UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1999
-----------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to_____
Commission File Number 000-25599
--------------------
ONEMAIN.COM, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 7375 11-3460073
----------- ---- ----------
(State or other jurisdiction of (Primary Standard industrial (I.R.S. Employer
incorporation or organization) classification number) identification number)
</TABLE>
1860 Michael Faraday Drive
2nd Floor
Reston, Virginia 20190
703-375-3000
(Address, including zip code, and telephone number, including area code,
of principal executive offices)
_______________________
Stephen E. Smith
Chairman, Chief Executive Officer
OneMain.com, Inc.
1860 Michael Faraday Drive
2nd Floor
Reston, Virginia 20190
(703) 375-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 10, 1999.
Common Stock $.001 par value Number of Shares
---------------------------- ----------------
23,449,000
1
ONEMAIN.COM, INC.
Form 10-Q For the Quarterly Period Ended September 30, 1999
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Index Page
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Part I. Financial Information 3
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended
September 30, 1999 and for the period
August 19, 1998 (inception) to September 30, 1998 5
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
1999 and for the period August 19, 1998 (inception)
to September 30, 1998 6
Condensed Consolidated Statements of
Stockholders' (Deficit) Equity
For the Nine Months Ended September 30,
1999 and for the period August 19, 1998 (inception)
to September 30, 1998 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II.-Other Information 24
Exhibit Index 24
Signatures 25
</TABLE>
2
ONEMAIN.COM, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the Company, all
adjustments necessary for the fair presentation of the Company's results of
operations, financial position and changes therein for the periods presented
have been included.
3
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
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<CAPTION>
September 30, December 31,
1999 1998
------------------ -------------------
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ASSETS
Cash and cash equivalents $ 47,191,000 $ 172,000
Marketable securities 25,230,000 -
Accounts receivable, net of allowance of $1,029,000 3,540,000 -
Deferred offering costs - 6,159,000
Prepaid expenses and other current assets 4,242,000 -
------------ ----------
Total current assets 80,203,000 6,331,000
Property and equipment, net 28,134,000 -
Goodwill, net 180,032,000 -
Customer lists, net 111,147,000 -
Other assets 978,000 -
------------ ----------
Total assets $400,494,000 $6,331,000
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable and accrued expenses $ 18,479,000 $6,549,000
Unearned revenue 17,191,000 -
Current portion of capital lease obligations 4,074,000 -
Deferred tax liability 14,595,000 -
Other current liabilities 992,000 500,000
------------ ----------
Total current liabilities 55,331,000 7,049,000
Capital lease obligations, net of current portion 3,996,000 -
Deferred tax liability and other 22,659,000 -
------------ ----------
Total liabilities 81,986,000 7,049,000
Stockholders' equity (deficit)
Preferred stock, $.001 par value; 10,000,000 shares authorized,
no shares issued or outstanding - -
Common stock, $.001 par value; 100,000,000 shares authorized,
23,448,647 and 4,782,500 shares issued and outstanding
at September 30, 1999 and December 31, 1998, respectively 24,000 5,000
Additional paid-in capital 367,765,000 53,000
Accumulated deficit (49,281,000) (765,000)
Stock subscriptions receivable - (11,000)
------------ ----------
Total stockholders' equity (deficit) 318,508,000 (718,000)
------------ ----------
Total liabilities and stockholders' equity (deficit) $400,494,000 $6,331,000
============ ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
For the period
Three Months Nine Months August 19, 1998
Ended Ended (inception)
September 30, September 30, to September 30,
1999 1999 1998
----------------- ----------------- --------------------
<S> <C> <C> <C>
Net revenues:
Access revenues $ 25,479,000 $ 46,948,000 $ -
Other revenues 1,524,000 3,067,000 -
----------------- ----------------- --------------------
Total revenues 27,003,000 50,015,000 -
Costs and expenses:
Costs of access revenues 10,481,000 19,097,000 -
Costs of other revenues 464,000 997,000 -
----------------- ----------------- --------------------
Total costs of revenues 10,945,000 20,094,000 -
----------------- ----------------- --------------------
Gross margin 16,058,000 29,921,000 -
Operating Expenses:
Operations and customer support 3,789,000 6,950,000 -
Sales and marketing 4,342,000 7,669,000 -
General and administrative 10,407,000 18,773,000 77,000
Equity compensation - 2,469,000 -
Amortization 25,131,000 47,427,000 -
Depreciation 2,269,000 3,855,000 -
Other income, net (29,000) (112,000) -
----------------- ----------------- --------------------
Total operating expenses 45,909,000 87,031,000 77,000
Loss from operations (29,851,000) (57,110,000) (77,000)
Interest income 1,172,000 2,438,000 -
Interest expense (203,000) (381,000) -
----------------- ----------------- --------------------
Total nonoperating income, net 969,000 2,057,000 -
----------------- ----------------- --------------------
Loss before income tax benefit (28,882,000) (55,053,000) (77,000)
Income tax benefit 3,449,000 6,537,000 -
----------------- ----------------- --------------------
Net loss $ (25,433,000) $ (48,516,000) $ (77,000)
================= ================= ====================
Basic and diluted net loss per share $ (1.12) $ (2.89) $ (0.02)
================= ================= ====================
Shares used in the calculation of basic
and diluted net loss per share 22,612,000 16,799,000 4,750,000
================= ================= ====================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
For the period
For The Nine August 19, 1998
Months Ended (inception) to
September 30, 1999 September 30, 1998
------------------- -----------------
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (48,516,000) $ (77,000)
Adjustments to reconcile net loss to net cash provided by operating activities
Amortization of goodwill and customer lists 47,427,000 -
Depreciation expense 3,855,000 -
Provision for bad debt 1,029,000 -
Income tax benefit (6,542,000) -
Equity compensation expense 2,594,000 -
Changes in operating assets and liabilities:
Accounts receivable (918,000) -
Prepaid expenses and other current assets (2,384,000) -
Unearned revenue 852,000 -
Accounts payable and accrued expenses 5,800,000 324,000
Other assets (172,000) -
Other current liabilities 657,000 (247,000)
------------------- -----------------
Net cash provided by operating activities 3,682,000 -
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired (108,734,000) -
Investment in marketable securities (25,230,000) -
Purchase of property and equipment (5,720,000) -
Proceeds from disposal of property and equipment 93,000 -
------------------- -----------------
Net cash used in investing activities (139,591,000) -
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock in
initial public offering net of underwriters discounts
and commissions and offering costs 190,622,000 -
Proceeds from note payable from stockholder 500,000 -
Repayment of note payable from stockholder (1,000,000) -
Repayment of long-term debt assumed through acquisitions (7,537,000) -
Repayment of capital lease obligations (1,614,000) -
Proceeds from exercise of common stock options 1,941,000 -
Proceeds from stock subscriptions receivable 16,000 -
Proceeds from issuance of common stock - 27,000
------------------- -----------------
Net cash provided by financing activities 182,928,000 27,000
------------------- -----------------
Net increase in cash and cash equivalents 47,019,000 27,000
Cash and cash equivalents, beginning of period 172,000 -
------------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,191,000 $ 27,000
=================== =================
Supplemental disclosure of cash flow information:
Interest paid $ 387,000 $ -
=================== =================
Issuance of common stock for Transactions and acquisitions $ 172,806,000 $ -
=================== =================
Acquisition of property and equipment through assumption of capital lease obligations $ 3,437,000 $ -
=================== =================
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
ONEMAIN.COM, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
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<CAPTION>
Additional Stock Total
Common Stock Paid-In Subscriptions Accumulated Stockholders'
Shares Amount Capital Receivable Deficit Deficit
----------- ----------- ------------ -------------- ------------ -------------
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Balance at August 19, 1998 (inception) $ - $ - $ - $ - $ -
Issuance of Common Stock 4,750,000 5,000 43,000 - - 48,000
Stock subscriptions receivable - - - (20,000) - (20,000)
Net loss for the period from August 19, 1998
(inception) through September 30, 1998 - - - (77,000) (77,000)
----------- ----------- ------------ -------------- ------------ -------------
Balance at September 30, 1998 4,750,000 $ 5,000 $ 43,000 $ (20,000) $ (77,000) $ (49,000)
=========== =========== ============ ============== ============ =============
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<CAPTION>
Additional Stock Total
Common Stock Paid-In Subscriptions Accumulated Stockholders'
Shares Amount Capital Receivable Deficit Equity
----------- ----------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 4,782,000 $ 5,000 $ 53,000 $ (11,000) $ (765,000) $ (718,000)
Issuance of Common Stock on January 1, 1999 100,000 - 5,000 (5,000) - -
Issuance of Common Stock in connection with initial
public offering and exercise of underwriters'
over-allotment, net of offering costs
and underwriters' discounts 9,775,000 10,000 190,375,000 - - 190,385,000
Issuance of Common Stock in connection with the
Transactions and Acquisitions 8,702,000 9,000 172,797,000 - - 172,806,000
Repayment of stock subscriptions receivable - - - 16,000 - 16,000
Exercise of Common Stock options 89,000 - 1,941,000 - - 1,941,000
Equity compensation expense - - 2,594,000 - - 2,594,000
Net loss for the nine months
ended September 30, 1999 - - - - (48,516,000) (48,516,000)
----------- ----------- ------------ -------------- ------------ -------------
Balance at September 30, 1999 23,448,000 $ 24,000 $ 367,765,000 $ - $ (49,281,000) $ 318,508,000
=========== =========== ============ ============== ============ =============
</TABLE>
See accompanying notes to unaudited condensed conslidated financial statements.
7
ONEMAIN.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) Organization and Basis of Presentation
In connection with the closing of the initial public offering of its Common
Stock on March 30, 1999 (the "Offering"), OneMain.com, Inc. (the "Company" or
"ONEM") acquired 17 Internet service providers (the "ISPs") effective March 30,
1999, in a series of separate business combination transactions (the
"Transactions"). The Company is one of the largest Internet service providers in
the United States focused on offering high levels of customer service to
individuals and businesses located predominantly in smaller metropolitan markets
and rural communities.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments necessary
for a fair presentation of the consolidated financial statements have been
included. These adjustments consisted of normal recurring adjustments in
addition to a one-time, non-cash equity compensation charge of $2,469,000
associated with the hiring of one executive and certain other consultants. The
results of interim periods are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. The consolidated financial
statements and footnotes should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in this Form 10-Q and the Company's Form S-4 Registration Statement,
filed on April 27, 1999 with the Securities and Exchange Commission (File No.
333-77063), which included the financial statements and footnotes for the year
ended December 31, 1998.
2) Initial Public Offering
On March 30, 1999, ONEM completed its Offering of 8,500,000 shares of its Common
Stock at $22.00 per share. On April 9, 1999, the underwriters exercised their
over-allotment option to purchase 1,275,000 shares of Common Stock at the
initial public offering price of $22.00 per share. The gross proceeds from the
Offering were $215,050,000. The net proceeds after underwriter discounts and
commissions and offering costs were approximately $190,622,000.
The net proceeds have been used as follows: (1) approximately $113,003,000 to
pay the cash portion of the purchase prices for the Transactions and
Acquisitions and (2) $1,021,000 to pay the founders notes and accrued interest
and (3) approximately $7,537,000 to retire debt assumed by ONEM in the
Transactions and Acquisitions. The remaining net proceeds will be used for
general corporate purposes, which may include future acquisitions, working
capital and the payment of any additional amounts payable to former owners of
the ISPs under the earn-out provisions of the acquisition agreements.
3) Business Combinations ISPs
During the third quarter of 1999, the Company acquired all of the outstanding
common stock and limited liability company interests of three ISPs and certain
assets of one ISP (the "Acquisitions"). The Acquisitions have been accounted for
using the purchase method of accounting. Accordingly, the statements of
operations include the results of operations for these ISPs from the date of
acquisition.
8
ONEMAIN.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3) Business Combinations ISPs (continued)
The total consideration paid by the Company for the Acquisitions was
$33,408,000, comprised of $18,147,000 in cash and 899,000 shares of Common
Stock.
The total purchase price of $33,408,000 has been preliminarily allocated to the
fair value of the net assets acquired in the Acquisitions as follows:
Goodwill $24,263,000
Customer lists 12,891,000
Cash 219,000
Other current assets 751,000
Property and equipment 2,767,000
Deferred tax liability (2,800,000)
Other liabilities, net (4,683,000)
-----------
$33,408,000
===========
The above purchase price does not reflect additional consideration that may be
issued pursuant to an earn-out arrangement included in the definitive agreement
for one of the Acquisitions. The payment of additional consideration is
contingent upon certain operational and earnings margin requirements being met.
The amount of additional consideration, if any, will be payable in cash.
On March 30, 1999, the Company acquired all of the outstanding common stock and
limited liability company interests of 17 ISPs. The Transactions have been
accounted for using the purchase method of accounting assuming the acquisitions
were consummated on March 31, 1999, as opposed to the March 30, 1999 acquisition
date. Accordingly, the statements of operations include the results of
operations for these ISPs since March 31, 1999. Activity occurring on March 31,
1999 was not material to the results of operations for the periods presented.
During the second quarter of 1999, the Company acquired all of the outstanding
common stock of two ISPs and certain assets of two ISPs (the "Acquisitions").
Accordingly, the statements of operations include the results of operations for
these ISPs from the date of acquisition. The Acquisitions have been accounted
for using the purchase method of accounting. The total consideration paid by
the Company for the Transactions and Acquisitions was $256,143,000, comprised of
$94,856,000 in cash and 7,803,000 shares of Common Stock and $3,743,000 in
estimated purchase price adjustments accrued through September 30, 1999.
The total purchase price of $256,143,000 has been preliminarily allocated to the
fair value of the net assets acquired in the Transactions as follows:
9
ONEMAIN.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Goodwill $184,896,000
Customer lists 116,464,000
Cash 4,050,000
Other current assets 4,757,000
Property and equipment 20,201,000
Deferred tax liability (40,985,000)
Other liabilities, net (33,240,000)
------------
$256,143,000
============
As of September 30, 1999, the Company has accrued $3,743,000 in estimated
additional purchase price adjustments related to the earn-out arrangements
included in the definitive agreements and other contractual adjustments pursuant
to the Transactions. The estimated additional consideration may be adjusted
further. The payment of additional consideration is contingent upon certain
operational and earnings margin requirements being met. The amount of the
additional consideration will be payable in either cash or stock at the option
of the Company.
4) Commitments and Contingencies
The Company is engaged in ordinary and routine litigation incidental to its
business. Management does not anticipate that any amounts the Company may be
required to pay by reason thereof will have a material effect on the Company's
financial position or results of operations.
5) Pro Forma Combined Financial Information
The following pro forma combined financial information for the nine months ended
September 30, 1999 and September 30, 1998, includes the results of OneMain.com
as if the Transactions and Acquisitions had occurred on January 1 of each
respective period. This pro forma combined financial information includes the
effects of (a) the Transactions and Acquisitions; (b) the Offering; (c) the
amortization of goodwill resulting from the Transactions and Acquisitions; (d)
the elimination of interest expense for the debt that was paid from the Offering
proceeds; and (e) an income tax benefit at an appropriate rate.
10
ONEMAIN.COM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5) Pro Forma Combined Financial Information (continued)
The pro forma combined financial information does not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions and events in fact had occurred on those dates or to
project the Company's results of operations for any future period.
<TABLE>
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------------------------------------
Nine months ended
September 30, September 30,
1999 1998
-----------------------------------
<S> <C> <C>
Total revenues $ 86,445,000 $ 55,172,000
============ =============
Net loss $ (80,797,000) $ (74,137,000)
============= =============
Basic and diluted net loss per share $ (3.52) $ (3.37)
============ =============
Shares used in calculation of basic
and diluted net loss per share 22,927,000 21,985,000
============ =============
</TABLE>
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
This filing contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements reflect the intent, belief
or current expectations of the Company and members of the management team.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance, involve risk and uncertainties, and that
actual results may differ materially from those contemplated by the forward-
looking statements as a result of, among other things, changes in assumptions,
the occurrence of unanticipated events or changes to future operating results
over time.
Introduction
The following discussion of the Company's results of operations and of its
liquidity and capital resources should be read in conjunction with the unaudited
condensed consolidated financial statements of the Company and the related notes
thereto appearing in this filing.
Overview
The Company successfully completed an initial public offering of 8,500,000
shares of its Common Stock on March 30, 1999, concurrently with the acquisitions
of 17 ISPs (the "Transactions"). On April 9, 1999, the underwriters exercised
their over-allotment option to purchase 1,275,000 shares of Common Stock at the
initial public offering price of $22.00 per share. As of the period ending
September 30, 1999 the Company acquired all of the outstanding common stock and
limited liability company interests of five additional ISPs and certain assets
of three ISPs for approximately $72,393,000 in cash and Common Stock (the
"Acquisitions"). The purchase of these companies and strategic organic growth
increased the Company's subscribers to approximately 561,000 at September 30,
1999.
Now serving nearly 600,000 customers in 29 states through over 1,019 access
points, the Company is one of the largest Internet service providers in the
United States. The Company strives to offer high levels of customer service to
individuals and businesses located predominantly in smaller metropolitan markets
and rural communities. The Company believes that its customers have
traditionally been under-served by other national on-line service providers, and
that an opportunity exists to meet their growing demand for Internet services.
Beyond the markets it serves, the Company is differentiating itself by providing
an online experience for its customers with a high level of local content.
Instead of a virtual community where every customer is given the same
information regardless of the customer's home address, the Company is creating a
series of online geographic communities. When a customer logs onto the service,
by virtue of his or her area code, the customer will enter an online geographic
community specific to his or her region of the country. These geographic
communities enable the Company to customize local content with links to
information and entertainment that are relevant to its customers.
The Company offers 56K-modem access through its dial-up locations and
dedicated high-speed Internet access, Web hosting and other services in certain
locations. The Company's ISPs support these services.
The Company's Common Stock is listed on the NASDAQ National Market under the
symbol ONEM.
----
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Results of Operations
The Company conducted no significant operations prior to March 31, 1999. The
Transactions closed on March 30, 1999. For financial reporting purposes, the
Transactions have been accounted for under the purchase method of accounting
from March 31, 1999. Activity that occurred on March 31, 1999 was not material
to the results of operations for the quarter.
From April 1, 1999 to September 30, 1999 the Company reported significant
operations. For a discussion of operations for the three and nine months ended
September 30, 1999 and 1998, see Results of Operations.
The Company reported net losses of $25,433,000 or $1.12 per share and
$48,516,000 or $2.89 per share, for the three and nine months ended September
30, 1999, respectively. The net loss for the three months ended September 30,
1999 was the result of $21,682,000 of non-cash amortization, net of the related
income tax benefit and $5,625,000 of corporate- related expenses. The net loss
for the nine months ended September 30, 1999 was the result of $40,890,000 of
non-cash amortization, net of the related income tax benefit, $9,078,000 of
corporate related expenses and a one-time, non-cash equity compensation charge
of $2,469,000 relating to the hiring of one executive and several outside
consultants. The Company does not anticipate incurring such equity compensation
charges in the future.
Liquidity and Capital Resources
As of September 30, 1999, the Company's combined cash and cash equivalents
balance was $47,191,000, compared with $172,000 at December 31, 1998. This
increase is mainly attributable to the receipt of $190,622,000 of net proceeds
from the Offering, the payment of the aggregate cash portion of the purchase
price of the Transactions and Acquisitions of $108,734,000, net of cash
acquired, repayment of $7,537,000 of debt assumed in the Transactions and the
Acquisitions and the investment of $25,230,000 of marketable securities. In
addition, the Company earned net interest income of $2,057,000. At closing of
the Transactions and the Acquisitions, the Company retired substantially all of
the acquired companies' debt obligations except to the extent such obligations
related to capitalized leases.
Net cash provided by operating activities amounted to $3,682,000 for the nine
months ended September 30, 1999.
Net cash used in investing activities amounted to $139,591,000 during the nine
months ended September 30, 1999, representing the payment of the cash portion of
the purchase prices for the Transactions and Acquisitions, net of cash acquired,
investment in marketable securities and the purchases of property, plant and
equipment.
Net cash provided by financing activities amounted to $182,928,000 for the nine
months ended September 30, 1999. The Company received net proceeds from the
Offering of $190,622,000 and $1,941,000 from exercises of Common Stock options.
The Company repaid $7,537,000 of debt assumed in the Transactions and the
Acquisitions. Additionally, during the three months ended March 31, 1999 the
Company issued a second promissory note in the amount of $500,000 to one of its
founders to fund the payment of pre-Offering expenses. During the nine months
ended September 30, 1999 the founders notes and accrued interest, in the
aggregate of $1,021,000 were paid in full.
Management expects the Company's capital expenditures to increase as its
operations continue to expand. It is anticipated that financial resources will
be utilized in acquiring additional communications equipment and improvements to
technology that will allow the Company's networks to grow to support new and
acquired subscribers, build a network operations center and integrate billing
and financial reporting systems. The Company expects to pay out additional
consideration that may be issued pursuant to earn-out arrangements included in
the definitive agreements for the Transactions and the Acquisitions. The payment
of additional consideration is contingent upon certain operational and earning
margin requirements being met by the ISPs. The amount of the additional
consideration will be payable in either cash or stock at the option of the
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Company. Through September 30, 1999 the Company estimates the amount of
additional consideration to be approximately $3,743,000, net of purchase price
adjustments related to the definitive agreements. Such amounts may be adjusted
further in future quarters.
The Company anticipates that its current cash on hand and cash flow from
operations will be sufficient to meet the Company's liquidity requirements for
its operations through the remainder of the fiscal year. However, the Company
is currently pursuing, and intends to continue to pursue additional
acquisitions, which are expected to be funded through a combination of cash and
the issuance by the Company of shares of its common stock. To the extent the
Company elects to pursue acquisitions involving the payment of significant
amounts of cash (to fund the purchase price of such acquisitions and the
repayment of assumed indebtedness), the Company is likely to require additional
sources of financing to fund such non-operating cash needs. The Company may
determine to raise additional debt or equity capital to finance potential
acquisitions and/or to fund accelerated growth. Any significant acquisitions or
increases in the Company's growth rate could materially affect the Company's
operating and financial expectations and results, liquidity and capital
resources.
Results of Operations
The following combined financial information for the three months ended
September 30, 1999 includes the results of operations for the acquired ISPs from
the Transactions and Acquisitions from the dates of acquisition. The following
pro forma combined financial information for the three months ended September
30, 1998, and the nine months ended September 30, 1999 and September 30, 1998
includes the results of OneMain.com combined with the 17 ISPs as if the
Transactions had occurred on January 1, 1998. The actual combined financial
information for the three months ended September 30, 1999 and the pro forma
combined information for the nine months ended September 30, 1999, includes the
results of operations of the Acquisitions from the date of acquisition only.
This pro forma combined financial information includes the effects of (a) the
Transactions; (b) the Offering; (c) the amortization of goodwill resulting from
the Transactions; (d) the elimination of interest expense for the debt that was
paid from the Offering proceeds; and (e) an income tax benefit at an appropriate
rate.
The pro forma combined financial information does not purport to represent what
the Company's financial position or results of operations would actually have
been if such transactions and events in fact had occurred on those dates or to
project the Company's results of operations for any future period.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
1999 1998 1999 1998
--------------- ---------------- ------------------- ----------------
Actual (Pro Forma) (Pro Forma) (Pro Forma)
(In Thousands, except per share data) --------------- ---------------- ------------------- ----------------
Statements of Operations Data
(Unaudited):
------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Access revenues $ 25,479 $ 13,912 $ 64,915 $ 36,346
Other revenues 1,524 1,170 4,601 3,414
-------- -------- -------- --------
Total revenues 27,003 15,082 69,516 39,760
Costs and expenses:
Cost of access revenues 10,481 5,763 26,814 14,925
Cost of other revenues 464 347 1,371 920
-------- -------- -------- --------
Total costs of revenues 10,945 6,110 28,185 15,845
-------- -------- -------- --------
Gross margin 16,058 8,972 41,331 23,915
Operating expenses:
Operations and customer support 3,789 2,461 9,735 6,268
Sales and marketing 4,342 1,848 10,038 4,833
General and Administrative 10,407 4,694 23,237 12,028
Equity compensation expense - - 2,594 -
Other (income) expenses, net (29) 50 (124) 295
-------- -------- -------- --------
Total operating expenses 18,509 9,053 45,480 23,424
EBITDA (a) (2,451) (81) (4,149) 491
Amortization 25,131 19,706 68,241 59,086
Depreciation 2,269 1,082 5,157 3,155
-------- -------- -------- --------
Loss from operations (29,851) (20,869) (77,547) (61,750)
Interest income 1,172 22 2,463 68
Interest expense (203) (54) (463) (155)
-------- -------- -------- --------
Loss before benefit for income taxes (28,882) (20,901) (75,547) (61,837)
Benefit for income taxes 3,449 2,590 9,420 7,778
Net loss $(25,433) $(18,311) $(66,127) $(54,059)
======== ======== ======== ========
Pro forma basic and diluted net loss $(1.12) $(0.90) $(3.05) $(2.65)
per share ======== ======== ======== ========
Shares used in the calculation of
basic and diluted net loss per share 22,612 20,422 21,685 20,422
======== ======== ======== ========
Subscribers at the end of the period 561,000 279,000 561,000 279,000
======== ======== ======== ========
</TABLE>
(a) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income as a measure of performance.
15
Three Months Ended September 30, 1999 and September 30, 1998
The Company reported a net loss of $25,433,000 or $1.12 per share for the three
months ended September 30, 1999 compared to a net loss of $18,311,000 or $.90
per share for the three months ended September 30, 1998. The net loss included
non-cash amortization costs, net of the related income tax benefits of
$21,682,000 and $17,116,000, associated with the purchase of the ISPs for the
three months ended September 30, 1999 and 1998, respectively. In addition to the
non-cash amortization and related income tax benefit, the net loss for the third
quarter of 1999 included corporate-related expenses of $5,625,000 and net
interest income of $969,000. There were $77,000 of corporate-related expenses
incurred in the three months ended September 30, 1998.
Exclusive of the non-cash amortization and related income tax benefit, the
Company's net loss would have been $3,751,000 or $.17 per share for the three
months ended September 30, 1999 compared to a net loss of $1,195,000 or $.06 per
share for the three months ended September 30, 1998.
Revenues. Total revenues for the three months ended September 30, 1999 were
$27,003,000, compared to $15,082,000 for the three months ended September 30,
1998, an increase of 79.0%. The increase was primarily attributable to an
increase in the number of subscribers. Total subscribers at September 30, 1999
were approximately 561,000 compared to approximately 279,000 at September 30,
1998, an increase of 101.1%.
Access revenues for the three months ended September 30, 1999 were $25,479,000,
compared to $13,912,000 for the three months ended September 30, 1998, an
increase of 83.1%. The increase was primarily attributable to the increase in
subscribers discussed above. The subscriber increase is a function of both
organic growth and acquisitions.
Access revenues are a recurring revenue stream for the Company. The Company
derives Internet access revenues primarily from subscriptions from individuals
and small businesses for dial-up access to the Internet. Subscription fees vary
among ISPs and by billing plan within the subscriber base for a particular ISP.
The Company also earns revenues by providing dedicated Internet access and Web
hosting services.
Other revenues for the three months ended September 30, 1999 totaled $1,524,000
compared to $1,170,000 for the three months ended September 30, 1998, an
increase of 30.3%.
Other revenues are derived primarily from set-ups and installations, Web page
design and development, technical services and equipment and software sales.
Costs and Expenses. The following table provides a comparison of actual and pro
forma costs of revenues, operations and customer support, sales and marketing
and general and administrative expenses as a percentage of total revenues for
the three months ended September 30, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
(Actual) (Pro Forma)
-------------------------
<S> <C> <C>
Total costs of revenues 40.5% 40.5%
Operations and customer support 14.0% 16.3%
Sales and marketing 16.1% 12.3%
General and administrative 38.5% 31.1%
</TABLE>
Total Costs of Revenues. Total costs of revenues as a percentage of revenues for
the three months ended September 30, 1999 and September 30, 1998 remained flat
at 40.5% for each respective period.
Cost of access revenues consists primarily of the costs of maintaining
sufficient telecommunications capacity to provide service to the Company's
subscribers. For an ISP, capacity is a measurement of the ISP's ability to
connect subscribers to the Internet. Capacity costs include the costs to carry
subscriber calls to the Company's points of presence, or "POPs", the costs
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
associated with connecting POPs to operation centers and the Internet, and
Internet backbone costs.
Cost of access revenues should decrease over time as the Company leverages the
combined scale of its ISPs to lower telecommunications capacity costs as a
percentage of revenues by negotiating one or more relationships with national
Internet backbone providers, negotiating more favorable local loop contracts
with local exchange carriers, establishing co-location arrangements with local
exchange carriers, establishing private peering relationships with other
Internet connectivity providers and negotiating discounts with equipment
vendors.
Cost of other revenues consists primarily of the salaries and benefits of the
personnel providing installation of equipment and software, Web development and
technical services and the costs of purchasing equipment and software for
resale.
Operations and customer support. Operations and customer support expense as a
percentage of revenues for the three months ended September 30, 1999 decreased
to 14.0% from 16.3% for the three months ended September 30, 1998. The decrease
is a result of the Company's ability to leverage this relatively fixed costs
over a larger subscriber base.
Operations and customer support expense includes the costs associated with
customer service and technical support, consisting primarily of salaries and
benefits. The Company plans to extend customer service and technical support
hours to 24 hours a day, 7 days a week in all markets. In the longer term, as a
percentage of revenues, the Company believes operations and customer support
expense should decline as these costs are leveraged over a growing subscriber
and revenue base. Therefore, the Company expects operations and customer support
expense to increase over time to support new and existing subscribers but at a
lower rate than the subscriber growth.
Sales and marketing. Sales and marketing expense as a percentage of revenues
for the three months ended September 30, 1999 increased to 16.1% from 12.3% for
the three months ended September 30, 1998. The increase is the result of
increased marketing promotions during 1999.
Sales and marketing expense includes costs associated with acquiring
subscribers, including salaries, bonuses, sales commissions, advertising,
promotion and referral bonuses. On a percentage of revenue basis, sales and
marketing expense is a relatively variable cost and will increase with the
Company's development of a common brand supported by a community-based marketing
program. The Company expects that, over time, the increase in sales and
marketing expense will be more than offset by anticipated increases in revenues
attributable to overall subscriber growth.
General and administrative. General and administrative expense as a percentage
of revenues for the three months ended September 30, 1999 increased to 38.5%
from 31.1% for the three months ended September 30, 1998. The increase in
general and administrative expense is attributable to the various integration
efforts of the Company.
General and administrative expenses consist primarily of salaries and related
benefits, voice telephone lines, rent and credit card processing fees. The
Company expects general and administrative costs to increase to support its
growth, particularly as it establishes a network operations center and
implements common billing and financial reporting systems. Over time, the
Company expects these relatively fixed expenses to decrease as a percentage of
revenues.
Amortization, Depreciation and Income Tax Benefit. The following table provides
a comparison of actual and pro forma amortization, depreciation and income tax
benefit for three months ended September 30, 1999 and 1998, respectively.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
<TABLE>
<CAPTION>
1999 1998
(Actual) (Pro Forma)
-----------------------------------------------
<S> <C> <C>
Amortization $25,131,000 $19,706,000
Depreciation 2,269,000 1,082,000
Income tax benefit 3,449,000 2,590,000
</TABLE>
Amortization. Amortization expense for the three months ended September 30, 1999
totaled $25,131,000 compared to $19,706,000 for the three months ended September
30, 1998. This increase is attributable to the increase in subscribers and
customer lists acquired in the Transactions and Acquisitions.
Amortization expense primarily relates to goodwill and customer lists acquired
in the Transactions and Acquisitions. The amortization period for both goodwill
and customer lists is three years.
Depreciation. Depreciation expense for the three months ended September 30,
1999 totaled $2,269,000 compared to $1,082,000 for the three months ended
September 30, 1998. The increase is the result of increased capital expenditures
resulting from the Company's continuing effort to improve its infrastructure to
support its continued growth.
Depreciation primarily relates to the Company's hardware infrastructure and is
provided over the estimated useful lives of the assets ranging from three to
five years using the straight-line method. The Company expects depreciation
expense to increase as it grows its networks to support new and acquired
subscribers, builds a network operations center and implements common billing
and financial reporting systems.
Income Tax Benefit. The income tax benefit for the three months ended September
30, 1999 totaled $3,449,000 compared to $2,590,000 for the three months ended
September 30, 1998. As a result of the Acquisitions during the three months
ended September 30, 1999, the Company recognized a deferred tax liability of
$2,800,000 related to the portion of the purchase price allocated to the
customer lists. The Company will amortize the deferred tax liability into
earnings over the three-year period in which it records the related amortization
expense associated with the customer lists. The Company anticipates recording
quarterly amortization expense of $28,750,000 relating to the amortization of
all intangibles and a deferred tax benefit of $3,649,000 related to the
amortization of the deferred tax liabilities associated with the customer lists.
The Company does not anticipate recognizing any other deferred tax benefits
associated with its anticipated operating losses because no asset will be
established for such benefit until the Company has a history of earnings.
Nine months ended September 30, 1999 and September 30, 1998
The Company reported a net loss of $66,127,000 or $3.05 per share for the nine
months ended September 30, 1999 compared to a net loss of $54,059,000 or $2.65
per share for the nine months ended September 30, 1998. The loss included non-
cash amortization costs, net of the related income tax benefit of $58,821,000
and $51,308,000, associated with the purchase of the ISPs for the nine months
ended September 30, 1999 and 1998, respectively. In addition to the non-cash
amortization and related income tax benefit, the net loss for the nine months
ended September 30, 1999 included corporate-related expenses of $9,078,000,
equity compensation expense of $2,594,000 and net interest income of $2,000,000.
There were $77,000 of corporate- related expenses incurred in the nine months
ended September 30, 1998.
Exclusive of the non-cash amortization and related income tax benefit, the
Company's net loss would have been $7,306,000 or $.34 per share for the nine
months ended September 30, 1999 compared to $2,751,000 or $.13 per share for the
nine months ended September 30, 1998.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Revenues. Total revenues for the nine months ended September 30, 1999 were
$69,516,000, compared to $39,760,000 for the nine months ended September 30,
1998, an increase of 74.8%. The increase was primarily attributable to an
increase in the number of subscribers. Total subscribers at September 30, 1999
were approximately 561,000 compared to approximately 279,000 at September 30,
1998, an increase of 101.1%.
Access revenues for the nine months ended September 30, 1999 were $64,915,000,
compared to $36,346,000 for the nine months ended September 30, 1998, an
increase of 78.6%. The increase was primarily attributable to the increase in
subscribers discussed above. The subscriber increase is a function of both
organic growth and acquisitions.
Other revenues for the nine months ended September 30, 1999 totaled $4,601,000
compared to $3,414,000 for the nine months ended September 30, 1998, an increase
of 34.8%.
Costs and Expenses. The following table provides a comparison of costs of
revenues, operations and customer support, sales and marketing and general and
administrative expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
(Pro Forma) (Pro Forma)
------------------------------------
<S> <C> <C>
Total costs of revenues 40.5% 39.9%
Operations and customer support 14.0% 15.8%
Sales and marketing 14.4% 12.2%
General and administrative 33.4% 30.3%
</TABLE>
Total Costs of Revenues. Total costs of revenues as a percentage of revenues for
the nine months ended September 30, 1999 increased to 40.5% from 39.9% for the
nine months ended September 30, 1998. This increase is attributable to the
initial costs associated with the increase in the Company's number of access
points in 1999.
Operations and customer support. Operations and customer support expense as a
percentage of revenues for the nine months ended September 30, 1999 decreased to
14.0% from 15.8% for the nine months ended September 30, 1998. The decrease is a
result of the Company's ability to leverage this relatively fixed costs over a
larger subscriber base.
Sales and marketing. Sales and marketing expense as a percentage of revenues
for the nine months ended September 30, 1999 increased to 14.4% from 12.2% for
the nine months ended September 30, 1998. The increase is the result of
increased marketing promotions during 1999.
General and administrative. General and administrative expense as a percentage
of revenues for the nine months ended September 30, 1999 increased to 33.4% from
30.3% for the nine months ended September 30, 1998. The increase in general and
administrative expense is attributable to the various integration efforts of the
Company.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Amortization, Depreciation and Income Tax Benefit. The following table provides
a comparison of pro forma amortization, depreciation and income tax benefit for
nine months ended September 30, 1999 and September 30, 1998.
<TABLE>
<CAPTION>
1999 1998
(Pro Forma) (Pro Forma)
-----------------------------------------------
<S> <C> <C>
Amortization $68,241,000 $59,086,000
Depreciation 5,157,000 3,155,000
Income tax benefit 9,420,000 7,778,000
</TABLE>
Amortization. Amortization expense for the nine months ended September 30, 1999
totaled $68,241,000 compared to $59,086,000 for the nine months ended September
30, 1998. This increase is attributable to the increase in subscribers and
customer lists acquired in the Transactions and Acquisitions.
Depreciation. Depreciation expense for the nine months ended September 30, 1999
totaled $5,157,000 compared to $3,155,000 for the nine months ended September
30, 1998. The increase is the result of increased capital expenditures resulting
from the Company's continuing effort to improve its infrastructure to support
its continued growth.
Income Tax Benefit. Income tax benefit for the nine months ended September 30,
1999 totaled $9,420,000 compared to $7,778,000 for the nine months ended
September 30, 1998. As a result of the Transactions and the Acquisitions, the
Company recognized a deferred tax liability of $43,785,000 related to the
portion of the purchase price allocated to the customer lists.
Effects of Inflation
The Company does not believe that inflation has had a material impact on the
Company's results of operations during the nine months ended September 30, 1999.
Additional Factors That May Affect the Company's Future Results
The future operating results of the Company may be affected by a number of
factors, including the matters discussed below:
FLUCTUATION IN QUARTERLY RESULTS OF OPERATIONS. The Company's Internet service
is subject to seasonal influences. The ISPs' revenue growth and profitability
have generally been lower in the second and third quarter of a calendar year,
primarily due to the lower level of business activity in the mid-spring and
summer months.
BUSINESS MODEL. With the combination of the ISPs, the Company will be applying
a business model that has not yet been tested in its industry. The success of
this business model depends on the Company's ability to build on the strengths
of its ISPs and to centralize many of its business functions. It may take the
Company longer than anticipated to implement its business model, and some
components of its model may not prove to be feasible or possible. As a result,
the business may not produce the level of profitability the Company expects to
achieve.
The Company's success as a new national Internet service provider will depend
largely on its ability to integrate the operations and management of its
independent ISPs acquired and its ability to integrate additional ISPs it may
acquire in the future. Failure to integrate its ISPs successfully may result in
significant operating inefficiencies, which may reduce the Company's
profitability. The Company will
20
expend substantial managerial, operating, financial and other resources to
integrate these businesses and implement its business model. In particular, to
integrate its newly acquired ISPs successfully, the Company must install and
standardize adequate operational and control systems, deploy equipment and
telecommunications facilities, implement new marketing efforts in new as well as
existing locations, employ qualified personnel to provide technical and
marketing support for its various operating sites and continue to expand its
managerial, operational, technical and financial resources.
ACQUISITIONS. If the Company cannot acquire additional Internet service
providers, or if its acquisition activities are delayed, it may not be able to
execute its business strategy. The Company's business strategy depends, in
part, upon its ability to expand into new markets and broaden the services the
Company provides by identifying and acquiring additional ISPs. In pursuing
acquisitions, the Company competes against other Internet service providers,
some of which are larger than the Company and have greater financial and other
resources available. The Company competes for potential acquisitions based on a
number of factors, including price, terms and conditions, size and growth
potential, and ability to offer cash, stock or other forms of consideration.
Since the Company intends to offer a combination of cash and stock to potential
sellers of Internet service providers, any reduction in the Company's stock
price due to market or other factors would negatively impact the Company's
ability to pursue its acquisition strategy.
In addition, there can be no assurance that acquisitions will be available to
the Company on favorable terms. If the Company is unable to use its Common
Stock as consideration in acquisitions, for example, because it believes that
the market price of the Common Stock is too low or because the owners of
potential acquisition targets conclude that the market price of the Company's
Common Stock is too volatile, the Company would need to use cash to make such
acquisitions. This might adversely affect the pace of the Company's acquisition
program and the impact of acquisitions on the Company's quarterly results.
Failure to acquire additional businesses or to acquire such businesses on
favorable terms in accordance with the Company's growth strategy could have a
material adverse impact on growth.
There can be no assurance that companies acquired, or acquired in the future,
will achieve sales and profitability levels that justify the investment therein.
Acquisitions may involve a number of special risks that could have a material
adverse effect on the Company's operations and financial performance, including
adverse short-term effects on the Company's reported operating results;
diversion of management's attention; difficulties with the retention, hiring and
training of key personnel; risks associated with unanticipated problems or legal
liabilities; and amortization of acquired tangible assets.
COMPETITION. The Company has faced a competitive environment in the market for
Internet access and related services. The Company expects that competition will
continue to intensify as more people begin using the Internet. The Company's
current competitors consist of other national, regional and local Internet
service providers, long-distance and local telecommunications companies, cable
television companies, direct broadcast satellite companies and wireless
communications providers and national on-line service providers. As a result of
an increase in the number of competitors, and vertical and horizontal
integration in the industry, the Company currently faces and expects to continue
to face significant competition, which may result in pressure to reduce prices.
Year 2000 Readiness Disclosure Statement
The Year 2000 problem is the result of computer programs using two digits rather
than four to define the applicable year. As a result, date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations, including, among others, a temporary inability to process
transactions, send invoices or engage in similar business activities. In
connection with the acquisition of its ISPs, the Company contacted each of its
ISPs to determine its Year 2000 readiness and received representation from the
former owners of each ISP that it does not face material, unresolved Year 2000
issues. Based on these representations and review of its Year 2000 readiness,
the Company does not expect significant Year 2000 problems in its network.
21
During the third quarter of 1999, the Company entered into an agreement with
PeopleSoft for a fully integrated financial system. Based upon representations
made by the supplier of the financial system, the Company believes the financial
system is Year 2000 compliant, and expect the financial system to be implemented
in the majority of the ISPs by the end of 2000. The Company is developing a
contingency plan to address any Year 2000 problems in the financial systems of
these ISPs that will be implemented after 1999.
During the second quarter of 1999, the Company entered into an agreement with
Kenan/Arbor Systems, a wholly owned subsidiary of Lucent Technologies, to help
deliver a single, fully integrated billing system for its growing customer base.
Based upon representations made by the supplier of the new billing system, the
Company believe the billing system is Year 2000 compliant and expect that it
will be implemented in three of the Company's ISPs by March 31, 2000. The
Company plans to complete its implementation to the new billing system for the
remainder of the ISPs by the end of 2000 and is currently developing a
contingency plan to address any Year 2000 problems in the billing systems of
these ISPs that will be implemented after 1999.
The Company has not independently verified the Year 2000 assurances received
from the third party suppliers of the financial system or the billing system.
Program Execution and Oversight. The Company has established a Year 2000
Program Office and a program manager to coordinate appropriate activity and to
help develop and implement a Year 2000 program. The Company's Year 2000 program
consists of the following phases: (1) project planning and inventory of the
Company's hardware, software and service providers, (2) assessment of potential
year 2000 issues, (3) development of remedies to address the Year 2000 issues
discovered during the assessment phase, (4) execution and testing of the
remedies, and (5) the development of contingency plans to address potential Year
2000 failures. To execute the Company's Year 2000 program, the Company is
utilizing both internal and external resources. The Company expects to complete
the phases of its Year 2000 program by the end of the fourth quarter of 1999.
Assessment. During the third quarter of 1999, the Company hired an outside
consulting firm to assist in analyzing and inventorying the hardware and
software applications for each of its ISPs to determine how these applications
might be affected by the Year 2000 problem. All of the Company's ISPs are in the
process of, or have completed, internal testing of their software and computer
systems to determine whether it is Year 2000 compliant. Of course, no Year 2000
testing can be fully comprehensive or simulate all possible circumstances of
actual use and the ability of other products that may be used in conjunction
with the applications, including any client products, to exchange date data
consistently with the applications. Additionally, many of its ISPs have received
assurances from their major vendors to assess their Year 2000 readiness,
however, the ISPs have not independently verified the Year 2000 assurances
received from the these major vendors.
Costs. From the inception of the Company's Year 2000 project through September
30, 1999, and based on the cost tracking methods the Company applied to this
project, the Company has incurred pre-tax expense of approximately $250,000.
The Company expects to incur approximately $750,000 of pre-tax expense and
approximately $1,000,000 of capital expenditures in connection with the Year
2000 project. These costs will be expensed and capitalized as incurred. The
costs and estimates provided include the Company's estimate of the cost of
internal and external resources directly attributable to the Year 2000 program.
The Company funded, and anticipates that it will continue funding, the costs of
the Year 2000 program from cash flows. The estimates for the costs of the Year
2000 program are based upon management's best estimates and may be updated or
revised as additional information becomes available. The Company currently
believes these costs will not have a material effect on its financial condition,
liquidity or results of operations. There may, however, be interruptions or
other limitations of financial and operating systems' functionality, and the
Company may incur additional costs to avoid these interruptions or limitations.
22
Risks. To the extent that the ISPs rely on external vendors or third-party
network service providers with Year 2000 exposure, any failure by these vendors
or service providers to resolve any Year 2000 issues on a timely basis or in a
manner that is compatible with its systems could adversely affect the Company's
ability to provide services to its subscribers. The inability to provide
Internet access could have an adverse impact on one or more of the Company's
ISPs or the Company as a whole. Although some of its ISPs have investigated the
readiness of their electrical, heating and telephone providers, most of them
have not contacted these providers to determine Year 2000 readiness.
The Company's expectations about future costs associated with the Year 2000
issue are limited by uncertainties that could cause actual results to have a
greater financial impact than currently anticipated. Factors that could
influence the amount and timing of future costs include:
. the Company's success in identifying systems and programs that contain two-
digit year codes;
. the nature and amount of programming required to upgrade or replace each of
the affected programs;
. the rate and magnitude of related labor and consulting costs; and,
. the Company's success in addressing Year 2000 issues with third-parties with
whom it does business.
The Company's failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations.
Presently, however, the Company perceives that its most reasonably likely worst
case scenario related to the Year 2000 is associated with potential concerns
with third-party services or products. Specifically, the Company is heavily
dependent on a significant number of third-party vendors to provide both network
services and equipment. A significant Year 2000-related disruption of the
network services or equipment provided to the Company by third-party vendors
could cause customers to consider seeking alternate providers or cause an
unmanageable burden on customer service and technical support, which in turn
could materially and adversely affect its results of operations, liquidity and
financial condition. The Company is not presently aware of any vendor-related
Year 2000 issue that is likely to result in this type of disruption.
Furthermore, its business depends on the continued operation of, and widespread
access to, the Internet. To the extent that the normal operation of the Internet
is disrupted by the Year 2000 issue, its results of operations, liquidity and
financial condition could be materially and adversely affected. Although there
is inherent uncertainty in the Year 2000 issue, the Company expects that as it
progress in its Year 2000 program the level of uncertainty about the impact of
the Year 2000 issue will be reduced significantly, and it should be better
positioned to identify the nature and extent of material risk as a result of
any Year 2000 disruptions.
Contingency Plans. The Company's Year 2000 program calls for the development of
contingency plans for at-risk functions. The Company has established a
Contingency Plan Committee to monitor and address the development of contingency
plans. Due to the current phase of the Year 2000 program in which the Company is
in, the Company is currently unable at this time to fully assess its risks and
determine what contingency plans, if any, need to be implemented. As the Company
progress in its Year 2000 program and identify specific risk areas, it intends
to timely implement appropriate remedial actions and contingency plans. The
estimates and conclusions included in this discussion contain forward-looking
statements and are based on management's best estimates of future events. The
Company's expectations about risks, future costs and the timely completion of
its Year 2000 modifications may turn out to be incorrect and any variance from
these expectations could cause actual results to differ materially from what has
been discussed above. Factors that could influence risks, amount of future costs
and the effective timing of remediation efforts include the Company's success in
identifying and correcting potential Year 2000 issues and the ability of third-
parties to appropriately address their Year 2000 issues.
The foregoing Year 2000 discussion and the information contained herein is
provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998.
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
1) From the effective date of the initial public offering registration to
September 30, 1999, the amount of net offering proceeds used for any
purpose for which at least 5% of the offering proceeds or $100,000
(whichever is less) was used is as follows:
<TABLE>
<S> <C>
Repayment of indebtedness directors
and officers 140,000
Repayment of indebtedness other 7,397,000
Repayment of the founder notes 1,021,000
Cash portion of purchase price for
Transactions and Acquisitions 113,003,000
------------
Total $121,561,000
============
</TABLE>
Item 5. Other Information
Subsequent to September 30, 1999, Dewey K. Shay, one of the Company's
co-founders, resigned from his executive position as Chief Financial
Officer. Mr. Shay will continue as a member of the Company's Board of
Directors. Joseph M. Songer, the Company's Chief Controller, will serve
as acting Chief Financial Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K: None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ONEMAIN.COM, INC.
-----------------
Date: November 15, 1999 By: /s/ Joseph M. Songer
----------------- -----------------------------------
Joseph M. Songer
Acting Chief Financial Officer
Chief Controller
(Authorized Officer on behalf of
Registrant and Principal Financial
Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 47,191,000
<SECURITIES> 25,230,000
<RECEIVABLES> 4,569,000
<ALLOWANCES> 1,029,000
<INVENTORY> 0
<CURRENT-ASSETS> 80,203,000
<PP&E> 32,892,000
<DEPRECIATION> 4,758,000
<TOTAL-ASSETS> 400,494,000
<CURRENT-LIABILITIES> 55,331,000
<BONDS> 8,070,000
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 24,000
<OTHER-SE> 318,484,000
<TOTAL-LIABILITY-AND-EQUITY> 400,494,000
<SALES> 0
<TOTAL-REVENUES> 50,015,000
<CGS> 0
<TOTAL-COSTS> 107,237,000
<OTHER-EXPENSES> (112,000)
<LOSS-PROVISION> 1,029,000
<INTEREST-EXPENSE> 381,000
<INCOME-PRETAX> (55,053,000)
<INCOME-TAX> 6,537,000
<INCOME-CONTINUING> (48,516,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,516,000)
<EPS-BASIC> (2.89)
<EPS-DILUTED> (2.89)
</TABLE>