.4 Capitalization and Stock Ownership
Schedule 4.7 Financial Statements
Schedule 4.8 Title to Assets
Schedule 4.10 Real Property
Schedule 4.11 Certain Personal Property
Schedule 4.12 Non-Real Estate Leases
Schedule 4.13 Accounts Receivable
Schedule 4.16 Legal Proceedings and Compliance with Law
Schedule 4.17(a) Contracts
Schedule 4.17(b) Subscriber Contracts
Schedule 4.17(c) Proposed Contracts
Schedule 4.17(d) Requests for Proposed Contracts
Schedule 4.18 Insurance
Schedule 4.19 Intellectual Property and Software Products
Schedule 4.20 List of Company Employees
Schedule 4.22 ERISA
Schedule 4.25 Systems
Schedule 4.26 Subscribers
Schedule 4.28 Absence of Changes
Schedule 4.30 Additional Information
</TABLE>
v
<PAGE> 7
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (this "Agreement") is made as of August
13, 1999, by and among ESPERNET.COM, INC., a Delaware corporation (the
"Acquirer"), WORLD TRADE NETWORK, INC., a Texas corporation (the "Company"), and
Jack C. Jui, the sole stockholder of the Company (the "Transferor"). The
Acquirer, the Company and the Transferor are sometimes referred to herein
individually as a "Party" and collectively as the "Parties." Certain other terms
are used herein as defined below in Section 1 or elsewhere in this Agreement.
RECITALS
A. The Company is engaged in the business of providing Internet access
and services, web hosting, and Internet related services and support.
B. The Transferor is the owner of all of the issued and outstanding
shares of the capital stock of the Company (the "Company Shares").
C. This Agreement contemplates a transaction in which the Transferor
will exchange all of his Company Shares for the right to receive the Transfer
Consideration (as hereinafter defined).
D. This Agreement further contemplates that the aforementioned
transaction will occur in conjunction with certain related transactions,
consisting of the IPO (as hereinafter defined) and the transfer of certain other
businesses by their respective owners to the Acquirer (the "Related
Transactions"), and the Parties intend that the receipt of the Acquirer Common
Stock (as hereinafter defined) will be tax-free under Section 351 of the Code
(as hereinafter defined).
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
receipt and sufficiency of which is hereby acknowledged, the Parties hereto,
intending to be legally bound, hereby agree as follows:
1. DEFINITIONS.
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Accounts Receivable" means, as of any date, any trade accounts
receivable, notes receivable, bid or performance deposits, employee advances and
other miscellaneous receivables included in the Assets of the Company.
"Acquirer" is defined above in the preamble.
"Acquirer Common Stock" means the common stock, $0.001 par value, of
the Acquirer.
<PAGE> 8
"Acquirer's Independent Public Accountant" means KPMG LLP, the
accounting firm engaged by the Acquirer to perform the audits required under
this Agreement.
"Action" is defined in Section 12.5.
"Affiliated Group" means any affiliated group within the meaning of
Code Sec. 1504 (or any similar group defined under a similar provision of state,
local or foreign Law).
"Affiliates" means, with respect to a particular party, persons or
entities controlling, controlled by or under common control with that party, as
well as any officers, directors and majority-owned entities of that party and of
its other Affiliates. As used in this definition, the term "control" means
either (i) the possession, directly or indirectly, of the power to direct or to
cause the direction of the management of the affairs of a Person or the conduct
of the business of a Person, or (ii) the holding of a direct or indirect equity
or voting interest of fifty percent (50%) or more in the Person.
"Agreement" means this Agreement and the annexes, exhibits and
schedules hereto.
"Allocation Summary" means the summary of the allocation of the
Transfer Consideration attached hereto as ANNEX V.
"Assets" means, with respect to a particular Person, all of the assets,
properties, goodwill and rights of every kind and description, real and
personal, tangible and intangible, that are owned or possessed by such Person.
"Association" is defined in Section 13.2.
"Balance Sheet Date" is defined in Section 4.7.
"Benefit Plans" means all "employee benefit plans" of the Company, as
defined in Section 3(3) of ERISA.
"Business" means, with respect to a particular Person, the entire
business, operations, and facilities of such Person.
"Cash Portion of the Transfer Consideration" is defined in Section
2.2(b) and set forth on ANNEX II.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Churn Rate" means the percentage obtained by dividing the number of
Subscribers that cancel, do not renew or have their Subscriber Contracts
canceled for non-payment during a quarter by the average number of Subscribers
during that quarter, except Subscribers that are canceled for non-payment but
who are reconnected within 30 days of cancellation are not deemed canceled for
-2-
<PAGE> 9
purposes of the churn rate. Average monthly churn rate is calculated as the
quarter's churn rate divided by three.
"Claim Notice" is defined in Section 12.3.
"Claim Response" is defined in Section 12.3.
"Closing" is defined in Section 3.1.
"Closing Date" is defined in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Period" is defined in Section 2.3(f)(i).
"Company" is defined above in the preamble.
"Company Balance Sheet" is defined in Section 4.7.
"Company Common Stock" means the Class "A" Voting Common Stock, $0.01
par value, of the Company and the Class "B" Voting Common Stock, $0.01 par
value, of the Company.
"Company Financial Statements" is defined in Section 4.7.
"Company Long-Term Debt" means all long-term Liabilities of the Company
as determined in accordance with GAAP consistently applied, the current portion
of any long-term Liabilities and the aggregate amount of any obligations under
Real Estate Leases and Non-Real Estate Leases with terms in excess of one year.
"Company Net Current Assets" means current Assets (excluding Accounts
Receivable (i) disputed, (ii) subject to pending or threatened Litigation, or
(iii) aged over 60 days) less current Liabilities (including any prepaid or
discounted subscriber contract but, excluding the current portion of long-term
debt) of the Company, each as determined in accordance with GAAP on an accrual
basis of accounting.
"Company Shares" is defined above in the preamble.
"Company Software" is defined in Section 4.19(e).
"Confidential Information" means information, including any formula,
pattern, compilation, program, device, method, technique or process that (a)
derives independent economic value, actual or potential, from not being
generally known to the public or to other Persons who can obtain economic value
from its disclosure or use; and (b) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. Without limiting the
foregoing, "Confidential Information" includes lists or descriptions of any
customers, referral sources or organizations; financial statements, cost reports
or other financial information; Contract proposals, or bidding information;
business plans
-3-
<PAGE> 10
and training and operations methods and manuals; personnel records; fee
structure; and management systems, policies or procedures, including related
forms and manuals.
"Consents" means any consent, waiver, approval, order or authorization
of, or registration, declaration or filing with or notice to, any governmental
authority or other Person.
"Contract" means any written or oral contract, agreement, lease,
instrument or other commitment that is binding on any Person or its property
under applicable Law.
"Court Order" means any judgment, decree, injunction, order or ruling
of any federal, state, local or foreign court or governmental or regulatory body
or authority that is binding on any person or its property under applicable Law.
"Damages" is defined in Section 12.1.
"Deductible Amount" is defined in Section 12.3(c).
"Default" means (a) a breach, default or violation, (b) the occurrence
of an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or (c) with respect to any
Contract, the occurrence of an event that with or without the passage of time or
the giving of notice, or both, would give rise to a right of termination,
renegotiation or acceleration or a right to receive damages or a payment of
penalties.
"Employment Agreements" means an Employment Agreement for each of Jack
C. Jui, Hang, A. Cheung, Kim Leung and Yick Leung substantially in the form of
EXHIBIT F attached hereto.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"Equity Subscription Agreement" means the Equity Subscription Agreement
between each Transferor and the Acquirer, substantially in the form of EXHIBIT I
hereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreement" means the Escrow Agreement by and among the Escrow
Agent, the Acquirer and the Transferor, substantially in the form of EXHIBIT C
hereto.
"Escrow Agent" means Chicago Title and Trust Company, or other
reputable bank or trust company selected by the Acquirer.
"Escrow Funds" is defined in Section 2.5.
"Escrow Period" is defined in Section 2.5.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
-4-
<PAGE> 11
"Excluded Business" means the business operations of U.C. Computer
(Shanghai) Co., Ltd. and any other operations of the Transferor which are based
in China.
"Expiration Date" is defined in Section 12.4.
"GAAP" means generally accepted accounting principles.
"Governmental Permit" is defined in Section 4.16(b).
"Indemnified Party" is defined in Sections 12.1 and 12.2.
"Indemnitor" is defined in Section 12.3.
"Intellectual Property" means all (a) trademarks, service marks, trade
dress, logos, trade names, and corporate names and registrations and
applications for registration thereof, (b) copyrights and registrations and
applications for registration thereof, (c) computer software, data, and
documentation, (d) trade secrets and confidential Business information
(including formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information, (e) courseware, classroom items and training materials, (f) other
proprietary rights, and (g) copies and tangible embodiments thereof (in whatever
form or medium).
"IPO" means the first underwritten public offering of the Acquirer
Common Stock pursuant to an effective registration statement under the
Securities Act that will result in an aggregate post-IPO market capitalization
of the Acquirer of at least $100 million (determined by multiplying the
outstanding shares of the Acquirer Common Stock by the IPO offering price).
"LLGM" means LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the
Acquirer.
"Law" means any statute, law, ordinance, regulation, order or rule of
any federal, state, local, foreign or other governmental agency or body or of
any other type of regulatory body, including those covering environmental,
energy, safety, health, transportation, bribery, record keeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control
matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, claim, loss, damage, deficiency, guaranty or endorsement of or by
any person, absolute or contingent, accrued or unaccrued, due or to become due,
liquidated or unliquidated.
"Licensed Software" is defined in Section 4.19(d).
"Liquidated Claim Notice" is defined in Section 12.3.
-5-
<PAGE> 12
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
"Material Adverse Effect" means, with respect to a particular Person, a
material adverse effect on the Business, Assets, financial condition, results of
operations, products, competitive position, customers or customer relations of
such Person, determined on a consolidated basis, and when used with respect to
representations, warranties or conditions, means the aggregate effect of all
similar situations unless the context indicates otherwise.
"Non-Real Estate Leases" is defined in Section 4.12.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Outage" means any loss of service to any Business or Systems of the
Company, including, but not limited to, network access, e-mail, web, news or
other services.
"Owned Software" is defined in Section 4.19(c).
"Party" is defined above in the preamble.
"PBGC" is defined in Section 4.22(e).
"Permitted Encumbrances" means those Real Estate and Non-Real Estate
Leases listed on SCHEDULE 4.8.
"Person" means any natural person, corporation, limited liability
company, partnership, proprietorship, association, trust or other legal entity.
"Prime Rate" is defined in Section 12.3(b).
"POPs" is defined in Section 4.25.
"Real Estate Lease" is defined in Section 4.10.
"Real Property" is defined in Section 4.10.
"Receivable Shortfall" is defined in Section 2.3(f)(ii).
"Registration Agreement" means the joinder to the Registration
Agreement between each Transferor and the Acquirer, substantially in the form of
EXHIBIT J hereto.
"Registration Statement" means the Acquirer's registration statement on
Form S-1 once filed with and deemed effective by the SEC in connection with the
IPO.
"Related Transaction" is defined above in the preamble.
-6-
<PAGE> 13
"Required Subscribers" means the number of Subscribers equal to the
product of (i) 24,500 multiplied by (ii) a 25% annual growth rate pro rated for
the period commencing on June 30, 1999 and ending on the Closing Date.
"Response Period" is defined in Section 12.3.
"Restricted Party" is defined in Section 14.1.
"Restricted Period" is defined in Section 14.1.
"Restricted Territory" is defined in Section 14.1.
"Retail Subscriber" means any customers of the Company who (a) are
currently connected to and receiving Internet related services from the
Company's Systems; (b) are being charged or have pre-paid the Company's standard
retail rates (which rates are set forth on SCHEDULE 4.26) pursuant to the
Company's standard form Subscriber Contracts attached hereto on SCHEDULE 4.26;
(c) have paid such stated rates in full for at least one full month; (d) are not
two or more months delinquent in the payment of any invoice from the Company;
(e) have not, in the preceding two months, been given a waiver or forgiveness of
service charges; (f) have not received any inducement to become connected to the
Company's Systems or to receive or pay for services (other than pursuant to the
Company's customary marketing practices); and (g) have not notified the Company
in writing of their intention to cancel service.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Portion of the Transfer Consideration" is defined in Section
2.2(b) and set forth on ANNEX III.
"Subscriber" means any Retail Subscriber or any Wholesale Subscriber.
"Subscriber Contract" means any Contract whereby the Company provides
services to a Subscriber.
"Systems" means the infrastructure used to provide Internet access and
related services, including network components, communications facilities,
servers, services and service platforms (including for e-mail, news, DNS, web,
authentication and other services), firewalls, power plants, data processing
platforms, MIS systems, office automation systems and internal LAN network
management systems.
"Taxes" means all taxes, duties, charges, fees, levies or other
assessments imposed by any taxing authority (i.e. whether federal, state, local,
municipal or foreign) including, without limitation, all net income, gross
income, gross receipts, value-added, excise, withholding, social security,
personal property, real estate, sales and use, ad valorem, license, lease,
service, severance, stamp, transfer, payroll, employment, unemployment,
disability, severance, customs, duties, alternative,
-7-
<PAGE> 14
windfall profits, add-on minimum, estimated and franchise taxes or other similar
governmental charge or imposition (including any interest, penalties or
additions attributable to or imposed on or with respect to any such Tax).
"Tax Return" means any federal, foreign, state and local governmental
tax return, declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
"Transaction Documents" means this Agreement, the Escrow Agreement, the
Equity Subscription Agreement, the Registration Agreement, and each of the other
documents contemplated by this Agreement.
"Transactions" means the transactions contemplated by the Transaction
Documents.
"Transfer" is defined in Section 11.3.
"Transfer Consideration" is defined in Section 2.2(d).
"Transferor" is defined above in the preamble.
"Treasury Regulations" means the regulations, including temporary and
proposed regulations, promulgated by the Treasury Department under the Code.
"Unliquidated Claim" is defined in Section 12.3.
"Welfare Plan" is defined in Section 4.22(g).
"Wholesale Subscriber" means any customers of a third-party service
provider who (a) are currently connected to and receiving Internet related
services from the Company's Systems; (b) are being charged or have pre-paid,
directly or indirectly through a third-party service provider, the Company's
standard wholesale rates (which rates are set forth on SCHEDULE 4.26) pursuant
to the Company's standard form Subscriber Contracts attached hereto on SCHEDULE
4.26; (c) have paid such stated rates in full for at least one full month; (d)
are not two or more months delinquent in the payment of any invoice from the
Company; (e) have not, in the preceding two months, been given a waiver or
forgiveness of service charges; (f) have not received any inducement to become
connected to the Company's Systems or to receive or pay for services (other than
pursuant to the Company's customary marketing practices); and (g) have not
notified the Company in writing of their intention to cancel service.
"Year 2000 Compliant (and Year 2000 Compliance)" means that all
software, hardware, firmware, and systems (a) include Year 2000 date data
century recognition, calculations which accommodate same century and
multi-century formulas and date values, correct date sort ordering (if date
sorting is an included function), and date data interface values that reflect
the century; (b) will not cause an abnormal abend or abort within the
application on account of the date data properly entered into the application or
result in the generation of incorrect values or invalid outputs involving
-8-
<PAGE> 15
such date; and (c) provide that all date related user interface functionalities
and data fields include the indication of the correct century.
2. THE EXCHANGE OF SHARES.
2.1 BASIC TRANSACTION. On and subject to the terms and conditions of
this Agreement, the Acquirer agrees to exchange with the Transferor and the
Transferor agrees to exchange with the Acquirer, all of the Company Shares for
the consideration specified below in this Section 2.
2.2 TRANSFER CONSIDERATION.
(a) Generally. The Transfer Consideration exchanged for
Company Shares shall be composed of (i) the Cash Portion of the Transfer
Consideration and (ii) the Stock Portion of the Transfer Consideration.
(b) Transfer Consideration Adjustments. The Acquirer agrees to
pay to the Transferor the aggregate sum of (i) $5,075,000.00 in U.S. currency
pursuant to ANNEX II, to be adjusted (A) downward by the aggregate amount of all
adjustments made pursuant to Section 2.3 and (B) upward by the amount of cash
paid in lieu of any fractional shares which would otherwise be issued in
accordance with this Agreement (the "Cash Portion of the Transfer
Consideration"); and (ii) $9,425,000.00 worth of Acquirer Common Stock,
consisting of an aggregate number of shares of Acquirer Common Stock pursuant to
ANNEX III, valued at the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the final prospectus immediately prior to
the effectiveness of the Registration Statement (the "Stock Portion of the
Transfer Consideration"); in exchange for all of the Company Shares to be
purchased by the Acquirer pursuant to the terms hereof; provided, however, that
the Cash Portion of the Transfer Consideration and the Stock Portion of the
Transfer Consideration may be altered by the Parties prior to the Closing Date
by mutual written agreement.
(c) Escrow Payments. At the Closing Date, $725,000.00 of the
Cash Portion of the Transfer Consideration will be paid in cash by wire transfer
of funds to the Escrow Agent by the Acquirer to be held in escrow pursuant to
Section 2.5 and shall be available to support the Transferor's indemnification
obligations specified in Section 12.
(d) Payment. The balance of the Cash Portion of the Transfer
Consideration shall be paid by the Acquirer to the Transferor at the Closing by
delivery of cash by wire transfer of funds in the amounts set forth on the
Allocation Summary. The Acquirer Common Stock comprising the Stock Portion of
the Transfer Consideration shall be issued on the Closing Date by the Acquirer
and delivered to the Transferor within seven (7) business days after the Closing
in the amounts set forth on the Allocation Summary. The sum of the Cash Portion
of the Transfer Consideration and the Stock Portion of the Transfer
Consideration shall be referred to as the "Transfer Consideration." Each of (i)
the Cash Portion of the Transfer Consideration and (ii) the Stock Portion of the
Transfer Consideration shall be allocated to the Transferor in dollar amounts
set forth on the Allocation Summary attached hereto as ANNEX V. Cash will be
paid in lieu of any fractional shares which would otherwise be issued in
accordance with this Agreement.
-9-
<PAGE> 16
(e) Surrender of Certificates. The aggregate Transfer
Consideration (less the Escrow Funds) will be payable and issuable upon the
surrender of the certificates and other documentation specified in Section 3.2.
Upon Transferor's proper surrender of such certificates and other documentation,
the Acquirer will pay and deliver to the Transferor the Transfer Consideration
(less the Escrow Funds). If payment is to be made to a Person other than the
Transferor, it shall be a condition of payment that the certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the Person requesting such payment shall pay any transfer or similar
Taxes required by reason of the payment to a Person other than the Transferor or
shall establish to the satisfaction of the Acquirer that such Tax has been paid
or is not applicable.
(f) Restricted Stock. None of the Acquirer Common Stock issued
in connection with this Agreement will be registered under the Securities Act.
Each certificate for the Acquirer Common Stock shall bear a legend describing
the foregoing restrictions.
(g) Optional Conversion of Transfer Consideration to All Cash.
The Acquirer shall have the right to convert the entire dollar value of the
Stock Portion of the Transfer Consideration set forth in Section 2.2(b) to the
Cash Portion of the Transfer Consideration if the IPO is not consummated prior
to the expiration of this Agreement including the extensions contained in
Section 2.2(h).
(h) Optional Extension of the Termination Date. The Acquirer
shall have the right in its sole discretion, whether or not a Registration
Statement has been filed with the SEC, to extend the termination date set forth
in Section 15.1(c) as follows: (i) to January 31, 2000 in consideration of
increasing the Cash Portion of the Transfer Consideration by $25 per Subscriber
on the Closing Date; and (ii) to February 29, 2000 in consideration of
increasing the Cash Portion of the Transfer Consideration by an additional $25
per Subscriber on the Closing Date. The number of Subscribers shall be
determined by Acquirer's Independent Public Accountants in good faith within two
business days prior to the Closing Date.
2.3 ADJUSTMENTS TO CASH PORTION OF THE TRANSFER CONSIDERATION.
(a) Net Current Assets Adjustment. The Cash Portion of the
Transfer Consideration shall be adjusted downward dollar for dollar by the
amount that the Company Net Current Assets on the Closing Date is less than zero
dollars ($0). The Company Net Current Assets shall be determined by Acquirer's
Independent Public Accountants in good faith within two business days prior to
the Closing Date.
(b) Long-Term Debt Adjustment. The Cash Portion of the
Transfer Consideration shall be adjusted downward on a dollar for dollar basis
by the amount of the Company Long-Term Debt outstanding on the Closing Date. The
Company Long-Term Debt shall be determined by Acquirer's Independent Public
Accountants in good faith, within two business days prior to the Closing Date.
(c) Subscriber Adjustment. The Cash Portion of the Transfer
Consideration shall be adjusted downward $591.84 per each Subscriber by which
the number of Subscribers on the Closing is less than the number of Required
Subscribers. The number of Subscribers shall be
-10-
<PAGE> 17
determined by Acquirer's Independent Public Accountants in good faith within two
business days prior to the Closing Date.
(d) Churn Rate Adjustment. The Cash Portion of the Transfer
Consideration shall be adjusted downward $14,500.00 per each 1/10 of one percent
by which the average monthly Churn Rate for the six-month period ending on the
Closing Date is greater than 3.0%. The average monthly Churn Rate for the
six-month period ending on the Closing Date shall be determined by Acquirer's
Independent Public Accountants in good faith within two business days prior to
the Closing Date.
(e) [RESERVED].
(f) Accounts Receivable Adjustment.
(i) Shortfall. The Acquirer and the Transferor agrees
that the Cash Portion of the Transfer Consideration shall be adjusted to the
extent that the Accounts Receivable have not been collected by the Acquirer
within sixty (60) days following the Closing Date; provided, however, that
Accounts Receivable that as of the Closing Date are (A) disputed, (B) subject to
pending Litigation or threatened Litigation, or (C) older than sixty (60) days,
shall be treated as having a value of zero dollars ($0) for purposes of this
Section 2.3, but any amounts collected on these accounts shall be credited
towards the Acquirer's collection of the Accounts Receivable. The "Collection
Period" shall refer to the period beginning on the Closing Date and continuing
until the expiration of sixty (60) days thereafter.
(ii) Adjustment to Purchase Price. Within sixty (60)
days following the end of the Collection Period, the Acquirer shall prepare and
furnish to the Transferor a statement setting forth the Accounts Receivable and
all payments made thereon, calculated as of the end of the Collection Period,
and the amount, if any, owing from the Transferor to the Acquirer pursuant to
Section 2.3 ("Receivable Shortfall"). The Acquirer shall first set-off any
Receivable Shortfall from the Escrow Funds, and, to the extent the amount of the
Receivable Shortfall exceeds the amount of the remaining Escrow Funds, the
Transferor shall be jointly and severally liable to pay the difference to the
Acquirer within ten (10) days after receipt of written demand therefor.
(iii) Collection of Accounts Receivable. Between the
Closing Date and the end of the Collection Period, the Acquirer shall cause the
Company to use its reasonable best efforts consistent with the Company's usual
and customary collection practices to collect the Accounts Receivable; provided,
however, that the Company shall not be obligated to resort to Litigation.
2.4 ACCESS TO INFORMATION. In connection with the determination of the
adjustments to the Cash Portion of the Transfer Consideration described in
Section 2.3, the Company and the Transferor shall (a) provide Acquirer's
Independent Public Accountants reasonable access to the books and records of the
Company, in whatever form maintained, (b) cause employees of the Company to
cooperate with Acquirer's Independent Public Accountants, (c) provide all
information reasonably requested, all after receiving reasonable notice from
Acquirer's Independent Public Accountants and reaching agreement as to mutually
convenient times for Acquirer's Independent Public Accountants' review, and (d)
provide access to the work papers and other materials and
-11-
<PAGE> 18
documents used or produced in connection with the preparation of the Company
Financial Statements.
2.5 ESCROW AGREEMENT. Pursuant to the Escrow Agreement to be
entered into among the Transferor, the Acquirer and the Escrow Agent, the
Acquirer shall deliver $725,000.00 of the Cash Portion of the Transfer
Consideration to the Escrow Agent by wire transfer in immediately available
funds at the Closing. Such monies (which, together with all interest accrued
thereon which may be due to the Party to whom such funds are ultimately paid in
accordance with the terms of the Escrow Agreement, are hereinafter referred to
as the "Escrow Funds") shall be held pursuant to the terms of the Escrow
Agreement for payment from such Escrow Funds of the amounts, if any, owing by
the Transferor to the Acquirer pursuant to the indemnification provisions of
Section 12 below, together with accrued interest thereon. Pursuant to the terms
of the Escrow Agreement, the Escrow Funds shall be used to satisfy any such owed
amounts. At the conclusion of the period ending on the first anniversary of the
Closing Date (such period being referred to herein as the "Escrow Period"), such
remaining portion of the Escrow Funds not theretofore paid to the Acquirer in
accordance with the terms of the Escrow Agreement or subject to a pending claim
under the Escrow Agreement and this Agreement shall be disbursed to the
Transferor together with accrued interest thereon. The Transferor and the
Acquirer agree that each will execute and deliver such reasonable instruments
and documents as are furnished by any other Party to enable such furnishing
Party to receive those portions of the Escrow Funds to which the furnishing
Party is entitled under the provisions of the Escrow Agreement and this
Agreement.
3. CLOSING.
3.1 LOCATION, DATE. The closing for the Transactions (the
"Closing") is being held at the offices of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., in New York, New York, or at such other location as the Parties hereto
may agree, commencing at 9:00 a.m. local time simultaneously with the closing of
the IPO and the Related Transactions or such other date as the Acquirer and the
Transferor may mutually determine (the "Closing Date").
3.2 DELIVERIES.
(a) At the Closing, the Acquirer shall pay by wire transfer or
certified or bank checks of immediately available funds the Cash Portion of the
Transfer Consideration in accordance with Section 2;
(b) Within seven (7) business days following the Closing Date,
the Acquirer shall deliver, or shall cause to be delivered by its transfer
agent, certificates for the Acquirer Common Stock representing the Stock Portion
of the Transfer Consideration in accordance with Section 2; and
(c) At least three (3) business days prior to the Closing, (i)
the Transferor will deliver to LLGM the various certificates, instruments, and
documents referred to in Section 9 below, (ii) the Acquirer will deliver to LLGM
the various certificates, instruments, and documents referred to in Section 10
below, and (iii) the Transferor will deliver to LLGM the certificates
representing all of his Company Shares, duly endorsed in blank or accompanied by
duly executed assignment
-12-
<PAGE> 19
documents. LLGM shall hold all such certificates, documents and instruments in
escrow pending consummation of the Closing.
3.3 [RESERVED].
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFEROR.
The Transferor hereby represents and warrants to the Acquirer as
follows:
4.1 CORPORATE STATUS. The Company is a corporation duly organized,
validly existing and in good standing under the Laws of the State of Texas and
is qualified to do business as a foreign corporation in any jurisdiction where
it is required to be so qualified. The Charter Documents and bylaws of the
Company that have been delivered to the Acquirer are in full force and effect
and are effective under applicable Laws and the Company is not in violation of
any of the provisions thereof.
4.2 AUTHORIZATION. The Company has the requisite power and
authority to own its Assets and to carry on its Business as currently conducted.
The Transferor has duly approved the terms of this Agreement and the
Transactions. Each Transferor and the Company have duly executed and delivered
each Transaction Document to which he or it is a Party, and each Transaction
Document constitutes a valid and binding obligation of such Party, enforceable
against the Transferor and the Company in accordance with its terms; except to
the extent that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar Laws relating to or
affecting the rights of creditors generally or contrary to public policy, except
as enforcement hereof is subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or in equity), and
except to the extent that provisions indemnifying a Party against Liability for
his, her or its own wrongful or negligent acts may be unenforceable.
4.3 CONSENTS AND APPROVALS. Neither the execution and delivery by
the Transferor and the Company of the Transaction Documents to which he or it is
a Party, nor the performance of the Transactions to be performed by such Party,
will require any Consent, constitute a Default or cause any payment obligation
(other than a payment obligation arising pursuant to a court-ordered decree of
divorce or an agreement or instrument entered into or given in connection with a
divorce proceeding or similar matter) to arise under (a) any Law or Court Order
to which the Transferor or the Company is subject, (b) the Charter Documents or
bylaws of the Company or (c) any Contract, Government Permit or other document
to which the Transferor or the Company is a party or by which the properties or
other Assets of the Transferor or the Company may be subject.
-13-
<PAGE> 20
4.4 CAPITALIZATION AND STOCK OWNERSHIP.
(a) The total authorized capital stock of the Company
consists of : (1) 10,000,000 shares of Class "A" Voting Company Common Stock,
900 shares of which are issued and outstanding, no shares of which are (i)
subject to issuance pursuant to vested options, (ii) subject to issuance
pursuant to unvested options, (iii) reserved for issuance pursuant to future
option grants, or (iv) subject to unexercised warrants; and (2) 100,000,000
shares of Class "B" Voting Common Stock, no shares of which are issued and
outstanding, and no shares of which are (i) subject to issuance pursuant to
vested options, (ii) subject to issuance pursuant to unvested options, (iii)
reserved for issuance pursuant to future option grants, or (iv) subject to
unexercised warrants. The Transferor is not a party to (or has otherwise
terminated) any voting trust, proxy, or other agreement or understanding with
respect to the voting of any capital stock of the Company.
(b) The Transferor represents and warrants that (i) the
Transferor is the sole record and beneficial owner of all of the shares of
Company Common Stock, and (ii) the Transferor owns all of such Company Common
Stock free and clear of any Encumbrances (other than restrictions on transfer
imposed by applicable federal and state securities Laws) .
(c) There are no existing options, warrants, calls,
commitments or other rights of any character (including conversion or preemptive
rights) relating to the acquisition of any issued or unissued capital stock or
other securities of the Company. There are no outstanding or authorized option,
stock appreciation, phantom stock, or similar rights with respect to the
Company. All of the Company Shares are duly and validly authorized and issued,
fully paid and non-assessable. The Company has complied with all applicable Laws
in connection with the issuance of the Company Shares, and none of the Company
Shares were issued in violation of any Contract binding upon the Company. Upon
completion of the Transactions at the Closing, the Acquirer shall receive valid
title to all of the Company Shares, free and clear of all Encumbrances.
4.5 SUBSIDIARIES. The Company does not own, directly or
indirectly, any subsidiary, any interest or investment (whether equity or debt)
in any corporation, partnership, business, trust, joint venture or other legal
entity.
4.6 CORPORATE RECORDS. The minute books of the Company contain
complete, correct and current copies of its Charter Documents and bylaws and of
all minutes of meetings, resolutions and other proceedings of its Board of
Directors and stockholders. The stock record book of the Company is complete,
correct and current.
4.7 FINANCIAL STATEMENTS. The Transferor has delivered to the
Acquirer correct and complete copies of the financial statements of the Company
consisting of a balance sheet of the Company as of June 30, 1999, and the
related income statement and statement of cash flows for the three months then
ended. The Transferor has also delivered to the Acquirer correct and complete
copies of the financial statements consisting of a balance sheet of the Company
as of December 31, 1996, 1997 and 1998, and the related income statement and
statement of cash flows for the years then ended. All such financial statements
are referred to herein collectively as the "Company Financial Statements" and
appear on SCHEDULE 4.7. The Company Financial Statements are consistent with the
books and records of the Company, and there have not been any material
-14-
<PAGE> 21
transactions that have not been recorded in the accounting records underlying
such Company Financial Statements. The Company Financial Statements have been
prepared on an accrual basis in accordance with GAAP applied consistently with
past practices, and the Company Financial Statements present accurately the
financial position and Assets and Liabilities of the Company as of the dates
thereof, and the results of its operations for the periods then ended. The
balance sheet of the Company as of June 30, 1999 that is included in the Company
Financial Statements is referred to herein as the "Company Balance Sheet," and
the date thereof is referred to as the "Balance Sheet Date."
4.8 TITLE TO ASSETS AND RELATED MATTERS. Except as set forth on
SCHEDULE 4.8, the Company has good and marketable title to, valid leasehold
interests in, or valid licenses to use, all of its Assets, free from any
Encumbrances other than Permitted Encumbrances. The use of the Assets is not
subject to any Encumbrances other than Permitted Encumbrances, and such use does
not materially encroach on the property or rights of anyone else. All Real
Property and tangible personal property (other than inventory) of the Company
are suitable for the purposes for which they are used, in good working condition
and reasonable repair, free from any known defects.
4.9 OWNED REAL PROPERTY. The Company does not own nor does it have
any interest in any real property or improvements thereon (other than the Real
Estate Leases disclosed in SCHEDULE 4.10, and the leasehold improvements
relating to the same) nor does the Company have any options, agreements or
Contracts under which it has the right or obligation to acquire any interest in
any real property or improvements.
4.10 LEASED REAL PROPERTY. SCHEDULE 4.10 lists by street address
all real estate used by the Company in the operation of its Business as well as
any other real estate that is in the possession of or leased by the Company and
the improvements (including buildings and other structures) located on such real
estate (collectively, the "Real Property"), and lists any leases under which any
such Real Property is possessed (the "Real Estate Leases"). SCHEDULE 4.10 also
describes any other real estate previously owned, leased or otherwise operated
by the Company or any predecessor thereof and the time periods of any such
ownership, lease or operation. The Real Property complies with all applicable
zoning Laws. The Company has obtained all licenses and rights-of-way from
governmental entities or private parties that are necessary to ensure vehicular
and pedestrian ingress and egress to and from any Real Property. Except as set
forth on SCHEDULE 4.10, none of the Real Estate Leases are for a term in excess
of one year.
4.11 CERTAIN PERSONAL PROPERTY. SCHEDULE 4.11 lists all tangible
personal property of the Company with a value in excess of $500.00, except for
items subject to any Non-Real Estate Leases, and describes and specifies the
location of all such items of tangible personal property that were included in
the Company Balance Sheet. Since the Balance Sheet Date, the Company has not
acquired any items of tangible personal property (other than inventory and
office supplies). All of such tangible personal property (a) is in operating
condition, reasonable wear and tear excepted, (b) is usable in the ordinary
course of the Company's Business, and (c) conforms with any applicable Laws
relating to its construction, use and operation. Except for those items subject
to the Non-Real Estate Leases (defined below), no Person other than the Company
owns any vehicles, equipment or other tangible Assets located on the Real
Property that are used by the Company in its Business
-15-
<PAGE> 22
(other than immaterial items of personal property owned by the Company's
employees) or that are necessary for the operation of its Business.
4.12 NON-REAL ESTATE LEASES. SCHEDULE 4.12 lists all Assets and
property (other than Real Property) with a value in excess of $500.00 that are
currently being used in the operation of the Business and that are possessed by
the Company under an existing lease, including all trucks, automobiles,
machinery, equipment, furniture and computers. SCHEDULE 4.12 also lists the
leases under which such Assets and property listed on SCHEDULE 4.12 are
possessed. All of such leases are referred to herein as the "Non-Real Estate
Leases." Except as set forth in SCHEDULE 4.12, none of the Non-Real Estate
Leases are for a term in excess of one year.
4.13 ACCOUNTS RECEIVABLE. All Accounts Receivable of the Company
that are reflected on the Company Balance Sheet represent or will represent
valid obligations arising from sales actually made or services actually
performed in the ordinary course of business. Except for those Accounts
Receivable of the Company in excess of 60 days from the date of creation as set
forth on SCHEDULE 4.13, all of the Accounts Receivable included in the Assets of
the Company are collectible within 60 days from the respective dates of sale.
The Transferor does not know of any facts or circumstances (other than general
economic conditions) that are likely to result in any material increase in the
uncollectibility of such Accounts Receivable. SCHEDULE 4.13 contains a complete
and accurate list of all Accounts Receivable as of the date provided therein,
which list sets forth the aging of such Accounts Receivable.
4.14 LIABILITIES. The Company has no Liabilities, and none of the
Assets of the Company is subject to any Liabilities, except (a) Liabilities set
forth on the Company Balance Sheet or incurred in the ordinary course (none of
which relates to any breach of contract, breach of warranty, tort, infringement,
or violation of Law or arose out of any charge, complaint, action, suit,
proceeding, hearing, investigation, claim or demand) since the Balance Sheet
Date that, individually or in the aggregate, are not material to the Business or
the Assets of the Company or (b) Liabilities of the Company under any Contracts
specifically disclosed on any Schedule (or not required to be disclosed because
of the term or amount involved) that were not required under GAAP to have been
specifically disclosed or reserved for on the Company Balance Sheet.
4.15 TAXES. With respect to the Company and any affiliated
predecessor entities, (i) all reports, returns, statements (including estimated
reports, returns, or statements), and other similar filings scheduled to be
filed on or before the Closing Date (the "Tax Returns") with respect to any
Taxes, have been or will be timely filed with the appropriate governmental
agencies in all jurisdictions in which such Tax Returns are required to be
filed, and all such Tax Returns correctly reflect the Liability for Taxes for
the periods, properties, or events covered thereby; (ii) all Taxes payable with
respect to the Tax Returns referred to in the preceding clause, and all Taxes
accruable or otherwise attributable to events occurring prior to the Closing
Date, whether disputed or not, whether or not shown on any Tax Return, and
whether or not currently due or payable, will have been paid in full prior to
the Closing Date; (iii) neither the Transferor nor the Company has any knowledge
of any unassessed Tax deficiencies or of any audits or investigations pending or
threatened with respect to any Taxes; (iv) all Tax Returns for the fiscal year
ending on or before December 31, 1995, have been examined by the Internal
Revenue Service and/or other state or local taxing authority, and no assessment
with respect to such returns has been made; (v) no issues have been raised in
any
-16-
<PAGE> 23
examination by any taxing authority which, by application of similar principles,
reasonably could be expected to result in a proposed deficiency for any other
period not so examined; (vi) there is in effect no extension for the filing of
any Tax Return and no extension or waiver of the application of any statute of
limitations of any jurisdiction regarding the assessment or collection of any
Tax has been given; (vii) no notice has been received from any Tax authority in
any jurisdiction in which any such entity does not file Tax Returns that it is
or may be subject to taxation by that jurisdiction; (viii) there are no liens
for Taxes upon any Asset except for liens for current Taxes not yet due; (ix)
all deposits required by Law to be made with respect to employees' withholding
and other payroll, employment, or other withholding Taxes, including the
portions of such Taxes imposed upon the employer, have been timely made; (x)
neither the Company, nor any Transferor, has taken or agreed to take any action
that would prevent the receipt by the Transferor of the Stock Portion of the
Transfer Consideration from qualifying as tax-free under the provisions of
Section 351 of the Code; (xi) there are no agreements in place relating to the
allocating or sharing of the payment of, or Liability for, Taxes for any period;
(xii) the Company is not a party to any joint venture, partnership or other
arrangement or Contract that could be treated as a partnership for federal
income Tax purposes; (xiii) the Company has not waived any statue of limitations
in respect of Taxes which waiver is currently in effect; (xiv) the Company is
not a party to any "closing agreement," as described in Section 7121 of the Code
or any corresponding provision of state or local Tax Law, and there are no Tax
rulings or requests for Tax rulings with respect to the Company; (xv) the
Company has not filed a consent under Code Sec. 341(f) concerning collapsible
corporations; (xvi) the Company has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that, under any
circumstances, will not be deductible to the Company under Code Sec. 280G;
(xvii) the Company is not and has never been a United States real property
holding corporation within the meaning of Code Sec. 897(c)(2); (xviii) the
Company has disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal income
Tax within the meaning of Code Sec. 6662; (xix) the Company has never been (nor
has any Liability for unpaid Taxes because it once was) a member of an
Affiliated Group filing a consolidated federal income Tax Return and has never
incurred any Liability for the Taxes of any Person under Treasury Regulations
(S)1.1502-6 (or any similar provision of Law); and (xx) the Company has never
incurred any Liability for the Taxes of any Person as a transferee or successor,
by contract, or otherwise.
4.16 LEGAL PROCEEDINGS AND COMPLIANCE WITH LAW.
(a) To the knowledge of the Transferor, there is no
Litigation that is pending or threatened against the Company. There has been no
Default by the Company under any Laws applicable to the Company, including Laws
relating to pollution or protection of the environment, and the Company has not
received any notices from any governmental entity regarding any alleged Defaults
under any Laws. There has been no Default with respect to any Court Order
applicable to the Company.
(b) The Company has (i) obtained and is in full
compliance with all governmental permits, licenses, registrations, certificates
of occupancy, approvals and other authorizations (the "Governmental Permits"),
all of which are listed in SCHEDULE 4.16 along with their respective expiration
dates, that are required for the complete operation of the Business of the
Company as currently operated, (ii) all of the Governmental Permits are
currently valid and in full force and
-17-
<PAGE> 24
(iii) filed such timely and complete renewal applications as may be required
with respect to its Governmental Permits. Further, no revocation, cancellation
or withdrawal thereof has been threatened.
(c) The Company has filed in a timely manner all reports,
documents, and other materials it was required to file (and the information
contained therein was correct and complete in all respects) under all applicable
Laws (including rules and regulations thereunder).
(d) The Company has possession of all records and
documents it was required to retain under all applicable Laws (including rules
and regulations thereunder).
4.17 CONTRACTS.
(a) SCHEDULE 4.17(a) lists each Contract of the following
types to which the Company is a party, or by which it is bound, as of the date
hereof, except for any Contract that may be terminated by the Company on not
more than 30 days' notice without any Liability:
(i) Contracts with any current or former
stockholder, director, officer, employee, partner or consultant of the
Company or any Affiliate thereof;
(ii) Contracts for the future purchase of, or
payment for, supplies or products, or for the lease of any Asset from
or the performance of services by a third party;
(iii) Contracts to sell or supply products or to
perform services;
(iv) Contracts to lease to or to operate for any
other party any Asset (other than Real Estate Leases and Non-Real
Estate Leases identified on other Schedules);
(v) Any notes, debentures, bonds, conditional
sale agreements, equipment trust agreements, letter of credit
agreements, reimbursement agreements, loan agreements or other
Contracts for the borrowing or lending of money (including loans to or
from the Transferor or any officers, directors, partners, stockholders
or Affiliates of the Company or any members of their immediate
families), agreements or arrangements for a line of credit or for a
guarantee of, or other undertaking in connection with, the indebtedness
of any other Person;
(vi) Any Contracts under which any Encumbrances
exist with respect to any Assets;
(vii) Any Subscriber Contracts for each of the
fiscal years ended December 31, 1996, 1997 and 1998, and for the
current fiscal year;
(viii) Any formal or informal partnering
arrangement with any merchant or service or web content provider;
-18-
<PAGE> 25
(ix) Any Contract with any local exchange
carrier, competitive local exchange carrier, competitive access
provider or other telecommunications carrier;
(x) Any peering, transit or other Contract with
any Internet service provider, online company or similar entity;
(xi) Any written Contract requiring
confidentiality or non-competition other than agreements with
customers, employees or subcontractors in the ordinary course of
business; or
(xii) Any other Contracts (other than those
described in any of (i) through (xi) above) not made in the ordinary
course of business.
(b) The Transferor has delivered to the Acquirer or made
available for review by the Acquirer a correct and complete copy of each written
Contract listed in Schedule 4.17(a) (as amended to date). Each of the Contracts
set forth on SCHEDULE 4.17(a) is legal, valid, binding and enforceable in
accordance with its terms, and is in full force and effect, and will continue to
be legal, valid, binding and enforceable in accordance with its terms, and will
be in full force and effect on identical terms immediately following the
Closing. The Company is not in Default under any Contract (including any Real
Estate Leases and Non-Real Estate Leases), which Default could result in a
Liability on the part of the Company. The Company has not received any
communication from, or given any communication to, any other party indicating
that the Company or such other party, as the case may be, is in Default under
any Contract where such Default could have a Material Adverse Effect. None of
the other parties in any such Contract to which the Company is a party is in
Default thereunder. Except as set forth on SCHEDULE 4.17(b), no unfulfilled
Subscriber Contract obligating the Company to perform services will result in a
loss to the Company upon completion of performance. Except as set forth on
SCHEDULE 4.17(b), the Company has not been notified that any of its Subscribers
intend either to dispute charges under or to terminate early a Subscriber
Contract.
(c) SCHEDULE 4.17(c) sets forth a complete and accurate
description of each proposed Contract to which the Company is proposed to be a
party, or by which it is proposed to be bound, as of the date hereof, currently
being negotiated with a possible customer. Notwithstanding the foregoing, the
Transferor makes no representations or warranties concerning such proposed
Contracts or the likelihood that the parties thereto will enter into such
proposed Contracts.
(d) SCHEDULE 4.17(d) sets forth a complete and accurate
description of each request for proposal for a Contract with a possible customer
to which the Company is proposed to be a party, or by which it is proposed to be
bound, as of the date hereof, that the Company has pending, or that is currently
being acted upon or considered by the Company. Notwithstanding the foregoing,
the Transferor makes no representations or warranties concerning such proposals
or the likelihood that the parties receiving such proposals will accept such
proposals.
4.18 INSURANCE. SCHEDULE 4.18 lists all policies or binders of
insurance held by or on behalf of the Company, specifying with respect to each
policy the insurer, the amount of the coverage offered under the terms of the
policy, the type of insurance, the risks insured, the expiration date, the
policy number and any pending claims thereunder. There is no Default with
respect to any such
-19-
<PAGE> 26
policy or binder, nor has there been any failure to give any notice or present
any claim under any such policy or binder in a timely fashion or in the manner
or detail required by the policy or binder. There is no notice of non-renewal or
cancellation with respect to, or disallowance of any claim under, any such
policy or binder that has been received by the Company. The Company has been
covered during the past three (3) years by insurance in scope and amount
customary and reasonable for the Business in which it has engaged during the
aforementioned period. The Company currently does not have and has never had any
self-insurance arrangements.
4.19 INTELLECTUAL PROPERTY AND SOFTWARE PRODUCTS.
(a) SCHEDULE 4.19 contains a description of all
Intellectual Property owned or used by the Company. SCHEDULE 4.19 separately
discloses all Intellectual Property under license. All Intellectual Property
developed by any Person for use by the Company was developed pursuant to valid
work-for-hire Contracts and such Intellectual Property is not subject to any
license or royalty payments. No Intellectual Property rights not described on
SCHEDULE 4.19 are necessary in connection with the conduct of the Business. The
Company owns the entire right, title and interest in and to, and has the
exclusive perpetual royalty-free right to use, the Intellectual Property, free
and clear of all Encumbrances. There are no pending or, to the knowledge of the
Transferor, threatened claims against the Company by any Person with respect to
any of the items, or their use, listed in SCHEDULE 4.19. No Person is infringing
upon nor has any Person misappropriated the Intellectual Property and the
Company is not infringing upon the Intellectual Property rights of any other
Person.
(b) The Company employs procedures to maintain the
proprietary nature of, and owns and has the unrestricted right to use all, trade
secrets, including know-how, inventions, designs, processes, computer software
and documentation for such software and technical data required for or incident
to the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company, free and clear of any Encumbrances,
including, without limitation, all claims of current and former employees,
consultants, officers, directors and shareholders. Each employee and officer of
the Company has executed an agreement with the Company regarding confidentiality
and proprietary information. The Transferor, after reasonable investigation, is
not aware that any of the Company's employees are in violation thereof.
(c) SCHEDULE 4.19 contains a complete and accurate list
of all computer software owned by the Company (the "Owned Software"). The
Company has exclusive title to the Owned Software, free and clear of all claims,
including claims or rights of employees, agents, consultants, customers,
licensees or other parties involved in the development, creation, marketing,
maintenance, enhancement or licensing of such computer software. The Owned
Software is not dependent on any Licensed Software (as defined in paragraph (d)
below) in order to fully operate in the manner in which it is intended.
(d) SCHEDULE 4.19 contains a complete and accurate list
of all software under which the Company is a licensee, lessee or otherwise has
obtained the right to use such software (the "Licensed Software"). SCHEDULE 4.19
also sets forth a list of all license fees, rents, royalties or other charges
that the Company is required or obligated to pay with respect to the Licensed
Software. The Company is in full compliance with all material provisions of any
license, lease or other similar agreement pursuant to which it has rights to use
the Licensed Software and has proof of purchase of
-20-
<PAGE> 27
each item of Licensed Software. None of the Licensed Software has been
incorporated into or made a part of any Owned Software or any other Licensed
Software. The Company has not published or disclosed any Licensed Software to
any other party.
(e) The Owned Software and Licensed Software
(collectively, the "Company Software") constitute all software currently used in
or necessary for the conduct of the Business as currently conducted. SCHEDULE
4.19 identifies all Contracts pursuant to which computer programming services
for the Company were performed. The Transactions will not cause a breach or
default under any license, lease or similar agreement relating to the Company
Software or materially impair the Company's ability to use the Company Software
after the Closing Date in the same manner as such computer software is currently
used by the Company. The Company is not infringing any intellectual property
rights of any other Person with respect to the Company Software, and no other
Person is infringing any intellectual property rights of the Company with
respect to the Company Software or is claiming any right, title or interest in
the Company Software or any infringement by the Company of any intellectual
property right which such other Person may possess.
(f) SCHEDULE 4.19 lists and separately identifies all
Contracts pursuant to which the Company has been granted rights to market
software owned by third parties, and lists and separately identifies all
Contracts pursuant to which the Company has granted marketing rights in the
Company Software to third parties.
(g) The Company has not taken or failed to take any
actions under the Law of any applicable foreign jurisdictions where the Company
has marketed or licensed the Company Software that would restrict or limit the
ability of the Company to protect, or prevent it from protecting, its ownership
interests in, confidentiality rights of, and rights to market, license, modify
or enhance, the Company Software.
(h) All Company Software is Year 2000 Compliant. All date
processing by the Company Software will include four digit year format and
recognize and correctly process dates for leap years.
(i) No current or former employee of the Company and no
other Person owns or has any proprietary, financial or other interest, direct or
indirect, in whole or in part, and including any right to royalties or other
compensation, in any of the Intellectual Property listed on SCHEDULE 4.19, or in
any application therefor.
4.20 EMPLOYEES.
(a) SCHEDULE 4.20 contains a complete and correct list of
the names and salaries, bonus and other cash compensation of all employees and
officers of the Company, including, without limitation, all temporary, for-hire,
or outsourced employees engaged by the Company during the current calendar year.
The Company does not have any written or oral Contracts of employment with any
employee of the Company. Any and all employees of the Company are employee(s)
"at will" and the Company or any employee(s) are free to terminate the
employment relationship at any time for any reason without any Liability.
-21-
<PAGE> 28
(b) Neither the execution and delivery of this Agreement
nor the consummation of the Transactions will (i) result in any payment to be
made by the Company (including, without limitation, severance, unemployment
compensation, golden parachute (as defined in Code Section 280G or otherwise))
becoming due to any employee or former employee, officer or director, or (ii)
increase or vest any benefits payable under any Benefit Plan.
(c) Any amount that could be received (whether in cash or
property or the vesting of property) as a result of any of the Transactions by
any employee, officer or director of the Company who is a "disqualified
individual" (as such term is defined in Treasury Regulation Section 1.280G-1)
under any employment, severance or termination agreement, other compensation
arrangement or Benefit Plan currently in effect would not be characterized as an
"excess parachute payment" (as such term is defined in Section 280G(b)(1) of the
Code).
4.21 EMPLOYEE RELATIONS. The Company is not (a) a party to any
collective bargaining agreement, (b) a party to, involved in, threatened by, any
labor dispute or unfair labor practice charge, or (c) currently negotiating any
collective bargaining agreement, and the Company has not experienced any work
stoppage during the last three years. The Company has not committed any unfair
labor practice.
4.22 ERISA. There are no Benefit Plans sponsored or maintained by
the Company or under which the Company may be obligated. The Company does not
sponsor or maintain any Benefit Plan that is intended to be qualified under
Section 401 (a) of the Code. The Company does not sponsor a defined benefit plan
subject to Title IV of ERISA, nor does the Company have a current or contingent
obligation to contribute to any multiemployer plan (as defined in Section 3(37)
of ERISA), and neither the Company nor any of its predecessors, if any, have
ever contributed to a multiemployer plan. The Company has no Liability with
respect to any employee benefit plan (as defined in Section 3(3) of ERISA).
4.23 GUARANTIES. The Company has not agreed to be a guarantor nor
has it otherwise agreed to be liable for any Liability or obligation (including
indebtedness) of any other person other than such potential Liabilities to which
the Company is subject based on the acts or omissions of its employees,
subcontractors and other agents performing services for the Company in the
ordinary course of business (of which the Transferor has no knowledge of any
claim for actual Liability therefor).
4.24 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY. Neither the
Transferor nor his Affiliates have been involved in any business arrangement or
relationship with the Company within the past twelve (12) months other than
service relationships in the ordinary course of business, and neither the
Transferor nor his Affiliates owns any material property or right, tangible or
intangible, which is used in the Business of the Company.
4.25 SYSTEMS. Except as set forth on SCHEDULE 4.25, (a) all of the
Systems services and platform servers are running, or peaking, at no higher than
90% of capacity, (b) all of the Systems' services are replicated in a redundant
manner across available platform servers, (c) all remote physical points of
presence ("POPs") are secure, conform to equipment manufacturers' recommended
environmental parameters, and contain an uninterrupted power supply with a
battery back-up of at
-22-
<PAGE> 29
least 15 minutes, (d) the average Subscriber blockage rate for dial-in
Subscribers is no greater than 1.0% of Subscriber attempts across the overall
network infrastructure, (e) the configuration diagrams provided to the Acquirer
reasonably represent the redundant network facilities between major backbone
locations, and between remote physical POPs and major network concentration
points, (f) the existing power plant at the Company's main location is equipped
with an uninterrupted power supply with a battery back-up of at least 60
minutes, (g) all deployed dial-in modem, modem shelf and corresponding
technology conform to applicable industry standards necessary to support
Subscriber traffic at a rate of 56Kbps or above, (h) all Systems owned, leased
by, or licensed to or by the Company are Year 2000 Compliant, (i) the Company
utilizes an IP address allocation scheme that conforms to industry standards,
and (j) the Company has access to the quantity of IP addresses sufficient to
support the Company's Subscriber base as currently existing and as currently
contemplated to exist as of September 30, 1999.
4.26 SUBSCRIBERS. SCHEDULE 4.26 sets forth (a) a copy of each
standard form Subscriber Contract, including electronic versions; (b) the number
of Wholesale Subscribers and Retail Subscribers served by the Company by type of
business (i.e., segregated by the following categories, if applicable to the
Company: (i) dial-up, (ii) dedicated access, (iii) web hosting, and (iv) other
businesses) as of June 30, 1999 and the Company's standard rates for such
Subscribers for each type of business; (c) for the period commencing January
1,1997, the Company's monthly Churn Rate (consisting of (i) cancellations of
month-to-month service and/or long-term subscription or service Contracts prior
to expiration (ii) terminations of any such Contracts, and (iii) non-renewal of
any such Contracts upon expiration) by business type during each full calendar
month prior to the date hereof; and (d) as of April 30, 1999, detail as to the
amount of prepaid subscription or service Contracts and the amount of unearned
revenue for all Subscriber Contracts with a remaining term of (i) less than or
equal to 90 days, (ii) greater than 90 days and less than or equal to one year,
(iii) greater than one year and less than or equal to two years, (iv) greater
than two years and less than or equal to three years and (v) greater than three
years. The Company has used its reasonable business efforts to maintain and
currently maintains, good working relationships with all of its Subscribers as a
whole. None of such Subscribers has given the Company notice terminating,
canceling or threatening to terminate or cancel any Contract or relationship
with the Company.
4.27 PREVIOUS SALES; WARRANTIES. Except for such defects and other
breaches that would not have a Material Adverse Effect, all goods sold or
distributed and all services performed by the Company were of merchantable
quality, and the Company has not breached any express or implied warranties
offered by it in connection with the sale or distribution of such goods or
services.
4.28 ABSENCE OF CERTAIN CHANGES. Except as set forth on SCHEDULE
4.28, since the Balance Sheet Date, the Company has conducted its Business in
the ordinary course and there has not been with respect to the Company:
(a) any change in the terms of the Subscriber Contracts,
including, without limitation, fees, terms, services, discounts, and
prepayments;
(b) any material Contract, lease, sublease, license or
sublicense (or series or related contracts, leases, subleases, licenses and
sublicenses) outside the ordinary course of business;
-23-
<PAGE> 30
(c) any employment Contract or collective bargaining
agreement, written or oral, or modification of the terms of any existing such
Contract or agreement with any of its full-time staff employees other than in
the ordinary course of business;
(d) a change in its Business that has had or is
reasonably likely to have a Material Adverse Effect;
(e) [RESERVED];
(f) any increase in the compensation payable or to become
payable to any director, officer, employee or agent, except for increases for
non-officer employees made in the ordinary course of business, nor any other
change in any employment or consulting arrangement;
(g) any sale, assignment or transfer of Assets, or any
additions to or transactions involving any Assets, other than those made in the
ordinary course of business;
(h) any change in its Charter Documents or bylaws;
(i) a commitment or agreement on the part of the Company
to incur any Liability or make any capital expenditure in excess of $5,000.00,
including without limitation any Contracts to provide services or products;
(j) the creation or assumption of any mortgage, pledge,
or other Encumbrance upon any of the Company's Assets;
(k) a breach of a Contract to which the Company is a
party, or an amendment or termination of a Contract or Governmental Permit to
which the Company is a party;
(l) a waiver or release of any claim or right or
cancellation of any debt held; or
(m) a payment to any Affiliate of the Company other than
in the ordinary course of business.
4.29 FINDER'S FEES. No Person retained by the Transferor or the
Company is or will be entitled to any commission or finder's or similar fee in
connection with the Transactions.
4.30 ADDITIONAL INFORMATION. SCHEDULE 4.30 accurately lists the
following:
(a) the names of all officers and directors of the
Company, all of which officers and directors shall have tendered their
resignations as officers and directors, effective as of the Closing;
(b) the names and addresses of every bank or other
financial institution in which the Company maintains an account (whether
checking, saving or otherwise), lock box or safe deposit box, and the account
numbers and names of Persons having signing authority or other access thereto;
-24-
<PAGE> 31
(c) the names of all Persons authorized to borrow money
or incur or guarantee indebtedness on behalf of the Company;
(d) the names of any Persons holding powers of attorney
from the Company and a summary statement of the terms thereof; and
(e) all names under which the Company has conducted any
Business or which it has otherwise used at any time during the past five years.
4.31 SECURITIES MATTERS. The Transferor represents and warrants as
follows:
(a) The Transferor is experienced in evaluating and
investing in high-technology companies such as Acquirer. The Transferor has
substantial experience in investing in and evaluating private placement
transactions of securities in companies similar to Acquirer and is capable of
evaluating the risks and merits of his investment in Acquirer and has the
capacity to protect his own interests.
(b) The Transferor is acquiring the Acquirer Common Stock
solely for his own account and not with a view to, or for resale in connection
with, any distribution thereof, except in compliance with the Securities Act and
applicable state securities Laws, and the Transferor has no present intention of
selling or distributing the Acquirer Common Stock except in compliance with the
Securities Act and applicable state securities Laws. The Transferor acknowledges
that as of the date of this Agreement the Acquirer Common Stock has not been
registered under the Securities Act.
(c) The Transferor is aware of the applicable limitations
under the Securities Act relating to a subsequent sale, transfer, pledge,
mortgage, hypothecation, assignment or other encumbrance of the Acquirer Common
Stock. The Transferor further acknowledges that the Acquirer Common Stock must
be held indefinitely unless it is subsequently registered under the Securities
Act and applicable state securities Laws or an exemption from such registration
is available. The Transferor is aware of the provisions of Rule 144 promulgated
under the Securities Act which permits limited resale of shares acquired in a
private placement subject to the satisfaction of certain conditions, including,
among other things, the resale occurring not less than one year after a party
has purchased and paid for the security to be sold.
(d) The Transferor acknowledges that the Acquirer has
provided him with adequate access to financial and other information concerning
the Acquirer and the Acquirer Common Stock, and that the Transferor has had the
opportunity to ask questions of and receive answers from the Acquirer concerning
the Acquirer Common Stock and to obtain therefrom any additional information
necessary to make an informed decision regarding the acquisition of the Acquirer
Common Stock.
(e) The Transferor is an "accredited investor" as that
term is defined in Rule 501(a) under the Securities Act. The Transferor has not
been organized for the specific purpose of acquiring the Acquirer Common Stock.
-25-
<PAGE> 32
(f) The Transferor will not sell, transfer, pledge,
donate, assign, mortgage, hypothecate or otherwise encumber the Acquirer Common
Stock unless the Acquirer Common Stock is registered under the Securities Act or
the Acquirer is given an opinion of counsel (which may be an opinion of counsel
to the Acquirer), reasonably acceptable to the Acquirer, that such registration
is not required under the Securities Act.
(g) The Transferor realizes that the Acquirer is relying
on the validity of the Transferor's representations and agreements contained
herein and in the other Transaction Documents in issuing the Acquirer Common
Stock to the Transferor without registration under the Securities Act.
4.32 ACCURACY OF INFORMATION. No representation or warranty by the
Transferor in any Transaction Document, and no information contained herein or
therein or in any document delivered pursuant hereto or thereto, including the
Company Financial Statements and the Schedules hereto, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements contained herein or therein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER.
The Acquirer hereby represents and warrants to the Transferor as
follows:
5.1 CORPORATE. The Acquirer is a corporation duly organized,
validly existing and in good standing under the Laws of the State of Delaware
and is qualified to do business as a foreign corporation in any jurisdiction
where it is required to be so qualified.
5.2 AUTHORIZATION. The Acquirer has the requisite power and
authority to execute and deliver the Transaction Documents to which it is a
Party and to perform the Transactions performed or to be performed by it. Such
execution, delivery and performance by the Acquirer has been duly authorized by
all necessary corporate action. The Acquirer has duly executed and delivered
this Agreement and this Agreement constitutes a valid and binding obligation of
the Acquirer, enforceable against the Acquirer in accordance with its terms;
except to the extent that enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar Laws
relating to or affecting the rights of creditors generally or contrary to public
policy, except as enforcement hereof is subject to general principles of equity
(regardless of whether such enforcement is considered in a proceeding at law or
in equity), and except to the extent that provisions indemnifying a Party
against Liability for his, her or its own wrongful or negligent acts may be
unenforceable.
5.3 CONSENTS AND APPROVALS. Neither the execution and delivery by
the Acquirer of the Transaction Documents to which it is a Party, nor the
performance of the Transactions by the Acquirer, will require any Consent,
constitute a Default, or cause any payment obligation to arise under (a) any Law
or Court Order to which the Acquirer is subject, (b) the Charter Documents or
bylaws of the Acquirer or (c) any Contract, Governmental Permit or other
document to which the Acquirer is a party or by which the properties or other
Assets of the Acquirer may be subject.
-26-
<PAGE> 33
5.4 CAPITALIZATION AND STOCK OWNERSHIP. The total authorized
capital stock of the Acquirer consists of 100,000,000 shares of Common Stock,
$0.001 par value, no shares of which are issued and outstanding as of June 7,
1999. When issued at the Closing, all issued and outstanding shares of Common
Stock of the Acquirer will be duly authorized, validly issued, fully paid and
non-assessable.
5.5 LEGAL PROCEEDINGS. There is no Litigation that is pending or,
to the Acquirer's knowledge, threatened against the Acquirer, except where such
Litigation is not expected to have a Material Adverse Effect. There has been no
Default by the Acquirer under any Laws applicable to the Acquirer, and the
Acquirer has not received any notices from any governmental entity regarding any
alleged Defaults under any Laws. There has been no Default with respect to any
Court Order applicable to the Acquirer.
5.6 FINDER'S FEES. Acquirer shall pay at the Closing all
commissions, finder's or similar fees in connection with the Transactions for
any Person retained by the Acquirer in such capacity.
5.7 SECTION 351. Immediately after the Closing, the Transferor,
together with (a) the Transferors of all Businesses acquired by the Acquirer in
connection with the IPO, (b) all of the purchasers of the Acquirer's Common
Stock in the IPO, and (c) all other Transferors of property to the Acquirer in
exchange for the Acquirer Common Stock in connection with the IPO, shall possess
at least eighty (80%) percent of the total combined voting power of all classes
of Acquirer Common Stock entitled to vote and at least eighty (80%) percent of
the total number of shares of all other classes of stock of the Acquirer;
provided, however, this representation only applies to Transferors receiving
Acquirer Common Stock as part of their Transfer Consideration.
6. TAXES.
The following provisions shall govern the allocation of
responsibility for certain Tax matters following the Closing Date:
6.1 TRANSFEROR'S TAX PREPARATION. The Transferor shall prepare or
cause to be prepared and file or cause to be filed, within the time and in the
manner provided by Law, all Tax Returns of the Company for all periods ending on
or before the Closing Date that are due after the Closing Date. Transferor shall
pay to the Company on or before the due date of such Tax Returns the amount of
all Taxes shown as due on such Tax Returns to the extent that such Taxes are not
reflected in the current Liability accruals for Taxes (excluding reserves for
deferred Taxes) shown on the Company's books and records as of the Closing Date.
Such Tax Returns shall be prepared and filed in accordance with applicable Law
and in a manner consistent with past practices and shall be subject to review
and approval by the Acquirer. To the extent reasonably requested by the
Transferor or required by Law, the Acquirer and the Company shall participate in
the filing of any Tax Returns filed pursuant to this paragraph.
6.2 TAX PREPARATION. The Company shall prepare or cause to be
prepared and file or cause to be filed any Tax Returns for Tax periods which
begin before the Closing Date and end after the Closing Date. The Transferor
shall pay to the Company within 15 days after the date on which Taxes are paid
with respect to such periods an amount equal to the portion of such Taxes which
-27-
<PAGE> 34
relates to the portion of such taxable period ending on the Closing Date to the
extent such Taxes are not reflected in the current Liability accruals for Taxes
(excluding reserves for deferred Taxes) shown on the Company's books and records
as of the Closing Date. For purposes of this Section 6, in the case of any Taxes
that are imposed on a periodic basis and are payable for a taxable period that
includes (but does not end on) the Closing Date, the portion of such Tax which
relates to the portion of such taxable period ending on the Closing Date shall
(a) in the case of any Taxes other than Taxes based upon or related to income or
receipts, be deemed to be the amount of such Tax for the entire taxable period
multiplied by a fraction the numerator of which is the number of days in the
taxable period ending on the Closing Date and the denominator of which is the
number of days in the entire taxable period, and (b) in the case of any Tax
based upon or related to income or receipts be deemed equal to the amount which
would be payable if the relevant taxable period ended on the Closing Date. Any
credits relating to a taxable period that begins before and ends after the
Closing Date shall be taken into account as though the relevant taxable period
ended on the Closing Date. Notwithstanding anything to the contrary herein, the
calculation of any Tax pursuant to this Section 6.2 shall be made on an accrual
basis.
6.3 COOPERATION ON TAX MATTERS. The Acquirer and the Company on
one hand and the Transferor on the other hand shall (a) cooperate fully, as
reasonably requested, in connection with the preparation and filing of Tax
Returns pursuant to this Section 6 and any audit, Litigation or other proceeding
with respect to Taxes; (b) make available to the other, as reasonably requested,
all information, records or documents with respect to Tax matters pertinent to
the Company for all periods ending prior to or including the Closing Date; and
(c) preserve information, records or documents relating to Tax matters pertinent
to the Company that is in their possession or under their control until the
expiration of any applicable statute of limitations or extensions thereof.
6.4 MISCELLANEOUS TAX OBLIGATIONS. The Transferor shall timely pay
all transfer, documentary, sales, use, stamp, registration and other Taxes and
fees arising from or relating to the Transactions, and the Transferor shall, at
his own expense, file all necessary Tax Returns and other documentation with
respect to all such transfer, documentary, sales, use, stamp, registration, and
other Taxes and fees. If required by applicable Law, the Acquirer and the
Company will join in the execution of any such Tax Returns and other
documentation.
7. COVENANTS OF THE COMPANY AND THE TRANSFEROR.
7.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date,
the Transferor shall pay the expenses incurred by him in connection with the
Transactions, including any amounts that may be due from the Transferor to his
lawyers, accountants, consultants, investment bankers, brokers, finders, and
other advisors.
7.2 OPERATION OF BUSINESS PRIOR TO THE CLOSING. Except as
contemplated hereby, or as may be incidental to or in furtherance of the
Transactions, or as may have been set forth herein or in the Schedules, the
Company will not (and the Transferor will not cause or permit the Company to)
engage in any practice, take any action, embark on any course of inaction, or
enter into any transaction outside the ordinary course of business. Without
limiting the generality of the foregoing, from the date hereof to the Closing:
-28-
<PAGE> 35
(a) the Company will not adopt or propose any change in
its Charter Documents or bylaws;
(b) the Company will not merge or consolidate with any
other Person or acquire a material amount of Assets of any other Person without
the written permission of the Acquirer;
(c) the Company will not sell, lease, license or
otherwise dispose of any material Assets or property except (i) pursuant to
existing Contracts or commitments, (ii) in the ordinary course of business, or
(iii) as consented to in writing by the Acquirer;
(d) except as otherwise provided for in this Agreement,
the Company will not issue, sell, purchase, repurchase, redeem or otherwise
acquire any Company securities;
(e) except with the prior written consent of the
Acquirer, the Company shall not make any Tax election that would have an adverse
effect on the Company;
(f) the Company will timely file all Tax Returns due on
or before the Closing Date and pay (or reserve for) all Taxes due and payable
with respect to periods;
(g) the Company will not do any of the items described in
Section 4.28; and
(h) the Company will not agree or commit to do any of the
foregoing.
7.3 PRESERVATION OF BUSINESS. Except as contemplated hereby, or as
may be incidental to or in furtherance of the Transactions, or as may have been
set forth herein or in the Schedules, the Transferor will cause the Company to
use reasonable commercial efforts to keep its Business and properties
substantially intact, including its present operations, physical facilities,
working conditions, and relationships with lessors, licensors, suppliers,
Subscribers, any other customers, and employees.
7.4 ACCESS.
(a) Only in the event that neither the Acquirer nor the
Transferor exercise their right to terminate this Agreement as provided in
Section 15 herein, the Transferor will cause the Company to permit the
Acquirer's representatives access at reasonable times, and in a manner so as not
to interfere with the normal Business operations of the Company, to the
headquarters of the Company and to all books, records, Contracts, Tax records,
and documents of or pertaining to the Company; provided, however, that the
Acquirer shall direct all requests for information and material only through the
Transferor, unless otherwise agreed to by the Acquirer and the Transferor in
writing.
(b) The Acquirer shall proceed to arrange with the
Transferor a mutually agreeable time and place at which the Acquirer may conduct
interviews with key employees and/or customers of the Company mutually agreed to
by the Acquirer and the Transferor.
7.5 NOTICE OF DEVELOPMENTS. The Transferor will give prompt
written notice to the Acquirer after the Company or the Transferor obtains
knowledge of any material development affecting the Assets, Liabilities,
Business, financial condition, operations, results of operations, or
-29-
<PAGE> 36
future prospects of the Company including but not limited to (a) any development
affecting the ability of the Company to consummate the Transactions, (b) any
Outage affecting more than 1% of all Subscribers lasting for 3 hours or more or
(c) any loss of any material Subscriber or any material equipment or other
supplier to the Company. A disclosure by any Party pursuant to this Section 7.5
shall not be deemed to amend or supplement the Schedules or to prevent or cure
any misrepresentation, breach of warranty, and/or breach of covenant.
7.6 EXCLUSIVITY. Through the Closing Date, the Transferor will not
(and the Transferor will not cause or permit the Company to) (a) solicit,
initiate, or encourage the submission of any proposal or offer from any Person
relating to any (i) liquidation, dissolution, or recapitalization, (ii) share
exchange or consolidation, (iii) acquisition or purchase of securities or Assets
or (iv) similar transaction or business combination involving the Company, or
(b) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. The Transferor will notify the Acquirer immediately if any entity or
person makes any such proposal, offer, inquiry, or contact with respect to any
of the foregoing and shall provide the identity of such entity or Person as well
as any other relevant details regarding the contact.
7.7 [RESERVED]
7.8 AUDITS. Prior to the Closing and at Acquirer's expense, the
Transferor shall use his commercially reasonable best efforts to deliver, or
cause to be delivered, to Acquirer any unqualified and unmodified audit report
of Acquirer's Independent Public Accountants on the Company Financial Statements
of the Company as of December 31, 1998, December 31, 1997 and December 31, 1996,
which report shall be without limitation as to the scope of the audit. The
Transferor and any of the officers or directors of the Company, in their
capacities as officers and directors of the Company, shall provide all
management letters, reports or representations reasonably requested by such
auditors in connection with such audits, and in connection with audits of the
Company for the years ended December 31, 1998, December 31, 1997 and December
31, 1996.
7.9 DUE DILIGENCE. The Company covenants that within 5 business
days of the date hereof, it will provide the Acquirer with substantial due
diligence material concerning the Company, and the Acquirer covenants that
within 21 days of the receipt of such due diligence material to either (i)
request further due diligence material from the Company, which request will
begin the time period response and review provisions of this Section 7.9 anew,
but such time period may be started anew only once; or (ii) notify the Company
of its intention whether or not to terminate this Agreement; provided, however,
that termination pursuant to this Section 7.9 will not be deemed a breach of
this Agreement.
7.10 SCHEDULES. The Transferor covenants that within 10 business
days of the date hereof, it will provide the Acquirer with completed Schedules
as required by this Agreement, and the Acquirer covenants that within 21 days of
the receipt of such Schedules to either (i) request additions, revisions and/or
deletions from such Schedules, which additions, revisions and/or deletions shall
be made by the Transferor within 3 days of receipt of Acquirer's request,
provided that if Transferor elects not to make the requested additions,
revisions and/or deletions, the Acquirer may elect to terminate this Agreement,
or (ii) notify the Company of its intention whether or not to terminate this
-30-
<PAGE> 37
Agreement; provided, however, that termination pursuant to this Section 7.10
will not be deemed a breach of this Agreement.
8. COVENANTS OF THE ACQUIRER.
8.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date,
the Acquirer shall pay the expenses incurred by it in connection with the
Transactions, including any amounts that may be due from the Acquirer to its
lawyers, accountants, consultants, investment bankers, brokers, finders, and
other advisors.
8.2 TAX-FREE EXCHANGE. The Parties agree that this transaction
will occur in conjunction with the Related Transactions, and the Parties intend
that the receipt of the Acquirer Common Stock by the Transferor and by the
parties involved in the Related Transactions will be tax-free under Section 351
of the Code; provided, however, this covenant only applies to Transferors
receiving Acquirer Common Stock as part of their Transfer Consideration.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER.
All obligations of the Acquirer to consummate the Transactions are
subject to the satisfaction (or waiver by the Acquirer) prior thereto of each of
the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS.
All of the representations and warranties of the Transferor and the Company
contained in this Agreement shall be true, correct and complete on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date; all of the terms, covenants, agreements
and conditions of this Agreement to be complied with, performed or satisfied by
the Company and the Transferor on or before the Closing Date shall have been
duly complied with, performed or satisfied; and the Acquirer shall have received
a Transferor's certificate and an officer's certificate, each dated the Closing
Date, signed by the Transferor and an officer of the Company, respectively, to
the foregoing effects.
9.2 NO LITIGATION. No Litigation shall have been instituted or
threatened to restrain or prohibit the Transactions, or limiting or restricting
the Acquirer's conduct or operation of the Business of the Company (or its own
Business) following the Closing. There shall be no Litigation of any nature
pending or threatened against the Acquirer or the Company, their respective
properties or any of their officers or directors, that could have a Material
Adverse Effect on the Business, Assets, Liabilities, financial condition,
results of operations or prospects of the Company.
9.3 NO MATERIAL ADVERSE CHANGE. There shall have been no changes
in the Business, operations, affairs, prospects, properties, Assets, existing
and potential Liabilities, obligations, profits or condition (financial or
otherwise) of the Company since the Balance Sheet Date which, taken as a whole,
have a Material Adverse Effect on the Business, Assets, Liabilities, financial
condition, results of operations or prospects of the Company; and the Acquirer
shall have received a certificate, dated the Closing Date, signed by the
Transferor and an officer of the Company to such effect.
-31-
<PAGE> 38
9.4 DUE DILIGENCE REVIEW COMPLETE. The Acquirer shall be fully
satisfied, in its sole discretion, with the results of its due diligence review
of the Company and the Transferor, including the Acquirer's review of, and other
due diligence investigations with respect to, the Business, operations, affairs,
prospects, properties, Assets, existing and potential Liabilities, obligations,
profits and condition (financial and otherwise) of the Company.
9.5 CONSENTS AND APPROVALS. All Consents relating to the
consummation of the Transactions by the Company and the Transferor shall have
been obtained.
9.6 FINANCIAL STATEMENTS. The Acquirer shall have received the
Company Financial Statements and such Company Financial Statements must, in the
opinion of Acquirer's Independent Public Accountants, be suitable or readily
adaptable for incorporation in the Registration Statement, and any prospectus
and annual and periodic reports to be filed by the Acquirer with the SEC
relating to the IPO.
9.7 IPO. The Registration Statement filed by the Acquirer with the
SEC in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
9.8 DOCUMENTS TO BE DELIVERED BY THE TRANSFEROR. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Company and the
Transferor:
(a) Officers/Transferor Certificate. An
Officers/Transferor Certificate substantially in the form of the certificate
attached as EXHIBIT A hereto.
(b) Secretary's Certificate. A Secretary's Certificate,
dated as of the Closing Date, substantially in the form of the certificate
attached as EXHIBIT B hereto, signed by the Secretary of the Company in which
the Secretary certifies that the following documents are attached to such
certificate: (a) the Articles of Incorporation of the Company, certified by the
Secretary of State of the State of Texas as of a date in close proximity to the
Closing Date; (b) a correct and complete copy of the bylaws of the Company; (c)
a certificate of good standing for the Company issued by the Comptroller of the
State of Texas and a Certificate of Existence for the Company certified by the
Secretary of State of the State of Texas, each on a date in close proximity to
the Closing Date; (d) complete and correct copies of all resolutions of the
Board of Directors of the Company; and (e) original signatures of the incumbent
officers of the Company next to their respective titles.
(c) Tax Clearance Certificate. A Tax Clearance
Certificate of the Company, certified by the Secretary of State of the State of
Texas as of a date in close proximity to the Closing Date.
(d) Resignations. The resignations, effective as of the
Closing, of each officer and director of the Company.
(e) Company Shares. Certificates of the Company Shares,
duly endorsed in blank or accompanied by duly executed assignment documents by
the Transferor, representing one hundred
-32-
<PAGE> 39
percent (100%) of the issued and outstanding capital stock of the Company and
all of such Company Shares shall be free and clear of any Encumbrances of any
nature whatsoever.
(f) Escrow Agreement. An Escrow Agreement in the form and
substance set forth as EXHIBIT C attached hereto.
(g) Opinion of Transferor's Counsel. An opinion from
Gardere Wynne Sewell & Riggs, L.L.P., dated the Closing Date, in the form and
substance set forth as EXHIBIT D attached hereto.
(h) [RESERVED]
(i) Subscription Agreement Joinder. A joinder to the
Equity Subscription Agreement in the form and substance of EXHIBIT I attached
hereto for the Transferor.
(j) Registration Agreement Joinder. A joinder to the
Registration Agreement in the form and substance of EXHIBIT J attached hereto
for the Transferor.
(k) Ancillary Documents. Any other Transaction Documents
to which they are a Party.
9.9 [RESERVED]
9.10 [RESERVED]
9.11 FINANCIAL CONDITION. Each of the following shall be true and
complete as of the Closing Date:
(a) the Company shall use its commercially reasonable
best efforts to ensure the release within a reasonable time after Closing, of
all Encumbrances securing debts of the Company which have been paid in full
prior to or at the Closing and all Uniform Commercial Code financing statements
covering such paid debts shall have been terminated;
(b) no unsatisfied liens for the failure to pay Taxes of
any nature whatsoever shall exist against the Company, or against or in any way
affecting any Company Share; and
(c) the Transferor and the Company shall have caused all
of the Company's officers, directors and/or key employees of the Company to have
repaid in full all debts and other obligations, if any, owed to the Company.
9.12 SCHEDULES. The Acquirer shall have received and approved the
Schedules required by this Agreement.
-33-
<PAGE> 40
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFEROR.
All obligations of the Company and the Transferor to consummate the
Transactions are subject to the satisfaction (or waiver by the Transferor to
which the condition relates) prior thereto of each of the following conditions:
10.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS.
All of the representations and warranties of the Acquirer contained in this
Agreement shall be true, correct and complete on and as of the Closing Date with
the same effect as though such representations and warranties had been made on
and as of such date; all of the terms, covenants, agreements and conditions of
this Agreement to be complied with, performed or satisfied by the Acquirer on or
before the Closing Date shall have been duly complied with, performed or
satisfied; and the Company and Transferor shall have received a certificate,
dated the Closing Date, signed by an officer of the Acquirer to the foregoing
effects.
10.2 NO LITIGATION. No Litigation shall have been instituted or
threatened to restrain or prohibit the Transactions.
10.3 CONSENTS AND APPROVALS. All Consents relating to the
consummation of the Transactions by the Acquirer shall have been obtained.
10.4 [RESERVED]
10.5 RECEIPT OF ACQUIRER'S SHARES AND CASH PORTION OF THE TRANSFER
CONSIDERATION. Transferor shall receive the Cash Portion of the Transfer
Consideration. Unless the Acquirer elects to convert the Transfer Consideration
to all cash pursuant to Section 2.2(g), the Transferor shall receive the
Acquirer Common Stock representing the Stock Portion of the Transfer
Consideration within seven (7) business days after the Closing.
10.6 DOCUMENTS TO BE DELIVERED BY THE ACQUIRER. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Acquirer:
(a) Officer's Certificate. An Officers Certificate
substantially in the form of the certificate attached as EXHIBIT G hereto.
(b) Secretary's Certificate. A Secretary's Certificate,
dated as of the Closing Date, substantially in the form of the certificate
attached as EXHIBIT H hereto, signed by the Secretary of the Acquirer in which
the Secretary certifies that the following documents are attached to such
certificate: (a) the Certificate of Incorporation of the Acquirer, certified by
the Secretary of State of the State of Delaware as of a date in close proximity
to the Closing Date; (b) a correct and complete copy of the bylaws of the
Acquirer; (c) a certificate of good standing for the Acquirer issued by the
Secretary of State of the State of Delaware on a date in close proximity to the
Closing Date; (d) complete and correct copies of all resolutions of the Board of
Directors of the Acquirer; and (e) original signatures of the incumbent officers
of the Company next to their respective titles.
-34-
<PAGE> 41
(c) Escrow Agreement. An Escrow Agreement in the form and
substance set forth as EXHIBIT C attached hereto.
(d) Subscription Agreement Joinder. A joinder to the
Equity Subscription Agreement in the form and substance of EXHIBIT I attached
hereto.
(e) Registration Agreement Joinder. A joinder to the
Registration Agreement in the form and substance of EXHIBIT J attached hereto.
(f) An Employment Agreement for each of Jack C. Jui, Hang
A. Cheung, Kim Leung and Yick Leung substantially in the form of EXHIBIT F
attached hereto.
(g) Ancillary Documents. Any other Transaction Documents
to which they are a Party.
10.7 IPO. The Registration Statement filed by the Acquirer with the
SEC in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
11. POST-CLOSING COVENANTS.
11.1 GENERAL. In case at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting Party
(unless the requesting Party is entitled to indemnification therefor under
Section 12 below). The Transferor acknowledges and agrees that, from and after
the Closing, the Acquirer and/or Company will be entitled to possession of all
documents, books, records, agreements, and financial data of any sort relating
to the Company; provided, however, that the Transferor may retain any copies of
the foregoing as shall be necessary to comply with applicable Tax and other
Laws, regulations and ordinances.
11.2 TRANSITION. The Transferor will not take any action that
primarily is designed or intended to have the effect of discouraging any lessor,
licensor, Subscriber, supplier, or other business associate of the Company from
maintaining the same business relationships with the Company after the Closing
for a period of twenty-four (24) months thereafter as it maintained with the
Company prior to the Closing.
11.3 RESTRICTIONS ON TRANSFER OF ACQUIRER COMMON STOCK. The
Transferor shall not directly or indirectly, sell, transfer any beneficial
interest in, pledge, hypothecate or otherwise dispose, or offer to sell,
transfer any beneficial interest in, pledge, hypothecate or otherwise dispose
(collectively "Transfer"), any shares of Acquirer Common Stock constituting the
Stock Portion of the Transfer Consideration during the 12-month period following
the Closing Date. The Transferor shall not Transfer more than twenty-five
percent (25%) of the shares of Acquirer Common Stock issued as part of the Stock
Portion of the Transfer Consideration on the Closing Date during any calendar
quarter following the one-year anniversary of the Closing Date.
-35-
<PAGE> 42
12. INDEMNIFICATION.
12.1 BY THE TRANSFEROR. From and after the Closing Date, to the
extent provided in this Section 12, the Transferor shall indemnify and hold
harmless the Acquirer and the Company, and its successors and assigns, and its
officers and directors (each, an "Indemnified Party") from and against any
Liabilities, claims, demands, judgments, losses, costs, damages or expenses
whatsoever (including attorneys', consultants' and other professional fees and
disbursements of every kind, nature and description incurred by such Indemnified
Party in connection therewith) (collectively, "Damages") that such Indemnified
Party may sustain, suffer or incur and that result from, arise out of or relate
to (a) any breach of any representation, warranty, covenant or agreement of the
Transferor or the Company contained in this Agreement, whether or not involving
a third-party claim, or (b) any Litigation affecting the Company that arose from
any matter or state of facts existing prior to the Closing, regardless of
whether it is disclosed in the Schedules to this Agreement.
12.2 BY THE ACQUIRER. From and after the Closing Date, to the
extent provided in this Section 12, the Acquirer shall indemnify and hold
harmless the Transferor, his heirs, legal representatives, successors and
assigns (each, an "Indemnified Party") from and against any Damages that such
Indemnified Party may sustain, suffer or incur and that result from, arise out
of or relate to any breach of any representation, warranty, covenant or
agreement of the Acquirer contained in this Agreement, whether or not involving
a third-party claim.
12.3 PROCEDURE FOR CLAIMS.
(a) An Indemnified Party that desires to seek
indemnification under any part of this Section 12 shall give notice (a "Claim
Notice") to each Party responsible or alleged to be responsible for
indemnification hereunder (an "Indemnitor") prior to any applicable Expiration
Date specified below. Such notice shall briefly explain the nature of the claim
and shall specify the amount thereof. If the matter to which a claim relates
shall not have been resolved as of the date of the Claim Notice, the Indemnified
Party shall estimate the amount of the claim in the Claim Notice, but also
specify therein that the claim has not yet been liquidated (an "Unliquidated
Claim"). If an Indemnified Party gives a Claim Notice for an Unliquidated Claim,
the Indemnified Party shall also give a second Claim Notice (the "Liquidated
Claim Notice") within 60 days after the matter giving rise to the claim becomes
finally resolved, and the Second Claim Notice shall specify the amount of the
claim. Each Indemnitor to which a Claim Notice is given shall respond to any
Indemnified Party that has given a Claim Notice (a "Claim Response") within 20
days (the "Response Period") after the later of (i) the date that the Claim
Notice is given or (ii) if a Claim Notice is first given with respect to an
Unliquidated Claim, the date on which the Liquidated Claim Notice is given. Any
Claim Notice or Claim Response shall be given in accordance with the notice
requirements hereunder, and any Claim Response shall specify whether or not the
Indemnitor giving the Claim Response disputes the claim described in the Claim
Notice. If any Indemnitor fails to give a Claim Response within the Response
Period, such Indemnitor shall be deemed not to dispute the claim described in
the related Claim Notice. If any Indemnitor elects not to dispute a claim
described in a Claim Notice, whether by failing to give a timely Claim Response
or otherwise, then the amount of such claim shall be conclusively deemed to be
an obligation of such Indemnitor.
-36-
<PAGE> 43
(b) If any Indemnitor shall be obligated to indemnify an
Indemnified Party hereunder, such Indemnitor shall pay to such Indemnified Party
within 30 days after the last day of the Response Period the amount to which
such Indemnified Party shall be entitled. If the Acquirer shall be the
Indemnified Party, it shall first seek payment of the Damages under the Escrow
Agreement, but only to the extent that Escrow Funds are then being held by the
Escrow Agent and are not subject to other claims for indemnification. To the
extent that the Escrow Funds are unavailable or insufficient to cover the
Damages, the Acquirer shall seek indemnification directly from the Transferor
for the payment of any remaining Damages. If the Transferor shall be the
Indemnified Party, he shall seek indemnification directly from the Acquirer. If
there shall be a dispute as to the amount or manner of indemnification under
this Section 12, the Indemnified Party shall seek arbitration under Section 13
to the extent that the Indemnified Party seeks to recover Damages from any
Indemnitor. If any Indemnified Party fails to receive all or part of any
indemnification obligation when due, then such Indemnified Party shall also be
entitled to receive from the applicable Indemnitor or the Escrow Agent, if
applicable, interest on the unpaid amount for each day during which the
obligation remains unpaid at an annual rate equal to the applicable short term
federal rate for federal income Tax purposes in effect on the date of expiration
of said 30-day period ("Prime Rate"), and the Prime Rate in effect on the first
business day of each calendar quarter shall apply to the amount of the unpaid
obligation during such calendar quarter.
(c) Notwithstanding any other provision of this Section
12, (i) an Indemnified Party shall be entitled to indemnification hereunder only
when the aggregate of all Damages to such Indemnified Party exceeds $25,000.00
(the "Deductible Amount") and then such Indemnified Party shall be entitled to
indemnification for its Damages in excess of the Deductible Amount and (ii) no
Indemnitor as a group shall be liable under this Section 12 for any amount in
excess of the Transfer Consideration, except that any Damages based on a breach
of representations and warranties with respect to Tax matters or Litigation
matters shall not be counted against or subject to such maximum limitation. In
addition, the limitations of this paragraph (c), however, shall not apply to (x)
the Company's or Transferor's representations and warranties in Section 4.2,
4.4, 4.5, 4.8, 4.15, 4.16 or Section 6, (y) damages arising out of common law
fraud in connection with the Transactions or (z) any covenants or agreements to
be performed after Closing.
(d) If the existence of an obligation for the payment of
money to a third party (other than fines or other payments to any governmental
entity that relate to matters that affect the ongoing operation of the Business
to which the fines or other payments relate) causes any representation or
warranty of an Indemnitor in this Agreement to be untrue, then, if such
Indemnitor satisfies such obligation to such third party in full, such
Indemnitor shall not be required to indemnify any Indemnified Party for any
Damages resulting from such breach of the representation or warranty.
12.4 CLAIMS PERIOD. Any claim for indemnification under this
Section 12 shall be made by giving a Claim Notice under Section 12.3 on or
before the applicable "Expiration Date" specified below in this Section 12.4, or
the claim under this Section 12 shall be invalid. The following claims shall
have the following respective "Expiration Dates": (a) the first anniversary of
the Closing Date--any claims that are not specified in any of the succeeding
clauses; (b) the date on which the applicable statute of limitations
expires--any claim for Damages related to a breach of any representations or
warranties in Sections 4.2, 4.5, 4.15, or Section 6; and (c) indefinitely--any
claim for Damages related to (i) a breach of any representations or warranties
in Sections 4.4, 4.8 and 4.16 and (ii) a breach of
-37-
<PAGE> 44
any representation or warranty that was untrue when made with an intent to
mislead or defraud. If more than one of such Expiration Dates applies to a
particular claim, the latest of such Expiration Dates shall be the controlling
Expiration Date for such claim. So long as an Indemnified Party in good faith
gives a Claim Notice for an Unliquidated Claim on or before the applicable
Expiration Date, such Indemnified Party shall be entitled to pursue its rights
to indemnification regardless of the date on which such Indemnified Party gives
the related Liquidated Claim Notice.
12.5 THIRD PARTY CLAIMS. An Indemnified Party that desires to seek
indemnification under any part of this Section 12 with respect to any actions,
suits or other administrative or judicial proceedings (each, an "Action") that
may be instituted by a third party shall give each Indemnitor prompt notice of a
third party's institution of such Action. After such notice, any Indemnitor may,
or if so requested by such Indemnified Party, any Indemnitor shall, participate
in such Action or assume the defense thereof, with counsel satisfactory to such
Indemnified Party; provided, however, that such Indemnified Party shall have the
right to participate at its own expense in the defense of such Action; and
provided, further, that the Indemnitor shall not consent to the entry of any
judgment or enter into any settlement, except with the written consent of such
Indemnified Party (which consent shall not be unreasonably withheld), that (a)
fails to include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all Liability in respect
of any such Action or (b) grants the claimant or plaintiff any injunctive relief
against the Indemnified Party. Any failure to give prompt notice under this
Section 12.5 shall not bar an Indemnified Party's right to claim indemnification
under this Section 12, except to the extent that an Indemnitor shall have been
harmed by such failure.
12.6 LIMITATION ON INDEMNIFICATION.
(a) Notwithstanding any provision of this Agreement to the
contrary:
(i) Attorney, consultant and other professional fees and
disbursements incurred by an Indemnified Party in connection with this Section
12 shall be based only on time actually spent which shall be charged at no more
than such professional's standard hourly rate, and only one law firm, accounting
firm and other professional firm shall be paid on any claim regardless of the
number of Indemnified Parties involved in such claim.
(ii) The amount of any costs, expenses and other
disbursements incurred by any Indemnified Party in connection with this Section
12 shall be only the actual out-of-pocket amounts actually paid by such
Indemnified Party.
13. DISPUTE RESOLUTION.
13.1 GOOD-FAITH NEGOTIATIONS. If after the Closing any dispute
arises under Section 12 with respect to a claim for Damages that is not settled
promptly in the ordinary course of business, the Parties shall seek to resolve
any such dispute between them, first, by negotiating promptly with each other in
good faith in face-to-face negotiations. If the Parties are unable to resolve
such dispute between them within twenty (20) business days (or such period as
the Parties shall otherwise agree) through these face-to-face negotiations, then
any such dispute shall be resolved in the manner set forth in Section 13.2.
-38-
<PAGE> 45
13.2 ARBITRATION. If the Parties do not resolve a dispute under
Section 13.1, the dispute shall be settled by arbitration conducted on a
confidential basis, under the U.S. Arbitration Act, if applicable, and the then
current Commercial Arbitration Rules of the American Arbitration Association
(the "Association") strictly in accordance with the terms of this Agreement and
the substantive Law of the State of New York. The arbitration shall be conducted
at the Association's regional office located in the Houston, Texas area by three
arbitrators, at least one of whom shall be knowledgeable regarding businesses
engaged in providing services via the Internet, one of whom shall be an attorney
and one of whom shall be a member of a "Big-Five" accounting firm familiar with
Businesses engaged in providing services via the Internet. Judgment upon the
arbitrators' award may be entered and enforced in any court of competent
jurisdiction. Neither Party shall institute a proceeding hereunder unless at
least 60 days prior thereto such Party shall have given written notice to the
other Party of its intent to do so. In any award, the arbitrators shall assess
the arbitration costs and expenses, including attorneys fees of the Parties, in
a manner deemed equitable by the arbitrators, taking into account the
arbitration decision.
13.3 WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING
UNDER OR IN CONNECTION WITH THIS AGREEMENT, WHICH HAS NOT BEEN RESOLVED BY
NEGOTIATION AS PROVIDED HEREIN AND AS TO WHICH LEGAL ACTION NEVERTHELESS OCCURS,
EACH PARTY HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY
TRIAL. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY EACH
PARTY HERETO AND EACH PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR ANY
PERSON ACTING ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT
TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS
EFFECT. EACH PARTY FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED OR HAS HAD
THE OPPORTUNITY TO BE REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE
MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE
WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
EACH PARTY FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION.
13.4 NO PUNITIVE DAMAGES. The Parties to this Agreement agree to
waive any right to seek punitive damages.
14. COMPETITION AND CONFIDENTIALITY BY THE TRANSFEROR.
14.1 RESTRICTED PERIOD. Neither the Transferor nor his respective
Affiliates as provided in Section 14.3 (each a "Restricted Party") shall, at any
time within the Restricted Period (defined below), directly or indirectly, (i)
own, manage, control, participate in, consult with, render services for, or in
any manner engage in any activity or Business competing with the Acquirer or the
Company within the Restricted Territory (as defined below); provided, however,
the Restricted Party will be permitted to continue his involvement in the
Excluded Business so long as it does not compete or interfere with the business
of the Company or the Acquirer in the United States, as of the Closing Date,
(ii) solicit from the Company any known Subscriber or other customer of the
Company, (iii) request or advise any known Subscriber or other customer of the
Company to withdraw, curtail
-39-
<PAGE> 46
or cancel such Subscriber's or other customer's Business with the Company, or
(iv) solicit for employment any person employed by the Company at any time
within the two (2) year period immediately preceding such solicitation;
provided, however, that no owner of less than five percent (5%) of the
outstanding stock of any publicly traded corporation shall be deemed to engage
solely by reason thereof in any of that corporation's Businesses. For purposes
of this Agreement, the Parties have agreed to allocate $50,000 of the Cash
Portion of the Transfer Consideration to the covenant not to compete contained
in this Section 14.1; provided, however, that such allocation will not otherwise
affect any other sections of this Agreement. In addition, no Restricted Party
during the Restricted Period shall contact any of the employees of the Acquirer
for the purpose of hiring or retaining any of such employees for employment,
consulting or similar purposes. The term "Restricted Period" means the period
beginning on the Closing Date and ending on the second anniversary of the
Closing Date. The "Restricted Territory" means the area comprising the entire
United States of America.
14.2 CONFIDENTIALITY. For an indefinite period after the Closing,
no Restricted Party shall divulge, communicate or use in any way, any
Confidential Information or trade secrets of the Business of the Acquirer or the
Company. Each Restricted Party shall, and shall cause its subsidiaries,
Affiliates, officers, directors, employees, accountants, counsel, financial
advisors and other representatives and agents, to treat and hold as such all of
the Confidential Information, refrain from disclosing or using any of the
Confidential Information except in connection with this Agreement and the
Transactions, and except as otherwise permitted hereunder or as may be required
by Law, deliver promptly to the Acquirer or the Company or destroy, at the
request and option of the Acquirer or the Company, all tangible embodiments (and
all copies) of the Confidential Information which are in the possession of such
Restricted Party. In the event that any Restricted Party is requested or
required (by request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar legal process)
to disclose any Confidential Information, such Restricted Party will notify the
Acquirer or the Company promptly of the request or requirement so that the
Acquirer or the Company may seek an appropriate protective order or waive
compliance with the provisions of this Section 14.2. If, in the absence of a
protective order or the receipt of a waiver hereunder, any Restricted Party is
compelled to disclose any Confidential Information or else stand liable for
contempt, such Restricted Party may disclose the Confidential Information;
provided, however, that such Restricted Party shall use its reasonable efforts
to obtain, at the reasonable request of the Acquirer or the Company, an order or
other assurance that confidential treatment will be accorded to such portion of
the Confidential Information required to be disclosed as the Acquirer or the
Company shall reasonably designate.
14.3 AFFILIATES. The terms of this Section 14 shall apply to the
Transferor and any Affiliate of his to the same extent as if they were parties
hereto, and each Transferor shall take whatever actions may be necessary to
cause his Affiliates to adhere to the terms of this Section 14.
14.4 INJUNCTIVE RELIEF. In the event of any breach or threatened
breach by any Restricted Party of any provision of this Section 14, the Acquirer
shall be entitled to injunctive or other equitable relief, restraining such
Party from using or disclosing any Confidential Information in whole or in part,
or from engaging in conduct that would constitute a breach of the obligations of
a Restricted Party under this Section 14. Such relief shall be in addition to
and not in lieu of any other remedies that may be available, including an action
for the recovery of damages. In the event of Litigation
-40-
<PAGE> 47
involving this Section 14, if a court of competent jurisdiction determines that
the scope of this Section 14 is too broad in any respect, then the scope shall
be deemed to be reduced or narrowed to such scope as is found lawful and
reasonable by such court. The Transferor acknowledges, however, that this
Section 14 has been negotiated by the Parties and that the geographical and time
limitations, as well as the limitation on activities, are reasonable in light of
the circumstances pertaining to the Business of the Acquirer and the Company.
15. TERMINATION
15.1 TERMINATION OF AGREEMENT. The Parties may terminate this
Agreement as provided below:
(a) the Acquirer and the Transferor may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(b) the Acquirer may terminate this Agreement by giving
written notice to the Transferor at any time prior to the Closing in the event
the Transferor is in breach of any representation, warranty, or covenant
contained in this Agreement in any material respect and such breach has not been
cured within ten (10) days of written notice thereof, and the Transferor may
terminate this Agreement by giving written notice to the Acquirer at any time
prior to the Closing in the event the Acquirer is in breach of any
representation, warranty, or covenant contained in this Agreement in any
material respect and such breach has not been cured within ten (10) days of
written notice thereof;
(c) unless the Acquirer elects to extend the date of
termination pursuant to Section 2.2(h), this Agreement will terminate if the
Closing shall not have occurred on or before October 31, 1999; provided,
however, that in the event the Acquirer has filed a Registration Statement with
the SEC and either (i) the Acquirer's lead underwriter informs the Acquirer that
a public offering of stock is not advisable or (ii) the Registration Statement
has not been declared effective but the Acquirer is using reasonable efforts to
have the Registration Statement declared effective, then this Agreement shall
terminate if the Closing has not occurred on or before December 31, 1999.
(d) Nothing contained in this Section 15.1 shall alter,
affect, modify or restrict any Parties' rights to rely on and/or seek
indemnification for a breach of any of the representations and warranties and/or
conditions or covenants of any of the Parties contained in this Agreement.
15.2 EFFECT OF TERMINATION. Except as provided in Section 14.2, if
either the Acquirer or the Transferor terminates this Agreement pursuant to
Section 15.1 above, all obligations of the Parties hereunder shall terminate
without any Liability of any Party to any other Party.
-41-
<PAGE> 48
16. MISCELLANEOUS.
16.1 PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by
applicable securities Laws or stock exchange requirements, no Party shall issue
any press release or public announcement relating to the subject matter of this
Agreement prior to, at or about the Closing without the prior written approval
of the Acquirer and the Transferor, which written approval will not be
unreasonably withheld by each Party; provided, however, that any Party may make
any public disclosure it believes in good faith is required by Law or regulation
(in which case the disclosing Party will advise the other Parties prior to
making the disclosure).
16.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer
any rights or remedies upon any person other than the Parties and their
respective successors and permitted assigns.
16.3 CONTENTS OF AGREEMENT. This Agreement, together with the other
Transaction Documents, sets forth the entire understanding of the Parties hereto
with respect to the Transactions and supersedes all prior agreements or
understandings among the Parties regarding those matters.
16.4 AMENDMENT, PARTIES IN INTEREST, ASSIGNMENT, ETC. This
Agreement may be amended, modified or supplemented only by a written instrument
duly executed by each of the Parties hereto. If any provision of this Agreement
shall for any reason be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not affect any
other provision hereof, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, legal representatives, successors and
permitted assigns of the Parties hereto. No Party hereto shall assign this
Agreement or any right, benefit or obligation hereunder; provided, however, that
the Acquirer may assign any or all of its rights, benefits or obligations herein
to any Affiliate. Any term or provision of this Agreement may be waived at any
time by the Party entitled to the benefit thereof by a written instrument duly
executed by such Party. The Parties hereto shall execute and deliver any and all
documents and take any and all other actions that may be deemed reasonably
necessary by their respective counsel to complete the Transactions.
16.5 INTERPRETATION. Unless the context of this Agreement clearly
requires otherwise, (a) references to the plural include the singular, the
singular the plural, the part the whole, (b) references to any gender include
all genders, (c) "or" has the inclusive meaning frequently identified with the
phrase "and/or," (d) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to" and (e) references to "hereunder" or
"herein" relate to this Agreement. The section and other headings contained in
this Agreement are for reference purposes only and shall not control or affect
the construction of this Agreement or the interpretation thereof in early
respect. Annex, section, subsection, schedule and exhibit references are to this
Agreement unless otherwise specified. Each accounting term used herein that is
not specifically defined herein shall have the meaning given to it under GAAP.
16.6 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The
Exhibits, Annexes, and Schedules identified in this Agreement are incorporated
herein by reference and made a part hereof.
-42-
<PAGE> 49
16.7 REMEDIES AND SET-OFF.
(a) The remedies provided by Section 12 shall constitute
the exclusive remedies for the matters covered thereby. With respect to any
matters not covered by such Section, any Party hereto shall be entitled to such
rights and remedies as such Party may have at law or in equity or otherwise for
any breach of this Agreement, including the right to seek specific performance,
rescission or restitution, none of which rights or remedies shall be affected or
diminished by the remedies provided hereunder.
(b) The Acquirer shall be entitled to a set-off against
the Escrow Funds for any, damages, losses, costs or expenses which are incurred
by the Acquirer or the Company and for which the Transferor has indemnified the
Acquirer pursuant to the terms of this Agreement, and for any Cash Portion of
the Transfer Consideration adjustment made pursuant to Section 2. The Acquirer
shall give the Transferor written notice of any claimed set-off. Notwithstanding
any provision of this Agreement to the contrary, after the Acquirer has given
written notice of a claimed set-off, the Acquirer may give unilateral written
notice to the Escrow Agent to release Escrow Funds in the amount of the claimed
set-off, which written notice Transferor hereby acknowledges to be sufficient to
authorize the Escrow Agent to release Escrow Funds as directed by the Acquirer,
unless the Transferor sends an objection notice to the Escrow Agent within the
prescribed period set forth in Section 2(b) of the Escrow Agreement.
16.8 NOTICES. All notices that are required or permitted hereunder
shall be in writing and shall be sufficient if personally delivered or sent by
mail, facsimile or Federal Express (or other reputable delivery or courier
service). Any notices shall be deemed given upon the earlier of (a) the date
when received, (b) the third day after the date when sent by registered or
certified mail, (c) the day when sent by facsimile, (d) the day after the date
when sent by Federal Express (or other reputable delivery or courier service),
to the address or fax number set forth below, unless such address or fax number
is changed by notice to the other Party hereto:
If to the Acquirer:
espernet.com, inc.
383 West 12th Street
New York, New York 10014
Attention: Paul Hart, President
Fax: (212) 989-4717
with a required copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Goodwin Square
225 Asylum Street, 13th Floor
Hartford, Connecticut 06103
Attention: John J. Altorelli, Esq.
Fax: (860) 293-3555
-43-
<PAGE> 50
If to the Transferor:
Jack C. Jui
5433 Westheimer #200
Houston, TX 77056
Fax: (713) 965-0076
with a required copy to:
Gardere, Wynne, Sewell & Riggs, L.L.P.
1000 Louisiana, Suite 3400
Houston, TX 77002-5007
Attention: Alexander C. Chae, Esq.
Fax: (713) 276-6539
16.9 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO
ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF
NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS
OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
16.10 EXPENSES. Each of the Parties and the Company will bear his,
her or its own costs and expenses (including legal fees and expenses and
investment banking fees) incurred in connection with this Agreement and the
Transactions.
16.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more Parties
hereto, and an executed copy of this Agreement may be delivered by one or more
Parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such Party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes as of the date first written above. At the request of
any Party hereto, all Parties hereto agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
[SIGNATURE PAGE FOLLOWS]
-44-
<PAGE> 51
IN WITNESS WHEREOF, this Stock Exchange Agreement has been executed by
the Parties hereto as of the day and year first written above.
ESPERNET.COM, INC.
By: /s/ Chinh Chu
---------------------------------------
Name: Chinh Chu
Title: Chairman
WORLD TRADE NETWORK, INC.
By: /s/ Jack C. Jui
---------------------------------------
Name: Jack C. Jui
Title: President
TRANSFEROR
/s/ Jack C. Jui
-------------------------------------------
Jack C. Jui
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
<PAGE> 52
ANNEX I
STOCKHOLDER LIST
<TABLE>
<CAPTION>
- ----------------------------------------------------------
NAME SHARES OF
OF COMPANY OWNERSHIP
STOCKHOLDER COMMON STOCK PERCENTAGE
- ----------------------------------------------------------
<S> <C> <C>
Jack C. Jui 900 100%
- ----------------------------------------------------------
TOTAL 900 100%
- ----------------------------------------------------------
</TABLE>
<PAGE> 53
ANNEX II
CASH PORTION OF THE TRANSFER CONSIDERATION (1)
<TABLE>
<S> <C> <C>
Gross Aggregate Cash Portion of the Transfer Consideration: $ 5,075,000.00
Less Adjustments:
Net Current Assets $
--------------
Debt $
--------------
Subscriber $
--------------
Churn Rate $
--------------
$
--------------
Less Escrowed Amount:
(5.0% of the Transfer Consideration)(2) $ 725,000.00
Net Aggregate Cash Portion of the Transfer Consideration: $
--------------
Divided by the Number of Outstanding
Shares of Company Common Stock / 900
--------------
CASH PORTION OF THE TRANSFER CONSIDERATION
PER SHARE OF COMPANY COMMON STOCK: $
--------------
</TABLE>
- ----------------
(1) This Annex shall be completed on or prior to the Closing Date,
upon determination of the adjustments to the Cash Portion of the Transfer
Consideration.
(2) The Accounts Receivable adjustment shall be set-off against
the Escrow Funds.
<PAGE> 54
ANNEX III
STOCK PORTION OF THE TRANSFER CONSIDERATION (3)
<TABLE>
<S> <C> <C>
Aggregate Dollar Value of Stock Portion of the Transfer Consideration: $ 9,425,000.00
Divided by the Number of Outstanding
Shares of Company Common Stock / 900
Divided by the midpoint of the IPO offering price
per share of the Acquirer Common Stock as set forth /
the Registration Statement
----------------
STOCK PORTION OF THE TRANSFER CONSIDERATION
PER SHARE OF COMPANY COMMON STOCK: $
----------------
</TABLE>
- ----------------
(3) This Annex shall be completed on or prior to the Closing Date,
upon determination of the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the Registration Statement.
<PAGE> 55
ANNEX IV
[RESERVED]
<PAGE> 56
ANNEX V
ALLOCATION SUMMARY (4)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COMPANY SHARE OWNERSHIP TRANSFER CONSIDERATION
- ----------------------------------------------------------------------------------------------------------------------
CASH PORTION OF STOCK PORTION OF
SHARES OF THE TRANSFER THE TRANSFER
NAME COMPANY CONSIDERATION CONSIDERATION
OF COMMON OWNERSHIP (NET CASH (NET CASH ESCROW
TRANSFEROR STOCK PERCENTAGE AMOUNT) AMOUNT) FUNDS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack C. Jui 900 100% $725,000.00
- ----------------------------------------------------------------------------------------------------------------------
TOTAL 900 100% $725,000.00
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOCATION OF CASH PORTION OF THE TRANSFER CONSIDERATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CASH PORTION OF THE
TRANSFER
NUMBER OF CONSIDERATION PER
EXCHANGED SHARE OF COMPANY TOTAL CASH
TRANSFEROR SHARES X 35% COMMON STOCK RECEIVED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack C. Jui 900 315
- -----------------------------------------------------------------------------------------------------------------
TOTAL 900 315
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOCATION OF STOCK PORTION OF THE TRANSFER CONSIDERATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
STOCK PORTION OF
TRANSFER
NUMBER OF CONSIDERATION PER
EXCHANGED SHARE OF COMPANY TOTAL STOCK
TRANSFEROR SHARES X 65% COMMON STOCK RECEIVED
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack C. Jui 900 585
- -----------------------------------------------------------------------------------------------------------------
TOTAL 900 585
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------
(4) This Annex shall be completed on or prior to the Closing Date,
upon determination of the adjustments to the Cash Portion of the Transfer
Consideration and the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the Registration Statement.
<PAGE> 1
Exhibit 10.3
STOCK EXCHANGE AGREEMENT
by and among
ESPERNET.COM, INC.
(a Delaware corporation)
ENTER.NET, INC.
(a Pennsylvania corporation)
and
THE STOCKHOLDERS OF
ENTER.NET, INC.
AUGUST 19, 1999
<PAGE> 2
STOCK EXCHANGE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS..............................................................................................1
2. THE EXCHANGE OF SHARES...................................................................................9
2.1 Basic Transaction...............................................................................9
2.2 Transfer Consideration..........................................................................9
2.3 Adjustments to Cash Portion of the Transfer Consideration......................................11
2.4 Access to Information; Dispute Resolution......................................................12
2.5 Escrow Agreement...............................................................................12
3. CLOSING.................................................................................................13
3.1 Location, Date.................................................................................13
3.2 Deliveries.....................................................................................13
3.3 [RESERVED].....................................................................................13
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS.......................................................13
4.1 Corporate Status...............................................................................13
4.2 Authorization..................................................................................14
4.3 Consents and Approvals.........................................................................14
4.4 Capitalization and Stock Ownership.............................................................14
4.5 Subsidiaries...................................................................................15
4.6 Corporate Records..............................................................................15
4.7 Financial Statements...........................................................................15
4.8 Title to Assets and Related Matters............................................................15
4.9 Owned Real Property............................................................................15
4.10 Leased Real Property...........................................................................16
4.11 Certain Personal Property......................................................................16
4.12 Non-Real Estate Leases.........................................................................16
4.13 Accounts Receivable............................................................................16
4.14 Liabilities....................................................................................17
4.15 Taxes..........................................................................................17
4.16 Legal Proceedings and Compliance with Law......................................................18
4.17 Contracts......................................................................................18
4.18 Insurance......................................................................................20
4.19 Intellectual Property and Software Products....................................................20
4.20 Employees......................................................................................22
4.21 Employee Relations.............................................................................23
4.22 ERISA..........................................................................................23
4.23 Guaranties.....................................................................................24
4.24 Certain Business Relationships with the Company................................................24
4.25 Systems........................................................................................24
4.26 Subscribers....................................................................................25
4.27 Previous Sales; Warranties.....................................................................25
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
4.28 Absence of Certain Changes.....................................................................25
4.29 Finder's Fees..................................................................................26
4.30 Additional Information.........................................................................26
4.31 Securities Matters.............................................................................27
4.32 Accuracy of Information........................................................................28
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER..........................................................28
5.1 Corporate......................................................................................28
5.2 Authorization..................................................................................28
5.3 Consents and Approvals.........................................................................28
5.4 Capitalization and Stock Ownership.............................................................29
5.5 Legal Proceedings..............................................................................29
5.6 Finder's Fees..................................................................................29
5.7 Section 351....................................................................................29
6. TAXES...................................................................................................29
6.1 Transferors Tax Preparation....................................................................29
6.2 Tax Preparation................................................................................29
6.3 Cooperation on Tax Matters.....................................................................30
6.4 Miscellaneous Tax Obligations..................................................................30
7. COVENANTS OF THE COMPANY AND THE TRANSFERORS............................................................30
7.1 Payment of Expenses............................................................................30
7.2 Operation of Business Prior to the Closing.....................................................30
7.3 Preservation of Business.......................................................................31
7.4 Access and Confidentiality.....................................................................31
7.5 Notice of Developments.........................................................................31
7.6 Exclusivity....................................................................................32
7.7 [RESERVED].....................................................................................32
7.8 Audits.........................................................................................32
7.9 Due Diligence..................................................................................32
7.10 Schedules......................................................................................32
8. COVENANTS OF THE ACQUIRER...............................................................................33
8.1 Payment of Expenses............................................................................33
8.2 Tax-Free Exchange..............................................................................33
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER.....................................................33
9.1 Representations and Warranties; Performance of Obligations.....................................33
9.2 No Litigation..................................................................................33
9.3 No Material Adverse Change.....................................................................34
9.4 Due Diligence Review Complete..................................................................34
9.5 Consents and Approvals.........................................................................34
9.6 Financial Statements...........................................................................34
9.7 IPO............................................................................................34
9.8 Documents to Be Delivered by the Transferors...................................................34
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
9.9 [RESERVED].....................................................................................35
9.10 [RESERVED].....................................................................................35
9.11 Financial Condition............................................................................35
9.12 Schedules......................................................................................36
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFERORS..................................36
10.1 Representations and Warranties; Performance of Obligations.....................................36
10.2 No Litigation..................................................................................36
10.3 Consents and Approvals.........................................................................36
10.4 [RESERVED].....................................................................................36
10.5 Receipt of Acquirer's Shares And Cash Portion of The Transfer Consideration....................36
10.6 Documents to Be Delivered by the Acquirer......................................................36
10.7 IPO............................................................................................37
11. POST-CLOSING COVENANTS..................................................................................37
11.1 General........................................................................................37
11.2 Transition.....................................................................................37
11.3 Restrictions on Transfer of Acquirer Common Stock..............................................37
12. INDEMNIFICATION.........................................................................................38
12.1 By the Transferors.............................................................................38
12.2 By the Acquirer................................................................................38
12.3 Procedure for Claims...........................................................................38
12.4 Claims Period..................................................................................40
12.5 Third Party Claims.............................................................................40
12.6 Limitation on Indemnification..................................................................40
13. DISPUTE RESOLUTION......................................................................................41
13.1 Good-Faith Negotiations........................................................................41
13.2 Arbitration....................................................................................41
13.3 WAIVER OF JURY TRIAL...........................................................................41
13.4 No Punitive Damages............................................................................41
14. COMPETITION AND CONFIDENTIALITY BY THE TRANSFERORS......................................................42
14.1 Restricted Period..............................................................................42
14.2 Confidentiality................................................................................42
14.3 Affiliates.....................................................................................42
14.4 Injunctive Relief..............................................................................43
15. TERMINATION.............................................................................................43
15.1 Termination of Agreement.......................................................................43
15.2 Effect of Termination..........................................................................44
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
16. MISCELLANEOUS...........................................................................................44
16.1 Press Releases and Announcements...............................................................44
16.2 No Third-party Beneficiaries...................................................................44
16.3 Contents of Agreement..........................................................................44
16.4 Amendment, Parties in Interest, Assignment, Etc................................................44
16.5 Interpretation.................................................................................44
16.6 Incorporation of Exhibits, Annexes, and Schedules..............................................45
16.7 Remedies and Set-Off...........................................................................45
16.8 Notices........................................................................................45
16.9 Governing Law..................................................................................46
16.10 Expenses.......................................................................................46
16.11 Counterparts...................................................................................46
</TABLE>
iv
<PAGE> 6
<TABLE>
<CAPTION>
Annexes
- -------
<S> <C>
Annex I Transferor List of Company
Annex II Cash Portion of the Transfer Consideration
Annex III Stock Portion of the Transfer Consideration
Annex IV [RESERVED]
Annex V Allocation Summary
</TABLE>
<TABLE>
<CAPTION>
Exhibits
- --------
<S> <C>
Exhibit A Form of Officer's/Transferor's Certificate of Company
Exhibit B Form of Secretary's Certificate of Company
Exhibit C Form of Escrow Agreement
Exhibit D Form of Opinion of Transferors' Counsel
Exhibit E Employment Agreement - Margo J. Corsa
Exhibit F Employment Agreement - Lawrence R. Corsa
Exhibit G Form of Officer's Certificate of the Acquirer
Exhibit H Form of Secretary's Certificate of the Acquirer
Exhibit I Form of Equity Subscription Agreement
Exhibit J Form of Joinder to Registration Agreement
Exhibit K [RESERVED]
</TABLE>
<TABLE>
<CAPTION>
Schedules
- ---------
<S> <C>
Schedule 4.4 Capitalization and Stock Ownership
Schedule 4.7 Financial Statements
Schedule 4.8 Title to Assets and Related Matters
Schedule 4.10 Real Property
Schedule 4.11 Certain Personal Property
Schedule 4.12 Non-Real Estate Leases
Schedule 4.13 Accounts Receivable
Schedule 4.16 Legal Proceedings and Compliance with Law
Schedule 4.17 Contracts
Schedule 4.18 Insurance
Schedule 4.19 Intellectual Property and Software Products
Schedule 4.20 List of Company Employees
Schedule 4.22 ERISA
Schedule 4.24 Certain Business Relationships with the Company
Schedule 4.26 Subscribers
Schedule 4.30 Additional Information
Schedule 7.2 Transactions Outside the Ordinary Course of Business
</TABLE>
v
<PAGE> 7
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (this "Agreement") is made as of August
19, 1999, by and among ESPERNET.COM, INC., a Delaware corporation (the
"Acquirer"), ENTER.NET, INC., a Pennsylvania corporation (the "Company"), and
all of the stockholders of the Company listed on ANNEX I hereto (each a
"Transferor" and collectively the "Transferors"). The Acquirer, the Company and
the Transferors are sometimes referred to herein individually as a "Party" and
collectively as the "Parties." Certain other terms are used herein as defined
below in Section 1 or elsewhere in this Agreement.
RECITALS
A. The Company is engaged in the business of providing Internet access
and services, web hosting, web design and Internet related services and support.
B. The Transferors in the aggregate are the owners of all of the issued
and outstanding shares of the capital stock of the Company (the "Company
Shares").
C. This Agreement contemplates a transaction in which the Transferors
will exchange their respective Company Shares for the right to receive the
Transfer Consideration (as hereinafter defined).
D. This Agreement further contemplates that the aforementioned
transaction will occur in conjunction with certain related transactions,
consisting of the IPO (as hereinafter defined) and the transfer of certain other
businesses by their respective owners to the Acquirer (the "Related
Transactions"), and the Parties intend that the receipt of the Acquirer Common
Stock (as hereinafter defined) will be tax-free under Section 351 of the Code
(as hereinafter defined).
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, covenants and agreements herein contained, the
receipt and sufficiency of which is hereby acknowledged, the Parties hereto,
intending to be legally bound, hereby agree as follows:
1. DEFINITIONS.
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Accounts Receivable" means, as of any date any trade accounts
receivable, notes receivable, bid or performance deposits, employee advances and
other miscellaneous receivables included in the Assets of the Company.
<PAGE> 8
"Acquirer" is defined above in the preamble.
"Acquirer Common Stock" means the common stock, $0.001 par value, of
the Acquirer.
"Acquirer's Independent Public Accountant" means the "Big-Five"
accounting firm engaged by the Acquirer to perform the audits required under
this Agreement.
"Action" is defined in Section 12.5.
"Affiliated Group" means any affiliated group within the meaning of
Code Sec. 1504 (or any similar group defined under a similar provision of state,
local or foreign law).
"Affiliates" means, with respect to a particular party, persons or
entities controlling, controlled by or under common control with that party, as
well as any officers, directors and majority-owned entities of that party and of
its other Affiliates. As used in this definition, the term "control" means
either (i) the possession, directly or indirectly, of the power to direct or to
cause the direction of the management of the affairs of a Person or the conduct
of the business of a Person, or (ii) the holding of a direct or indirect equity
or voting interest of fifty percent (50%) or more in the Person.
"Agreement" means this Agreement and the annexes, exhibits and
schedules hereto.
"Allocation Summary" means the summary of Transferors and their
respective allocation of the Transfer Consideration attached hereto as ANNEX V.
"Assets" means, with respect to a particular Person, all of the assets,
properties, goodwill and rights of every kind and description, real and
personal, tangible and intangible, that are owned or possessed by such Person.
"Association" is defined in Section 13.2.
"Balance Sheet Date" is defined in Section 4.7.
"Benefit Plans" means all "employee benefit plans" of the Company, as
defined in Section 3(3) of ERISA.
"Business" means, with respect to a particular Person, the entire
business, operations, and facilities of such Person.
"Cash Portion of the Transfer Consideration" is defined in Section
2.2(b) and set forth on ANNEX II.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
-2-
<PAGE> 9
"Churn Rate" means the percentage obtained by dividing the number of
Subscribers that cancel or do not renew their Subscriber Contracts during a
quarter by the average number of Subscribers during that quarter. Average
monthly churn rate is calculated as the quarter's churn rate divided by three.
"Claim Notice" is defined in Section 12.3.
"Claim Response" is defined in Section 12.3.
"Closing" is defined in Section 3.1.
"Closing Date" is defined in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Period" is defined in Section 2.3(f)(i).
"Company" is defined above in the preamble.
"Company Balance Sheet" is defined in Section 4.7.
"Company Common Stock" means the common stock, no par value, of the
Company.
"Company Financial Statements" is defined in Section 4.7.
"Company Long-Term Debt" means all long-term Liabilities of the Company
as determined in accordance with GAAP consistently applied, including the
current portion of any long-term Liabilities, but specifically excluding the
aggregate amount of any Real Estate Leases and Non-Real Estate Leases, whether
or not the terms are in excess of one year.
"Company Net Current Assets" means current Assets (excluding Accounts
Receivable (i) disputed, (ii) subject to pending or threatened Litigation, or
(iii) aged over 60 days) less current Liabilities (including any prepaid or
discounted subscriber contract but, excluding the current portion of long-term
debt) of the Company, each as determined in accordance with GAAP on an accrual
basis of accounting.
"Company Shares" is defined above in the preamble.
"Company Software" is defined in Section 4.19(e).
"Confidential Information" means information, including any formula,
pattern, compilation, program, device, method, technique or process that (a)
derives independent economic value, actual or potential, from not being
generally known to the public or to other Persons who can obtain economic value
from its disclosure or use; and (b) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. Without limiting the
foregoing, "Confidential Information" includes lists or descriptions of any
customers, referral sources or organizations; financial statements,
-3-
<PAGE> 10
cost reports or other financial information; Contract proposals, or bidding
information; business plans and training and operations methods and manuals;
personnel records; fee structure; and management systems, policies or
procedures, including related forms and manuals.
"Consents" means any consent, waiver, approval, order or authorization
of, or registration, declaration or filing with or notice to, any governmental
authority or other Person.
"Contract" means any written or oral contract, agreement, lease,
instrument or other commitment that is binding on any Person or its property
under applicable Law.
"Court Order" means any judgment, decree, injunction, order or ruling
of any federal, state, local or foreign court or governmental or regulatory body
or authority that is binding on any person or its property under applicable Law.
"Damages" is defined in Section 12.1.
"Deductible Amount" is defined in Section 12.3(c).
"Default" means (a) a breach, default or violation, (b) the occurrence
of an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or (c) with respect to any
Contract, the occurrence of an event that with or without the passage of time or
the giving of notice, or both, would give rise to a right of termination,
renegotiation or acceleration or a right to receive damages or a payment of
penalties.
"Employment Agreements" mean the Employment Agreements between the
Acquirer and each Transferor substantially in the form of EXHIBITS E and F
hereto and entered into as of the Closing Date.
"Encumbrances" means any lien, mortgage, security interest (other than
security interests for Non-Real Estate Leases), pledge, restriction on
transferability, defect of title or other claim, charge or encumbrance of any
nature whatsoever on any property or property interest.
"Equity Subscription Agreement" means the Equity Subscription Agreement
between each Transferor and the Acquirer, substantially in the form of EXHIBIT I
hereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreement" means the Escrow Agreement by and among the Escrow
Agent, the Acquirer and the Transferors, substantially in the form of EXHIBIT C
hereto.
"Escrow Agent" means Chicago Title and Trust Company, or other
reputable bank or trust company selected by the Acquirer.
"Escrow Funds" is defined in Section 2.5.
"Escrow Period" is defined in Section 2.5.
-4-
<PAGE> 11
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" is defined in Section 12.4.
"GAAP" means generally accepted accounting principles.
"Governmental Permit" is defined in Section 4.16(b).
"Indemnified Party" is defined in Sections 12.1 and 12.2.
"Indemnitor" is defined in Section 12.3.
"Intellectual Property" means all (a) trademarks, service marks, trade
dress, logos, trade names, and corporate names and registrations and
applications for registration thereof, (b) copyrights and registrations and
applications for registration thereof, (c) computer software, data, and
documentation, (d) trade secrets and confidential Business information
(including formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data
copyrightable works, financial, marketing, and business data, pricing and cost
information, business and marketing plans, and customer and supplier lists and
information, (e) courseware, classroom items and training materials, (f) other
proprietary rights, and (g) copies and tangible embodiments thereof (in whatever
form or medium).
"IPO" means the first underwritten public offering of the Acquirer
Common Stock pursuant to an effective registration statement under the
Securities Act that will result in an aggregate post-IPO market capitalization
of the Acquirer of at least $100 million (determined by multiplying the
outstanding shares of the Acquirer Common Stock by the IPO offering price).
"LLGM" means LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the
Acquirer.
"Law" means any statute, law, ordinance, regulation, order or rule of
any federal, state, local, foreign or other governmental agency or body or of
any other type of regulatory body, including those covering environmental,
energy, safety, health, transportation, bribery, record keeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control
matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, claim, loss, damage, deficiency, guaranty or endorsement of or by
any person, absolute or contingent, accrued or unaccrued, due or to become due,
liquidated or unliquidated.
"Licensed Software" is defined in Section 4.19(d).
"Liquidated Claim Notice" is defined in Section 12.3.
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
-5-
<PAGE> 12
"Material Adverse Effect" means, with respect to a particular Person, a
material adverse effect on the Business, Assets, financial condition, results of
operations, products, competitive position, customers or customer relations of
such Person, determined on a consolidated basis, and when used with respect to
representations, warranties or conditions, means the aggregate effect of all
similar situations unless the context indicates otherwise.
"Non-Real Estate Leases" is defined in Section 4.12.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Outage" means any loss of service to any Business or Systems of the
Company, including but not limited to network access, e-mail, web, news or other
services.
"Owned Software" is defined in Section 4.19(c).
"Party" is defined above in the preamble.
"PBGC" is defined in Section 4.22(e).
"Person" means any natural person, corporation, limited liability
company, partnership, proprietorship, association, trust or other legal entity.
"Prime Rate" is defined in Section 12.3(b).
"POPs" is defined in Section 4.25.
"Real Estate Lease" is defined in Section 4.10.
"Real Property" is defined in Section 4.10.
"Receivable Shortfall" is defined in Section 2.3(f)(ii).
"Registration Agreement" means the joinder to the Registration
Agreement between each Transferor and the Acquirer, substantially in the form of
EXHIBIT J hereto.
"Registration Statement" means the Acquirer's registration statement on
Form S-1 once filed with and deemed effective by the SEC in connection with the
IPO.
"Related Transaction" is defined above in the preamble.
"Required Subscribers" means the number of Subscribers equal to the
product of (i) 18,000 multiplied by (ii) a 20% annual growth rate pro rated for
the period commencing on May 31, 1999 and ending on the Closing Date.
"Response Period" is defined in Section 12.3.
-6-
<PAGE> 13
"Restricted Party" is defined in Section 14.1.
"Restricted Period" is defined in Section 14.1.
"Restricted Territory" is defined in Section 14.1.
"Retail Subscriber" means any customers of the Company who (a) are
currently connected to and receiving Internet related services from the
Company's Systems; (b) are being charged or have pre-paid the Company's standard
retail rates (which rates are set forth on SCHEDULE 4.26) pursuant to the
Company's standard form Subscriber Contracts attached hereto on SCHEDULE 4.26;
(c) have paid such stated rates in full for at least one full month; (d) are not
two or more months delinquent in the payment of any invoice from the Company;
(e) have not, in the preceding two months, been given a waiver or forgiveness of
service charges; (f) have not received any inducement to become connected to the
Company's Systems or to receive or pay for services (other than pursuant to the
Company's customary marketing practices); and (g) have not notified the Company
in writing of their intention to cancel service.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Stock Portion of the Transfer Consideration" is defined in Section
2.2(b) and set forth on ANNEX III.
"Subscriber" means any Retail Subscriber or any Wholesale Subscriber.
"Subscriber Contract" means any Contract whereby the Company provides
services to a Subscriber.
"Systems" means the infrastructure used to provide Internet access and
related services, including network components, communications facilities,
servers, services and service platforms (including for e-mail, news, DNS, web,
authentication and other services), firewalls, power plants, data processing
platforms, MIS systems, office automation systems and internal LAN network
management systems.
"Taxes" means all taxes, duties, charges, fees, levies or other
assessments imposed by any taxing authority (i.e. whether federal, state, local,
municipal or foreign) including, without limitation, all net income, gross
income, gross receipts, value-added, excise, withholding, social security,
personal property, real estate, sales and use, ad valorem, license, lease,
service, severance, stamp, transfer, payroll, employment, unemployment,
disability, severance, customs, duties, alternative, windfall profits, add-on
minimum, estimated and franchise taxes or other similar governmental charge or
imposition (including any interest, penalties or additions attributable to or
imposed on or with respect to any such Tax).
-7-
<PAGE> 14
"Tax Return" means any federal, foreign, state and local governmental
tax return, declaration, report, claim for refund, or information return or
statement relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
"Transaction Documents" means this Agreement, the Escrow Agreement, the
Equity Subscription Agreement, the Registration Agreement, the Employment
Agreements and each of the other documents contemplated by this Agreement.
"Transactions" means the transactions contemplated by the Transaction
Documents.
"Transfer" is defined in Section 11.3.
"Transfer Consideration" is defined in Section 2.2(d).
"Transferor" is defined above in the preamble.
"Treasury Regulations" means the regulations, including temporary and
proposed regulations, promulgated by the Treasury Department under the Code
"Unliquidated Claim" is defined in Section 12.3.
"Welfare Plan" is defined in Section 4.22(g).
"Wholesale Subscriber" means any customers of a third-party service
provider who (a) are currently connected to and receiving Internet related
services from the Company's Systems; (b) are being charged or have pre-paid,
directly or indirectly through a third-party service provider, the Company's
standard wholesale rates (which rates are set forth on SCHEDULE 4.26) pursuant
to the Company's standard form Subscriber Contracts attached hereto on SCHEDULE
4.26; (c) have paid such stated rates in full for at least one full month; (d)
are not two or more months delinquent in the payment of any invoice from the
Company; (e) have not, in the preceding two months, been given a waiver or
forgiveness of service charges; (f) have not received any inducement to become
connected to the Company's Systems or to receive or pay for services (other than
pursuant to the Company's customary marketing practices); and (g) have not
notified the Company in writing of their intention to cancel service.
"Year 2000 Compliant" means that all software, hardware, firmware, and
systems (a) include Year 2000 date data century recognition, calculations which
accommodate same century and multi-century formulas and date values, correct
date sort ordering (if date sorting is an included function), and date data
interface values that reflect the century; (b) will not cause an abnormal abend
or abort within the application on account of the date data properly entered
into the application or result in the generation of incorrect values or invalid
outputs involving such date; and (c) provide that all date related user
interface functionalities and data fields include the indication of the correct
century.
-8-
<PAGE> 15
2. THE EXCHANGE OF SHARES.
2.1 BASIC TRANSACTION. On and subject to the terms and conditions of
this Agreement, the Acquirer agrees to exchange with the Transferors, and each
Transferor agrees to exchange with the Acquirer, all of the Company Shares for
the consideration specified below in this Section 2.
2.2 TRANSFER CONSIDERATION.
(a) Generally. The Transfer Consideration exchanged for
Company Shares shall be composed of (i) the Cash Portion of the Transfer
Consideration and (ii) the Stock Portion of the Transfer Consideration. In
addition, the Acquirer shall pay to the Company as payment of employee retention
bonuses (1) $24,000.00 as payment of employee retention bonuses within 24 hours
of execution of this Agreement by wire transfer or certified check delivered the
next day by overnight courier, (2) $100,000.00 as payment of employee retention
bonuses on the Closing Date by wire transfer, and (3) $11,000 as the final
installment of legal and accounting expense reimbursements pursuant to the
letter agreement dated July 14, 1999 between the Acquirer and the Transferors.
(b) Transfer Consideration Adjustments. The Acquirer agrees to
pay to the Transferors the aggregate sum of (i) $7,200,000.00 in U.S. currency
pursuant to ANNEX II, to be adjusted (A) downward by the aggregate amount of all
adjustments made pursuant to Section 2.3, and (B) upward by the amount of cash
paid in lieu of any fractional shares which would otherwise be issued in
accordance with this Agreement (the "Cash Portion of the Transfer
Consideration"); and (ii) $4,800,000 worth of Acquirer Common Stock, consisting
of an aggregate number of shares of Acquirer Common Stock pursuant to ANNEX III,
valued at the midpoint of the IPO offering price per share of the Acquirer
Common Stock as set forth in the final prospectus immediately prior to the
effectiveness of the Registration Statement (the "Stock Portion of the Transfer
Consideration"); in exchange for all of the Company Shares to be purchased by
the Acquirer pursuant to the terms hereof; provided, however, that the Cash
Portion of the Transfer Consideration and the Stock Portion of the Transfer
Consideration may be altered by the Parties prior to the Closing Date by mutual
written agreement; provided, further, that the Transferors may elect to allocate
up to $200,000.00 of the Transfer Consideration to be paid to a Person
designated by the Transferors at least ten (10) business days prior to the
Closing Date or such other type of allocation of the Transfer Consideration as
mutually agreed by the Parties and the Acquirer agrees to reasonably cooperate
with the Transferors in making such allocation provided that any such allocation
does not (I) increase the Taxes of the Company or the Acquirer, (II) decrease
any the Tax attributes that would otherwise be available to the Company or the
Acquirer, (III) affect the tax-free exchange under Section 351 of the Code or
(IV) have a Material Adverse Effect on the Company or the Acquirer. The
Transferors may elect to allocate part of the Stock Portion of the Transfer
Consideration (subject to the $200,000.00 limit set forth above) if such Person
(1) is an "accredited investor" as that term is defined in Rule 501(a) under the
Securities Act, (2) completes an accredited investor qualification statement
satisfactory to the Acquirer, and (3) agrees to be bound by the restrictions set
forth in Section 11.3. Any Acquirer Common Stock issued to such Person shall not
qualify as a tax-free exchange under Section 351 of the Code.
(c) Escrow Payments. At the Closing Date, $600,000.00 of the
Cash Portion of the Transfer Consideration will be paid in cash by wire transfer
of funds to the Escrow Agent by the
-9-
<PAGE> 16
Acquirer to be held in escrow pursuant to Section 2.5 and shall be available to
support the Transferors' indemnification obligations specified in Section 12.
(d) Payment. The balance of the Cash Portion of the Transfer
Consideration shall be paid by the Acquirer to the Transferors at the Closing by
delivery of cash by wire transfer of funds in the amounts set forth on the
Allocation Summary. The Acquirer Common Stock comprising the Stock Portion of
the Transfer Consideration shall be issued on the Closing Date by the Acquirer
and delivered to the Transferors within seven (7) business days after the
Closing in the amounts set forth on the Allocation Summary next to such
Transferor's name. The sum of the Cash Portion of the Transfer Consideration and
the Stock Portion of the Transfer Consideration shall be referred to as the
"Transfer Consideration." Each of (i) the Cash Portion of the Transfer
Consideration and (ii) the Stock Portion of the Transfer Consideration shall be
allocated among the Transferors in dollar amounts set forth on the Allocation
Summary attached hereto as ANNEX V. Cash will be paid in lieu of any fractional
shares which would otherwise be issued in accordance with this Agreement.
(e) Surrender of Certificates. The aggregate Transfer
Consideration (less the Escrow Funds) will be payable and issuable upon the
surrender of the certificates and other documentation specified in Section 3.2.
As to each Transferor who properly surrenders such certificates and other
documentation, the Acquirer will pay and deliver to such Transferor such
Transferor's Transfer Consideration (less the Escrow Funds). If payment is to be
made to a Person other than the Person in whose name a certificate surrendered
is registered, it shall be a condition of payment that the certificate so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the Person requesting such payment shall pay any transfer or similar
Taxes required by reason of the payment to a Person other than a Transferor or
shall establish to the satisfaction of the Acquirer that such Tax has been paid
or is not applicable.
(f) Restricted Stock. None of the Acquirer Common Stock issued
in connection with this Agreement will be registered under the Securities Act.
Each certificate for such the Acquirer Common Stock shall bear a legend
describing the foregoing restrictions.
(g) Optional Conversion of Transfer Consideration to All Cash.
The Acquirer shall have the right in its sole discretion, whether or not the
Acquirer consummates the IPO, to convert the entire dollar value of the Stock
Portion of the Transfer Consideration set forth in Section 2.2(b) to the Cash
Portion of the Transfer Consideration.
(h) Optional Extension of the Termination Date. In the event
the Closing has not occurred prior to the termination set forth in Section
15.1(c), the Transferors shall have the right in their sole discretion, whether
or not a Registration Statement has been filed with the SEC, to extend the
termination date set forth in Section 15.1(c) as follows: (i) to January 31,
2000 in consideration of increasing the Cash Portion of the Transfer
Consideration by $25 per Subscriber on the Closing Date; and (ii) in the event
the Closing has not occurred prior to January 31, 2000, to February 29, 2000 in
consideration of increasing the Cash Portion of the Transfer Consideration by an
additional $25 per Subscriber on the Closing Date. The number of Subscribers
shall be determined by Acquirer's Independent Public Accountants in good faith
within two business days prior to the Closing Date.
-10-
<PAGE> 17
2.3 ADJUSTMENTS TO CASH PORTION OF THE TRANSFER CONSIDERATION.
(a) Net Current Assets Adjustment. The Cash Portion of the
Transfer Consideration shall be adjusted downward dollar for dollar by the
amount that the Company Net Current Assets on the Closing Date is less than the
greater of (i) the Company Net Current Assets on the Company Balance Sheet or
(ii) zero dollars ($0). In the event the Company Net Current Assets exceeds the
amount required by the preceding sentence, the Company may distribute such
excess to the Transferors on or before the Closing Date. The Company Net Current
Assets shall be determined by Acquirer's Independent Public Accountants in good
faith within two business days prior to the Closing Date.
(b) Long-Term Debt Adjustment. The Cash Portion of the
Transfer Consideration shall be adjusted downward on a dollar for dollar basis
by the amount of the Company Long-Term Debt outstanding on the Closing Date. The
Company Long-Term Debt shall be determined by Acquirer's Independent Public
Accountants in good faith, within two business days prior to the Closing Date.
(c) Subscriber Adjustment. The Cash Portion of the Transfer
Consideration shall be adjusted downward $666.66 per each Subscriber by which
the number of Subscribers on the Closing is less than the number of Required
Subscribers. The number of Subscribers shall be determined by Acquirer's
Independent Public Accountants in good faith within two business days prior to
the Closing Date.
(d) Churn Rate Adjustment. The Cash Portion of the Transfer
Consideration shall be adjusted downward $12,000.00 per each 1/10 of one percent
by which the average monthly Churn Rate for the six-month period ending on the
Closing Date is greater than 3.0%. The average monthly Churn Rate for the
six-month period ending on the Closing Date shall be determined by Acquirer's
Independent Public Accountants in good faith within two business days prior to
the Closing Date.
(e) [RESERVED]
(f) Accounts Receivable Adjustment.
(i) Shortfall. The Acquirer and the Transferors agree
that the Cash Portion of the Transfer Consideration shall be adjusted to the
extent that the Accounts Receivable have not been collected by the Acquirer
within sixty (60) days following the Closing Date; provided, however, that
Accounts Receivable that as of the Closing Date are (A) disputed, (B) subject to
pending Litigation or threatened Litigation, or (C) older than sixty (60) days,
shall be treated as having a value of zero dollars ($0) for purposes of this
Section 2.3, but any amounts collected on these accounts shall be credited
towards the Acquirer's collection of the Accounts Receivable. The "Collection
Period" shall refer to the period beginning on the Closing Date and continuing
until the expiration of sixty (60) days thereafter.
(ii) Adjustment to Purchase Price. Within sixty
(60) days following the end of the Collection Period, the Acquirer shall prepare
and furnish to the Transferors a statement setting forth the Accounts Receivable
and all payments made thereon, calculated as of the end of the
-11-
<PAGE> 18
Collection Period, and the amount, if any, owing from the Transferors to the
Acquirer pursuant to Section 2.3 ("Receivable Shortfall"). The Acquirer shall
first set-off any Receivable Shortfall from the Escrow Funds, and, to the extent
the amount of the Receivable Shortfall exceeds the amount of the remaining
Escrow Funds, the Transferors shall be jointly and severally liable to pay the
difference to the Acquirer within ten (10) days after receipt of written demand
therefor.
(iii) Collection of Accounts Receivable. Between
the Closing Date and the end of the Collection Period, the Acquirer shall cause
the Company to use its reasonable best efforts consistent with the Company's
usual and customary collection practices to collect the Accounts Receivable;
provided, however, that the Company shall not be obligated to resort to
Litigation.
2.4 ACCESS TO INFORMATION; DISPUTE RESOLUTION. Subject to the
requirements of Section 7.4, in connection with the determination of the
adjustments to the Cash Portion of the Transfer Consideration described in
Section 2.3, the Company and the Transferors shall (a) provide Acquirer's
Independent Public Accountants reasonable access to the books and records of the
Company, in whatever form maintained, (b) cause employees of the Company to
cooperate with Acquirer's Independent Public Accountants, (c) provide all
information reasonably requested, all after receiving reasonable notice from
Acquirer's Independent Public Accountants and reaching agreement as to mutually
convenient times for Acquirer's Independent Public Accountants review, and (d)
provide access to the work papers and other materials and documents used or
produced in connection with the preparation of the Company Financial Statements.
Acquirer's Independent Public Accountants shall provide the Transferors with
access to the work papers and other materials and documents used or produced in
connection with the determination of the adjustments to the Cash Portion of the
Transfer Consideration described in Section 2.3. In the event of any dispute
between the Parties concerning the determination of the adjustments to the Cash
Portion of the Transfer Consideration described in Section 2.3, the adjustments
shall be made on the Closing Date in accordance with the determinations of
Acquirer's Independent Public Accountants and such dispute shall be settled
after the Closing Date in accordance with Section 13. In the event that the
Transferors are required to reimburse the Acquirer for any amounts with respect
to the resolution of a dispute concerning the determination of the adjustments
to the Cash Portion of the Transfer Consideration described in Section 2.3, the
Transferors shall first set-off any such amount from the Escrow Funds, and, to
the extent the amount of the reimbursement exceeds the amount of the remaining
Escrow Funds, the Transferors shall be jointly and severally liable to pay the
difference to the Acquirer within ten (10) days after receipt of written demand
therefor.
2.5 ESCROW AGREEMENT. Pursuant to the Escrow Agreement to be entered
into among the Transferors, the Acquirer and the Escrow Agent, the Acquirer
shall deliver $600,000.00 of the Cash Portion of the Transfer Consideration to
the Escrow Agent by wire transfer in immediately available funds at the Closing.
Such monies (which, together with all interest accrued thereon which may be due
to the Party to whom such funds are ultimately paid in accordance with the terms
of the Escrow Agreement, are hereinafter referred to as the "Escrow Funds")
shall be held pursuant to the terms of the Escrow Agreement for payment from
such Escrow Funds of the amounts, if any, owing by the Transferors to the
Acquirer pursuant to the indemnification provisions of Section 12 below,
together with accrued interest thereon. Pursuant to the terms of the Escrow
Agreement, the Escrow Funds shall be used to satisfy any such owed amounts. At
the conclusion of the period ending on the first anniversary of the Closing Date
(such period being referred to herein as the "Escrow Period"),
-12-
<PAGE> 19
such remaining portion of the Escrow Funds not theretofore paid to the Acquirer
in accordance with the terms of the Escrow Agreement or subject to a pending
claim under the Escrow Agreement and this Agreement shall be disbursed to the
Transferors together with accrued interest thereon. The Transferors and the
Acquirer agree that each will execute and deliver such reasonable instruments
and documents as are furnished by any other Party to enable such furnishing
Party to receive those portions of the Escrow Funds to which the furnishing
Party is entitled under the provisions of the Escrow Agreement and this
Agreement.
3. CLOSING.
3.1 LOCATION, DATE. The closing for the Transactions (the "Closing") is
being held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., in New
York, New York, or at such other location as the Parties hereto may agree,
commencing at 9:00 a.m. local time simultaneously with the closing of the IPO
and the Related Transactions or such other date as the Acquirer and the
Transferors may mutually determine (the "Closing Date").
3.2 DELIVERIES.
(a) At the Closing, the Acquirer shall pay by wire transfer or
certified or bank checks of immediately available funds the Cash Portion of the
Transfer Consideration in accordance with Section 2;
(b) Within seven (7) business days following the Closing Date,
the Acquirer shall deliver, or shall cause to be delivered by its transfer
agent, certificates for the Acquirer Common Stock representing the Stock Portion
of the Transfer Consideration in accordance with Section 2; and
(c) At least three (3) business days prior to the Closing, (i)
the Transferors will deliver to LLGM the various certificates, instruments, and
documents referred to in Section 9 below, (ii) the Acquirer will deliver to LLGM
the various certificates, instruments, and documents referred to in Section 10
below, and (iii) each of the Transferors will deliver to LLGM the certificates
representing all of its Company Shares, duly endorsed in blank or accompanied by
duly executed assignment documents. LLGM shall hold all such certificates,
documents and instruments in escrow pending consummation of the Closing.
3.3 [RESERVED]
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS.
Upon the acceptance by the Acquirer of the completed Schedules pursuant
to Section 7.10, the Transferors hereby jointly and severally represent and
warrant to the Acquirer as follows:
4.1 CORPORATE STATUS. The Company is a corporation duly organized,
validly existing and in good standing under the Laws of the Commonwealth of
Pennsylvania and is qualified to do business as a foreign corporation in any
jurisdiction where it is required to be so qualified. The Charter Documents and
bylaws of the Company that have been delivered to the Acquirer are in full
-13-
<PAGE> 20
force and effect and are effective under applicable Laws and the Company is not
in violation of any of the provisions thereof.
4.2 AUTHORIZATION. The Company has the requisite power and authority to
own its Assets and to carry on its Business as currently conducted. The
Transferors have duly approved the terms of this Agreement and the Transactions.
Each Transferor and the Company have duly executed and delivered each
Transaction Document to which he, she or it is a Party, and each Transaction
Document constitutes a valid and binding obligation of such Party, enforceable
against each Transferor and the Company in accordance with its terms; except to
the extent that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar Laws relating to or
affecting the rights of creditors generally or contrary to public policy, except
as enforcement hereof is subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or in equity), and
except to the extent that provisions indemnifying a Party against Liability for
his, her or its own wrongful or negligent acts may be unenforceable.
4.3 CONSENTS AND APPROVALS. Neither the execution and delivery by each
Transferor and the Company of the Transaction Documents to which he, she or it
is a Party, nor the performance of the Transactions to be performed by such
Party, will require any Consent, constitute a Default or cause any payment
obligation (other than a payment obligation arising pursuant to a court-ordered
decree of divorce or an agreement or instrument entered into or given in
connection with a divorce proceeding or similar matter) to arise under (a) any
Law or Court Order to which any Transferor or the Company is subject, (b) the
Charter Documents or bylaws of the Company or (c) any Contract, Government
Permit or other document to which any Transferor or the Company is a party or by
which the properties or other Assets of any Transferor or the Company may be
subject.
4.4 CAPITALIZATION AND STOCK OWNERSHIP.
(a) The total authorized capital stock of the Company consists
of 100 shares of Company Common Stock, 100 shares of which are issued and
outstanding, no shares are (i) subject to issuance pursuant to vested options,
(ii) subject to issuance pursuant to unvested options, (iii) reserved for
issuance pursuant to future option grants, or (iv) subject to unexercised
warrants. The Transferors are not a party to (or have otherwise terminated) any
voting trust, proxy, or other agreement or understanding with respect to the
voting of any capital stock of the Company.
(b) Each Transferor, severally but not jointly, represents and
warrants, only with respect to the Company Shares of such Transferor as set
forth beside his, her or its name on SCHEDULE 4.4, that (i) such Transferor is
the sole record and beneficial owner of the number of shares of Company Common
Stock as set forth beside his, her or its name on SCHEDULE 4.4, and (ii) such
Transferor owns all of such Company Common Stock free and clear of any
Encumbrances (other than restrictions on transfer imposed by applicable federal
and state securities Laws) .
(c) There are no existing options, warrants, calls,
commitments or other rights of any character (including conversion or preemptive
rights) relating to the acquisition of any issued or unissued capital stock or
other securities of the Company. There are no outstanding or authorized option,
stock appreciation, phantom stock, or similar rights with respect to the
Company. All of the
-14-
<PAGE> 21
Company Shares are duly and validly authorized and issued, fully paid and
non-assessable. The Company has complied with all applicable Laws in connection
with the issuance of the Company Shares, and none of the Company Shares were
issued in violation of any Contract binding upon the Company. Upon completion of
the Transactions at the Closing, the Acquirer shall receive valid title to all
of the Company Shares, free and clear of all Encumbrances.
4.5 SUBSIDIARIES. The Company does not own, directly or indirectly, any
subsidiary, any interest or investment (whether equity or debt) in any
corporation, partnership, business, trust, joint venture or other legal entity.
4.6 CORPORATE RECORDS. The minute books of the Company contain
complete, correct and current copies of its Charter Documents and bylaws and of
all minutes of meetings, resolutions and other proceedings of its Board of
Directors and stockholders. The stock record book of the Company is complete,
correct and current.
4.7 FINANCIAL STATEMENTS. The Transferors have delivered to the
Acquirer correct and complete copies of the financial statements of the Company
consisting of a balance sheet of the Company as of March 31, 1999, and the
related income statement and statement of cash flows for the three months then
ended. The Transferors have also delivered to the Acquirer correct and complete
copies of the financial statements consisting of a balance sheet of the Company
as of December 31, 1996, 1997 and 1998, and the related income statement and
statement of cash flows for the years then ended. All such financial statements
are referred to herein collectively as the "Company Financial Statements" and
appear on SCHEDULE 4.7. The Company Financial Statements are consistent with the
books and records of the Company, and there have not been any material
transactions that have not been recorded in the accounting records underlying
such Company Financial Statements. The Company Financial Statements have been
prepared on a cash basis but will be converted, at the Acquirer's expense prior
to the Closing, to an accrual basis in accordance with GAAP applied consistently
with past practices other than the cash basis method of accounting, and the
Company Financial Statements present accurately the financial position and
Assets and Liabilities of the Company as of the dates thereof, and the results
of its operations for the periods then ended. The balance sheet of the Company
as of March 31, 1999 that is included in the Company Financial Statements is
referred to herein as the "Company Balance Sheet," and the date thereof is
referred to as the "Balance Sheet Date."
4.8 TITLE TO ASSETS AND RELATED MATTERS. The Company has good and
marketable title to, valid leasehold interests in, or valid licenses to use, all
of its Assets, free from any Encumbrances, except those set forth on SCHEDULE
4.8. The use of the Assets is not subject to any Encumbrances, and such use does
not materially encroach on the property or rights of anyone else, except those
set forth on SCHEDULE 4.8. All Real Property and tangible personal property
(other than inventory) of the Company are suitable for the purposes for which
they are used, in good working condition and reasonable repair, free from any
known defects.
4.9 OWNED REAL PROPERTY. The Company does not own nor does it have any
interest in any real property or improvements thereon (other than the Real
Estate Leases disclosed in SCHEDULE 4.10, and the leasehold improvements
relating to the same) nor does the Company have
-15-
<PAGE> 22
any options, agreements or Contracts under which it has the right or obligation
to acquire any interest in any real property or improvements.
4.10 LEASED REAL PROPERTY. SCHEDULE 4.10 lists by street address all
real estate used by the Company in the operation of its Business as well as any
other real estate that is in the possession of or leased by the Company and the
improvements (including buildings and other structures) located on such real
estate (collectively, the "Real Property"), and lists any leases under which any
such Real Property is possessed (the "Real Estate Leases"). SCHEDULE 4.10 also
describes any other real estate previously owned, leased or otherwise operated
by the Company or any predecessor thereof and the time periods of any such
ownership, lease or operation. The Real Property complies with all applicable
zoning Laws. The Company has obtained all licenses and rights-of-way from
governmental entities or private parties that are necessary to ensure vehicular
and pedestrian ingress and egress to and from any Real Property. Except as
otherwise set forth in SCHEDULE 4.10, none of the Real Estate Leases are for a
term in excess of one year.
4.11 CERTAIN PERSONAL PROPERTY. SCHEDULE 4.11 lists all tangible
personal property of the Company, except for items subject to any Non-Real
Estate Leases, and describes and specifies the location of all such items of
tangible personal property that were included in the Company Balance Sheet.
Except as otherwise set forth in SCHEDULE 4.11, since the Balance Sheet Date,
the Company has not acquired any items of tangible personal property (other than
inventory and office supplies). All of such tangible personal property (a) is in
operating condition, reasonable wear and tear excepted, (b) is usable in the
ordinary course of the Company's Business, and (c) conforms with any applicable
Laws relating to its construction, use and operation. Except for those items
subject to the Non-Real Estate Leases (defined below), no Person other than the
Company owns any vehicles, equipment or other tangible Assets located on the
Real Property that are used by the Company in its Business (other than
immaterial items of personal property owned by the Company's employees) or that
are necessary for the operation of its Business.
4.12 NON-REAL ESTATE LEASES. SCHEDULE 4.12 lists all Assets and
property (other than Real Property) that are currently being used in the
operation of the Business and that are possessed by the Company under an
existing lease, including all trucks, automobiles, machinery, equipment,
furniture and computers. SCHEDULE 4.12 also lists the leases under which such
Assets and property listed on SCHEDULE 4.12 are possessed. All of such leases
are referred to herein as the "Non-Real Estate Leases." Except as otherwise set
forth on SCHEDULE 4.12, none of the Non-Real Estate Leases are for a term in
excess of one year.
4.13 ACCOUNTS RECEIVABLE. All Accounts Receivable of the Company that
are reflected on the Company Balance Sheet represent or will represent valid
obligations arising from sales actually made or services actually performed in
the ordinary course of business. Except for those Accounts Receivable of the
Company in excess of 60 days from the date of creation as set forth on SCHEDULE
4.13, all of the Accounts Receivable included in the Assets of the Company are
collectible within 60 days from the respective dates of sale. None of the
Transferors knows of any facts or circumstances (other than general economic
conditions) that are likely to result in any material increase in the
uncollectibility of such Accounts Receivable. SCHEDULE 4.13 contains a complete
and accurate list of all Accounts Receivable as of the date provided therein,
which list sets forth the aging of such Accounts Receivable.
-16-
<PAGE> 23
4.14 LIABILITIES. The Company has no Liabilities, and none of the
Assets of the Company is subject to any Liabilities, except (a) Liabilities set
forth on the Company Balance Sheet or incurred in the ordinary course (none of
which relates to any breach of contract, breach of warranty, tort, infringement,
or violation of Law or arose out of any charge, complaint, action, suit,
proceeding, hearing, investigation, claim or demand) since the Balance Sheet
Date that, individually or in the aggregate, are not material to the Business or
the Assets of the Company or (b) Liabilities of the Company specifically
disclosed on any Schedule (or not required to be disclosed because of the term
or amount involved) that were not required under GAAP to have been specifically
disclosed or reserved for on the Company Balance Sheet.
4.15 TAXES. With respect to the Company and any affiliated predecessor
entities, (i) all reports, returns, statements (including estimated reports,
returns, or statements), and other similar filings scheduled to be filed on or
before the Closing Date (the "Tax Returns") with respect to any Taxes, have been
or will be timely filed with the appropriate governmental agencies in all
jurisdictions in which such Tax Returns are required to be filed, and all such
Tax Returns correctly reflect the Liability for Taxes for the periods,
properties, or events covered thereby; (ii) all Taxes payable with respect to
the Tax Returns referred to in the preceding clause, and all Taxes accruable or
otherwise attributable to events occurring prior to the Closing Date, whether
disputed or not, whether or not shown on any Tax Return, and whether or not
currently due or payable, will have been paid in full prior to the Closing Date;
(iii) none of the Transferors or the Company has any knowledge of any unassessed
Tax deficiencies or of any audits or investigations pending or threatened with
respect to any Taxes; (iv) [RESERVED]; (v) no issues have been raised in any
examination by any taxing authority which, by application of similar principles,
reasonably could be expected to result in a proposed deficiency for any other
period not so examined; (vi) there is in effect no extension for the filing of
any Tax Return and no extension or waiver of the application of any statute of
limitations of any jurisdiction regarding the assessment or collection of any
Tax has been given; (vii) no notice has been received from any Tax authority in
any jurisdiction in which any such entity does not file Tax Returns that it is
or may be subject to taxation by that jurisdiction; (viii) there are no liens
for Taxes upon any Asset except for liens for current Taxes not yet due; (ix)
all deposits required by Law to be made with respect to employees' withholding
and other payroll, employment, or other withholding Taxes, including the
portions of such Taxes imposed upon the employer, have been timely made; (x)
neither the Company, nor any Transferor, has taken or agreed to take any action
that would prevent the receipt by the Transferors of the Stock Portion of the
Transfer Consideration from qualifying as tax-free under the provisions of
Section 351 of the Code; (xi) there are no agreements in place relating to the
allocating or sharing of the payment of, or Liability for, Taxes for any period;
(xii) the Company is not a party to any joint venture, partnership or other
arrangement or Contract that could be treated as a partnership for federal
income Tax purposes; (xiii) the Company has not waived any statue of limitations
in respect of Taxes which waiver is currently in effect; (xiv) the Company is
not a party to any "closing agreement," as described in Section 7121 of the Code
or any corresponding provision of state or local Tax Law, and there are no Tax
rulings or requests for Tax rulings with respect to the Company; (xv) the
Company has not filed a consent under Code Sec. 341(f) concerning collapsible
corporations; (xvi) the Company has not made any payments, is not obligated to
make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that, under any
circumstances, will not be deductible to the Company under Code Sec. 280G;
(xvii) the Company is not and has never been a United States real property
holding corporation within the meaning of Code Sec. 897(c)(2); (xviii) the
Company has disclosed on its
-17-
<PAGE> 24
federal income Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning of Code Sec.
6662; (xix) the Company has never been (nor has any Liability for unpaid Taxes
because it once was) a member of an Affiliated Group filing a consolidated
federal income Tax Return and has never incurred any Liability for the Taxes of
any Person under Treasury Regulations (S)1.1502-6 (or any similar provision of
Law); (xx) the Company has never incurred any Liability for the Taxes of any
Person as a transferee or successor, by contract, or otherwise; (xxi) the
Company has been a validly electing S corporation within the meaning of Sections
1361 and 1362 of the Code at all times during its existence and the Company will
be an S corporation up to and including the Closing Date; (xxii) the Company
would not be liable for any Tax under Section 1374 of the Code if its Assets
were sold for their fair market value as of the Closing Date; and (xxiii) the
Company has not, in the past ten years, (A) acquired assets from another
corporation in a transaction in which the Company's Tax basis for the acquired
assets were determined, in whole or part, by reference to the Tax basis of the
acquired assets (or any other property) in the hands of the transferor or (B)
acquired the stock of any corporation which is a qualified subchapter S
subsidiary.
4.16 LEGAL PROCEEDINGS AND COMPLIANCE WITH LAW.
(a) There is no Litigation that is pending or, to the
Transferors knowledge, threatened against the Company. There has been no Default
by the Company under any Laws applicable to the Company, including Laws relating
to pollution or protection of the environment, and the Company has not received
any notices from any governmental entity regarding any alleged Defaults under
any Laws. There has been no Default with respect to any Court Order applicable
to the Company.
(b) The Company has (i) obtained and is in full compliance
with all governmental permits, licenses, registrations, certificates of
occupancy, approvals and other authorizations (the "Governmental Permits"), all
of which are listed in SCHEDULE 4.16 along with their respective expiration
dates, that are required for the complete operation of the Business of the
Company as currently operated, (ii) all of the Governmental Permits are
currently valid and in full force and (iii) filed such timely and complete
renewal applications as may be required with respect to its Governmental
Permits. Further, no revocation, cancellation or withdrawal thereof has been
threatened.
(c) The Company has filed in a timely manner all reports,
documents, and other materials it was required to file (and the information
contained therein was correct and complete in all respects) under all applicable
Laws (including rules and regulations thereunder).
(d) The Company has possession of all records and documents it
was required to retain under all applicable Laws (including rules and
regulations thereunder).
4.17 CONTRACTS.
(a) SCHEDULE 4.17(a) lists each Contract of the following
types to which the Company is a party, or by which it is bound, as of the date
hereof, except for any Contract that may be terminated by the Company on not
more than 30 days' notice without any Liability:
-18-
<PAGE> 25
(i) Contracts with any current or former stockholder,
director, officer, employee, partner or consultant of the Company or any
Affiliate thereof;
(ii) Contracts for the future purchase of, or payment
for, supplies or products, or for the lease of any Asset from or the performance
of services by a third party;
(iii) Contracts to sell or supply products or to
perform services;
(iv) Contracts to lease to or to operate for any
other party any Asset (other than Real Estate Leases and Non-Real Estate Leases
identified on other Schedules);
(v) Any notes, debentures, bonds, conditional sale
agreements, equipment trust agreements, letter of credit agreements,
reimbursement agreements, loan agreements or other Contracts for the borrowing
or lending of money (including loans to or from the Transferors or any officers,
directors, partners, stockholders or Affiliates of the Company or any members of
their immediate families), agreements or arrangements for a line of credit or
for a guarantee of, or other undertaking in connection with, the indebtedness of
any other Person;
(vi) Any Contracts under which any Encumbrances exist
with respect to any Assets;
(vii) Any Subscriber Contracts for each of the fiscal
years ended December 31, 1996, 1997 and 1998, and for the current fiscal year;
and
(viii) Any formal or informal partnering arrangement
with any merchant or service or web content provider;
(ix) Any Contract with any local exchange carrier,
competitive local exchange carrier, competitive access provider or other
telecommunications carrier;
(x) Any peering, transit or other Contract with any
Internet service provider, online company or similar entity;
(xi) Any written Contract requiring confidentiality
or non-competition other than agreements with customers, employees or
subcontractors in the ordinary course of business; or
(xii) Any other Contracts (other than those described
in any of (i) through (xi) above) not made in the ordinary course of business.
(b) The Transferors have delivered to the Acquirer or made
available for review by the Acquirer a correct and complete copy of each written
Contract listed in Schedule 4.17(a) (as amended to date). Each of the Contracts
set forth on SCHEDULE 4.17(a) is legal, valid, binding and enforceable in
accordance with its terms, and is in full force and effect, and will continue to
be legal, valid, binding and enforceable in accordance with its terms, and will
be in full force and effect on
-19-
<PAGE> 26
identical terms immediately following the Closing. The Company is not in Default
under any Contract (including any Real Estate Leases and Non-Real Estate
Leases), which Default could result in a Liability on the part of the Company.
The Company has not received any communication from, or given any communication
to, any other party indicating that the Company or such other party, as the case
may be, is in Default under any Contract where such Default could have a
Material Adverse Effect. None of the other parties in any such Contract to which
the Company is a party is in Default thereunder. No unfulfilled Subscriber
Contract obligating the Company to perform services will result in a loss to the
Company upon completion of performance. Except for notifications from
Subscribers which would not have a Material Adverse Effect, the Company has not
been notified that any of its Subscribers intend either to dispute charges under
or to terminate early a Subscriber Contract.
(c) SCHEDULE 4.17(c) sets forth a complete and accurate
description of each proposed Contract to which the Company is proposed to be a
party, or by which it is proposed to be bound, as of the date hereof, currently
being negotiated with a possible customer. Notwithstanding the foregoing, the
Transferors make no representations or warranties concerning such proposed
Contracts or the likelihood that the parties thereto will enter into such
proposed Contracts.
(d) SCHEDULE 4.17(d) sets forth a complete and accurate
description of each request for proposal for a Contract with a possible customer
to which the Company is proposed to be a party, or by which it is proposed to be
bound, as of the date hereof, that the Company has pending, or that is currently
being acted upon or considered by the Company. Notwithstanding the foregoing,
the Transferors make no representations or warranties concerning such proposals
or the likelihood that the parties receiving such proposals will accept such
proposals.
4.18 INSURANCE. SCHEDULE 4.18 lists all policies or binders of
insurance held by or on behalf of the Company, specifying with respect to each
policy the insurer, the amount of the coverage offered under the terms of the
policy, the type of insurance, the risks insured, the expiration date, the
policy number and any pending claims thereunder. There is no Default with
respect to any such policy or binder, nor has there been any failure to give any
notice or present any claim under any such policy or binder in a timely fashion
or in the manner or detail required by the policy or binder. There is no notice
of non-renewal or cancellation with respect to, or disallowance of any claim
under, any such policy or binder that has been received by the Company. The
Company has been covered during the past three (3) years by insurance in scope
and amount customary and reasonable for the Business in which it has engaged
during the aforementioned period. The Company currently does not have and has
never had any self-insurance arrangements.
4.19 INTELLECTUAL PROPERTY AND SOFTWARE PRODUCTS.
(a) SCHEDULE 4.19 contains a description of all material
Intellectual Property owned or used by the Company, other than off-the-shelf
software. SCHEDULE 4.19 separately discloses all Intellectual Property under
license, other than licenses related to off-the-shelf software. Except as
otherwise set forth on SCHEDULE 4.19, all Intellectual Property developed by any
Person for use by the Company was developed pursuant to valid work-for-hire
Contracts and such Intellectual Property is not subject to any license or
royalty payments. No Intellectual Property rights not described on SCHEDULE 4.19
are necessary in connection with the conduct of the Business.
-20-
<PAGE> 27
Except as otherwise set forth on SCHEDULE 4.19, the Company owns the entire
right, title and interest in and to, and has the exclusive perpetual
royalty-free right to use, the Intellectual Property, free and clear of all
Encumbrances. Except as otherwise set forth on SCHEDULE 4.19, there are no
pending or, to the knowledge of the Transferors, threatened claims against the
Company by any Person with respect to any of the items, or their use, listed in
SCHEDULE 4.19. Except as otherwise set forth on SCHEDULE 4.19, no Person is
infringing upon nor has any Person misappropriated the Intellectual Property and
the Company is not infringing upon the Intellectual Property rights of any other
Person.
(b) The Company employs procedures to maintain the proprietary
nature of, and owns and has the unrestricted right to use all, trade secrets,
including know-how, inventions, designs, processes, computer software and
documentation for such software and technical data required for or incident to
the development, manufacture, operation and sale of all products and services
sold or proposed to be sold by the Company, free and clear of any Encumbrances,
including, without limitation, all claims of current and former employees,
consultants, officers, directors and shareholders. Each employee and officer of
the Company has executed an agreement with the Company regarding confidentiality
and proprietary information. The Transferors, after reasonable investigation,
are not aware that any of the Company's employees are in violation thereof.
(c) SCHEDULE 4.19 contains a complete and accurate list of all
computer software owned by the Company (the "Owned Software"). Except as
otherwise set forth on SCHEDULE 4.19, the Company has exclusive title to the
Owned Software, free and clear of all claims, including claims or rights of
employees, agents, consultants, customers, licensees or other parties involved
in the development, creation, marketing, maintenance, enhancement or licensing
of such computer software. The Owned Software is not dependent on any Licensed
Software (as defined in paragraph (d) below) in order to fully operate in the
manner in which it is intended.
(d) SCHEDULE 4.19 contains a complete and accurate list of all
software under which the Company is a licensee, lessee or otherwise has obtained
the right to use such software (the "Licensed Software"). SCHEDULE 4.19 also
sets forth a list of all license fees, rents, royalties or other charges that
the Company is required or obligated to pay with respect to the Licensed
Software. Except as otherwise set forth on SCHEDULE 4.19, the Company is in full
compliance with all material provisions of any license, lease or other similar
agreement pursuant to which it has rights to use the Licensed Software and has
proof of purchase of each item of Licensed Software. None of the Licensed
Software has been incorporated into or made a part of any Owned Software or any
other Licensed Software. The Company has not published or disclosed any Licensed
Software to any other party.
(e) The Owned Software and Licensed Software (collectively,
the "Company Software") constitute all software currently used in or necessary
for the conduct of the Business as currently conducted. SCHEDULE 4.19 identifies
all Contracts pursuant to which computer programming services for the Company
were performed. The Transactions will not cause a breach or default under any
license, lease or similar agreement relating to the Company Software or
materially impair the Company's ability to use the Company Software after the
Closing Date in the same manner as such computer software is currently used by
the Company. The Company is not infringing any intellectual property rights of
any other Person with respect to the Company Software, and no other Person is
infringing any intellectual property rights of the Company with respect to the
-21-
<PAGE> 28
Company Software or is claiming any right, title or interest in the Company
Software or any infringement by the Company of any intellectual property right
which such other Person may possess.
(f) SCHEDULE 4.19 lists and separately identifies all
Contracts pursuant to which the Company has been granted rights to market
software owned by third parties, and lists and separately identifies all
Contracts pursuant to which the Company has granted marketing rights in the
Company Software to third parties.
(g) The Company has not taken or failed to take any actions
under the Law of any applicable foreign jurisdictions where the Company has
marketed or licensed the Company Software that would restrict or limit the
ability of the Company to protect, or prevent it from protecting, its ownership
interests in, confidentiality rights of, and rights to market, license, modify
or enhance, the Company Software.
(h) All Company Software is Year 2000 Compliant. All date
processing by the Company Software will include four digit year format and
recognize and correctly process dates for leap years.
(i) No current or former employee of the Company and no other
Person owns or has any proprietary, financial or other interest, direct or
indirect, in whole or in part, and including any right to royalties or other
compensation, in any of the Intellectual Property listed on SCHEDULE 4.19, or in
any application therefor.
4.20 EMPLOYEES.
(a) SCHEDULE 4.20 contains a complete and correct list of the
names and salaries, bonus and other cash compensation of all employees and
officers of the Company, including, without limitation, all temporary, for-hire,
or outsourced employees engaged by the Company during the current calendar year.
Except as set forth on SCHEDULE 4.20, the Company does not have any written or
oral Contracts of employment with any employee of the Company. Except as
otherwise set forth on SCHEDULE 4.20, all employees of the Company are
employee(s) "at will" and the Company or any employee(s) are free to terminate
the employment relationship at any time for any reason without any Liability.
(b) Neither the execution and delivery of this Agreement nor
the consummation of the Transactions will (i) result in any payment to be made
by the Company (including, without limitation, severance, unemployment
compensation, golden parachute (as defined in Code Section 280G or otherwise))
becoming due to any employee or former employee, officer or director, or (ii)
increase or vest any benefits payable under any Benefit Plan.
(c) Any amount that could be received (whether in cash or
property or the vesting of property) as a result of any of the Transactions by
any employee, officer or director of the Company who is a "disqualified
individual" (as such term is defined in Treasury Regulation Section 1.280G-1)
under any employment, severance or termination agreement, other compensation
arrangement or Benefit Plan currently in effect would not be characterized as an
"excess parachute payment" (as such term is defined in Section 280(b)(1) of the
Code).
-22-
<PAGE> 29
4.21 EMPLOYEE RELATIONS. The Company is not (a) a party to any
collective bargaining agreement, (b) a party to, involved in, threatened by, any
labor dispute or unfair labor practice charge, or (c) currently negotiating any
collective bargaining agreement, and the Company has not experienced any work
stoppage during the last three years. The Company has not committed any unfair
labor practice.
4.22 ERISA.
(a) SCHEDULE 4.22 contains a complete list of all Benefit
Plans sponsored or maintained by the Company or under which the Company may be
obligated. Except as otherwise set forth on SCHEDULE 4.22, the Transferors have
delivered to the Acquirer (i) accurate and complete copies of all Benefit Plan
documents and all other material documents relating thereto, including (if
applicable) all summary plan descriptions, summary annual reports and insurance
Contracts, (ii) accurate and complete detailed summaries of all unwritten
Benefit Plans, (iii) accurate and complete copies of the most recent financial
statements and actuarial reports with respect to all Benefit Plans for which
financial statements or actuarial reports are required or have been prepared and
(iv) accurate and complete copies of all annual reports for all Benefit Plans
(for which annual reports are required) prepared within the last three years,
except where such inaccuracy or incompleteness does not have a Material Adverse
Effect. Each Benefit Plan providing benefits that are funded through a policy of
insurance is indicated by the word "insured" placed by the listing of the
Benefit Plan on SCHEDULE 4.22.
(b) Except as otherwise set forth on SCHEDULE 4.22, all
Benefit Plans conform (and at all times have conformed) in all material respects
to, and are being administered and operated (and have at all times been
administered and operated) in material compliance with, the requirements of (to
the extent governed thereby) ERISA, the Code and all other applicable Laws.
Except as otherwise set forth on SCHEDULE 4.22, all returns, reports and
disclosure statements required to be made under ERISA and the Code with respect
to all Benefit Plans have been timely filed or delivered. Except as otherwise
set forth on SCHEDULE 4.22, there have not been any "prohibited transactions,"
as such term is defined in Section 4975 of the Code or Section 406 of ERISA
involving any of the Benefit Plans, that could subject the Company to any
material penalty or Tax imposed under the Code or ERISA.
(c) Except as otherwise set forth on SCHEDULE 4.22, the
Company does not sponsor or maintain any Benefit Plan that is intended to be
qualified under Section 401 (a) of the Code.
(d) Except as otherwise set forth on SCHEDULE 4.22, the
Company does not sponsor a defined benefit plan subject to Title IV of ERISA,
nor does the Company have a current or contingent obligation to contribute to
any multiemployer plan (as defined in Section 3(37) of ERISA), and neither the
Company nor any of its predecessors, if any, have ever contributed to a
multiemployer plan. Except as otherwise set forth on SCHEDULE 4.22, the Company
has no Liability with respect to any employee benefit plan (as defined in
Section 3(3) of ERISA) other than with respect to the Benefit Plans.
-23-
<PAGE> 30
(e) Except as otherwise set forth on SCHEDULE 4.22, there are
no pending or threatened claims by or on behalf of any Benefit Plans, or by or
on behalf of any individual participants or beneficiaries of any Benefit Plans,
alleging any breach of fiduciary duty on the part of the Company or any of its
officers, directors or employees under ERISA or any other applicable
regulations, or claiming benefit payments other than those made in the ordinary
operation of such plans, nor is there, to the knowledge of any Transferor, any
basis for such claim. Except as otherwise set forth on SCHEDULE 4.22, the
Benefit Plans are not the subject of any pending (or any threatened)
investigation or audit by the Internal Revenue Service, the Department of Labor
or the Pension Benefit Guaranty Corporation ("PBGC").
(f) Except as otherwise set forth on SCHEDULE 4.22, the
Company has timely made any and all required contributions under the Benefit
Plans including the payment of any premiums payable to the PBGC and other
insurance premiums.
(g) Except as otherwise set forth on SCHEDULE 4.22, with
respect to any Benefit Plan that is an employee welfare benefit plan (within the
meaning of Section 3(l) of ERISA) (a "Welfare Plan"), (i) each Welfare Plan for
which contributions are claimed as deductions under any provision of the Code is
in material compliance with all applicable requirements pertaining to such
deduction, (ii) with respect to any welfare benefit fund (within the meaning of
Section 419 of the Code) related to a Welfare Plan, there is no disqualified
benefit (within the meaning of Section 4976(b) of the Code) that would result in
the imposition of a Tax under Section 4976(a) of the Code, (iii) any Benefit
Plan that is a group health plan (within the meaning of Section 4980B(g)(2) of
the Code) complies, and in each and every case has complied, with all of the
material requirements of Section 4980B of the Code, ERISA, Title XXII of the
Public Health Service Act and the applicable provisions of the Social Security
Act, and (iv) all Welfare Plans may be amended or terminated at any time on or
after the Closing Date. Except as otherwise set forth on SCHEDULE 4.22, no
Benefit Plan provides any health, life or other welfare coverage to employees of
any Company beyond termination of their employment with the Company by reason of
retirement or otherwise, other than coverage as may be required under Section
4980B of the Code or Part 6 of ERISA, or under the continuation of coverage
provisions of the Laws of any state or locality.
4.23 GUARANTIES. The Company has not agreed to be a guarantor nor has
it otherwise agreed to be liable for any Liability or obligation (including
indebtedness) of any other person other than such potential Liabilities to which
the Company is subject based on the acts or omissions of its employees,
subcontractors and other agents performing services for the Company in the
ordinary course of business (of which the Transferors have no knowledge of any
claim for actual Liability therefor).
4.24 CERTAIN BUSINESS RELATIONSHIPS WITH THE COMPANY. Except as set
forth on SCHEDULE 4.24, neither the Transferors nor their Affiliates have been
involved in any business arrangement or relationship with the Company within the
past twelve (12) months other than service relationships in the ordinary course
of business, and neither the Transferors nor their Affiliates owns any material
property or right, tangible or intangible, which is used in the Business of the
Company.
4.25 SYSTEMS. (a) All of the Systems services and platform servers are
running, or peaking, at no higher than 90% of capacity, (b) all of the Systems'
services are replicated in a redundant
-24-
<PAGE> 31
manner across available platform servers, (c) all remote physical points of
presence ("POPs") are secure, conform to equipment manufacturers' recommended
environmental parameters, and contain an uninterrupted power supply with a
battery back-up of at least 15 minutes, (d) the average Subscriber blockage rate
for dial-in Subscribers is no greater than 1.0% of Subscriber attempts across
the overall network infrastructure, (e) the configuration diagrams provided to
the Acquirer reasonably represent the redundant network facilities between major
backbone locations, and between remote physical POPs and major network
concentration points, (f) the existing power plant at the Company's main
location is equipped with an uninterrupted power supply with a battery back-up
of at least 60 minutes, (g) all deployed dial-in modem, modem shelf and
corresponding technology conform to applicable industry standards necessary to
support Subscriber traffic at a rate of 56Kbps or above, (h) all Systems owned,
leased by, or licensed to or by the Company are Year 2000 Compliant, (i) the
Company utilizes an IP address allocation scheme that conforms to industry
standards, and (j) the Company has access to the quantity of IP addresses
sufficient to support the Company's Subscriber base as currently existing and as
currently contemplated to exist as of September 30, 1999.
4.26 SUBSCRIBERS. SCHEDULE 4.26 sets forth (a) a copy of each standard
form Subscriber Contract, including electronic versions; (b) the number of
Wholesale Subscribers and Retail Subscribers served by the Company by type of
business (i.e., segregated by the following categories, if applicable to the
Company: (i) dial-up, (ii) dedicated access, (iii) web hosting, and (iv) other
businesses) as of April 30, 1999 and the Company's standard rates for such
Subscribers for each type of business; (c) for the period commencing January
1,1997, the Company's monthly Churn Rate (consisting of (i) cancellations of
month-to-month service and/or long-term subscription or service Contracts prior
to expiration (ii) terminations of any such Contracts, and (iii) non-renewal of
any such Contracts upon expiration) by business type during each full calendar
month prior to the date hereof; and (d) as of April 30, 1999, detail as to the
amount of prepaid subscription or service Contracts and the amount of unearned
revenue for all Subscriber Contracts with a remaining term of (i) less than or
equal to 90 days, (ii) greater than 90 days and less than or equal to one year,
(iii) greater than one year and less than or equal to two years, (iv) greater
than two years and less than or equal to three years and (v) greater than three
years. The Company has used its reasonable business efforts to maintain and
currently maintains, good working relationships with all of its Subscribers as a
whole. Except for notices from Subscribers which would not have a Material
Adverse Effect, none of such Subscribers has given the Company notice
terminating, canceling or threatening to terminate or cancel any Contract or
relationship with the Company.
4.27 PREVIOUS SALES; WARRANTIES. Except for such defects and other
breaches that would not have a Material Adverse Effect, all goods sold or
distributed and all services performed by the Company were of merchantable
quality, and the Company has not breached any express or implied warranties
offered by it in connection with the sale or distribution of such goods or
services.
4.28 ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date, the
Company has conducted its Business in the ordinary course and there has not been
with respect to the Company:
(a) any change in the terms of the Subscriber Contracts,
including, without limitation, fees, terms, services, discounts, and
prepayments;
-25-
<PAGE> 32
(b) any material Contract, lease, sublease, license or
sublicense (or series or related contracts, leases, subleases, licenses and
sublicenses) outside the ordinary course of business;
(c) any employment Contract or collective bargaining
agreement, written or oral, or modified the terms of any existing such Contract
or agreement with any of its full-time staff employees other than in the
ordinary course of business;
(d) a change in its Business that has had or is reasonably
likely to have a Material Adverse Effect;
(e) any distribution or payment declared or made in respect of
its capital stock by way of dividends, purchase or redemption of shares or
otherwise, except for subchapter S corporation distributions;
(f) any increase in the compensation payable or to become
payable to any director, officer, employee or agent, except for increases for
non-officer employees made in the ordinary course of business, nor any other
change in any employment or consulting arrangement;
(g) any sale, assignment or transfer of Assets, or any
additions to or transactions involving any Assets, other than those made in the
ordinary course of business;
(h) any change in its Charter Documents or bylaws;
(i) a commitment or agreement on the part of the Company to
incur any Liability or make any capital expenditure in excess of $25,000
individually and $200,000 in the aggregate, including without limitation any
Contracts to provide services or products;
(j) the creation or assumption of any mortgage, pledge, or
other Encumbrance upon any of the Company's Assets;
(k) a breach of a Contract to which the Company is a party, or
an amendment or termination of a Contract or Governmental Permit to which the
Company is a party;
(l) a waiver or release of any claim or right or cancellation
of any debt held; or
(m) a payment to any Affiliate of the Company other than in
the ordinary course of business.
4.29 FINDER'S FEES. No Person retained by any Transferor or the Company
is or will be entitled to any commission or finder's or similar fee in
connection with the Transactions.
4.30 ADDITIONAL INFORMATION. SCHEDULE 4.30 accurately lists the
following:
(a) the names of all officers and directors of the Company,
all of which officers and directors shall have tendered their resignations as
officers and directors, effective as of the Closing;
-26-
<PAGE> 33
(b) the names and addresses of every bank or other financial
institution in which the Company maintains an account (whether checking, saving
or otherwise), lock box or safe deposit box, and the account numbers and names
of Persons having signing authority or other access thereto;
(c) the names of all Persons authorized to borrow money or
incur or guarantee indebtedness on behalf of the Company;
(d) the names of any Persons holding powers of attorney from
the Company and a summary statement of the terms thereof; and
(e) all names under which the Company has conducted any
Business or which it has otherwise used at any time during the past five years.
4.31 SECURITIES MATTERS. Each Transferor receiving Acquirer Common
Stock as part of the Transfer Consideration, severally but not jointly,
represents and warrants as follows:
(a) The Transferors are experienced in evaluating and
investing in high-technology companies such as Acquirer. The Transferors have
substantial experience in investing in and evaluating private placement
transactions of securities in companies similar to Acquirer and are capable of
evaluating the risks and merits of their investment in Acquirer and have the
capacity to protect their own interests.
(b) The Transferors are acquiring the Acquirer Common Stock
solely for their own account and not with a view to, or for resale in connection
with, any distribution thereof, except in compliance with the Securities Act and
applicable state securities Laws, and the Transferors have no present intention
of selling or distributing the Acquirer Common Stock except in compliance with
the Securities Act and applicable state securities Laws. The Transferors
acknowledge that as of the date of this Agreement the Acquirer Common Stock has
not been registered under the Securities Act.
(c) The Transferors are aware of the applicable limitations
under the Securities Act relating to a subsequent sale, transfer, pledge,
mortgage, hypothecation, assignment or other encumbrance of the Acquirer Common
Stock. The Transferors further acknowledge that the Acquirer Common Stock must
be held indefinitely unless it is subsequently registered under the Securities
Act and applicable state securities Laws or an exemption from such registration
is available. The Transferors are aware of the provisions of Rule 144
promulgated under the Securities Act which permits limited resale of shares
acquired in a private placement subject to the satisfaction of certain
conditions, including, among other things, the resale occurring not less than
one year after a party has purchased and paid for the security to be sold.
(d) The Transferors acknowledge that the Acquirer has provided
them with adequate access to financial and other information concerning the
Acquirer and the Acquirer Common Stock, and that the Transferors have had the
opportunity to ask questions of and receive answers from the Acquirer concerning
the Acquirer Common Stock and to obtain therefrom any additional information
necessary to make an informed decision regarding the acquisition of the Acquirer
Common Stock.
-27-
<PAGE> 34
(e) Each of the Transferors is an "accredited investor" as
that term is defined in Rule 501(a) under the Securities Act. None of the
Transferors has been organized for the specific purpose of acquiring the
Acquirer Common Stock.
(f) The Transferors will not sell, transfer, pledge, donate,
assign, mortgage, hypothecate or otherwise encumber the Acquirer Common Stock
unless the Acquirer Common Stock is registered under the Securities Act or the
Acquirer is given an opinion of counsel (which may be an opinion of counsel to
the Acquirer), reasonably acceptable to the Acquirer, that such registration is
not required under the Securities Act.
(g) The Transferors realize that the Acquirer is relying on
the validity of the Transferors' representations and agreements contained herein
and in the other Transaction Documents in issuing the Acquirer Common Stock to
the Transferors without registration under the Securities Act.
4.32 ACCURACY OF INFORMATION. No representation or warranty by any
Transferor in any Transaction Document, and no information contained herein or
therein or in any document delivered pursuant hereto or thereto, including the
Company Financial Statements and the Schedules hereto, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements contained herein or therein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER.
The Acquirer hereby represents and warrants to the Transferors as
follows:
5.1 CORPORATE. The Acquirer is a corporation duly organized, validly
existing and in good standing under the Laws of the jurisdiction of its
incorporation.
5.2 AUTHORIZATION. The Acquirer has the requisite power and authority
to execute and deliver the Transaction Documents to which it is a Party and to
perform the Transactions performed or to be performed by it. Such execution,
delivery and performance by the Acquirer has been duly authorized by all
necessary corporate action. The Acquirer has duly executed and delivered this
Agreement and this Agreement constitutes a valid and binding obligation of the
Acquirer, enforceable against the Acquirer in accordance with its terms; except
to the extent that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar Laws relating to or
affecting the rights of creditors generally or contrary to public policy, except
as enforcement hereof is subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or in equity), and
except to the extent that provisions indemnifying a Party against Liability for
his, her or its own wrongful or negligent acts may be unenforceable.
5.3 CONSENTS AND APPROVALS. Neither the execution and delivery by the
Acquirer of the Transaction Documents to which it is a Party, nor the
performance of the Transactions by the Acquirer, will require any Consent, or
constitute a Default or cause any payment obligation to arise under (a) any Law
or Court Order to which the Acquirer is subject, (b) the Charter Documents or
-28-
<PAGE> 35
bylaws of the Acquirer or (c) any Contract, Governmental Permit or other
document to which the Acquirer is a party or by which the properties or other
Assets of the Acquirer may be subject.
5.4 CAPITALIZATION AND STOCK OWNERSHIP. The total authorized capital
stock of the Acquirer consists of 100,000,000 shares of Common Stock, $0.001 par
value, no shares of which are issued and outstanding as of June 7, 1999. When
issued at the Closing, all issued and outstanding shares of Common Stock of the
Acquirer will be duly authorized, validly issued, fully paid and non-assessable.
5.5 LEGAL PROCEEDINGS. There is no Litigation that is pending or, to
the Acquirer's knowledge, threatened against the Acquirer, except where such
Litigation is not expected to have a Material Adverse Effect. There has been no
Default by the Acquirer under any Laws applicable to the Acquirer, and the
Acquirer has not received any notices from any governmental entity regarding any
alleged Defaults under any Laws. There has been no Default with respect to any
Court Order applicable to the Acquirer.
5.6 FINDER'S FEES. Acquirer shall pay at the Closing all commissions,
finder's or similar fees in connection with the Transactions for any Person
retained by the Acquirer in such capacity.
5.7 SECTION 351. Immediately after the Closing, the Transferors,
together with (a) the Transferors of all Businesses acquired by the Acquirer in
connection with the IPO, (b) all of the purchasers of the Acquirer's Common
Stock in the IPO, and (c) all other Transferors of property to the Acquirer in
exchange for the Acquirer Common Stock in connection with the IPO, shall possess
at least eighty (80%) percent of the total combined voting power of all classes
of Acquirer Common Stock entitled to vote and at least eighty (80%) percent of
the total number of shares of all other classes of stock of the Acquirer;
provided, however, this representation only applies to Transferors receiving
Acquirer Common Stock as part of their Transfer Consideration.
6. TAXES.
The following provisions shall govern the allocation of
responsibility for certain Tax matters following the Closing Date:
6.1 TRANSFERORS TAX PREPARATION. The Transferors shall prepare or cause
to be prepared and file or cause to be filed, within the time and in the manner
provided by Law, all Tax Returns of the Company for all periods ending on or
before the Closing Date that are due after the Closing Date, including all
necessary short period or interim federal and state Tax Returns. Transferors
shall pay on or before the due date of such Tax Returns the amount of all Taxes
shown as due on such Tax Returns. Such Tax Returns shall be prepared and filed
in accordance with applicable Law and in a manner consistent with past
practices. To the extent reasonably requested by the Transferors or required by
Law, the Acquirer and the Company shall participate in the filing of any Tax
Returns filed pursuant to this paragraph.
6.2 TAX PREPARATION. The Acquirer shall cause the Company to prepare
and file any Tax Returns for Tax periods which begin on the Closing Date and end
after the Closing Date.
-29-
<PAGE> 36
6.3 COOPERATION ON TAX MATTERS. The Acquirer and the Company on one
hand and the Transferors on the other hand shall (a) cooperate fully, as
reasonably requested, in connection with the preparation and filing of Tax
Returns pursuant to this Section 6 and any audit, Litigation or other proceeding
with respect to Taxes; (b) make available to the other, as reasonably requested,
all information, records or documents with respect to Tax matters pertinent to
the Company for all periods ending prior to or including the Closing Date; and
(c) preserve information, records or documents relating to Tax matters pertinent
to the Company that is in their possession or under their control until the
expiration of any applicable statute of limitations or extensions thereof.
6.4 MISCELLANEOUS TAX OBLIGATIONS. The Transferors shall timely pay all
transfer, documentary, sales, use, stamp, registration and other Taxes and fees
arising from or relating to the Transactions, and the Transferors shall, at
their own expense, file all necessary Tax Returns and other documentation with
respect to all such transfer, documentary, sales, use, stamp, registration, and
other Taxes and fees. If required by applicable Law, the Acquirer and the
Company will join in the execution of any such Tax Returns and other
documentation.
7. COVENANTS OF THE COMPANY AND THE TRANSFERORS.
7.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date, the
Transferors shall pay the expenses incurred by them in connection with the
Transactions, including any amounts that may be due from the Transferors to
their lawyers, accountants, consultants, investment bankers, brokers, finders,
and other advisors.
7.2 OPERATION OF BUSINESS PRIOR TO THE CLOSING. Except as contemplated
hereby, or as may be incidental to or in furtherance of the Transactions, or as
may have been set forth herein or in the Schedules, the Company will not (and
the Transferors will not cause or permit the Company to) engage in any practice,
take any action, embark on any course of inaction, or enter into any transaction
outside the ordinary course of business. Without limiting the generality of the
foregoing, from the date hereof to the Closing:
(a) the Company will not adopt or propose any change in its
Charter Documents or bylaws;
(b) the Company will not merge or consolidate with any other
Person or acquire a material amount of Assets of any other Person without the
written permission of the Acquirer;
(c) except as set forth on SCHEDULE 7.2, the Company will not
sell, lease, license or otherwise dispose of any material Assets or property
except (i) pursuant to existing Contracts or commitments, (ii) in the ordinary
course of business, and (iii) as consented to in writing by the Acquirer;
(d) except as otherwise provided for in this Agreement, the
Company will not issue, sell, purchase, repurchase, redeem or otherwise acquire
any Company securities;
(e) except with the prior written consent of the Acquirer, the
Company shall not make any Tax election that would have an adverse effect on the
Company;
-30-
<PAGE> 37
(f) the Company will timely file all Tax Returns due on or
before the Closing Date and pay (or reserve for) all Taxes due and payable with
respect to periods;
(g) except as set forth on SCHEDULE 7.2, the Company will not
do any of the items described in Section 4.28; and
(h) the Company will not agree or commit to do any of the
foregoing.
7.3 PRESERVATION OF BUSINESS. Except as contemplated hereby, or as may
be incidental to or in furtherance of the Transactions, or as may have been set
forth herein or in the Schedules, the Transferors will cause the Company to use
reasonable commercial efforts to keep its Business and properties substantially
intact, including its present operations, physical facilities, working
conditions, and relationships with lessors, licensors, suppliers, Subscribers,
any other customers, and employees.
7.4 ACCESS AND CONFIDENTIALITY.
(a) Only in the event that neither the Acquirer nor the
Transferors exercise their right to terminate this Agreement as provided in
Section 15 herein, the Transferors will cause the Company to permit the
Acquirer's representatives access at reasonable times, and in a manner so as not
to interfere with the normal Business operations of the Company, to the
headquarters of the Company and to all books, records, Contracts, Tax records,
and documents of or pertaining to the Company; provided, however, that the
Acquirer shall direct all requests for information and material only through the
Transferors, unless otherwise agreed to by the Acquirer and the Transferors in
writing.
(b) The Acquirer shall proceed to arrange with the Transferors
a mutually agreeable time and place at which the Acquirer may conduct interviews
with key employees and/or customers of the Company mutually agreed to by the
Acquirer and the Transferors.
(c) Except as may be required by applicable securities Laws or
stock exchange requirements, the Acquirer and its representatives, including
Acquirer's Independent Public Accountants, will treat and hold as such any
Confidential Information it receives from the Company and the Transferor in the
course of the reviews contemplated by this Agreement, will not use any of the
Confidential Information except in connection with this Agreement, and, if this
Agreement is terminated for any reason whatsoever, will return to the Company
and the Transferor (as the case may be) all embodiments (and all copies) of the
Confidential Information of the Company and the Transferors which are in its
possession.
7.5 NOTICE OF DEVELOPMENTS. Any of the Transferors will give prompt
written notice to the Acquirer after the Company or any of the Transferors
obtains knowledge of any material development affecting the Assets, Liabilities,
Business, financial condition, operations, results of operations, or future
prospects of the Company including but not limited to (a) any development
affecting the ability of the Company to consummate the Transactions, (b) any
Outage affecting more than 1% of all Subscribers lasting for 3 hours or more or
(c) any loss of any material Subscriber or any material equipment or other
supplier to the Company. A disclosure by any Party pursuant to this
-31-
<PAGE> 38
Section 7.5 shall not be deemed to amend or supplement the Schedules or to
prevent or cure any misrepresentation, breach of warranty, and/or breach of
covenant.
7.6 EXCLUSIVITY. Through the Closing Date, the Transferors will not
(and the Transferors will not cause or permit the Company to) (a) solicit,
initiate, or encourage the submission of any proposal or offer from any Person
relating to any (i) liquidation, dissolution, or recapitalization, (ii) share
exchange or consolidation, (iii) acquisition or purchase of securities or Assets
or (iv) similar transaction or business combination involving the Company, or
(b) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in, or facilitate in any
other manner any effort or attempt by any Person to do or seek any of the
foregoing. The Transferors will notify the Acquirer immediately if any entity or
person makes any such proposal, offer, inquiry, or contact with respect to any
of the foregoing and shall provide the identity of such entity or Person as well
as any other relevant details regarding the contact.
7.7 [RESERVED]
7.8 AUDITS. Prior to the Closing and at Acquirer's expense, the
Transferors shall use their best efforts to deliver, or cause to be delivered,
to Acquirer any unqualified and unmodified audit report of Acquirer's
Independent Public Accountants on the Company Financial Statements of the
Company as of December 31, 1998, December 31, 1997 and December 31, 1996, which
report shall be without limitation as to the scope of the audit. The Transferors
and any of the officers or directors of the Company, in their capacities as
officers and directors of the Company, shall provide all management letters,
reports or representations reasonably requested by such auditors in connection
with such audits, and in connection with audits of the Company for the years
ended December 31, 1998, December 31, 1997 and December 31, 1996. In the event
that the Closing does not occur prior to the termination of this Agreement, the
audit report of Acquirer's Independent Public Accountants on the Company
Financial Statements of the Company as of December 31, 1998, December 31, 1997
and December 31, 1996 shall remain the property of the Company.
7.9 DUE DILIGENCE. The Company covenants that within 5 days of the date
hereof, it will provide the Acquirer with substantial due diligence material
concerning the Company, and the Acquirer covenants that within 21 days of the
receipt of such due diligence material to either (i) request further due
diligence material from the Company, which request will begin the time period
response and review provisions of this Section 7.9 anew; or (ii) notify the
Company of its intention whether or not to terminate this Agreement; provided,
however, that termination pursuant to this Section 7.9 will not be deemed a
breach of this Agreement. The Acquirer covenants to complete its due diligence
review and advise the Transferors of its completion or election to terminate
this Agreement within 45 days of the date hereof.
7.10 SCHEDULES. The Transferors covenant that within 10 days of the
date hereof, it will provide the Acquirer with completed Schedules as required
by this Agreement, and the Acquirer covenants that within 21 days of the receipt
of such Schedules to either (i) request reasonable additions, revisions and/or
deletions from such Schedules, which additions, revisions and/or deletions shall
be made by the Transferors within 3 days of receipt of Acquirer's request,
provided that if Transferors elect not to make the requested additions,
revisions and/or deletions (which election shall not be deemed a breach of this
Agreement), the Acquirer make elect to terminate this Agreement, or
-32-
<PAGE> 39
(ii) notify the Company of its intention whether or not to terminate this
Agreement; provided, however, that termination pursuant to this Section 7.10
will not be deemed a breach of this Agreement. Acquirer's failure to timely
exercise its right to terminate hereunder shall be deemed an acceptance of the
said Schedules. The Acquirer covenants to complete its due diligence review and
advise the Transferors of its completion or election to terminate within 45 days
of the date hereof.
8. COVENANTS OF THE ACQUIRER.
8.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date, the
Acquirer shall pay the expenses incurred by it in connection with the
Transactions, including any amounts that may be due from the Acquirer to its
lawyers, accountants, consultants, investment bankers, brokers, finders, and
other advisors. In the event that the Company is required to provide access to
the Acquirer's Independent Public Accountants beyond the normal working hours of
the Company, the Acquirer shall reimburse the Company for its reasonable
expenses in connection therewith. In addition, the Acquirer shall bear the
expenses related to any relocation after the Closing Date of any equipment of
the Company from one location of the Company to another.
8.2 TAX-FREE EXCHANGE. The Parties agree that this transaction will
occur in conjunction with the Related Transactions, and the Parties intend that
the receipt of the Acquirer Common Stock by the Transferors and by the parties
involved in the Related Transactions will be tax-free under Section 351 of the
Code; provided, however, this covenant only applies to Transferors receiving
Acquirer Common Stock as part of their Transfer Consideration.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER.
All obligations of the Acquirer to consummate the Transactions are
subject to the satisfaction (or waiver by the Acquirer) prior thereto of each of
the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All of
the representations and warranties of the Transferors and the Company contained
in this Agreement shall be true, correct and complete on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of such date; all of the terms, covenants, agreements and
conditions of this Agreement to be complied with, performed or satisfied by the
Company and the Transferors on or before the Closing Date shall have been duly
complied with, performed or satisfied; and the Acquirer shall have received a
Transferors' certificate and an officer's certificate, each dated the Closing
Date, signed by each Transferor and an officer of the Company, respectively, to
the foregoing effects.
9.2 NO LITIGATION. No Litigation shall have been instituted or
threatened to restrain or prohibit the Transactions, or limiting or restricting
the Acquirer's conduct or operation of the Business of the Company (or its own
Business) following the Closing. There shall be no Litigation of any nature
pending or threatened against the Acquirer or the Company, their respective
properties or any of their officers or directors, that could have a Material
Adverse Effect on the Business, Assets, Liabilities, financial condition,
results of operations or prospects of the Company.
-33-
<PAGE> 40
9.3 NO MATERIAL ADVERSE CHANGE. There shall have been no changes in the
Business, operations, affairs, prospects, properties, Assets, existing and
potential Liabilities, obligations, profits or condition (financial or
otherwise) of the Company since the Balance Sheet Date which, taken as a whole,
has a Material Adverse Effect on the Business, Assets, Liabilities, financial
condition, results of operations or prospects of the Company; and the Acquirer
shall have received a certificate, dated the Closing Date, signed by each
Transferor and an officer of the Company to such effect.
9.4 DUE DILIGENCE REVIEW COMPLETE. The Acquirer shall be fully
satisfied, in its sole discretion, with the results of its due diligence review
of the Company and the Transferors, including the Acquirer's review of, and
other due diligence investigations with respect to, the Business, operations,
affairs, prospects, properties, Assets, existing and potential Liabilities,
obligations, profits and condition (financial and otherwise) of the Company. The
Acquirer covenants to complete its due diligence review within 45 days of the
date hereof.
9.5 CONSENTS AND APPROVALS. All Consents relating to the consummation
of the Transactions by the Company and the Transferors shall have been obtained.
9.6 FINANCIAL STATEMENTS. The Acquirer shall have received the Company
Financial Statements and such Company Financial Statements must, in the opinion
of Acquirer's Independent Public Accountants, be suitable or readily adaptable
for incorporation in the Registration Statement, and any prospectus and annual
and periodic reports to be filed by the Acquirer with the SEC relating to the
IPO.
9.7 IPO. The Registration Statement filed by the Acquirer with the SEC
in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
9.8 DOCUMENTS TO BE DELIVERED BY THE TRANSFERORS. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Company and the
Transferors:
(a) Officers/Transferors Certificate. An Officers/Transferors
Certificate substantially in the form of the certificate attached as EXHIBIT A
hereto.
(b) Secretary's Certificate. A Secretary's Certificate, dated
as of the Closing Date, substantially in the form of the certificate attached as
EXHIBIT B hereto, signed by the Secretary of the Company in which the Secretary
certifies that the following documents are attached to such certificate: (a) the
Articles of Incorporation of the Company, certified by the Secretary of State of
the Commonwealth of Pennsylvania as of a date in close proximity to the Closing
Date; (b) a correct and complete copy of the bylaws of the Company; (c) a
certificate of good standing for the Company issued by the Secretary of State of
the Commonwealth of Pennsylvania on a date in close proximity to the Closing
Date; (d) complete and correct copies of all resolutions of the Board of
Directors of the Company; (e) complete and correct copies of resolutions of the
Transferors approving the Transactions; and (f) original signatures of the
incumbent officers of the Company next to their respective titles.
-34-
<PAGE> 41
(c) Tax Lien Certificate. A Tax Lien Certificate of the
Company, certified by the Secretary of State of the Commonwealth of Pennsylvania
as of a date in close proximity to the Closing Date.
(d) Resignations. The resignations, effective as of the
Closing, of each officer and director of the Company.
(e) Company Shares. Certificates of the Company Shares, duly
endorsed in blank or accompanied by duly executed assignment documents by the
respective Transferors, representing one hundred percent (100%) of the issued
and outstanding capital stock of the Company and all of such Company Shares
shall be free and clear of any Encumbrances of any nature whatsoever.
(f) Escrow Agreement. An Escrow Agreement in the form and
substance set forth as EXHIBIT C attached hereto.
(g) Opinion of Transferors' Counsel. An opinion from McNees,
Wallace & Nurick dated the Closing Date, in the form and substance set forth as
EXHIBIT D attached hereto.
(h) [RESERVED]
(i) Subscription Agreement Joinder. A joinder to the Equity
Subscription Agreement in the form and substance of EXHIBIT I attached hereto
for each of the Transferors receiving Acquirer Common Stock as part of their
Transfer Consideration.
(j) Registration Agreement Joinder. A joinder to the
Registration Agreement in the form and substance of EXHIBIT J attached hereto
for each of the Transferors receiving Acquirer Common Stock as part of their
Transfer Consideration.
(k) Ancillary Documents. Any other Transaction Documents to
which they are a Party.
9.9 [RESERVED]
9.10 [RESERVED]
9.11 FINANCIAL CONDITION. Each of the following shall be true and
complete as of the Closing Date:
(a) The Company shall use its best efforts to ensure the
release within a reasonable time after Closing, of all Encumbrances securing
debts of the Company which have been paid in full prior to or at the Closing and
all Uniform Commercial Code financing statements covering such paid debts shall
have been terminated;
(b) no unsatisfied liens for the failure to pay Taxes of any
nature whatsoever shall exist against the Company, or against or in any way
affecting any Company Share; and
-35-
<PAGE> 42
(c) the Transferors and the Company shall have caused all of
the Company's officers, directors and/or key employees of the Company to have
repaid in full all debts and other obligations, if any, owed to the Company.
9.12 SCHEDULES. The Acquirer shall have received and approved the
Schedules required by this Agreement.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFERORS.
All obligations of the Company and the Transferors to consummate the
Transactions are subject to the satisfaction (or waiver by the Transferors to
which the condition relates) prior thereto of each of the following conditions:
10.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All of
the representations and warranties of the Acquirer contained in this Agreement
shall be true, correct and complete on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date; all of the terms, covenants, agreements and conditions of this
Agreement to be complied with, performed or satisfied by the Acquirer on or
before the Closing Date shall have been duly complied with, performed or
satisfied; and the Company and Transferors shall have received a certificate,
dated the Closing Date, signed by an officer of the Acquirer to the foregoing
effects.
10.2 NO LITIGATION. No Litigation shall have been instituted or
threatened to restrain or prohibit the Transactions.
10.3 CONSENTS AND APPROVALS. All Consents relating to the consummation
of the Transactions by the Acquirer shall have been obtained.
10.4 [RESERVED]
10.5 RECEIPT OF ACQUIRER'S SHARES AND CASH PORTION OF THE TRANSFER
CONSIDERATION. Transferors shall receive the Cash Portion of the Transfer
Consideration. Unless the Acquirer elects to convert the Transfer Consideration
to all cash pursuant to Section 2.2(g), the Transferors shall receive the
Acquirer Common Stock representing the Stock Portion of the Transfer
Consideration within seven (7) business days after the Closing.
10.6 DOCUMENTS TO BE DELIVERED BY THE ACQUIRER. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Acquirer:
(a) Officer's Certificate. An Officers Certificate
substantially in the form of the certificate attached as EXHIBIT G hereto.
(b) Secretary's Certificate. A Secretary's Certificate, dated
as of the Closing Date, substantially in the form of the certificate attached as
EXHIBIT H hereto, signed by the Secretary of the Acquirer in which the Secretary
certifies that the following documents are attached to such
-36-
<PAGE> 43
certificate: (a) the Certificate of Incorporation of the Acquirer, certified by
the Secretary of State of the State of Delaware as of a date in close proximity
to the Closing Date; (b) a correct and complete copy of the bylaws of the
Acquirer; (c) a certificate of good standing for the Acquirer issued by the
Secretary of State of the State of Delaware on a date in close proximity to the
Closing Date; (d) complete and correct copies of all resolutions of the Board of
Directors of the Acquirer; and (e) original signatures of the incumbent officers
of the Acquirer next to their respective titles.
(c) Escrow Agreement. An Escrow Agreement in the form and
substance set forth as EXHIBIT C attached hereto.
(d) Subscription Agreement Joinder. A joinder to the Equity
Subscription Agreement in the form and substance of EXHIBIT I attached hereto
for each of the Transferors receiving Acquirer Common Stock as part of their
Transfer Consideration.
(e) Registration Agreement Joinder. A joinder to the
Registration Agreement in the form and substance of EXHIBIT J attached hereto
for each of the Transferors receiving Acquirer Common Stock as part of their
Transfer Consideration.
(f) Ancillary Documents. Any other Transaction Documents to
which they are a Party.
10.7 IPO. The Registration Statement filed by the Acquirer with the SEC
in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO; provided, however, this condition
only applies to Transferors receiving Acquirer Common Stock as part of their
Transfer Consideration.
11. POST-CLOSING COVENANTS.
11.1 GENERAL. In case at any time after the Closing any further action
is necessary or desirable to carry out the purposes of this Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Section 12
below). The Transferors acknowledge and agree that, from and after the Closing,
the Acquirer and/or Company will be entitled to possession of all documents,
books, records, agreements, and financial data of any sort relating to the
Company; provided, however, that the Transferors may retain any copies of the
foregoing as shall be necessary to comply with applicable Tax and other Laws,
regulations and ordinances.
11.2 TRANSITION. The Transferors will not take any action that
primarily is designed or intended to have the effect of discouraging any lessor,
licensor, Subscriber, supplier, or other business associate of the Company from
maintaining the same business relationships with the Company after the Closing
for a period of twenty-four (24) months thereafter as it maintained with the
Company prior to the Closing.
11.3 RESTRICTIONS ON TRANSFER OF ACQUIRER COMMON STOCK. The Transferors
shall not directly or indirectly, sell, transfer any beneficial interest in,
pledge, hypothecate or otherwise dispose,
-37-
<PAGE> 44
or offer to sell, transfer any beneficial interest in, pledge, hypothecate or
otherwise dispose (collectively "Transfer"), any shares of Acquirer Common Stock
constituting the Stock Portion of the Transfer Consideration during the 12-month
period following the Closing Date. The Transferors shall not, individually or in
the aggregate, Transfer more than twenty-five percent (25%) of the shares of
Acquirer Common Stock issued as part of the Stock Portion of the Transfer
Consideration on the Closing Date during any calendar quarter following the
one-year anniversary of the Closing Date.
12. INDEMNIFICATION.
12.1 BY THE TRANSFERORS. From and after the Closing Date, to the extent
provided in this Section 12, each of the Transferors shall, jointly and
severally, indemnify and hold harmless the Acquirer and the Company, and its
successors and assigns, and its officers and directors (each, an "Indemnified
Party") from and against any Liabilities, claims, demands, judgments, losses,
costs, damages or expenses whatsoever (including attorneys', consultants' and
other professional fees and disbursements of every kind, nature and description
incurred by such Indemnified Party in connection therewith) (collectively,
"Damages") that such Indemnified Party may sustain, suffer or incur and that
result from, arise out of or relate to (a) any breach of any representation,
warranty, covenant or agreement of the Transferors or the Company contained in
this Agreement, whether or not involving a third-party claim, or (b) any
Litigation affecting the Company that arose from any matter or state of facts
existing prior to the Closing, regardless of whether it is disclosed in the
Schedules to this Agreement.
12.2 BY THE ACQUIRER. From and after the Closing Date, to the extent
provided in this Section 12, the Acquirer shall indemnify and hold harmless the
Transferors, their heirs, legal representatives, successors and assigns (each,
an "Indemnified Party") from and against any Damages that such Indemnified Party
may sustain, suffer or incur and that result from, arise out of or relate to any
breach of any representation, warranty, covenant or agreement of the Acquirer
contained in this Agreement, whether or not involving a third-party claim.
12.3 PROCEDURE FOR CLAIMS.
(a) An Indemnified Party that desires to seek indemnification
under any part of this Section 12 shall give notice (a "Claim Notice") to each
Party responsible or alleged to be responsible for indemnification hereunder (an
"Indemnitor") prior to any applicable Expiration Date specified below. Such
notice shall briefly explain the nature of the claim and shall specify the
amount thereof. If the matter to which a claim relates shall not have been
resolved as of the date of the Claim Notice, the Indemnified Party shall
estimate the amount of the claim in the Claim Notice, but also specify therein
that the claim has not yet been liquidated (an "Unliquidated Claim"). If an
Indemnified Party gives a Claim Notice for an Unliquidated Claim, the
Indemnified Party shall also give a second Claim Notice (the "Liquidated Claim
Notice") within 60 days after the matter giving rise to the claim becomes
finally resolved, and the Second Claim Notice shall specify the amount of the
claim. Each Indemnitor to which a Claim Notice is given shall respond to any
Indemnified Party that has given a Claim Notice (a "Claim Response") within 20
days (the "Response Period") after the later of (i) the date that the Claim
Notice is given or (ii) if a Claim Notice is first given with respect to an
Unliquidated Claim, the date on which the Liquidated Claim Notice is given. Any
Claim Notice or Claim Response shall be given in accordance with the notice
requirements hereunder, and any Claim
-38-
<PAGE> 45
Response shall specify whether or not the Indemnitor giving the Claim Response
disputes the claim described in the Claim Notice. If any Indemnitor fails to
give a Claim Response within the Response Period, such Indemnitor shall be
deemed not to dispute the claim described in the related Claim Notice. If any
Indemnitor elects not to dispute a claim described in a Claim Notice, whether by
failing to give a timely Claim Response or otherwise, then the amount of such
claim shall be conclusively deemed to be an obligation of such Indemnitor.
(b) If any Indemnitor shall be obligated to indemnify an
Indemnified Party hereunder, such Indemnitor shall pay to such Indemnified Party
within 30 days after the last day of the Response Period the amount to which
such Indemnified Party shall be entitled. If the Acquirer shall be the
Indemnified Party, it shall first seek payment of the Damages under the Escrow
Agreement, but only to the extent that Escrow Funds are then being held by the
Escrow Agent and are not subject to other claims for indemnification. To the
extent that the Escrow Funds are unavailable or insufficient to cover the
Damages, the Acquirer shall seek indemnification directly from the Transferors,
jointly and severally, for the payment of any remaining Damages. If a Transferor
shall be the Indemnified Party, he, she or it shall seek indemnification
directly from the Acquirer. If there shall be a dispute as to the amount or
manner of indemnification under this Section 12, the Indemnified Party shall
seek arbitration under Section 13 to the extent that the Indemnified Party seeks
to recover Damages from any Indemnitor. If any Indemnified Party fails to
receive all or part of any indemnification obligation when due, then such
Indemnified Party shall also be entitled to receive from the applicable
Indemnitor or the Escrow Agent, if applicable, interest on the unpaid amount for
each day during which the obligation remains unpaid at an annual rate equal to
the applicable short term federal rate for federal income Tax purposes in effect
on the date of expiration of said 30-day period ("Prime Rate"), and the Prime
Rate in effect on the first business day of each calendar quarter shall apply to
the amount of the unpaid obligation during such calendar quarter.
(c) Notwithstanding any other provision of this Section 12,
(i) an Indemnified Party shall be entitled to indemnification hereunder only
when the aggregate of all Damages to such Indemnified Party exceeds $25,000.00
(the "Deductible Amount") and then such Indemnified Party shall be entitled to
indemnification for its Damages in excess of the Deductible Amount and (ii) no
Indemnitor as a group shall be liable under this Section 12 for any amount in
excess of the Transfer Consideration, except that any Damages based on a breach
of representations and warranties with respect to Tax matters or Litigation
matters shall not be counted against or subject to such maximum limitation. In
addition, the limitations of this paragraph (c), however, shall not apply to (x)
the Company's or Transferors' representations and warranties in Section 4.2,
4.4, 4.5, 4.8, 4.15, 4.16 or Section 6, (y) damages arising out of common law
fraud in connection with the Transactions or (z) any covenants or agreements to
be performed after Closing.
(d) If the existence of an obligation for the payment of money
to a third party (other than fines or other payments to any governmental entity
that relate to matters that affect the ongoing operation of the Business to
which the fines or other payments relate) causes any representation or warranty
of an Indemnitor in this Agreement to be untrue, then, if such Indemnitor
satisfies such obligation to such third party in full, such Indemnitor shall not
be required to indemnify any Indemnified Party for any Damages resulting from
such breach of the representation or warranty.
-39-
<PAGE> 46
12.4 CLAIMS PERIOD. Any claim for indemnification under this Section 12
shall be made by giving a Claim Notice under Section 12.3 on or before the
applicable "Expiration Date" specified below in this Section 12.4, or the claim
under this Section 12 shall be invalid. The following claims shall have the
following respective "Expiration Dates": (a) the first anniversary of the
Closing Date--any claims that are not specified in any of the succeeding
clauses; and (b) the date on which the applicable statute of limitations
expires--any claim for Damages related to a breach of any representations or
warranties in Sections 4.2, 4.4, 4.5, 4.8, 4.15, 4.16 or Section 6. If more than
one of such Expiration Dates applies to a particular claim, the latest of such
Expiration Dates shall be the controlling Expiration Date for such claim. So
long as an Indemnified Party in good faith gives a Claim Notice for an
Unliquidated Claim on or before the applicable Expiration Date, such Indemnified
Party shall be entitled to pursue its rights to indemnification regardless of
the date on which such Indemnified Party gives the related Liquidated Claim
Notice.
12.5 THIRD PARTY CLAIMS. An Indemnified Party that desires to seek
indemnification under any part of this Section 12 with respect to any actions,
suits or other administrative or judicial proceedings (each, an "Action") that
may be instituted by a third party shall give each Indemnitor prompt notice of a
third party's institution of such Action. After such notice, any Indemnitor may,
or if so requested by such Indemnified Party, any Indemnitor shall, participate
in such Action or assume the defense thereof, with counsel satisfactory to such
Indemnified Party; provided, however, that such Indemnified Party shall have the
right to participate at its own expense in the defense of such Action; and
provided, further, that the Indemnitor shall not consent to the entry of any
judgment or enter into any settlement, except with the written consent of such
Indemnified Party (which consent shall not be unreasonably withheld), that (a)
fails to include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all Liability in respect
of any such Action or (b) grants the claimant or plaintiff any injunctive relief
against the Indemnified Party. Any failure to give prompt notice under this
Section 12.5 shall not bar an Indemnified Party's right to claim indemnification
under this Section 12, except to the extent that an Indemnitor shall have been
harmed by such failure.
12.6 LIMITATION ON INDEMNIFICATION.
(a) Notwithstanding any provision of this Agreement to the
contrary:
(i) Attorney, consultant and other professional fees
and disbursements incurred by an Indemnified Party in connection with
this Section 12 shall be based only on time actually spent which shall
be charged at no more than such professional's standard hourly rate,
and only one law firm, accounting firm and other professional firm
shall be paid on any claim regardless of the number of Indemnified
Parties involved in such claim.
(ii) The amount of any costs, expenses and other
disbursements incurred by any Indemnified Party in connection with this
Section 12 shall be only the actual out-of-pocket amounts actually paid
by such Indemnified Party.
-40-
<PAGE> 47
13. DISPUTE RESOLUTION.
13.1 GOOD-FAITH NEGOTIATIONS. If after the Closing any dispute arises
under Section 2.3 with respect to the determination of the adjustments to the
Cash Portion of the Transfer Consideration or Section 12 with respect to a claim
for Damages that is not settled promptly in the ordinary course of business, the
Parties shall seek to resolve any such dispute between them, first, by
negotiating promptly with each other in good faith in face-to-face negotiations.
If the Parties are unable to resolve such dispute between them within twenty
(20) business days (or such period as the Parties shall otherwise agree) through
these face-to-face negotiations, then any such dispute shall be resolved in the
manner set forth in Section 13.2.
13.2 ARBITRATION. If the Parties do not resolve a dispute under Section
13.1, the dispute shall be settled by arbitration conducted on a confidential
basis, under the U.S. Arbitration Act, if applicable, and the then current
Commercial Arbitration Rules of the American Arbitration Association (the
"Association") strictly in accordance with the terms of this Agreement and the
substantive Law of the State of New York. The arbitration shall be conducted at
the Association's regional office located in the New York, New York area by
three arbitrators, at least one of whom shall be knowledgeable regarding
businesses engaged in providing services via the Internet, one of whom shall be
an attorney and one of whom shall be a member of a "Big-Five" accounting firm
familiar with Businesses engaged in providing services via the Internet.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither Party shall institute a proceeding hereunder
unless at least 60 days prior thereto such Party shall have given written notice
to the other Party of its intent to do so. In any award, the arbitrators shall
assess the arbitration costs and expenses, including attorneys fees of the
Parties, in a manner deemed equitable by the arbitrators, taking into account
the arbitration decision.
13.3 WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT, WHICH HAS NOT BEEN RESOLVED BY NEGOTIATION AS
PROVIDED HEREIN AND AS TO WHICH LEGAL ACTION NEVERTHELESS OCCURS, EACH PARTY
HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY EACH PARTY HERETO
AND EACH PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR ANY PERSON ACTING
ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT TO INDUCE
THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. EACH
PARTY FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED OR HAS HAD THE
OPPORTUNITY TO BE REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING
OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND
THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. EACH PARTY
FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION.
13.4 NO PUNITIVE DAMAGES. The Parties to this Agreement agree to waive
any right to seek punitive damages.
-41-
<PAGE> 48
14. COMPETITION AND CONFIDENTIALITY BY THE TRANSFERORS.
14.1 RESTRICTED PERIOD. Neither the Transferors nor their respective
Affiliates as provided in Section 14.3 (each a "Restricted Party") shall, at any
time within the Restricted Period (defined below), directly or indirectly, (i)
own, manage, control, participate in, consult with, render services for, or in
any manner engage in any activity or Business competing with the Acquirer or the
Company within the Restricted Territory (as defined below), (ii) solicit from
the Company any known Subscriber or other customer of the Company, (iii) request
or advise any known Subscriber or other customer of the Company to withdraw,
curtail or cancel such Subscriber's or others customer's Business with the
Company, or (iv) solicit for employment any person employed by the Company at
any time within the two (2) year period immediately preceding such solicitation;
provided, however, that no owner of less than five percent (5%) of the
outstanding stock of any publicly traded corporation shall be deemed to engage
solely by reason thereof in any of that corporation's Businesses. For purposes
of this Agreement, the Parties have agreed to allocate $50,000 of the Cash
Portion of the Transfer Consideration to the covenant not to compete contained
in this Section 14.1; provided, however, that such allocation will not otherwise
affect any other sections of this Agreement. In addition, no Restricted Party
during the Restricted Period shall contact any of the employees of the Acquirer
for the purpose of hiring or retaining any of such employees for employment,
consulting or similar purposes. The term "Restricted Period" means the period
beginning on the Closing Date and ending on the second anniversary of the
Closing Date. The "Restricted Territory" means the area comprising the entire
United States of America.
14.2 CONFIDENTIALITY. For an indefinite period after the Closing, no
Restricted Party shall divulge, communicate or use in any way, any Confidential
Information or trade secrets of the Business of the Acquirer or the Company.
Each Restricted Party shall, and shall cause its subsidiaries, Affiliates,
officers, directors, employees, accountants, counsel, financial advisors and
other representatives and agents, to treat and hold as such all of the
Confidential Information, refrain from disclosing or using any of the
Confidential Information except in connection with this Agreement and the
Transactions, and except as otherwise permitted hereunder or as may be required
by Law, deliver promptly to the Acquirer or the Company or destroy, at the
request and option of the Acquirer or the Company, all tangible embodiments (and
all copies) of the Confidential Information which are in the possession of such
Restricted Party. In the event that any Restricted Party is requested or
required (by request for information or documents in any legal proceeding,
interrogatory, subpoena, civil investigative demand, or similar legal process)
to disclose any Confidential Information, such Restricted Party will notify the
Acquirer or the Company promptly of the request or requirement so that the
Acquirer or the Company may seek an appropriate protective order or waive
compliance with the provisions of this Section 14.2. If, in the absence of a
protective order or the receipt of a waiver hereunder, any Restricted Party is
compelled to disclose any Confidential Information or else stand liable for
contempt, such Restricted Party may disclose the Confidential Information;
provided, however, that such Restricted Party shall use its reasonable efforts
to obtain, at the reasonable request of the Acquirer or the Company, an order or
other assurance that confidential treatment will be accorded to such portion of
the Confidential Information required to be disclosed as the Acquirer or the
Company shall reasonably designate.
14.3 AFFILIATES. The terms of this Section 14 shall apply to each
Transferor and any Affiliate of his or hers to the same extent as if they were
parties hereto, and each Transferor shall take
-42-
<PAGE> 49
whatever actions may be necessary to cause his or her Affiliates to adhere to
the terms of this Section 14.
14.4 INJUNCTIVE RELIEF. In the event of any breach or threatened breach
by any Restricted Party of any provision of this Section 14, the Acquirer shall
be entitled to injunctive or other equitable relief, restraining such Party from
using or disclosing any Confidential Information in whole or in part, or from
engaging in conduct that would constitute a breach of the obligations of a
Restricted Party under this Section 14. Such relief shall be in addition to and
not in lieu of any other remedies that may be available, including an action for
the recovery of damages. In the event of Litigation involving this Section 14,
if a court of competent jurisdiction determines that the scope of this Section
14 is too broad in any respect, then the scope shall be deemed to be reduced or
narrowed to such scope as is found lawful and reasonable by such court. Each
Transferor acknowledges, however, that this Section 14 has been negotiated by
the Parties and that the geographical and time limitations, as well as the
limitation on activities, are reasonable in light of the circumstances
pertaining to the Business of the Acquirer and the Company.
15. TERMINATION
15.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
as provided below:
(a) the Acquirer and the Transferors may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(b) the Acquirer may terminate this Agreement by giving
written notice to the Transferors at any time prior to the Closing in the event
the Transferors are in breach of any representation, warranty, or covenant
contained in this Agreement in any material respect and such breach has not been
cured within ten (10) days of written notice thereof, and the Transferors may
terminate this Agreement by giving written notice to the Acquirer at any time
prior to the Closing in the event the Acquirer is in breach of any
representation, warranty, or covenant contained in this Agreement in any
material respect and such breach has not been cured within ten (10) days of
written notice thereof;
(c) unless the Transferors elect to extend the date of
termination pursuant Section 2.2(h), this Agreement will terminate if the
Closing shall not have occurred on or before October 31, 1999; provided,
however, that in the event the Acquirer has filed a Registration Statement with
the SEC and either (i) the Acquirer's lead underwriter informs the Acquirer that
a public offering of stock is not advisable or (ii) the Registration Statement
has not been declared effective but the Acquirer is using reasonable efforts to
have the Registration Statement declared effective, then this Agreement shall
terminate if the Closing has not occurred on or before December 31, 1999.
(d) Nothing contained in this Section 15.1 shall alter,
affect, modify or restrict any Parties' rights to rely on and/or seek
indemnification for a breach of any of the representations and warranties and/or
conditions or covenants of any of the Parties contained in this Agreement.
-43-
<PAGE> 50
15.2 EFFECT OF TERMINATION. Except as provided in Section 14.2, if
either the Acquirer or the Transferors terminate this Agreement pursuant to
Section 15.1 above, all obligations of the Parties hereunder shall terminate
without any Liability of any Party to any other Party.
16. MISCELLANEOUS.
16.1 PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by
applicable securities Laws or stock exchange requirements, no Party shall issue
any press release or public announcement relating to the subject matter of this
Agreement prior to, at or about the Closing without the prior written approval
of the Acquirer and the Transferors, which written approval will not be
unreasonably withheld by each Party; provided, however, that any Party may make
any public disclosure it believes in good faith is required by Law or regulation
(in which case the disclosing Party will advise the other Parties prior to
making the disclosure).
16.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns.
16.3 CONTENTS OF AGREEMENT. This Agreement, together with the other
Transaction Documents, sets forth the entire understanding of the Parties hereto
with respect to the Transactions and supersedes all prior agreements or
understandings among the Parties regarding those matters.
16.4 AMENDMENT, PARTIES IN INTEREST, ASSIGNMENT, ETC. This Agreement
may be amended, modified or supplemented only by a written instrument duly
executed by each of the Parties hereto. If any provision of this Agreement shall
for any reason be held to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other
provision hereof, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective heirs, legal representatives, successors and permitted assigns
of the Parties hereto. No Party hereto shall assign this Agreement or any right,
benefit or obligation hereunder; provided, however, that the Acquirer may assign
any or all of its rights, benefits or obligations herein to any Affiliate. Any
term or provision of this Agreement may be waived at any time by the Party
entitled to the benefit thereof by a written instrument duly executed by such
Party. The Parties hereto shall execute and deliver any and all documents and
take any and all other actions that may be deemed reasonably necessary by their
respective counsel to complete the Transactions.
16.5 INTERPRETATION. Unless the context of this Agreement clearly
requires otherwise, (a) references to the plural include the singular, the
singular the plural, the part the whole, (b) references to any gender include
all genders, (c) "or" has the inclusive meaning frequently identified with the
phrase "and/or," (d) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to" and (e) references to "hereunder" or
"herein" relate to this Agreement. The section and other headings contained in
this Agreement are for reference purposes only and shall not control or affect
the construction of this Agreement or the interpretation thereof in early
respect. Annex, section, subsection, schedule and exhibit references are to this
Agreement unless otherwise specified. Each accounting term used herein that is
not specifically defined herein shall have the meaning given to it under GAAP.
-44-
<PAGE> 51
16.6 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
16.7 REMEDIES AND SET-OFF.
(a) The remedies provided by Section 12 shall constitute the
exclusive remedies for the matters covered thereby. With respect to any matters
not covered by such Section, any Party hereto shall be entitled to such rights
and remedies as such Party may have at law or in equity or otherwise for any
breach of this Agreement, including the right to seek specific performance,
rescission or restitution, none of which rights or remedies shall be affected or
diminished by the remedies provided hereunder.
(b) The Acquirer shall be entitled to a set-off against the
Escrow Funds for any, damages, losses, costs or expenses which are incurred by
the Acquirer or the Company and for which the Transferors have indemnified the
Acquirer pursuant to the terms of this Agreement, and for any Cash Portion of
the Transfer Consideration adjustment made pursuant to Section 2. The Acquirer
shall give the Transferors written notice of any claimed set-off.
Notwithstanding any provision of this Agreement to the contrary, after the
Acquirer has given written notice of a claimed set-off, the Acquirer may give
unilateral written notice to the Escrow Agent to release Escrow Funds in the
amount of the claimed set-off, which written notice Transferors hereby
acknowledge to be sufficient to authorize the Escrow Agent to release Escrow
Funds as directed by the Acquirer, unless the Transferors sends an objection
notice to the Escrow Agent within the prescribed period set forth in Section
2(b) of the Escrow Agreement.
16.8 NOTICES. All notices that are required or permitted hereunder
shall be in writing and shall be sufficient if personally delivered or sent by
mail, facsimile or Federal Express (or other reputable delivery or courier
service). Any notices shall be deemed given upon the earlier of (a) the date
when received, (b) the third day after the date when sent by registered or
certified mail, (c) the day when sent by facsimile, (d) the day after the date
when sent by Federal Express (or other reputable delivery or courier service),
to the address or fax number set forth below, unless such address or fax number
is changed by notice to the other Party hereto:
If to the Acquirer:
espernet.com, inc.
383 West 12th Street
New York, New York 10014
Attention: Paul Hart, President
Fax: (212) 989-4717
-45-
<PAGE> 52
with a required copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Goodwin Square
225 Asylum Street, 13th Floor
Hartford, Connecticut 06103
Attention: John J. Altorelli, Esq.
Fax: (860) 293-3555
If to the Transferors:
Lawrence R. Corsa
815 N. 12th Street
Allentown, PA 18102
Fax: (610) 435-3550
with a required copy to:
McNees, Wallace & Nurick
100 Pine Street
P.O. Box 1166
Harrisburg, PA 17108-1166
Attention: Bruce R. Spicer, Esq.
Fax: (717) 237-5300
16.9 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY
CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW
YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF
ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
16.10 EXPENSES. Each of the Parties and the Company will bear his, her
or its own costs and expenses (including legal fees and expenses and investment
banking fees) incurred in connection with this Agreement and the Transactions.
16.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more Parties
hereto, and an executed copy of this Agreement may be delivered by one or more
Parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such Party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes as of the date first written above. At the request of
any Party hereto, all Parties hereto agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
[SIGNATURE PAGE FOLLOWS]
-46-
<PAGE> 53
IN WITNESS WHEREOF, this Stock Exchange Agreement has been executed by
the Parties hereto as of the day and year first written above.
ESPERNET.COM, INC.
By: /s/ Paul Hart
--------------------------------------
Name: Paul Hart
Title: President
ENTER.NET, INC.
By: /s/ Lawrence R. Corsa
--------------------------------------
Name: Lawrence R. Corsa
Title: President
TRANSFERORS:
/s/ Lawrence R. Corsa
-----------------------------------------------
Lawrence R. Corsa
/s/ Margo J. Corsa
-----------------------------------------------
Margo J. Corsa
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
<PAGE> 54
ANNEX I
STOCKHOLDER LIST
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
NAME SHARES OF
OF COMPANY OWNERSHIP
STOCKHOLDER COMMON STOCK PERCENTAGE
- -------------------------------------------------------------------------------------
<S> <C> <C>
Lawrence R. Corsa & Margo J. Corsa 100 100%
- -------------------------------------------------------------------------------------
TOTAL 100 100%
- -------------------------------------------------------------------------------------
</TABLE>
<PAGE> 55
ANNEX II
CASH PORTION OF THE TRANSFER CONSIDERATION(1)
<TABLE>
<S> <C>
Gross Aggregate Cash Portion of the Transfer Consideration: $ 7,200,000.00
Less Adjustments:
Net Current Assets $_______________
Debt $_______________
Subscriber $_______________
Churn Rate $_______________ $_______________
Less Escrowed Amount:
(5% of the Transfer Consideration)(2) $ 600,000.00
Net Aggregate Cash Portion of the Transfer Consideration: $_______________
Divided by the Number of Outstanding
Shares of Company Common Stock / 100
CASH PORTION OF THE TRANSFER CONSIDERATION
PER SHARE OF COMPANY COMMON STOCK: $_______________
</TABLE>
- --------
(1) This Annex shall be completed on or prior to the Closing Date, upon
determination of the adjustments to the Cash Portion of the Transfer
Consideration.
(2) The Accounts Receivable adjustment shall be set-off against the
Escrow Funds.
<PAGE> 56
ANNEX III
STOCK PORTION OF THE TRANSFER CONSIDERATION(3)
<TABLE>
<S> <C>
Aggregate Dollar Value of Stock Portion of the Transfer Consideration: $ 4,800,000.00
Divided by the Number of Outstanding
Shares of Company Common Stock / 100
Divided by the midpoint of the IPO offering price
per share of the Acquirer Common Stock as set forth / ________________
the Registration Statement
STOCK PORTION OF THE TRANSFER CONSIDERATION
PER SHARE OF COMPANY COMMON STOCK: $_______________
</TABLE>
- --------
(3) This Annex shall be completed on or prior to the Closing Date, upon
determination of the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the Registration Statement.
<PAGE> 57
ANNEX IV
[RESERVED]
<PAGE> 58
ANNEX V
ALLOCATION SUMMARY(4)
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ------------------------------------------------------------
COMPANY SHARE OWNERSHIP TRANSFER CONSIDERATION
- ---------------------------------------------------------- ------------------------------------------------------------
NAME SHARES OF CASH PORTION OF STOCK PORTION OF
OF COMPANY OWNERSHIP THE TRANSFER THE TRANSFER ESCROW
TRANSFERORS COMMON PERCENTAGE CONSIDERATION CONSIDERATION FUNDS
STOCK (NET CASH (NET CASH
AMOUNT) AMOUNT)
- ---------------------------------------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Lawrence R. Corsa & 100 100% $600,000.00
Margo J. Corsa
- ---------------------------------------------------------- ------------------------------------------------------------
TOTAL 100 100% $600,000.00
- ---------------------------------------------------------- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ALLOCATION OF CASH PORTION OF THE TRANSFER CONSIDERATION
- -----------------------------------------------------------------------------------------------------------------------
CASH PORTION OF THE
TRANSFER
NUMBER OF CONSIDERATION PER
EXCHANGED SHARE OF COMPANY TOTAL CASH
TRANSFEROR SHARES X 60% COMMON STOCK RECEIVED
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lawrence R. Corsa & 100 60
Margo J. Corsa
- -----------------------------------------------------------------------------------------------------------------------
TOTAL 100 60
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
ALLOCATION OF STOCK PORTION OF THE TRANSFER CONSIDERATION
- -----------------------------------------------------------------------------------------------------------------------
STOCK PORTION OF
TRANSFER
NUMBER OF CONSIDERATION PER
EXCHANGED SHARE OF COMPANY TOTAL STOCK
TRANSFEROR SHARES X 40% COMMON STOCK RECEIVED
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lawrence R. Corsa & 100 40
Margo J. Corsa
- -----------------------------------------------------------------------------------------------------------------------
TOTAL 100 40
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(4) This Annex shall be completed on or prior to the Closing Date, upon
determination of the adjustments to the Cash Portion of the Transfer
Consideration and the midpoint of the IPO offering price per share of the
Acquirer Common Stock as set forth in the Registration Statement.
<PAGE> 1
Exhibit 10.4
STOCK EXCHANGE AGREEMENT
by and among
ESPERNET.COM, INC.
(a Delaware corporation)
ESPERNET.COM OF NEW YORK, INC.
(a New York corporation)
and
THE STOCKHOLDERS OF
ESPERNET.COM OF NEW YORK, INC.
SEPTEMBER 21, 1999
<PAGE> 2
STOCK EXCHANGE AGREEMENT
TABLE OF CONTENTS
1. DEFINITIONS.............................................................. 1
2. THE EXCHANGE OF SHARES................................................... 4
2.1 Basic Transaction................................................... 4
2.2 Stock Exchange...................................................... 5
3. CLOSING.................................................................. 5
3.1 Location, Date...................................................... 5
3.2 Deliveries.......................................................... 5
3.3 Transferors' Representative......................................... 6
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS........................ 7
4.1 Corporate Status.................................................... 7
4.2 Authorization....................................................... 7
4.3 Consents and Approvals.............................................. 7
4.4 Capitalization and Stock Ownership.................................. 7
4.5 Subsidiaries........................................................ 8
4.6 Corporate Records................................................... 8
4.7 Legal Proceedings and Compliance with Law........................... 8
4.8 Securities Matters.................................................. 8
4.9 Accuracy of Information............................................. 9
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER........................... 9
5.1 Corporate........................................................... 9
5.2 Authorization....................................................... 10
5.3 Consents and Approvals.............................................. 10
5.4 Capitalization and Stock Ownership.................................. 10
5.5 Legal Proceedings................................................... 10
5.6 Finder's Fees....................................................... 10
5.7 Section 351......................................................... 10
6. COVENANTS OF THE ACQUIRER................................................ 11
6.1 Payment of Expenses................................................. 11
6.2 Tax-Free Exchange................................................... 11
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER...................... 11
7.1 Representations and Warranties; Performance of Obligations.......... 11
7.2 No Litigation....................................................... 11
7.3 No Material Adverse Change.......................................... 11
7.4 Consents and Approvals.............................................. 11
7.5 IPO................................................................. 11
7.6 Documents to Be Delivered by the Transferors........................ 12
<PAGE> 3
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFERORS.. 12
8.1 Representations and Warranties; Performance of Obligations........ 12
8.2 No Litigation..................................................... 12
8.3 Consents and Approvals............................................ 12
8.4 Receipt of Acquirer's Shares...................................... 12
8.5 Documents to Be Delivered by the Acquirer......................... 12
8.6 IPO............................................................... 13
9. POST-CLOSING COVENANTS.................................................. 13
9.1 General........................................................... 13
9.2 Restrictions on Transfer of Acquirer Common Stock................. 13
10. [RESERVED].............................................................. 13
11. DISPUTE RESOLUTION...................................................... 13
11.1 Good-Faith Negotiations........................................... 13
11.2 Arbitration....................................................... 14
11.3 WAIVER OF JURY TRIAL.............................................. 14
11.4 No Punitive Damages............................................... 14
12. COMPETITION AND CONFIDENTIALITY BY THE TRANSFERORS...................... 14
12.1 [RESERVED]........................................................ 14
12.2 Confidentiality................................................... 14
12.3 Affiliates........................................................ 15
12.4 Injunctive Relief................................................. 15
13. TERMINATION............................................................. 15
13.1 Termination of Agreement.......................................... 15
13.2 Effect of Termination............................................. 16
14. MISCELLANEOUS........................................................... 16
14.1 Press Releases and Announcements.................................. 16
14.2 No Third-party Beneficiaries...................................... 16
14.3 Contents of Agreement............................................. 16
14.4 Amendment, Parties in Interest, Assignment, Etc................... 16
14.5 Interpretation.................................................... 17
14.6 Incorporation of Exhibits, Annexes, and Schedules................. 17
14.7 Remedies.......................................................... 17
14.8 Notices........................................................... 17
14.9 Governing Law..................................................... 18
14.10 Expenses.......................................................... 18
14.11 Counterparts...................................................... 18
Annexes
Annex I Allocation Summary
ii
<PAGE> 4
Exhibits
Exhibit A Form of Equity Subscription Agreement
Exhibit B Form of Joinder to Registration Agreement
iii
<PAGE> 5
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (this "Agreement") is made as of
September 21, 1999, by and among ESPERNET.COM, INC., a Delaware corporation (the
"Acquirer"), ESPERNET.COM OF NEW YORK, INC., a New York corporation (the
"Company"), and the Transferors' Representative (as hereinafter defined) on
behalf of all of the stockholders of the Company listed on ANNEX I hereto (each
a "Transferor" and collectively the "Transferors"). The Acquirer, the Company
and the Transferors are sometimes referred to herein individually as a "Party"
and collectively as the "Parties". Certain other terms are used herein as
defined below in Section 1 or elsewhere in this Agreement.
RECITALS
A. The Company is engaged in acquiring businesses which provide
Internet access and services, web hosting, web design and Internet related
services and support.
B. The Transferors in the aggregate are the owners of all of the issued
and outstanding shares of the capital stock of the Company (the "Company
Shares").
C. This Agreement contemplates a transaction in which the Transferors
will exchange their respective Company Shares for Acquirer Common Stock (as
hereinafter defined).
D. This Agreement further contemplates that the aforementioned
transaction will occur in conjunction with certain related transactions,
consisting of the IPO (as hereinafter defined) and the transfer of certain other
businesses by their respective owners to the Acquirer (as hereinafter defined)
(together, the "Related Transactions"). The Parties intend that the receipt of
the Acquirer Common Stock (as hereinafter defined) will be tax-free under
Section 351 of the Code (as hereinafter defined).
AGREEMENT
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements herein contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereto, intending to be legally bound, hereby agree as
follows:
1. DEFINITIONS.
For convenience, certain terms used in more than one part of this
Agreement are listed in alphabetical order and defined or referred to below
(such terms as well as any other terms defined elsewhere in this Agreement shall
be equally applicable to both the singular and plural forms of the terms
defined).
"Acquirer" is defined above in the preamble.
<PAGE> 6
"Acquirer Common Stock" means the common stock, $0.001 par value per
share, of the Acquirer.
"Affiliates" means, with respect to a particular Party, Persons
controlling, controlled by or under common control with that Party, as well as
any officers, directors and majority-owned entities of that Party and of its
other Affiliates. As used in this definition, the term "control" means either
(i) the possession, directly or indirectly, of the power to direct or to cause
the direction of the management of the affairs of a Person or the conduct of the
business of a Person, or (ii) the holding of a direct or indirect equity or
voting interest of fifty percent (50%) or more in the Person.
"Agreement" means this Agreement and the annexes, exhibits and
schedules hereto.
"Allocation Summary" means the summary of Transferors and their
respective allocation of the Acquirer Common Stock attached hereto as ANNEX I.
"Assets" means, with respect to a particular Person, all of the assets,
properties, goodwill and rights of every kind and description, real and
personal, tangible and intangible, that are owned or possessed by such Person.
"Association" is defined in Section 11.2.
"Business" means, with respect to a particular Person, the entire
business, operations, and facilities of such Person.
"Charter Documents" means an entity's certificate or articles of
incorporation, certificate defining the rights and preferences of securities,
articles of organization, general or limited partnership agreement, certificate
of limited partnership, joint venture agreement or similar document governing
the entity.
"Closing" is defined in Section 3.1.
"Closing Date" is defined in Section 3.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" is defined above in the preamble.
"Company Common Stock" means the common stock, $0.01 par value per
share, of the Company.
"Company Shares" is defined above in the preamble.
"Confidential Information" means information, including any formula,
pattern, compilation, program, device, method, technique or process that (a)
derives independent economic value, actual or potential, from not being
generally known to the public or to other Persons who can obtain economic value
from its disclosure or use; and (b) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. Without limiting the
foregoing, "Confidential
-2-
<PAGE> 7
Information" includes lists or descriptions of any customers, referral sources
or organizations; financial statements, cost reports or other financial
information; Contract proposals, or bidding information; business plans and
training and operations methods and manuals; personnel records; fee structure;
and management systems, policies or procedures, including related forms and
manuals.
"Consents" means any consent, waiver, approval, order or authorization
of, or registration, declaration or filing with or notice to, any governmental
authority or other Person.
"Contract" means any written or oral contract, agreement, lease,
instrument or other commitment that is binding on any Person or its property
under applicable Law.
"Court Order" means any judgment, decree, injunction, order or ruling
of any federal, state, local or foreign court or governmental or regulatory body
or authority that is binding on any person or its property under applicable Law.
"Default" means (a) a breach, default or violation, (b) the occurrence
of an event that with or without the passage of time or the giving of notice, or
both, would constitute a breach, default or violation or (c) with respect to any
Contract, the occurrence of an event that with or without the passage of time or
the giving of notice, or both, would give rise to a right of termination,
renegotiation or acceleration or a right to receive damages or a payment of
penalties.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"Equity Subscription Agreement" means the Equity Subscription Agreement
between each Transferor and the Acquirer, substantially in the form of EXHIBIT I
hereto.
"IPO" means the first underwritten public offering of the Acquirer
Common Stock pursuant to an effective registration statement under the
Securities Act that will result in an aggregate post-IPO market capitalization
of the Acquirer of at least $100 million (determined by multiplying the
outstanding shares of the Acquirer Common Stock by the IPO offering price).
"LLGM" means LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to the
Acquirer.
"Law" means any statute, law, ordinance, regulation, order or rule of
any federal, state, local, foreign or other governmental agency or body or of
any other type of regulatory body, including those covering environmental,
energy, safety, health, transportation, bribery, record keeping, zoning,
antidiscrimination, antitrust, wage and hour, and price and wage control
matters.
"Liability" means any direct or indirect liability, indebtedness,
obligation, claim, loss, damage, deficiency, guaranty or endorsement of or by
any person, absolute or contingent, accrued or unaccrued, due or to become due,
liquidated or unliquidated.
"Litigation" means any lawsuit, action, arbitration, administrative or
other proceeding, criminal prosecution or governmental investigation or inquiry.
-3-
<PAGE> 8
"Material Adverse Effect" means, with respect to a particular Person, a
material adverse effect on the Business, Assets, financial condition, results of
operations, products, competitive position, customers or customer relations of
such Person, determined on a consolidated basis, and when used with respect to
representations, warranties or conditions, means the aggregate effect of all
similar situations unless the context indicates otherwise.
"Ordinary course" or "ordinary course of business" means the ordinary
course of business that is consistent with past practices.
"Party" is defined above in the preamble.
"Person" means any natural person, corporation, limited liability
company, partnership, proprietorship, association, trust or other legal entity.
"Registration Agreement" means the joinder to the Registration Rights
Agreement between each Transferor and the Acquirer, substantially in the form of
EXHIBIT B hereto.
"Registration Statement" means the Acquirer's registration statement on
Form S-1 once filed with and deemed effective by the SEC in connection with the
IPO.
"Related Transaction" is defined above in the preamble.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Transaction Documents" means this Agreement, the Equity Subscription
Agreement, the Registration Agreement, and each of the other documents
contemplated by this Agreement.
"Transactions" means the transactions contemplated by the Transaction
Documents.
"Transfer" is defined in Section 9.2.
"Transferors" is defined above in the preamble.
"Transferors' Representative" is defined in Section 3.3(a).
2. THE EXCHANGE OF SHARES.
2.1 BASIC TRANSACTION. On and subject to the terms and conditions of
this Agreement, the Acquirer agrees to exchange with the Transferors, and each
Transferor agrees to exchange with the Acquirer, all of the Company Shares in
exchange for the Acquirer Common Stock as specified below in this Section 2.
Each share of Company Common Stock shall be exchanged for the number of shares
of Acquirer Common Stock set forth on the Allocation Summary.
-4-
<PAGE> 9
2.2 STOCK EXCHANGE.
(a) Exchange Value. The amount of Acquirer Common Stock
payable to the Transferors in exchange for their shares of Company Common Stock
shall equal the total value of the Company based on the IPO offering price less
(i) the total value of shares of Acquirer Common Stock issued to public
investors in connection with the IPO and (ii) the total value of the shares of
Acquirer Common Stock issued to the other transferors in connection with the
Related Transactions.
(b) Surrender of Certificates. Each Transferor's allocable
share of the Acquirer Common Stock as set forth in ANNEX I will be issuable upon
the surrender of the certificates and other documentation specified in Section
3.2. As to each Transferor who properly surrenders such certificates and other
documentation, the Acquirer will deliver to such Transferor such Transferor's
allocable share of the Acquirer Common Stock as set forth in ANNEX I.
(c) Restricted Stock. Unless the Acquirer agrees to include
any of the Acquirer Common Stock in the Registration Statement, none of the
Acquirer Common Stock issued in connection with this Agreement will be
registered under the Securities Act. Each certificate for the Acquirer Common
Stock shall bear a legend describing the foregoing restriction.
3. CLOSING.
3.1 LOCATION, DATE. The closing for the Transactions (the "Closing") is
being held at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., in New
York, New York, or at such other location as the Parties hereto may agree,
commencing at 9:00 a.m. local time simultaneously with the closing of the IPO
and the Related Transactions or such other date as the Acquirer and the
Transferors may mutually determine (the "Closing Date").
3.2 DELIVERIES.
(a) Within seven (7) business days following the Closing Date,
the Acquirer shall deliver, or shall cause to be delivered by its transfer
agent, certificates to each Transferor for the Acquirer Common Stock
representing such Transferor's allocable share of the Acquirer Common Stock as
set forth in ANNEX I in accordance with Section 2; and
(b) At least three (3) business days prior to the Closing, (i)
the Transferors will deliver to LLGM the various certificates, instruments, and
documents referred to in Section 7 below, (ii) the Acquirer will deliver to LLGM
the various certificates, instruments, and documents referred to in Section 8
below, and (iii) each of the Transferors will deliver to LLGM the certificates
representing all of their respective Company Shares, duly endorsed in blank or
accompanied by a duly executed stock power. LLGM shall hold all such
certificates, documents and instruments in escrow pending consummation of the
Closing.
-5-
<PAGE> 10
3.3 TRANSFERORS' REPRESENTATIVE.
(a) In order to administer efficiently (i) the execution and
implementation of this Agreement by the Transferors, (ii) the waiver of any
condition to the obligations of the Transferors to consummate the Transactions
and (iii) the settlement of any dispute with respect to this Agreement, the
Transferors, by their execution of this Agreement, do hereby designate and
irrevocably appoint Chinh Chu as their representative and attorney-in-fact with
full power of substitution for all purposes under this Agreement (the
"Transferors' Representative").
(b) The Transferors, by their execution of this Agreement, do
hereby authorize the Transferors' Representative (i) to take all action
necessary in connection with the implementation of this Agreement on behalf of
the Transferors, the waiver of any condition to the obligations of the
Transferors to consummate the Transactions, or the settlement of any dispute,
(ii) to give and receive all notices required to be given under this Agreement
and (iii) to take any and all additional action as is contemplated to be taken
by or on behalf of the Transferors by the terms of this Agreement.
(c) All decisions and actions by the Transferors'
Representative shall be conclusive and binding upon all of the Transferors, and
no individual Transferor shall have the right to object, dissent, protest or
otherwise contest the same or have any cause of action against the Acquirer for
any action taken or omitted to be taken, given by the Transferors'
Representative; and no Transferor shall have any cause of action against the
Transferors' Representative for any action taken, decision made or instruction
given by the Transferors' Representative under this Agreement, in the absence of
fraud, gross negligence or willful misconduct of the Transferors'
Representative.
(d) By their execution of this Agreement, the Transferors
agree that: (i) the Acquirer shall be able to rely conclusively on the
instructions and decisions of the Transferors' Representative as to any actions
required or permitted to be taken by the Transferors or the Transferors'
Representative hereunder, and no Party hereunder shall have any cause of action
against the Acquirer for action taken by the Acquirer in reliance upon the
instructions or decisions of the Transferors' Representative; (ii) the
Transferors' Representative shall be deemed to fulfill any fiduciary obligation
to the Transferors so long as no Transferor is adversely affected by any action
or failure to act of the Transferors' Representative in a disproportionate
measure compared to any other Transferor; (iii) remedies available at law for
any breach of the provisions of this Section are inadequate, therefore, the
Acquirer shall be entitled to temporary and permanent injunctive relief without
the necessity of proving damages if the Acquirer brings an action to enforce the
provisions of this Section; (iv) the provisions of this Section 3.3 are
independent and severable, shall constitute an irrevocable power of attorney,
coupled with an interest and surviving death of the Transferors, or any one of
them granted by the Transferors to the Transferors' Representative and shall be
binding upon the executors, heirs, legal representatives and successors of each
Transferor; and (v) all fees and expenses incurred by the Transferors'
Representative shall be paid ratably by the Transferors.
-6-
<PAGE> 11
4. REPRESENTATIONS AND WARRANTIES OF THE TRANSFERORS.
Except as otherwise provided in Section 4.4(b) and Section 4.8, the
Transferors hereby jointly and severally represent and warrant to the Acquirer
as follows:
4.1 CORPORATE STATUS. The Company is a corporation duly organized,
validly existing and in good standing under the Laws of the State of New York
and is qualified to do business as a foreign corporation in any jurisdiction
where it is required to be so qualified.
4.2 AUTHORIZATION. The Company has the requisite power and authority to
own its Assets and to carry on its Business as currently conducted. The
Transferors have approved the appointment of the Transferors' Representative to
act on their behalf in accordance with the terms of Section 3.3. Each Transferor
and the Company have duly executed and delivered each Transaction Document to
which he, she or it is a Party, and each Transaction Document constitutes a
valid and binding obligation of such Party, enforceable against each Transferor
and the Company in accordance with its terms; except to the extent that
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar Laws relating to or affecting the
rights of creditors generally or contrary to public policy, except as
enforcement hereof is subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or in equity), and
except to the extent that provisions indemnifying a Party against Liability for
his, her or its own wrongful or negligent acts may be unenforceable.
4.3 CONSENTS AND APPROVALS. Neither the execution and delivery by each
Transferor and the Company of the Transaction Documents to which he, she or it
is a Party, nor the performance of the Transactions to be performed by such
Party, will require any Consent, constitute a Default or cause any payment
obligation (other than a payment obligation arising pursuant to a court-ordered
decree of divorce or an Agreement or instrument entered into or given in
connection with a divorce proceeding or similar matter) to arise under (a) any
Law or Court Order to which any Transferor or the Company is subject, (b) the
Charter Documents or bylaws of the Company or (c) any Contract, Government
Permit or other document to which any Transferor or the Company is a party or by
which the properties or other Assets of any Transferor or the Company may be
subject.
4.4 CAPITALIZATION AND STOCK OWNERSHIP.
(a) The total authorized capital stock of the Company consists
of 10,000,000 shares of Company Common Stock, of which 6,360,192 shares are
issued and outstanding, and no shares are (i) subject to issuance pursuant to
vested options, (ii) subject to issuance pursuant to unvested options, (iii)
reserved for issuance pursuant to future option grants, or (iv) subject to
unexercised warrants. The Transferors are not a party to (or have otherwise
terminated) any voting trust, proxy, or other Agreement or understanding with
respect to the voting of any capital stock of the Company.
(b) Each Transferor, severally but not jointly, represents and
warrants, only with respect to the Company Shares of such Transferor as set
forth beside his, her or its name on ANNEX I, that (i) such Transferor is the
sole record and beneficial owner of the number of shares of Company Common Stock
as set forth beside his, her or its name on ANNEX I, and (ii) such Transferor
owns all of such Company Common Stock free and clear of any Encumbrances (other
-7-
<PAGE> 12
than vesting or forfeiture provisions or restrictions on transfer imposed by
applicable federal and state securities Laws).
(c) There are no existing options, warrants, calls,
commitments or other rights of any character (including conversion or preemptive
rights) relating to the acquisition of any issued or unissued capital stock or
other securities of the Company. There are no outstanding or authorized option,
stock appreciation, phantom stock, or similar rights with respect to the
Company. All of the Company Shares are duly and validly authorized and issued,
fully paid and non-assessable. The Company has complied with all applicable Laws
in connection with the issuance of the Company Shares, and none of the Company
Shares were issued in violation of any Contract binding upon the Company. Upon
completion of the Transactions at the Closing, the Acquirer shall receive valid
title to all of the Company Shares, free and clear of all Encumbrances.
4.5 SUBSIDIARIES. The Company does not own, directly or indirectly, any
subsidiary, any interest or investment (whether equity or debt) in any
corporation, partnership, business, trust, joint venture or other legal entity.
4.6 CORPORATE RECORDS. The minute books of the Company contain
complete, correct and current copies of its Charter Documents and bylaws and of
all minutes of meetings, resolutions and other proceedings of its Board of
Directors and stockholders. The stock record book of the Company is complete,
correct and current.
4.7 LEGAL PROCEEDINGS AND COMPLIANCE WITH LAW. There is no Litigation
that is pending or threatened against the Company. There has been no Default by
the Company under any Laws applicable to the Company and the Company has not
received any notices from any governmental entity regarding any alleged Defaults
under any Laws. There has been no Default with respect to any Court Order
applicable to the Company.
4.8 SECURITIES MATTERS. Each Transferor, severally but not jointly,
represents and warrants as follows:
(a) The Transferors are experienced in evaluating and
investing in high-technology companies such as Acquirer. The Transferors have
substantial experience in investing in and evaluating private placement
transactions of securities in companies similar to Acquirer and are capable of
evaluating the risks and merits of their investment in Acquirer and have the
capacity to protect their own interests.
(b) The Transferors are acquiring the Acquirer Common Stock
solely for their own account and not with a view to, or for resale in connection
with, any distribution thereof, except in compliance with the Securities Act and
applicable state securities Laws, and the Transferors have no present intention
of selling or distributing the Acquirer Common Stock except in compliance with
the Securities Act and applicable state securities Laws. The Transferors
acknowledge that as of the date of this Agreement the Acquirer Common Stock has
not been registered under the Securities Act.
(c) The Transferors are aware of the applicable limitations
under the Securities Act relating to a subsequent sale, transfer, pledge,
mortgage, hypothecation, assignment or other
-8-
<PAGE> 13
encumbrance of the Acquirer Common Stock. The Transferors further acknowledge
that the Acquirer Common Stock must be held indefinitely unless it is
subsequently registered under the Securities Act and applicable state securities
Laws or an exemption from such registration is available. The Transferors are
aware of the provisions of Rule 144 promulgated under the Securities Act which
permits limited resale of shares acquired in a private placement subject to the
satisfaction of certain conditions, including, among other things, the resale
occurring not less than one year after a party has purchased and paid for the
security to be sold.
(d) The Transferors acknowledge that the Acquirer has provided
them with adequate access to financial and other information concerning the
Acquirer and the Acquirer Common Stock, and that the Transferors have had the
opportunity to ask questions of and receive answers from the Acquirer concerning
the Acquirer Common Stock and to obtain therefrom any additional information
necessary to make an informed decision regarding the acquisition of the Acquirer
Common Stock.
(e) Each of the Transferors is an "accredited investor" as
that term is defined in Rule 501(a) under the Securities Act. None of the
Transferors has been organized for the specific purpose of acquiring the
Acquirer Common Stock.
(f) The Transferors will not sell, transfer, pledge, donate,
assign, mortgage, hypothecate or otherwise encumber the Acquirer Common Stock
unless the Acquirer Common Stock is registered under the Securities Act or the
Acquirer is given an opinion of counsel (which may be an opinion of counsel to
the Acquirer), reasonably acceptable to the Acquirer, that such registration is
not required under the Securities Act.
(g) The Transferors realize that the Acquirer is relying on
the validity of the Transferors' representations and agreements contained herein
and in the other Transaction Documents in issuing the Acquirer Common Stock to
the Transferors without registration under the Securities Act.
4.9 ACCURACY OF INFORMATION. No representation or warranty by any
Transferor in any Transaction Document, and no information contained herein or
therein or in any document delivered pursuant hereto or thereto, including the
Company Financial Statements and the Schedules hereto, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements contained herein or therein not misleading.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRER.
The Acquirer hereby represents and warrants to the Transferors as
follows:
5.1 CORPORATE. The Acquirer is a corporation duly organized, validly
existing and in good standing under the Laws of Delaware.
5.2 AUTHORIZATION. The Acquirer has the requisite power and authority
to execute and deliver the Transaction Documents to which it is a Party and to
perform the Transactions performed or to be performed by it. Such execution,
delivery and performance by the Acquirer has been duly authorized by all
necessary corporate action. The Acquirer has duly executed and delivered this
-9-
<PAGE> 14
Agreement and this Agreement constitutes a valid and binding obligation of the
Acquirer, enforceable against the Acquirer in accordance with its terms; except
to the extent that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other similar Laws relating to or
affecting the rights of creditors generally or contrary to public policy, except
as enforcement hereof is subject to general principles of equity (regardless of
whether such enforcement is considered in a proceeding at law or in equity), and
except to the extent that provisions indemnifying a Party against Liability for
his, her or its own wrongful or negligent acts may be unenforceable.
5.3 CONSENTS AND APPROVALS. Neither the execution and delivery by the
Acquirer of the Transaction Documents to which it is a Party, nor the
performance of the Transactions by the Acquirer, will require any Consent, or
constitute a Default or cause any payment obligation to arise under (a) any Law
or Court Order to which the Acquirer is subject, (b) the Charter Documents or
bylaws of the Acquirer or (c) any Contract, Governmental Permit or other
document to which the Acquirer is a party or by which the properties or other
Assets of the Acquirer may be subject.
5.4 CAPITALIZATION AND STOCK OWNERSHIP. The total authorized capital
stock of the Acquirer consists of 120,000,000 shares, of which 100,000,000
shares are designated as Common Stock, $0.001 par value per share, one share of
which is issued and outstanding as of the date hereof, and 20,000,000 are
designated as Preferred Stock, $0.001 par value per share, none of which are
issued and outstanding as of the date hereof.
5.5 LEGAL PROCEEDINGS. There is no Litigation that is pending or, to
the Acquirer's knowledge, threatened against the Acquirer, except where such
Litigation is not expected to have a Material Adverse Effect. There has been no
Default by the Acquirer under any Laws applicable to the Acquirer, and the
Acquirer has not received any notices from any governmental entity regarding any
alleged Defaults under any Laws. There has been no Default with respect to any
Court Order applicable to the Acquirer.
5.6 FINDER'S FEES. Acquirer shall pay at the Closing all commissions,
finder's or similar fees in connection with the Transactions for any Person
retained by the Acquirer or the Company in such capacity.
5.7 SECTION 351. Immediately after the Closing, the Transferors,
together with (a) the Transferors of all Businesses acquired by the Acquirer in
connection with the IPO, (b) all of the purchasers of the Acquirer's Common
Stock in the IPO, and (c) all other Transferors of property to the Acquirer in
exchange for the Acquirer Common Stock in connection with the IPO, shall possess
at least eighty (80%) percent of the total combined voting power of all classes
of Acquirer Common Stock entitled to vote and at least eighty (80%) percent of
the total number of shares of all other classes of stock of the Acquirer.
6. COVENANTS OF THE ACQUIRER.
6.1 PAYMENT OF EXPENSES. On or promptly after the Closing Date, the
Acquirer shall pay the expenses incurred in connection with the Transactions,
including any amounts that may be due from the Parties to their lawyers,
accountants, consultants, investment bankers, brokers, finders, and other
advisors.
-10-
<PAGE> 15
6.2 TAX-FREE EXCHANGE. The Parties agree that this transaction will
occur in conjunction with the Related Transactions, and the Parties intend that
the receipt of the Acquirer Common Stock by the Transferors and by the parties
involved in the Related Transactions will be tax-free under Section 351 of the
Code.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRER.
All obligations of the Acquirer to consummate the Transactions are
subject to the satisfaction (or waiver by the Acquirer) prior thereto of each of
the following conditions:
7.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All of
the representations and warranties of the Transferors and the Company contained
in this Agreement shall be true, correct and complete on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of such date; all of the terms, covenants, agreements and
conditions of this Agreement to be complied with, performed or satisfied by the
Company and the Transferors on or before the Closing Date shall have been duly
complied with, performed or satisfied.
7.2 NO LITIGATION. No Litigation shall have been instituted or
threatened to restrain or prohibit the Transactions, or limiting or restricting
the Acquirer's conduct or operation of the Business of the Company (or its own
Business) following the Closing. There shall be no Litigation of any nature
pending or threatened against the Acquirer or the Company, their respective
properties or any of their officers or directors, that could have a Material
Adverse Effect on the Business, Assets, Liabilities, financial condition,
results of operations or prospects of the Company.
7.3 NO MATERIAL ADVERSE CHANGE. There shall have been no changes in the
Business, operations, affairs, prospects, properties, Assets, existing and
potential Liabilities, obligations, profits or condition (financial or
otherwise) of the Company since the Balance Sheet Date which, taken as a whole,
have a Material Adverse Effect on the Business, Assets, Liabilities, financial
condition, results of operations or prospects of the Company; and the Acquirer
shall have received a certificate, dated the Closing Date, signed by each
Transferor and an officer of the Company to such effect.
7.4 CONSENTS AND APPROVALS. All Consents relating to the consummation
of the Transactions by the Company and the Transferors shall have been obtained.
7.5 IPO. The Registration Statement filed by the Acquirer with the SEC
in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
7.6 DOCUMENTS TO BE DELIVERED BY THE TRANSFERORS. The following
documents, duly executed by the appropriate Parties, shall have been delivered
to LLGM at least three business days prior to the Closing by the Company and the
Transferors:
(a) Resignations. The resignations, effective as of the
Closing, of each officer and director of the Company.
-11-
<PAGE> 16
(b) Company Shares. Certificates of the Company Shares, duly
endorsed in blank or accompanied by duly executed assignment documents by the
respective Transferors, representing one hundred percent (100%) of the issued
and outstanding capital stock of the Company and all of such Company Shares
shall be free and clear of any Encumbrances of any nature whatsoever.
(c) Subscription Agreement Joinder. A joinder in the form and
substance of EXHIBIT A attached hereto to the Equity Subscription Agreement for
each of the Transferors.
(d) Registration Agreement Joinder. A joinder in the form and
substance of EXHIBIT B attached hereto to the Registration Agreement for each of
the Transferors.
(e) Ancillary Documents. Any other Transaction Documents to
which they are a Party.
8. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE TRANSFERORS.
All obligations of the Company and the Transferors to consummate the
Transactions are subject to the satisfaction (or waiver by the Transferors to
which the condition relates) prior thereto of each of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All of
the representations and warranties of the Acquirer contained in this Agreement
shall be true, correct and complete on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
such date; all of the terms, covenants, agreements and conditions of this
Agreement to be complied with, performed or satisfied by the Acquirer on or
before the Closing Date shall have been duly complied with, performed or
satisfied.
8.2 NO LITIGATION. No Litigation shall have been instituted or
threatened to restrain or prohibit the Transactions.
8.3 CONSENTS AND APPROVALS. All Consents relating to the consummation
of the Transactions by the Acquirer shall have been obtained.
8.4 RECEIPT OF ACQUIRER'S SHARES. The Transferors shall receive the
Acquirer Common Stock pursuant to Section 2.2 within seven (7) business days
after the Closing.
8.5 DOCUMENTS TO BE DELIVERED BY THE ACQUIRER. The following documents,
duly executed by the appropriate Parties, shall have been delivered to LLGM at
least three business days prior to the Closing by the Acquirer:
(a) Subscription Agreement Joinder. A joinder in the form and
substance of EXHIBIT A attached hereto to the Equity Subscription Agreement
attached hereto for each of the Transferors.
(b) Registration Agreement Joinder. A joinder to the
Registration Agreement in the form and substance of EXHIBIT B attached hereto
for each of the Transferors.
-12-
<PAGE> 17
(c) Ancillary Documents. Any other Transaction Documents to
which they are a Party.
8.6 IPO. The Registration Statement filed by the Acquirer with the SEC
in connection with the IPO shall have become effective and there shall be no
other impediments to the closing of the IPO.
9. POST-CLOSING COVENANTS.
9.1 GENERAL. In case at any time after the Closing any further action
is necessary or desirable to carry out the purposes of this Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Section 10
below). The Transferors acknowledge and agree that, from and after the Closing,
the Acquirer and/or Company will be entitled to possession of all documents,
books, records, agreements, and financial data of any sort relating to the
Company; provided, however, that the Transferors may retain any copies of the
foregoing as shall be necessary to comply with applicable Tax and other Laws,
regulations and ordinances.
9.2 RESTRICTIONS ON TRANSFER OF ACQUIRER COMMON STOCK. Except as
permitted by the Acquirer pursuant to the Registration Statement, the
Transferors shall not directly or indirectly, sell, transfer any beneficial
interest in, pledge, hypothecate or otherwise dispose, or offer to sell,
transfer any beneficial interest in, pledge, hypothecate or otherwise dispose
(collectively "Transfer"), any shares of Acquirer Common Stock constituting the
Stock Portion of the Transfer Consideration during the 12-month period following
the Closing Date.
10. [RESERVED].
11. DISPUTE RESOLUTION.
11.1 GOOD-FAITH NEGOTIATIONS. If after the Closing any dispute arises
under Section 10 with respect to a claim for Damages that is not settled
promptly in the ordinary course of business, the Parties shall seek to resolve
any such dispute between them, first, by negotiating promptly with each other in
good faith in face-to-face negotiations. If the Parties are unable to resolve
such dispute between them within twenty (20) business days (or such period as
the Parties shall otherwise agree) through these face-to-face negotiations, then
any such dispute shall be resolved in the manner set forth in Section 11.2.
11.2 ARBITRATION. If the Parties do not resolve a dispute under Section
11.1, the dispute shall be settled by arbitration conducted on a confidential
basis, under the U.S. Arbitration Act, if applicable, and the then current
Commercial Arbitration Rules of the American Arbitration Association (the
"Association") strictly in accordance with the terms of this Agreement and the
substantive Law of the State of New York. The arbitration shall be conducted at
the Association's regional office located in the New York, New York area by
three arbitrators, at least one of whom shall be knowledgeable regarding
businesses engaged in providing services via the Internet, one of whom shall be
an attorney and one of whom shall be a member of a "Big-Five" accounting firm
-13-
<PAGE> 18
familiar with Businesses engaged in providing services via the Internet.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither Party shall institute a proceeding hereunder
unless at least 60 days prior thereto such Party shall have given written notice
to the other Party of its intent to do so. In any award, the arbitrators shall
assess the arbitration costs and expenses, including attorneys fees of the
Parties, in a manner deemed equitable by the arbitrators, taking into account
the arbitration decision.
11.3 WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT, WHICH HAS NOT BEEN RESOLVED BY NEGOTIATION AS
PROVIDED HEREIN AND AS TO WHICH LEGAL ACTION NEVERTHELESS OCCURS, EACH PARTY
HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY EACH PARTY HERETO
AND EACH PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR ANY PERSON ACTING
ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT TO INDUCE
THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. EACH
PARTY FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED OR HAS HAD THE
OPPORTUNITY TO BE REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING
OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND
THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. EACH PARTY
FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION.
11.4 NO PUNITIVE DAMAGES. The Parties to this Agreement agree to waive
any right to seek punitive damages.
12. COMPETITION AND CONFIDENTIALITY BY THE TRANSFERORS.
12.1 [RESERVED].
12.2 CONFIDENTIALITY. For an indefinite period after the Closing, no
Transferor shall divulge, communicate or use in any way, any Confidential
Information or trade secrets of the Business of the Acquirer or the Company.
Each Transferor shall, and shall cause its subsidiaries, Affiliates, officers,
directors, employees, accountants, counsel, financial advisors and other
representatives and agents, to treat and hold as such all of the Confidential
Information, refrain from disclosing or using any of the Confidential
Information except in connection with this Agreement and the Transactions, and
except as otherwise permitted hereunder or as may be required by Law, deliver
promptly to the Acquirer or the Company or destroy, at the request and option of
the Acquirer or the Company, all tangible embodiments (and all copies) of the
Confidential Information which are in the possession of such Transferor. In the
event that any Transferor is requested or required (by request for information
or documents in any legal proceeding, interrogatory, subpoena, civil
investigative demand, or similar legal process) to disclose any Confidential
Information, such Transferor will notify the Acquirer or the Company promptly of
the request or requirement so that the Acquirer or the Company may seek an
appropriate protective order or waive compliance with the provisions of this
Section 12.2. If, in the absence of a protective order or the receipt of a
waiver hereunder, any Transferor is compelled to disclose any Confidential
Information or else stand liable
-14-
<PAGE> 19
for contempt, such Transferor may disclose the Confidential Information;
provided, however, that such Transferor shall use its reasonable efforts to
obtain, at the reasonable request of the Acquirer or the Company, an order or
other assurance that confidential treatment will be accorded to such portion of
the Confidential Information required to be disclosed as the Acquirer or the
Company shall reasonably designate.
12.3 AFFILIATES. The terms of this Section 12 shall apply to each
Transferor and any Affiliate of his or hers to the same extent as if they were
parties hereto, and each Transferor shall take whatever actions may be necessary
to cause his or her Affiliates to adhere to the terms of this Section 12.
12.4 INJUNCTIVE RELIEF. In the event of any breach or threatened breach
by any Transferor of any provision of this Section 12, the Acquirer shall be
entitled to injunctive or other equitable relief, restraining such Party from
using or disclosing any Confidential Information in whole or in part, or from
engaging in conduct that would constitute a breach of the obligations of a
Transferor under this Section 12. Such relief shall be in addition to and not in
lieu of any other remedies that may be available, including an action for the
recovery of damages. In the event of Litigation involving this Section 12, if a
court of competent jurisdiction determines that the scope of this Section 12 is
too broad in any respect, then the scope shall be deemed to be reduced or
narrowed to such scope as is found lawful and reasonable by such court. Each
Transferor acknowledges, however, that this Section 12 has been negotiated by
the Parties and that the geographical and time limitations, as well as the
limitation on activities, are reasonable in light of the circumstances
pertaining to the Business of the Acquirer and the Company.
13. TERMINATION
13.1 TERMINATION OF AGREEMENT. The Parties may terminate this Agreement
as provided below:
(a) the Acquirer and the Transferors may terminate this
Agreement by mutual written consent at any time prior to the Closing;
(b) the Acquirer may terminate this Agreement by giving
written notice to the Transferors' Representative at any time prior to the
Closing in the event the Transferors are in breach of any representation,
warranty, or covenant contained in this Agreement in any material respect and
such breach has not been cured within ten (10) days of written notice thereof,
and the Transferors may terminate this Agreement by giving written notice to the
Acquirer at any time prior to the Closing in the event the Acquirer is in breach
of any representation, warranty, or covenant contained in this Agreement in any
material respect and such breach has not been cured within ten (10) days of
written notice thereof;
(c) this Agreement will terminate if the Closing shall not
have occurred on or before February 29, 2000.
(d) Nothing contained in this Section 13.1 shall alter,
affect, modify or restrict any Parties' rights to rely on and/or seek
indemnification for a breach of any of the representations and warranties and/or
conditions or covenants of any of the Parties contained in this Agreement.
-15-
<PAGE> 20
13.2 EFFECT OF TERMINATION. Except as provided in Section 12.2, if
either the Acquirer or any one or the Transferors terminates this Agreement
pursuant to Section 13.1 above, all obligations of the Parties hereunder shall
terminate without any Liability of any Party to any other Party.
14. MISCELLANEOUS.
14.1 PRESS RELEASES AND ANNOUNCEMENTS. Except as may be required by
applicable securities Laws or stock exchange requirements, no Party shall issue
any press release or public announcement relating to the subject matter of this
Agreement prior to, at or about the Closing without the prior written approval
of the Acquirer and the Transferors, provided, however, that any Party may make
any public disclosure it believes in good faith is required by Law or regulation
(in which case the disclosing Party will advise the other Parties prior to
making the disclosure).
14.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns.
14.3 CONTENTS OF AGREEMENT. This Agreement, together with the other
Transaction Documents, sets forth the entire understanding of the Parties hereto
with respect to the subject matter hereof and supersedes all prior agreements or
understandings among the Parties regarding such matters.
14.4 AMENDMENT, PARTIES IN INTEREST, ASSIGNMENT, ETC. This Agreement
may be amended, modified or supplemented only by a written instrument duly
executed by each of the Parties hereto. If any provision of this Agreement shall
for any reason be held to be invalid, illegal, or unenforceable in any respect,
such invalidity, illegality, or unenforceability shall not affect any other
provision hereof, and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein. This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective heirs, legal representatives, successors and permitted assigns
of the Parties hereto. No Party hereto shall assign this Agreement or any right,
benefit or obligation hereunder; provided, however, that the Acquirer may assign
any or all of its rights, benefits or obligations herein to any Affiliate. Any
term or provision of this Agreement may be waived at any time by the Party
entitled to the benefit thereof by a written instrument duly executed by such
Party. The Parties hereto shall execute and deliver any and all documents and
take any and all other actions that may be deemed reasonably necessary by their
respective counsel to complete the Transactions.
14.5 INTERPRETATION. Unless the context of this Agreement clearly
requires otherwise, (a) references to the plural include the singular, the
singular the plural, the part the whole, (b) references to any gender include
all genders, (c) "or" has the inclusive meaning frequently identified with the
phrase "and/or," (d) "including" has the inclusive meaning frequently identified
with the phrase "but not limited to" and (e) references to "hereunder" or
"herein" relate to this Agreement. The section and other headings contained in
this Agreement are for reference purposes only and shall not control or affect
the construction of this Agreement or the interpretation thereof in early
respect. Annex, section, subsection, schedule and exhibit references are to this
Agreement
-16-
<PAGE> 21
unless otherwise specified. Each accounting term used herein that is not
specifically defined herein shall have the meaning given to it under GAAP.
14.6 INCORPORATION OF EXHIBITS, ANNEXES, AND SCHEDULES. The Exhibits,
Annexes, and Schedules identified in this Agreement are incorporated herein by
reference and made a part hereof.
14.7 REMEDIES. The remedies provided by Section 12 shall constitute the
exclusive remedies for the matters covered thereby. With respect to any matters
not covered by such Section, any Party hereto shall be entitled to such rights
and remedies as such Party may have at law or in equity or otherwise for any
breach of this Agreement, including the right to seek specific performance,
rescission or restitution, none of which rights or remedies shall be affected or
diminished by the remedies provided hereunder.
14.8 NOTICES. All notices that are required or permitted hereunder
shall be in writing and shall be sufficient if personally delivered or sent by
mail, facsimile or Federal Express (or other reputable delivery or courier
service). Any notices shall be deemed given upon the earlier of (a) the date
when received, (b) the third day after the date when sent by registered or
certified mail, (c) the day when sent by facsimile, (d) the day after the date
when sent by Federal Express (or other reputable delivery or courier service),
to the address or fax number set forth below, unless such address or fax number
is changed by notice to the other Party hereto:
If to the Acquirer:
espernet.com, inc.
383 West 12th Street
New York, New York 10014
Attention: Martin Prazak, CEO
Fax: (212) 989-4717
with a required copy to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Goodwin Square
225 Asylum Street, 13th Floor
Hartford, Connecticut 06103
Attention: John J. Altorelli, Esq.
Fax: (860) 293-3555
If to the Transferors or Transferors' Representative:
Chinh Chu
15 West 17th Street
3rd Floor
New York, NY
14.9 GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
-17-
<PAGE> 22
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE
(WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE
THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW
YORK.
14.10 EXPENSES. The Acquirer bear all costs and expenses (including
legal fees and expenses and investment banking fees) incurred in connection with
this Agreement and the Transactions.
14.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more Parties
hereto, and an executed copy of this Agreement may be delivered by one or more
Parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such Party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes as of the date first written above. At the request of
any Party hereto, all Parties hereto agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
[SIGNATURE PAGE FOLLOWS]
-18-
<PAGE> 23
IN WITNESS WHEREOF, this Stock Exchange Agreement has been executed by
the Parties hereto as of the day and year first written above.
ESPERNET.COM, INC.
By: /s/ Paul Hart
----------------------------------
Name: Paul Hart
Title: Executive Vice President
ESPERNET.COM OF NEW YORK, INC.
By: /s/ Paul Hart
----------------------------------
Name: Paul Hart
Title: President
TRANSFERORS' REPRESENTATIVE
/s/ Chinh Chu
----------------------------------
Chinh Chu
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
<PAGE> 24
TRANSFERORS
_____________________________________________
Chinh Chu
_____________________________________________
Curtis G. Macnguyen
RANGER INVESTMENTS, LP
By:__________________________________________
Its
_____________________________________________
Howard Fritz
_____________________________________________
Keith W. Abell
_____________________________________________
HRH Crown Prince Pavlos
SPRINGFIELD TECHNOLOGY VENTURES LIMITED
By:__________________________________________
Its
_____________________________________________
Albert W. Lin
_____________________________________________
Christopher T. Winkler
_____________________________________________
Richard J. Prati
_____________________________________________
John G. Troiano
<PAGE> 25
HIGHLINE CAPITAL HOLDINGS, LLC
By:__________________________________________
Its
_____________________________________________
Aristotle Perry Navab
_____________________________________________
Peter D. DeSorcy
_____________________________________________
Mary Yuen
_____________________________________________
Anand K. Desai
_____________________________________________
Paul J. Hart
_____________________________________________
Martin D. Prazak
_____________________________________________
Ihsan M. Essaid
_____________________________________________
John Leiderback
_____________________________________________
Jerry C. Yuen
_____________________________________________
Roger A. Aguinaldo
_____________________________________________
Richard M. Aguinaldo
_____________________________________________
Elvira Artemiuk
<PAGE> 26
_____________________________________________
Douglas B. Newton
_____________________________________________
Stephanie J. Schulwolf
_____________________________________________
Alexander M. Bacher
[SIGNATURE PAGE TO STOCK EXCHANGE AGREEMENT]
<PAGE> 27
ANNEX I
ALLOCATION SUMMARY(1)
<TABLE>
<CAPTION>
COMPANY CONVERSION ACQUIRER
SHAREHOLDER COMMON STOCK RATE COMMON STOCK
- ----------- ------------ ---------- ------------
<S> <C> <C> <C>
Chinh E. Chu 2,305,600
Curtis G. Macnguyen 672,000
Ranger Investments, LP 576,000
Howard Fritz 300,400
Keith W. Abell 240,000
HRH Crown Prince Pavlos 192,000
Springfield Technology 144,000
Ventures Limited
Albert W. Lin 112,000
Christopher T. Winkler 96,000
Richard J. Prati 96,000
John G. Troiano 96,000
Highline Capital Holdings, 96,000
LLC
Aristotle Perry Navab 96,000
Peter D. DeSorcy 57,600
Mary Yuen 48,000
Anand K. Desai 38,400
Paul J. Hart 694,848
Martin D. Prazak 159,008
Ihsan M. Essaid 159,008
John Leiderback 60,400
Jerry C. Yuen 66,464
Roger A. Aguinaldo 30,240
Richard M. Aguinaldo 9,088
Elvira Artemiuk 6,048
Douglas B. Newton 6,048
Stephanie J. Schulwolf 1,520
Alexander M. Bacher 1,520
TOTALS 6,360,192
</TABLE>
- --------
(1) The Conversion Rate shall be determined on the IPO date in
accordance with the exchange value set forth in Section 2.2(a) of this
Agreement.
<PAGE> 1
Exhibit 10.5
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of September 21, 1999 between espernet.com,
inc., a Delaware corporation (the "Company"), and Martin D. Prazak the
"Executive").
The parties hereto hereby agree as follows:
1. EMPLOYMENT.
1.1. Agreement. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to serve the Company, in each case subject to the
terms and conditions set forth herein.
1.2. Expiration Date. The employment of the Executive by the Company
shall be for the period commencing on the date of the Company's initial public
offering (the "IPO") of its common stock (the "Starting Date") and expiring on
the third anniversary of the Starting Date (the "Expiration Date"), unless such
employment shall have been extended or sooner terminated as hereinafter set
forth. On each date that is six months prior to the Expiration Date then in
effect, the Expiration Date shall be automatically extended by one year unless
either party hereto shall have previously given notice to the other party that
the Expiration Date shall not be so extended.
2. POSITION AND DUTIES. The Executive shall serve as Chief Executive Officer and
President of the Company, and shall be accountable to, and shall also have such
other powers, duties and responsibilities as may from time to time be prescribed
by, the Board of Directors of the Company (the "Board of Directors").
The Executive shall perform and discharge, faithfully, diligently and
competently, such duties and responsibilities. The Executive shall devote
substantially all his working time and attention and his best efforts and
ability to the business and affairs of the Company and its subsidiaries, and
shall not engage in other activities that a reasonable man could conclude would
interfere with the proper discharge of his duties. It is recognized that (i) the
Executive shall continue to work in the greater New York City metropolitan area
and shall travel to the extent that the Executive reasonably deems necessary to
fulfill his duties hereunder and (ii) the Executive may serve as a director of
an entity that is not, directly or indirectly, in competition with the Company.
3. COMPENSATION. Subject to the performance by the Executive of his duties and
obligations to the Company:
3.1. Salary. As compensation for services performed under and during
the term of his employment hereunder, the Company shall pay the Executive a
salary of $200,000.00 per annum or such higher amount as may from time to time
be established by the Board of Directors (the annual rate of salary in effect
from time to time being referred to as the "Salary"). Salary shall be
<PAGE> 2
payable in accordance with the Company's standard payroll policies as in effect
from time to time. Except as otherwise provided in this Agreement, the Salary
shall be prorated for any period of service less than a full year.
Notwithstanding the foregoing, one half of the Executive's Salary shall be
accrued until the closing of the IPO.
3.2. Signing Bonus. As compensation for entering into this Agreement,
the Company shall pay to the Executive upon consummation of the IPO the bonus
amount specified in Appendix I hereto (the "Signing Bonus").
3.3. Performance Bonus. As additional compensation for his services
during the term of his employment hereunder, the Company shall pay the Executive
with respect to each fiscal year of the Company, determined in accordance with
Appendix I hereto, the performance bonus amounts, if any, determined as set
forth in said Appendix I (the "Performance Bonus Plan").
3.4. Stock Option. Subject to all of the terms and provisions hereof,
the Company shall grant to the Executive the stock option specified in Appendix
II hereto (the "Stock Option").
3.5. Business Expenses. During the term of his employment hereunder,
the Executive shall be entitled to receive prompt reimbursement by the Company
for all reasonable business expenses incurred by him on behalf of the Company or
any of its subsidiaries (in accordance with the policies and procedures
established by the Board of Directors from time to time for the Company's senior
executive officers) in performing services hereunder, provided that the
Executive properly accounts therefor in accordance with requirements for federal
income tax deductibility and the Company's policies and procedures.
3.6. Fringe Benefits. During the term of his employment hereunder, the
Executive shall be entitled to participate in or receive benefits under any life
insurance, health and accident plans, retirement plans or other arrangements
made generally available by the Company to its executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and. The benefits to which the Executive is
entitled under this Section 3.5 are referred to hereinafter collectively as the
"Fringe Benefit Package."
3.7. Vacations. During the term of his employment hereunder, the
Executive shall be entitled to 30 paid vacation days in each calendar year
(inclusive of all sick and personal days, etc.) and shall also be entitled to
all paid holidays given by the Company to its employees.
4. OFFICES; SUBSIDIARIES AND AFFILIATES. The Executive agrees to serve during
the term of his employment hereunder, if elected or appointed thereto, in one or
more positions as an officer or director of the Company or any one or more of
its present or future subsidiaries, as a director of any one or more other
Affiliates of the Company, or as an officer, trustee or director of any pension
plan of the Company or any of its subsidiaries. Service in such additional
offices will be without additional compensation except for reimbursement of
reasonably related business expenses on the same terms as provided elsewhere in
this Agreement. As used herein, the term "Affiliate" shall mean any person or
entity directly or indirectly controlling, controlled by or under common control
with the Company. The Executive shall immediately resign, and his offices and
2
<PAGE> 3
directorships in the Company and any of its affiliates shall immediately be
terminated, in the event of a termination of the Executive's employment under
this Agreement for any reason whatsoever.
5. UNAUTHORIZED DISCLOSURE; INVENTIONS; NONCOMPETITION.
5.1. Unauthorized Disclosure. The Executive shall not, without the
written consent of the Board of Directors or a person duly authorized thereby,
disclose to any person, other than an employee or professional adviser of the
Company or other person to whom disclosure is in the reasonable judgment of the
Executive necessary or appropriate in connection with the performance by the
Executive of his duties as an executive officer of the Company, any information
possessed by him the disclosure of which he knows, or in the exercise of
reasonable care should know, may be damaging to, or otherwise adverse to the
interests of, the Company or any of its subsidiaries; provided, however, that
such information shall not include (i) any information known generally to the
public (other than as a result of unauthorized disclosure by the Executive) or
(ii) any information generally obtainable on a non-confidential basis from a
source other than the Company that is not itself bound by a confidentiality or
non-disclosure obligation; and provided, further, that (x) the Executive's
duties under this Section 5.1 shall not extend to any disclosure that may be
required by law in connection with any judicial or administrative proceeding or
inquiry and (y) Executive may disclose general information relating to sales
trends and profitability and the Executive's role therein to the extent
necessary to allow him to obtain new employment after the term of Executive's
employment hereunder. The Executive understands and agrees that the restrictions
of this Section 5.1 shall continue to apply after his employment terminates,
regardless of the reason for such termination, for so long as may be reasonably
required to protect the legitimate business interests of the Company and its
subsidiaries.
5.2. Proprietary Rights. Any and all inventions, discoveries,
developments, methods, processes, compositions, works, supplier and customer
lists (including without limitation information relating to the generation and
updating thereof), concepts and ideas (whether or not patentable or
copyrightable) conceived, made, developed, created or reduced to practice by the
Executive (whether at the request or suggestion of the Company or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) during the term of Executive's employment with the Company
and for one year thereafter, which may be directly or indirectly useful in, or
relate to, the business, ventures or other activities of or products
manufactured or sold by the Company or any business or products contemplated by
the Company or any of its subsidiaries, while the Executive is employed by the
Company (collectively, "Proprietary Rights"), shall be promptly and fully
disclosed by the Executive to an appropriate executive officer of the Company
and shall be the Company's exclusive property as against the Executive and his
successors, heirs, devisees, legatees and assigns, and the Executive hereby
assigns to the Company his entire right, title and interest therein and shall
promptly deliver to appropriate executive officers of the Company all papers,
drawings, models, data and other material relating to any of the foregoing
Proprietary Rights, conceived, made, developed, created or reduced to practice
by him as aforesaid.
All copyrightable Proprietary Rights shall be considered "works made
for hire."
3
<PAGE> 4
The Executive shall, upon the Company's request and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Company's counsel to assign, and confirm the Company's title in, his entire
right, title and interest in the foregoing Proprietary Rights and to direct
issuance of patents or copyrights to the Company with respect to such
Proprietary Rights as are the Company's exclusive property as against the
Executive and his successors, heirs, devisees, legatees and assigns under this
Section 5.2 or to vest in the Company title to such Proprietary Rights as
against the Executive and his successors, heirs, devisees, legatees and assigns,
the expense of securing any such patent or copyright, however, to be borne by
the Company.
5.3. Noncompetition.
(a) Restriction on Competitive Activities. During the period
beginning on the Starting Date and ending on the first anniversary of
the Date of Termination, the Executive shall not, directly or
indirectly, own, manage, operate, control or participate in any manner
in the ownership, management, operation or control of, or be connected
as an officer, employee, partner, director, principal, consultant,
agent or otherwise with, or have any financial interest in, or aid or
assist anyone else in the conduct of, any business or venture, a
significant portion of which is engaged in any activity or business
competing with the Company or any of its subsidiaries, whether or not
the Executive is to be compensated for such participation.
(b) Restriction on Taking Employees or Customers. During the
period beginning on the Starting Date and ending on the date on which
the Executive's activities are no longer restricted under Section
5.3(a) hereof, the Executive shall not, directly or indirectly, (i)
recruit or otherwise seek to induce any employees of the Company or any
of its subsidiaries or Affiliates to terminate their employment or
violate any agreement with or duty to the Company of any of its
subsidiaries or Affiliates, or (ii) solicit or encourage any customer
or supplier of the Company to terminate or materially diminish its
relationship with the Company or of any group, division, subsidiary or
Affiliate of the Company.
(c) Scope of Restriction. The provisions of this Section 5.3
shall extend to all geographic areas where the Company has offered any
products, processes or services at any time during the Executive's
employment hereunder and to all areas where the Company had, to the
knowledge of the Executive, actual plans to offer any products,
processes or services within one year from the date on which the
Executive's activities are first restricted under this Section 5.
4
<PAGE> 5
6. TERMINATION.
6.1. Death. The Executive's employment hereunder shall terminate upon
his death.
6.2. Incapacity. If in the reasonable judgment of the Board of
Directors, as a result of the Executive's incapacity due to physical or mental
illness or otherwise, the Executive shall during the term of this Agreement be
unable to perform satisfactorily all of his duties hereunder on a full-time
basis, the Company may suspend the Executive's employment hereunder by notice to
the Executive and, upon such inability having continued for at least six months
and constituting a long-term disability under Executive's current health and
medical plan, may terminate the Executive's employment hereunder by notice to
the Executive.
6.3. Termination by the Executive. The Executive may terminate his
employment hereunder upon thirty days' prior written notice to the Company for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean (a) any
removal of the Executive from each of the positions indicated in Section 2
hereof, except in connection with termination of the Executive's employment for
Cause or termination or suspension of employment due to the Executive's death or
incapacity, (b) a reduction in the Executive's Salary, or a material reduction
in the Fringe Benefit Package without a corresponding increase in Executive's
Salary, (c) any requirement by the Company that the Executive must regularly
report to work at a location not in the greater New York City metropolitan area,
or (d) a Change of Control of the Company. For purposes of this Agreement,
"Change of Control" shall mean any of the following: (i) a change in the
ownership or management of Company that would be required to be reported in
response to certain provisions of the Securities Exchange Act of 1934; (ii) an
acquisition (other than directly from the Company) by a person or entity
(excluding the Company) of 25% or more of the Company's common stock or the
Company's then outstanding voting securities; (iii) a change in a majority of
the Company's Board of Directors as of the IPO date (the "Incumbent Board")
(excluding any persons approved by a vote of at least a majority of the
Incumbent Board other than in connection with an actual or threatened proxy
contest); (iv) consummation of a reorganization, merger, consolidation or sale
of all or substantially all of the Company's assets (collectively, a
"Transaction") other than a Transaction in which all or substantially all of the
stockholders of the Company prior to such Transaction own, in the same
proportion, more than 50% of the voting power of the entity resulting from the
Transaction, at least a majority of the Company's Board of Directors of the
resulting entity were members of the Incumbent Board, and after which no person
(other than the resulting entity and its Affiliates) beneficially owns 25% or
more of the voting power of the resulting entity, except to the extent such
ownership existed prior to the Transaction; or (v) the approval by the Company's
stockholders of a complete liquidation or dissolution of the Company.
6.4. Cause. The Company may terminate the Executive's employment
hereunder for Cause. For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon the Executive's
(i) material failure, refusal or neglect to perform and discharge his duties and
responsibilities hereunder, (ii) conviction of any crime involving fraud or the
personal dishonesty or moral turpitude of the Executive, or (iii) other
intentional or willful material breach of any provision of this Agreement, or
other intentional or
5
<PAGE> 6
willful action that is materially inconsistent with the terms hereof, that in
each case is materially harmful to the business interests of the Company or any
of its subsidiaries and which Executive has not cured upon receipt of written
notice after a reasonable opportunity to cure.
6.5. Termination by the Company other than for Cause. The Company may
terminate the Executive's employment hereunder other than for Cause at any time
upon written notice to the Executive.
6.6. Date of Termination; Term of Employment. The term "Date of
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the
Executive's employment is terminated (A) by his death, the date of his death, or
(B) for any other reason, the date on which such termination is to be effective
pursuant to the notice of termination given by the party terminating the
employment relationship. For all purposes of this Agreement, references to the
"term" of the Executive's employment hereunder shall mean the period commencing
on the Starting Date and ending on the Date of Termination.
7. COMPENSATION UPON TERMINATION.
7.1. Death. Notwithstanding any other provision of this Agreement, if
the Executive's employment shall be terminated by reason of his death, the
Company shall pay or provide to such person or entity as the Executive shall
have designated in a notice filed with the Company, or, if no such person or
entity shall have been designated, to his estate: (a) his full Salary and the
Fringe Benefit Package through the Date of Termination at the rate in effect at
the time of his death; and (b) the Prorated Performance Bonus (as defined in the
Performance Bonus Plan), if any.
7.2. Incapacity. Notwithstanding any other provision of this Agreement,
if the Executive's employment shall be terminated by reason of his incapacity:
(a) the Company shall continue to pay or provide the Executive his full Salary
and the Fringe Benefit Package through the Date of Termination at the rate in
effect at the time the notice of termination is given as provided under Section
6.2 hereof; and (b) the Prorated Performance Bonus, if any.
7.3. Cause. Notwithstanding any other provision of this Agreement, if
the Company shall terminate the Executive's employment for Cause, the Company
shall have no further obligations to the Executive under this Agreement other
than his pro rata Salary and the Fringe Benefit Package through the Date of
Termination.
7.4. Good Reason or Other Termination. If the Company shall terminate
the Executive's employment pursuant to Section 6.5 hereof or if the Executive
shall terminate his employment for Good Reason in accordance with Section 6.3
hereof, then the company shall (a) pay to the Executive his full Salary through
the greater of (i) one year from the Date of Termination or (ii) the Expiration
Date, at the rate in effect at the time notice of termination is given; (b) pay
to the Executive a prorated Performance Bonus, if any; (c) provide the Executive
with outplacement assistance so long as the cost thereof to the Company does not
exceed $35,000; and (d) provide to the Executive the Fringe Benefit Package
during the period from the
6
<PAGE> 7
Date of Termination to the earlier of (x) the Expiration Date and (y) the date
on which the Executive becomes engaged in any business or venture as an officer,
employee, partner, director, principal, consultant, agent or otherwise.
7.5. Post-Termination Obligations Generally. In the event the
Executive's employment shall terminate by reason of the expiration of the term
of this Agreement: (i) the Company shall pay to the Executive (a) his
Performance Bonus, if any, with respect to the fiscal year ending on or prior to
the Expiration Date and (b) the Prorated Performance Bonus, if any, for that
portion of the fiscal year through the Expiration Date; and (ii) the Company
shall provide the Executive with outplacement assistance so long as the cost
thereof to the Company does not exceed $35,000. Except as expressly set forth in
the preceding sentence and in the Stock Option, the Company shall have no
further obligations to the Executive following expiration of the term of this
Agreement. In the event of the termination of the Executive's employment other
than by expiration of the term of this Agreement, the Company shall have no
obligation to the Executive except as otherwise specifically provided in this
Section 7 and in the Stock Option, and performance by the Company thereof shall
constitute full settlement of any claim that the Executive may have against the
Company or any of its shareholders, subsidiaries or Affiliates on account of
such termination.
8. WITHHOLDING. All payments made by the Company under this Agreement shall be
net of any tax or other amounts required to be withheld by the Company under any
applicable law or legal requirement.
9. NOTICES. For all purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
deposited in the United States mail, postage prepaid, certified or registered,
addressed, in the case of the Company, to it at 383 West 12th Street, New York,
New York, Attention: Chief Financial Officer, or, in the case of the Executive,
to him at the address set forth at the foot of this Agreement; or to such other
address as either party shall designate by giving like notice of such change to
the other party.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is approved by the
Board of Directors and agreed to in writing signed by the Executive and such
officer as may be specifically authorized by the Board of Directors in
connection with such approval. No waiver by either party hereto at any time of
compliance with or of any breach by the other party hereto of any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the domestic substantive laws
of the State of New York without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction. The Executive acknowledges and agrees that,
because the Company's legal remedies may be inadequate in the event of a breach
of, or other failure to perform, any of the covenants and agreements set forth
in Section 5 hereof by the Executive, the Company may, in addition to
7
<PAGE> 8
obtaining any other remedy or relief available to it (including without
limitation damages at law), enforce the provisions of said Section 5 by
injunction and other equitable relief.
11. VALIDITY. In the event that any provision hereof would, under applicable
law, be invalid or unenforceable, such provision shall, to the extent permitted
under applicable law, be construed by modifying or limiting it so as to be valid
and enforceable to the maximum extent possible under applicable law. The
provisions of this Agreement are severable, and in the event that any provision
hereof should be held invalid or unenforceable in any respect, it shall not
invalidate, render unenforceable or otherwise affect any other provision hereof.
12. COUNTERPARTS. This Agreement may be executed in any one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. ENTIRE AGREEMENT. This Agreement, including Appendices I and II hereto,
constitute the entire agreement between the parties hereto, and supersedes any
and all prior communications, agreements and understandings, written or oral,
with respect to the terms and conditions of the Executive's employment with the
Company, including, without limitation, the letter dated August 26, 1999 to the
Executive from the Company regarding Employment Terms.
14. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon
(i) the Executive, his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and any successor of the Company by reorganization, merger,
consolidation or liquidation and any assignee of all or substantially all of the
business or assets of the Company or of any division or line of business of the
Company with which the Executive is at any time associated. In addition, the
Company may assign this Agreement to any subsidiary, provided that the Company
guarantees the obligations of such subsidiary hereunder. The Company requires
the personal services of the Executive hereunder and the Executive may not
assign this Agreement.
15. ARBITRATION. Any dispute between the Company and Executive regarding the
interpretation of this Agreement and the rights and obligations of the parties
hereunder (other than a dispute involving Section 5 of this Agreement) shall be
immediately submitted by the Company and Executive for binding arbitration under
the rules of the American Arbitration Association to an arbitrator mutually
acceptable to the Company and Executive, and, if the Company and Executive are
not able to agree on an arbitrator within 30 days after one party delivers
notice of a request for arbitration hereunder to the other party, the arbitrator
shall be selected according to such rules. The arbitrator shall render a
decision on the matter within 30 days after its submission and shall decide upon
an appropriate allocation of costs and expenses between the parties. The Company
and the Executive hereby waive any punitive damages.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
under seal, as of the date first above written.
COMPANY:
ESPERNET.COM, INC.
By: /s/ Paul Hart
----------------------------------
Name: Paul Hart
Title: Executive Vice President
EXECUTIVE:
/s/ Martin D. Prazak
--------------------------------------
Martin D. Prazak
Executive's Address:
14601 Waterview Circle
- ---------------------------
Addison, TX 75001
9
<PAGE> 10
APPENDIX I
I. Signing Bonus: $200,000.00
II. Performance Bonus Plan: Annual Cash Target Bonus of $200,000.00 based
upon performance targets established by the Board of Directors and
payable at the end of the Company's fiscal year established by the
Board of Directors. If the Performance Bonus becomes payable for any
period less than a full fiscal year, then such Performance Bonus shall
be prorated for the such period so long as the performance targets have
been satisfied.
10
<PAGE> 11
APPENDIX II
Stock Option Plan: 1999 Stock Option/Stock Issuance Plan
Optionee: Martin D. Prazak
Grant Date: Closing of IPO
Vesting Commencement Date: Closing of IPO
Exercise Price: IPO Price
Number of Option Shares: 150,000 of Common Stock
Expiration Date: 10 years from Vesting Commencement Date
Type of Option: Non-Statutory Option
Vesting Schedule: Ratably (1/3 each) over 3 years
Accelerated Vesting: Upon a Change of Control of the Company, all of the
Executive's unvested option shares shall immediately vest.
11
<PAGE> 1
Exhibit 10.6
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of September 21, 1999 between
espernet.com, inc., a Delaware corporation (the "Company"), and Ihsan M. Essaid
(the "Executive").
The parties hereto hereby agree as follows:
1. EMPLOYMENT.
1.1. Agreement. The Company hereby agrees to employ the Executive, and
the Executive hereby agrees to serve the Company, in each case subject to the
terms and conditions set forth herein.
1.2. Expiration Date. The employment of the Executive by the Company
shall be for the period commencing on the date of the Company's initial public
offering (the "IPO") of its common stock (the "Starting Date") and expiring on
the third anniversary of the Starting Date (the "Expiration Date"), unless such
employment shall have been extended or sooner terminated as hereinafter set
forth. On each date that is six months prior to the Expiration Date then in
effect, the Expiration Date shall be automatically extended by one year unless
either party hereto shall have previously given notice to the other party that
the Expiration Date shall not be so extended.
2. POSITION AND DUTIES. The Executive shall serve as Chief Financial Officer and
Treasurer of the Company, and shall be accountable to, and shall also have such
other powers, duties and responsibilities as may from time to time be prescribed
by, the Board of Directors of the Company (the "Board of Directors").
The Executive shall perform and discharge, faithfully, diligently and
competently, such duties and responsibilities. The Executive shall devote
substantially all his working time and attention and his best efforts and
ability to the business and affairs of the Company and its subsidiaries, and
shall not engage in other activities that a reasonable man could conclude would
interfere with the proper discharge of his duties. It is recognized that (i) the
Executive shall continue to work in the greater New York City metropolitan area
and shall travel to the extent that the Executive reasonably deems necessary to
fulfill his duties hereunder and (ii) the Executive may serve as a director of
an entity that is not, directly or indirectly, in competition with the Company.
3. COMPENSATION. Subject to the performance by the Executive of his duties and
obligations to the Company:
3.1. Salary. As compensation for services performed under and during
the term of his employment hereunder, the Company shall pay the Executive a
salary of $175,000.00 per annum or such higher amount as may from time to time
be established by the Board of Directors (the
<PAGE> 2
annual rate of salary in effect from time to time being referred to as the
"Salary"). Salary shall be payable in accordance with the Company's standard
payroll policies as in effect from time to time. Except as otherwise provided in
this Agreement, the Salary shall be prorated for any period of service less than
a full year.
3.2. Signing Bonus. As compensation for entering into this Agreement,
the Company shall pay to the Executive upon consummation of the IPO the bonus
amount specified in Appendix I hereto (the "Signing Bonus").
3.3. Performance Bonus. As additional compensation for his services
during the term of his employment hereunder, the Company shall pay the Executive
with respect to each fiscal year of the Company, determined in accordance with
Appendix I hereto, the performance bonus amounts, if any, determined as set
forth in said Appendix I (the "Performance Bonus Plan").
3.4. Stock Option. Subject to all of the terms and provisions hereof,
the Company shall grant to the Executive the stock option specified in Appendix
II hereto (the "Stock Option").
3.5. Business Expenses. During the term of his employment hereunder,
the Executive shall be entitled to receive prompt reimbursement by the Company
for all reasonable business expenses incurred by him on behalf of the Company or
any of its subsidiaries (in accordance with the policies and procedures
established by the Board of Directors from time to time for the Company's senior
executive officers) in performing services hereunder, provided that the
Executive properly accounts therefor in accordance with requirements for federal
income tax deductibility and the Company's policies and procedures.
3.6. Fringe Benefits. During the term of his employment hereunder, the
Executive shall be entitled to participate in or receive benefits under any life
insurance, health and accident plans, retirement plans or other arrangements
made generally available by the Company to its executives and key management
employees, subject to and on a basis consistent with the terms, conditions and
overall administration of such plans and. The benefits to which the Executive is
entitled under this Section 3.5 are referred to hereinafter collectively as the
"Fringe Benefit Package."
3.7. Vacations. During the term of his employment hereunder, the
Executive shall be entitled to 30 paid vacation days in each calendar year
(inclusive of all sick and personal days, etc.) and shall also be entitled to
all paid holidays given by the Company to its employees.
4. OFFICES; SUBSIDIARIES AND AFFILIATES. The Executive agrees to serve during
the term of his employment hereunder, if elected or appointed thereto, in one or
more positions as an officer or director of the Company or any one or more of
its present or future subsidiaries, as a director of any one or more other
Affiliates of the Company, or as an officer, trustee or director of any pension
plan of the Company or any of its subsidiaries. Service in such additional
offices will be without additional compensation except for reimbursement of
reasonably related business expenses on the same terms as provided elsewhere in
this Agreement. As used herein, the term "Affiliate" shall mean any person or
entity directly or indirectly controlling, controlled by or under common control
with the Company. The Executive shall immediately resign, and his offices and
2
<PAGE> 3
directorships in the Company and any of its affiliates shall immediately be
terminated, in the event of a termination of the Executive's employment under
this Agreement for any reason whatsoever.
5. UNAUTHORIZED DISCLOSURE; INVENTIONS; NONCOMPETITION.
5.1. Unauthorized Disclosure. The Executive shall not, without the
written consent of the Board of Directors or a person duly authorized thereby,
disclose to any person, other than an employee or professional adviser of the
Company or other person to whom disclosure is in the reasonable judgment of the
Executive necessary or appropriate in connection with the performance by the
Executive of his duties as an executive officer of the Company, any information
possessed by him the disclosure of which he knows, or in the exercise of
reasonable care should know, may be damaging to, or otherwise adverse to the
interests of, the Company or any of its subsidiaries; provided, however, that
such information shall not include (i) any information known generally to the
public (other than as a result of unauthorized disclosure by the Executive) or
(ii) any information generally obtainable on a non-confidential basis from a
source other than the Company that is not itself bound by a confidentiality or
non-disclosure obligation; and provided, further, that (x) the Executive's
duties under this Section 5.1 shall not extend to any disclosure that may be
required by law in connection with any judicial or administrative proceeding or
inquiry and (y) Executive may disclose general information relating to sales
trends and profitability and the Executive's role therein to the extent
necessary to allow him to obtain new employment after the term of Executive's
employment hereunder. The Executive understands and agrees that the restrictions
of this Section 5.1 shall continue to apply after his employment terminates,
regardless of the reason for such termination, for so long as may be reasonably
required to protect the legitimate business interests of the Company and its
subsidiaries.
5.2. Proprietary Rights. Any and all inventions, discoveries,
developments, methods, processes, compositions, works, supplier and customer
lists (including without limitation information relating to the generation and
updating thereof), concepts and ideas (whether or not patentable or
copyrightable) conceived, made, developed, created or reduced to practice by the
Executive (whether at the request or suggestion of the Company or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) during the term of Executive's employment with the Company
and for one year thereafter, which may be directly or indirectly useful in, or
relate to, the business, ventures or other activities of or products
manufactured or sold by the Company or any business or products contemplated by
the Company or any of its subsidiaries, while the Executive is employed by the
Company (collectively, "Proprietary Rights"), shall be promptly and fully
disclosed by the Executive to an appropriate executive officer of the Company
and shall be the Company's exclusive property as against the Executive and his
successors, heirs, devisees, legatees and assigns, and the Executive hereby
assigns to the Company his entire right, title and interest therein and shall
promptly deliver to appropriate executive officers of the Company all papers,
drawings, models, data and other material relating to any of the foregoing
Proprietary Rights, conceived, made, developed, created or reduced to practice
by him as aforesaid.
All copyrightable Proprietary Rights shall be considered "works made
for hire."
3
<PAGE> 4
The Executive shall, upon the Company's request and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Company's counsel to assign, and confirm the Company's title in, his entire
right, title and interest in the foregoing Proprietary Rights and to direct
issuance of patents or copyrights to the Company with respect to such
Proprietary Rights as are the Company's exclusive property as against the
Executive and his successors, heirs, devisees, legatees and assigns under this
Section 5.2 or to vest in the Company title to such Proprietary Rights as
against the Executive and his successors, heirs, devisees, legatees and assigns,
the expense of securing any such patent or copyright, however, to be borne by
the Company.
5.3. Noncompetition.
(a) Restriction on Competitive Activities. During the period
beginning on the Starting Date and ending on the first anniversary of
the Date of Termination, the Executive shall not, directly or
indirectly, own, manage, operate, control or participate in any manner
in the ownership, management, operation or control of, or be connected
as an officer, employee, partner, director, principal, consultant,
agent or otherwise with, or have any financial interest in, or aid or
assist anyone else in the conduct of, any business or venture, a
significant portion of which is engaged in any activity or business
competing with the Company or any of its subsidiaries, whether or not
the Executive is to be compensated for such participation.
(b) Restriction on Taking Employees or Customers. During the
period beginning on the Starting Date and ending on the date on which
the Executive's activities are no longer restricted under Section
5.3(a) hereof, the Executive shall not, directly or indirectly, (i)
recruit or otherwise seek to induce any employees of the Company or any
of its subsidiaries or Affiliates to terminate their employment or
violate any agreement with or duty to the Company of any of its
subsidiaries or Affiliates, or (ii) solicit or encourage any customer
or supplier of the Company to terminate or materially diminish its
relationship with the Company or of any group, division, subsidiary or
Affiliate of the Company.
(c) Scope of Restriction. The provisions of this Section 5.3
shall extend to all geographic areas where the Company has offered any
products, processes or services at any time during the Executive's
employment hereunder and to all areas where the Company had, to the
knowledge of the Executive, actual plans to offer any products,
processes or services within one year from the date on which the
Executive's activities are first restricted under this Section 5.
6. TERMINATION.
6.1. Death. The Executive's employment hereunder shall terminate upon
his death.
4
<PAGE> 5
6.2. Incapacity. If in the reasonable judgment of the Board of
Directors, as a result of the Executive's incapacity due to physical or mental
illness or otherwise, the Executive shall during the term of this Agreement be
unable to perform satisfactorily all of his duties hereunder on a full-time
basis, the Company may suspend the Executive's employment hereunder by notice to
the Executive and, upon such inability having continued for at least six months
and constituting a long-term disability under Executive's current health and
medical plan, may terminate the Executive's employment hereunder by notice to
the Executive.
6.3. Termination by the Executive. The Executive may terminate his
employment hereunder upon thirty days' prior written notice to the Company for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean (a) any
removal of the Executive from each of the positions indicated in Section 2
hereof, except in connection with termination of the Executive's employment for
Cause or termination or suspension of employment due to the Executive's death or
incapacity, (b) a reduction in the Executive's Salary, or a material reduction
in the Fringe Benefit Package without a corresponding increase in Executive's
Salary, (c) any requirement by the Company that the Executive must regularly
report to work at a location not in the greater New York City metropolitan area,
or (d) a Change of Control of the Company. For purposes of this Agreement,
"Change of Control" shall mean any of the following: (i) a change in the
ownership or management of Company that would be required to be reported in
response to certain provisions of the Securities Exchange Act of 1934; (ii) an
acquisition (other than directly from the Company) by a person or entity
(excluding the Company) of 25% or more of the Company's common stock or the
Company's then outstanding voting securities; (iii) a change in a majority of
the Company's Board of Directors as of the IPO date (the "Incumbent Board")
(excluding any persons approved by a vote of at least a majority of the
Incumbent Board other than in connection with an actual or threatened proxy
contest); (iv) consummation of a reorganization, merger, consolidation or sale
of all or substantially all of the Company's assets (collectively, a
"Transaction") other than a Transaction in which all or substantially all of the
stockholders of the Company prior to such Transaction own, in the same
proportion, more than 50% of the voting power of the entity resulting from the
Transaction, at least a majority of the Company's Board of Directors of the
resulting entity were members of the Incumbent Board, and after which no person
(other than the resulting entity and its Affiliates) beneficially owns 25% or
more of the voting power of the resulting entity, except to the extent such
ownership existed prior to the Transaction; or (v) the approval by the Company's
stockholders of a complete liquidation or dissolution of the Company.
6.4. Cause. The Company may terminate the Executive's employment
hereunder for Cause. For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon the Executive's
(i) material failure, refusal or neglect to perform and discharge his duties and
responsibilities hereunder, (ii) conviction of any crime involving fraud or the
personal dishonesty or moral turpitude of the Executive, or (iii) other
intentional or willful material breach of any provision of this Agreement, or
other intentional or willful action that is materially inconsistent with the
terms hereof, that in each case is materially harmful to the business interests
of the Company or any of its subsidiaries and which Executive has not cured upon
receipt of written notice after a reasonable opportunity to cure.
5
<PAGE> 6
6.5. Termination by the Company other than for Cause. The Company may
terminate the Executive's employment hereunder other than for Cause at any time
upon written notice to the Executive.
6.6. Date of Termination; Term of Employment. The term "Date of
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the
Executive's employment is terminated (A) by his death, the date of his death, or
(B) for any other reason, the date on which such termination is to be effective
pursuant to the notice of termination given by the party terminating the
employment relationship. For all purposes of this Agreement, references to the
"term" of the Executive's employment hereunder shall mean the period commencing
on the Starting Date and ending on the Date of Termination.
7. COMPENSATION UPON TERMINATION.
7.1. Death. Notwithstanding any other provision of this Agreement, if
the Executive's employment shall be terminated by reason of his death, the
Company shall pay or provide to such person or entity as the Executive shall
have designated in a notice filed with the Company, or, if no such person or
entity shall have been designated, to his estate: (a) his full Salary and the
Fringe Benefit Package through the Date of Termination at the rate in effect at
the time of his death; and (b) the Prorated Performance Bonus (as defined in the
Performance Bonus Plan), if any.
7.2. Incapacity. Notwithstanding any other provision of this Agreement,
if the Executive's employment shall be terminated by reason of his incapacity:
(a) the Company shall continue to pay or provide the Executive his full Salary
and the Fringe Benefit Package through the Date of Termination at the rate in
effect at the time the notice of termination is given as provided under Section
6.2 hereof; and (b) the Prorated Performance Bonus, if any.
7.3. Cause. Notwithstanding any other provision of this Agreement, if
the Company shall terminate the Executive's employment for Cause, the Company
shall have no further obligations to the Executive under this Agreement other
than his pro rata Salary and the Fringe Benefit Package through the Date of
Termination.
7.4. Good Reason or Other Termination. If the Company shall terminate
the Executive's employment pursuant to Section 6.5 hereof or if the Executive
shall terminate his employment for Good Reason in accordance with Section 6.3
hereof, then the company shall (a) pay to the Executive his full Salary through
the greater of (i) one year from the Date of Termination or (ii) the Expiration
Date, at the rate in effect at the time notice of termination is given; (b) pay
to the Executive a prorated Performance Bonus, if any; (c) provide the Executive
with outplacement assistance so long as the cost thereof to the Company does not
exceed $35,000; and (d) provide to the Executive the Fringe Benefit Package
during the period from the Date of Termination to the earlier of (x) the
Expiration Date and (y) the date on which the Executive becomes engaged in any
business or venture as an officer, employee, partner, director, principal,
consultant, agent or otherwise.
6
<PAGE> 7
7.5. Post-Termination Obligations Generally. In the event the
Executive's employment shall terminate by reason of the expiration of the term
of this Agreement: (i) the Company shall pay to the Executive (a) his
Performance Bonus, if any, with respect to the fiscal year ending on or prior to
the Expiration Date and (b) the Prorated Performance Bonus, if any, for that
portion of the fiscal year through the Expiration Date; and (ii) the Company
shall provide the Executive with outplacement assistance so long as the cost
thereof to the Company does not exceed $35,000. Except as expressly set forth in
the preceding sentence and in the Stock Option, the Company shall have no
further obligations to the Executive following expiration of the term of this
Agreement. In the event of the termination of the Executive's employment other
than by expiration of the term of this Agreement, the Company shall have no
obligation to the Executive except as otherwise specifically provided in this
Section 7 and in the Stock Option, and performance by the Company thereof shall
constitute full settlement of any claim that the Executive may have against the
Company or any of its shareholders, subsidiaries or Affiliates on account of
such termination.
8. WITHHOLDING. All payments made by the Company under this Agreement shall be
net of any tax or other amounts required to be withheld by the Company under any
applicable law or legal requirement.
9. NOTICES. For all purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
deposited in the United States mail, postage prepaid, certified or registered,
addressed, in the case of the Company, to it at 383 West 12th Street, New York,
New York, Attention: Chief Financial Officer, or, in the case of the Executive,
to him at the address set forth at the foot of this Agreement; or to such other
address as either party shall designate by giving like notice of such change to
the other party.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is approved by the
Board of Directors and agreed to in writing signed by the Executive and such
officer as may be specifically authorized by the Board of Directors in
connection with such approval. No waiver by either party hereto at any time of
compliance with or of any breach by the other party hereto of any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the domestic substantive laws
of the State of New York without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction. The Executive acknowledges and agrees that,
because the Company's legal remedies may be inadequate in the event of a breach
of, or other failure to perform, any of the covenants and agreements set forth
in Section 5 hereof by the Executive, the Company may, in addition to obtaining
any other remedy or relief available to it (including without limitation damages
at law), enforce the provisions of said Section 5 by injunction and other
equitable relief.
7
<PAGE> 8
11. VALIDITY. In the event that any provision hereof would, under applicable
law, be invalid or unenforceable, such provision shall, to the extent permitted
under applicable law, be construed by modifying or limiting it so as to be valid
and enforceable to the maximum extent possible under applicable law. The
provisions of this Agreement are severable, and in the event that any provision
hereof should be held invalid or unenforceable in any respect, it shall not
invalidate, render unenforceable or otherwise affect any other provision hereof.
12. COUNTERPARTS. This Agreement may be executed in any one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. ENTIRE AGREEMENT. This Agreement, including Appendices I and II hereto,
constitute the entire agreement between the parties hereto, and supersedes any
and all prior communications, agreements and understandings, written or oral,
with respect to the terms and conditions of the Executive's employment with the
Company, including, without limitation, the letter dated August 27, 1999 to the
Executive from the Company regarding Employment Terms.
14. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon
(i) the Executive, his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and any successor of the Company by reorganization, merger,
consolidation or liquidation and any assignee of all or substantially all of the
business or assets of the Company or of any division or line of business of the
Company with which the Executive is at any time associated. In addition, the
Company may assign this Agreement to any subsidiary, provided that the Company
guarantees the obligations of such subsidiary hereunder. The Company requires
the personal services of the Executive hereunder and the Executive may not
assign this Agreement.
15. ARBITRATION. Any dispute between the Company and Executive regarding the
interpretation of this Agreement and the rights and obligations of the parties
hereunder (other than a dispute involving Section 5 of this Agreement) shall be
immediately submitted by the Company and Executive for binding arbitration under
the rules of the American Arbitration Association to an arbitrator mutually
acceptable to the Company and Executive, and, if the Company and Executive are
not able to agree on an arbitrator within 30 days after one party delivers
notice of a request for arbitration hereunder to the other party, the arbitrator
shall be selected according to such rules. The arbitrator shall render a
decision on the matter within 30 days after its submission and shall decide upon
an appropriate allocation of costs and expenses between the parties. The Company
and the Executive hereby waive any punitive damages.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
under seal, as of the date first above written.
COMPANY:
ESPERNET.COM, INC.
By: /s/ Paul Hart
-----------------------------------
Name: Paul Hart
Title: Executive Vice President
EXECUTIVE:
/s/ Ihsan M. Essaid
--------------------------------------
Ihsan M. Essaid
Executive's Address:
17 Grove Street
- -----------------------
Cos Cob, CT 06807
- -----------------------
9
<PAGE> 10
APPENDIX I
I. Signing Bonus: $200,000
II. Performance Bonus Plan: Annual Cash Target Bonus of $175,000 based upon
performance targets established by the Board of Directors and payable
at the end of the Company's fiscal year established by the Board of
Directors. If the Performance Bonus becomes payable for any period less
than a full fiscal year, then such Performance Bonus shall be prorated
for the such period so long as the performance targets have been
satisfied.
10
<PAGE> 11
APPENDIX II
Stock Option Plan: 1999 Stock Option/Stock Issuance Plan
Optionee: Ihsan M. Essaid
Grant Date: Closing of IPO
Vesting Commencement Date: Closing of IPO
Exercise Price: IPO Price
Number of Option Shares: 125,000 shares of Common Stock
Expiration Date: 10 years from Vesting Commencement Date
Type of Option: Non-Statutory Option
Accelerated Vesting: Upon a Change of Control of the Company, all of the
Executive's unvested option shares shall immediately vest.
11
<PAGE> 1
Exhibit 10.7
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of September 21, 1999 between
espernet.com, inc., a Delaware corporation (the "Company"), and Paul Hart (the
"Executive").
The parties hereto hereby agree as follows:
1. EMPLOYMENT.
1.1. Agreement. The Company hereby agrees to employ the Executive,
and the Executive hereby agrees to serve the Company, in each case subject to
the terms and conditions set forth herein.
1.2. Expiration Date. The employment of the Executive by the
Company shall be for the period commencing on the date of the Company's initial
public offering (the "IPO") of its common stock (the "Starting Date") and
expiring on the third anniversary of the Starting Date (the "Expiration Date"),
unless such employment shall have been extended or sooner terminated as
hereinafter set forth. On each date that is six months prior to the Expiration
Date then in effect, the Expiration Date shall be automatically extended by one
year unless either party hereto shall have previously given notice to the other
party that the Expiration Date shall not be so extended.
2. POSITION AND DUTIES. The Executive shall serve as Executive Vice
President of the Company, and shall be accountable to, and shall also have such
other powers, duties and responsibilities as may from time to time be prescribed
by, the Board of Directors of the Company (the "Board of Directors").
The Executive shall perform and discharge, faithfully, diligently and
competently, such duties and responsibilities. The Executive shall devote
substantially all his working time and attention and his best efforts and
ability to the business and affairs of the Company and its subsidiaries, and
shall not engage in other activities that a reasonable man could conclude would
interfere with the proper discharge of his duties. It is recognized that (i) the
Executive shall continue to work in the greater New York City metropolitan area
and shall travel to the extent that the Executive reasonably deems necessary to
fulfill his duties hereunder and (ii) the Executive may serve as a director of
an entity that is not, directly or indirectly, in competition with the Company.
3. COMPENSATION. Subject to the performance by the Executive of his duties
and obligations to the Company:
3.1. Salary. As compensation for services performed under and
during the term of his employment hereunder, the Company shall pay the Executive
a salary of $150,000.00 per annum or such higher amount as may from time to time
be established by the Board of Directors (the annual rate of salary in effect
from time to time being referred to as the "Salary"). Salary shall be
<PAGE> 2
payable in accordance with the Company's standard payroll policies as in effect
from time to time. Except as otherwise provided in this Agreement, the Salary
shall be prorated for any period of service less than a full year. In addition,
the Company shall pay or cause to be paid to the Executive all of his accrued
salary through the Starting Date for services rendered to Espernet.com, Inc. a
New York corporation, as set forth on Appendix I.
3.2. Signing Bonus. As compensation for entering into this
Agreement, the Company shall pay to the Executive upon consummation of the IPO
the bonus amount specified in Appendix I hereto (the "Signing Bonus").
3.3. Performance Bonus. As additional compensation for his services
during the term of his employment hereunder, the Company shall pay the Executive
with respect to each fiscal year of the Company, determined in accordance with
Appendix I hereto, the performance bonus amounts, if any, determined as set
forth in said Appendix I (the "Performance Bonus Plan").
3.4. Stock Option. Subject to all of the terms and provisions
hereof, the Company shall grant to the Executive the stock option specified in
Appendix II hereto (the "Stock Option").
3.5. Business Expenses. During the term of his employment
hereunder, the Executive shall be entitled to receive prompt reimbursement by
the Company for all reasonable business expenses incurred by him on behalf of
the Company or any of its subsidiaries (in accordance with the policies and
procedures established by the Board of Directors from time to time for the
Company's senior executive officers) in performing services hereunder, provided
that the Executive properly accounts therefor in accordance with requirements
for federal income tax deductibility and the Company's policies and procedures.
3.6. Fringe Benefits. During the term of his employment hereunder,
the Executive shall be entitled to participate in or receive benefits under any
life insurance, health and accident plans, retirement plans or other
arrangements made generally available by the Company to its executives and key
management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and. The benefits to which
the Executive is entitled under this Section 3.5 are referred to hereinafter
collectively as the "Fringe Benefit Package."
3.7. Vacations. During the term of his employment hereunder, the
Executive shall be entitled to 30 paid vacation days in each calendar year
(inclusive of all sick and personal days, etc.) and shall also be entitled to
all paid holidays given by the Company to its employees.
4. OFFICES; SUBSIDIARIES AND AFFILIATES. The Executive agrees to serve
during the term of his employment hereunder, if elected or appointed thereto, in
one or more positions as an officer or director of the Company or any one or
more of its present or future subsidiaries, as a director of any one or more
other Affiliates of the Company, or as an officer, trustee or director of any
pension plan of the Company or any of its subsidiaries. Service in such
additional offices will be without additional compensation except for
reimbursement of reasonably related business expenses on the same terms as
provided elsewhere in this Agreement. As used herein, the term "Affiliate" shall
mean any person or entity directly or indirectly controlling, controlled by or
under
<PAGE> 3
common control with the Company. The Executive shall immediately resign, and his
offices and directorships in the Company and any of its affiliates shall
immediately be terminated, in the event of a termination of the Executive's
employment under this Agreement for any reason whatsoever.
5. UNAUTHORIZED DISCLOSURE; INVENTIONS; NONCOMPETITION.
5.1. Unauthorized Disclosure. The Executive shall not, without the
written consent of the Board of Directors or a person duly authorized thereby,
disclose to any person, other than an employee or professional adviser of the
Company or other person to whom disclosure is in the reasonable judgment of the
Executive necessary or appropriate in connection with the performance by the
Executive of his duties as an executive officer of the Company, any information
possessed by him the disclosure of which he knows, or in the exercise of
reasonable care should know, may be damaging to, or otherwise adverse to the
interests of, the Company or any of its subsidiaries; provided, however, that
such information shall not include (i) any information known generally to the
public (other than as a result of unauthorized disclosure by the Executive) or
(ii) any information generally obtainable on a non-confidential basis from a
source other than the Company that is not itself bound by a confidentiality or
non-disclosure obligation; and provided, further, that (x) the Executive's
duties under this Section 5.1 shall not extend to any disclosure that may be
required by law in connection with any judicial or administrative proceeding or
inquiry and (y) Executive may disclose general information relating to sales
trends and profitability and the Executive's role therein to the extent
necessary to allow him to obtain new employment after the term of Executive's
employment hereunder. The Executive understands and agrees that the restrictions
of this Section 5.1 shall continue to apply after his employment terminates,
regardless of the reason for such termination, for so long as may be reasonably
required to protect the legitimate business interests of the Company and its
subsidiaries.
5.2. Proprietary Rights. Any and all inventions, discoveries,
developments, methods, processes, compositions, works, supplier and customer
lists (including without limitation information relating to the generation and
updating thereof), concepts and ideas (whether or not patentable or
copyrightable) conceived, made, developed, created or reduced to practice by the
Executive (whether at the request or suggestion of the Company or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) during the term of Executive's employment with the Company
and for one year thereafter, which may be directly or indirectly useful in, or
relate to, the business, ventures or other activities of or products
manufactured or sold by the Company or any business or products contemplated by
the Company or any of its subsidiaries, while the Executive is employed by the
Company (collectively, "Proprietary Rights"), shall be promptly and fully
disclosed by the Executive to an appropriate executive officer of the Company
and shall be the Company's exclusive property as against the Executive and his
successors, heirs, devisees, legatees and assigns, and the Executive hereby
assigns to the Company his entire right, title and interest therein and shall
promptly deliver to appropriate executive officers of the Company all papers,
drawings, models, data and other material relating to any of the foregoing
Proprietary Rights, conceived, made, developed, created or reduced to practice
by him as aforesaid.
<PAGE> 4
All copyrightable Proprietary Rights shall be considered "works made
for hire."
The Executive shall, upon the Company's request and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Company's counsel to assign, and confirm the Company's title in, his entire
right, title and interest in the foregoing Proprietary Rights and to direct
issuance of patents or copyrights to the Company with respect to such
Proprietary Rights as are the Company's exclusive property as against the
Executive and his successors, heirs, devisees, legatees and assigns under this
Section 5.2 or to vest in the Company title to such Proprietary Rights as
against the Executive and his successors, heirs, devisees, legatees and assigns,
the expense of securing any such patent or copyright, however, to be borne by
the Company.
5.3. Noncompetition.
(a) Restriction on Competitive Activities. During the
period beginning on the Starting Date and ending on the first
anniversary of the Date of Termination, the Executive shall not,
directly or indirectly, own, manage, operate, control or participate in
any manner in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director, principal,
consultant, agent or otherwise with, or have any financial interest in,
or aid or assist anyone else in the conduct of, any business or
venture, a significant portion of which is engaged in any activity or
business competing with the Company or any of its subsidiaries, whether
or not the Executive is to be compensated for such participation.
(b) Restriction on Taking Employees or Customers. During
the period beginning on the Starting Date and ending on the date on
which the Executive's activities are no longer restricted under Section
5.3(a) hereof, the Executive shall not, directly or indirectly, (i)
recruit or otherwise seek to induce any employees of the Company or any
of its subsidiaries or Affiliates to terminate their employment or
violate any agreement with or duty to the Company of any of its
subsidiaries or Affiliates, or (ii) solicit or encourage any customer
or supplier of the Company to terminate or materially diminish its
relationship with the Company or of any group, division, subsidiary or
Affiliate of the Company.
(c) Scope of Restriction. The provisions of this Section
5.3 shall extend to all geographic areas where the Company has offered
any products, processes or services at any time during the Executive's
employment hereunder and to all areas where the Company had, to the
knowledge of the Executive, actual plans to offer any products,
processes or services within one year from the date on which the
Executive's activities are first restricted under this Section 5.
6. TERMINATION.
6.1. Death. The Executive's employment hereunder shall terminate
upon his death.
<PAGE> 5
6.2. Incapacity. If in the reasonable judgment of the Board of
Directors, as a result of the Executive's incapacity due to physical or mental
illness or otherwise, the Executive shall during the term of this Agreement be
unable to perform satisfactorily all of his duties hereunder on a full-time
basis, the Company may suspend the Executive's employment hereunder by notice to
the Executive and, upon such inability having continued for at least six months
and constituting a long-term disability under Executive's current health and
medical plan, may terminate the Executive's employment hereunder by notice to
the Executive.
6.3. Termination by the Executive. The Executive may terminate his
employment hereunder upon thirty days' prior written notice to the Company for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean (a) any
removal of the Executive from each of the positions indicated in Section 2
hereof, except in connection with termination of the Executive's employment for
Cause or termination or suspension of employment due to the Executive's death or
incapacity, (b) a reduction in the Executive's Salary, or a material reduction
in the Fringe Benefit Package without a corresponding increase in Executive's
Salary, (c) any requirement by the Company that the Executive must regularly
report to work at a location not in the greater New York City metropolitan area,
or (d) a Change of Control of the Company. For purposes of this Agreement,
"Change of Control" shall mean any of the following: (i) a change in the
ownership or management of Company that would be required to be reported in
response to certain provisions of the Securities Exchange Act of 1934; (ii) an
acquisition (other than directly from the Company) by a person or entity
(excluding the Company) of 25% or more of the Company's common stock or the
Company's then outstanding voting securities; (iii) a change in a majority of
the Company's Board of Directors as of the IPO date (the "Incumbent Board")
(excluding any persons approved by a vote of at least a majority of the
Incumbent Board other than in connection with an actual or threatened proxy
contest); (iv) consummation of a reorganization, merger, consolidation or sale
of all or substantially all of the Company's assets (collectively, a
"Transaction") other than a Transaction in which all or substantially all of the
stockholders of the Company prior to such Transaction own, in the same
proportion, more than 50% of the voting power of the entity resulting from the
Transaction, at least a majority of the Company's Board of Directors of the
resulting entity were members of the Incumbent Board, and after which no person
(other than the resulting entity and its Affiliates) beneficially owns 25% or
more of the voting power of the resulting entity, except to the extent such
ownership existed prior to the Transaction; or (v) the approval by the Company's
stockholders of a complete liquidation or dissolution of the Company.
6.4. Cause. The Company may terminate the Executive's employment
hereunder for Cause. For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon the Executive's
(i) material failure, refusal or neglect to perform and discharge his duties and
responsibilities hereunder, (ii) conviction of any crime involving fraud or the
personal dishonesty or moral turpitude of the Executive, or (iii) other
intentional or willful material breach of any provision of this Agreement, or
other intentional or willful action that is materially inconsistent with the
terms hereof, that in each case is materially harmful to the business interests
of the Company or any of its subsidiaries and which Executive has not cured upon
receipt of written notice after a reasonable opportunity to cure.
<PAGE> 6
6.5. Termination by the Company other than for Cause. The Company
may terminate the Executive's employment hereunder other than for Cause at any
time upon written notice to the Executive.
6.6. Date of Termination; Term of Employment. The term "Date of
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the
Executive's employment is terminated (A) by his death, the date of his death, or
(B) for any other reason, the date on which such termination is to be effective
pursuant to the notice of termination given by the party terminating the
employment relationship. For all purposes of this Agreement, references to the
"term" of the Executive's employment hereunder shall mean the period commencing
on the Starting Date and ending on the Date of Termination.
7. COMPENSATION UPON TERMINATION.
7.1. Death. Notwithstanding any other provision of this Agreement,
if the Executive's employment shall be terminated by reason of his death, the
Company shall pay or provide to such person or entity as the Executive shall
have designated in a notice filed with the Company, or, if no such person or
entity shall have been designated, to his estate: (a) his full Salary and the
Fringe Benefit Package through the Date of Termination at the rate in effect at
the time of his death; and (b) the Prorated Performance Bonus (as defined in the
Performance Bonus Plan), if any.
7.2. Incapacity. Notwithstanding any other provision of this
Agreement, if the Executive's employment shall be terminated by reason of his
incapacity: (a) the Company shall continue to pay or provide the Executive his
full Salary and the Fringe Benefit Package through the Date of Termination at
the rate in effect at the time the notice of termination is given as provided
under Section 6.2 hereof; and (b) the Prorated Performance Bonus, if any.
7.3. Cause. Notwithstanding any other provision of this Agreement,
if the Company shall terminate the Executive's employment for Cause, the Company
shall have no further obligations to the Executive under this Agreement other
than his pro rata Salary and the Fringe Benefit Package through the Date of
Termination.
7.4. Good Reason or Other Termination. If the Company shall
terminate the Executive's employment pursuant to Section 6.5 hereof or if the
Executive shall terminate his employment for Good Reason in accordance with
Section 6.3 hereof, then the company shall (a) pay to the Executive his full
Salary through the greater of (i) one year from the Date of Termination or (ii)
the Expiration Date, at the rate in effect at the time notice of termination is
given; (b) pay to the Executive a prorated Performance Bonus, if any; (c)
provide the Executive with outplacement assistance so long as the cost thereof
to the Company does not exceed $35,000; and (d) provide to the Executive the
Fringe Benefit Package during the period from the Date of Termination to the
earlier of (x) the Expiration Date and (y) the date on which the Executive
becomes engaged in any business or venture as an officer, employee, partner,
director, principal, consultant, agent or otherwise.
<PAGE> 7
7.5. Post-Termination Obligations Generally. In the event the
Executive's employment shall terminate by reason of the expiration of the term
of this Agreement: (i) the Company shall pay to the Executive (a) his
Performance Bonus, if any, with respect to the fiscal year ending on or prior to
the Expiration Date and (b) the Prorated Performance Bonus, if any, for that
portion of the fiscal year through the Expiration Date; and (ii) the Company
shall provide the Executive with outplacement assistance so long as the cost
thereof to the Company does not exceed $35,000. Except as expressly set forth in
the preceding sentence and in the Stock Option, the Company shall have no
further obligations to the Executive following expiration of the term of this
Agreement. In the event of the termination of the Executive's employment other
than by expiration of the term of this Agreement, the Company shall have no
obligation to the Executive except as otherwise specifically provided in this
Section 7 and in the Stock Option, and performance by the Company thereof shall
constitute full settlement of any claim that the Executive may have against the
Company or any of its shareholders, subsidiaries or Affiliates on account of
such termination.
8. WITHHOLDING. All payments made by the Company under this Agreement
shall be net of any tax or other amounts required to be withheld by the Company
under any applicable law or legal requirement.
9. NOTICES. For all purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
deposited in the United States mail, postage prepaid, certified or registered,
addressed, in the case of the Company, to it at 383 West 12th Street, New York,
New York, Attention: Chief Financial Officer, or, in the case of the Executive,
to him at the address set forth at the foot of this Agreement; or to such other
address as either party shall designate by giving like notice of such change to
the other party.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is approved by the
Board of Directors and agreed to in writing signed by the Executive and such
officer as may be specifically authorized by the Board of Directors in
connection with such approval. No waiver by either party hereto at any time of
compliance with or of any breach by the other party hereto of any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the domestic substantive laws
of the State of New York without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction. The Executive acknowledges and agrees that,
because the Company's legal remedies may be inadequate in the event of a breach
of, or other failure to perform, any of the covenants and agreements set forth
in Section 5 hereof by the Executive, the Company may, in addition to obtaining
any other remedy or relief available to it (including without limitation damages
at law), enforce the provisions of said Section 5 by injunction and other
equitable relief.
<PAGE> 8
11. VALIDITY. In the event that any provision hereof would, under
applicable law, be invalid or unenforceable, such provision shall, to the extent
permitted under applicable law, be construed by modifying or limiting it so as
to be valid and enforceable to the maximum extent possible under applicable law.
The provisions of this Agreement are severable, and in the event that any
provision hereof should be held invalid or unenforceable in any respect, it
shall not invalidate, render unenforceable or otherwise affect any other
provision hereof.
12. COUNTERPARTS. This Agreement may be executed in any one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. ENTIRE AGREEMENT. This Agreement, including Appendices I and II hereto,
constitute the entire agreement between the parties hereto, and supersedes any
and all prior communications, agreements and understandings, written or oral,
with respect to the terms and conditions of the Executive's employment with the
Company, including, without limitation, the letter dated April 16, 1999 to the
Executive from the Company regarding Employment Terms.
14. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding
upon (i) the Executive, his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and any successor of the Company by reorganization, merger,
consolidation or liquidation and any assignee of all or substantially all of the
business or assets of the Company or of any division or line of business of the
Company with which the Executive is at any time associated. In addition, the
Company may assign this Agreement to any subsidiary, provided that the Company
guarantees the obligations of such subsidiary hereunder. The Company requires
the personal services of the Executive hereunder and the Executive may not
assign this Agreement.
15. EFFECT OF ACQUISITION, ETC. The Company is party to the Stock Exchange
Agreement dated as of September 7, 1999 (the "Stock Exchange Agreement"), among
the Company and Espernet.com, Inc., a New York corporation ("Espernet NY"),
pursuant to which it is contemplated that the Company will acquire the capital
stock of Espernet NY (the "Acquisition"). On and after the date of the
Acquisition, this Agreement shall supersede any and all previously existing
employment, compensation and consulting agreements between the Executive and the
Company or Espernet NY, and all such agreements shall become void and shall have
no force or effect whatsoever, and all rights, claims, duties and obligations
under, pursuant to or in connection with any or all such agreements shall be
deemed to have been waived by the Executive in all respects and shall cease and
be extinguished forever.
16. ARBITRATION. Any dispute between the Company and Executive regarding
the interpretation of this Agreement and the rights and obligations of the
parties hereunder (other than a dispute involving Section 5 of this Agreement)
shall be immediately submitted by the Company and Executive for binding
arbitration under the rules of the American Arbitration Association to an
arbitrator mutually acceptable to the Company and Executive, and, if the Company
and Executive are not able to agree on an arbitrator within 30 days after one
party delivers notice of a request for arbitration hereunder to the other party,
the arbitrator shall be selected according to
<PAGE> 9
such rules. The arbitrator shall render a decision on the matter within 30 days
after its submission and shall decide upon an appropriate allocation of costs
and expenses between the parties. The Company and the Executive hereby waive any
punitive damages.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
under seal, as of the date first above written.
COMPANY:
ESPERNET.COM, INC.
By: /s/Chinh Chu
-----------------------------------------
Name: Chinh Chu
Title: Chairman of the Board of Directors
EXECUTIVE:
/s/ Paul Hart
---------------------------------------------
Paul Hart
Executive's Address:
Paul Hart
- -----------------------------------------
6 Walt Witman Trail
- -----------------------------------------
Morristown, NJ 07960
- -----------------------------------------
<PAGE> 11
APPENDIX I
I. Signing Bonus: $400,000
II. Performance Bonus Plan: Annual Cash Target Bonus of $150,000 based upon
performance targets established by the Board of Directors and payable
at the end of the Company's fiscal year established by the Board of
Directors. If the Performance Bonus becomes payable for any period less
than a full fiscal year, then such Performance Bonus shall be prorated
for the such period so long as the performance targets have been
satisfied.
<PAGE> 12
APPENDIX II
Stock Option Plan: 1999 Stock Option/Stock Issuance Plan
Optionee: Paul Hart
Grant Date: Closing of IPO
Vesting Commencement Date: Closing of IPO
Exercise Price: IPO Price
Number of Option Shares: 125,000 shares of Common Stock
Expiration Date: 10 years from Vesting Commencement Date
Type of Option: Non-Statutory Option
Vesting Schedule: Ratably (1/3 each) over 3 years
Accelerated Vesting: Upon a Change of Control of the Company, all of the
Executive's unvested option shares shall immediately vest.
<PAGE> 1
Exhibit 10.8
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made as of September 19, 1999 between
espernet.com, inc., a Delaware corporation (the "Company"), and Janet M. Rogers
(the "Executive").
The parties hereto hereby agree as follows:
1. EMPLOYMENT.
1.1. Agreement. The Company hereby agrees to employ the Executive,
and the Executive hereby agrees to serve the Company, in each case subject to
the terms and conditions set forth herein.
1.2. Expiration Date. The employment of the Executive by the
Company shall be for the period commencing on the date of the Company's initial
public offering (the "IPO") of its common stock (the "Starting Date") and
expiring on the third anniversary of the Starting Date (the "Expiration Date"),
unless such employment shall have been extended or sooner terminated as
hereinafter set forth. On each date that is six months prior to the Expiration
Date then in effect, the Expiration Date shall be automatically extended by one
year unless either party hereto shall have previously given notice to the other
party that the Expiration Date shall not be so extended.
2. POSITION AND DUTIES. The Executive shall serve as Chief Technology
Officer of the Company, and shall be accountable to, and shall also have such
other powers, duties and responsibilities as may from time to time be prescribed
by, the Board of Directors of the Company (the "Board of Directors").
The Executive shall perform and discharge, faithfully, diligently and
competently, such duties and responsibilities. The Executive shall devote
substantially all his working time and attention and his best efforts and
ability to the business and affairs of the Company and its subsidiaries, and
shall not engage in other activities that a reasonable man could conclude would
interfere with the proper discharge of his duties. It is recognized that (i) the
Executive shall continue to work in the greater New York City metropolitan area
and shall travel to the extent that the Executive reasonably deems necessary to
fulfill his duties hereunder and (ii) the Executive may serve as a director of
an entity that is not, directly or indirectly, in competition with the Company.
3. COMPENSATION. Subject to the performance by the Executive of his duties
and obligations to the Company:
3.1. Salary. As compensation for services performed under and
during the term of his employment hereunder, the Company shall pay the Executive
a salary of $150,000.00 per annum or such higher amount as may from time to time
be established by the Board of Directors (the
<PAGE> 2
annual rate of salary in effect from time to time being referred to as the
"Salary"). Salary shall be payable in accordance with the Company's standard
payroll policies as in effect from time to time. Except as otherwise provided in
this Agreement, the Salary shall be prorated for any period of service less than
a full year.
3.2. Signing Bonus. As compensation for assisting the Company
during the period prior to the IPO, the Company shall pay to the Executive upon
consummation of the IPO the bonus amount specified in Appendix I hereto (the
"Signing Bonus").
3.3. Performance Bonus. As additional compensation for his services
during the term of his employment hereunder, the Company shall pay the Executive
with respect to each fiscal year of the Company, determined in accordance with
Appendix I hereto, the performance bonus amounts, if any, determined as set
forth in said Appendix I (the "Performance Bonus Plan").
3.4. Stock Option. Subject to all of the terms and provisions
hereof, the Company shall grant to the Executive the stock option specified in
Appendix II hereto (the "Stock Option").
3.5. Business Expenses. During the term of his employment
hereunder, the Executive shall be entitled to receive prompt reimbursement by
the Company for all reasonable business expenses incurred by him on behalf of
the Company or any of its subsidiaries (in accordance with the policies and
procedures established by the Board of Directors from time to time for the
Company's senior executive officers) in performing services hereunder, provided
that the Executive properly accounts therefor in accordance with requirements
for federal income tax deductibility and the Company's policies and procedures.
3.6. Fringe Benefits. During the term of his employment hereunder,
the Executive shall be entitled to participate in or receive benefits under any
life insurance, health and accident plans, retirement plans or other
arrangements made generally available by the Company to its executives and key
management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and. The benefits to which
the Executive is entitled under this Section 3.5 are referred to hereinafter
collectively as the "Fringe Benefit Package."
3.7. Vacations. During the term of his employment hereunder, the
Executive shall be entitled to 30 paid vacation days in each calendar year
(inclusive of all sick and personal days, etc.) and shall also be entitled to
all paid holidays given by the Company to its employees.
3.8. Automobile Allowance. The Company shall pay the Executive a
monthly automobile allowance of $800.00.
4. OFFICES; SUBSIDIARIES AND AFFILIATES. The Executive agrees to serve
during the term of his employment hereunder, if elected or appointed thereto, in
one or more positions as an officer or director of the Company or any one or
more of its present or future subsidiaries, as a director of any one or more
other Affiliates of the Company, or as an officer, trustee or director of any
pension plan of the Company or any of its subsidiaries. Service in such
additional offices will be without additional compensation except for
reimbursement of reasonably related business
<PAGE> 3
expenses on the same terms as provided elsewhere in this Agreement. As used
herein, the term "Affiliate" shall mean any person or entity directly or
indirectly controlling, controlled by or under common control with the Company.
5. UNAUTHORIZED DISCLOSURE; INVENTIONS; NONCOMPETITION.
5.1. Unauthorized Disclosure. The Executive shall not, without the
written consent of the Board of Directors or a person duly authorized thereby,
disclose to any person, other than an employee or professional adviser of the
Company or other person to whom disclosure is in the reasonable judgment of the
Executive necessary or appropriate in connection with the performance by the
Executive of his duties as an executive officer of the Company, any information
possessed by him the disclosure of which he knows, or in the exercise of
reasonable care should know, may be damaging to, or otherwise adverse to the
interests of, the Company or any of its subsidiaries; provided, however, that
such information shall not include (i) any information known generally to the
public (other than as a result of unauthorized disclosure by the Executive) or
(ii) any information generally obtainable on a non-confidential basis from a
source other than the Company that is not itself bound by a confidentiality or
non-disclosure obligation; and provided, further, that (x) the Executive's
duties under this Section 5.1 shall not extend to any disclosure that may be
required by law in connection with any judicial or administrative proceeding or
inquiry and (y) Executive may disclose general information relating to sales
trends and profitability and the Executive's role therein to the extent
necessary to allow him to obtain new employment after the term of Executive's
employment hereunder. The Executive understands and agrees that the restrictions
of this Section 5.1 shall continue to apply after his employment terminates,
regardless of the reason for such termination, for so long as may be reasonably
required to protect the legitimate business interests of the Company and its
subsidiaries.
5.2. Proprietary Rights. Any and all inventions, discoveries,
developments, methods, processes, compositions, works, supplier and customer
lists (including without limitation information relating to the generation and
updating thereof), concepts and ideas (whether or not patentable or
copyrightable) conceived, made, developed, created or reduced to practice by the
Executive (whether at the request or suggestion of the Company or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) during the term of Executive's employment with the Company
and for one year thereafter, which may be directly or indirectly useful in, or
relate to, the business, ventures or other activities of or products
manufactured or sold by the Company or any business or products contemplated by
the Company or any of its subsidiaries, while the Executive is employed by the
Company (collectively, "Proprietary Rights"), shall be promptly and fully
disclosed by the Executive to an appropriate executive officer of the Company
and shall be the Company's exclusive property as against the Executive and his
successors, heirs, devisees, legatees and assigns, and the Executive hereby
assigns to the Company his entire right, title and interest therein and shall
promptly deliver to appropriate executive officers of the Company all papers,
drawings, models, data and other material relating to any of the foregoing
Proprietary Rights, conceived, made, developed, created or reduced to practice
by him as aforesaid.
<PAGE> 4
All copyrightable Proprietary Rights shall be considered "works made
for hire."
The Executive shall, upon the Company's request and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Company's counsel to assign, and confirm the Company's title in, his entire
right, title and interest in the foregoing Proprietary Rights and to direct
issuance of patents or copyrights to the Company with respect to such
Proprietary Rights as are the Company's exclusive property as against the
Executive and his successors, heirs, devisees, legatees and assigns under this
Section 5.2 or to vest in the Company title to such Proprietary Rights as
against the Executive and his successors, heirs, devisees, legatees and assigns,
the expense of securing any such patent or copyright, however, to be borne by
the Company.
5.3. Noncompetition.
(a) Restriction on Competitive Activities. During the
period beginning on the Starting Date and ending on the first
anniversary of the Date of Termination, the Executive shall not,
directly or indirectly, own, manage, operate, control or participate in
any manner in the ownership, management, operation or control of, or be
connected as an officer, employee, partner, director, principal,
consultant, agent or otherwise with, or have any financial interest in,
or aid or assist anyone else in the conduct of, any business or
venture, a significant portion of which is engaged in any activity or
business competing with the Company or any of its subsidiaries, whether
or not the Executive is to be compensated for such participation.
(b) Restriction on Taking Employees or Customers. During
the period beginning on the Starting Date and ending on the date on
which the Executive's activities are no longer restricted under Section
5.3(a) hereof, the Executive shall not, directly or indirectly, (i)
recruit or otherwise seek to induce any employees of the Company or any
of its subsidiaries or Affiliates to terminate their employment or
violate any agreement with or duty to the Company of any of its
subsidiaries or Affiliates, or (ii) solicit or encourage any customer
or supplier of the Company to terminate or materially diminish its
relationship with the Company or of any group, division, subsidiary or
Affiliate of the Company.
(c) Scope of Restriction. The provisions of this Section
5.3 shall extend to all geographic areas where the Company has offered
any products, processes or services at any time during the Executive's
employment hereunder and to all areas where the Company had, to the
knowledge of the Executive, actual plans to offer any products,
processes or services within one year from the date on which the
Executive's activities are first restricted under this Section 5.
6. TERMINATION.
6.1. Death. The Executive's employment hereunder shall terminate
upon his death.
<PAGE> 5
6.2. Incapacity. If in the reasonable judgment of the Board of
Directors, as a result of the Executive's incapacity due to physical or mental
illness or otherwise, the Executive shall during the term of this Agreement be
unable to perform satisfactorily all of his duties hereunder on a full-time
basis, the Company may suspend the Executive's employment hereunder by notice to
the Executive and, upon such inability having continued for at least six months
and constituting a long-term disability under Executive's current health and
medical plan, may terminate the Executive's employment hereunder by notice to
the Executive.
6.3. Termination by the Executive. The Executive may terminate his
employment hereunder upon thirty days' prior written notice to the Company for
Good Reason. For purposes of this Agreement, "Good Reason" shall mean (a) any
removal of the Executive from each of the positions indicated in Section 2
hereof, except in connection with termination of the Executive's employment for
Cause or termination or suspension of employment due to the Executive's death or
incapacity, (b) a reduction in the Executive's Salary, or materially reduces the
Fringe Benefit Package without a corresponding increase in Executive's Salary,
(c) the Company requires you to regularly report to work at a location not in
the greater New York City metropolitan area, or (d) a Change of Control of the
Company. For purposes of this Agreement, "Change of Control" shall mean any of
the following: (i) a change in the ownership or management of Company that would
be required to be reported in response to certain provisions of the Securities
Exchange Act of 1934; (ii) an acquisition (other than directly from the Company)
by a person or entity (excluding the Company) of 25% or more of the Company's
common stock or the Company's then outstanding voting securities; (iii) a change
in a majority of the Company's Board of Directors as of the IPO date (the
"Incumbent Board") (excluding any persons approved by a vote of at least a
majority of the Incumbent Board other than in connection with an actual or
threatened proxy contest); (iv) consummation of a reorganization, merger,
consolidation or sale of all or substantially all of the Company's assets
(collectively, a "Transaction") other than a Transaction in which all or
substantially all of the stockholders of the Company prior to such Transaction
own, in the same proportion, more than 50% of the voting power of the entity
resulting from the Transaction, at least a majority of the Company's Board of
Directors of the resulting entity were members of the Incumbent Board, and after
which no person (other than the resulting entity and its Affiliates)
beneficially owns 25% or more of the voting power of the resulting entity,
except to the extent such ownership existed prior to the Transaction; or (v) the
approval by the Company's stockholders of a complete liquidation or dissolution
of the Company.
6.4. Cause. The Company may terminate the Executive's employment
hereunder for Cause. For the purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment hereunder upon the Executive's
(i) material failure, refusal or neglect to perform and discharge his duties and
responsibilities hereunder, (ii) conviction of any crime involving fraud or the
personal dishonesty or moral turpitude of the Executive, or (iii) other
intentional or willful material breach of any provision of this Agreement, or
other intentional or willful action that is materially inconsistent with the
terms hereof, that in each case is materially harmful to the business interests
of the Company or any of its subsidiaries and which Executive has not cured upon
receipt of written notice after a reasonable opportunity to cure.
<PAGE> 6
6.5. Termination by the Company other than for Cause. The Company
may terminate the Executive's employment hereunder other than for Cause at any
time upon written notice to the Executive.
6.6. Date of Termination; Term of Employment. The term "Date of
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if the
Executive's employment is terminated (A) by his death, the date of his death, or
(B) for any other reason, the date on which such termination is to be effective
pursuant to the notice of termination given by the party terminating the
employment relationship. For all purposes of this Agreement, references to the
"term" of the Executive's employment hereunder shall mean the period commencing
on the Starting Date and ending on the Date of Termination.
7. COMPENSATION UPON TERMINATION.
7.1. Death. Notwithstanding any other provision of this Agreement,
if the Executive's employment shall be terminated by reason of his death, the
Company shall pay or provide to such person or entity as the Executive shall
have designated in a notice filed with the Company, or, if no such person or
entity shall have been designated, to his estate: (a) his full Salary and the
Fringe Benefit Package through the Date of Termination at the rate in effect at
the time of his death; and (b) the Prorated Performance Bonus (as defined in the
Performance Bonus Plan), if any.
7.2. Incapacity. Notwithstanding any other provision of this
Agreement, if the Executive's employment shall be terminated by reason of his
incapacity: (a) the Company shall continue to pay or provide the Executive his
full Salary and the Fringe Benefit Package through the Date of Termination at
the rate in effect at the time the notice of termination is given as provided
under Section 6.2 hereof; and (b) the Prorated Performance Bonus, if any.
7.3. Cause. Notwithstanding any other provision of this Agreement,
if the Company shall terminate the Executive's employment for Cause, the Company
shall have no further obligations to the Executive under this Agreement other
than his pro rata Salary and the Fringe Benefit Package through the Date of
Termination.
7.4. Good Reason or Other Termination. If the Company shall
terminate the Executive's employment pursuant to Section 6.5 hereof or if the
Executive shall terminate his employment for Good Reason in accordance with
Section 6.3 hereof, then the company shall pay to the Executive: (a) his full
Salary through the greater of (i) one year from the Date of Termination or (ii)
the Expiration Date, at the rate in effect at the time notice of termination is
given; (b) a prorated Performance Bonus, if any; (c) provide the Executive with
outplacement assistance so long as the cost thereof to the Company does not
exceed $35,000; and (d) during the period from the Date of Termination to the
earlier of (x) the Expiration Date and (y) the date on which the Executive
becomes engaged in any business or venture as an officer, employee, partner,
director, principal, consultant, agent or otherwise, provide to the Executive
the Fringe Benefit Package.
<PAGE> 7
7.5. Post-Termination Obligations Generally. In the event the
Executive's employment shall terminate by reason of the expiration of the term
of this Agreement: (i) the Company shall pay to the Executive (a) his
Performance Bonus, if any, with respect to the fiscal year ending on or prior to
the Expiration Date and (b) the Prorated Performance Bonus, if any, for that
portion of the fiscal year through the Expiration Date; and (ii) the Company
shall provide the Executive with outplacement assistance so long as the cost
thereof to the Company does not exceed $35,000. Except as expressly set forth in
the preceding sentence and in the Stock Option, the Company shall have no
further obligations to the Executive following expiration of the term of this
Agreement. In the event of the termination of the Executive's employment other
than by expiration of the term of this Agreement, the Company shall have no
obligation to the Executive except as otherwise specifically provided in this
Section 7 and in the Stock Option, and performance by the Company thereof shall
constitute full settlement of any claim that the Executive may have against the
Company or any of its shareholders, subsidiaries or Affiliates on account of
such termination.
8. WITHHOLDING. All payments made by the Company under this Agreement
shall be net of any tax or other amounts required to be withheld by the Company
under any applicable law or legal requirement.
9. NOTICES. For all purposes of this Agreement, notices and all other
communications to either party provided for in this Agreement shall be in
writing and shall be deemed to have been duly given when delivered in person or
deposited in the United States mail, postage prepaid, certified or registered,
addressed, in the case of the Company, to it at 383 West 12th Street, New York,
New York, Attention: Chief Financial Officer, or, in the case of the Executive,
to him at the address set forth at the foot of this Agreement; or to such other
address as either party shall designate by giving like notice of such change to
the other party.
10. MISCELLANEOUS. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is approved by the
Board of Directors and agreed to in writing signed by the Executive and such
officer as may be specifically authorized by the Board of Directors in
connection with such approval. No waiver by either party hereto at any time of
compliance with or of any breach by the other party hereto of any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. The validity, interpretation, construction and
performance of this Agreement shall be governed by the domestic substantive laws
of the State of New York without giving effect to any choice or conflict of laws
provision or rule that would cause the application of the domestic substantive
laws of any other jurisdiction. The Executive acknowledges and agrees that,
because the Company's legal remedies may be inadequate in the event of a breach
of, or other failure to perform, any of the covenants and agreements set forth
in Section 5 hereof by the Executive, the Company may, in addition to obtaining
any other remedy or relief available to it (including without limitation damages
at law), enforce the provisions of said Section 5 by injunction and other
equitable relief.
<PAGE> 8
11. VALIDITY. In the event that any provision hereof would, under
applicable law, be invalid or unenforceable, such provision shall, to the extent
permitted under applicable law, be construed by modifying or limiting it so as
to be valid and enforceable to the maximum extent possible under applicable law.
The provisions of this Agreement are severable, and in the event that any
provision hereof should be held invalid or unenforceable in any respect, it
shall not invalidate, render unenforceable or otherwise affect any other
provision hereof.
12. COUNTERPARTS. This Agreement may be executed in any one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
13. ENTIRE AGREEMENT. This Agreement, including Appendices I and II hereto,
constitute the entire agreement between the parties hereto, and supersedes any
and all prior communications, agreements and understandings, written or oral,
with respect to the terms and conditions of the Executive's employment with the
Company.
14. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding
upon (i) the Executive, his personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees and (ii)
the Company and any successor of the Company by reorganization, merger,
consolidation or liquidation and any assignee of all or substantially all of the
business or assets of the Company or of any division or line of business of the
Company with which the Executive is at any time associated. In addition, the
Company may assign this Agreement to any subsidiary, provided that the Company
guarantees the obligations of such subsidiary hereunder. The Company requires
the personal services of the Executive hereunder and the Executive may not
assign this Agreement.
15. ARBITRATION. Any dispute between the Company and Executive regarding
the interpretation of this Agreement and the rights and obligations of the
parties hereunder (other than a dispute involving Section 5 of this Agreement)
shall be immediately submitted by the Company and Executive for binding
arbitration under the rules of the American Arbitration Association to an
arbitrator mutually acceptable to the Company and Executive, and, if the Company
and Executive are not able to agree on an arbitrator within 30 days after one
party delivers notice of a request for arbitration hereunder to the other party,
the arbitrator shall be selected according to such rules. The arbitrator shall
render a decision on the matter within 30 days after its submission and shall
decide upon an appropriate allocation of costs and expenses between the parties.
The Company and the Executive hereby waive any punitive damages.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
under seal, as of the date first above written.
COMPANY:
ESPERNET.COM, INC.
By: /s/ Martin D. Prazak
---------------------------------
Name: Martin D. Prazak
Title: Chief Executive Officer
EXECUTIVE:
/s/ Janet M. Rogers
--------------------------------------
Janet M. Rogers
Executive's Address:
1110 North Grove
- --------------------------------------
Oak Park, IL 60302
- --------------------------------------
<PAGE> 10
APPENDIX I
I. Signing Bonus: $75,000
II. Performance Bonus Plan: Annual Cash Target Bonus of $150,000.00 based
upon performance targets established by the Board of Directors and
payable at the end of the Company's fiscal year established by the
Board of Directors. If the Performance Bonus becomes payable for any
period less than a full fiscal year, then such Performance Bonus shall
be prorated for the such period so long as the performance targets have
been satisfied.
<PAGE> 11
APPENDIX II
Stock Option Plan: 1999 Stock Option/Stock Issuance Plan
Optionee: Janet M. Rogers
Grant Date: Closing of IPO
Vesting Commencement Date: Closing of IPO
Exercise Price: IPO Price
Number of Option Shares: 150,000 shares of Common Stock
Expiration Date: 10 years from Vesting Commencement Date
Type of Option: Non-Statutory Option
Vesting Schedule: Ratably (1/3 each) over 3 years
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of September
17, 1999, by and between ESPERNET.COM, INC., a Delaware corporation with a place
of business at 383 West 12th Street, New York, NY 10014 (the "Company") and
STEVEN F. DEMAR, an individual residing at 1925 North Halsted, Chicago, IL 60614
(the "Employee").
RECITALS
A. The Company has acquired from the Employee all of the issued and
outstanding shares of capital stock of InfoRamp, Inc., an Illinois corporation
("InfoRamp"), pursuant to a Stock Exchange Agreement made as of June 30, 1999,
by and among the Company, Employee and InfoRamp (the "Stock Exchange
Agreement").
B. The Company is an Internet Service Provider ("ISP") engaged in the
business of providing Internet access and services, web hosting, web design and
Internet related services and support.
C. As a condition to the consummation of the Stock Exchange Agreement,
the parties have agreed to enter into an employment relationship, in accordance
with the terms and conditions of this Agreement.
D. The Company wishes to employ Employee subject to the terms and
conditions of this Agreement, and Employee wishes to accept such employment
subject to the terms and conditions of this Agreement.
E. The giving of the covenants contained herein is a condition
precedent to the employment of Employee, and Employee acknowledges that the
execution of this Agreement and the entering into of these covenants is an
express condition of Employee's employment and other benefits conferred upon him
by this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements herein set forth, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
<PAGE> 2
1. Employee's Duties and Responsibilities.
1.1 Company hereby agrees to employ Employee, and Employee
agrees to enter the employ of Company for the term of employment as provided in
Section 2. Employee shall perform such duties from time to time and at such
place or places as the Company shall designate as appropriate and necessary in
connection with such employment. It is recognized that the Employee shall
continue to work within 25 miles of his residence in Chicago, Illinois and shall
travel to the extent that the Employee reasonably deems necessary to fulfill his
duties hereunder. Employee shall serve in the capacity of Vice President -
Midwest Region and Vice President - Marketing and Sales and a member of the
Council of Presidents and Board of Directors of the Company.
1.2 Employee will, to the best of Employee's reasonable
ability, devote his reasonable best efforts to the performance of his duties
hereunder and the business and affairs of the Company; provided, however,
notwithstanding the foregoing, Employee shall be entitled to expend reasonable
time and attention to the businesses set forth on Appendix III. Employee agrees
to perform such duties as may be assigned to Employee by or on the authority of
the Company's Board of Directors from time to time; provided, however, Employee
shall not be requested or required to perform duties which are not commensurate
with duties assigned to other senior executives of the Company or which are not
commensurate with the job titles and capacities enumerated in Section 1.1.
1.3 Employee will duly, punctually and faithfully perform and
observe any and all rules and regulations which the Company may now or shall
hereafter establish governing the conduct of its business of general
applicability to the Company's most senior executives.
2. Term of Employment.
2.1 The employment of the Employee by the Company shall be for
the period commencing on the date of the Company's initial public offering (the
"IPO") of its common stock (the "Starting Date") and expiring on the third
anniversary of the Starting Date (the "Expiration Date"), unless such employment
shall have been extended or sooner terminated as hereinafter set forth.
Employee's employment with the Company may be terminated at any time as provided
in Section 2.2.
2.2 The Company shall have the right, on written notice to
Employee, to terminate Employee's employment:
(a) immediately at any time for cause, as determined
under Section 2.3;
(b) at any time upon the mutual written agreement of
the parties hereto;
(c) immediately upon Employee's death;
2
<PAGE> 3
(d) immediately upon Employee's Total Disability (as
defined in Section 2.5); or
(e) upon not less than 30 days' advance written
notice from Employee of Employee's desire to terminate this Agreement; provided,
however, that, following such notice, the Company shall have the right to
terminate Employee's employment immediately.
2.3 Employee's employment may be terminated by the Company
upon written notice to Employee at any time for any of the following reasons,
each of which shall constitute "cause":
(a) any material breach of this Agreement by Employee
which is not cured within 20 days after written notice by the Company;
(b) Employee's fraud, embezzlement, dishonesty or
unlawful acts in connection with the business of the Company or its Affiliates;
(c) Employee's conviction for any felony or material
misdemeanor; or
(d) Employee's substantial and continuing willful
failure to perform, or grossly negligent performance of, the legal and ethical
duties of Employee's position and consistent with other senior executives of the
Company, which failure or performance is not cured within twenty (20) days after
written notice by the Company.
2.4 The term "Date of Termination" shall mean the earlier of
(i) the Expiration Date or (ii) if the Employee's employment is terminated (A)
by his death, the date of his death, or (B) for any other reason, the date on
which such termination is to be effective pursuant to the notice of termination
given by the party terminating the employment relationship. For all purposes of
this Agreement, references to the "term" of the Employee's employment hereunder
shall mean the period commencing on the Starting Date and ending on the Date of
Termination.
2.5 "Total Disability" means having a physical or mental
condition has rendered Employee incapable of substantially performing his
material duties and responsibilities with the Company after a consecutive period
of six months. Determination of a Total Disability will be made by a physician
selected by the Company. If the determination of such physician differs from the
opinion as to disability of the Employee's physician, the two physicians shall
select a third physician, whose determination shall be binding on both parties.
3. Compensation.
3.1 Salary. Employee shall receive a salary of $150,000.00 per
annum (the annual rate of salary in effect from time to time being referred to
as the "Salary"). Salary shall be payable in accordance with the Company's
standard payroll policies as in effect from time to time, but in no
3
<PAGE> 4
event less frequently than monthly. Except as otherwise provided in this
Agreement, the Salary shall be prorated for any period of service less than a
full year.
3.2 Performance Bonus. As additional compensation for his
services during the term of his employment hereunder, the Company shall pay the
Employee with respect to each fiscal year of the Company, determined in
accordance with Appendix I hereto, the performance bonus amounts, if any,
determined as set forth in said Appendix I (the "Performance Bonus Plan"). The
performance bonus shall be paid in accordance with the Company's policies for
payment thereof to its senior executives but in no event later than thirty (30)
days after the end of each fiscal year.
3.3 Stock Option. Subject to all of the terms and provisions
hereof, the Company shall grant to the Employee the stock option specified in
Appendix II hereto (the "Stock Option").
3.4 Automobile Allowance. The Company shall pay the Employee a
monthly automobile allowance of $800.00.
3.5 Vacation. Employee shall be entitled to vacation in
accordance with the Company's consistently applied policies for its most senior
executives but in no event less than four (4) weeks per annum.
3.6 Sick and Holiday Days. Employee shall be entitled to sick
and holiday days in accordance with the Company's consistently applied policies
for its most senior executives.
3.7 Fringe Benefits. Employee shall be entitled to participate
in benefits under the Company's benefit plans and arrangements, including,
without limitation, any employee benefit plan or arrangement made available in
the future by the Company to its senior executives, subject to and on a basis
consistent with the terms, conditions, and overall administration of such plans
and arrangements. The Company shall have the right to amend or delete any such
benefit plan or arrangement made available by the Company to its senior
executives and not otherwise specifically provided for herein.
3.8 Expenses. The Company shall reimburse Employee for
reasonable out-of-pocket expenses incurred in connection with the Company's
business and the performance of his duties hereunder, subject to (i) such
policies as the Board may from time to time establish, (ii) Employee furnishing
the Company with evidence in the form of receipts satisfactory to the Company
substantiating the claimed expenditures, (iii) Employee receiving advance
approval from the Board in case of expenses (or a series of related expenses) in
excess of $5,000.
4. Compensation upon Termination.
4.1 Death. Notwithstanding any other provision of this
Agreement, if the Employee's employment shall be terminated by reason of his
death, the Company shall pay or provide to such person or entity as the Employee
shall have designated in a notice filed with the Company,
4
<PAGE> 5
or, if no such person or entity shall have been designated, to his estate: (a)
his full Salary through the Date of Termination at the rate in effect at the
time of his death; and (b) the Prorated Performance Bonus (as defined in the
Performance Bonus Plan), if any.
4.2 Incapacity. Notwithstanding any other provision of this
Agreement, if the Employee's employment shall be terminated by reason of his
incapacity: (a) the Company shall continue to pay or provide the Employee his
full Salary through the Date of Termination at the rate in effect at the time
the notice of termination is given; and (b) the Prorated Performance Bonus, if
any.
4.3 Cause. Notwithstanding any other provision of this
Agreement, if the Company shall terminate the Employee's employment for cause,
the Company shall have no further obligations to the Employee under this
Agreement other than his pro rata Salary and the through the Date of
Termination.
4.4 Without Cause. Notwithstanding any other provision of this
Agreement, if the Company shall terminate the Employee's employment other than
pursuant to Section 2.2 hereof or if the Employee elects to terminate his
employment pursuant to Section 2.2(e) due to (a) Company's breach of its
obligations hereunder, (b) constructive discharge of Employee, or (c) a change
in control of the Company, then the company shall pay to the Employee: (i) his
full Salary through the earlier of (A) one year from the Date of Termination or
(B) the Expiration Date, at the rate in effect at the time notice of termination
is given; and (ii) a prorated Performance Bonus, if any.
4.5 Post-Termination Obligations Generally. In the event the
Employee's employment shall terminate by reason of the expiration of the term of
this Agreement: the Company shall pay to the Employee (a) his Performance Bonus,
if any, with respect to the fiscal year ending on or prior to the Expiration
Date and (b) the Prorated Performance Bonus, if any, for that portion of the
fiscal year through the Expiration Date. Except as expressly set forth in the
preceding sentence and in the Stock Option, the Company shall have no further
obligations to the Employee following expiration of the term of this Agreement.
In the event of the termination of the Employee's employment other than by
expiration of the term of this Agreement, the Company shall have no obligation
to the Employee except as otherwise specifically provided in this Section 4 and
in the Stock Option, and performance by the Company thereof shall constitute
full settlement of any claim that the Employee may have against the Company or
any of its shareholders, subsidiaries or Affiliates on account of such
termination.
5. Other Activities During Employment. Except for any outside
employment and directorships currently held by Employee, as listed on Appendix
III attached hereto, and except with the prior written consent of the Company's
Board of Directors, which consent shall not be unreasonably withheld, Employee
will not during the term of this Agreement undertake or engage in any other
employment, occupation or business enterprise other than one in which Employee
is an inactive investor.
5
<PAGE> 6
6. Former Employers. Employee represents that the execution and
delivery of this Agreement and Employee's employment with the Company does not
violate any previous employment agreement or other contractual obligation of
Employee. Employee represents and agrees that any and all employment agreements
to which Employee is or was a party (the "Employment Agreements") have been
terminated and Employee has obtained releases with respect to said Employment
Agreements. Employee also represents and agrees that Employee has not used or
disclosed, and will not use or disclose, to the Company any information, whether
confidential, proprietary, or otherwise, which Employee has in Employee's
possession and which Employee is not legally free to use or disclose.
7. Confidential and Proprietary Information. Employee agrees that as a
condition to Employee's employment that he will never disclose, directly or
indirectly, to any other firm or person any of Company's or its Affiliates'
confidential or proprietary information including customer lists, trade secrets,
and know-how relating to its or their business. Confidential or proprietary
information shall not include any information which is or hereafter comes in the
public domain or is or becomes generally known or available in the industry
through no act of Employee prohibited by this Agreement.
8. Non-Compete and Non-Solicitation Agreement.
8.1 Employee recognizes that (a) the Company and its
Affiliates have spent substantial money, time and effort developing and
solidifying their relationships with their customers and in developing their
confidential information; (b) customer relationships have been difficult to
develop and required a significant investment of Company time, effort and
expense; (c) the Company pays its employees to, among other things, develop and
preserve business information, customer goodwill and customer loyalty for and on
behalf of the Company; and (d) the Company is hereby agreeing to employ and pay
Employee based upon Employee's assurances and promises contained herein not to
misappropriate the goodwill of the Company's customers and not to put herself in
a position during or following Employee's employment with the Company in which
the confidentiality of the Company's confidential and proprietary information as
described in Section 7 might somehow be compromised. Accordingly, Employee
covenants and agrees that for a period ending on the later of (i) two years from
the date hereof or (ii) one year after termination of Employee's employment
hereunder (the "Non-Compete Period"), regardless of whether Employee's
termination of employment, if any, is with or without cause, neither Employee
nor any entity controlled by or under common control with Employee shall (x)
engage in, or have any direct or indirect interest in any other person, firm,
corporation, or other entity engaged in any material business activities engaged
in by the Company on the Date of Termination, or (y) become an employee,
director, advisor, consultant, independent contractor, or agent of any such
person, firm, corporation or other entity, except with the Company's prior
written consent.
6
<PAGE> 7
8.2 Employee further covenants that he shall not (a) solicit,
cause or induce or attempt to solicit, cause or induce any present or future
employee of the Company or its Affiliates (i.e., any person employed by the
Company or its Affiliates (or their successors) at any time from and including
the date hereof through the Date of Termination) to leave the employ of the
Company or its Affiliates (or their successors), (b) cause or induce or attempt
to cause or induce any present or future client ("Present or Future Client") of
the Company or its Affiliates (or their successors) (i.e., any person or entity
which is a client of the Company or its Affiliates (or their successors) at any
time from and including the date hereof through the Date of Termination) to
reduce or sever its affiliation with the Company or its Affiliates (or their
successors) with respect to a material business of the Company or its Affiliates
engage in on the Date of Termination, or (c) solicit, attempt to solicit or
accept business relating to the material business of the Company or its
Affiliates engaged in by the Company on the Date of Termination from any Present
or Future Client of the Company or its Affiliates (or their successors).
8.3 Employee recognizes and agrees that the restraints
contained in Sections 8.1 and 8.2 are reasonable and enforceable in view of the
legitimate interests of the Company and its Affiliates in protecting their
confidential information and customer goodwill, and that the limitations
contained therein on the duration and geographic scope of, and activities
prohibited by, such restraints are reasonable and binding upon Employee.
8.4 The covenants contained in this Section 8 shall be deemed
to be a series of separate covenants, one for each aspect of the Company's
businesses and locations. Each separate covenant shall hereinafter be referred
to as a "Separate Covenant."
8.5 If any court or tribunal of competent jurisdiction shall
refuse to enforce one or more of the Separate Covenants because the time limit
applicable thereto is deemed unreasonable, it is expressly understood and agreed
that such Separate Covenant or Separate Covenants shall not be void but that for
the purpose of such proceedings such time limitation shall be deemed to be
reduced to the extent necessary to permit the enforcement of such Separate
Covenant or Separate Covenants.
8.6 If any court or tribunal of competent jurisdiction shall
refuse to enforce any or all of the Separate Covenants because, taken together,
they are more extensive (whether as to geographic area, scope of business, or
otherwise) than is deemed to be reasonable, it is expressly understood and
agreed between the parties that such Separate Covenant or Separate Covenants
shall not be void but that for the purpose of such proceedings the restrictions
contained therein (whether as to geographic area, scope of business or
otherwise) shall be deemed to be reduced to the extent necessary to permit the
enforcement of such Separate Covenant or Separate Covenants.
8.7 Nothing contained herein shall restrict Employee from
owning 5% or less of the corporate securities of any entity in competition with
the Company's businesses,
7
<PAGE> 8
which securities are listed on any national securities exchange or authorized
for listing on the NASDAQ National Market, if Employee has no other connection
or relationship, direct or indirect, with the issuer of such securities.
9. Survival. Employee's obligations under the provisions of Sections 7,
8, 9, 10 and 14 of this Agreement (as modified by Section 10, if applicable)
shall survive the expiration or termination of Employee's employment (whether
through Employee's resignation or otherwise) with the Company.
10. Assignment. This Agreement and the rights and obligations of the
parties hereto shall bind and inure to the benefit of any successor or
successors of the Company by reorganization, merger or consolidation and any
assignee of all or substantially all of its business and properties.
Notwithstanding any other provision of this Agreement, and properties, but,
except as to any such successor or assignee of the Company, neither this
Agreement nor any rights or benefits hereunder may be assigned by the Company or
by Employee.
11. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any
one or more of the provisions contained in this Agreement shall, for any reason,
be held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect the other provisions of this
Agreement, and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. MOREOVER, IT IS THE
INTENT OF THE PARTIES THAT in case any one or more of the provisions contained
in this Agreement shall for any reason be held to be excessively broad as to
duration, geographical scope, activity or subject, such provision shall be
construed by limiting and reducing it as determined by a court of competent
jurisdiction, so as to be enforceable to the extent compatible with applicable
law.
12. Notices. Any notice which the Company is required or may desire to
give Employee shall be given by personal delivery or registered or certified
mail, return receipt requested, addressed to Employee at Employee's address of
record with the Company, or at such other place as Employee may from time to
time designate in writing. Any notice which Employee is required or may desire
to give to the Company hereunder shall be given by personal delivery or by
registered or certified mail, return receipt requested, addressed to the Company
at its principal office, or at such other office as the Company may from time to
time designate in writing. The date of personal delivery or the date of mailing
any notice under this Section 11 shall be deemed to be the date of delivery
thereof.
13. Waivers. If either party should waive any breach of any provision
of this Agreement, such party shall not thereby be deemed to have waived any
preceding or succeeding breach of the same or any other provision of this
Agreement.
8
<PAGE> 9
14. The Company's Right to Injunctive Relief. In the event of a breach
or threatened breach of any of Employee's duties and obligations under the terms
and provisions of Sections 7 or 8 hereof, the Company shall be entitled, in
addition to any other legal or equitable remedies it may have (including any
right to damages that it may suffer), to temporary, preliminary, and permanent
injunctive relief restraining such breach or threatened breach. Employee hereby
expressly acknowledges that the harm which might result to the Company's
business as a result of any noncompliance by Employee with any of the provisions
of Sections 7 or 8 hereof would be largely irreparable.
15. Definition of Affiliate. "Affiliate" shall for purposes of this
Agreement mean any person or entity (the "Specified Person") (a) who directly or
indirectly controls, is controlled by, or is under common control with the
Company, (b) who owns or controls fifty percent (50%) or more of the Company's
outstanding voting securities or percentage interests; (c) in whom the Company
owns or controls fifty percent (50%) or more of the outstanding voting
securities or percentage interests; (d) who is a director, partner, manager,
employee, officer or trustee of the Company; (e) in whom the Company is a
partner; or (f) who has any relationship with the Specified Person by blood,
marriage or adoption, not more remote than lineal ancestor or lineal descendant.
16. Complete Agreement; Amendments. The foregoing, including each of
the Appendices attached hereto, is the entire agreement of the parties with
respect to the subject matter hereof, superseding any previous oral or written
communications, representations, understandings, or agreements with the Company
or any officer or representative thereof. Any amendment to this Agreement or
waiver by the Company of any right hereunder shall be effective only if
evidenced by a written instrument executed by the parties hereto, upon
authorization of the Company's Board of Directors.
17. Headings. The headings of the Sections hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning of this Agreement.
18. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. A facsimile, telecopy or
other reproduction of this Agreement may be executed by one or more parties
hereto, and an executed copy of this Agreement may be delivered by one or more
parties hereto by facsimile or similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such party can be
seen, and such execution and delivery shall be considered valid, binding and
effective for all purposes as of the date first written above. At the request of
any party hereto, all parties hereto agree to execute an original of this
Agreement as well as any facsimile, telecopy or other reproduction hereof.
9
<PAGE> 10
19. Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Illinois without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of Illinois or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Illinois.
20. No Joint Venture. Nothing in this Agreement shall be construed as
creating a joint venture or partnership between Employee and the Company or any
of its Affiliates.
21. Arbitration. In the event of any dispute, claim or controversy
concerning, arising out of or relating to this Agreement, its effect, the breach
thereof, or the transactions contemplated by it, including, without limitation,
issues of arbitrability, the dispute shall be settled by arbitration conducted
on a confidential basis, under the U.S. Arbitration Act, if applicable, and the
then current Commercial Arbitration Rules of the American Arbitration
Association (the "Association") strictly in accordance with the terms of this
Agreement and the substantive law of the State of Illinois. The arbitration
shall be conducted at the Association's regional office located in the Chicago,
Illinois area by three arbitrators, at least one of whom shall be knowledgeable
regarding businesses engaged in providing services via the Internet, one of whom
shall be an attorney and one of whom shall be a member of a "Big-Five"
accounting firm familiar with businesses engaged in providing services via the
Internet. Judgment upon the arbitrators' award may be entered and enforced in
any court of competent jurisdiction. Neither party shall institute a proceeding
hereunder unless at least 60 days prior thereto such party shall have given
written notice to the other party of its intent to do so. In any award, the
arbitrators shall assess the arbitration costs and expenses, including attorneys
fees of the parties, in a manner deemed equitable by the arbitrators, taking
into account the arbitration decision.
22. Separate Transaction. The employment relationship contemplated
herein between Employee and Company is a separate, distinct, and independent
transaction from the transaction contemplated in the Stock Exchange Agreement.
The entry into this Agreement shall be in full satisfaction of the condition of
Employee's employment with the Company pursuant to the Stock Exchange Agreement.
No breach by either party of this Agreement shall constitute a breach of the
Stock Exchange Agreement.
22. WAIVER OF JURY TRIAL. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT, WHICH HAS NOT BEEN RESOLVED BY NEGOTIATION AS
PROVIDED HEREIN AND AS TO WHICH LEGAL ACTION NEVERTHELESS OCCURS, EACH PARTY
HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY EACH PARTY HERETO
AND EACH PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR ANY PERSON ACTING
ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT TO INDUCE
THIS WAIVER OF TRIAL BY
10
<PAGE> 11
JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE PARTIES EACH FURTHER
ACKNOWLEDGE THAT IT HAS BEEN REPRESENTED OR HAS HAD THE OPPORTUNITY TO BE
REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY
INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD
THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. THE PARTIES EACH FURTHER
ACKNOWLEDGE THAT IT HAS READ AND UNDERSTOOD THE MEANING AND RAMIFICATIONS OF
THIS WAIVER PROVISION.
23. No Punitive Damages. The parties to this Agreement agree to waive
any right to seek punitive damages.
[SIGNATURE PAGE FOLLOWS]
11
<PAGE> 12
PLEASE NOTE: BY SIGNING THIS EMPLOYMENT AGREEMENT, EMPLOYEE IS HEREBY CERTIFYING
THAT EMPLOYEE (A) HAS RECEIVED A COPY OF THIS AGREEMENT FOR REVIEW AND STUDY
BEFORE EXECUTING IT; (B) HAS READ THIS AGREEMENT CAREFULLY BEFORE SIGNING IT;
(C) HAS CONSULTED AN ATTORNEY PRIOR TO SIGNING OR HAS VOLUNTARILY ELECTED NOT TO
DO SO; (D) HAS HAD SUFFICIENT TIME TO CONSIDER WHETHER TO SIGN THIS AGREEMENT;
(E) HAS HAD SUFFICIENT OPPORTUNITY BEFORE SIGNING THE AGREEMENT TO ASK ANY
QUESTIONS EMPLOYEE HAS ABOUT THE AGREEMENT AND HAS RECEIVED SATISFACTORY ANSWERS
TO ALL SUCH QUESTIONS; AND (F) UNDERSTANDS EMPLOYEE'S RIGHTS AND OBLIGATIONS
UNDER THE AGREEMENT.
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement on the date first set out above.
COMPANY:
ESPERNET.COM, INC.
By: /s/ Chinh Chu
-------------------------------------
Name: Chinh Chu
Title: Chairman
EMPLOYEE:
/s/ Steven F. DeMar
-------------------------------------------
Steven F. DeMar
[SIGNATURE PAGE TO EMPLOYMENT AGREEMENT]
12
<PAGE> 13
APPENDIX I
1. Performance Bonus Plan: Annual Cash Target Bonus of 100% of your Salary
based upon performance targets established by the Board of Directors
and payable at the end of the Company's fiscal year established by the
Board of Directors. If the Performance Bonus becomes payable for any
period less than a full fiscal year, then such Performance Bonus shall
be prorated for the such period so long as the performance targets have
been satisfied.
<PAGE> 14
APPENDIX II
Stock Option Plan: 1999 Stock Option/Stock Issuance Plan
Optionee: Steven F. DeMar
Grant Date: Closing of IPO
Vesting Commencement Date: Closing of IPO
Exercise Price: IPO Price
Number of Option Shares: 150,000 shares of Common Stock
Expiration Date: 10 years from Vesting Commencement Date
Type of Option: Non-Statutory Option
Vesting Schedule: Ratably (1/3 each) over 3 years; fulling vesting upon
any Corporate Transaction; full vesting upon an event described in
Section 4.4 of the Employment Agreement.
Exercise Period After Termination of Service: In no event shall
Employee have less than three (3) months to exercise his options after
a Termination of Service.
<PAGE> 15
APPENDIX III
Cellular Dynamics, Inc.
Aces Group, Ltd.
Techdogs, Inc.
Case Venture Management, Inc.
InfoRamp, Inc.
<PAGE> 1
Exhibit 10.10
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement"), dated as of
June 8, 1999, by and between espernet.com, inc., a Delaware corporation (the
"Company"), and Espernet.com, Inc., a New York corporation (the "Provider").
WHEREAS, the Company desires that the Provider perform certain
management and administration services for the Company, and the Provider desires
to perform such management and administrative services for the Company, subject
to the terms and conditions hereinafter set forth.
NOW, THEREFORE, IN CONSIDERATION of the foregoing, and of the mutual
premises, covenants, agreements, representations and warranties contained
herein, and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Agreement to Provide Administrative Services. The Provider shall
provide or cause to be provided to the Company, if, when and to the extent
required by the Company, the administrative services described in Exhibit A and
such other services that the Provider, is capable of providing with its
then-current personnel and facilities without unreasonable interference with its
normal business operations (the "Administrative Services").
2. Charges for Services. For all costs and expenses, including
third-party charges, incurred by the Provider in providing the Administrative
Services to the Company that are separately identifiable, the Company shall pay
to the Provider the actual cost thereof. For Administrative Services provided by
the Provider's employees, the actual costs shall include, without limitation,
(i) an hourly charge for such employees' time which shall approximate the
Provider's cost of such employee's compensation and benefits and (ii) an
overhead charge in an amount equal to a pro rata share of the Provider's general
and administrative costs based on the ratio of employee time devoted to
providing the Administrative Services to the total Provider employee time. For
all costs and expenses, including third-party charges, incurred by the Provider
in providing the Administrative Services to the Company that are not separately
identifiable, the Company shall pay to the Provider that portion of such costs
and expenses reasonably attributable to the Company. The amount of such payments
shall be determined using generally accepted accounting principles consistently
applied.
3. Invoices. Except for items as to which other payment arrangements
have been made, the Provider shall submit to the Company, by the 15th day of
each month, an invoice for all charges associated with the Administrative
Services for the preceding month and any adjustments for prior months. Except as
provided in this Section 3 business hereof, the Company shall remit payment in
full before the last business day of the month in which the invoice is received
for all charges invoiced on or before the 15th day of such month. From the
Effective
<PAGE> 2
Date through the date of the Company's IPO, all charges shall be accrued but not
paid until the closing of the IPO. Notwithstanding any other provision of this
Section 3, the Provider shall timely make any and all payments to third parties
necessary to ensure continued services of the types contemplated in this
Agreement.
4. Disputes. In the event of a dispute as to an invoiced amount, the
Company shall promptly pay all undisputed amounts, but shall be entitled to
withhold amounts in dispute. The Company shall promptly notify the Provider of
any such dispute. Each party will provide the other sufficient records and
information to resolve any such dispute and, without limiting the rights and
remedies of the parties hereunder, will negotiate in good faith a resolution
thereto.
5. Method of Payment. Transfer of funds pursuant to this Agreement
shall be made in U.S. dollars by Company check or wire transfer of immediately
available funds to an account or accounts specified by the party receiving such
payment. Whenever any payment hereunder is required or requested on a day other
than a business day, such payment shall be made on the next succeeding business
day and any such extension of time shall be included in the computation of the
payment of interest.
6. Performance of Administrative Services.
(a) Degree of Care. The Provider shall perform the
Administrative Services with the same degree of care, skill and prudence
customarily exercised by it in respect of its own business, operations and
affairs.
(b) Certain Limitations. Each party acknowledges that the
Administrative Services shall be provided only with respect to the business of
the Company and its respective subsidiaries as such businesses exist as of the
Effective Date or as otherwise mutually agreed by the parties.
7. Limitations on Liability and Indemnification.
(a) Limitations on Liability. Neither party shall have any
liability under this Agreement (including any liability for its own negligence)
for damages, losses or expenses suffered by the other party or its subsidiaries
as a result of the performance or non-performance of such party's obligations
hereunder, unless such damages, losses or expenses are caused by or arise out of
the willful misconduct or gross negligence of such party or a breach by such
party of any of the express provisions hereof. In no event shall either party
have any liability to the other party for indirect, incidental or consequential
damages that such other party or its subsidiaries or any third party may incur
or experience on account of the performance or non-performance of such party's
obligations hereunder. Notwithstanding the foregoing, each party shall use its
best efforts to timely cure any defect in or failure of performance (whether as
a result of negligence or otherwise) and to otherwise correct or improve the
level of performance in order to render
-2-
<PAGE> 3
Administrative Services substantively and qualitatively equal to or better than
those presently being rendered.
(b) Indemnification. Subject to the limitations on liability
set forth in Section 7(a) hereof, each party shall indemnify, defend and hold
harmless the other party and its directors, officers, employees, agents and
representatives from and against all claims, liabilities, damages, losses and
expenses (including reasonable attorneys fees and expenses) caused by or arising
out of the willful misconduct or gross negligence of such indemnifying party in
the performance or non-performance of its obligations hereunder or the breach by
such indemnifying party of any of the express provisions hereof.
(c) Survival. The provisions of this Section 7 shall survive
any termination of this Agreement.
8. Term of Agreement. This Agreement shall be effective until it is
terminated by either party in accordance with Section 12 hereof.
9. Confidentiality. Each party will hold in trust and maintain
confidential and, except as required by law, not disclose to others without the
prior written approval of the other party, any information received by it from
the other party or developed or otherwise obtained by it in connection with the
performance of its obligations hereunder (the "Information"). Within ninety (90)
days after the date of termination of this Agreement, each party will return to
the other party, all documents, data and other materials of whatever nature
relating to the businesses of the other and its subsidiaries that it obtained in
connection with the performance of its obligations hereunder, provided that the
parties may retain any Information to the extent reasonably needed to comply
with applicable tax, accounting or financial reporting requirements or to
resolve any legal issues identified at the time of termination. The provisions
of this Section 9 shall survive any termination of this Agreement.
10. Representations and Covenants of the Company. The Company hereby
represents and covenants to the Provider as follows:
(a) The Company is a Delaware corporation, validly existing
and in good standing under the laws of the State of Delaware and has the power
and authority to carry on its business as it is now being conducted.
(b) The Company has and will continue to conduct its Internet
service provider in accordance and compliance with any and all laws, regulations
and professional business standards applicable thereto.
(c) The Company agrees to do everything within its ability to
reasonably protect the ongoing goodwill of the Provider.
-3-
<PAGE> 4
11. Relationship of the Parties.
(a) Independent Contracting Parties. The Provider and the
Company are independent contracting parties. Nothing in this Agreement shall be
construed to create a principal-agent, employer-employee, or master-servant
relationship.
(b) Benefits and Taxes. The Company and the Provider hereby
understand and agree that:
(i) The Company will not withhold on behalf of the
Provider, and the Provider will not withhold on behalf of the Company, any sums
for income tax, unemployment insurance, social security, or any other
withholding pursuant to any law or requirement of any governmental body; and
(ii) The Company and the Provider are individually
responsible for all of such payments, withholdings, and benefits, if any. Each
party hereby agrees to indemnify and hold the other party harmless for any of
the above costs which are not the responsibility of such other party.
12. Termination. This Agreement may be terminated by either party upon
30 days written notice to the other party. The Provider shall provide on invoice
for all Administrative Services provided pursuant to this Agreement within 15
days of such written notice and the Company shall have 15 days from receipt of
such invoice to make payment therefore in accordance with Paragraph 3 hereof.
13. Miscellaneous Provisions.
(a) Arbitration. In the event of any dispute, claim or
controversy concerning, arising out of or relating to this Agreement, its
effect, the breach thereof, or the transactions contemplated by it, including
without limitation, issues of arbitrability, the same shall be settled by
arbitration in accordance with the Federal Arbitration Act (Title 9 of the U.S.
Code) and the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA Rules"). The arbitration shall be before one neutral
arbitrator to be selected in accordance with the AAA Rules whose decision shall
be rendered in writing. The results of the arbitration shall be final and
binding upon the parties, with costs paid by the party who does not prevail in
the arbitration as determined by the arbitrator, and judgment on the award may
be entered in any court having jurisdiction thereof. In rendering the award, the
arbitrator shall determine the rights and obligations of the parties according
to the substantive and procedural laws of the State of New York without regard
to principles of conflict of laws. The arbitration shall be held in New York, or
at such other place as may be selected by mutual agreement of the parties. The
arbitrator shall have no authority to award punitive damages or any other
damages not measured by the prevailing party's actual damages, and may not, in
any event, make any ruling, finding or award that does not conform to the terms
and conditions of this Agreement. Neither party nor the arbitrator may
-4-
<PAGE> 5
disclose the existence, content, or results of any arbitration hereunder without
the prior written consent of both parties, unless required to do so by order of
a governmental authority, or as required by either party's auditors in
connection with the preparation of audited financial statements, or as required
by the disclosure requirements of any U.S. or foreign securities law, regulation
or stock exchange rule, or if a petition to enforce arbitration is necessary to
be filed with a court of competent jurisdiction.
(b) Applicable Law. This Agreement will be deemed to be a
contract made under the laws of the State of New York and for all purposes will
be governed by and interpreted in accordance with the laws prevailing in the
State of New York, without regard to principles of conflict of laws.
(c) Prevailing Agreement. The terms and provisions of this
Agreement entirely supersede any other agreement between the parties with
respect to the subject matter hereof and constitute the entire agreement between
the parties.
(d) Inurement. This Agreement will inure to the benefit of and
be binding upon the parties, their heirs, administrators, successors and
assigns.
(e) Counterparts. This Agreement may be executed in several
counterparts, each of which when so executed will be deemed to be an original
and which will together constitute the one and the same agreement; and it will
not be necessary in proving this Agreement to produce or to prove more than one
such counterpart.
(f) Severability. If an arbitration proceeding or court of
competent jurisdiction, the parties agree that the arbitrator or court shall
limit the scope or duration shall find any term or provision deemed by an
arbitration proceeding or court of competent jurisdiction to be unenforceable
and invalid for any other reason shall be severed from this Agreement, and the
remainder of this Agreement shall continue in full force and effect.
[SIGNATURE PAGE FOLLOWS]
-5-
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have executed this
Agreement on the day first above written.
THE COMPANY:
ESPERNET.COM. INC. (Delaware)
By:________________________________
Name:
Title:
THE PROVIDER:
ESPERNET.COM, INC. (New York)
By:________________________________
Name:
Title:
-6-
<PAGE> 7
EXHIBIT A
ADMINISTRATIVE SERVICES TO BE PROVIDED BY THE PROVIDER
The Provider shall provide or cause to be provided to the Company the
services of its employees and consultants, including, but not limited to:
management, accounting and financial, legal, research and development,
acquisition representatives and finders, systems and other support, and such
other administrative services as the Provider is capable of providing with its
then-current personnel and facilities without unreasonable interference with the
Provider's normal business operations.
The Provider shall also provide the Company with the use of the
Provider's facilities, equipment and supplies, including computer hardware and
software and peripherals, telephone, photocopiers, facsimile and postage
machines.
<PAGE> 1
Exhibit 10.13
DATED: August 11, 1999
LOOKSMART, LTD.
-and-
ESPERNET.COM, INC.
CO-BRANDING AND MARKETING AGREEMENT
________________________________________________________________________________
<PAGE> 2
CO-BRANDING AND MARKETING AGREEMENT
This Co-Branding and Marketing Agreement (the "Agreement") is entered
into and effective as of August 11, 1999 (the "Effective Date") by and between
LookSmart, Ltd, a Delaware corporation located at 487 Bryant Street, San
Francisco, California 94107 ("LookSmart"), and espernet.com, inc. located at
383 W. 12th Street, New York, NY 10014 (the "ISP").
RECITALS
WHEREAS, LookSmart is the developer, owner and operator of an
Internet directory and search engine web site located at www.looksmart.com;
WHEREAS, ISP is an Internet Service Provider that provides access to
the Internet to its subscribers.
WHEREAS, LookSmart and the ISP desire that (i) LookSmart design,
develop and maintain a Co-Branded Site that incorporates certain material
provided by both parties, and (ii) both parties promote such Co-Branded Site.
Now therefore, the parties agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms shall have
the indicated meanings:
1.1 "Advertising Impression" means every instance that a Co-Branded
Page which contains a Banner Advertisement is viewed by an Internet user.
1.2 "Banner Advertisement" means a third party advertisement on a
Page; provided, that such advertisement (i) is placed by LookSmart,
(ii) occupies all or a substantial portion of the width of the Page or all or a
substantial portion of the length above the fold of the Page, and (iii) does not
include any sponsorship or promotional programs, third party content
arrangements or any smaller hypertext links to any third party site.
Notwithstanding anything contained herein, LookSmart shall not place any Banner
Advertisement that is offensive or objectionable to ISP.
1.3 "Co-Branded Home Page" means the Page that first appears when an
Internet user accesses the Co-Branded Site, a static copy of which shall reside
on the ISP's server.
1.4 "Co-Branded Page" means each Page of the Co-Branded Site.
1.5 "Co-Branded Site" means the collection of Pages, including the
Co-Branded Home Page, designed, developed and maintained by LookSmart pursuant
to Section 2 of this Agreement that (i) provides similar products and services
as the LookSmart Site, and (ii) incorporates certain ISP Content.
2
<PAGE> 3
1.6 "Content" means the ISP Content or the LookSmart Content, as
the case may be.
1.7 "hypertext link" means a section of a Page that when selected
provides access to another Page (which may be part of the same document or site
or part of a different document or site).
1.8 "Intellectual Property Rights" means any and all now known or
hereafter existing rights associated with works of authorship or inventions
throughout the world, including but not limited to copyrights, patents,
trademarks, service marks, know how, "look and feel" and all other intellectual
and industrial property and proprietary rights (of every kind and nature
throughout the universe and however designated) relating to intangible
property.
1.9 "ISP Content" means any ISP logo, trademark, service mark,
and all text, data images, design structure, any audio and audiovisual
material, photographs, trademarks, and other materials developed by ISP that
are (i) provided to LookSmart hereunder for the purpose of promoting the
Co-Branded Site, and/or (ii) incorporated into the Co-Branded Site.
1.10 "ISP Home Page" means the Page located at home.espernet.com.
1.11 "ISP Site" means the collection of Pages established by the
ISP on the internet and located at home.espernet.com and all portions thereof,
including without limitation, all HTML, Java and other computer languages used
in the creation of those Pages and/or other formatted text files, all related
graphics files, animation files, data files, modules, routines and objects, and
the computer software and all other script or program files required to exploit
such materials and collectively control the display of and user interaction with
that site;
1.12 "LookSmart Content" means any LookSmart logo, trademark,
service mark, and all text, data images, design structure, any audio and
audiovisual material, photographs, trademarks, and other materials that
LookSmart provides to ISP for the purpose of promoting LookSmart or the
Co-Branded Site.
1.13 "LookSmart Site" means the internet directory and search
engine available on the World Wide Web currently known as "LookSmart" and
available at http://www.looksmart.com and all portions thereof, including
without limitation, all HTML, Java and other computer languages used in the
creation of those Pages and/or other formatted text files, all related graphics
files, animation files, data files, modules, routines and objects, and the
computer software and all other script or program files required to exploit such
materials and collectively control the display of and user interaction with the
LookSmart Site.
1.14 "Page" means the information that appears on an Internet
user's computer screen when that user accesses any site on the Internet.
1.15 "Quarter" means each period of three months commencing on 1
January, 1 April, 1 July and 1 October in each year.
1.16 "Net Advertising Revenue(s)" means gross revenues earned by
Looksmart via the sales of advertising, less Looksmart's cost of sales.
1.17 "Fee Percentage" means fee paid to ISP based on percentage of
Looksmart Net Advertising Revenues.
3
<PAGE> 4
2. CREATION OF CO-BRANDED SITE
2.1 Development of Co-Branded Site. LookSmart shall, at the ISP's
request, design and develop the Co-Branded Site in collaboration with and under
the direction of the ISP.
2.2 Co-Branded Home Page. The Co-Branded Home Page shall reside on the
ISP server and be located at http://home.espernet.com such that ISP subscribers
will automatically access the Co-Branded Home Page every time that they dial-in
to the ISP's server.
2.3 Advertising. The Co-Branded Home Page and each and every Co-Branded
Page shall include space designated for advertising, including at least one
Banner Advertisement per page. The parties agree and acknowledge that LookSmart
shall have the right, except as otherwise set forth in writing, to sell and
place advertisements on the Co-Branded Site and each Co-Branded Page, including
the Co-Branded Home Page. The ISP will also have the right to sell and serve
advertisements to the Co-Branded Home Page. LookSmart shall not willfully place
any advertisements on the Co-Branded Site that (i) promote another company's
internet connection services, or (ii) promote web sites that display
pornographic material.
2.4 ISP Content. ISP shall provide LookSmart with ISP Content to
incorporate into the Co-Branded Site. ISP shall deliver such ISP Content via
the means of delivery and in the format specified by LookSmart. Notwithstanding
anything contained herein, ISP can reject and override any changes made by
Looksmart on the Co-Branded Home Page.
2.5 ISP acknowledges that LookSmart may modify the Co-Branded Site,
excluding the ISP Home Page, from time to time without ISP's consent if such
modification does not materially impact the rights conferred on the ISP
pursuant to this Agreement.
3. PAYMENT
3.1 LookSmart shall pay ISP a fee at the end of each Quarter based upon
the number of page views delivered via the Co-Branded Site during such Quarter
(the "Quarterly Payment"). The Quarterly Payment will total 50% ("Fee
Percentage") of Looksmart's Net Advertising Revenues generated from traffic
sent through to the espernet Co-branded site. Net Revenues shall mean gross
revenues less cost of sales which is not to exceed 30% of gross revenues
generated from traffic sent through the espernet Co-branded site.
3.2 Looksmart will guarantee to espernet a minimum payment of $3.00 per
1000 pageviews (CPM) for all traffic delivered via the Co-Branded Site.
3.3 The Quarterly Payment will be payable within fifteen (15) business
days after the end of each Quarter. LookSmart shall be responsible for
calculating the Page Views and the amount of the Quarterly Payment.
3.4 espernet shall have the right, upon reasonable notice, to audit the
books and records of Looksmart as it relates to the Revenue Share payments.
Such audits will not be more frequent than once per Agreement period.
4
<PAGE> 5
3.5 ISP and LookSmart agree to review payment terms, two months after the
IPO of ISP, in order to decide on mutually agreeable terms if different from
terms outlined in 3.1 and 3.2. This review and mutual agreement will be a
condition of continuing this contract.
4. CO-MARKETING
4.1 ISP's Obligations. ISP will use reasonable efforts to maximize the use
of the Co-Branded Site by its subscribers. Such efforts shall include, but not
be limited to, the following:
(a) ISP will use reasonable efforts to provide each new subscriber
with a pre-configured version of Netscape Navigator, Internet Explorer, and/or
any other internet browser software ISP distributes to its subscribers in which
the default home page is set to the Co-Branded Home Page and, where applicable,
the default search engine is set to the Co-Branded Home Page.
(b) Immediately following the commercial launch of the Co-Branded
Site, ISP shall insert banners, buttons and or hypertext links on the ISP Home
Page that are linked to the Co-Branded Site.
(c) ISP shall use best efforts to promote the Co-Branded Site in any
and all material it distributes to promote its services to current and potential
subscribers.
4.2 LookSmart's Obligations. LookSmart shall use its best efforts to
promote the Co-Branded Site (a) within the Internet Service Providers Locator
referral program on the LookSmart Site, (b) in certain marketing materials
distributed by LookSmart that describe LookSmart's internet service provider
partnership program. In addition, LookSmart shall include the ISP in the
internet service provider subcategory of the LookSmart directory.
4.3 Joint Obligations. In addition to the above, each of LookSmart and the
ISP will publicize the Co-Branded Site in as many forums as they consider
appropriate.
5. LICENSE
5.1 ISP License. ISP hereby grants LookSmart a non-exclusive license to
reproduce, publicly display, and otherwise use the ISP Content, and such other
images and materials for which ISP grants its prior written consent, during the
term of this Agreement for the purpose of creating, maintaining and promoting
the Co-Branded Site as contemplated herein.
5.2 LookSmart License. LookSmart hereby grants the ISP a limited
non-exclusive, non-transferable license to use the LookSmart Content during the
term of this Agreement for the sole purpose of promoting the Co-Branded Site as
set forth herein.
5.3 Use of Logos. Each party's use of the other's Logo shall be limited to
the style and format of such Logos as provided by that party. In exercising its
rights under any license granted pursuant to this Agreement a party shall not
combine any other trademark or service mark with the other party's Logo without
the prior written consent of the other party. LookSmart shall have the right to
review any advertising or promotional material of the ISP that refers to
LookSmart or incorporates the LookSmart Logo and LookSmart shall have the right
to require the removal of any such advertising or promotional material if it
determines, in
5
<PAGE> 6
its absolute discretion, that such advertising or promotional material is not
consistent with its editorial policy or commonly accepted standards of decency
or tolerance or with any applicable laws relating thereto.
6. PROPRIETARY RIGHTS
6.1 LookSmart Content. LookSmart will own all rights in and to the
LookSmart Content, the LookSmart Site, the Co-Branded Site (other than the ISP
Content) and all Intellectual Property Rights therein and thereto. ISP
acknowledges that the LookSmart Content and the LookSmart Site and the goodwill
associated therewith are valuable properties belonging to LookSmart and that
all rights thereto are and shall remain the sole and exclusive property of
LookSmart. Except for the limited license set forth above, nothing in this
Agreement grants ISP any right, title or interest in LookSmart's Content, the
LookSmart Site or any and all Intellectual Property Rights. ISP agrees that it
will do nothing inconsistent with LookSmart's ownership rights as set forth
above and that all uses of the LookSmart Content shall inure to the sole
benefit of and be on behalf of LookSmart.
6.2 ISP Content. ISP will own all rights in and to the ISP Content, the
ISP Site and all Intellectual Property Rights therein and thereto. LookSmart
acknowledges that the ISP Content and the goodwill associated therewith are
valuable properties belonging to ISP and that all rights thereto are and shall
remain the sole and exclusive property of ISP. LookSmart agrees that it will do
nothing inconsistent with ISP's ownership of the ISP Content and that all uses
of the ISP Content shall inure to the sole benefit of and be on behalf of ISP.
7. CONFIDENTIAL INFORMATION
7.1 Confidential Information. Each party acknowledges that by reason of
its relationship to the other party under this Agreement it will have access to
and acquire knowledge from, material, data, systems and other information
concerning the operation, business, financial affairs, products, customers and
Intellectual Property Rights of the other party that may not be accessible or
known to the general public (referred to as "Confidential Information").
"Confidential Information" shall include, but not be limited to, (i) the terms
of this Agreement, and (ii) any and all information regarding any software
utilized by LookSmart to create, operate or maintain the LookSmart Site and the
Co-Branded Site.
7.2 No Disclosure. Each party agrees to maintain all Confidential
Information received from the other, both orally and in writing, in confidence
and agrees not to disclose or otherwise make available such Confidential
Information to any third party without the prior written consent of the
disclosing party; provided, however, that each party may disclose the financial
terms of this Agreement to its legal and business advisors and to potential
investors if such third parties agree to maintain the confidentiality of such
Confidential Information. Each party further agrees to use the Confidential
Information only for the purpose of performing this Agreement. In addition,
neither party shall reverse engineer, disassemble or decompile any prototypes,
software or other tangible objects which embody the other party's Confidential
Information and which are provided to the party hereunder. Whenever requested
by a disclosing party, a receiving party shall immediately return to the
disclosing party all manifestations of the Confidential Information or, at the
disclosing party's option, shall destroy all such Confidential Information as
the disclosing party may designate. The receiving party's
6
<PAGE> 7
obligation of confidentiality shall survive this Agreement for a period of five
(5) years from the date of its termination, and thereafter shall terminate and
be of no further force or effect.
7.3 Exclusions. The parties' obligations under Section 7.2 above shall not
apply to Confidential Information which: (i) is or becomes a matter of public
knowledge though no fault of or action by the receiving party; (ii) was
rightfully in the receiving party's possession prior to disclosure by the
disclosing party; (iii) subsequent to disclosure, is rightfully obtained by the
receiving party from a third party who is lawfully in possession of such
Confidential Information without restriction; (iv) is independently developed by
the receiving party without resort to the disclosing party's Confidential
Information; or (v) is required by law or judicial order, provided that prior
written notice of such required disclosure is furnished to the disclosing party
as soon as practicable in order to afford the disclosing party an opportunity to
seek a protective order and that if such order cannot be obtained disclosure may
be made without liability.
8. REPRESENTATIONS, WARRANTIES, AND INDEMNIFICATION
8.1 ISP's Representations and Warranties. ISP represents and warrants that
(i) it has the right, power and authority to enter into this Agreement and to
fully perform its obligations under this Agreement; (ii) entering into this
Agreement does not violate any agreement existing between it and any other
person or entity; (iii) it is the sole owner or is a valid licensee of the ISP
Content, the ISP Site and all content contained therein, and any other materials
it contributes to the Co-Branded Site and has secured all necessary licenses,
consents and authorizations with respect to use of such content and all elements
thereof to the full extent contemplated herein; (iv) the ISP Content and the
content on the ISP Site does not violate or infringe any right of privacy or
publicity or any other Intellectual Property Right or contain any libelous,
defamatory, obscene or unlawful material, or otherwise violate or infringe any
other right of any person or entity; and (v) the ISP Content shall at all times
comply with LookSmart's editorial policies and commonly accepted standards of
decency.
8.2 ISP's Indemnification. ISP agrees to, and shall, indemnify, defend and
hold harmless LookSmart and its directors, shareholders, officers, agents,
employees, successors, affiliates and assigns from and against any and all
claims, demands, suits, actions, judgments, damages, costs, losses, expenses
(including attorneys' fees and expenses) and other liabilities arising from, in
connection with or related in any way to, directly or indirectly, (i) any breach
or alleged breach of any of the representations, warranties, undertakings or
agreements made by it under this Agreement, (ii) any claims related to the
development, operation, maintenance and/or content of the ISP Site, and (iii)
any claims related to the promotion, provision and maintenance of ISP's products
and services. LookSmart shall promptly notify ISP of any such claim. ISP shall
bear full responsibility for the defense (including any settlements); provided
however, that (i) ISP shall keep LookSmart informed of, and consult with
LookSmart in connection with the progress of such litigation or settlement; and
(ii) ISP shall not have any right, without LookSmart's written consent, to
settle any such claim if such settlement arises from or is part of any criminal
action, suit or proceeding or contains a stipulation to or admission or
acknowledgment of, any liability or wrongdoing (whether in contract, tort or
otherwise) on the part of LookSmart.
7
<PAGE> 8
8.3 LookSmart's Representations and Warranties. LookSmart represents and
warrants that (a) it has the right, power and authority to enter into this
Agreement and to fully perform its obligations under this Agreement; (b)
entering into this Agreement does not violate any agreement existing between it
and any other person or entity; (c) it has all necessary rights in and to the
LookSmart Content and any other materials it contributes to the Co-Branded
Site; and (d) the LookSmart Content does not violate or infringe any right of
privacy or publicity or any other Intellectual Property Right or contain any
libelous, defamatory, obscene or unlawful material, or otherwise violate or
infringe any other right of any person or entity.
8.4 LookSmart's Indemnification. LookSmart agrees to, and shall,
indemnify, defend and hold harmless ISP, and its directors, shareholders,
officers, agents, employees, successors and assigns from and any and all third
party claims, demands, suits, actions, judgments, damages, costs, losses,
expenses (including attorneys' fees and expenses) and other liabilities arising
from, in connection with or related in any way to, directly or indirectly, a
breach or alleged breach of the representations and warranties set forth in
Section 8.3 hereof. ISP shall promptly notify LookSmart of any such claim, and
LookSmart shall bear full responsibility for the defense of such claim
(including any settlements).
8.5 EXCEPT AS EXPRESSLY STATED IN THIS SECTION 8 AND IN THIS AGREEMENT,
NEITHER PARTY MAKES ANY AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS ANY
WARRANTIES, EXPRESSED OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE. EACH PARTY
DISCLAIMS THE IMPLIED WARRANTY OF MERCHANTABILITY AND THE IMPLIED WARRANTY OF
FITNESS FOR A PARTICULAR PURPOSE.
9. LIMITATION OF LIABILITY
Under no circumstances shall LookSmart be liable to ISP for any
indirect, incidental, consequential, special or exemplary damages, arising from
any act or omission, including negligent acts or omissions, of that party, even
if LookSmart has been advised of the possibility of such damages, arising from
any provision of this Agreement, such as, but not limited to loss of revenue or
anticipated profits, lost data, or lost business.
10. TERM AND TERMINATION
10.1 This Agreement shall commence on Execution Date and shall continue
for (1) one year.
10.2 If this Agreement is terminated for any reason after initial term,
(i) each party shall immediately remove the other party's Content from their
respective web sites, (ii) LookSmart shall remove the Co-Branded Site, (iii)
ISP shall remove any LookSmart Content from the static copy of the Co-Branded
Home Page on its server, (iv) each party shall promptly deliver to the other
party all originals and copies of the other party's Content, together with any
other material provided by the other party (including all copies thereof), (v)
each party shall immediately cease to use the other party's Content, and (vi)
ISP shall return to LookSmart any and all prepayment in excess of any Quarterly
Payment due to ISP. Each party shall ensure that such materials have been
erased from all computer memories and storage devices within its possession or
control.
10.3 In no event shall either party have any right to recover or obtain
any Intellectual Property rights in or to the other party's site, nor shall
either party enjoin or otherwise interfere
8
<PAGE> 9
with the other party's development, exploitation or promotion of its site (or
any element thereof), or any derivative work thereof except to the extent that
a party is permitted to use the other party's Content strictly in accordance
with this Agreement.
10.4 In the event of termination or expiration of this Agreement for any
reason, Section 6, 7, 8 and 9 shall survive such termination or expiration.
10.5 In the event of termination due to a breach by Looksmart of any
provision in this agreement, ISP may terminate agreement and may, its
discretion, use the existing Co-branded content for, the longer of, (a) 90 days
or (b) until end of contract term.
11. WAIVER, REMEDIES CUMULATIVE
Any waiver of one (1) or more of the provisions of this Agreement or of a
party's rights or remedies under this Agreement must be in writing to be
effective, and must be signed by a signatory of the party to be charged with
actual corporate authority to waive such provision, right or remedy. Failure,
neglect, or delay by a party to enforce the provisions of this Agreement or its
rights or remedies at any time, will not be construed and will not be deemed to
be a waiver of such party's rights under this Agreement and will not in any way
affect the validity of the whole or any part of this Agreement or prejudice
such party's right to take subsequent action.
12. COSTS
Each party shall bear its own legal, accounting and other costs, charges
and expenses of and incidental to this Agreement.
13. ENTIRE AGREEMENT AND AMENDMENT
This Agreement constitutes the entire understanding and agreement between
LookSmart and ISP with respect to the transactions contemplated herein, and
supercedes any and all prior or contemporaneous oral or written understanding,
agreement or communication between LookSmart and ISP. No term or provision of
this Agreement may be amended or modified unless such amendment or modification
is approved in writing and signed by the parties.
14. INDEPENDENT CONTRACTORS
The parties are independent contractors and no agency, partnership,
franchise or other relationship is created hereby. Neither party shall have any
power to obligate or bind the other party, except as specifically provided
herein, and neither party may make or purport to make any representations,
warranties or undertakings for the other party.
15. NOTICES
All notices, requests, demands, consents, approvals, agreements or other
communications authorized or required to be made to or by a party under or in
connection with this Agreement shall be in writing and may be given by telecopy
or hand to or upon the recipient at the address set out in this Agreement or to
such other address or telecopy number as it may have notified the sender.
16. FORCE MAJEURE
9
<PAGE> 10
Any delay in or failure of performance by either party under this
Agreement will not be considered a breach of this Agreement and will be excused
to the extent caused by any occurrence beyond the reasonable control of such
party including, but not limited to, acts of God, power outages and
governmental restrictions.
17. ASSIGNMENT
The obligations and liabilities imposed and the rights and benefits
conferred on the parties shall be binding upon and inure to the parties and
each of their respective successors in title, transferees and permitted assigns.
18. PUBLIC ANNOUNCEMENT
Looksmart and Espernet agree to provide preapproved wording to the
other party of the purposes of press releases and public comments and or
announcements. Any joint marketing or joint advertising campaign must be
discussed and approved by both parties.
19. FURTHER ASSURANCES
Each party shall exercise all such powers as are available to it, do
all such acts, matters and things and sign, execute and deliver all such
documents and instruments as may be necessary or reasonably required to give
full force and effect to the provisions of this Agreement.
20. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware without reference to its conflicts of laws
provisions.
21. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original and all of which shall constitute one and the same agreement.
The parties have caused this Agreement to be executed by their duly
authorized representatives as of the date written above.
10
<PAGE> 11
LOOKSMART, LTD.
By: /s/Ryan McShera
-----------------------------
Type/Print Name: Ryan McShera
-----------------------------
Title: Manager, ISP Partnerships
-----------------------------
Date: 8/18/99
-----------------------------
ESPERNET.COM, INC.
By (Signature): /s/Roger Aguinaldo
-----------------------------
Type/Print Name: Roger Aguinaldo
-----------------------------
Title: SVP, Director
-----------------------------
Date: 8/19/99
-----------------------------
11
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Company State of Alternate Names
Incorporation
<S> <C> <C> <C>
1 Alliance Internet Illinois
Technologies, L.L.C.
2 Black Sheep Arkansas BSC Net
Computing, Inc. Trumann Net
3 COL Networks, Inc. North Carolina Caroline Online
4 The Computer Care Michigan TC3 Net
Company, Inc.
5 ComQuest Networks, Indiana ComQuest Internet Services
Inc.
6 Copper.Net, Inc. Ohio Copper.Net
ECR Internet Services, Inc.
ECR
ECR.Net
7 Crocker Massachusetts
Communications, Inc.
8 CSW Net, Inc. Arkansas
9 DuplinNet Corporation North Carolina
10 Delanet, Inc. Delaware
11 ECSIS.Net, LLC Tennessee
12 Enter.Net, Inc. Pennsylvania
13 ESP Acquisition Corp. Delaware
14 E-Znet Incorporated New York InterAxess
15 Fairnet, Inc. Indiana
16 Futura, Inc. Arkansas Webfoot
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Company State of Alternate Names
Incorporation
<S> <C> <C> <C>
Company State of Alternate Names
17 IOCC.com, LLC Arkansas Internet of Clark County, LLC
IOCC
18 InfoRamp, Inc. Illinois Onramp, Ltd.
Inforamp USA
Netrollup.net
19 Innernet, Inc. Pennsylvania
20 Intensity Computer Arkansas Nexnet
Systems, Inc.
21 Internet Nebraska Nebraska
Corporation
22 Internet Solutions, Inc. Arkansas
23 ISP Management, Inc. Michigan Liberty Access
Nethawk
Sensible-Net
Your-Page.Net
24 Midwest Iowa
Communications, Inc.
25 N/Connect, Inc. Wisconsin N/Connect, Inc.
26 Netplus Ohio
Communications, Inc.
27 NetWest Online, Inc. Texas U R Online, Inc.
RU Online
Netwest
Netwest Online
Daynet Online
DayNet Direct Internet Services
28 Netwurx Inc. Wisconsin Netwurx.com
Netwurx.net
Netwurx.org
29 NuNet, Inc. Pennsylvania
30 Pennsylvania Online Pennsylvania
Ltd.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Company State of Alternate Names
Incorporation
<S> <C> <C> <C>
31 Perigee.net Corporation North Carolina Perigee, Inc.
Perigee Internet Services
Ethereal Art
32 Prometheus Information Pennsylvania
Corp.
33 RapidNet, Inc. South Dakota DakotaConnect
RN, Inc.
DakotaLink
Technical Skills Development, L.L.C.
PC Associates
34 STIC.NET, Inc. Texas South Texas Internet Connections, Inc.
35 Southern Maryland Maryland Chesapeake Net
Internet, Inc. SMI
36 The 3rd Door, Inc. North Carolina Computers Plus
37 U S A Choice Internet Pennsylvania
Services Co.
38 WaveNet, Inc. North Carolina
39 Weidner Associates, Pennsylvania Ezaccess.net
Inc. Internet Access Services
40 Wisconsin Internet, Inc. Wisconsin
41 World Trade Network, Texas WT.Net
Inc.
42 WWW Internet Ohio ISOC.Net
Solutions, Inc.
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Espernet.com, Inc.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the registration statement.
Our report on the financial statements of NuNet, Inc. dated August 20, 1999,
contains an explanatory paragraph that states that NuNet, Inc. has suffered
recurring losses from operations and has a working capital deficiency and a net
capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our report on the financial statements of Prometheus Information Corporation,
Inc. dated August 24, 1999, contains an explanatory paragraph that states that
Prometheus Information Corporation Inc.'s current liabilities exceed current
assets and it has a stockholders' deficit that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard
to these matters are discussed in Note 9. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Our report on the financial statements of Midwest Communications, Inc. dated
August 20, 1999, except as to Note 13 which is as of September 9, 1999, contains
an explanatory paragraph that states that Midwest Communications, Inc. has
suffered recurring losses from operations and has a net working capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 12.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our report on the financial statements of The Computer Care Company, Inc. dated
August 13, 1999, contains an explanatory paragraph that states that the Computer
Care Company, Inc's current liabilities exceed current assets and it has a
stockholders' deficit that raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are described
in Note 10. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Our report on the financial statements of Rapid.Net, Inc. dated August 6, 1999,
contains an explanatory paragraph that states that Rapid.Net Inc has suffered
recurring losses from operations and has a net working capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG LLP
KPMG LLP
New York, New York
September 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-30-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
