-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A2uzFbCM/C0rl86UejCOGkBW1YJEaIkWnxkDl25GJC/UP3Qpgt3hm5RiTbRQaTfN 5Sr6sNVkZm0LU0RvtLp7Hg== 0000950130-99-003619.txt : 19990615 0000950130-99-003619.hdr.sgml : 19990615 ACCESSION NUMBER: 0000950130-99-003619 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOYAGER NET INC CENTRAL INDEX KEY: 0001085634 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 383431501 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-77917 FILM NUMBER: 99645215 BUSINESS ADDRESS: STREET 1: 4660 S HAGADORN RD STREET 2: STE 320 CITY: EAST LANSING STATE: MI ZIP: 48823 BUSINESS PHONE: 5173248940 MAIL ADDRESS: STREET 1: 4660 SOUTH HAGADORN RD STREET 2: STE 320 CITY: EAST LANSING STATE: MI ZIP: 48823 S-1/A 1 FORM S-1 AMENDMENT #1 As filed with the Securities and Exchange Commission on June 11, 1999 Registration Statement No. 333-77917 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------- VOYAGER.NET, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 7389 38-3431501 (State or Other (Primary Standard Industrial (I.R.S. Employer Jurisdiction Classification Code Number) Identification No.) of Incorporation or Organization)
---------- 4660 S. Hagadorn Road, Suite 320 East Lansing, MI 48823 (517) 324-8940 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive office) ---------- Christopher P. Torto President and Chief Executive Officer Voyager.net, Inc. 4660 S. Hagadorn Road, Suite 320 East Lansing, MI 48823 (517) 324-8940 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------- Copies to: David F. Dietz, P.C. Mark G. Borden, Esq. John B. Steele, Esq. Thomas L. Barrette, Jr., Esq. Goodwin, Procter & Hoar LLP Hale and Dorr LLP Exchange Place 60 State Street Boston, Massachusetts 02109-2881 Boston, Massachusetts 02109 (617) 570-1000 (617) 526-6000 ---------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration 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 box. [_] ---------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the SEC, acting pursuant to Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +We will amend and complete the information in this prospectus. Although we + +are permitted by U.S. federal securities law to offer these securities using + +this prospectus, we may not sell them or accept your offer to buy them until + +the documentation filed with the SEC relating to these securities has been + +declared effective by the SEC. This prospectus is not an offer to sell these + +securities or our solicitation of your offer to buy these securities in any + +jurisdiction where that would not be permitted or legal. + + + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION -- JUNE 11, 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Prospectus , 1999 Voyager.net, Inc. Shares of Common Stock [LOGO] - -------------------------------------------------------------------------------- Voyager.net, Inc.: The Offering: . We are the largest . Voyager.net is Internet service offering of the provider focused shares and selling on the Midwestern stockholders are United States. offering of the shares. . Voyager.net, Inc. 4660 South . The underwriters Hagadorn Road have an option to Suite 320 purchase an East Lansing, additional shares Michigan 48823 from Voyager.net (517) 324-8940 and existing stockholders to cover the underwriter's over-allotment options. Proposed symbol & market: . VOYN/Nasdaq National Market . This is our initial public offering, and no public market currently exists for our shares. . We plan to use the proceeds from this offering to repay our senior bank debt, to redeem our outstanding preferred stock and subordinated notes, and for general corporate purposes, including potential acquisitions and capital expenditures. . Closing: ,
1999. ---------------------------------------------------
Per Share Total --------------------------------------------------- Public offering price: $ $ Underwriting fees: $ $ Proceeds to Voyager.net: $ $ Proceeds to selling stockholders: $ $ ---------------------------------------------------
This investment involves risk. See "Risk Factors" beginning on Page 9. - -------------------------------------------------------------------------------- Neither the SEC nor any state securities commission has determined whether this prospectus is truthful or complete. Nor have they made, nor will they make, any determination as to whether anyone should buy these securities. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Donaldson, Lufkin & Jenrette First Union Capital Markets Corp. CIBC World Markets Facilitator of Internet distribution. DLJdirect Inc. [GRAPHIC DESCRIPTION] An outline of a map showing the States of Wisconsin, Illinois, Michigan, Indiana and Ohio will be centered. Superimposed on the map of these five states will be the d/b/a names of EXEC-PC, Freeway, Voyager, Netlink, exchangeNet, Infinite Systems and Hoosier On-Line, and their respective logos, pointing to the markets where each provides Internet access services. Above the map will be the name Voyager.net and to the left of the name will be Voyager.net's logo. Voyager.net's company philosophy, the services it provides, its customer service approach and its network are described in paragraphs surrounding the five state map. Voyager.net's Web address is included below the map to the right. TABLE OF CONTENTS
Page Prospectus Summary.......... 1 Risk Factors................ 9 Use of Proceeds............. 20 Dividend Policy............. 20 Capitalization.............. 21 Dilution.................... 22 Selected Consolidated Financial and Other Data .. 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 25 Business.................... 39 Management.................. 55
Page Certain Transactions with Related Parties............ 66 Principal and Selling Stockholders............... 69 Description of Capital Stock...................... 71 Shares Eligible For Future Sale....................... 75 Underwriting................ 77 Legal Matters............... 79 Experts..................... 79 Change in Independent Accountants................ 80 Where You Can Find More Information................ 80 Index to Financial Statements................. F-1
PROSPECTUS SUMMARY This is only a summary and may not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and our consolidated financial statements and the notes to those financial statements included elsewhere in this prospectus. Voyager.net, Inc. Voyager.net is the largest Internet service provider focused on the Midwestern United States. At May 31, 1999, we had approximately 221,000 subscribers. We operate the largest dial-up Internet network in the Midwest in terms of geographic coverage, with approximately 150 Voyager.net-owned points of presence in Michigan, Wisconsin, Ohio, Illinois, Indiana and Minnesota. Points of presence, or POPs, are facilities located in a particular market which allow our subscribers to access the Internet through a local telephone call. We serve residential and business customers in markets within our target region which we believe have been historically under-served by the larger, national providers of Internet service. Our primary service offering is Internet access to residential and business subscribers. Residential subscribers use our dial-up service, which allows them to access the Internet using standard modems in computers. Our business subscribers use either our dial-up service or our dedicated service, which allows them to have continuous access to the Internet using traditional telecommunications lines. We offer a variety of additional Internet services such as maintaining customer Web sites on our servers, known as Web hosting, and providing telecommunications facilities for customer-owned Web servers and related equipment, known as co- location, as well as electronic commerce. In addition, we offer enhanced communications services such as broadband Internet access services using digital subscriber lines, which provide high-speed communications over traditional telephone lines, and modems integrated with cable television services, or cable modems, and the resale of long distance voice services bundled with our Internet access products. The business model that we have developed has resulted in substantial revenue growth, reduced costs for acquiring new customers and significant EBITDA while maintaining high customer satisfaction. We define EBITDA as earnings before interest, taxes, depreciation, amortization and non-recurring, non-cash compensation charges. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be construed as a substitute for net income or cash flows from operating activities. Our subscriber base has increased from approximately 17,000 subscribers as of December 31, 1997 to approximately 188,000 subscribers as of March 31, 1999, including approximately 5,000 Web hosting customers and approximately 900 dedicated access subscribers. For the three months ended March 31, 1999 our pro forma revenues, EBITDA and cash flows from operating activities were $9.7 million, $2.7 million, and $4.0 million, respectively, representing EBITDA as a percentage of revenues of 27.8%. We believe that our business model is scalable and can be sustained at any level. Our business model is based on the following key principles: . We focus on the Midwestern United States. Our regional focus on markets within the Midwest enables us to conduct highly targeted sales and marketing programs, cultivate local brand-name recognition and generate a significant number of word-of-mouth referrals. As a result, we believe that our costs to acquire new customers are significantly less than those of our competitors. Our regional operations also provide us with a competitive advantage over national Internet service providers operating in our markets due to our ability to provide broader dial-in capability using local telephone calls within our region. . We deliver superior customer care and service. Over 60% of our employees are dedicated to providing customer and technical support from our two network operating centers. This customer-oriented operating focus has allowed us to achieve high customer satisfaction and customer retention rates which are significantly greater than industry averages. We have also developed a proprietary Web-based customer care and billing system which is user-friendly and enables subscribers to sign-up for our services immediately. Despite our regional focus, we ranked 10th among national and regional Internet service providers in a recent survey conducted by PC World Magazine in terms of access speed and reliability, customer satisfaction and product offerings. .We own and manage our network equipment. We believe that we are the only large regional or national consumer-focused Internet service provider that owns and operates 100% of its network equipment and customer care operations. Since we own the network equipment at each of our points of presence, rather than lease services from national carriers, we have much greater control over the utilization, efficiency, scalability and quality of our network. This enables us to reduce our telecommunication cost per customer, the single largest expense for an Internet service provider. .We efficiently integrate acquired businesses. Our integration model generates significant cost savings and economies of scale within a short time after completing an acquisition while offering improved performance and a broader range of Internet services to our newly acquired customers. We typically realize significant cost savings by transferring network traffic from the acquired Internet service provider's customers to our regional network and eliminating duplicated network infrastructure. We also consolidate many operations after an acquisition, such as sales and marketing, network operations, customer support, billing and accounting and human resources, into our operations. In addition, we use our significant purchasing power to re- negotiate more favorable pricing on telecommunication access lines, equipment purchases and other vendor services. Our Market Opportunity We believe we are well-positioned to capitalize on the significant market opportunity to provide Internet products and services to our target market: residential and business customers in the Midwest. For example, International Data Corporation estimates that: . the number of U.S. users accessing the World Wide Web will increase from 51.6 million at the end of 1998 to 135.9 million in 2002; . the percentage of U.S. households with Internet access will increase from 29.5% at the end of 1998 to 64.0% at the end of 2002; 2 . revenues from U.S. consumer Internet access services will increase from $4.7 billion in 1998 to $10.6 billion in 2002; . the percentage of U.S. households with broadband Internet access will grow from 1.0% at the end of 1998 to 13.2% at the end of 2002; and . revenues from U.S. corporate Internet access services will increase from $2.9 billion in 1998 to $10.1 billion in 2002. The rapid expansion of the Internet and its use has resulted in a highly fragmented Internet service provider market, with over 4,850 providers in the United States at the end of 1998 according to Boardwatch Magazine. While approximately 180 of these entities are national service providers, the vast majority of them are small, local operators with fewer than 10,000 customers each. We believe our target markets in the Midwest have been under-served by both large national providers and by small local providers. Many of the national on- line service providers do not maintain the same level of marketing presence, network accessibility and quality of service in small markets within the Midwest as they do in larger markets. In many of our markets, customers of national on-line service providers are required to access the Internet through a long-distance phone call, which can be more expensive for subscribers. Currently, approximately 98% of our dial-up subscribers can access our network through a local phone call. While smaller Internet service providers may have a stronger local presence in certain markets than larger providers, they typically do not provide a full range of Internet services and lack the resources to provide high quality, reliable Internet access service, customer support, and 24 hour per day, seven days per week network monitoring. We anticipate that a significant number of these local operators, which typically are not profitable and have limited financial resources to expand their operations, will make attractive acquisition candidates for us in the future. We believe that our strong regional presence, high quality Internet products and services, emphasis on customer care, experienced management team and financial resources position us to compete effectively in our target markets against both large and small Internet service providers. Our Growth Strategy Our strategy is to capitalize on the substantial growth of the Internet and be the dominant Internet service provider in the Midwest. We plan to grow our business through both internal growth initiatives as well as through strategic acquisitions, as follows: . maintain our superior customer care and service in order to increase customer referrals and customer retention; . continue to invest in our network to provide our subscribers with the most reliable, high quality, high speed Internet access services at lower costs; . continue our highly focused sales and marketing efforts and use of strategic reseller agreements; 3 . offer enhanced communications services such as digital subscriber lines, or DSL, Internet access through the integration with cable television systems, or cable modems, and the resale of bundled voice and data services at competitive rates; and . continue to acquire and integrate local and regional Internet service providers to increase network utilization and enter new markets. Our History Voyager Information Networks, Inc., our wholly-owned operating subsidiary, was incorporated in 1994 in the State of Michigan and began offering Internet access services to residential and business customers in 1995. We incorporated in 1998 in the State of Delaware under the name Voyager Holdings, Inc. We changed our name to Voyager.net, Inc. on April 29, 1999. Our principal executive office is located at 4660 South Hagadorn Road, Suite 320, East Lansing, Michigan 48823. Our telephone number is (517) 324-8940. Our primary Web page is at http://www.voyager.net. The information on all of our Web sites is not a part of this prospectus. 4 Recent Developments In order to provide greater flexibility in pursuing our growth strategy, we recently amended our revolving senior credit facility with a syndicate of banks managed by Fleet National Bank to provide for up to $70.0 million of credit. The credit facility matures on March 31, 2005. The credit facility is to be used to fund working capital and permitted acquisitions. Our obligations under the senior bank debt agreements are secured by all of our assets. We recently completed the following acquisitions: . In April, we acquired approximately 5,900 dial-up consumer and Web hosting subscribers in the greater Chicago, Illinois area from StarNet, Inc., a Chicago-based Internet service provider; . In May, we acquired all of the outstanding capital stock of GDR Enterprises, Inc., a Dayton, Ohio-based provider of Internet services with approximately 20,000 dial-up, dedicated and Web hosting subscribers in southern Ohio and parts of Kentucky; and . In June, we acquired approximately 5,500 dial-up, dedicated and Web hosting subscribers in the Minneapolis, Minnesota area from Edgeware, Inc., d/b/a PCLink.com, located in Wayzata, Minnesota. The Offering Common stock offered: By Voyager.net ..................... shares By the selling stockholders ........ shares ------------ Total .......................... shares Common stock to be outstanding after this offering................ shares Estimated net proceeds to Voyager.net... $ Use of Proceeds ........................ To repay our senior bank debt, to redeem our outstanding preferred stock and subordinated notes and for general corporate purposes, including potential acquisitions and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol ............................ VOYN 5 The number of shares of our common stock that will be outstanding after this offering is based on the number outstanding as of March 31, 1999. It excludes: . shares of common stock issuable pursuant to the over-allotment option granted to the underwriters; . shares of common stock issuable upon exercise of stock options outstanding as of March 31, 1999, with a weighted average exercise price of $ per share, of which options to purchase shares were then exercisable; and . shares of common stock available for future grant under our stock option plan as of March 31, 1999. See "Management--Executive Compensation" and "Management--1998 Stock Option and Incentive Plan." ------------- The name Voyager.net and our logo are names and marks which belong to us. We have a registered trademark for the name VoyagerLink and have registrations for other names and marks used in this prospectus. This prospectus also contains the trademarks and trade names of other entities which are the property of their respective owners. Unless otherwise stated in this prospectus, the information contained in this prospectus assumes that the underwriters' over-allotment option is not exercised and that we have completed a -for-one stock split of our common stock effected as a dividend which is expected to occur prior to the consummation of this offering. Unless the context otherwise requires, all references to Voyager.net includes all of our wholly-owned subsidiaries. 6 Summary Consolidated Financial and Other Data (In thousands, except per share and other data) You should read the following summary consolidated historical financial and other data along with the sections entitled "Use of Proceeds," "Selected Consolidated Financial and Operating Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes and other financial and operating data included elsewhere in this prospectus. This summary consolidated historical financial and other data includes a presentation of EBITDA. EBITDA represents earnings before interest, taxes, depreciation, amortization and non-recurring, non-cash compensation charges. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. EBITDA, as calculated by Voyager.net, is not necessarily comparable with similarly titled measures for other companies.
Three Months Ended March Years Ended December 31, 31, ----------------------------------------------- --------------------------- Pro Pro Forma Forma 1995 1996 1997 1998 1998 (1) 1998 1999 1999 (1) Consolidated Statement of Operations Data: Revenue................. $ 202 $ 1,707 $ 3,454 $ 10,722 $ 25,743 $ 1,135 $ 8,519 $ 9,661 Operating expenses...... 893 3,215 4,212 13,271 36,583 1,032 9,749 11,484 ------ ------- ------- -------- -------- ------- -------- ------- Income (loss) from operations............. (691) (1,508) (758) (2,549) (10,840) 103 (1,230) (1,823) Other income (expense).. 17 10 (62) (912) (3,618) (39) (771) (1,012) ------ ------- ------- -------- -------- ------- -------- ------- Net income (loss)....... (674) (1,498) (820) (3,461) (14,458) 64 (2,001) (2,835) Preferred stock dividends.............. -- -- (74) (348) (348) (50) (166) (166) ------ ------- ------- -------- -------- ------- -------- ------- Net income (loss) applicable to common stockholders........... $ (674) $(1,498) $ (894) $ (3,809) $(14,806) $ 14 $ (2,167) $(3,001) ====== ======= ======= ======== ======== ======= ======== ======= Per Share Data: Basic and diluted net loss per share applicable to common stockholders........... $(0.09) $ (0.35) $ (0.12) $ (0.27) $ (1.04) $ 0.00 $ (0.12) $ (0.16) Weighted average common shares outstanding..... 7,231 4,316 7,160 14,238 14,238 12,096 18,539 18,539 Other Financial Data: EBITDA (as defined)..... $ (563) $(1,088) $ (364) $ 1,721 $ 5,630 $ 229 $ 2,297 $ 2,684 EBITDA margin........... (278.7)% (63.7)% (10.5)% 16.1% 21.9% 20.2% 27.0% 27.8% Capital expenditures.... 411 759 661 1,514 1,743 171 1,321 1,406 Other Data: Subscribers at end of period (approximate)... 3,000 10,000 17,000 142,000 160,000 19,000 188,000 208,000 POPs.................... 5 25 32 138 158 35 146 166 Cash Flow Data: Cash flow provided by (used in): Operating activities.... $ (538) $ (877) $ (398) $ 2,702 $ 7,292 $ 215 $ 3,432 $ 3,957 Investing activities.... (408) (759) (574) (34,336) (35,192) (171) (10,692) (10,778) Financing activities.... 1,980 583 1,488 33,466 30,753 34 9,336 (6,821)
7
As of March 31, 1999 ------------------------------------- Pro forma As Actual (unaudited) (1) Adjusted (2) Consolidated Balance Sheet Data: Cash and cash equivalents............... $ 4,427 $5,701 Working capital......................... (6,269) (7,232) Total assets............................ 52,459 63,310 Total long-term debt, notes payable and capital leases, including current maturities............................. 43,062 52,261 Total stockholders' equity (deficit).... (725) (1,498)
- -------------------- (1) The summary pro forma financial and other data gives effect to the acquisition of Freeway, Inc., EXEC-PC, Inc., NetLink Systems, L.L.C. and GDR Enterprises, Inc. as if the acquisition of each of these businesses was completed as of January 1, 1998. The historical financial data of Voyager.net, Inc. and the pre-acquisition results of operations of Freeway, Inc., EXEC-PC, Inc., NetLink Systems, L.L.C. and GDR Enterprises, Inc. were combined with certain pro forma adjustments to calculate the summary pro forma financial data for 1998. Additionally, the historical financial data of Voyager.net, Inc. and the pre-acquisition results of operations of GDR Enterprises, Inc. were combined with certain pro forma adjustments to calculate the summary pro forma financial data for March 31, 1999. (2) Gives effect to the sale of the shares of common stock being offered in this prospectus and the receipt and application of the net proceeds from this offering as discussed in this prospectus. 8 RISK FACTORS You should carefully consider the following factors and all other information contained in this prospectus before purchasing our common stock. If any of the events described in the risk factors below actually occur, our business could be adversely affected. In that case, the trading price of our common stock could decline, and you could lose all or part of the money you paid to buy our common stock. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below and elsewhere in this prospectus. Our recent substantial growth and planned future growth could strain our managerial, operational and financial resources We have expanded our operations rapidly during the past eighteen months and intend to continue to aggressively pursue existing and potential market opportunities. Much of this growth is attributable to several recent acquisitions, including the acquisition of substantially all of the assets of EXEC-PC, Inc., which was double our size at the time of acquisition. Our rapid growth has placed, and is expected to continue to place, a strain on our managerial, operational and financial resources. In order to manage our growth, we must improve our operational systems, procedures and controls on a timely basis, retain key employees and maintain our customer relationships. Also, if the demands placed on our network resources by our growing subscriber base outpace our growth and operating plans, the quality and reliability of our service may decline, our relationships with our customers may be harmed and, as a result, our business may suffer. Our growth strategy and acquisitions may not be successful Our growth strategy is largely dependent upon acquiring the business and assets of Internet service providers within the Midwest. We may not be successful, however, in locating or acquiring additional businesses in the future. We also may encounter substantial competition from other Internet service providers and telecommunications providers which are seeking to consolidate operations within our region. Some of these competitors may have a larger subscriber base and greater financial resources. Our inability to continue acquiring these businesses on favorable terms in the future could have an adverse effect on our business, financial condition and results of operations. Our business could be adversely affected if we fail to integrate our acquisitions successfully Our continued success as a regional Internet service provider will depend in large part on our ability to successfully integrate the operations and management of the Internet service provider businesses that we have acquired and will acquire in the future. A significant component of our growth is attributable to our acquisitions, particularly the EXEC-PC acquisition. Failure to successfully integrate EXEC-PC and the other businesses 9 we have acquired or will acquire in the future may result in significant operating inefficiencies, which may hurt our operating results. In addition, to integrate these acquired businesses, we may have to expend substantially more managerial, operating, financial and other resources than we have planned, which would have an adverse effect on our results of business, financial condition and results of operations. Any future acquisition could result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, or the incurrence of debt or amortization expenses related to goodwill and other intangible assets, any of which could adversely affect our business, operating results and financial condition. In addition, acquisitions involve numerous risks, including: .difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company; .the diversion of management's attention from other business concerns; .risks of entering markets in which we have no or limited prior experience; and .the potential loss of key employees of the acquired company. We have a limited operating history at our current scale and may face difficulties encountered by companies operating in new and rapidly evolving markets We were incorporated in June 1994 and began offering Internet access to the public in December 1995. Only recently have we grown significantly, primarily as a result of our acquisitions. As a result, we have only operated at this size for a limited time. When making your investment decision and evaluating our business and prospects, you should consider the risks and difficulties we may encounter in the new and rapidly evolving Internet service provider market, especially given our limited operating history at this size. These risks include our ability to: .expand our subscriber base and increase subscriber revenues; .compete favorably in a highly competitive market; .attract and retain qualified employees; .develop strategic relationships; .introduce new products and services; and .continue to develop and upgrade our network systems and infrastructure. We cannot be certain that we will successfully address any of these risks. We have a history of operating losses and expect future losses We incurred net losses of approximately $1.5 million, $0.8 million and $3.5 million in the fiscal years ended December 31, 1996, 1997 and 1998, respectively. Although we have grown our revenues substantially in recent periods, we cannot assure you that we will be able to sustain these growth rates or avoid future net losses. We expect to continue to make significant operating and capital expenditures and, as a result, we will need to generate significant revenues to achieve and maintain profitability. If we do achieve profitability, we cannot be certain that we will be able to sustain our profitability in future periods. 10 Our annual and quarterly operating results are subject to significant fluctuations and, as a result, period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance We have experienced significant fluctuations in our results of operations on a quarterly and annual basis. We expect to continue to experience significant fluctuations in our future quarterly and annual results of operations due to a variety of factors, many of which are outside of our control, including: .demand for and market acceptance of our services; .customer retention; .the timing and magnitude of capital expenditures, including costs relating to the expansion of operations and network infrastructure; .introductions of new services or enhancements by us and our competitors; .increased competition in our markets within the Midwest; .growth of Internet use and establishment of Internet operations by mainstream enterprises; .changes in our and our competitors' pricing policies; and .general economic conditions affecting our industry. We face intense competition in our business from other Internet service providers and telecommunications providers We face intense competition in conducting our business, and we expect the competition to intensify as the Internet becomes more popular in the future. Our competitors include national, regional and local Internet service providers, telecommunications companies, competitive local exchange carriers and cable television operators. Some of these competitors have much larger subscriber bases than ours and in some cases greater financial, technical and marketing resources. Furthermore, a number of our competitors offer a broader variety of access and data services, including Internet access through high speed digital subscriber lines and cable modems, and may have done so for longer periods of time. Every local market within the region in which we participate or intend to participate is served by multiple Internet access providers of various type. As a result of increased competition in our industry, we expect to encounter significant pricing pressure. We cannot be certain that we will be able to offset the effects of any required price reductions through an increase in the number of our subscribers, higher revenues from our enhanced business services, cost reductions or otherwise, or that we will have the resources to continue to compete successfully. You should read "Business--Competition" for a more complete discussion on the competitive factors and competitors in our industry. We face the uncertainty of customer retention We believe that our long-term success depends largely on our ability to retain our existing customers while continuing to attract new customers. We continue to invest significant resources in our network infrastructure and customer and technical support 11 capabilities to provide high levels of customer care. We cannot be certain that these investments will maintain or improve our customer retention rate. We believe that intense competition from our competitors, some of which offer free hours of service or other enticements for new customers, has caused, and may continue to cause, some of our customers to switch to our competitors' services. We are also susceptible to losing customers that we acquire through our acquisitions due to the customers' lack of familiarity with Voyager.net and the billing and network difficulties which sometimes occur after an acquisition. 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 their service. These factors may adversely affect our subscriber retention rates, which would have an adverse effect on our business and operating results. If we are unable to obtain the additional capital required to continue to grow our business, we may be required to modify our growth and operating plans Our ability to grow depends significantly on our ability to expand our operations through internal growth and by acquiring other Internet service providers, which require significant capital resources. We anticipate that our cash requirements for 1999 will include disbursements for some or all of the following purposes: .potential acquisitions; .expansion of our network infrastructure; .development of enhanced services offerings; .interest expense and repayment of senior indebtedness; and .working capital and general corporate purposes. If the proceeds from this offering, after these and other expenditures, are not sufficient to meet our cash requirements, we will need to seek additional capital from public or private equity and debt sources to fund our growth and operating plans and respond to other contingencies, which may include: .increases in our growth rate; .shortfalls in anticipated revenues or increases in expenses; .the development of new products and services; or .the expansion of our customer care operations, including the recruitment of additional customer care and support personnel. 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 alternative sources of financing are insufficient or unavailable, we may be required to modify our growth and operating plans in accordance with the extent of available financing. Our ability to provide access services to our customers would be interrupted if our third-party suppliers and telecommunications carriers discontinue doing business with us and we were unable to find adequate replacements We depend on third-party suppliers of hardware components and telecommunications carriers to provide equipment and telecommunications services 12 in a reliable and secure manner. We currently acquire hardware components used in our network system from a few primary sources, including high performance routers and servers manufactured by Cisco Systems, Inc. and modems manufactured by Lucent Technologies, Inc. and 3Com Corporation. We currently rely on several local telephone companies, such as Ameritech Corporation, GTE Corporation and MCI WorldCom, to lease to us data communications capacity via local telecommunications lines and leased long-distance lines. We also have relationships with competitive local exchange carriers such as Brooks Fiber (MCI WorldCom) and Phone Michigan (Mcleod). Our suppliers and telecommunications carriers also sell or lease products and services to our competitors and may be, or may become, our competitors. Expansion of our network infrastructure and other competitors' needs will continue to place a significant demand on our suppliers and telecommunications carriers. We cannot be certain that our suppliers and telecommunications carriers will continue to sell or lease their products and services to us at commercially reasonable prices or at all. Difficulties in developing alternative sources of supply, if required, could adversely affect our business, financial condition and operating results. Moreover, failure of our telecommunications providers to promptly provide the data communications capacity required by us could cause interruptions in our ability to provide access services to our customers, which may adversely affect our business, financial condition and operating results. If we are unable to continue to upgrade our network infrastructure to meet additional demand and changing subscriber requirements, our business and financial results could be adversely affected Our network infrastructure is composed of a complex system of routers, switches, transmission lines and other hardware used to provide Internet access and other services. The future success of our business will depend on the capacity, reliability and security of this network infrastructure. We will have to continue to upgrade and adapt our network infrastructure as the number of customers and the amount and type of information they wish to transmit over the Internet increases. This development of our network infrastructure will require substantial financial, operational and managerial resources. We cannot be certain that we will be able to upgrade or adapt our network infrastructure to meet additional demand or changing customer requirements on a timely basis and at a commercially reasonable cost, or at all. If we fail to upgrade our network infrastructure on a timely basis or adapt it to an expanding customer base, changing customer requirements or evolving industry standards, our business could be adversely affected. Disruptions of our services due to system failure could result in subscriber cancellations which may adversely affect our business and financial results A significant portion of our computer equipment, including critical equipment dedicated to our Internet access services, is presently located at two network operating centers: one in East Lansing, Michigan and the other in New Berlin, Wisconsin. The occurrence of a natural disaster, the failure of one of our systems or the occurrence of other unanticipated problems at our network operating centers or at one of our points of 13 presence could cause interruptions in our services. Extensive or multiple interruptions in providing customers with Internet access and other services are a primary reason for customer decisions to cancel the use of Internet access services. Accordingly, any disruption of our services due to system failure could have an adverse effect on our business and financial results. We must adapt to technology trends and evolving industry standards to remain competitive The Internet market is characterized by rapid changes due to technological innovation, evolving industry standards, changes in customer 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 the Internet access industry. We cannot be certain that we will be successful in these efforts. We are also at risk due to fundamental changes in the way that Internet access may be delivered in the future. Currently, Internet access services are accessed primarily by computers connected by telephone lines. Recently, several companies, including Voyager.net through our relationship with Millennium Digital Media Systems, L.L.C., began offering continuous, high speed Internet access through the use of cable television systems and cable modems. These cable modems have the ability to transmit data at substantially faster speeds than the modems currently used by our customers over phone lines. As the Internet becomes accessible by broad segments of the U.S. population through these cable modems and other consumer electronic devices, such as Web-TV, or as customer requirements change the means by which Internet access is provided, we will have to modify our technologies to accommodate these developments and remain competitive. Our continued development and implementation of these technological advances may require substantial time and expense, and we cannot be certain that we will succeed in adapting our Internet access services business to alternative access devices and 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 business, financial condition and operating results. If Internet usage does not continue to grow, we may not be able to continue our business plan Widespread use of the Internet is a relatively recent phenomenon. Our future success depends on continued 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 at or above its historical rates or that extensive Internet content will continue to be developed or accessible for free or at nominal cost to users. If Internet use does not continue to grow or users do not accept our products and services, our business, financial condition and operating results could be adversely affected. 14 State and federal government regulation could require us to change our business We provide Internet access and other services, in part, using telecommunications services provided by carriers that are subject to the jurisdiction of state and federal regulators. Due to the increasing popularity and use of the Internet, state and federal regulators may adopt additional laws and regulations relating to content, user privacy, pricing, copyright infringement and other matters. We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business. You should read "Business--Government Regulation" for a more detailed discussion of the government regulation to which we may be subject. We will be subject to additional government regulation relating to our competitive local exchange carrier status One of our subsidiaries, EriNet Telecom, Inc., is authorized as a competitive local exchange carrier, or CLEC, with the State of Ohio and we may in the future seek CLEC status in other states within our operating region. To the extent we conduct business as a CLEC, the telecommunications services that we provide will be subject to federal, state and local regulation, which may include tariff and price listing requirements and state certification proceedings. We could incur substantial legal and administrative expenses if a third party challenged our filed tariffs or our status as a competitive local exchange carrier. In addition, some state statutes include provisions requiring competitive local exchange carriers to obtain additional approval in the event of certain changes in the ownership of the outstanding voting securities of CLECs. In connection with our acquisition of GDR Enterprises, Inc. we have filed a petition for approval of change in ownership of EriNet Telecom which approval we anticipate will be obtained prior to consummation of this offering. We cannot assure you that this approval will be granted at such time or at all. You should read "Business--Government Regulation" for a more detailed discussion of the regulations to which we will be subject as a result of our status as a competitive local exchange carrier. We face potential liability for material transmitted through our network or retrieved through our services The law relating to the liability of Internet services providers for information carried on or disseminated through their networks is unsettled. In addition, the Federal Telecommunications Act of 1996 imposes fines on any entity that knowingly permits any telecommunications facility under its control to be used to make obscene or indecent material available to minors via an interactive computer service. We cannot predict whether any claim under the federal statute, similar state statutes or common law will be asserted against us, or if asserted, whether it will be successful. As the law in this area develops, we may be required to expend substantial resources or discontinue certain services to reduce our exposure to the potential imposition of liability. Any costs that we incur as a result of contesting any asserted claims or the consequent imposition of liability could adversely affect our business and operating results. 15 In addition, because our users may download materials and subsequently distribute them to others, persons may potentially make claims against us for defamation, negligence, copyright or trademark infringement, personal injury or other claims based on the nature, content, publication and distribution of such materials. We also could be exposed to liability with respect to the offering of third-party content that may be accessible through our services. It is also possible that if any third-party content provided through our services contains errors, third parties who access this material could make claims against us for losses incurred in reliance on this information. We also offer e-mail services, which expose us to other potential risks, such as liabilities or claims resulting from unsolicited e-mail, lost or misdirected messages, illegal or fraudulent use of e-mail or interruptions or delays in e-mail service. These claims, whether with or without merit, likely would divert management's time and attention, may result in negative publicity and could result in significant costs to investigate and defend. We are subject to risks associated with year 2000 compliance Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Confusion of dates may bring about system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar business activities. As a result, many companies' software and computer systems need to be upgraded or replaced in order to comply with such "year 2000" requirements. We rely on third party telecommunications and information systems equipment and software that may not be year 2000 compliant to provide our services. We are in the early stages of conducting an audit of our own systems and of our third-party suppliers as to the year 2000 compliance of their systems. Based upon the results of this assessment, we have developed and implemented a remediation plan with respect to third-party software, computer technology and services that may fail to be year 2000 compliant. At this time, the expenses associated with this assessment and remediation plan cannot be determined. We presently believe that the most reasonably likely worst case scenario related to the year 2000 issue is associated with third-party services and products, specifically our network, telecommunications lines and equipment. The disruption to or failure of our internal computer systems or of third-party equipment or software to operate without year 2000 complications could result in the interruption or failure of our services, could require us to incur significant unanticipated expenses to remedy any problems, could expose us to claims for losses incurred by our users due to year 2000 complications and could cause customers to seek alternative Internet service providers. The defense of any claims, whether with or without merit, could require us to incur substantial costs and would divert management's time and attention, which could have an adverse effect on our business and operating results. In addition, we are subject to external forces that might generally affect industry and commerce, such as utility company year 2000 compliance failures and related service interruptions. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." 16 Our success is dependent upon our senior management team Our success will depend in large part on the continued availability of our senior management team. The loss of the services of any of the members of our senior management team could have an adverse effect on our business, financial condition and results of operations. We maintain a key man life insurance policy on each of our executive officers, however the proceeds from insurance policies are not an adequate replacement for these individuals' services. Although we have entered into employment agreements and noncompetition agreements with each of our executive officers, we cannot assure you that these agreements will be enforceable or that we will enjoy the continued service of our senior management. You should read "Management--Employment Agreements" for a more detailed description of our arrangements with senior management. There has been no prior public market for our common stock Before this offering, there has been no public market for our common stock. We have applied to the Nasdaq National Market to list our common stock, but we cannot offer any assurance that an active trading market for these shares will develop or continue or how liquid that market might become following this offering, or that purchasers in this offering will be able to resell their shares at prices equal to or greater than the initial public offering price. The initial public offering price will be determined through negotiations between us and the underwriters and may not be indicative of the market price for these shares following this offering. You should read "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The market price of our shares of common stock may experience extreme price and volume fluctuations The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may adversely affect the market price for our common stock following this offering, including: .the demand for our common stock; .the number of market makers for our common stock; .investor perception of the Internet, the Internet industry generally and the Internet service provider industry in particular; .general technology or economic trends; .revenues and operating results failing to meet or surpass the expectations of securities analysts or investors in any quarter; and .changes in securities analysts' estimates or general market conditions. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we become the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources and have an adverse effect on our business, financial condition and results of operations. 17 Our existing stockholders will control all matters requiring a stockholder vote and, as a result, could prevent or delay a change in control Upon the closing of this offering, our existing directors, officers and stockholders will beneficially own approximately % of our outstanding common stock. In particular, Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership will retain approximately % of our outstanding stock in the aggregate. If all of these stockholders were to vote their shares of common stock together as a group, these stockholders would have the ability to exert significant influence over our board of directors and its policies. Control by existing stockholders could have the effect of delaying, deferring or preventing a change in control because these stockholders will be in a position to control the outcome of all stockholder votes, including votes concerning director elections, by-law amendments and possible mergers, corporate control contests and other significant corporate transactions. See "Principal and Selling Stockholders." Provisions of Delaware law and of our charter and by-laws may make a takeover more difficult Provisions in our certificate of incorporation and by-laws, as amended and restated, and in the Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt which is opposed by our management. Stockholders who might desire to participate in such a transaction may not have an opportunity to do so, and the ability of stockholders to change our management could be substantially impeded by these anti-takeover provisions. We also will have a staggered board of directors that has the right under our charter documents to issue preferred stock without further stockholder approval, which could adversely affect the holders of our common stock and the potential for a tender offer or change in control. See "Description of Capital Stock." The estimated initial public offering price is significantly higher than the book value of our common stock and you will experience immediate and substantial dilution in the value of your investment As a purchaser of our common stock in this offering, you will experience immediate and substantial dilution of $ per share in the net tangible book value of the common stock from the initial public offering price. To the extent outstanding options to purchase common stock are exercised, you will experience further dilution. See "Dilution." The future sale of shares of our common stock could adversely affect the market price of our common stock Substantial sales of our common stock in the public market following this offering, or the perception by the market that such sales could occur, could lower the market price of our common stock or make it difficult for us to raise additional equity capital in the future. The shares of common stock which are being sold in this offering will generally be freely tradeable without restriction, and: 18 . the remaining shares of common stock outstanding will be "restricted securities" as defined in Rule 144 under the Securities Act, and may be sold in the future without registration under the Securities Act subject to compliance with the provisions of Rule 144 or any other applicable exemption under the Securities Act; and . existing stockholders have registration rights requiring us to register up to shares of common stock for sale under the Securities Act. Upon expiration of lock-up agreements entered into with the underwriters, 180 days after the date of this prospectus, shares of common stock, and shares of common stock issuable as a result of the exercise of vested options, will be eligible for resale in accordance with the provisions of the Securities Act. You should read "Shares Eligible for Future Sale" for a more detailed description of these risks. Covenants in our debt agreements may restrict our business Our existing senior bank debt agreements contain a number of significant covenants. These covenants limit our ability to, among other things, borrow additional money, create liens, make some types of investments, issue additional equity securities, declare and pay dividends and sell significant assets. They also require us to meet certain financial tests. Our ability to meet those financial tests may be affected by events beyond our control. If we are unable to meet our debt service obligations or comply with these covenants, we will be in default under these agreements. A default, if not waived, could result in acceleration of our repayment obligations, which would have a significantly adverse effect on our financial condition. You should read "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a more detailed description of our debt agreements. We do not intend to pay dividends We have never declared nor paid any cash dividends on shares of our common stock. We currently intend to retain our earnings for future growth and, therefore, do not anticipate paying any dividends in the foreseeable future. In addition, under the terms of our senior bank debt agreements, we are prohibited from paying any cash dividends to our stockholders. See "Dividend Policy." 19 USE OF PROCEEDS We estimate that our net proceeds from the sale of our common stock will be approximately $ million, at an assumed initial offering price of $ per share and after deducting the estimated underwriting discounts and commissions and offering expenses payable by us in connection with this offering. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ million. We expect to use all of these estimated net proceeds as follows: .to repay approximately $ million of senior bank debt under our senior credit facility with a number of lending institutions, including accrued and unpaid interest, which senior bank debt bears interest at a variable rate, currently set at 8.0% per annum, and matures on March 31, 2005; .to redeem all 82,748 outstanding shares of series A preferred stock in the aggregate face amount of approximately $8.3 million, plus cumulative undeclared dividends; .to repay approximately $ million of subordinated notes owed to Horizon Cable I Limited Partnership, including accrued and unpaid interest, which notes bear interest at a rate of 8.0% compounded annually; and .for general corporate purposes, including potential acquisitions and capital expenditures. Except for repayment of the outstanding bank debt and subordinated notes and the redemption of the shares of outstanding series A preferred stock, the net proceeds will be invested in government securities and other short-term, government-grade investment securities until allocated for specific use. We will receive no proceeds from the sale of common stock in this offering by the selling stockholders. We used the borrowings under our senior credit facility and the proceeds that we received from the issuance of the series A preferred stock and subordinated notes primarily to finance our consummated acquisitions as well as for general corporate purposes. The shares of series A preferred stock and, indirectly through Horizon, the subordinated notes are held by Media/Communications Partners II Limited Partnership, Media/Communications Investors Limited Partnership and Messrs. Friedly, Baird and Heinze, each a Voyager.net stockholder. DIVIDEND POLICY We have never declared nor paid any dividends on our common stock. Under the terms of our senior bank debt agreements, we are prohibited from paying any dividends to our stockholders other than dividends payable in shares of common stock to our stockholders. In addition, we currently intend to retain our earnings for future growth and, therefore, do not anticipate paying cash dividends in the foreseeable future. 20 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999: .on an actual basis; .on a pro forma basis to give effect to the acquisition of GDR Enterprises, Inc.; and .on an as adjusted basis to give effect to our receipt of the estimated net proceeds from the sale of the shares of common stock offered by Voyager.net at an assumed initial public offering price of $ per share, after deduction of underwriting discounts and estimated expenses payable in connection with the offering, and the use of the net proceeds as described in "Use of Proceeds." You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes to those statements included elsewhere in this prospectus. The table below excludes shares of common stock issuable upon exercise of outstanding stock options at a weighted average exercise price of $ per share and additional shares of common stock available for future grant under our 1998 Stock Option and Incentive Plan as of March 31, 1999. See "Management-- Executive Compensation" and "Management--1998 Stock Option and Incentive Plan."
As of March 31, 1999 -------------------------------- Pro Forma Actual (unaudited) As Adjusted (in thousands) Cash and cash equivalents..................... $ 4,427 $ 5,701 $ ======= ======= ==== Current portion of long-term debt: Capital leases.............................. $ 392 $ 392 Notes payable, related party................ 2,297 2,297 ------- ------- ---- Total current portion of long-term debt..... 2,689 2,689 ------- ------- ---- Long-term debt: Obligations under capital leases............ 973 973 Long-term debt.............................. 39,400 48,600 ------- ------- ---- Total long-term debt.......................... $40,373 $49,573 $ ------- ------- ---- Stockholders' equity (deficit): Series A preferred stock, $0.01 par value per share: 100,000 shares authorized; 82,748 shares issued and outstanding actual (includes 6,667 shares subject to purchase at March 31, 1999 that were purchased on May 3, 1999); shares, as adjusted................................ 8,275 8,275 Common stock, $0.0001 par value per share: 25,000,000 shares authorized; 18,916,380 shares issued and outstanding actual, shares, as adjusted..................... 2 3 Additional paid-in capital.................. 6,413 6,462 Receivable for preferred and common stock..... (6,667) (6,667) Accumulated deficit........................... (8,748) (9,571) ------- ------- ---- Total stockholders' equity (deficit)........ (725) (1,498) ------- ------- ---- Total capitalization...................... $42,337 $50,764 $ ======= ======= ====
21 DILUTION As of March 31, 1999, we had a pro forma net tangible book value of ($34,576,995) or ($1.87) per share. Pro forma net tangible book value per share is equal to our total tangible assets less total liabilities, divided by the number of shares of our outstanding common stock. Without taking into account any other changes in net tangible book value after March 31, 1999, other than to give effect to our receipt of the estimated net proceeds from the sale of the shares of common stock offered hereby at an assumed initial public offering price of $ per share, our pro forma net tangible book value as of March 31, 1999 would have been $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to new investors. If the initial public offering price is higher or lower than $ per share, the dilution to new stockholders will be lower or higher, respectively. The following table illustrates this per share dilution: Assumed initial public offering price per share................... $ Pro forma net tangible book value per share before this offering....................................................... $ Increase per share attributable to new investors................ Pro forma net tangible book value per share after this offering... $ ---- Dilution per share to new investors............................... $ ====
Assuming the underwriters exercise their right to purchase additional shares from us, the pro forma net tangible book value per share as of March 31, 1999 would have been $ , representing an immediate increase in net tangible book value per share of $ to our existing stockholders and an immediate dilution in net tangible book value per share of $ to new investors. The following table summarizes, on a pro forma basis as of March 31, 1999, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased, the total consideration paid and the average price per share paid:
Shares Purchased Total Consideration ------------------- --------------------- Average Price Number Percent Amount Percent Per Share Existing stockholders... % $ % $ New investors........... --------- ---------- Total................. 100.0% $ 100.0% ========= ==========
The foregoing table excludes: . shares to be issued pursuant to the underwriters' over-allotment option; .shares of common stock subject to outstanding options at March 31, 1999 at a weighted average exercise price of $ per share; and .an aggregate of shares available for future grant under our 1998 Stock Option and Incentive Plan as of March 31, 1999. To the extent these options are exercised and the underlying shares are granted, there will be further dilution to new investors. See "Management" and the notes to our financial statements included elsewhere in this prospectus. 22 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (In thousands, except per share and other data) The following tables sets forth selected consolidated financial information and other data for Voyager.net. The selected consolidated results of operations and the selected historical consolidated balance sheet data for the years ended December 31, 1995, 1996, 1997, and 1998 have been derived from the audited consolidated financial statements of Voyager.net. The selected consolidated financial information and other data as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 are unaudited; however, in the opinion of our management the unaudited data includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the information. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999 or any other future period. The pro forma information and other data for the year ended December 31, 1998 and the three months ended March 31, 1999 are unaudited. The pro forma information and other data is not necessarily indicative of the results of operations that would actually have occurred if the acquired business transactions included therein had been consummated as of January 1, 1998. For all periods presented, the related financial information has been presented using consistent methods of accounting. You should read the following selected historical consolidated financial statements and other data in conjunction with our consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected consolidated financial data as of and for the year ended December 31, 1994 are not presented since we had just begun operations. As of December 31, 1994, total assets were approximately $140,000 and total revenue for the year then ended was approximately $20,000. The selected consolidated financial and other data includes a presentation of EBITDA. As used in this prospectus, EBITDA represents earnings before interest, taxes, depreciation, amortization and non-recurring, non-cash compensation charges. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles, and should not be construed as a substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. EBITDA, as calculated by Voyager.net, is not necessarily comparable with similarly titled measures for other companies. 23
Years Ended December 31, Three Months Ended March 31, ---------------------------------------------- --------------------------------- Pro Pro Forma Forma 1995 1996 1997 1998 1998 (1) 1998 1999 1999 (1) Consolidated Statement of Operations Data: Revenues: Internet access service............... $ 202 $ 1,707 $ 3,440 $10,589 $ 25,593 $ 1,132 $ 8,405 $ 9,547 Other.................. -- -- 14 133 150 3 114 114 ------ ------- ------- ------- -------- -------- --------- ---------- Total revenue.......... 202 1,707 3,454 10,722 25,743 1,135 8,519 9,661 ------ ------- ------- ------- -------- -------- --------- ---------- Operating expenses: Internet access service costs................. 143 1,002 1,318 3,608 9,620 370 2,790 3,108 Sales and marketing.... 101 638 1,038 1,987 2,923 181 969 1,053 General and administrative........ 521 1,155 1,462 3,406 7,570 355 2,463 2,816 Depreciation and amortization.......... 128 420 394 3,862 16,062 126 3,527 4,507 Compensation charge for issuance of common stock and stock op- tions................. -- -- -- 408 408 -- -- -- ------ ------- ------- ------- -------- -------- --------- ---------- Total operating expenses.............. 893 3,215 4,212 13,271 36,583 1,032 9,749 11,484 ------ ------- ------- ------- -------- -------- --------- ---------- Income (loss) from operations ............ (691) (1,508) (758) (2,549) (10,840) 103 (1,230) (1,823) Other income (expense).. 17 10 (62) (912) (3,618) (39) (771) (1,012) ------ ------- ------- ------- -------- -------- --------- ---------- Net income (loss)....... $ (674) $(1,498) $ (820) $(3,461) $(14,458) $ 64 $ (2,001) $ (2,835) Preferred stock dividends.............. -- -- (74) (348) (348) (50) (166) (166) ------ ------- ------- ------- -------- -------- --------- ---------- Net income (loss) applicable to common stockholders........... $ (674) $(1,498) $ (894) $(3,809) $(14,806) $ 14 $ (2,167) $ (3,001) ====== ======= ======= ======= ======== ======== ========= ========== Per Share Data: Basic and diluted net loss per share applicable to common stockholders........... $(0.09) $ (0.35) $ (0.12) $ (0.27) $ (1.04) $ 0.00 $ (0.12) $ (0.16) ====== ======= ======= ======= ======== ======== ========= ========== Weighted average common shares outstanding............ 7,231 4,316 7,160 14,238 14,238 12,096 18,539 18,539 Other Financial Data: EBITDA (as defined)..... $ (563) $(1,088) $ (364) $ 1,721 $ 5,630 $ 229 $ 2,297 $ 2,684 EBITDA margin........... (278.7)% (63.7)% (10.5)% 16 .1% 21.9% 20.2% 27.0% 27.8% Capital expenditures.... 411 759 661 1,514 1,743 171 1,321 1,406 Other Data: Subscribers at end of period (approximate).......... 3,000 10,000 17,000 142,000 160,000 19,000 188,000 208,000 POPs.................... 5 25 32 138 158 35 146 166 Cash Flow Data: Cash flow provided by (used in): Operating activities.... $ (538) $ (877) $ (398) $ 2,702 $ 7,292 $ 215 $ 3,432 $ 3,957 Investing activities.... (408) (759) (574) (34,336) (35,192) (171) (10,692) (10,778) Financing activities.... 1,980 583 1,488 33,466 30,753 34 9,336 (6,821) Consolidated Balance Sheet Data: Cash and cash equivalents............ $1,055 $ 3 $ 519 $ 2,350 $ 4,121 $ 597 $ 4,427 $ 5,701 Working capital......... 917 (275) (1,785) (6,242) (7,243) (1,902) (6,269) (7,232) Total assets............ 1,603 1,186 2,101 41,725 45,014 2,297 52,459 63,310 Total long-term debt, notes payable and capi- tal leases, including current maturities..... 73 871 2,155 33,308 34,307 2,189 43,062 52,261 Total stockholders' equity (deficit)....... 1,350 (148) (539) 1,276 1,324 (475) (725) (1,498)
- --------------------- (1) The selected pro forma financial and other data gives effect to the acquisition of Freeway, Inc., EXEC-PC, Inc., NetLink Systems, L.L.C. and GDR Enterprises, Inc. as if the acquisition of each of these businesses was completed as of January 1, 1998. The historical financial data of Voyager.net, Inc. and the pre-acquisition results of operations of Freeway, Inc., EXEC-PC, Inc., NetLink Systems, L.L.C. and GDR Enterprises, Inc. were combined with certain pro forma adjustments to calculate the summary pro forma financial data for 1998. Additionally, the historical financial data of Voyager.net, Inc. and the pre-acquisition results of operations of GDR Enterprises, Inc. were combined with certain pro forma adjustments to calculate the summary pro forma financial data for March 31, 1999. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Read the following discussion together with the financial statements and related notes included elsewhere in this prospectus. The results discussed below are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations and which involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth herein, in the section entitled "Risk Factors" and elsewhere in this prospectus. General We are the largest Internet service provider focused on the Midwestern United States. We incorporated in June 1994 and began offering Internet access to residential and business customers in Michigan in 1995. From 1995 to 1997, we focused on building our network infrastructure in Michigan as well as developing the core competencies to grow our business. We funded the initial build-out of our network and development of our operations primarily through an aggregate $2.5 million in debt and equity capital from Horizon Cable I Limited Partnership, Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership. In 1998, we began pursuing an acquisition program focused on acquiring regional and local Internet service providers throughout the Midwest. This program allowed us to expand into new markets as well as to increase the utilization of Voyager.net-owned points of presence network infrastructure and operations. During 1998, we acquired seven Internet service providers in the Midwest with approximately 100,000 subscribers, including the acquisition of EXEC-PC, Inc., a consumer-based Internet service provider located in Milwaukee, Wisconsin with 80,000 subscribers. We funded these acquisitions primarily with $4.8 million of equity capital raised from private equity investors and through a $40.0 million revolving credit facility with a group of banks led by Fleet National Bank. The credit facility was increased to $70.0 million on April 13, 1999. Thus far in 1999, we have acquired an additional six Internet service providers with approximately 60,000 subscribers in the aggregate. We currently operate the largest dial-up Internet network in the Midwest in terms of geographic coverage, with approximately 150 Voyager.net-owned points of presence in Michigan, Wisconsin, Ohio, Illinois, Indiana and Minnesota. Through a combination of internal growth and acquisitions, we have increased our subscriber base from approximately 17,000 subscribers at the end of December 1997 to approximately 188,000 subscribers as of March 31, 1999, including approximately 5,000 Web hosting subscribers and approximately 900 dedicated access subscribers. Revenues and Expenses Our revenues are generally composed of: .dial-up Internet access services, or services which allow customers to access the Internet through a local telephone call using standard modems in computers; 25 .dedicated Internet access services, or continuous connection to the Internet using dedicated, high-speed access lines; and .additional Web and communications services, such as Web hosting, or maintaining customer Web sites on our servers and computers, co- location, or providing telecommunications facilities for customer owned Web servers and equipment, electronic commerce, and other broadband voice and data services. Dial-up Internet access service revenues consist of monthly, quarterly, semi-annual and annual prepaid subscriptions for Internet access services. We offer dial-up Internet access to residential and small- and medium-sized business customers. Advance collections relating to prepaid subscriptions for future access services are recorded as deferred revenue when collected and revenue is recognized ratably over the term of the prepaid subscription. Subscribers may cancel their subscriptions at any time, in which case we charge the subscribers for their subscription to the date of cancellation and refund any remaining amounts prepaid. Cash received from prepaid subscribers is classified as deferred revenue when received, and no cash reserves are maintained for potential refund obligations. A majority of our residential subscribers pay their monthly fee automatically by a pre-authorized monthly charge to their credit card. Dedicated Internet access services revenues are offered on a monthly, yearly, three-year and five-year subscription basis. We offer dedicated Internet access services using leased dedicated telecommunication lines primarily to business customers, with Internet access using digital subscriber lines and cable modems offered to both residential and business customers. The revenue recognition policies and customer cancellation practices described for the dial-up Internet access services also apply to the dedicated access services. We also provide a wide range of Web services such as Web hosting, co- location, registering customer domain names and Internet addresses, and electronic commerce. We derive recurring revenue from Web site hosting primarily on a fixed-rate monthly basis. We charge our co-location customers monthly fees based on the physical use of our facilities. Other services such as domain name and Internet address registration, e-commerce services and other consulting services are typically offered at a fixed-rate basis or time plus materials basis. We also provide long distance voice services offered through a reseller relationship with IXC Communications Services, Inc. Revenue from long- distance service is recognized as used by the customer. Payments from customers for prepaid calling card services are recorded as deferred revenue when collected and revenue is recognized as the prepaid subscription is used. The average monthly rate at which we experienced customer cancellations and non-renewals of subscriptions, or churn rate, was 2.6% and 2.1% for the year ended December 31, 1998 and the three months ended March 31, 1999, respectively. We calculate our churn rate by dividing (1) the number of subscriber cancellations and non-renewals during the month (excluding cancellations made by new customers during the first 30 days of service) by (2) the average number of subscribers during the month. We devote 26 substantial resources to maintain high quality customer care, and we are continually upgrading and expanding our network infrastructure to ensure high levels of customer satisfaction. We believe that our emphasis and focus on customer care has resulted in one of the lowest churn rates in the industry, and we expect to maintain or improve this rate by ensuring that customer support and care are always high priorities for all of our employees. Our operating costs and expenses include the following: .internet access service cost; .sales and marketing expenses; .general and administrative expenses; and .depreciation and amortization expenses. Internet access service costs includes costs for providing local telephone lines into each Voyager.net-owned point of presence, costs associated with leased lines connecting each point of presence to our two network operation centers, costs for our connections from our network operating centers to the Internet, billing and bad debt expense and other technical related expenses. Telecommunication costs include the costs of data circuits, dial-in line expenses and connectivity fees. Billing costs include credit card processing fees, banking fees and customer billing expenses. Internet access service costs for Web hosting consists primarily of telecommunication costs. Internet access service costs for other non-recurring value added services consists of licensing fees and cost of labor and overhead performing the service. Internet access service costs for reselling of long distance services consists of third- party wholesale costs of the products resold. Other technical related expenses primarily consist of maintenance contracts and domain name registration costs. As we execute our acquisition strategy in the future, we expect increased Internet access service costs on an absolute dollar basis, but lower Internet access service costs on a percentage basis as a result of continued revenue growth, reduction of redundant costs, consolidation of operations and re- negotiation of pricing on telecommunication, equipment and other vendor contracts. Sales and marketing costs consist of salaries and commissions for sales, marketing and business support personnel, advertising and promotion expenses and commissions for value added resellers. Since 1998, we have expanded our marketing and sales efforts as we have expanded our geographic coverage, increased our subscriber base, acquired additional businesses and introduced new products and services. We expect increases in the absolute spending for sales and marketing, but we expect these costs to be more than offset by the increase in customer revenues that will be achieved. We do not defer any costs associated with obtaining or retaining customers or entering new markets. General and administrative expenses consist of compensation costs for business development, finance, accounting and billing, customer and technical support and administration personnel and occupancy costs. Since January 1998, we have hired several members of our senior management. We are currently seeking to hire additional personnel to support our growth. We expect increases in general and administrative expenses on an 27 absolute dollar basis as we continue to execute our acquisition strategy and expand our operations, but we expect these costs to be more than offset by the increase in customer revenues that will be achieved. On a monthly per customer basis and as a percentage of revenue, we expect our general and administrative expenses to decrease over time. Depreciation expense is recognized over the estimated useful lives of our property and equipment ranging from three to ten years on a straight-line basis. Capital investment typically consists of networking equipment such as routers, servers, and various internal network components, telecommunications gear such as access modems, computer equipment and general office equipment with a useful life in excess of one year. Equipment acquired under a capital lease is depreciated over the related lease term or the estimated productive useful life, depending on the criteria met in determining their qualification as a capital lease. Amortization expense generally consists of the costs associated with acquiring our customer base, which is amortized using the straight-line method over three years. Additional amortization expenses consist of bank debt financing fees and miscellaneous costs associated with the development of other assets such as our proprietary customer care and billing system. We have historically not paid any income taxes due to our net losses. As of December 31, 1998, we had deferred tax assets for federal income tax purposes of approximately $1.5 million, which are primarily related to net operating loss carryforwards. These deferred tax assets have been offset by recognition of corresponding valuation allowances. These deferred tax assets expire in the years 2013 and 2018. We have historically experienced negative cash flow from operations and have incurred net losses as a result of our efforts to build our network infrastructure, develop our management team, provide quality customer care programs and acquisition-related spending. We had net losses of $1.5 million, $0.8 million and $3.5 million for the years ended December 31, 1996, 1997 and 1998, respectively, and net income of $64,000 and net loss of $2.0 million for the three months ended March 31, 1998 and 1999, respectively. At March 31, 1999, we had an accumulated deficit of $8.7 million. We intend to capitalize on our successful business model to expand our geographic operations and increase our subscriber base through continued internal growth as well as through strategic acquisitions. As a result, we expect that our Internet access service costs, sales and marketing, general and administrative, and depreciation and amortization costs will increase on an absolute dollar basis. However, we expect continued growth in our revenues to result in increased operating cash flow and EBITDA, both in terms of absolute results and as a percentage of revenues. Our revenues, cash flows from operations and EBITDA were $8.5 million, $3.4 million and $2.3 million, respectively, for the three months ended March 31, 1999, representing an EBITDA margin of 27.0%, compared to revenues, cash flows from operations and EBITDA of $1.1 million, $215,000 and $229,000, respectively, for the three months ended March 31, 1998, representing an EBITDA margin of 20.2%. Our ability to generate positive cash flow from operations and achieve profitability is dependent upon our ability to continue to grow our revenue base and achieve operating efficiencies. 28 As used in this prospectus, EBITDA represents earnings before interest, taxes, depreciation, amortization and non-recurring, non-cash compensation charges. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles, and should not be construed as as substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. EBITDA, as calculated by Voyager.net, is not necessarily comparable with similarly titled measures for other companies. Acquisitions Our acquisition strategy is designed to leverage our existing network and administrative operations to allow us to enter new markets within the Midwest, as well as to expand our presence in existing markets, and to realize economies of scale. Since July 1, 1998 we have acquired 13 Internet service provider businesses in the Midwest totaling approximately 160,000 subscribers. Below is a summary of our completed acquisitions, with the number of customers acquired calculated at the respective date of acquisition:
Number of Company Date Location Customers CDL Corp. 7/1/98 Monroe, MI 550 Internet-Michigan, Inc. 7/1/98 Hastings, MI 1,000 Freeway, Inc. 7/31/98 Petoskey, MI 10,000 EXEC-PC, Inc. 9/23/98 Milwaukee, WI 80,000 Netimation, Inc. 10/2/98 East Lansing, MI 500 NetLink Systems, L.L.C. 10/2/98 Kalamazoo, MI 7,500 Add, Inc. 11/20/98 Waupaca, WI 500 Hoosier On-Line Systems, Inc. 1/15/99 Seymour, IN 8,000 Infinite Systems, Ltd. 2/24/99 Columbus, OH 12,500 Exchange Network Services, Inc. 3/10/99 Cleveland, OH 8,000 StarNet, Inc. 4/23/99 Chicago, IL 5,900 GDR Enterprises, Inc. 5/7/99 Dayton, OH 20,000 PCLink.com 6/4/99 Wayzata, MN 5,500
Our acquisition activity has primarily been financed with $4.8 million of equity capital from private equity investors and loans from a $40.0 million revolving credit facility with a group of banks managed by Fleet National Bank. We increased the overall capacity of our credit facility to $70.0 million on April 13, 1999. Voyager.net is currently in various levels of acquisition discussions with a number of Internet service providers in targeted markets in the Midwest. However, we cannot assure you that we will successfully complete any of the acquisitions we are currently evaluating. Results of Operations The following table sets forth certain consolidated statement of operations data for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 as a percentage of revenue. This information should be read with our consolidated financial statements and notes included elsewhere in this prospectus. 29
Three Months Year Ended December 31, Ended March 31, --------------------------- ---------------- 1996 1997 1998 1998 1999 (unaudited) Revenue: Internet access service..... 100.0% 99.6% 98.8% 99.7% 98.7% Other....................... -- 0.4 1.2 0.3 1.3 ------- ------- ------- ------- ------- Total revenues............ 100.0 100.0 100.0 100.0 100.0 ------- ------- ------- ------- ------- Operating expenses: Internet access service costs...................... 58.7 38.2 33.6 32.6 32.7 Sales and marketing......... 37.4 30.0 18.5 15.9 11.4 General and administrative.. 67.6 42.3 31.8 31.3 28.9 Depreciation and amortization............... 24.6 11.4 36.0 11.1 41.4 Compensation charge for issuance of common stock and stock options.......... -- -- 3.8 -- -- ------- ------- ------- ------- ------- Total operating expenses.. 188.3 121.9 123.7 90.9 114.4 ------- ------- ------- ------- ------- Other income (expense), net... 0.6 (1.8) (8.5) (3.4) (9.1) ------- ------- ------- ------- ------- Net income (loss)......... (87.7)% (23.7)% (32.2)% 5.7% (23.5)% ======= ======= ======= ======= ======= EBITDA Margin............. (63.7)% (10.5)% 16.1% 20.2% 27.0% ======= ======= ======= ======= =======
Three Months Ended March 31, 1999 Compared to March 31, 1998 Revenues. Total consolidated revenues increased from $1.1 million for the three months ended March 31, 1998 to $8.5 million for the three months ended March 31, 1999, representing an increase of 650.6%. The revenue growth was primarily driven by the increase in our customer base from approximately 19,000 at March 31, 1998 to approximately 188,000 at March 31, 1999. The growth in customers was primarily the result of our acquisitions. We also experienced strong internal growth from our effort to provide high quality customer and technical service and support, geographic expansion in our coverage areas and low churn rates. In addition, we introduced several new service offerings, such as DSL and long distance telephone service, which generated additional revenue from our customer base. Internet access service costs. Internet access service costs increased from $370,000 for the three months ended March 31, 1998 to $2.8 million for the three months ended March 31, 1999. Internet access service costs as a percent of revenue remained relatively constant at approximately 33.0% due to improved telecommunication contracts and economies of scale. The increase in absolute spending for the three months ended March 31, 1999 was driven by a significant increase in customers and their associated network expenses and an increase in billing costs. We expect to improve our gross margins in the future as we more fully integrate our acquired companies and leverage our existing network and back office infrastructure over a larger customer base. Sales and marketing. Sales and marketing expense increased from $181,000 for the three months ended March 31, 1998 to $1.0 million for the three months ended March 31, 1999. The increase in spending was attributable to the growth in our customer base and support functions and the expansion of our geographic coverage area. As a percentage of revenue, sales and marketing costs decreased from 15.9% for the three months ended 30 March 31, 1998 to 11.4% for the three months ended March 31, 1999. The improvement in sales and marketing expenses as a percentage of revenues reflects lower customer acquisition costs from our effective customer care and referral programs spread over a larger revenue base. General and administrative. General and administrative expenses increased from $355,000 for the three months ended March 31, 1998 to $2.5 million for the three months ended March 31, 1999. The absolute increase in spending was due to the growth of our business and the administrative functions necessary to support our growth. As a percentage of revenue, general and administrative costs decreased from 31.3% for the three months ended March 31, 1998 to 28.9% for the three months ended March 31, 1999. The improvement on a percentage basis represents leveraging of resources across an increased customer base. Depreciation and amortization. Depreciation and amortization expense increased from $126,000 for the three months ended March 31, 1998 to $3.5 million for the three months ended March 31, 1999. This increase was a result of the amortization of intangible assets related to acquiring our customer base since March 31, 1998, as well as increased capital spending for expanded network operations and infrastructure. Other income (expense), net. Other expenses, net increased from $39,000 for the three months ended March 31, 1998 to $0.8 million for the three months ended March 31, 1999. This increase is the result of the higher average balance on our $40.0 million line-of-credit which was used to fund acquisitions completed during 1998. Net income (loss). As a result of the above, we reported net income of $64,000, or less than $0.01 per share applicable to common stockholders, for the three months ended March 31, 1998 as compared to net loss of $2.0 million, or $0.12 per share applicable to common stockholders, for the three months ended March 31, 1999. EBITDA. EBITDA increased from $229,000 for the three months ended March 31, 1998 to $2.3 million for the three months ended March 31, 1999. As a percentage of revenues, EBITDA increased from 20.2% for the three months ended March 31, 1998 to 27.0% for the three months ended March 31, 1999. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Total consolidated revenues increased from $3.5 million for the year ended December 31, 1997 to $10.7 million for the year ended December 31, 1998, representing an increase of 210.4%. The revenue growth was primarily driven by the increase in our customer base from approximately 17,000 at December 31, 1997 to approximately 142,000 at December 31, 1998. The growth in customers was primarily a result of the seven acquisitions during 1998, which added approximately 100,000 subscribers to our customer base. Internet access service costs. Internet access service costs increased from $1.3 million for the year ended December 31, 1997 to $3.6 million for the year ended December 31, 1998. Internet access service costs as a percent of revenue decreased from 31 38.2% for the year ended December 31, 1997 to 33.6% for the year ended December 31, 1998 due to improved telecommunication contracts and economies of scale. The increase in absolute spending for the year ended December 31, 1998 was driven by a significant increase in customers and their associated network expenses and an increase in billing costs. Sales and marketing. Sales and marketing expense increased from $1.0 million for the year ended December 31, 1997 to $2.0 million for the year ended December 31, 1998. The increase in absolute spending was a result of the rapid growth of our operations and the acquisitions completed during 1998. As a percentage of revenue, sales and marketing costs decreased from 30.0% for the year ended December 31, 1997 to 18.5% for the year ended December 31, 1998. The improvement of sales and marketing expenses as a percentage of revenues reflects the efficiencies of our marketing programs over a larger customer base. General and administrative. General and administrative expenses increased from $1.5 million for the year ended December 31, 1997 to $3.4 million for the year ended December 31, 1998. The absolute increase in spending was due to the increase in support functions and basic infrastructure necessary to support the expansion of our business and the acquisition activity. As a percentage of revenue, general and administrative expenses decreased from 42.3% for the year ended December 31, 1997 to 31.8% for the year ended December 31, 1998. The improvement on a percentage basis represents efficiencies achieved through the integration of acquired businesses and leveraging resources across an increased customer base. Depreciation and amortization. Depreciation and amortization expense increased from $394,000 for the year ended December 31, 1997 to $3.9 million for the year ended December 31, 1998. This increase was a result of the amortization of intangible assets related to acquiring our customer base since December 31, 1997, as well as increased capital spending for expanded network operations and infrastructure. Compensation charge for issuance of common stock and stock options. We incurred a charge of $408,000 for the year ended December 31, 1998 related to the issuance of common stock and stock options during the year ended December 31, 1998. The amount of this charge was based on the issuance and grant of common stock and options at purchase and exercise prices below fair market value. We believe these charges to be non-recurring in nature. However, upon the closing of this offering the vesting provisions of some issued and outstanding stock options and restricted common stock will accelerate, which acceleration will result in additional compensation expense of approximately $38,000 from April 1, 1999 through the anticipated closing date of this offering. Other income (expense), net. Other expenses, net increased from $62,000 for the year ended December 31, 1997 to $0.9 million for the year ended December 31, 1998. This increase is the result of the higher average balance on our $40 million line-of-credit which was used to fund acquisitions completed during 1998. Net income (loss). As a result of the above, we reported a net loss of $0.8 million, or $0.12 per share applicable to common stockholders, for the year ended December 31, 32 1997 as compared to a net loss of $3.5 million, or $0.27 per share applicable to common stockholders, for the year ended December 31, 1998. EBITDA. EBITDA increased from ($364,000) for the year ended December 31, 1997 to $1.7 million for the year ended December 31, 1998. As a percentage of revenues, EBITDA increased from (10.5%) for the year ended December 31, 1997 to 16.1% for the year ended December 31, 1998. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues. Total consolidated revenues increased from $1.7 million for the year ended December 31, 1996 to $3.5 million for the year ended December 31, 1997, representing an increase of 102.5%. The revenue growth was primarily driven by the increase in our customer base from approximately 10,000 at December 31, 1996 to approximately 17,000 at December 31, 1997. The growth in customers was the result of the development of our core Internet access service business. Internet access service costs. Internet access service costs increased from $1.0 million for the year ended December 31, 1996 to $1.3 million for the year ended December 31, 1997. Internet access service costs as a percent of revenue decreased from 58.7% for the year ended December 31, 1996 to 38.2% for the year ended December 31, 1997 due to economies of scale in the increased size of our operations. The increase in absolute spending for the year ended December 31, 1997 was driven by a significant increase in customers and their associated network expenses and an increase in billing costs due to rapid customer growth. Sales and marketing. Sales and marketing expense increased from $0.6 million for the year ended December 31, 1996 to $1.0 million for the year ended December 31, 1997. The increase in sales and marketing on an absolute basis was the result of the subscriber growth during 1997. As a percentage of revenue, sales and marketing costs decreased from 37.4% for the year ended December 31, 1996 to 30.0% for the year ended December 31, 1997. General and administrative. General and administrative expenses increased from $1.2 million for the year ended December 31, 1996 to $1.5 million for the year ended December 31, 1997. The absolute increase in spending was due to the increase in administrative functions to support our growing subscriber base. As a percentage of revenue, general and administrative costs decreased from 67.6% for the year ended December 31, 1996 to 42.3% for the year ended December 31, 1997. Depreciation and amortization. Depreciation and amortization expense decreased from $420,000 for the year ended December 31, 1996 to $394,000 for the year ended December 31, 1997. Other income (expense), net. Other income, net decreased from $10,000 for the year ended December 31, 1996 to ($62,000) for the year ended December 31, 1997. Net income (loss). As a result of the above, we reported a net loss of $1.5 million, or $0.35 per share applicable to common stockholders, for the year ended December 31, 1996 as compared to a net loss of $0.8 million, or $0.12 per share applicable to common stockholders, for the year ended December 31, 1997. 33 EBITDA. EBITDA increased from ($1.1) million for the year ended December 31, 1996 to ($364,000) for the year ended December 31, 1997. As a percentage of revenues, EBITDA increased from (63.7%) for the year ended December 31, 1996 to (10.5%) for the year ended December 31, 1997. Quarterly Results of Operations The following tables set forth the statement of operations data for the periods indicated. This information has been derived from our unaudited consolidated financial statements, which in management's opinion has been prepared on substantially the same basis as the audited financial statements and includes all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial condition and results of operations for these periods. The operating results for any quarter are not necessarily indicative of results for any future period.
Three Months Ended -------------------------------------------------------- March 31, June 30, September 30, December 31, March 31, 1998 1998 1998 1998 1999 (In thousands, except per share and subscriber data) Revenue: Internet access service.............. $ 1,132 $ 1,222 $ 2,042 $ 6,193 $ 8,405 Other................. 3 -- 4 126 114 ------- ------- ------- ------- ------- Total revenues...... 1,135 1,222 2,046 6,319 8,519 Operating expenses: Internet access service costs........ 370 429 818 1,991 2,790 Sales and marketing... 181 224 390 1,192 969 General and administrative....... 355 466 657 1,928 2,463 Depreciation and amortization......... 126 143 345 3,248 3,527 Compensation charge for issuance of common stock and stock options........ -- -- 408 -- -- ------- ------- ------- ------- ------- Total operating expenses........... 1,032 1,262 2,618 8,359 9,749 ------- ------- ------- ------- ------- Income (loss) from operations............. 103 (40) (572) (2,040) (1,230) Other income (expense), net.................... (39) (38) (96) (739) (771) ------- ------- ------- ------- ------- Net income (loss)....... $ 64 $ (78) $ (668) $(2,779) $(2,001) Preferred stock dividends.............. (51) (51) (80) (166) (166) ------- ------- ------- ------- ------- Net income (loss) applicable to common stockholders........... $ 13 $ (129) $ (748) $(2,945) $(2,167) ======= ======= ======= ======= ======= Basic earnings net (loss) per share applicable to common stockholders........... $ 0.00 $ (0.01) $ (0.05) $ (0.16) $ (0.12) Weighted average common shares outstanding..... 12,096 12,114 14,722 17,912 18,539 EBITDA (as defined)..... 229 103 180 1,209 2,297 Subscribers (approximate).......... 19,000 20,000 118,000 142,000 188,000
Our quarterly operating results have fluctuated and will continue to fluctuate from period-to-period depending upon certain factors. Factors that may contribute to the variability of operating results include: the growth rate of new customers, retention of 34 existing customers, the timing of the expansion of our operations, the payment of interest related to the fully utilized revolving credit facility, the introduction of new and enhanced services by us, competitive pricing pressures, changes in our ability to negotiate favorable rates for the use of its network infrastructure, customer demand for Internet services and increased costs for retaining employees. In view of the significant growth of our operations, management believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance and that we may experience in the future significant period-to-period fluctuations in operating results. We expect to focus in the near term on building and increasing our revenue base, which will require additional expenses for personnel, marketing, and network infrastructure that may adversely impact short term operating results. As a result, there can be no assurance that we will be profitable on a quarterly basis in the future and management believes that it will incur losses in at least the near term. Liquidity and Capital Resources Our principal capital and liquidity needs historically have related to funding the cash portion of our acquisitions, our sales and marketing activities, the development and expansion of our network infrastructure, the establishment of our customer service and support operations and general working capital needs. The capital needs of our company were initially met in 1996 and 1997 by loan advances from Horizon Cable I Limited Partnership and private placements of our securities to our principal stockholders, as further described below. As we grew our operations during 1998, we received capital from other sources, including cash provided by operating activities, proceeds from the issuance of debt and notes payable and through private placements of our securities, as further described below. Net cash provided by operating activities was $2.7 million in 1998, compared to net cash used in operating activities of $398,000 in 1997. The primary sources of cash from operating activities in 1998 were increases in deferred revenue of $1.2 million, increases in accounts payable and accrued expenses of $1.3 million, and $3.9 million in depreciation and amortization. These sources were partially offset by a $3.5 million net loss and increased accounts receivable of $0.5 million. Net cash used in investing activities was $34.3 million in 1998, compared to net cash used in investing activities of $0.6 million in 1997. Cash used in investing activities in 1998 consisted of $32.9 million to acquire seven Internet service provider businesses and $1.5 million for the purchase of capital equipment. Cash used in investing activities in 1997 primarily relates to the purchase of capital equipment. Net cash provided by financing activities was $33.5 million in 1998, compared to cash provided in financing activities of $1.5 million in 1997. The primary sources of cash from financing activities in 1998 were net borrowings of $30.0 million under our revolving credit facility, net proceeds of $2.8 million from the issuance of notes payable and net proceeds of $2.1 million from the issuance of series A preferred stock, partially offset by a payment of $1.3 million for bank financing fees. 35 In September 1998, we entered into a $40.0 million revolving credit facility with a bank group led by Fleet National Bank. At March 31, 1999, $39.4 million was outstanding. On April 13, 1999, we increased our availability under our credit facility to $70.0 million on similar terms and conditions. Interest is payable quarterly with the first payment on December 31, 1998. The bank agreements allow us to elect an interest rate as of any borrowing date of either the (1) prime rate or (2) LIBOR, plus a margin ranging from 1.5% to 3.5% depending upon our funded debt to EBITDA ratio. The elected rate as of March 31, 1999 was approximately 8.0%. Automatic and permanent reductions of the maximum commitments begin September 30, 2000 and continue until maturity. In September 1998, we issued series A preferred stock and common stock for gross proceeds of approximately $0.5 million to private investors and cancellation of outstanding promissory notes. In July 1998, $4.3 million was raised through the issuance of preferred stock, common stock and promissory notes to private investors. In 1997, we raised $0.5 million from the issuance of series A preferred stock to private investors. As of March 31, 1999, our principal sources of liquidity consisted of $4.4 million of cash and cash equivalents, and approximately $0.6 million of available credit under our revolving credit facility. In the opinion of management, we will be able to finance our business as currently conducted and as currently planned from operating cash flow, current working capital, available borrowing capacity under our line-of-credit and the net proceeds of this offering for a period of at least the next twelve months. Year 2000 Compliance Introduction. The term "year 2000 issue" is generally used to describe the various computer and other problems that may result from the improper processing of dates and date-sensitive calculations as the year 2000 approaches and is reached. These problems arise from hardware and software unable to distinguish dates in the "2000s" from dates in the "1900s" and from other sources such as the use of special codes and conventions in software that use a date field. These problems could result in a system failure of miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices or engage in other normal business activities. The year 2000 issue may pose additional problems due to the fact the year 2000 is a leap year and some computers and programs may fail to recognize the extra day. Our State of Readiness. We have undertaken an assessment of our vulnerability to the year 2000 issue with respect to our software, equipment, and other information systems. We based this assessment upon a review of our network and software, communications with our software vendors, telecommunications providers and third-party suppliers. To date, we have not experienced any problems with year 2000 issues with either third-party or internal systems. Our year 2000 readiness program is supervised by our executive committee and we review our year 2000 program on a monthly basis. 36 Our overall year 2000 readiness program consists of the following steps: . developing a complete inventory of our hardware and software and assessing whether each specific piece of equipment or software is year 2000 compliant; . contacting all of our major equipment vendors to ensure that the equipment or software purchase has been tested and verified as year 2000 compliant; . testing all of our internal equipment and software to insure that it is year 2000 compliant; . upgrading, repairing, or replacing all internal or purchase equipment or software to ensure that it is year 2000 compliant; and . developing contingency plans to address potential year 2000 problems which are not directly in our control or have not previously been tested or repaired. Specific areas in our year 2000 program which have been completed: . upgrading our internal customer care system which includes our billing, technical support, and customer support modules and which is now year 2000 compliant; . contacting our major equipment providers, including Oracle, Cisco, Gateway, 3Com, and Sun Microsystems, and receiving disclosure statements that all of the equipment or software purchased from these vendors is year 2000 compliant; and . replacing all modems, servers and other telecommunications equipment which had been tested and reviewed as non-year 2000 compliant. Contingency Plans for Year 2000 problems. For the equipment and software which is directly in our control, we have started the development of various contingency plans for year 2000 problems. We do rely, however, on equipment purchased by third-party vendors, over which we have no control. We have and will continue to take the necessary steps in order to assure that the equipment purchased from third-party vendors is year 2000 compliant. We expect to complete all of our year 2000 testing by October 1, 1999. Cost to Address Year 2000 Issues. Our historical costs to assess our year 2000 readiness have been negligible. We are not currently able to estimate the final aggregate cost of addressing the year 2000 issue because funds may be required as a result of future findings. We do not expect these costs to have an adverse effect on our business and financial results. Risks Presented by Year 2000 Issues. We are still in the process of evaluating potential disruptions or complications that might result from year 2000-related problems. Our failure to correct a material year 2000 problem could result in a complete failure or degradation of the performance of our network or other systems, including the disruption of operations and normal business activities. Presently, however, we believe that the most reasonably likely worst case scenario related to the year 2000 issue is associated with third-party services and products. Specifically, Voyager.net is heavily dependent on a significant number of third-party vendors to provide both network services, telecommunications lines and equipment. A significant year 2000-related disruption of the services provided to us by third-party vendors could cause customers to consider seeking 37 alternate Internet access providers or cause an unmanageable burden on customer service and technical support, which in turn could materially and adversely affect our results of operations, liquidity and financial condition. We are not presently aware of any vendor-related year 2000 issue that is likely to result in such a disruption. Furthermore, Voyager.net's business depends on the continued operation of, and widespread access to, the Internet. To the extent the year 2000 issue disrupts the normal operation of the Internet, our results of operations, liquidity and financial condition could be materially and adversely affected. Although there is inherent uncertainty in the year 2000 issue, we expect that as we progress with our year 2000 readiness plan, the level of uncertainty about the impact of the year 2000 issue on us will be reduced and we should be better positioned to identify the nature and extent of material risk to us as a result of any year 2000 disruptions. Forward-Looking Statements This prospectus contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed in the sections captioned "Risk Factors" as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the "Risk Factors" section and elsewhere in this prospectus could have a material adverse effect on our business, operating results and financial condition. 38 BUSINESS Overview Voyager.net is the largest Internet service provider focused on the Midwestern United States. We serve residential and business customers in markets within our target region which we believe have been historically under- served by the larger, national Internet service providers. Our primary service offering is Internet access to residential and business subscribers. We also offer a variety of additional Internet services such as maintaining customer Web sites on our servers, known as Web-hosting, and providing telecommunication facilities for customer-owned Web servers and related equipment, known as co- location, and electronic commerce. In addition, we offer enhanced communications services such as broadband Internet access services using high speed digital service technology through traditional copper telephone lines, known as digital subscriber lines, or DSL, and modems integrated with cable television services, or cable modems, and the resale of long distance voice services bundled with our Internet access products. We operate the largest dial-up Internet network in the Midwest in terms of geographic coverage, with approximately 150 Voyager.net-owned points of presence in Michigan, Wisconsin, Ohio, Illinois, Indiana and Minnesota. Industry Background The Internet has rapidly developed into an integral business and personal communications tool. Consumers and businesses are demanding solutions which provide them with the ability to access and utilize the Internet in a fast, secure and reliable manner. Factors driving the growth in the number of Internet users and Web sites include the large and growing installed base of low-cost personal computers, advances in the performance and speed of personal computers and modems, improvements in network infrastructure, easier access to the Internet and the increasing importance of the Internet as a communications and commercial medium. International Data Corporation, estimates that the number of Internet users in the United States is expected to increase 27.4% annually from 51.6 million in 1998 to 135.9 million in 2002. U.S. consumers account for the highest concentration of global Internet users. According to International Data Corporation, the number of household on- line subscriptions is expected to increase from 29.8 million in 1998 to 67.6 million in 2002. This implies that the on-line penetration rate for U.S. households will rise from 29.5% in 1998 to 64.0% by 2002. Industry experts expect a substantial share of the residential growth to be derived from the small office and home office market. This segment represents heavy users of personal computers and communications services, resulting in high Internet access service needs. According to International Data Corporation, residential Internet access service revenues will more than double from $4.7 billion in 1998 to $10.6 billion in 2002. Businesses have also rapidly established corporate Internet sites and connectivity as a means to expand customer reach and improve communications efficiency. Many businesses are utilizing the Internet as a lower cost alternative to certain traditional telecommunications services. The Strategis Group estimates that the penetration of U.S. businesses connected to the Internet will rise from 66% in 1998 to nearly 80% in 2003, resulting in 4.1 million businesses being connected to the Internet by 2003. The number of individual U.S. 39 corporate users is expected to increase from 34.9 million users in 1998 to 50.3 million users in 2003. According to International Data Corporation, U.S. corporate Internet access service revenues are expected to more than triple from $2.9 billion in 1998 to $10.1 billion in 2002. The Internet service provider market is highly fragmented. As of the end of 1998, there were over 4,850 providers in the U.S., according to Boardwatch Magazine. These Internet service providers vary widely in their geographic coverage, customer focus and the nature and the quality of their services. The Internet service provider market is generally segmented into three broad categories: .national providers are typically full-service providers that offer a broad range of Internet access and other services to businesses; .regional providers which include the regional telephone operators, competitive local exchange carriers and Internet access providers, such as Voyager.net; and .local providers which are typically closely-held start-ups or small companies serving a single market. The vast majority of Internet service providers are small, local operations with fewer than 10,000 customers each. According to Boardwatch Magazine, there are approximately 40 national backbone providers and there are approximately 180 national dial-up providers. Despite the growth in the Internet service provider industry, very few Internet service providers are profitable. In addition, the dramatic growth of Internet usage and dependency has prompted customers to demand from their providers more enhanced technology and services and reliable, high speed, quality Internet access. Thus, Internet service providers will be faced with expending significant capital resources to attract and retain subscribers. As a result, the industry is expected to undergo substantial consolidation over the next few years, particularly among the local providers, who typically lack the financial resources necessary to continue to compete. We believe that the anticipated growth in Internet use and the significant number of under- capitalized local providers within our region meeting our acquisition criteria provides us with an excellent opportunity to extend our scalable business model and become one of the largest Internet service providers in the U.S. The Voyager.net Solution The business model that we have developed has resulted in substantial revenue growth, reduced customer acquisition costs and significant EBITDA while maintaining high customer satisfaction. Our business model is based on the following key principles: .we control our costs of acquiring new customers by focusing on markets in the Midwestern United States, thereby reducing the need for more expensive, broad-based marketing campaigns; .we focus on delivering high quality products and services and superior customer care which we believe results in significant word of mouth referrals and customer retention greater than industry average; 40 .we own and manage 100% of our network equipment and customer care operations which significantly reduces our telecommunication costs and provides us with greater control over our network utilization, efficiency, scalability and quality; and .we realize significant cost savings and economies of scale from our acquired businesses by eliminating duplicated network infrastructure and consolidating sales and marketing, network operations, customer support and back office operations. The success of our business model is evidenced by a recent survey conducted by PC World Magazine in which we ranked 10th among national and regional Internet service providers in the U.S. in terms of access speed and reliability, customer satisfaction and product offerings. Our Growth Strategy Our overall strategy is to continue as the dominant Internet access provider to residential and business customers in the Midwest. We intend to continue to capitalize on our scalable business model and strong regional presence by executing a regional growth strategy through internal growth and strategic acquisitions. Internal Growth Strategy. The key principles of our internal growth strategy are as follows: . Maintain our superior customer care and service in order to increase customer referrals and customer retention. Customer care is at the heart of running an Internet service provider. In general, the Internet service provider industry has struggled to provide a consistent quality of service. Busy signals and inattentive customer support staff represent the principal causes for subscriber cancellations. We believe that we are well-positioned with established systems, procedures and a core management team and staff to manage significant growth without sacrificing quality. We have staffed our two large call centers located in East Lansing, Michigan and New Berlin, Wisconsin with more than 170 employees, or more than 60% of all our employees. We have complemented our customer service support by developing a proprietary, customer care and billing solution designed with several Internet functions. We believe this system gives us a competitive advantage versus other Internet service providers and offers the following benefits: .easy internal use from any computer connected to the Internet; .beginning to end customer service tracking including automated service rendering and tracking of marketing channels; .complete technical support history by account; .real-time third-party account creation (order fulfillment); .automated billing and creation of new service plans (including usage based billing); .tracking of usage and creation of usage reports; .automated marketing reports and information on subscriber churn; and .third-party accessibility and controllable levels of customer interactivity. 41 As a result of these customer care initiatives, our customer support telephone hold times are consistently close to two minutes, and our average monthly customer churn is 2.6%, each of which is significantly less than the industry average. . Continue to invest in our network to provide our subscribers with the most reliable, high quality, high speed Internet access services at lower costs. We believe that continually improving our network capacity and speed increases our customers' satisfaction and decreases subscriber churn and our cost of acquiring new subscribers. The number of subscribers per phone line, or contention ratio, is a critical factor in the Internet service provider business, since overloading and significant busy signals are the primary causes of subscriber churn. Our goal is to have zero busy signals. Our network capacity includes approximately 150 points of presence and approximately 21,000 phone lines equipped with dial-in digital modems for our customers. As a result, our average ratio of subscribers to dial-in modems, or contention ratio, is approximately 9:1, significantly better than the industry average of approximately 13:1. More importantly, we focus on utilization ratios at each of our points of presence to ensure that each dial-in location maintains sufficient phone lines. We also recently upgraded the speed, capacity and reliability of our telecommunications infrastructure by leasing lines from multiple incumbent local exchange carriers and competitive local exchange carriers. We connect our points of presence to our two main network operating centers in East Lansing, Michigan and New Berlin, Wisconsin using high speed leased line connections, and from there we have multiple high-speed connections to the Internet. Since we own and manage 100% of all network equipment at our points of presence, rather than lease the equipment from national carriers, we are able to more efficiently load our customers on to each point of presence and reduce our telecommunication cost per customer, the single largest expense for an Internet service provider. . Continue our highly focused sales and marketing efforts and use of strategic reseller arrangements. We market our services through a combination of local, direct advertising and word-of-mouth referrals. Because we currently focus exclusively on markets in contiguous states in the Midwest, including numerous small- to medium-sized markets, we can avoid broad-based and expensive advertising campaigns and have lower costs of acquiring new customers than most of our competitors. Our attention to customer care has fostered brand names within our region leading to significant customer-to-customer referrals, which account for over 70% of all new sales. We also benefit from the ease of use of our customer application and support system. Our customer sign-up process is customer- friendly and is easily accomplished through our Web site or by calling our customer support personnel, and, unlike many service providers' sign-up procedures, a Voyager.net user can be on-line in a matter of minutes. In addition, we have entered into strategic reseller agreements with several companies to further market our services within local communities. . Offer enhanced communications services such as digital subscriber lines, Internet access through the integration with cable television systems, cable modems, and the resale bundled voice and data services at competitive rates. We presently offer a broad range of Internet services to residential and business customers such as dial-up and dedicated access, Web hosting, Web server co-location, domain name registration and various e-commerce services. We believe, however, that consumer users, businesses and residential users, including home office 42 users, are increasingly seeking high-speed, high-capacity Internet access and a single source for their Internet and telecommunications needs. To meet these demands, we have begun offering more enhanced services to our subscribers, such as: .expanded high speed Internet access through digital subscriber lines and cable modems; .bundled voice and data telecommunications services; and .branded Web-TV services for Internet access without a computer. As part of our goal to offer our subscribers these enhanced services, we recently acquired EriNet Telecom, Inc., which is authorized by the State of Ohio as a competitive local exchange carrier. As a competitive local exchange carrier, we will gain access to wholesale telecommunication rates and related network elements and be able to offer a comprehensive package of bundled voice and data telecommunications services to our subscribers. We believe that providing enhanced service product offerings will satisfy this emerging customer trend of desiring a single source vendor for all telecommunications services, adding to our competitive strengths and further entrenching us with an expanding customer base. We anticipate filing for status as a competitive local exchange carrier in other states within our region in the future. External Growth Strategy. Our external growth strategy is to continue to acquire and integrate local and regional Internet service providers to increase network utilization and enter new markets. The key elements of our acquisition strategy are as follows: . Identify suitable acquisition candidates. Our management conducts an extensive review of Internet service providers within our target universe to identify promising potential acquisition candidates. Desired target characteristics include: . high customer growth and customer retention rates; . compatibility of product/service mix; . cash flow positive operations; . dominant local market presence; . identifiable scale efficiencies; and . expanded contiguous market reach within the Midwest or increased utilization of existing points of presence. Using this criteria, during the past 12 months our acquisition team has successfully identified and consummated the purchase of 13 Internet service provider businesses, representing approximately 160,000 subscribers. These acquisitions have helped us become one of the 20 largest Internet service providers in the U.S. in terms of subscribers. We believe that consolidation in the Internet service provider industry will continue and that significant opportunities exist for future growth through the acquisition of Internet service providers within our region. We have currently 43 identified approximately 50 additional companies in the Midwest with between 5,000 and 20,000 subscribers, representing approximately 500,000 potential subscribers, which meet our acquisition criteria. We believe that our regional focus, experienced management team and proven integration plan provides us with a competitive advantage over national Internet service providers and other consolidators and allows us to more efficiently integrate the acquired businesses. By acquiring businesses within one region, we also are able to leverage our existing network and administrative operations while gaining a foothold in markets within the region, thereby achieving significant economies of scale. . Manage the acquisition process. Our acquisition team is an important element of this acquisition strategy. We have a dedicated acquisition team whose responsibility is to manage the acquisition process, including the identification, selection and integration of the acquired business. Our acquisition team is continually evaluating acquisition opportunities, and has developed strong relationships with Midwest Internet service provider operators and mergers and acquisitions professionals. Our acquisition team also works closely with our sales and marketing, network engineering and executive management teams to identify potential cost savings and synergies for each acquisition candidate and to develop a detailed acquisition and integration plan. . Integrate the acquired businesses. We also have developed a detailed integration plan for our acquired companies which focuses on reducing redundant costs and consolidating operations within a short time after closing. The first step of our integration process is to assume control of all the financial operations as of the date of acquisition to ensure strict financial controls over cash and financial reporting. We also centralize all of the accounting and related financial functions at our main office in East Lansing and incorporate the acquired subscriber accounts into our customer care and billing system to take advantage of the functionality and scalability of our systems. Once the acquired company's systems are transferred, we then consolidate all of the customer support and network operations into our two call centers in East Lansing, Michigan and New Berlin, Wisconsin, thus eliminating various offices, personnel and their related costs. The final component of our integration process is to capitalize on our scale economies. We eliminate duplicate network costs and connections to the Internet, thereby significantly reducing costs. We also realize cost savings by re-negotiating more favorable pricing on telecommunication lines and equipment purchases. Our scale allows us to demand better pricing from other third-party vendors as well. Our successful integration of the acquired companies and the realization of the scale economies relating to our acquisitions has contributed to the increase in our EBITDA margins since 1998. Voyager.net Service Offerings Internet Access Services. We offer a full range of dial-up Internet access services to residential subscribers and dedicated and dial-up Internet access to business customers. By 44 selecting between the various types of access services and pricing plans available, subscribers can select services that fit their specific needs. . Dial-up access. Our residential access services are designed to provide our subscribers with reliable Internet access through standard dial-up modems. Our dial-up Internet access service includes: .local access numbers; .personal Web space; .multiple e-mail accounts; .toll-free customer support; .light usage plans; and .Internet chat and news groups. The price plans for our dial-up access services range from $9.95 to $19.95 per month. We also offer prepaid plans for quarterly, semi-annual and annual access. A majority of our residential subscribers pay their monthly fee automatically by a pre-authorized monthly charge to their credit card. . Dedicated access. We offer continuous connections to both business and residential subscribers at a range of speeds using traditional telecommunications lines, integrated services digital network lines and frame relay communications services for those customers requiring greater speed and reliability. The price plans for dedicated access services range from $30 to $1,000 per month. . Cable modems. Through a reseller arrangement with Millennium Digital Media Systems, L.L.C., we offer broadband Internet access in certain locations through the use of modems integrated with cable television systems and provide the technical and billing support to this fast-growing segment of the Internet access business. The retail price for the cable modem service is $49.90 per month for residential customers and $79.95 per month for business customers, including the modem for 500 Kilobits per second, or kbps, two-way access. . Digital subscriber lines. Through various reseller arrangements with competitive local exchange carriers, we offer high-speed Internet access using digital service technology through traditional telephone lines, known as digital subscriber lines or DSL, to both residential and business customers in selective areas. The retail price for this service ranges from $90 to $225 per month depending upon the speed of the service. We currently offer DSL Internet access at speeds of 384 Kbps, 768 Kbps, and 1.5 megabits per second. . Set-top television access. We have begun offering in certain markets Internet access via alternative mediums, such as set-top television boxes that seek to provide customers with basic Internet and connectivity service that complements traditional computer-based access. Web Services. Our Web services help organizations and individuals implement their Web site goals. We offer various Web hosting and other services that enable customers to establish a Web site presence without maintaining their own Web servers and high speed connectivity to the Internet. 45 . Web hosting. Our Web hosting service, or maintaining customer-owned Web servers and related equipment on our servers, includes state-of-the-art Web servers, high speed connections to the Internet at our network operations centers, registering the customer's domain name and Internet address, Web page design, development, maintenance and traffic reporting and consulting services. We currently have over 5,000 Web hosting subscribers. The price plans for our Web services range from $25 to $100 per month. . Co-location. We offer co-location services, providing telecommunications facilities for customer-owned Web servers, for customers who prefer to own and have physical access to their servers but require the reliability, security and performance of our on-site facilities. Our co-location customers house their equipment at our secure network operating centers and receive direct high speed connections to the Internet. . E-commerce. We recently introduced our electronic commerce solution for business customers through an agreement with INEX, which allows businesses to create and operate an on-line "storefront" within minutes and sell merchandise over the Internet. Our e-commerce services include secure on- line payment processing services, technical support and additional e-mail accounts. . Local content. We offer our subscribers customized, local, community- specific content, such as weather, sports and news, through relationships with national providers of local content, such as Snap.com! and Planet Direct as well as various local providers. Other Services and Offerings. We also offer other enhanced communications services to meet the one-stop shopping demands of residential and business customers. . Virtual private networks. Our custom virtual private networks solutions enable our customers to deploy tailored, Internet protocol-based mission- critical business applications for internal enterprise, business-to- business and business-to-customer data communications on our network while also affording high-speed access to the Internet. We offer our customers a secure network on which to communicate and access information between an organization's geographically dispersed locations, collaborate with external groups or individuals, including customers, suppliers, and other business partners and use the Web to access information on the Internet and communicate with other Web users. . Long distance and other telecommunications. We currently resell long distance telecommunications services provided by IXC Communications Services, Inc. as well as an 800 service, calling cards and prepaid cards to our Internet customers through our VoyagerLink operations. We currently offer this interstate and intrastate long-distance service to our customers at 9 cents per minute, with no set-up or monthly charges. We also have begun offering bundled voice and data services to customers who seek Internet access and telecommunications services from a single service. We also recently acquired a business which is licensed as a competitive local exchange carrier in the State of Ohio, and we plan to file applications for authorization in other states within our region. Sales and Marketing Marketing. Our marketing philosophy is based on the belief that a consumer's selection of an Internet service provider is often strongly influenced by a personal referral. 46 Accordingly, we believe that the high customer satisfaction of our subscriber base has led to significant word-of-mouth referrals. Our referral incentive program awards subscribers one month of free service for every customer which joins us from their recommendation. As a result, over 70% of our new sign-ups come from existing subscriber referrals. Our proprietary customer care and billing system automatically tracks and credits the subscriber's account, thus providing us with valuable marketing information and flexibility with this program. We also market our services through strategic relationships with value added resellers in the local communities, such as computer stores, trade associations, unions, Web development companies, local area network administrators and other retail stores which represent and promote us on a commission basis. These relationships are a significant source of new customers. In addition, we offer free Internet training classes within our markets to cultivate interest in the Internet and increase brand recognition. We do not use mass marketing media as a major source of acquiring new customers, but instead believe that by providing superior customer service and developing strong relationships within local communities, particularly in small- and medium-sized markets, we can continue to grow organically at rates greater than the industry average with very low costs for acquiring new customers. Web-based Marketing. We maintain a Web site (www.voyager.net) that provides Internet users with the opportunity to learn about us and enroll in one of our Internet access service plans. Upon viewing information on our services, potential customers can either subscribe online or contact a customer support employee for enrollment. Customers who sign-up on-line or through our 800 number have their accounts created instantly and are thus able to use their accounts within minutes of account activation. Free CDs and Diskettes. Upon the request of prospective customers, we distribute free software via CD and diskettes that contain both the Netscape browser software for Win95, Windows 3.1 and Macintosh as well as Microsoft's Internet Explorer 4.0. The software is configured to facilitate installation and connection to a point of presence. Individuals receiving the CD or diskettes have the opportunity to obtain the free browser software contained on the CD by opening an account with us, either online or via a toll-free telephone number. New customers can be on-line in a matter of minutes after opening an account on-line or by calling our toll-free telephone number. Business Sales and Support. We have a business sales and support team dedicated to selling and providing customized support to our growing small- and medium-sized business customers. Our business teams include well-trained support personnel located throughout our target region. This strong local presence allows us to meet face-to-face with our business customers to evaluate their needs and respond with customized solutions. Our locally-based sales and support teams are supported by additional network engineers at our headquarters for trouble-shooting on specific problems. Customer Service and Technical Support We believe that customer care and support has been critical in our success in retaining and attracting subscribers. We provide our customer service and technical support through our two large call centers located in East Lansing, Michigan and New Berlin, Wisconsin. 47 We provide 100% of our customer care internally, and do not outsource any customer operations to third party providers. We have staffed these call centers with over 170 employees, or more than 60% of our workforce. These two centers are fully-integrated so that both centers can handle calls from subscribers located anywhere within our region. This interoperability allows us to more efficiently handle support calls, thereby reducing telephone hold times. We recently upgraded our phone system that intelligently routes calls, tracks important call-in data, automatically answers certain questions and moves customers quickly through the call-in process. Our comprehensive staff training program and incentive compensation program linked to customer satisfaction has led to significant improvements in the time required to move our subscribers through the various calling queues. In addition to using our call centers, subscribers can also e-mail questions directly to our technical support staff, as well as find solutions on-line through the use of the tutorials found at our Web site. Our free Internet training and educational classes within our markets also allow our customers and potential subscribers to ask questions about the Internet and our services. Network and Technology We operate the largest dial-up Internet network in the Midwest in terms of geographic coverage, with approximately 150 Voyager.net-owned points of presence in Michigan, Indiana, Illinois, Minnesota, Ohio and Wisconsin. Network Infrastructure. Our network infrastructure and related systems are designed to provide fast, reliable, high quality Internet access services, including dedicated access. We designed and built our network to specifically service Internet (data) traffic. The network is comprised primarily of the latest Cisco Systems' routing and switching equipment, which provides a common platform for increased flexibility and maintenance while allowing for the use of advanced routing protocols to quickly and dependably deliver customer traffic. Our network points of presence are linked by high speed capacity connections. In addition, we have two network operating centers to oversee traffic flows and general network operations, as opposed to a single network operating center as found in many national networks, which helps create redundancy and ensures a secure and reliable network. We are continuously improving our network infrastructure and connectivity costs through our relationships with incumbent local exchange carriers such as Ameritech Corporation and GTE Corporation as well as with competitive local exchange carriers such as Brooks Fiber (MCI WorldCom), Phone Michigan (McLeod), Time Warner, Coast to Coast and Focal Communications. Our points of presence are linked to regional network points, or hubs, which for us happen to be the two network operating centers. These network points are linked to the Internet by fiber optic connections and employ asynchronous transfer mode, or ATM, frame relay and other methods of handling traffic efficiently. Interlinked network points allow Internet users to access sites located on other network points. In the event that one of our subscribers wishes to access a Web site that is located on another service provider's network, data is directed to a network access point where information sharing is conducted under arrangements known as peering. The flow of information across a network access 48 point allows information to be downloaded from one service provider's network to a subscriber on another service provider's network. Points of Presence. Our approximately 150 dial-in points of presence primarily utilize digital access servers manufactured by 3Com Corporation and Lucent Technologies, Inc. These servers allow for a variety of customer connections from standard dial-up to traditional telecommunications lines, including integrated digital services network. Our entire network has been reconfigured to include redundant data circuits which will automatically route customer traffic in the event of a failure. Our network topology offers high levels of performance and security. Through various relationships with competitive local exchange carriers, we have been able to reduce the overall number of points of presence by consolidating several of them into "SuperPOPs" with expanded calling areas. The SuperPOP allows us to consolidate our equipment into one large modem bank and eliminate various telecommunication links from our points of presence back to the network operating center, thereby creating enhanced network reliability and reducing telecommunication costs. We have aggressively worked with our providers to create additional SuperPOPs and we will continue to explore opportunities to create additional SuperPOPs in the future. Network Operation Centers. We have two main network operation centers, or hubs, in East Lansing, Michigan and New Berlin, Wisconsin. These two hubs house all of our internal network equipment (servers, routers, mail, hosting, disk arrays, etc.) as well as our main routing equipment and connection to the Internet. The two hubs have recently been interconnected to provide redundancy and to insure the highest quality network. The hubs are monitored on a 24 hours per day, seven days per week basis in order to provide the highest level of network performance. Peering Relationships. Peering is the act of exchanging data across networks, typically at specific, discrete locations. By allowing separate networks to exchange data, users on a particular Internet service provider's network are able to access information and communicate with users on another provider's network. Many formal peering points exist where several dozen Internet service providers and other providers exchange data, including network access points. Internet service providers can also run connections to peer with several different providers (known as multihoming). Multihoming allows an Internet service provider to provide better service, as inbound and outbound data can go over different routes if a particular network is overloaded. We have multihoming relationships at multiple points with several different organizations, including Verio, Inc. in Ann Arbor, Michigan, NAP.net in Chicago, and MCI and Savvis in Kalamazoo, Michigan, thereby building in network redundancy that allows for better connectivity for its customers. Integrating Acquired Networks. As we continue to play a leading role in consolidating the Internet service provider industry, one of our most important tasks is to configure the acquired equipment and network into our regional Internet-based network. We will continue to gain scale economies by eliminating redundant and expensive Internet connectivity and better utilizing our current infrastructure. Our integration plan calls for 49 connecting the acquired points of presence directly to our network at the most cost effective point and eliminating duplicate Internet telecommunication costs. We typically connect within three to six months after the acquisition so as to allow for a prompt yet smooth integration of the acquired networks and to reduce service disruptions. Competition The Internet services market is extremely competitive and highly fragmented. We face competition from numerous types of providers in our five state region and anticipate that competition will only intensify in the future as the Internet service provider industry consolidates. We believe that the primary competitive factors determining success as an Internet service provider are: .accessibility and performance of service; .quality customer support; .price; .access speed; .brand awareness; .ease of use; and .scope of geographic coverage. We believe that we have competed favorably based on these factors, particularly due to: .regionally focused operating strategy; .superior customer care and service; .high performance of Voyager.net-owned network facilities; and .competitive, multi-tiered pricing policy. Our current competitors include many large companies that have substantially greater market presence, brand name recognition and financial resources than us. Some of our local or regional competitors may also enjoy greater recognition within a particular community. We currently compete, or expect to compete, with the following types of companies: . established on-line information service providers, which provide basic Internet access as well as proprietary information not available through public Internet access, such as America Online, Inc.; . national Internet service providers, including EarthLink Network, Inc. and MindSpring Enterprises, Inc.; . numerous regional and local Internet service providers, some of which have significant market share in their particular market area; . providers of Web hosting, co-location and other Internet-based business services, such as Verio, Inc.; 50 . computer hardware and software and other technology companies that provide Internet connectivity with their products, including IBM and Microsoft Corporation; . national long distance carriers such as AT&T Corporation, MCI WorldCom and Sprint Corporation; . regional Bell operating companies and local telephone companies; . cable operators, including Tele-Communications, Inc. and Time Warner Cable; and . nonprofit or educational Internet service providers. Many of the major cable companies and some other Internet access providers have begun to offer or are exploring the possibility of offering Internet connectivity through the use of cable modems. Cable companies, however, are faced with large-scale upgrades of their existing plant equipment and infrastructure in order to support connections to the Internet backbone via high-speed cable access devices. We believe that there is a trend toward horizontal integration through acquisitions or joint ventures between cable companies and telecommunications carriers. The acquisition of TeleCommunications, Inc. by AT&T Corporation is indicative of this trend. Other alternative service companies have also announced plans to enter the Internet connectivity market with various wireless terrestrial and satellite-based service technologies. In addition, several competitive local exchange carriers and other Internet access providers have launched national or regional digital subscriber line programs providing high speed Internet access using the existing copper telephone infrastructure. Several of these competitive local exchange carriers have announced strategic alliances with local Internet service providers to provide broadband Internet access. 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, which will intensify competition. Any of these developments could materially and adversely affect our business, operating results and financial condition. Government Regulation The Federal Communications Commission exercises jurisdiction over all facilities of, and services offered by, telecommunications carriers to the extent that they involve the provision, origination or termination of jurisdictional interstate or international communications. Some state regulatory commissions retain jurisdiction over the same facilities and services to the extent they involve origination or termination of jurisdictional intrastate communications. In addition, as a result of the passage of the Telecommunications Act of 1996, state and federal regulators share responsibility for implementing and enforcing the domestic pro- competitive policies of the Act. In particular, state regulatory commissions have substantial oversight over the provision of interconnection and non- discriminatory network access by incumbent local exchange carriers. Municipal authorities generally have some jurisdiction over access to rights of way, franchises, zoning and other matters of local concern. 51 Internet operations are currently not subject to direct regulation by the Federal Communications Commission or any other governmental agency (other than regulations applicable to businesses generally). Due to the increasingly widespread use of the Internet, however, it is possible that additional laws and regulations may be adopted. The Federal Communication Commission continues to review its regulatory position on the usage of the basic network and communications facilities by Internet service providers. Even though the Federal Communications Commission determined in April 1998 that Internet service providers should not be treated as telecommunications carriers and therefore not regulated, it is expected that future Internet service provider regulatory status will continue to be uncertain. Indeed, in that report, the Federal Communications Commission concluded that certain services offered over the Internet, such as phone-to- phone Internet protocol telephony, may be functionally indistinguishable from traditional telecommunications service offerings and their non-regulated status may have to be re-examined. Although the Federal Communications Commission has thus far decided not to allow local telephone companies to impose per minute access charges on Internet service providers, and that decision has been upheld by the reviewing court, further regulatory and legislative consideration of this issue is likely. To the extent that an end user's call to an Internet access provider is local rather than long distance, the local telephone company that serves the Internet service provider may be entitled to reciprocal compensation from the end user's local telephone company. Reciprocal compensation is a reimbursement from one local telephone company to a second one for handling calls that originate with the first local telephone company and terminate with the second one. To the extent that a call from an end user to an Internet service provider is considered intrastate, the local telephone company serving an Internet service provider would be entitled to reciprocal compensation. This payment of reciprocal compensation reduces the local telephone company's costs and ultimately reduces the Internet service provider's costs. The Federal Communications Commission recently determined that most, but not all, traffic to an Internet access provider is interstate in nature rather than local. This determination could potentially eliminate the payment of reciprocal compensation to the local telephone company, which ultimately may increase our Internet access service costs. The Federal Communications Commission has yet to rule on the specific issue of reciprocal compensation and Internet service provider traffic and has currently left individual state regulators to determine whether reciprocal compensation should be paid, which may also affect our costs. In recent months, several state regulatory authorities have determined that reciprocal compensation is not required to be paid. One of our subsidiaries, EriNet Telecom, Inc., is authorized as a competitive local exchange carrier with the State of Ohio and we anticipate that we will seek competitive local exchange carrier status in other states in the future. To the extent we conduct business as a competitive local exchange carrier, the telecommunications services that we provide will be subject to federal, state and local regulation, which may include tariff and price listing requirements and state certification proceedings. State regulatory authorities exercise jurisdiction over intrastate services. Local authorities may also have regulatory power over certain aspects of our competitive local exchange carrier operations. In addition, pursuant to the Telecommunications Act of 1996, the Federal Communications Commission is required to establish a subsidy mechanism for universal telephone service to which our competitive local exchange carrier services will be required to contribute 52 based on telecommunications revenues. The Act also requires competitive local exchange carriers to make their services available for resale by other carriers, to interconnect their networks and ensure they interoperate and provide non-discriminatory rights-of-way, offer reciprocal compensation for termination of locate traffic, and provide dialing parity and local telephone number portability. The Act also further reserves the right for individual states to impose additional state regulations, including subsidies, which are consistent with the Act. We are unable to predict how the State of Ohio and the other states in which we become certified as a competitive local exchange carrier in the future, if any, will regulate our services. By providing interstate, intrastate and international services as a competitive local exchange carrier, we would generally be subject to tariff or price list filing requirements pursuant to which we would be required to publicly disclose, or in some instances obtain approval of, the terms, conditions and prices for telecommunications services prior to or soon after offering such services. In addition, individual states in which we may conduct activities as a competitive local exchange carrier may subject us to state certification proceedings and intrastate and local tariff regulations. These certifications generally require a showing that the carrier has adequate financial, managerial and technical resources to offer the proposed services consistent with the public interest. While unusual, challenges to these tariffs and certification proceedings by third parties could cause us to incur substantial legal and administrative expenses. Many states also impose additional regulatory requirements, such as minimum service quality reporting and customer service requirements and uniform local exchange carrier accounting requirements. In addition, some state statutes provide that changes in the ownership of a competitive local exchange carrier's outstanding voting securities may require prior approval of the state public utility commission. In fact, certain jurisdictions may require an investor who acquires as little as 10% of a competitive local exchange carrier's voting securities to obtain prior approval for such acquisition because such ownership interest might be deemed to constitute an indirect controlling interest in the carrier. We have filed a petition for approval of the change in ownership of EriNet Telecom and anticipate that the approval will be granted prior to consummation of this offering. See "Risk Factors--State and Federal Government Regulation Could Require Us to Change Our Business." Intellectual Property We have developed and acquired certain proprietary rights for which we have sought and will continue to seek federal, state and local protection. We rely on a combination of copyright, trademark and trade secret laws to protect our proprietary rights, particularly related to our names and logos. "Voyager.net" and our associated logo are names and marks which belong to Voyager.net. In addition, we have registered VoyagerLink and several other names, marks and logos, and have additional registrations pending for names and marks, under which we do business at local levels within our region. An integral part of our successful business strategy is our proprietary Web-based customer care and billing system. We are exploring whether to seek patent protection with respect to this customer care system and will act accordingly. We have each of our employees sign an inventions agreement pursuant to which they agree that any intellectual property rights developed 53 while in our employment belong to Voyager.net. We cannot assure you that the steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of our technology or that third parties, including competitors, will not independently develop technologies that are substantially equivalent or superior to our proprietary technology. In connection with the delivery of our access and other services, we rely on the use of products of software manufacturers that we bundle in our software for users with personal computers operating on the Windows or Macintosh platforms. While certain of the applications included in our start-up kit for access services subscribers are shareware that we have obtained permission to distribute or that are otherwise in the public domain and freely distributable, certain other applications included in the start-up kit have been licensed where necessary. We currently intend to maintain or negotiate renewals of all existing software licenses and authorizations as necessary, although we cannot be certain that such renewals will be available to us on acceptable terms, if at all. We may also enter into licensing arrangements in the future for other applications. Employees As of March 31, 1999, we had 278 employees, including 235 full-time employees and 43 regular part-time employees. We are not a party to any collective bargaining agreements covering any of our employees, have never experienced any material labor disruption and are unaware of any current efforts or plans to organize our employees. We consider our relationships with our employees to be good. Facilities We lease each of our office locations. Our leases cover in the aggregate approximately 55,000 square feet of space. We have two primary lease locations which serve as our network operating centers: East Lansing, Michigan, which is also our corporate headquarters, with approximately 17,000 square feet, which lease expires in 2007; and New Berlin, Wisconsin, where we lease space at four locations covering in the aggregate approximately 25,000 square feet under long-term leases. We also lease space, typically less than 50 square feet per location, to house our network equipment at each of our points of presence. We do not own any real estate. We believe that our current facilities are suitable and adequate for our business and, upon expiration of our leases, we do not anticipate any significant difficulty in obtaining renewals or alternative space in our desired markets. Legal Proceedings We have been, from time to time, involved in various litigation matters arising in the ordinary course of business. We are not involved currently in any pending legal proceedings that either individually or taken as a whole, will have a material adverse effect on our business, financial condition and results of operations. 54 MANAGEMENT Executive Officers, Key Employees and Directors Our executive officers, key employees and directors, their positions and their ages as of March 31, 1999, are set forth below. The compensation committee of the board of directors is comprised of the entire board, and the audit committee is comprised of Messrs. Dietz, Friedly and Hayes.
Name Age Position ---- --- -------- Christopher Torto......... 34 President, Chief Executive Officer and Vice Chairman of the Board of Directors Dennis Stepaniak.......... 41 Chief Financial Officer, Senior Vice President and Treasurer Osvaldo deFaria........... 35 Chief Operating Officer Christopher Michaels...... 32 Chief Technology Officer Michael Williams.......... 35 Vice President--Sales David Shires.............. 36 Vice President--Business Development Joan Holda................ 43 Vice President--Human Resources Glenn Friedly............. 50 Chairman of the Board of Directors John Hayes................ 35 Director Christopher Gaffney....... 36 Director David Dietz............... 49 Director and Secretary
Christopher Torto. Mr. Torto has served as Chief Executive Officer since February 1998, and has served as President and Vice Chairman of the board of directors since March 1999. From December 1996 to January 1998, Mr. Torto was the President and Chief Executive Officer of Horizon Cablevision do Brasil, a start-up cable television venture in Brazil. From 1992 to 1996, Mr. Torto served as General Manager of GTECH do Brasil, a Brazilian subsidiary of GTECH Corporation. Mr. Torto received his Bachelor of Science degree in Finance from the University of Maine and a Master of Business Administration degree from the Harvard Graduate School of Business Administration. Dennis Stepaniak. Mr. Stepaniak has been Senior Vice President, Chief Financial Officer and Treasurer since March 1999. From 1995 to February 1999 he served as Vice President of Finance and Chief Financial Officer for UMI, Inc., a database publishing company and wholly owned subsidiary of Bell & Howell Corporation. From 1984 to 1995, he held various financial positions with UMI, including Controller, Director of Financial Planning, and financial analyst. Mr. Stepaniak received a degree in Finance and Economics from Alma College and a Master of Business Administration degree from Eastern Michigan University. Osvaldo deFaria. Mr. deFaria has served as Chief Operating Officer since January 1999. Prior to that, Mr. deFaria spent 13 years at AT&T Corporation in various management positions including General Manager of Internet Telephony, Director of Consumer Marketing, Consumer Marketing Director of AT&T of Puerto Rico, and various other sales and marketing positions. Mr. deFaria received his Bachelor of Science degree in Business Administration from the University of Maine and a Master of Business Administration degree from Fairleigh Dickinson University. Mr. deFaria has also attended Harvard Business School's executive education program. 55 Christopher Michaels. Mr. Michaels has served as Chief Technology Officer since February 1999. From October 1998 to February 1999, Mr. Michaels served as Vice President of Technical Operations. Mr. Michaels was the co-founder of NetLink Systems, L.L.C., a regional Internet service provider based in Kalamazoo, Michigan, and served as President from May 1995 to October 1998. From June 1991 to May 1995, Mr. Michaels was a senior research engineer at Automotive Diagnostics, an automotive test equipment company. Mr. Michaels received Bachelor of Science degrees in Mathematics, Physics and Computer Science from Western Michigan University. Michael Williams. Mr. Williams has served as Vice President-Sales since January 1999. From January 1998 to January 1999, Mr. Williams served in various senior management positions at Voyager.net. From October 1997 to January 1998, Mr. Williams was the Chief Financial Officer of Horizon Cablevision. From March 1994 to September 1997, he served as the Director of Finance for the Great Lakes area of Nextel Communications, where he was responsible for the financial management of wireless communications deployment, accounting functions and financial planning and analysis. Mr. Williams received his Bachelor of Science degree in Economics from the University of Wisconsin--Madison. David Shires. Mr. Shires has served as Vice President-Business Development since October 1998, and is responsible for leading all of the acquisition efforts of Voyager.net. Mr. Shires was a co-founder of NetLink Systems, L.L.C., a regional Internet service provider based in Kalamazoo, Michigan, and served as Vice President from May 1995 to October 1998. From October 1992 to April 1995, he was a software engineer at Automotive Diagnostics, an automotive test equipment company. Mr. Shires received his Bachelor's degree in Robotic Engineering from Lake Superior State College and a Master of Business Administration from Western Michigan University. Joan Holda. Ms. Holda has served as Vice President-Human Resources since July 1998. From 1986 to June 1998, she served as Director of Training and Human Resources at Quality Dairy Company, a 700-employee retail and manufacturing facility. Ms. Holda received a Bachelor of Science degree in Merchandising and Management and a Masters in Labor and Industrial Relations from Michigan State University. She received her certification as a Senior Professional in Human Resources in 1997. Glenn Friedly. Mr. Friedly is founder and Chairman of the Board of Voyager.net. From 1983 to April 1999, Mr. Friedly was President of Horizon Cablevision, a leading cable operator in Michigan. From 1972 to 1980, Mr. Friedly worked for the State of Michigan, including as Executive Assistant to Governor William G. Milliken. Mr. Friedly is the past President of the Michigan Cable Television Association and has served on boards of the National Cable Television Cooperative Association and on the Small Cable Business Association. Mr. Friedly has been a member of the Michigan State Bar since 1980. John Hayes. Mr. Hayes has served as director of Voyager.net since July 1995. Mr. Hayes is a managing partner of Great Hill Partners, L.L.C., a private equity firm. Mr. Hayes has been associated with Media/Communications Partners, a private equity firm, since 1989 and has served as a partner since 1993. Mr. Hayes serves as Chairman of 56 Horizon Telecom International, L.L.C., a cable television operator focused on developing cable television systems in Brazil, and of Amstar Entertainment, L.L.C., a movie theater developer. Mr. Hayes also serves as a director of Language for Industry Worldwide, Inc., a consolidator of business translation services companies, and Teltrust, Inc., a telecommunications services provider. Christopher Gaffney. Mr. Gaffney has served as a director of Voyager.net since December 1998. Mr. Gaffney is a managing partner of Great Hill Partners, L.L.C., a private equity firm. Mr. Gaffney has been associated with Media/Communications Partners, a private equity firm, since 1986 and has served as a partner since 1992. Mr. Gaffney also serves as Chairman of the Board of Adams Trade Press, Inc., a business-to-business publishing company, and also as a director of Medical World Communications, Inc., a provider of professional continuing education programs and supplemental educational materials, Marks- Ferber Communications, Inc., a community newspaper publisher, Sunburst Communications Radio L.L.C., a radio broadcaster, Tarver Holdings, Inc., a computer services company, and several other privately held companies. David Dietz. Mr. Dietz has served as a director and the Secretary of Voyager.net since March 1999. Mr. Dietz, or a professional corporation owned by Mr. Dietz, has been a partner of Goodwin, Procter & Hoar LLP and its predecessor firm since 1984. Mr. Dietz is also a director of High Liner Foods (USA), Incorporated and The Andover Companies, as well as several other privately held companies. Board Composition The number of our directors is currently fixed at five. Following this offering, our board of directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Our board of directors will consist of two Class I directors, Christopher Torto and David Dietz, one Class II director, Christopher Gaffney, and two Class III directors, John Hayes and Glenn Friedly. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the Class I directors, Class II directors and Class III directors expire upon the election and qualification of successor director at the annual meeting of stockholders to be held during the calendar year 2000, 2001 and 2002, respectively. Each officer serves under his employment agreement with us and at the discretion of our board of directors. See "--Employment Agreements." There are no family relationships among any of our directors or executive officers. Committees of the Board of Directors Audit Committee. The audit committee is responsible for recommending to the board of directors the engagement of our outside auditors and reviewing our accounting controls and the results and scope of audits and other services provided by our auditors. The members of the audit committee are John Hayes, David Dietz and Glenn Friedly. 57 Option Committee. Under our 1998 Stock Option and Incentive Plan, the board of directors may designate a committee of two independent directors to administer the 1998 Stock Option and Incentive Plan. The 1998 Stock Option and Incentive Plan is currently administered by the full board of directors. The directors have, however, appointed a committee, consisting of Messrs. Friedly, Hayes and Torto, having the authority to grant up to 50,000 plan awards to any one individual, and 100,000 plan awards in the aggregate, in any one fiscal year under the 1998 Stock Option and Incentive Plan. See "--1998 Stock Option and Incentive Plan." Compensation Committee. The compensation committee is responsible for reviewing and approving the amount and type of consideration to be paid to senior management. The members of the compensation committee is currently comprised of the entire board of directors. Other Committees. The board of directors may, in its discretion, establish, from time to time, other committees to facilitate the management of our business. Director Compensation Directors who are employees receive no additional compensation for their services as directors. Non-employee directors do not currently receive a fee for their service as directors, although the board of directors may in the future determine to pay such a fee. Non-employee directors are also eligible to participate in the 1998 Stock Option and Incentive Plan at the discretion of the full board of directors. 58 Executive Compensation The following table sets forth in summary form the compensation that was paid to our Chief Executive Officer and the other most highly compensated executive officers whose aggregate compensation exceeded $100,000 in the year ended December 31, 1998 (the "Named Executive Officers"). No other executive officer currently employed by us earned total compensation in excess of $100,000 in 1998. Mr. Torto, our president and chief executive officer, commenced employment with us in February 1998. His current annual salary is $225,000 and he is eligible to receive an annual bonus equal to 40% of his annual base salary. Mr. Williams, our vice president-sales, commenced employment with us in January 1999. His current annual salary is $120,000 and he is eligible to receive an annual bonus equal to 20% of his annual base salary. Summary Compensation Table
Annual Compensation Long-Term Compensation ------------------------------ --------------------------------------- Number of Securities Other Underlying Restricted All Annual Options Stock Other Name Salary Bonus Compensation Granted Awards Compensation Christopher P. Torto.... $ 59,900 $100,000 $ -- -- $279,300(2) $1,735(3) President and Chief Executive Officer Michael Williams........ 118,000 23,350 -- (1) -- 3,350(4) Vice President--Sales
- ----------------------- (1) Does not include options to purchase shares of common stock which were cancelled pursuant to an agreement with Mr. Williams. (2) Represents the fair value of shares of restricted common stock purchased by Mr. Torto in 1998 based on an appraisal of the underlying common stock, performed by an independent valuation firm less the aggregate purchase price for such shares of common stock paid by Mr. Torto. Prior to this offering, there was no public market for our common stock and, therefore, we did not have a fair market value of our common stock as of December 31, 1998. Of the shares of restricted common stock purchased by Mr. Torto, shares of restricted common stock are fully vested and shares vest on December 31, 1999. Vesting of these shares of common stock will be accelerated upon closing of this offering. (3) Includes the cost of term life insurance which was paid by Voyager.net. (4) Includes a matching contribution under our 401(k) plan and the cost of term life insurance which was paid by Voyager.net. 59 Option Grants in Last Fiscal Year The following table sets forth information regarding stock options granted during 1998 to our Named Executive Officers. The exercise price per share of each option is equal to the fair market value of the common stock as of the grant date as determined by the board of directors. During 1998, we granted options to purchase an aggregate shares of common stock to employees. The amounts shown as potential realizable value illustrate what might be realized upon exercise immediately prior to expiration of the option term using the 5% and 10% appreciation rates compounded annually as established in regulations of the SEC. The potential realizable value of the options to Mr. Williams using an assumed initial public offering price of $ per share is $ at an assumed 5% appreciation rate and $ at an assumed 10% appreciation rate. The potential realizable value is not intended to predict future appreciation of the price of our common stock. Mr. Williams exercised his option to purchase all shares of common stock in May 1999. Option Grants In Last Fiscal Year
Individual Grants ----------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Number of Percent of Total Appreciation Securities Options for Option Underlying Granted to Exercise Term Options Employees in or Base Expiration ------------- Name Granted Fiscal Year Price Date 5% 10% Christopher Torto....... -- -- $ -- -- Michael Williams........ 80.65% $ 9/23/98
Option Exercises and Fiscal Year-End Option Values The following table sets forth information concerning the number and value of unexercised options to purchase common stock held by the Named Executive Officers. There was no public trading market for our common stock as of December 31, 1998. Accordingly, the values of the unexercised in-the-money options have been calculated on the basis of an assumed initial public offering price of $ per share, less the applicable exercise price multiplied by the number of shares acquired on exercise. Neither of the Named Executive Officers exercised any stock options in 1998, but Mr. Williams exercised his option to purchase all shares of common stock in May 1999. Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Unexercised Value of Unexercised Options at Fiscal Year- In-The-Money Options End at Fiscal Year-End ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable Christopher Torto........... -- -- $ -- $ -- Michael Williams............
60 1998 Stock Option and Incentive Plan Our board of directors and stockholders adopted the 1998 Stock Option and Incentive Plan in September 1998. In April 1999, the 1998 Stock Option Plan was amended to increase the number of shares of common stock and other awards available under the plan. In June 1999, the plan was amended and restated by the board of directors and our stockholders. The 1998 Stock Option and Incentive Plan permits us to: .grant incentive stock options; .grant non-qualified stock options; .grant stock appreciation rights; .issue or sell common stock with vesting or other restrictions, or without restrictions; .grant rights to receive common stock in the future with or without vesting; .grant common stock upon the attainment of specified performance goals; and .grant dividend rights in respect of common stock. These grants may be made to our officers, employees, directors, consultants, advisors and other key persons of Voyager.net. The 1998 Stock Option and Incentive Plan allows for the issuance of up to shares of common stock and other awards. Of the shares reserved for issuance under the 1998 Stock Option and Incentive Plan: . an aggregate of shares of restricted common stock were sold to Mr. Torto on September 23, 1998 and October 2, 1998 at a per share purchase price of $ , all of which shares of common stock will be fully vested upon the closing of this offering; . an aggregate of shares of restricted common stock were sold to Mr. Shires on October 2, 1998 at a per share purchase price of $ , all of which shares of common stock will be fully vested upon the closing of this offering; . an aggregate of shares of restricted common stock were sold to Mr. Michaels on October 2, 1998 at a per share purchase price of $ , all of which shares of common stock will be fully vested upon the closing of this offering; . an aggregate of shares of restricted common stock were sold to Mr. deFaria on January 11, 1999 at a per share purchase price of $ , all of which shares of common stock will be fully vested upon the closing of this offering; . an aggregate of shares of restricted common stock were sold to Mr. Friedly on January 11, 1999 at a per share purchase price of $ , all of which shares of common stock will be fully vested upon the closing of this offering; . shares are subject to outstanding options to purchase common stock granted on September 23, 1998 to Mr. Williams, with a per share exercise price of $ , all of which options were exercised by Mr. Williams in May 1999; 61 . shares are subject to outstanding options to purchase common stock granted on September 23, 1998 to several of our other key employees, with a per share exercise price of $ , all of which options are fully vested; and . shares are subject to outstanding options to purchase common stock granted on January 1, 1999 to several of our key employees, with a per share exercise price of $ , which options vest in four equal installments on the next four anniversaries of the grant date. Upon consummation of this offering, we will grant options to purchase an aggregate shares of common stock to our employees. The exercise price for these options will be the initial public offering price of the common stock. All of these options will vest in four equal annual installments on each of the first four anniversaries of the date of this offering. Messrs. Friedly, deFaria, Michaels and Stepaniak will be granted options to purchase , , and shares of common stock, respectively. The 1998 Stock Option and Incentive Plan is administered by our board of directors or a committee designated by our board of directors consisting solely of two or more independent directors. Subject to the provisions of the 1998 Stock Option and Incentive Plan, the board or the committee may select the individuals eligible to receive awards, determine the terms and conditions of the awards granted, accelerate the vesting schedule of any award and generally administer and interpret the plan. The exercise price of options granted under the 1998 Stock Option and Incentive Plan is determined by the committee. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986 may not be granted at an exercise price less than the fair market value of the common stock on the date of grant, or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power. Non-qualified stock options may be granted at prices which are less than the fair market value of the underlying shares on the date granted. Options are typically subject to vesting schedules, terminate ten years from the date of grant and may be exercised for specified periods after to the termination of the optionee's employment or other service relationship with us. Upon the exercise of options, the option exercise price must be paid in full either in cash or by certified or bank check or other instrument acceptable to the committee or, in the sole discretion of the committee, by delivery of shares of common stock that have been owned by the optionee free of restrictions for at least six months. The exercise price may also be delivered to us (a) by the optionee in the form of a promissory note if the loan of these funds to the optionee has been authorized by the board of directors and the optionee pays so much of the exercise price as represents the par value of the common stock acquired in a form other than a promissory note and (b) by a broker under irrevocable instructions to the broker selling the underlying shares from the optionee. In the event of a merger, reorganization or consolidation, the sale of all or substantially all of our assets or all of our outstanding capital stock or a liquidation or other similar transaction, all outstanding awards issued under the 1998 Stock Option and 62 Incentive Plan provides for whether unvested awards will become fully vested and exercisable upon the closing of the transaction. The 1998 Stock Option and Incentive Plan and all awards issued under the plan will terminate upon any of the transactions described above, unless Voyager.net and the other parties to the transactions have agreed otherwise. All participants under the 1998 Stock Option and Incentive Plan will be permitted to exercise for a period of 30 days before any termination all awards held by them which are then exercisable or will become exercisable upon the closing of the transaction. Employment Agreements We have entered into the following agreements with our senior management: . In February 1998, we entered into (i) an employment agreement and (ii) an agreement regarding inventions, non-competition and confidentiality with Christopher Torto. The employment agreement, which was amended in April 1999, provides for: . an annual base salary of $225,000; . an annual bonus of 40% of base salary; . an employment term ending on April 30, 2002 with potential one- year renewals thereafter, subject to earlier termination by either party; . the continuation of base salary and benefit payments for one year after termination of employment in the event we elect to terminate Mr. Torto without cause (as defined in the agreement) or Mr. Torto terminates employment as a result of a default by us under the agreement; and . Mr. Torto's non-competition agreement prohibits him from competing with us until the first anniversary of the date of his termination of employment with us. . In January 1998, we entered into (i) an employment agreement and (ii) an agreement regarding inventions, non-competition and confidentiality with Michael Williams. The employment agreement provides for: . an annual base salary of $120,000; . an annual bonus of 20% of base salary; . an at-will employment term; . the continuation of base salary and benefit payments for one year after termination of employment in the event we elect to terminate Mr. Williams without cause (as defined in the agreement); and . Mr. Williams' non-competition agreement prohibits him from competing with us until the three month anniversary of the date of his termination of employment with us. . In October 1998, we entered into (i) an employment agreement and (ii) an employee non-competition agreement with David Shires. The employment agreement provides for: . an annual base salary of $90,000; 63 . an annual bonus of 20% of base salary; . an employment term ending on October 2, 2000, with potential one- year renewals thereafter, subject to earlier termination by either party; . the continuation of base salary and benefit payments for up to one year after termination of employment in the event we elect to terminate Mr. Shires without cause (as defined in the agreement) or if Mr. Shires terminates employment as a result of a default by us under his agreement; and . Mr. Shires' non-competition agreement prohibits him from competing with us until the first anniversary of the date of his termination of employment with us. . In October 1998, we entered into (i) an employment agreement and (ii) an employee non-competition agreement with Christopher Michaels. In April 1999, we amended each of those agreements. The employment agreement provides for: .an annual base salary of $190,000; .an annual bonus of 40% of base salary; .an employment term ending on October 2, 2000, with potential one-year renewals thereafter, subject to earlier termination by either party; .the continuation of base salary and benefit payments for one year after termination of employment in the event we elect to terminate Mr. Michaels without cause (as defined in the agreement) or if Mr. Michaels terminates employment as a result of a default by us under his agreement; and . Mr. Michaels' non-competition agreement prohibits him from competing with us until the first anniversary of the date of his termination of employment with us. . In November 1998, we entered into (i) an employment agreement and (ii) an agreement regarding inventions, non-competition and confidentiality with Osvaldo deFaria, effective January 1999. The employment agreement provides for: .an annual base salary of $200,000; .an annual bonus of 40% of base salary; .an employment term ending on January 11, 2002, with potential one- year renewals thereafter, subject to earlier termination by either party; .the continuation of base salary and benefit payments for one year after termination of employment in the event we elect to terminate Mr. deFaria without cause (as defined in the agreement) or Mr. deFaria terminates employment as a result of a default by us under the agreement; and . Mr. deFaria's non-competition agreement prohibits him from competing with us until the first anniversary of the date of his termination of employment with us. 64 . In March 1999, we entered into (i) an employment agreement and (ii) an agreement regarding inventions, non-competition and confidentiality with Dennis Stepaniak. The employment agreement provides for: .an annual base salary of $190,000; .annual bonus of 40% of annual base salary; .an employment term ending on March 18, 2003, with potential one-year renewals thereafter, subject to earlier termination by either party; .the continuation of base salary and benefit payments for one year after termination of employment in the event we elect to terminate Mr. Stepaniak without cause (as defined in the agreement) or Mr. Stepaniak terminates employment as a result of a default by us under the agreement; and . Mr. Stepaniak's non-competition agreement prohibits him from competing with us until the first anniversary of the date of his termination of employment with us. Compensation Committee Interlocks and Insider Participation Our compensation committee is comprised of our entire board of directors. The compensation committee reviews and makes recommendations to our board of directors regarding compensation of senior management and other key employees other than Mr. Torto. The members of the compensation committee other than Mr. Torto review and recommend all executive compensation arrangements with respect to Mr. Torto. 65 CERTAIN TRANSACTIONS WITH RELATED PARTIES In August 1997, Voyager Information Networks, Inc. sold an aggregate shares of common stock and an aggregate 25,000 shares of series A preferred stock to Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership for aggregate consideration of $500,000 and exchange of 2,696 shares of existing shares of series A convertible participating preferred stock. In connection with the sale and purchase, the investors also received an option to purchase an additional shares of common stock and 15,000 shares of series A preferred stock for aggregate consideration of $1.5 million. The investors also received voting rights, registration rights and participation rights which were superseded by the rights given in the September 1998 stock purchase agreement. The purchase price of the securities was the fair market value as determined by the parties at the time of sale, and the transaction was accounted for on a cost basis. In July 1998, pursuant to the exercise by the investors of the option referenced above, we sold an aggregate shares of common stock and an aggregate 15,000 shares of series A preferred stock to Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership for aggregate consideration of $1.5 million. In connection with this sale, we also issued demand promissory notes in the original principal amount of $2.8 million in the aggregate to these investors. We used the proceeds from this transaction to finance the acquisition of the assets of Freeway, Inc. The purchase price of the securities was determined by the parties in August 1997 and the transaction was accounted for on a cost basis. In September 1998, Voyager.net entered into a series of transactions, including: . Entering into a stock exchange agreement with Voyager Information Networks, Inc. and all of its stockholders whereby we exchanged an aggregate shares of common stock and an aggregate 42,424 shares of series A preferred stock for all of the outstanding capital stock of Voyager. In connection with the exchange, each option holder exchanged his existing Voyager option for an option to purchase shares of Voyager.net common stock. We consummated the stock exchange solely to effect a reincorporation under the laws of the State of Delaware. The stock exchange was intended to be a tax-free reorganization and was accounted for as if it was a pooling of interests. . Entering into a stock purchase agreement with Media/Communications Partners II Limited Partnership, Media/Communications Investors Limited Partnership, Glenn Friedly, Alan Baird and Michael Heinze whereby we sold an aggregate shares of common stock and an aggregate 33,657 shares of series A preferred stock to the investors at an aggregate purchase price of $0.5 million in cash and cancellation of promissory notes in the principal amount of $2.8 million, plus accrued interest of $32,524. Under the stock purchase agreement, certain investors received demand and "piggyback" registration rights, participation rights with respect to our future equity issuances and the right to nominate two individuals to our board of directors. Mr. Hayes and Mr. Gaffney, who are 66 associated with Great Hill Partners, L.L.C., are members of our Board of Directors. Upon the closing of this offering, the participation rights and the nomination rights of the investors will terminate in accordance with their terms. We intend to use part of the proceeds that we receive from this offering to redeem all 76,081 shares of our series A preferred stock held by the investors, plus accrued dividends thereon, which as of May 31, 1999 was approximately $8.0 million in the aggregate. . Entering into a stockholders' agreement with each of our stockholders, whereby the stockholders agreed to certain restrictions on the transferability of their shares of common stock. Upon the closing of this offering, the stockholders' agreement will terminate in accordance with its terms. . Issuing an amended and restated promissory note in favor of Horizon Cable I Limited Partnership in the principal amount of approximately $2.1 million. Messrs. Friedly, Baird and Heinze are principals and executive officers of Horizon Cable, and Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership are investors in Horizon Cable. We will use part of the proceeds that are received from this offering to repay the principal and interest under the note, which as of May 31, 1999 was approximately $2.4 million in the aggregate. In January 1999, we sold shares of restricted common stock to Mr. deFaria, our Chief Operating Officer. In connection with this sale, Mr. deFaria issued a promissory note to us in the principal amount of $1.8 million with interest accruing thereon at 5% annually. The note matures and all principal and interest is due on January 11, 2003. The note is secured by a pledge of shares of common stock and is a recourse obligation of Mr. deFaria in the amount of 25% of the outstanding principal and 100% of the accrued interest. In January 1999, we sold shares of restricted common stock to Mr. Friedly, the Chairman of the Board of Directors and one of our principal stockholders. In connection with this sale, Mr. Friedly issued a promissory note to us in the principal amount of $4.2 million with interest accruing thereon at 5% annually. The note matures and all principal and interest is due on January 11, 2003. The note is secured by a pledge of shares of common stock and is a recourse obligation of Mr. Friedly in the amount of 25% of the outstanding principal and 100% of the accrued interest. In April 1999, Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership agreed to purchase unspecified equity securities of Voyager.net for an aggregate purchase price of $5 million. The type of equity securities and the per share price of the securities to be issued to the investors is to be determined by Voyager.net and the investors at the time of purchase and sale. The investors have until November 1, 1999 to purchase these shares. The commitment to purchase the securities, and the obligations of the parties thereunder, terminates upon the closing of this offering. In 1998, we entered into a consulting arrangement with Mr. Friedly, pursuant to which Mr. Friedly receives $75,000 per year. 67 In 1998, we entered into a reseller agreement with Horizon Cablevision, Inc. relating to the reselling of Internet access services using cable modems on Horizon's cable television systems. Mr. Friedly is the President, and Messrs. Friedly, Baird and Heinze are principals, of Horizon. This agreement has been terminated. In March 1999, we entered into a software license agreement with Horizon Telecom International, L.L.C., whereby we granted Horizon Telecom International a non-exclusive license to use our customer care and billing software for $1.00. Messrs. Friedly and Torto, as well as investment funds managed by Great Hill Partners, L.L.C., of which Messrs. Hayes and Gaffney are managing partners, are investors in Horizon Telecom International, Mr. Friedly has agreed to serve as the vice chairman of Horizon Telecom International and Mr. Torto has agreed to serve as a director of Horizon Telecom International. In April 1999, we made a loan of $500,000 to Mr. Torto, our President and Chief Executive Officer, which is payable over three years and accrues interest at 5% per year. The loan is unsecured and we have full recourse against Mr. Torto. In May 1999, we sold an aggregate 6,667 shares of series A preferred stock to Messrs. Friedly, Baird and Heinze pursuant to the exercise of an option to purchase shares of series A preferred stock in the stock purchase agreement, for an aggregate purchase price of approximately $667,000. We intend to use part of the proceeds that we receive from this offering to redeem all 6,667 shares of series A preferred stock, plus accrued dividends thereon, which as of May 31, 1999, was approximately $0.7 million in the aggregate. In June 1999, we made a loan of $5,000,000 to Mr. Torto, our President and Chief Executive Officer, which is payable over four years and accrues interest at 5% per year. The loan is secured by a pledge of shares of common stock and is a recourse obligation of Mr. Torto in the amount of 25% of the outstanding principal of and 100% of the accrued interest on the loan. Since January 1998, we have retained Goodwin, Procter & Hoar LLP for certain legal services. Mr. Dietz, a director and secretary of Voyager.net, is the sole shareholder of David F. Dietz, P.C., which is a partner in Goodwin, Procter & Hoar LLP. We believe that, with the exception of the software license, all of the transactions identified above were conducted on terms no less favorable to Voyager.net than could have been obtained from unaffiliated third parties. We have adopted an insider trading policy in connection with this offering. In the future, all transactions between any of our officers and directors and us will be reviewed by the board of directors or the audit committee on an ongoing basis and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 68 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of common stock as of March 31, 1999 and as adjusted to reflect the sale of the common stock offered hereby, by: .all persons known by us to own beneficially 5% or more of the common stock; .each of our directors; .the Chief Executive Officer and the other Named Executive Officers; .each of the selling stockholders; and .all directors and Named Executive Officers as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares of common stock beneficially owned by the stockholder. The address of Media/Communications Partners is 75 State Street, Suite 2500, Boston, MA 02109. The address of Messrs. Hayes and Gaffney is c/o Great Hill Partners, L.L.C., One Liberty Square, Boston, MA 02109. The address of Mr. Dietz is c/o Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109. The address of all other listed stockholders is c/o Voyager.net, Inc., 4660 South Hagadorn Road, Suite 320, East Lansing, MI 48823. The number of shares beneficially owned by each stockholder is determined under rules issued by the Securities and Exchange Commission. The information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after March 31, 1999 through the exercise of any stock option or other right. As of March 31, 1999, a total of shares of common stock were either outstanding or subject to options, warrants or other convertible securities that are exercisable or that will become exercisable within 60 days of the estimated effective date of this offering. The inclusion in this prospectus of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. The applicable percentage of "beneficial ownership" after the offering is based upon shares of common stock outstanding.
Shares Owned Shares Owned After the Offering Prior to the Offering (1) ------------------------ Shares --------------------- Name of Beneficial Owners Number Percent Offered Number Percent - ------------------------- ---------- ----------- ------- --------- --------- Entities affiliated with Media/Communications Partners (2)........... % % Glenn R. Friedly (3).... Alan R. Baird (4)....... Christopher P. Torto (5).................... Michael Williams........ John G. Hayes (5)....... Christopher Gaffney (6).................... David F. Dietz (7)...... All executive officers and directors, as a group (8 persons (8))..
69 - ----------------------- * Represents less than 1% of the outstanding shares of common stock (1) Assumes the underwriters do not elect to exercise the over-allotment option to purchase an additional shares of common stock. (2) Represents shares of common stock owned by investment funds affiliated with Media/Communications Partners which are managed by Great Hill Partners, L.L.C., of which Mr. Hayes and Mr. Gaffney are managing partners, including: . shares of common stock owned by Media/Communications Partners II Limited Partnership; and . shares of common stock owned by Media/Communications Investors Limited Partnership. (3) Includes shares of common stock held by Apache Limited Partnership, of which Mr. Friedly serves as managing general partner and the limited partner of which is the Robert Taylor Friedly Trust. Mr. Friedly disclaims beneficial ownership of the shares held by the limited partnership. (4) Includes shares of common stock held by Stonehenge Limited Partnership, of which Mr. Baird serves as managing general partner and the limited partners of which are the Justin Baird Irrevocable Trust, the Morgan Baird Irrevocable Trust and the Lauren Baird Irrevocable Trust. Mr. Baird disclaims beneficial ownership of the shares held by the limited partnership. (5) Represents shares of restricted common stock held by Mr. Torto, all of which shares will be vested upon consummation of this offering. (6) Includes (i) shares of common stock held by Media/Communications Partners II Limited Partnership and (ii) shares of common stock held by Media/Communications Investors Limited Partnership. Messrs. Gaffney and Hayes are members of the general partner of each of these funds. Each of Messrs. Gaffney and Hayes disclaims beneficial ownership of shares held by these funds, except to the extent of their respective pecuniary interest therein. (7) Includes shares of common stock which is held by Media/Communications Investors Limited Partnership of which Mr. Dietz is a limited partner. Mr. Dietz disclaims beneficial ownership of these shares of common stock except to the extent of his pecuniary interest therein. (8) Includes shares of common stock which may be acquired upon exercise of stock options that are currently exercisable. 70 DESCRIPTION OF CAPITAL STOCK Authorized and Outstanding Capital Stock There are currently shares of common stock and 82,748 shares of series A preferred stock issued and outstanding. At and subject to the closing of this offering, all of the outstanding shares of series A preferred stock will be redeemed by Voyager.net. Following the offering, our authorized capital stock will consist of shares of common stock, of which will be issued and outstanding; and 5,000,000 shares of undesignated preferred stock authorized and issuable in one or more series designated by our board of directors, of which no shares will be issued and outstanding. Common Stock Voting Rights. The holders of our common stock have one vote per share. Holders of our common stock are not entitled to vote cumulatively for the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority, or, in the case of election of directors, by a plurality, of the votes entitled to be cast at a meeting at which a quorum is present by all shares of common stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any then outstanding preferred stock. Except as otherwise provided by law, amendments to our certificate of incorporation, which will be effective upon consummation of this offering must be approved by a majority of the voting power of the common stock. Dividends. Holders of common stock will share ratably in any dividends declared by our board of directors, subject to the preferential rights of any preferred stock then outstanding. Dividends consisting of shares of common stock may be paid to holders of shares of common stock. Other Rights. In the event of any merger or consolidation of Voyager.net with or into another company as a result of which shares of common stock are converted into or exchangeable for shares of stock, other securities or property, including cash, all holders of common stock will be entitled to receive the same kind and amount, on a per share of common stock basis, of such shares of stock and other securities and property, including cash. On liquidation, dissolution or winding up of Voyager.net, all holders of common stock are entitled to share ratably in any assets available for distribution to holders of shares of common stock. No shares of common stock are subject to redemption or have preemptive rights to purchase additional shares of common stock. Preferred Stock Our certificate of incorporation provides that shares of preferred stock may be issued from time to time in one or more series. Our board of directors is authorized to fix the voting rights, if any, designations, powers, preferences, qualifications, limitations and restrictions thereof, applicable to the shares of each series. Our board of directors may, without stockholder approval, issue preferred stock with voting and other rights that could 71 adversely affect the voting power and other rights of the holders of the common stock and could have anti-takeover effects. We have no present plans to issue any shares of preferred stock. The ability of our board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of Voyager.net or the removal of existing management. Registration Rights Under the terms of the stock purchase agreement entered into on September 23, 1998, Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership, who in the aggregate hold % of the outstanding shares of common stock as of this offering, may demand that we file a registration statement for the registration of all or any portion of their shares under the Securities Act. We are not required to effect more one of these demand registrations. After the closing of this offering, those stockholders also will be entitled to unlimited piggyback registration rights in connection with any registration by us of securities for our own account or the account of other stockholders. If we propose to register any shares of common stock under the Securities Act, we are required to give those stockholders notice of the registration and to include their shares in the registration statement. At any time after we become eligible to file a registration statement on Form S-3, these stockholders may require us to file an unlimited number of registration statements on Form S-3 under the Securities Act with respect to their shares of common stock, so long as the aggregate dollar amount of the shares of common stock to be registered exceeds $250,000. The registration rights of these stockholders will terminate when the shares held by them may be sold under Rule 144 under the Securities Act. We are generally required to bear all of the expenses of all demand and piggyback registrations, except underwriting discounts and commissions. We also have agreed to indemnify those stockholders under the terms of the stock purchase agreement. Indemnification Matters Our certificate of incorporation contains a provision permitted by Delaware law that generally eliminates the personal liability of directors for monetary damages for breaches of their fiduciary duty, including breaches involving negligence or gross negligence in business combinations, unless the director has breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or a knowing violation of law, paid a dividend or approved a stock repurchase in violation of the Delaware General Corporation Law or obtained in improper personal benefit. This provision does not alter a director's liability under the federal securities laws and does not affect the availability of equitable remedies, such as an injunction or rescission, for breach of fiduciary duty. Our by-laws provide that directors and officers shall be, and in the discretion of our board of directors, non-officer employees may be, indemnified by Voyager.net to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of Voyager.net. Our by-laws also provide for the advancement of expenses to directors and, 72 in the discretion of our Board of Directors, officers and non-officer employees. Our by-laws also provide that the right of directors and officers to indemnification shall be a contract right and shall not be exclusive of any other right now possessed or hereafter acquired under any by-law, agreement, vote of stockholders or otherwise. We also have directors' and officers' insurance against certain liabilities and have entered into indemnification agreements with each of our directors. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Voyager.net as described above, we have 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. At present, there is no pending material litigation or proceeding involving any director, officer, employee or agent of Voyager.net in which indemnification will be required or permitted. Amendment of the Certificate of Incorporation Any amendment to our certificate of incorporation must first be approved by a majority of our board of directors and thereafter approved by a majority, and in some instances, 66 2/3%, of the total votes eligible to be cast by holders of voting stock with respect to such amendment. By-law Provisions Our by-laws provide that a special meeting of stockholders may be called only by the President or our board of directors unless otherwise required by law. Our by-laws provide that only those matters included in the notice of the special meeting may be considered or acted upon at that special meeting unless otherwise provided by law. In addition, our by-laws include advance notice and informational requirements and time limitations on any director nomination or any new proposal which a stockholder wishes to make at an annual meeting of stockholders. Ability to Adopt Stockholder Rights Plan Our board of directors may in the future resolve to issue shares of preferred stock or rights to acquire such shares to implement a stockholder rights plan. A stockholder rights plan typically creates voting or other impediments to discourage persons seeking to gain control of Voyager.net by means of a merger, tender offer, proxy contest or otherwise if our board of directors determines that such change in control is not in the best interests of Voyager.net and our stockholders. Our board of directors has no present intention of adopting a stockholder rights plan and is not aware of any attempt to effect a change of control of Voyager.net. Statutory Business Combination Provision Following the offering, we will be subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly held Delaware corporation from consummating a "business combination," except under certain circumstances, with an 73 "interested stockholder" for a period of three years after the date such person became an "interested stockholder" unless: . before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; . upon the closing of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares held by directors who are also officers of the corporation and shares held by employee stock plans; or . following the transaction in which such person became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of 66 2/3% of the outstanding voting stock of the corporation not owned by the interested stockholder. The term "interested stockholder" generally is defined as a person who, together with affiliates and associates, owns, or, within the prior three years, owned, 15% or more of a corporation's outstanding voting stock. The term "business combination" includes mergers, asset sales and other similar transactions resulting in a financial benefit to an interested stockholder. Section 203 makes it more difficult for an "interested stockholder" to effect various business combinations with a corporation for a three-year period. A Delaware corporation may "opt out" of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from an amendment approved by holders of at least a majority of the outstanding voting stock. Neither our certificate of incorporation nor our by-laws contains any such exclusion. Trading on the Nasdaq National Market System We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "VOYN." Transfer Agent and Registrar The transfer agent and registrar for our common stock will be State Street Bank and Trust Company. 74 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there has been no public market for our common stock, and no prediction can be made as to the effect, if any, that sales of common stock or the availability of common stock for sale will have on the market price of our common stock prevailing from time to time. Nonetheless, substantial sales of common stock in the public market following this offering, or the perception that such sales could occur, could lower the market price of our common stock or make it difficult for us to raise additional equity capital in the future. Following this offering, there will be shares of our common stock outstanding. Of these shares, the shares which are being sold in this offering generally will be freely transferable without restriction or further registration under the Securities Act, except that any shares held by our "affiliates" as is defined in Rule 144 under the Securities Act may be sold only in compliance with the limitations described below. The remaining shares of common stock which will be outstanding after the offering will be "restricted securities" as defined in Rule 144, and may be sold in the future without registration under the Securities Act subject to compliance with the provisions of Rule 144 or any other applicable exemption under the Securities Act. In connection with this offering, our existing officers, directors, stockholders and optionholders, who hold all of the currently outstanding shares of common stock and will own an aggregate of shares of common stock after this offering, have agreed with the underwriters that, subject to exceptions, they will not sell or dispose of any of their shares for 180 days after the date of this prospectus. Donaldson, Lufkin & Jenrette Securities Corporation may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to such restrictions. Subject to these lock-up agreements, the shares of common stock outstanding upon the closing of the offering will be available for sale in the public market as follows:
Approximate Number of Shares Description ---------------- ------------------------------------------------------------- After the date of this prospectus, freely tradeable shares sold in the offering. After 180 days from the date of this prospectus, the lock-up is released and these shares are saleable under Rule 144 (subject, in some cases, to volume limitations), Rule 144(k), or under a registration statement to register for resale shares of common stock issued upon the exercise of stock options.
In general, under Rule 144, as currently in effect, a person or persons whose shares are required to be aggregated, including an affiliate of ours, and who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock, which is expected to be approximately shares upon the completion of this offering, or the average weekly trading volume of the common stock during the calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least 75 two years would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate of ours, such person's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. We have agreed not to sell or otherwise dispose of any shares of common stock during the 180-day period following the date of this prospectus, except we may issue, and grant options to purchase, shares of common stock under the 1998 Stock Option and Incentive Plan. See "Risk Factors--The future sale of shares of our common stock could adversely affect the market price of our common stock." Following the offering, under specified circumstances and subject to customary conditions, Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership will have the right with respect to shares of common stock, subject to the 180-day lock-up arrangement described above, to require us to register their shares of common stock under the Securities Act, and they will have rights to participate in any future registration of securities by us. 76 UNDERWRITING Subject to the terms and conditions contained in the underwriting agreement, the underwriters named below, who are represented by Donaldson, Lufkin & Jenrette Securities Corporation, First Union Capital Markets Corp. and CIBC World Markets Corp., have severally agreed to purchase from us and the selling stockholders the number of shares of common stock opposite their respective names below.
Number of Shares ---------------- Underwriters: Donaldson, Lufkin & Jenrette Securities Corporation............ First Union Capital Markets Corp. ............................. CIBC World Markets Corp........................................ DLJdirect Inc.................................................. --- Total...................................................... ===
The underwriting agreement provides that the obligations of the several underwriters to purchase and accept delivery of shares included in this offering are subject to approval of certain legal matters and to certain other conditions. The underwriters are obligated to purchase and accept delivery of all the shares, other than those shares covered by the over-allotment option described below, if they purchase any of the shares. The underwriters propose to initially offer some of the shares directly to the public at the initial public offering price on the cover page of this prospectus and some of the shares to certain dealers at the initial public offering price less a concession not in excess of $ per share. The underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share on sales to other dealers. After the initial public offering of the shares to the public, the representatives may change the public offering price and such concessions. The underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation and a member of the selling group, is facilitating the distribution of the shares sold in the offering over the Internet. The underwriters have agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its brokerage account holders. The following table shows the underwriting fees we will pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of our common stock.
Paid by Voyager.net ----------------- No Full Exercise Exercise -------- -------- Per share..................................................... $ $ Total......................................................... $ $
We will pay all of the offering expenses, estimated to be $ . 77 Voyager.net and the selling stockholders have granted to the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to additional shares at the initial public offering price less the underwriting fees. The underwriters may exercise such option only to cover over-allotments, if any, made in connection with this offering. To the extent that the underwriters exercise this option, each underwriter will become obligated, subject to certain conditions, to purchase a number of additional shares approximately proportionate to that underwriter's initial purchase commitment. Voyager.net and the selling stockholders have severally agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect any of those liabilities. We, our executive officers and directors, and substantially all of our stockholders have agreed, for a period of 180 days from the date of this prospectus, not to, without the prior written consent of Donaldson, Lufkin & Jenrette: . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock; or . enter into any swap or other arrangement that transfer all or a portion of the economic consequences associated with the ownership of any common stock, regardless of whether any of the transactions described in these clauses are to be settled by the delivery of common stock, or such other securities, in cash or otherwise. In addition, during this period, we have agreed not to file any registration statement with respect to, and each of our executive officers and directors and a significant majority of our stockholders have agreed not to make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any securites convertible into or exercisable or exchangeable for common stock (other than a registration statement registering options or shares granted under a stock option plan) without the prior written consent of Donaldson, Lufkin & Jenrette. Prior to this offering, there was no established trading market for our common stock. The initial public offering price for our common stock will be determined by negotiation among us and the representatives of the underwriters. The factors to be considered in determining the initial public offering price include the history of and the prospects for the industry in which we compete, the ability of our management, our past and present operations, our prospects for future earnings, the general condition of the securities markets at the time of this offering and the recent market prices of securities of generally comparable companies. 78 Persons who receive this prospectus are advised to inform themselves about and to observe any restrictions relating to the offering of our common stock and the distribution of this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of our common stock included in this offering in any jurisdiction where that would not be permitted or legal. 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. The underwriters have reserved for sale up to shares of common stock for sale at the initial public offering price to persons, at our request, associated with Voyager.net. The number of shares available for sale to the general public will be reduced to the extent any reserved shares are purchased. Any reserved shares not so purchased will be offered by the underwriters on the same basis as the other shares offered hereby. We have applied for quotation of our common stock on the Nasdaq National Market under the symbol "VOYN". LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for Voyager.net by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. David Dietz, a director and the secretary of Voyager.net, is the sole owner of David F. Dietz, P.C., a partner of Goodwin, Procter & Hoar LLP and its predecessor firm. Mr. Dietz is also a limited partner with a pecuniary interest in Media/Communications Investor Limited Partnership, one of the selling stockholders in this offering. Various legal matters related to the sale of the common stock offered hereby will be passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts. EXPERTS Our audited financial statements as of December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998 included in this prospectus have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their reports appearing in this prospectus, and have been so included in reliance upon their authority as experts in accounting and auditing. 79 CHANGE IN INDEPENDENT ACCOUNTANTS In July 1998,Voyager.net engaged PricewaterhouseCoopers LLP as its independent public accountants, to replace Plante & Moran. The decision was made by Voyager.net's board of directors and was not due to any disagreement with Plante & Moran. During the fiscal years ended December 31, 1996 and December 1997, Voyager.net had no disagreements with Plante & Moran on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Plante & Moran, would have caused them to make reference thereto in their report on our financial statements. The reports of Plante & Moran on our financial statements for the fiscal years ended December 31, 1996 and December 31, 1997 (the last fiscal year audited by Plante & Moran) did not contain any adverse opinion, disclaimer of opinion or qualification or modification as to uncertainty, audit scope or accounting principles. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, or SEC, a registration statement on Form S-1 (including the exhibits and schedules thereto) under the Securities Act and the rules and regulations thereunder, for the registration of the common stock offered hereby. This prospectus is part of the registration statement. This prospectus does not contain all the information included in the registration statement because we have omitted certain parts of the registration statement as permitted by the SEC rules and regulations. For further information about us and our common stock, you should refer to the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are complete with respect to the material provisions of such contract; reference is made in each instance to the copy of such contract or any other document filed as an exhibit to the registration statement. Where the contract or other document is an exhibit to the registration statement, each statement is qualified by the provisions of that exhibit. The registration statement can be inspected and copied at the public reference facility maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the SEC at 1- 800-SEC-0330 for further information about the operation of the public reference rooms. Copies of all or any portion of the registration statement can be obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration statement is publicly available through the SEC's site on the Internet's World Wide Web, located at http://www.sec.gov. We will also file annual, quarterly and current reports, proxy statements and other information with the SEC. You can also request copies of these documents, for a copying fee, by writing to the SEC. We intend to furnish to our stockholders annual reports containing audited financial statements for each fiscal year. 80 VOYAGER.NET, INC. INDEX TO FINANCIAL STATEMENTS
Pages Voyager.net, Inc. - Consolidated Financial Statements: Report of Independent Accountants...................................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999.............................................................. F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and for the Quarter Ended March 31, 1999.......... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1997 and 1998 and the Quarter Ended March 31, 1999.................................................................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Quarter Ended March 31, 1999.............. F-6 Notes to Consolidated Financial Statements............................. F-7 Pro Forma Condensed Consolidated Financial Statements (Unaudited): Pro Forma Condensed Consolidated Statements of Operations for the Year Ended December 31, 1998 (Unaudited)................................... F-18 Pro Forma Condensed Consolidated Statements of Operations for the three months ended March 31, 1999 (Unaudited)............................... F-20 Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1999.... F-22 Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)........................................................... F-23 Freeway, Inc. - Financial Statements: Report of Independent Accountants...................................... F-24 Balance Sheets as of December 31, 1997 and July 31, 1998............... F-25 Statements of Income for the Year Ended December 31, 1997 and for the Seven Months Ended July 31, 1998...................................... F-26 Statements of Stockholders' Equity for the Year Ended December 31, 1997 and for the Seven Months Ended July 31, 1998.......................... F-27 Statements of Cash Flows for the Year Ended December 31, 1997 and for the Seven Months Ended July 31, 1998.................................. F-28 Notes to Financial Statements.......................................... F-29 EXEC-PC, Inc. - Financial Statements: Report of Independent Accountants...................................... F-31 Balance Sheets as of December 31, 1997 and September 22, 1998.......... F-32 Statements of Income for the Year Ended December 31, 1997 and for the Period From January 1, 1998 through September 22, 1998................ F-33 Statements of Stockholders' Deficit for the Year Ended December 31, 1997 and for the Period From January 1, 1998 through September 22, 1998.................................................................. F-34 Statements of Cash Flows for the Year Ended December 31, 1997 and for the Period From January 1, 1998 through September 22, 1998............ F-35 Notes to Financial Statements.......................................... F-36 NetLink Systems, L.L.C. - Financial Statements: Report of Independent Accountants...................................... F-40 Balance Sheets as of December 31, 1997 and September 30, 1998.......... F-41 Statement of Income and Members' Equity for the Year Ended December 31, 1997 and the Nine Months Ended September 30, 1998..................... F-42 Statement of Cash Flows for the Year Ended December 31, 1997 and the Nine Months Ended September 30, 1998.................................. F-43 Notes to Financial Statements.......................................... F-44 GDR Enterprises, Inc. - Financial Statements: Report of Independent Accountants...................................... F-46 Consolidated Balance Sheets as of December 31, 1998 and March 31, 1998 and 1999.............................................................. F-47 Consolidated Statements of Income for the Year Ended December 31, 1998 and the Quarters Ended March 31, 1998 and 1999........................ F-48 Consolidated Statements of Stockholder's Equity (Deficit) for the Year Ended December 31, 1998 and the Quarters Ended March 31, 1998 and 1999.................................................................. F-49 Consolidated Statements of Cash Flows for the Year Ended December 31, 1998 and the Quarters Ended March 31, 1998 and 1999................... F-50 Notes to the Consolidated Financial Statements......................... F-51
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Voyager.net, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows, present fairly, in all material respects, the financial position of Voyager.net, Inc. (the "Company") and subsidiaries at December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards, which 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, 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 expressed above. PricewaterhouseCoopers LLP Grand Rapids, Michigan March 5, 1999, except for Note 17, for which the date is June 10, 1999 F-2 VOYAGER.NET, INC. CONSOLIDATED BALANCE SHEETS
December 31, March 31, ------------------------ 1999 1997 1998 (unaudited) Assets Current assets: Cash and cash equivalents.............. $ 518,791 $ 2,350,292 $ 4,426,518 Accounts receivable, less allowance for doubtful accounts of $40,000, $99,000 and $134,000 in 1997, 1998 and 1999, respectively.......................... 196,955 950,381 1,812,496 Prepaid and other assets............... 24,969 154,059 303,204 ----------- ----------- ----------- Total current assets................. 740,715 3,454,732 6,542,218 Property and equipment, net............. 1,256,753 9,528,372 12,064,932 Intangible assets, net.................. 103,529 28,741,650 33,852,138 ----------- ----------- ----------- Total assets......................... $ 2,100,997 $41,724,754 $52,459,288 =========== =========== =========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of obligations under capital leases........................ $ 43,978 $ 303,562 $ 391,667 Notes payable, related party........... 1,996,014 2,252,713 2,296,525 Accounts payable....................... 125,620 659,351 1,620,772 Other liabilities...................... 165,779 855,727 1,128,370 Deferred revenue....................... 194,273 5,625,627 7,373,988 ----------- ----------- ----------- Total current liabilities............ 2,525,664 9,696,980 12,811,322 Commitments and contingencies........... -- -- -- Obligations under capital leases........ 114,646 751,613 972,823 Long-term debt.......................... -- 30,000,000 39,400,000 Stockholders' equity (deficit): Preferred stock, Series A, 8% cumulative, non- voting, $.01 par value, $100 redemption value: authorized 40,000 shares in 1997, and 100,000 shares in 1998 and 1999; issued and outstanding, 25,000 shares in 1997 and 82,748 shares in 1998 and 1999 (includes 6,667 shares subject to purchase that have not been issued)... 2,500,000 8,274,819 8,274,819 Common stock, $.0001 par value: authorized 60,000,000 shares in 1997 and 25,000,000 shares in 1998 and 1999; issued and outstanding, 11,994,320 shares in 1997 and 17,916,380 in 1998 and 18,916,380 in 1999.................................. 1,200 1,792 1,892 Additional paid-in capital.............. 3,292 413,168 6,413,068 Receivable for preferred and common stock.................................. -- (666,700) (6,666,700) Accumulated deficit..................... (3,043,805) (6,746,918) (8,747,936) ----------- ----------- ----------- Total stockholders' equity (deficit)........................... (539,313) 1,276,161 (724,857) Total liabilities and stockholders' equity.............................. $ 2,100,997 $41,724,754 $52,459,288 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-3 VOYAGER.NET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Years Ended December 31, March 31, ------------------------------------ ------------------------ 1996 1997 1998 1998 1999 (unaudited) Revenue: Internet access service............... $ 1,707,499 $3,440,212 $10,588,963 $ 1,131,774 $ 8,405,202 Other.................. -- 14,063 133,199 3,470 114,024 ----------- ---------- ----------- ----------- ----------- Total revenue........... 1,707,499 3,454,275 10,722,162 1,135,244 8,519,226 ----------- ---------- ----------- ----------- ----------- Operating expenses: Internet access service costs................. 1,002,431 1,318,163 3,607,665 370,353 2,789,676 Sales and marketing.... 638,446 1,038,459 1,987,113 180,582 969,031 General and administrative........ 1,154,815 1,461,720 3,405,870 355,438 2,463,200 Depreciation and amortization.......... 420,315 394,385 3,862,041 126,005 3,526,824 Compensation charge for issuance of common stock and stock options............... -- -- 408,407 -- -- ----------- ---------- ----------- ----------- ----------- Total operating ex- penses................. 3,216,007 4,212,727 13,271,096 1,032,378 9,748,731 ----------- ---------- ----------- ----------- ----------- Income (loss) from oper- ations before other income (expense)....... (1,508,508) (758,452) (2,548,934) 102,866 (1,229,505) Other income (expense): Interest income........ 17,298 11,312 30,987 5,792 26,773 Interest expense....... (7,010) (72,932) (942,766) (44,833) (798,286) ----------- ---------- ----------- ----------- ----------- Total other income (ex- pense)................. 10,288 (61,620) (911,779) (39,041) (771,513) ----------- ---------- ----------- ----------- ----------- Net income (loss)....... (1,498,220) (820,072) (3,460,713) 63,825 (2,001,018) Preferred stock divi- dends.................. -- (73,456) (348,494) (50,000) (165,496) ----------- ---------- ----------- ----------- ----------- Net income (loss) appli- cable to common stockholders........... $(1,498,220) $ (893,528) $(3,809,207) $ 13,825 $(2,166,514) =========== ========== =========== =========== =========== Per Share Data: Basic and diluted net loss per share applica- ble to common stock- holders................ $ (0.35) $ (0.12) $ (0.27) $ 0.00 $ (0.12) =========== ========== =========== =========== =========== Weighted average common shares outstanding: Basic and diluted....... 4,316,000 7,160,080 14,238,296 12,095,704 18,538,602 =========== ========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-4 VOYAGER.NET, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Receivable For Total Preferred Stock Common Stock Additional Preferred Stockholders' ----------------- ------------------ Paid-in and Common Accumulated Equity Shares Amount Shares Amount Capital Stock Deficit (Deficit) Balance at January 1, 1996.................... 20,000 $2,000,000 4,316,000 $ 432 $ 44,374 $ (695,076) $ 1,349,730 Net loss................ -- -- -- -- -- (1,498,220) (1,498,220) ------ ---------- ---------- ------ ---------- ----------- ----------- Balance at December 31, 1996................... 20,000 2,000,000 4,316,000 432 44,374 (2,193,296) (148,490) Redemption of common stock................... -- -- (1,888,000) (189) (44,374) (30,437) (75,000) Issuance of common stock................... -- -- 9,566,320 957 3,292 -- 4,249 Issuance of preferred stock................... 5,000 500,000 -- -- -- -- 500,000 Net loss................ -- -- -- -- -- (820,072) (820,072) ------ ---------- ---------- ------ ---------- ----------- ----------- Balance at December 31, 1997................... 25,000 2,500,000 11,994,320 1,200 3,292 (3,043,805) (539,313) Conversion of notes pay- able to preferred stock and issuance of preferred and common stock........ 40,324 4,032,419 360,000 36 144 $ (666,700) -- 3,365,899 Issuance of preferred and common stock........ 15,000 1,500,000 3,762,060 376 1,505 -- -- 1,501,881 Conversion of preferred dividends to preferred stock................... 2,424 242,400 -- -- -- -- (242,400) -- Issuance of common stock and options............. -- -- 1,800,000 180 408,227 -- -- 408,407 Net loss................ -- -- -- -- -- -- (3,460,713) (3,460,713) ------ ---------- ---------- ------ ---------- ----------- ----------- ----------- Balance at December 31, 1998................... 82,748 8,274,819 17,916,380 1,792 413,168 (666,700) (6,746,918) 1,276,161 Issuance of common stock................... 1,000,000 100 5,999,900 (6,000,000) -- -- Net loss................ -- -- -- -- -- -- (2,001,018) (2,001,018) ------ ---------- ---------- ------ ---------- ----------- ----------- ----------- Balance at March 31, 1999 (unaudited)....... 82,748 $8,274,819 18,916,380 $1,892 $6,413,068 $(6,666,700) $(8,747,936) $ (724,857) ====== ========== ========== ====== ========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-5 VOYAGER.NET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Years Ended December 31, March 31, ------------------------------------ ----------------------- 1996 1997 1998 1998 1999 (unaudited) Cash flows from operating activities Net income (loss)...... $(1,498,220) $ (820,072) $(3,460,713) $ 63,825 $ (2,001,018) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......... 420,315 394,385 3,862,041 126,005 3,526,824 (Gain) loss on sale of equipment............. -- (7,071) 5,952 -- -- Compensation charge for issuance of common stock shares and options............... -- -- 408,407 -- -- Changes in assets and liabilities excluding effects of business combinations: Accounts receivable... (131,048) (28,199) (513,909) 9,815 (475,909) Prepaids and other assets............... 48,842 (24,251) (104,990) (83,400) (47,308) Accounts payable...... 188,898 (237,551) 512,591 36,944 961,421 Accrued expenses...... 92,675 137,486 831,577 (35,422) 302,869 Deferred revenue...... 1,902 187,203 1,160,698 97,005 1,165,556 ----------- ---------- ----------- --------- ------------ Net cash provided by (used in) operating activities............. (876,636) (398,070) 2,701,654 214,772 3,432,435 Cash flows from investing activities Business acquisition costs, net of cash acquired.............. -- -- (32,850,289) -- (9,371,427) Purchase of property and equipment......... (759,119) (661,312) (1,514,323) (170,840) (1,320,563) Proceeds from the sale of equipment.......... -- 87,282 28,248 -- -- ----------- ---------- ----------- --------- ------------ Net cash used in invest- ing activities......... (759,119) (574,030) (34,336,364) (170,840) (10,691,990) Cash flows from financing activities Payments on capital leases................ (20,373) (54,216) (54,565) (15,938) (64,219) Advances from related party................. 603,806 1,127,777 4,047 49,921 -- Payment to related party................. -- (15,000) (25,521) -- -- Payment of bank financing fees........ -- -- (1,325,530) -- -- Proceeds from issuance of debt............... -- -- 30,000,000 -- 9,400,000 Proceeds from notes payable issuance...... -- -- 2,800,000 -- -- Proceeds from common stock issuance........ -- 4,249 2,061 -- -- Proceeds from preferred stock issuance........ -- 500,000 2,065,719 -- -- Redemption of common stock................. -- (75,000) -- -- -- ----------- ---------- ----------- --------- ------------ Net cash provided by fi- nancing activities..... 583,433 1,487,810 33,466,211 33,983 9,335,781 ----------- ---------- ----------- --------- ------------ Net increase (decrease) in cash and cash equivalents............ (1,052,322) 515,710 1,831,501 77,915 2,076,226 Cash and cash equivalents at beginning of period.... 1,055,403 3,081 518,791 518,791 2,350,292 ----------- ---------- ----------- --------- ------------ Cash and cash equivalents at end of period................. $ 3,081 $ 518,791 $ 2,350,292 $ 596,706 $ 4,426,518 =========== ========== =========== ========= ============
The accompanying notes are an integral part of the consolidated financial statements. F-6 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization and Basis of Presentation Voyager.net, Inc. (the "Company") owns 100% of Voyager Information Networks, Inc., which was incorporated in the State of Michigan in 1994. Voyager.net was incorporated in 1998 in the State of Delaware under the name Voyager Holdings, Inc. The Company's name was changed to Voyager.net, Inc. on April 29, 1999. The Company provides full service access to the Internet for corporate and residential users in Michigan, Illinois, Indiana, Minnesota, Ohio and Wisconsin. Revenue Recognition The Company recognizes revenue for dial-up Internet access services, dedicated Internet access services and value-added Web services when the services are provided. Dial-up and dedicated Internet access service plans range from one month to one year. Value-added Web services are sold on a monthly basis. Advance collections relating to future access services are recorded as deferred revenue and recognized as revenue when earned. Cash Equivalents The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Equipment acquired under capital leases is depreciated over the related lease terms or the estimated productive useful lives, depending on the criteria met in determining the qualification as a capital lease. Costs of repair and maintenance are charged to expense as incurred. Intangible Assets Intangible assets consist primarily of the cost of the acquired customer base. The acquired customer base is amortized using the straight-line method over 3 years based on the estimated customer churn rate. Bank financing fees, included in intangible assets, are being amortized on a straight-line basis over the term of the related debt. Other intangible assets are amortized over a 10 year period. Impairments, if any, are measured based upon discounted cash flow analyses and are recognized in operating results in the period in which the impairment in value is determined. Advertising Costs Advertising costs are expensed as incurred. Advertising expense of approximately $151,000, $372,000 and $185,000 was charged to operations in 1996, 1997 and 1998, respectively. F-7 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Financial Instruments The Company's financial instruments, as defined by SFAS No. 107 Disclosures About Fair Value of Financial Instruments, consist of cash, notes payable and long-term debt. The Company's estimate of the fair value of these financial instruments approximates their carrying amounts at December 31, 1997 and 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between financial and tax accounting. Interim Financial Information The consolidated financial statements of the Company as of March 31, 1999 and for the three months ended March 31, 1999 and 1998 are unaudited. All adjustments (consisting only of normal recurring adjustments) have been made, which in the opinion of management, are necessary for a fair presentation. Results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999 or for any other future period. 2. Business Combinations: In 1998, the Company acquired certain assets used in connection with the Internet access service business of seven entities as described below: July 1, 1998, the Company purchased assets from CDL Corp. for approximately $69,000, of which approximately $55,500 was remitted to CDL Corp. and the remainder was deposited in an escrow account. Approximately $68,000 was allocated to the acquired customer base cost as a result of this transaction. July 1, 1998, the Company purchased assets from Internet-Michigan, Inc. for approximately $203,000. Approximately $202,000 was allocated to the acquired customer base cost as a result of this transaction. July 31, 1998, the Company purchased assets from Freeway, Inc. for approximately $3,991,000, of which approximately $3,586,000 was remitted to Freeway, Inc. and the remainder was deposited in an escrow account. Approximately $3,074,000 was allocated to the acquired customer base cost as a result of this transaction. F-8 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 23, 1998, the Company purchased assets from EXEC-PC, Inc. for approximately $23,983,000, of which $22,733,000 was paid to EXEC-PC, Inc., including approximately $3,827,000 for payment of certain liabilities with the remainder deposited in an escrow account. Approximately $21,992,000 was allocated to the acquired customer base cost as a result of this transaction. October 2, 1998, the Company purchased assets from Netimation, Inc. for approximately $258,000 of which $233,000 was remitted to Netimation, Inc., including approximately $6,000 for payment of certain liabilities with the remainder deposited in an escrow account. Approximately $260,000 was allocated to the acquired customer base cost as a result of this transaction. October 2, 1998, the Company purchased assets from NetLink Systems, L.L.C. for approximately $3,363,000, of which approximately $3,003,000 was remitted to NetLink Systems, L.L.C. and the remainder was deposited in an escrow account. Approximately $3,197,000 was allocated to the acquired customer base cost as a result of this transaction. November 20, 1998, the Company purchased assets from Add, Inc. for approximately $41,000, of which approximately $6,800 was remitted to Add, Inc. and the remainder is payable over five months. Approximately $6,000 was allocated to the acquired customer base cost as a result of this transaction. The above acquisitions were accounted for as purchases and, accordingly, the purchase prices were allocated to assets acquired and liabilities assumed based upon their estimated fair values at the dates of acquisition. For each individual acquisition listed above, the amounts allocated to the acquired customer base excludes broker commissions and legal fees aggregating 1,235,000. Such amounts have been added to the total customer base being amortized over three years. For those businesses acquired, the results of operations are included in the Company's consolidated statement of operations from the dates of acquisitions. The unaudited pro forma combined historical results, as if the Freeway, Inc., EXEC-PC, Inc. and NetLink Systems, L.L.C. had been acquired at the beginning of fiscal 1997 and 1998, respectively, are included in the table below. The pro forma combined historical results for CDL Corp., Internet- Michigan, Inc., Netimation, Inc. and Add, Inc. were not deemed to be material and are not included for 1997 and 1998. Additionally, the unaudited pro forma combined historical results of Hoosier On-Line Services, Inc., Infinite Systems, Ltd., and Exchange Network Services, Inc. are included in the three months ended March 31, 1999 as if they had been acquired January 1, 1999. The unaudited pro forma combined historical results of GDR Enterprises, Inc., which was acquired on May 7, 1999, are included for the year ended December 31, 1998 and for the three months ended March 31, 1999 as if it had been acquired on January 1, 1998. F-9 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands except per share data) Three Months Years Ended December 31, Ended -------------------------- March 31, 1997 1998 1999 (unaudited) (unaudited) Revenue............................. $ 14,120 $ 25,743 $10,510 Net loss............................ $ (12,590) $ (14,458) $(2,829) Basic loss per share................ $ (1.76) $ (1.04) $ (0.15)
The pro forma results above include amortization of intangibles and interest expense on debt assumed issued to finance the acquisitions. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of each of the fiscal periods presented, nor are they necessarily indicative of future consolidated results. 3. Property and Equipment: Cost of property and equipment and depreciable lives are summarized as follows:
Depreciable 1997 1998 Life-Years Computer equipment........ $1,551,099 $8,461,789 5 Office equipment.......... 25,052 230,009 7 Furniture and fixtures.... 76,238 96,559 5-7 Software.................. 157,260 389,863 3-5 Equipment acquired under capital lease............ 251,355 1,178,525 5 Vehicles.................. -- 32,807 5 Building improvements..... -- 860,526 7-10 ---------- ---------- 2,061,004 11,250,078 Less accumulated depreciation............ (804,251) (1,721,706) ---------- ---------- Property and equipment, net.................... $1,256,753 $9,528,372 ========== ==========
Depreciation expense of approximately $238,000, $393,000 and $842,000 was charged to operations in 1996, 1997 and 1998, respectively. 4. Intangible Assets: Intangible assets consist of the following:
Years Ended December Three Months 31, Ended --------------------- March 31, 1997 1998 1999 (unaudited) Acquired customer base.................. $ 25,775 $30,127,837 $37,897,134 Bank financing fees..................... -- 1,348,182 1,348,182 Other................................... 108,124 237,658 286,980 -------- ----------- ----------- 133,899 31,713,677 39,532,296 Less accumulated amortization........... (30,370) (2,972,027) (5,680,158) -------- ----------- ----------- Intangible assets, net.................. $103,529 $28,741,650 $33,852,138 ======== =========== ===========
F-10 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Capital Leases: The Company leases computer equipment under capital leases expiring in various years through the year 2002. The assets under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The net book value of these assets as of December 31, 1998 is $982,822. Depreciation of assets under capital leases is included in depreciation expense. Future minimum lease payments under capital leases as of December 31, 1998 are as follows: 1999............................................................. $ 395,315 2000............................................................. 380,723 2001............................................................. 349,608 2002............................................................. 123,907 ---------- Total minimum lease payments..................................... 1,249,553 Less amount representing interest................................ (194,378) ---------- Present value of net minimum lease payments...................... $1,055,175 ==========
6. Related Party Transactions: The notes payable, related party, represent principal and interest payable on demand to Horizon Cable I Limited Partnership, an entity under common management. Interest on the notes is at rates of 10.5 percent in 1997 and of 8.0 and 8.5 percent in 1998. Interest has not been paid through December 31, 1998 on these notes. On July 31, 1998, the Company's majority stockholder issued $2,800,000 in notes payable at interest of 8 percent per annum. These notes, along with $32,526 of accrued interest and cash in the amount of $533,333, were converted into 33,657 shares of preferred stock for $100 per share and 360,000 shares of common stock for $1,881. 7. Other Liabilities: Other liabilities consist of the following:
1997 1998 Accrued payroll and related expenses...................... $ 94,129 $272,654 Accrued expenses.......................................... -- 465,732 Other..................................................... 71,650 117,341 -------- -------- $165,779 $855,727 ======== ========
8. Debt: In 1998, the Company entered into a $40,000,000 revolving credit facility with a bank group which matures September 30, 2004. At December 31, 1998, $30,000,000 was outstanding under the credit facility. Interest is payable quarterly beginning December 31, 1998 through maturity. The revolving credit facility agreement allows the Company to F-11 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) elect an interest rate as of any borrowing date based on either the (1) prime rate, or (2) LIBOR, plus a margin ranging from 1.5% to 3.5% depending upon funded debt to EBITDA. The elected rate as of December 31, 1998 is approximately 8.5%. Commitment fees on the unused credit facility are 0.5%. Automatic and permanent reductions of the maximum commitments begin September 30, 2000 and continue until maturity. Based on the balance as of December 31, 1998, the scheduled permanent reductions of long-term debt are as follows:
Year 1999.................................. $ -- 2000.................................. 1,000,000 2001.................................. 4,000,000 2002.................................. 8,000,000 2003.................................. 12,000,000 Thereafter............................ 5,000,000 ----------- $30,000,000 ===========
The revolving credit facility is collateralized by all of the Company's tangible and intangible personal property and fixtures as well as substantially all of the issued and outstanding equity securities of the Company. The revolving credit facility is subject to an agreement that contains, among other provisions, certain financial covenants. These financial covenants include maintenance of a minimum fixed charges ratio, a total interest coverage ratio, and a leverage ratio. Additional Financing (Unaudited) On April 13, 1999, the Company increased its revolving available credit facility with its bank group to $70,000,000. The credit facility matures on March 31, 2005. 9. Income Taxes: The Company's effective tax rate varies from the statutory rate as follows:
1997 1998 Statutory rate................................................. 35.0% 35.0% Effect of graduated tax rate................................... (1.0) (1.0) Change in valuation allowance.................................. (34.0) (34.0) ----- ----- 0.0% 0.0% ===== =====
Based on the Company's current financial status, realization of the Company's deferred tax assets does not meet the "more likely than not" criteria under SFAS No. 109 and accordingly a valuation allowance for the entire deferred tax asset amount has been recorded. The components of the net deferred tax asset (liability) and the related valuation allowance are as follows: F-12 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 1998 Net operating loss carryforward.................... $ 1,055,000 $ 1,462,000 Intangible assets.................................. -- 755,000 Other.............................................. 18,000 13,000 ----------- ----------- Deferred tax assets................................ 1,073,000 2,230,000 ----------- ----------- Valuation allowance................................ (1,073,000) (2,230,000) ----------- ----------- Net deferred tax assets............................ $ -- $ -- =========== ===========
Deferred tax assets, primarily attributable to net operating loss ("NOL") carryforwards, expiring in years 2013 through 2018, totaled $3,102,000 and $4,300,000 at December 31, 1997 and 1998, respectively. 10. Retirement Savings Plan: In 1997, the Company established a retirement savings 401(k) plan for all employees. The Company can make discretionary matching contributions to the plan. Contributions to the plan totaled $7,300 and $14,789 in 1997 and 1998, respectively. 11. Equity Transactions: On September 23, 1998, the Company issued 33,657 shares of preferred stock at $100 per share and 360,000 shares of common stock in exchange for $2,800,000 notes payable to its majority stockholders along with $32,566 in accrued interest and $533,513 in cash. Also, the Company agreed to the sale of 6,667 shares of preferred stock at $100 per share to certain investors for which payment on such shares in the amount of $666,700 is due by May 7, 1999. If payment is not received for such shares, the majority stockholder has the option to purchase these shares. Also on September 23, 1998, the Company converted accumulated preferred stock dividends in the amount of $242,400 through September 23, 1998 into 2,424 shares of preferred stock at $100 per share. On July 6, 1998, the Board of Directors authorized a 20-for-1 stock split on the common stock, and on August 22, 1997, the Board of Directors authorized a 100-for-1 stock split on the common stock. The stock splits were applied retroactively and, accordingly, all share data has been restated to reflect these splits. In the event of liquidation of the Company, the holders of outstanding Series A Preferred Stock shall be entitled to receive a distribution of $100 per share plus all accumulated and unpaid dividends. Dividends accumulated and unpaid related to the preferred stock as of December 31, 1998 were approximately $180,000. Additional Equity Transactions (Unaudited): On January 11, 1999, the Company issued to members of management 1,000,000 shares of common stock at $6.00 per share in exchange for promissory notes payable in the aggregate amount of $6,000,000 which notes are due January 11, 2003 and have an F-13 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) interest rate of 5% per annum compounded annually. The per share price was based on an appraisal performed by an independent valuation firm. 12. Stock-Based Compensation Plan: During the year, the 1998 Stock Option and Incentive Plan the ("Plan") was established. The Plan provides for the ability to issue Stock Options (either Incentive Stock Options or Non-Qualified Stock Options), Stock Appreciation Rights, Restricted Stock Awards, Deferred Stock Awards, Unrestricted Stock Awards, Performance Share Awards and Dividend Equivalent Rights. As of December 31, 1998, there were 3,884,000 shares of common stock authorized for issuance under the Plan. At December 31, 1998, 1,464,000 shares are available for issuance under the Plan. The Plan provides for the granting of options to officers, employees, consultants, members of the Board of Directors and other key persons for purchase of the Company's common shares. The Plan is administered by the Board of Directors. No option can be for a term of more than ten years from the grant date. The option price and the vesting provisions are determined by the Board of Directors at the time of the grant. Stock option activity under the Plan during the year ended December 31, 1998 is as follows:
Weighted- Number Average Of Exercise Options Price Outstanding at December 31, 1997........................... -- -- Granted.................................................... 620,000 $.0005 Exercised, forfeited and expired........................... -- -- ------- ------ Outstanding at December 31, 1998........................... 620,000 $.0005 ======= ====== Exercisable at December 31, 1998........................... 470,000 $.0005 ======= ======
On September 23, 1998, the Company granted 620,000 options to purchase common stock to certain members of management. At the grant date, 470,000 options were fully vested; the remaining 150,000 options become fully vested on January 15, 1999. The fair value at the date of grant was $.20 per share based on an appraisal performed by an independent valuation firm of the underlying common stock. The weighted-average remaining contractual life of the options outstanding at December 31, 1998 is in approximately 10 years. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, in accounting for its stock options issued to employees. Accordingly, the Company recorded compensation cost of approximately $120,000 for the year ended December 31, 1998. Under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), compensation cost is measured at the grant date based on the value of the award and is recognized over the service (or vesting) period. Under F-14 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) SFAS 123, the Company's net loss and loss per share for the year ended December 31, 1998, would have been adjusted to the pro forma amounts indicated in the following table: Net loss applicable to common stockholders: As reported........................... $3,809,207 Pro forma............................. $3,909,240 Loss per share: As reported: Basic and diluted.................... $ .27 Pro forma: Basic and diluted.................... $ .28
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk free rate of 4.6 percent; no expected dividend; expected life of 4 years and volatility assumption of 75%. On September 23, 1998, the Company issued 1,800,000 shares of restricted common stock to certain members of management for a nominal amount; 400,000 of which are subject to certain vesting provisions through October 2002. The fair value at the issuance date was $.20 per share based on an appraisal performed by an independent valuation firm. Accordingly, the Company recorded compensation expense of approximately $288,000 for the year ended December 31, 1998. Deferred compensation as of December 31, 1998 was approximately $55,000. 13. Earnings Per Share: The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Years Ended December 31, March 31, ------------------------------------ ------------------------ 1996 1997 1998 1998 1999 Net income (loss)....... $(1,498,220) $ (820,072) $(3,460,713) $ 63,825 $(2,001,018) Less: Preferred stock dividends.............. -- (73,456) (348,494) (50,000) (165,496) ----------- ---------- ----------- ----------- ----------- Net income (loss) applicable to common stockholders........... (1,498,220) (893,528) (3,809,207) 13,825 (2,166,514) ----------- ---------- ----------- ----------- ----------- Basic weighted average shares................. 4,316,000 7,160,080 14,238,296 12,095,704 18,538,602 ----------- ---------- ----------- ----------- ----------- Basic loss per share.... $ (.35) $ (.12) $ (.27) $ -- $ (.12) =========== ========== =========== =========== ===========
The impact of dilutive shares is not significant. F-15 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Supplemental Disclosure of Cash Flow Information: The following is the supplemental cash flow information for all periods presented:
Three Months Ended Years Ended December 31, March 31, ---------------------------- ------------------- 1996 1997 1998 1998 1999 (unaudited) Cash paid during the period for interest..... $7,010 $ 7,604 $ 632,027 $59,981 $ 1,097,716 Noncash financing and investing activities: In connection with the acquisitions described in Notes 2 and 17, lia- bilities were assumed as follows: Fair value of assets acquired............... $ 37,890,628 $ 9,967,818 Business acquisition costs, net of cash acquired............... (32,850,289) (9,371,427) ------------ ----------- Liabilities assumed...... $ 5,040,339 $ 596,391 ============ =========== Acquisition of equipment through capital lease... -- $159,974 $ 951,117 -- $ 373,534 Conversion of note pay- able and accumulated dividends to preferred stock................... -- -- $ 3,042,400 -- -- Issuance of compensatory common stock and options................. -- -- $ 408,407 -- -- Issuance of common stock in exchange for promissory notes........ -- -- -- -- $ 6,000,000
15. Commitments and Contingencies: The Company leases office facilities under operating lease agreements that expire in the years 2000, 2006 and 2007. The following is a schedule of future minimum rental payments under these leases: 1999................................... $ 318,390 2000................................... 236,052 2001................................... 212,715 2002................................... 219,106 2003................................... 225,681 Thereafter............................. 1,101,424 ---------- $2,313,368 ==========
In addition to these office leases, the Company also leases point of presence locations under lease terms of less than one year. Rent expense under all operating leases of approximately $52,000, $103,000 and $190,000 was charged to operations in 1996, 1997 and 1998, respectively. 16. Segment Reporting: In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," which requires certain information to be reported about operating segments consistent with management's internal view of the Company. The Company has a single operating segment, Internet access services. The Company has no organizational structure dictated by product lines, geography or customer type. F-16 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Sales are derived from one service line, Internet access service, and are residential and business customers in the Midwestern United States. The Company evaluates performance based on profit or loss from operations before interest, income taxes, depreciation and amortization. 17. Subsequent Events: Acquisitions: On January 15, 1999, the Company purchased assets of Hoosier On-Line Systems, Inc. for approximately $2,347,000, of which approximately $2,197,000 was remitted to Hoosier On-Line Systems, Inc. and the remainder was deposited in an escrow account. Approximately $2,030,000 was allocated to the acquired customer base cost as a result of this transaction. On February 24, 1999, the Company purchased assets of Infinite Systems, Ltd. for approximately $3,100,000, of which approximately $2,766,000 was remitted to Infinite Systems, Ltd. and the remainder was deposited in an escrow account. Approximately $2,538,000 was allocated to the acquired customer base cost as a result of this transaction. On March 10, 1999, the Company purchased assets of Exchange Network Services, Inc. for approximately $3,250,000, of which approximately $3,005,000 was remitted to Exchange Network Services, Inc. and the remainder was deposited in an escrow account. Approximately $2,803,000 was allocated to the acquired customer base cost as a result of this transaction. On April 23, 1999, the Company acquired certain subscribers of StarNet, Inc. for approximately $1,835,000, of which $1,635,000 was remitted to StarNet, Inc. and the remainder was deposited in an escrow account. Approximately $2,000,000 was allocated to the acquired customer base cost as a result of this transaction. On May 7, 1999, the Company purchased the stock of GDR Enterprises, Inc. for approximately $9,075,000, of which approximately $8,275,000 was remitted to GDR Enterprises, Inc. and the remainder was deposited in an escrow account. Approximately $9,018,000 was allocated to the acquired customer base cost as a result of the transaction. On June 4, 1999, the Company purchased assets of PCLink.com for approximately $1.9 million. Employee Stock Option Plan (Unaudited): Concurrent with the Company's initial public offering of securities, the Company anticipates that it will grant to employees options to purchase common stock under its stock option plan. Options will be granted at the initial public offering price and will be granted based on a formula of years of service, level of compensation and other factors. F-17 VOYAGER.NET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On May 3, 1999, the Company received $666,700 for its preferred stock subscription. On June 10, 1999, the Board of Directors authorized a loan in the amount of $5,000,000 to Mr. Torto, Chief Executive Officer, payable over four years at interest of 5 percent per year compounded annually. F-18 VOYAGER.NET, INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) During the period from July 1, 1998 through December 31, 1998, Voyager.net (the "Company") completed seven business acquisitions and from January 1, 1999 through June 4, 1999 Voyager.net completed an additional six business acquisitions as follows:
Company Date ------- -------- CDL Corp. 7/1/98 Internet-Michigan, Inc. 7/1/98 Freeway, Inc. 7/31/98 EXEC-PC, Inc. 9/23/98 Netimation, Inc. 10/2/98 NetLink Systems, L.L.C. 10/2/98 Add, Inc. 11/20/98 Hoosier On-Line Systems, Inc. 1/15/99 Infinite Systems, Ltd. 2/26/99 Exchange Network Services, Inc. 3/10/99 StarNet, Inc. 4/23/99 GDR Enterprises, Inc. 5/7/99 PCLink.com 6/4/99
These acquisitions were accounted for using the purchase method of accounting. Accordingly, the purchase prices were allocated to assets acquired and liabilities assumed based upon their estimated fair values at the dates of acquisitions. Condensed pro forma financial statements are required for the companies and the periods presented herein and include Freeway, Inc., EXEC-PC, Inc., NetLink Systems L.L.C., and GDR Enterprises, Inc. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1998 assumes, that for the acquired entities presented, that the acquisitions in 1998 and 1999 had occurred on January 1, 1998. The unaudited pro forma condensed consolidated balance sheet as of March 31, 1999 assumes that the acquisition of GDR Enterprises, Inc. that occurred on May 7, 1999 had occurred as of March 31, 1999. The unaudited pro forma condensed consolidated statement of operations is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been consummated as of January 1, 1998 and is not intended to indicate the expected results for any future period. Also, the unaudited pro forma condensed consolidated balance sheet at March 31, 1999 is not intended to present the financial position as of March 31, 1999. These statements should be read in conjunction with the historical consolidated financial statements and related notes of Voyager.net, and certain acquired businesses, included herein. F-19 VOYAGER.NET, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For the year ended December 31, 1998
Pre-acquisition Results ----------------------------------------------- NetLink GDR Voyager.net, Freeway, ExecPC, Systems, Enterprises, Inc. Inc. Inc. L.L.C. Inc. Adjustments Total Revenue: Internet access service............... $10,588,963 $1,049,380 $8,652,989 $1,441,020 $3,860,368 $ 25,592,720 Other.................. 133,199 -- 15,855 1,080 -- 150,134 ----------- ---------- ---------- ---------- ---------- ------------ Total revenue......... 10,722,162 1,049,380 8,668,844 1,442,100 3,860,368 25,742,854 ----------- ---------- ---------- ---------- ---------- ------------ Internet access service costs.................. 3,607,665 411,816 3,493,066 853,582 1,253,554 9,619,683 Sales and marketing..... 1,987,113 155,947 574,078 69,645 136,221 2,923,004 General and administrative......... 3,405,870 286,498 1,773,757 364,591 1,739,115 7,569,831 Depreciation and amortization........... 3,862,041 56,744 1,151,960 73,808 651,771 $ 10,265,389 16,061,713 Compensation charge for issuance of common stock and options...... 408,407 -- -- -- -- -- 408,407 ----------- ---------- ---------- ---------- ---------- ------------ ------------ Total operating expenses............... 13,271,096 911,005 6,992,861 1,361,626 3,780,661 10,265,389 36,582,638 ----------- ---------- ---------- ---------- ---------- ------------ ------------ Total operating income (loss)................. (2,548,934) 138,375 1,675,983 80,474 79,707 (10,265,389) (10,839,784) Other income (expense).. (911,779) (41,626) (12,073) (41,719) (2,610,432) (3,617,629) ----------- ---------- ---------- ---------- ---------- ------------ ------------ Net income (loss)....... (3,460,713) 138,375 1,634,357 68,401 37,988 (12,875,821) (14,457,413) Preferred stock dividends.............. (348,494) -- -- -- -- -- (348,494) ----------- ---------- ---------- ---------- ---------- ------------ ------------ Net income (loss) applicable to common stockholders........... $(3,809,207) $ 138,375 $1,634,357 $ 68,401 $ 37,988 $(12,875,821) $(14,805,907) =========== ========== ========== ========== ========== ============ ============ EBITDA (1).............. $ 1,721,514 $ 195,119 $2,827,943 $ 154,282 $ 731,478 -- $ 5,630,336 =========== ========== ========== ========== ========== ============ ============ Basic and diluted earnings per share..... $ (1.04) ============ Basic weighted average shares (in thousands).. 14,238,296 ============
(1) EBITDA represents earnings before interest, taxes, and depreciation, and amortization and non-recurring, non-cash compensation charges. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. EBITDA, as calculated by Voyager.net, is not necessarily comparable with similarly titled measures for other companies. F-20 VOYAGER.NET, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) For the three months ended March 31, 1999
Pre-acquisition Results ---------------- Voyager.net, GDR Enterprises, Inc. Inc. Adjustments Total Revenue: Internet access service.............. $ 8,405,202 $1,141,331 $ 9,546,533 Other................. 114,024 114,024 ----------- ---------- ----------- Total revenue....... 8,519,226 1,141,331 9,660,557 ----------- ---------- ----------- Internet access service costs.................. 2,789,676 318,029 3,107,705 Sales and marketing..... 969,031 83,782 1,052,813 General and administrative......... 2,463,200 353,138 2,816,338 Depreciation and amortization........... 3,526,824 228,864 $ 751,508 4,507,196 ----------- ---------- --------- ----------- Total operating expenses............... 9,748,731 983,813 751,508 11,484,052 ----------- ---------- --------- ----------- Total operating income (loss)................. (1,229,505) 157,518 (751,508) (1,823,495) Other income (expense).. (771,513) (44,684) (195,500) (1,011,697) ----------- ---------- --------- ----------- Net income (loss)....... (2,001,018) 112,834 (947,008) (2,835,192) Preferred stock dividends.............. (165,496) (165,496) ----------- ---------- --------- ----------- Net income (loss) applicable to common stockholders........... $(2,166,514) $ 112,834 $(947,008) $(3,000,688) =========== ========== ========= =========== EBITDA(1)............... $ 2,297,319 $ 386,382 $ -- $ 2,683,701 =========== ========== ========= =========== Basic and diluted earnings per share..... $ (0.16) =========== Basic and diluted weighted average shares (in thousands)......... 18,538,602 ===========
(1) EBITDA represents earnings before interest, taxes, and depreciation, and amortization and non-recurring, non-cash compensation charges. EBITDA is provided because it is a measure commonly used by investors to analyze and compare companies on the basis of operating performance. EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for operating income, net income or cash flows from operating activities for purposes of analyzing our operating performance, financial position and cash flows. EBITDA, as calculated by Voyager.net, is not necessarily comparable with similarly titled measures for other companies. F-21 VOYAGER.NET, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) As of March 31, 1999
Pre-acquisition Results ---------------- Voyager.net, GDR Enterprises, Inc. Inc. Adjustments Total Assets Current Assets: Cash and cash equivalents.......... $ 4,426,518 $1,995,158 $ (720,200) $ 5,701,476 Accounts receivable, net.................. 1,812,496 1,812,496 Prepaid and other assets............... 303,204 303,204 ----------- ---------- ---------- ----------- Total current assets............. 6,542,218 1,995,158 (720,200) 7,817,176 Property and equipment, net.................... 12,064,932 1,278,068 13,343,000 Note receivable, related party.................. 169,422 (169,422) Intangible assets, net.. 33,852,138 31,235 8,266,593 42,149,966 ----------- ---------- ---------- ----------- Total assets........ $52,459,288 $3,473,883 $7,376,971 $63,310,142 =========== ========== ========== =========== Liabilities and Stockholders' Equity (Deficit) Current Liabilities: Notes payable and current portion of obligations under capital leases....... $ 2,688,192 $ 643,679 $ (643,679) $ 2,688,192 Accounts payable and other liabilities.... 2,749,142 363,688 3,112,830 Deferred revenue...... 7,373,988 1,874,555 9,248,543 ----------- ---------- ---------- ----------- Total current liabilities........ 12,811,322 2,881,922 (643,679) 15,049,565 ----------- ---------- ---------- ----------- Long term debt and obligations under capital leases, less current portion........ 40,372,823 245,943 8,954,057 49,572,823 Deferred revenue, less current portion........ 185,396 185,396 Stockholders' equity (deficit): Preferred Stock....... 8,274,819 8,274,819 Common stock and additional paid-in capital.............. 6,414,960 50,500 6,465,460 Receivable for preferred and common stock................ (6,666,700) (6,666,700) Retained earnings (deficit)............ (8,747,936) 110,122 (933,407) (9,571,221) ----------- ---------- ---------- ----------- Total stockholders' equity (deficit)... (724,857) 160,622 (933,407) (1,497,642) ----------- ---------- ---------- ----------- Total liabilities and stockholders' equity............. $52,459,288 $3,473,883 $7,376,971 $63,310,142 =========== ========== ========== ===========
F-22 VOYAGER.NET, INC. NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A.Acquired customer bases for the required reported entities, in the amount of 39.2 million are amortized over a three-year period beginning January 1, 1998 as if the acquisitions had occurred on that date. Additional amortization expense for the year ended December 31, 1998 of approximately $10.3 million would have been recorded if these acquisitions had occurred on January 1, 1998. The historical results of GDR Enterprises, Inc. are included for the three months ended March 31, 1999 and adjusted for approximately $750,000 of additional amortization expense. B.Voyager.net utilized $30,000,000 of its revolving credit facility to complete the acquisitions in 1998. On April 13, 1999, the Company increased its revolving credit facility to $70,000,000. Additional interest expense on the related debt for the required reported entities would have been approximately $2.6 million and $196,000 for the year ended December 31, 1998 and March 31, 1999, respectively. The assumed interest rate was 8.5% for all periods presented. C. The GDR Enterprises, Inc. note receivable, related party and obligations under capital leases were received and paid, respectively, at the date of acquisition. These transactions were treated as if received and paid, respectively, on March 31, 1999. F-23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Voyager.net, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations, stockholder's (deficit) equity and cash flows, present fairly, in all material respects, the financial position of Freeway, Inc. (the "Company") at December 31, 1997 and at July 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1997 and for the seven months ended July 31, 1998, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Grand Rapids, Michigan April 28, 1999 F-24 FREEWAY, INC. BALANCE SHEETS
December 31, July 31, Assets 1997 1998 Current assets: Cash and cash equivalents............................... $ 329 $ 9,585 Accounts receivable, less allowance for doubtful accounts of $11,000 and $35,000 in 1997 and 1998, respectively........................................... 194,216 212,134 Prepaid and other assets................................ 900 2,100 -------- -------- Total current assets..................................... 195,445 223,819 Computer equipment, net.................................. 245,242 321,058 -------- -------- Total assets............................................. $440,687 $544,877 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Cash overdraft.......................................... $ 24,956 $ -- Accounts payable........................................ 25,034 13,774 Accrued payroll and related expenses.................... 16,161 21,209 Deferred revenue........................................ 20,522 17,505 Stockholder loans....................................... 190,965 190,965 -------- -------- Total current liabilities................................ 277,638 243,453 Stockholders' equity: Common stock............................................ 1,000 1,000 Retained earnings....................................... 162,049 300,424 -------- -------- Total stockholders' equity............................... 163,049 301,424 -------- -------- Total liabilities and stockholders' equity............... $440,687 $544,877 ======== ========
The accompanying notes are an integral part of the financial statements. F-25 FREEWAY, INC. STATEMENTS OF INCOME
Seven months Year ended ended December 31, July 31, 1997 1998 Revenue, Internet access service....................... $1,163,019 $1,049,380 ---------- ---------- Operating expenses: Internet access service costs......................... 523,566 411,816 Sales and marketing................................... 153,542 155,947 General and administrative............................ 302,435 286,498 Depreciation and amortization......................... 75,982 56,744 ---------- ---------- Total operating expenses............................... 1,055,525 911,005 ---------- ---------- Income from operations before interest expense......... 107,494 138,375 ---------- ---------- Interest expense....................................... 630 -- ---------- ---------- Net income............................................. $ 106,864 $ 138,375 ========== ==========
The accompanying notes are an integral part of the financial statements. F-26 FREEWAY, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock ------------- Retained Shares Amount Earnings Total Balances at January 1, 1997.................... 1,000 $1,000 $ 55,185 $ 56,185 Net income.................................... 106,864 106,864 ----- ------ -------- -------- Balances at December 31, 1997.................. 1,000 1,000 162,049 163,049 Net income.................................... 138,375 138,375 ----- ------ -------- -------- Balances at July 31, 1998...................... 1,000 $1,000 $300,424 $301,424 ===== ====== ======== ========
The accompanying notes are an integral part of the financial statements. F-27 FREEWAY, INC. STATEMENTS OF CASH FLOWS
Seven Months Year ended ended December 31, July 31, 1997 1998 Cash flows from operating activities Net income............................................ $ 106,864 $ 138,375 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................ 75,982 56,744 Changes in assets and liabilities Accounts receivable................................. (77,035) (17,918) Prepaids and other assets........................... 50 (1,200) Accounts payable.................................... (24,251) (11,260) Accrued expenses.................................... (781) 5,048 Deferred revenue.................................... 8,059 (3,017) --------- --------- Net cash provided by operating activities.............. 88,888 166,772 Cash flows from investing activities Purchase of property and equipment.................... (200,656) (132,560) --------- --------- Net cash used in investing activities.................. (200,656) (132,560) Cash flows from financing activities Proceeds from stockholder loans....................... 62,378 -- Cash overdraft, net................................... 24,956 (24,956) --------- --------- Net cash provided by (used in) financing activities.... 87,334 (24,956) --------- --------- Net (decrease) increase in cash and cash equivalents... (24,434) 9,256 Cash and cash equivalents at beginning of period....... 24,763 329 --------- --------- Cash and cash equivalents at end of period............. $ 329 $ 9,585 ========= ========= Supplemental disclosure of cash flow information Interest paid.......................................... $ 630 $ -- ========= =========
The accompanying notes are an integral part of the financial statements. F-28 FREEWAY, INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization and Basis of Presentation Freeway, Inc. (the "Company") provides full service access to the Internet for corporate and individual users in Michigan. Revenue Recognition The Company recognizes revenue when Internet access services are provided. Advance collections relating to future access services are recorded as deferred revenue and recognized as revenue when earned. Cash Equivalents The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Costs of repair and maintenance are charged to expense as incurred. Advertising Costs Advertising costs are expensed as incurred. Advertising expense of approximately $13,000, $34,000, and $26,000 was charged to operations in 1996, 1997 and 1998, respectively. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company is taxed as an S-Corporation. Accordingly, the stockholders of the Company are subject to federal income taxes rather than the Company. 2. Property and Equipment: Cost of property and equipment and depreciable lives are summarized as follows:
Depreciable 1997 1998 Life-Years Computer equipment......................... $ 357,036 $ 489,595 5 Less accumulated depreciation............. (111,794) (168,537) --------- --------- Computer equipment, net.................. $ 245,242 $ 321,058 ========= =========
F-29 FREEWAY, INC. NOTES TO FINANCIAL STATEMENTS--(continued) Depreciation expense of approximately $76,000 and $57,000 was charged to operations in 1997 and 1998, respectively. 3. Operating Leases: The Company also leases point of presence locations under lease terms of less than one year. Rent expense under all operating leases of approximately $10,000 and $8,000 was charged to operations in 1997 and 1998, respectively. 4. Stockholder loans: The stockholder loans are interest free and payable upon demand. F-30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Voyager.net, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations, stockholder's equity (deficit) and cash flows, present fairly, in all material respects, the financial position of EXEC-PC, Inc. (the "Company") at December 31, 1997 and September 22, 1998 and the results of its operations and its cash flows for the year ended December 31, 1997 and for the period ended September 22, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Grand Rapids, Michigan April 28, 1999 F-31 EXEC-PC, INC. BALANCE SHEETS
December 31, September 22, 1997 1998 Assets Current assets: Cash............................................... $ 248,268 $ 461,924 Accounts receivable, less allowance for doubtful accounts of $37,900 and $53,900 in 1997 and 1998, respectively...................................... 63,400 52,022 Prepaid and other assets........................... 7,460 50,351 ----------- ---------- Total current assets.............................. 319,128 564,297 Property and equipment, net......................... 2,464,138 3,925,550 Intangible assets, net.............................. 355,158 327,358 ----------- ---------- Total assets........................................ $ 3,138,424 $4,817,205 =========== ========== Liabilities and Stockholder's Deficit Current liabilities: Current portion of obligations under capital leases............................................ $ 1,083,144 $1,238,844 Note payable, bank................................. 295,000 145,000 Accounts payable................................... 257,980 305,951 Accrued payroll and related expenses............... 165,100 132,606 Deferred revenue................................... 3,353,920 3,353,387 ----------- ---------- Total current liabilities........................... 5,155,144 5,175,788 Obligations under capital leases.................... 253,483 1,414,602 Long-term debt...................................... 212,418 117,177 Stockholder's deficit: Common stock....................................... 100 100 Paid-in capital.................................... 169,783 169,783 Accumulated deficit................................ (2,652,504) (2,060,245) ----------- ---------- Total stockholder's deficit......................... (2,482,621) (1,890,362) ----------- ---------- Total liabilities and stockholder's deficit......... $ 3,138,424 $4,817,205 =========== ==========
The accompanying notes are an integral part of the financial statements. F-32 EXEC-PC, INC. STATEMENTS OF INCOME
Year ended Period ended December 31, September 22, 1997 1998 Revenue: Internet access service........................... $8,029,414 $8,652,989 Other............................................. 73,740 15,855 ---------- ---------- Total revenue.................................... 8,103,154 8,668,844 ---------- ---------- Operating expenses: Internet access service costs..................... 2,846,798 3,493,066 Sales and marketing............................... 660,898 574,078 General and administrative........................ 2,676,032 1,773,757 Depreciation and amortization..................... 1,274,787 1,151,960 ---------- ---------- Total operating expenses......................... 7,458,515 6,992,861 ---------- ---------- Income from operations before other income (expense)......................................... 644,639 1,675,983 ---------- ---------- Other income (expense): Interest income................................... 1,910 95 Interest expense.................................. (80,309) (71,742) Gain (loss) on sale of assets..................... (222,458) 30,021 ---------- ---------- Total other (expense).............................. (300,857) (41,626) ---------- ---------- Net income......................................... $ 343,782 $1,634,357 ========== ==========
The accompanying notes are an integral part of the financial statements. F-33 EXEC-PC, INC. STATEMENTS OF STOCKHOLDER'S DEFICIT
Common Stock ------------- Paid-in Accumulated Shares Amount Capital Deficit Total Balance at December 31, 1996........................ 100 $100 $169,783 $(2,195,786) $(2,025,903) Dividends................... -- -- -- (800,500) (800,500) Net income.................. -- -- -- 343,782 343,782 --- ---- -------- ----------- ----------- Balance at December 31, 1997........................ 100 100 169,783 (2,652,504) (2,482,621) Dividends................... -- -- -- (1,042,098) (1,042,098) Net income.................. -- -- -- 1,634,357 1,634,357 --- ---- -------- ----------- ----------- Balance at September 22, 1998........................ 100 $100 $169,783 $(2,060,245) $(1,890,362) === ==== ======== =========== ===========
The accompanying notes are an integral part of the financial statements. F-34 EXEC-PC, INC. STATEMENTS OF CASH FLOWS
Year ended Period ended December 31, September 22, 1997 1998 Cash flows from operating activities Net income........................................ $ 343,782 $ 1,634,357 Adjustments to reconcile net loss to net cash Provided by operating activities: Depreciation and amortization.................... 1,274,787 1,151,960 (Gain) loss on (sale) disposal of equipment...... 222,458 (30,021) Changes in assets and liabilities: Accounts receivable............................. 30,400 11,378 Prepaids and other assets....................... 12,435 (42,891) Accounts payable................................ 64,495 47,971 Accrued expenses................................ 75,133 (32,494) Deferred revenue................................ 697,801 (533) ----------- ----------- Net cash provided by operating activities.......... 2,721,291 2,739,727 Cash flows from investing activities Purchase of property and equipment................ (1,143,349) (465,299) Proceeds from the sale of equipment............... 58,960 -- Payment for purchase of a business................ (370,600) -- ----------- ----------- Net cash used in investing activities.............. (1,454,989) (465,299) Cash flows from financing activities Payments on capital leases........................ (347,107) (773,433) Advances from related party....................... 431,963 -- Payments to related party......................... (431,963) -- Payment on notes payable.......................... (249,819) (245,241) Proceeds from notes payable issuance.............. 300,000 -- Dividends......................................... (800,500) (1,042,098) ----------- ----------- Net cash used in financing activities.............. (1,097,426) (2,060,772) ----------- ----------- Net increase in cash and cash equivalents.......... 168,876 213,656 Cash and cash equivalents at beginning of period... 79,392 248,268 ----------- ----------- Cash and cash equivalents at end of period......... $ 248,268 $ 461,924 =========== =========== Supplemental disclosure of cash flow information Interest paid...................................... $ 80,309 $ 71,742 =========== ===========
The accompanying notes are an integral part of the financial statements. F-35 EXEC-PC, INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization and Basis of Presentation EXEC-PC, Inc. (the "Company") provides full service access to the Internet for corporate and individual users in Illinois and Wisconsin. Revenue Recognition The Company recognizes revenue when internet access services are provided. Advance collections relating to future access services are recorded as deferred revenue and recognized as revenue when earned. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Equipment acquired under capital leases are depreciated over their related lease terms or their estimated productive useful lives, depending on the criteria met in determining their qualification as a capital lease. Costs of repair and maintenance are charged to expense as incurred. Advertising Costs Advertising costs are expensed as incurred. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intangible Assets Goodwill, representing the excess cost over net assets of an acquired company, is amortized using the straight-line method over 10 years. The carrying value of goodwill will be periodically reviewed to determine if an impairment has occurred. F-36 EXEC-PC, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 2. Property and Equipment: Cost of property and equipment and depreciable lives are summarized as follows:
Depreciable 1997 1998 Life-Years Computer equipment................... $ 862,695 $ 865,782 3 Office equipment..................... 105,903 144,969 5-7 Furniture and fixtures............... 113,974 124,873 7 Software............................. 97,729 99,183 3 Equipment acquired under capital lease............................... 1,710,400 3,800,652 3-5 Vehicles............................. 21,882 24,094 5 Building improvements................ 811,444 882,768 7 ----------- ----------- 3,724,027 5,942,321 Less accumulated depreciation....... (1,259,889) (2,016,771) ----------- ----------- Property and equipment, net........ $ 2,464,138 $ 3,925,550 =========== ===========
Depreciation expense of approximately $1,259,000 and $1,124,000 was charged to operations in 1997 and 1998, respectively. 3. Intangible Assets: Intangible assets consist of the following:
1997 1998 Goodwill................................................. $370,600 $370,600 Less accumulated amortization............................ (15,442) (43,242) -------- -------- Intangible assets, net.................................. $355,158 $327,358 ======== ========
4. Capital Leases: The Company leases computer equipment under capital leases expiring in various years through the year 2001. The assets under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The net book value of these assets as of September 22, 1998 is $3,084,907. Depreciation of assets under capital leases is included in depreciation expense. Future minimum lease payments under capital leases as of September 22, 1998 are as follows: 1999............................................................ $ 1,329,600 2000............................................................ 1,131,942 2001............................................................ 391,552 2002............................................................ 4,506 ----------- Total minimum lease payments.................................... 2,857,600 Less amount representing interest............................... (204,154) ----------- Present value of net minimum lease payments..................... 2,653,446 Less current maturities......................................... (1,238,844) ----------- Long-term portion............................................... $ 1,414,602 ===========
F-37 EXEC-PC, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The Company also leases office facilities under operating lease agreements that expire in the years 2006 and 2007. The following is a schedule of future minimum rental payments under these leases as of September 22, 1998: 1999.............................................................. $ 199,050 2000.............................................................. 205,021 2001.............................................................. 211,172 2002.............................................................. 217,507 2003.............................................................. 224,033 Thereafter........................................................ 932,125 ---------- $1,988,908 ==========
In addition to these office leases, the Company also leases point of presence locations under lease terms of less than one year. Rent expense under the above operating leases was approximately $203,000 and $165,000 was charged to operations in 1997 and 1998, respectively. 5. Long-Term Debt: Long-term debt consists of the following:
1997 1998 Note payable to bank, original amount $446,635 due in monthly principal and interest payments of $14,171 through May 1, 2000, interest due monthly at 8.6% per annum on the unpaid principal balance................ $ 357,418 $ 262,177 Note payable, StarNet, Inc. (Five Star Telecom), original amount $300,000, due in monthly principal payments of $30,000 through May 31, 1998, non- interest bearing..................................... 150,000 -- --------- --------- 507,418 262,177 Less current maturities............................... (295,000) (145,000) --------- --------- Long-term debt........................................ $ 212,418 $ 117,177 ========= =========
Maturities of principal payments of long-term debt are as follows: 1999................................................................ $145,000 2000................................................................ 117,177 -------- $262,177 ========
6. Related Party Transactions: In 1997, the Company borrowed a total of approximately $432,000 from an officer of the Company at an interest rate of ten percent. The entire amount borrowed was repaid by December 31, 1997. Interest expense on the note payable in 1997 was approximately $13,000. F-38 EXEC-PC, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 7. Acquisition: During 1997, the Company acquired StarNet, Inc. for $370,600. The transaction was accounted as a purchase and goodwill in the amount of $370,600 was recognized. The purchase price consisted of cash in the amount of $70,600 and a $300,000 note payable (see Note 5). F-39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Voyager.net, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations, stockholder's equity (deficit) and cash flows, present fairly, in all material respects, the financial position of NetLink Systems, L.L.C. (the "Company") at December 31, 1997 and September 30, 1998 and the results of its operations and its cash flows for the year ended December 31, 1997 and the nine months ended September 30, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Grand Rapids, Michigan April 28, 1999 F-40 NETLINK SYSTEMS, L.L.C. BALANCE SHEETS
December 31, September 30, 1997 1998 Assets Current assets: Cash............................................... $ 55,407 $ 26,070 Accounts receivable, less allowance for doubtful accounts of $10,000 and $45,000 in 1997 and 1998, respectively...................................... 28,528 66,547 Prepaid and other assets........................... 4,500 3,300 -------- -------- Total current assets................................ 88,435 95,917 Property and equipment, net......................... 383,577 338,711 -------- -------- Total assets........................................ $472,012 $434,628 ======== ======== Liabilities and Members' Equity Current liabilities: Line of credit..................................... $149,237 $167,747 Current portion of note payable.................... 1,586 10,587 Accounts payable................................... 102,697 72,554 Other liabilities.................................. 25,591 23,138 Deferred revenue................................... -- 119,166 -------- -------- Total current liabilities........................... 279,111 393,192 Note payable........................................ 26,691 -- Members' equity..................................... 166,210 41,436 -------- -------- Total liabilities and members' equity............... $472,012 $434,628 ======== ========
The accompanying notes are an integral part of the financial statements. F-41 NETLINK SYSTEMS, L.L.C. STATEMENTS OF INCOME AND MEMBERS' EQUITY
Nine months Year ended ended December 31, September 30, 1997 1998 Revenue: Internet access service........................... $1,399,514 $1,441,020 Other............................................. 258 1,080 ---------- ---------- Total revenue...................................... 1,399,772 1,442,100 ---------- ---------- Operating expenses: Internet access service costs..................... 702,888 853,582 Sales and marketing............................... 34,990 69,645 General and administrative........................ 260,516 364,591 Depreciation and amortization..................... 41,540 73,808 ---------- ---------- Total operating expenses........................... 1,039,934 1,361,626 ---------- ---------- Income from operations before other income (expense)......................................... 359,838 80,474 ---------- ---------- Other income (expense): Interest income................................... 296 758 Interest expense.................................. (9,422) (12,831) ---------- ---------- Total other income (expense)....................... (9,126) (12,073) ---------- ---------- Net income......................................... 350,712 68,401 Members' equity, beginning of year................. 57,217 166,210 Distribution to members............................ (241,719) (193,175) ---------- ---------- Members' equity, end of year....................... $ 166,210 $ 41,436 ========== ==========
The accompanying notes are an integral part of the financial statements. F-42 NETLINK SYSTEMS, L.L.C. STATEMENTS OF CASH FLOWS
Year ended Nine months December 31, September 30, 1997 1998 Cash Flows From Operating Activities: Net income......................................... $ 350,712 $ 68,401 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................... 41,540 73,808 Changes in assets and liabilities: Accounts receivable.............................. 23,718 (38,019) Prepaids and other assets........................ (1,500) 1,200 Accounts payable................................. 29,937 (30,143) Accrued expenses................................. (5,197) (2,453) Deferred revenue................................. -- 119,166 --------- --------- Net cash provided by operating activities......... . 439,210 191,960 Cash Flows From Investing Activities: Purchase of property and equipment................. (279,672) (28,942) --------- --------- Net cash used in investing activities............... (279,672) (28,942) Cash Flows Provided By Financing Activities: Payment on line of credit.......................... (26,805) (48,490) Proceeds from line of credit....................... 176,042 67,000 Payment on note payable............................ (25,023) (17,690) Distributions to members........................... (241,719) (193,175) --------- --------- Net cash used in financing activities............... (117,505) (192,355) --------- --------- Net increase (decrease) in cash..................... 42,033 (29,337) Cash at beginning of period......................... 13,374 55,407 --------- --------- Cash at end of period............................... $ 55,407 $ 26,070 ========= ========= Supplemental disclosure of cash flow information: Interest paid...................................... $ 9,422 $ 12,831 ========= =========
The accompanying notes are an integral part of the financial statements. F-43 NETLINK SYSTEMS, L.L.C. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization and Basis of Presentation NetLink Systems, L.L.C. (the "Company") provides full service access to the Internet for corporate and individual users in Michigan. Revenue Recognition The Company recognizes revenue when Internet access services are provided. Advance collections relating to future access services are recorded as deferred revenue and recognized as revenue when earned. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Costs of repair and maintenance are charged to expense as incurred. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes The Company is classified as a limited liability corporation for federal income tax purposes. Accordingly, no provisions for income taxes are required as income or losses generated flow to the individual members. 2. Property and Equipment: Cost of property and equipment and depreciable lives are summarized as follows:
Depreciable 1997 1998 Life-Years Computer equipment........................... $446,722 $473,171 5 Furniture and fixtures....................... 21,415 21,415 7 -------- -------- 468,137 494,586 Less accumulated depreciation............... (84,560) (155,875) -------- -------- Property and equipment, net................ $383,577 $338,711 ======== ========
Depreciation expense of approximately $42,000 and $74,000 was charged to operations in 1997 and 1998, respectively. F-44 NETLINK SYSTEMS, L.L.C. NOTES TO FINANCIAL STATEMENTS--(Continued) 3. Other Liabilities: Other liabilities consist of the following:
1997 1998 Accrued payroll and related expenses........................ $19,091 $10,302 Accrued expenses............................................ 6,500 12,836 ------- ------- $25,591 $23,138 ======= =======
4. Operating Leases: The Company leases office space and communication services under operating leases expiring in various years through 2001. Minimum future rental payments under noncancellable operating leases as follows:
1998 1999............................................................... $ 47,040 2000............................................................... 45,920 2001............................................................... 40,260 -------- Total minimum future rental payments............................... $133,220 ========
Rent expense under the above operating leases was approximately $56,000 and $45,000 in 1997 and 1998, respectively. 5. Line of Credit: In 1997, the Company entered into a $250,000 revolving term loan with a bank which matures July 10, 2000, bearing interest at the bank's prime rate plus .25%. The rate at September 30, 1998 is 8.5%. Borrowings are collateralized by substantially all of the Company's assets and the limited personal guarantees of the members. At December 31, 1997 and September 30, 1998, $149,237 and $167,747, respectively, was outstanding under the credit facility. 6. Long-Term Debt: At December 31, 1996, the Company entered into an agreement to purchase a member's equity. Under the terms of the agreement, the Company is to pay the former member $46,300 in full consideration for a note payable and accrued interest of $27,627 and a return of capital in the amount of $18,673. The full consideration to be paid consists of a $10,300 cash payment and an unsecured note in the amount of $36,000. The unsecured note bearing interest at 7 percent is payable in monthly installments of $1,093, including interest, through July 1999. F-45 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and the Stockholders of Voyager.net, Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, stockholders' equity and cash flows, present fairly, in all material respects, the financial position of GDR Enterprises, Inc. (the "Company") and its subsidiaries at December 31, 1998, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance with generally accepted auditing standards, which 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, 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. PricewaterhouseCoopers LLP Grand Rapids, Michigan June 9, 1999 F-46 GDR ENTERPRISES, INC. CONSOLIDATED BALANCE SHEET
March 31, December 31, ---------------------- 1998 1998 1999 (unaudited) Assets Current assets: Cash and cash equivalents................ $1,771,056 $1,315,887 $1,995,158 ---------- ---------- ---------- Total current assets...................... 1,771,056 1,315,887 1,995,158 Property and equipment, net............... 1,309,222 981,382 1,278,068 Note receivable, related party............ 172,432 273,614 169,422 Intangible assets, net.................... 36,765 53,355 31,235 ---------- ---------- ---------- Total assets.............................. $3,289,475 $2,624,238 $3,473,883 ========== ========== ========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current portion of obligations under capital leases.......................... $ 704,577 $ 434,257 $ 643,679 Accounts payable......................... 392,781 254,198 249,255 Income taxes payable..................... 18,510 62,406 37,728 Other liabilities........................ 84,878 154,200 76,705 Current portion of deferred revenue...... 1,570,855 1,527,553 1,874,555 ---------- ---------- ---------- Total current liabilities................. 2,771,601 2,432,614 2,881,922 Obligations under capital leases.......... 294,849 211,612 245,943 Deferred revenue, non-current portion..... 175,237 23,262 185,396 Stockholders' equity (deficit): Common stock............................. 1,000 1,000 1,000 Paid-in capital.......................... 49,500 49,500 49,500 Retained earnings (deficit).............. (2,712) (93,750) 110,122 ---------- ---------- ---------- Total stockholders' equity (deficit)...... 47,788 (43,250) 160,622 ---------- ---------- ---------- Total liabilities and stockholders' equity (deficit)................................ $3,289,475 $2,624,238 $3,473,883 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-47 GDR ENTERPRISES, INC. CONSOLIDATED STATEMENT OF INCOME
Three months ended March 31, December 31, ------------------- 1998 1998 1999 (unaudited) Revenue, Internet access service............... $3,860,368 $914,138 $1,141,331 ---------- -------- ---------- Operating expenses: Internet access service costs................. 1,253,554 301,666 318,029 Sales and marketing........................... 136,221 25,903 83,782 General and administrative.................... 1,739,115 406,809 353,138 Depreciation and amortization................. 651,771 146,929 228,864 ---------- -------- ---------- Total operating expenses....................... 3,780,661 881,307 983,813 ---------- -------- ---------- Income from operations before other income and expense................................... 79,707 32,831 157,518 ---------- -------- ---------- Other income (expense): Interest income............................... 101,124 24,983 25,316 Loss on sale of assets........................ (108,843) -- -- ---------- -------- ---------- Total other income (expense)................... (7,719) 24,983 25,316 ---------- -------- ---------- Income before income taxes..................... 71,988 57,814 182,834 Income taxes................................... 34,000 22,000 70,000 ---------- -------- ---------- Net income..................................... $ 37,988 $ 35,814 $ 112,834 ========== ======== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-48 GDR ENTERPRISES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock ------------- Retained Total Paid-in Earnings Stockholders' Shares Amount Capital (Deficit) Equity (Deficit) Balances at January 1, 1998....................... 800 $1,000 $49,500 $(40,700) $ 9,800 Net income................ 37,988 37,988 --- ------ ------- -------- -------- Balances at December 31, 1998....................... 800 $1,000 $49,500 $ (2,712) $ 47,788 Net income (unaudited).... 112,834 112,834 --- ------ ------- -------- -------- Balances at March 31, 1999 (unaudited)................ 800 $1,000 $49,500 $110,122 $160,622 === ====== ======= ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-49 GDR ENTERPRISES, INC. CONSOLIDATED STATEMENT OF CASH FLOW
Three Months Ended Year Ended March 31, December 31, ---------------------- 1998 1998 1999 (unaudited) Cash Flows From Operating Activities: Net income............................. $ 37,988 $ 35,814 $ 112,834 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 651,771 146,929 228,864 Loss on sale of equipment............ 108,843 -- -- Changes in assets and liabilities: Accounts payable................... 209,906 71,323 (142,526) Income taxes payable............... (55,404) 78,050 19,218 Other liabilities.................. 147,736 49,450 (8,173) Deferred revenue................... 391,474 196,197 313,859 ---------- ---------- ---------- Net cash provided by operating activities.............................. 1,492,314 577,763 524,076 Cash Flows Used In Investing Activities: Purchase of property and equipment..... (229,006) (82,689) (85,633) ---------- ---------- ---------- Net cash used in investing activities.... (229,006) (82,689) (85,633) Cash Flows From Financing Activities: Payments on capital leases............. (536,814) (122,567) (217,351) Proceeds from note receivable, related party................................. 101,784 602 3,010 ---------- ---------- ---------- Net cash used in financing activities.... (435,030) (121,965) (214,341) ---------- ---------- ---------- Net increase in cash and cash equivalents............................. 828,278 373,109 224,102 Cash and cash equivalents at beginning of period.................................. 942,778 942,778 1,771,056 ---------- ---------- ---------- Cash and cash equivalents at end of period.................................. $1,771,056 $1,315,887 $1,995,158 ========== ========== ========== Supplemental disclosure of cash flow information: Refundable income taxes received....... $ 32,000 $ -- $ -- ========== ========== ========== Equipment acquired through capital leases................................ $1,086,239 $ 310,200 $ 106,546 ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-50 GDR ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization and Basis of Presentation GDR Enterprises, Inc. ("Company") provides full service access to the Internet for corporate and individual users in Ohio, Indiana, Kentucky, Tennessee, North Carolina, and Alabama through its wholly-owned subsidiaries Mall 2000, Inc. and TDIN, Inc. EriNet Telecom, a wholly-owned subsidiary of the Company, is a competitive local exchange carrier licensed in approximately 15 Ohio counties. On July 16, 1998 all the issued and outstanding common stock of Mall 2000, Inc. were exchanged for shares in the Company. Revenue Recognition The Company recognizes revenue when Internet access services are provided. Advance collections relating to future access services are recorded as deferred revenue and recognized as revenue when earned. Cash Equivalents The Company considers all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost and depreciated over their estimated useful lives using an accelerated method. Equipment acquired under capital leases are depreciated over their related lease terms. Costs of repair and maintenance are charged to expense as incurred. Advertising Costs Advertising costs are expensed as incurred. Advertising costs of approximately $122,000 were charged to operations in 1998. Intangible Assets Intangible assets consist primarily of the acquired customer base. The acquired customer base is amortized using the straight-line method over 3 years based on the estimated customer churn rate. The carrying value of intangible assets will be periodically reviewed to determine if an impairment has occurred. Impairments, if any, are measured based upon discounted cash flow analyses and are recognized in operating results in the period in which the impairment in value is determined. F-51 GDR ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the year. Deferred tax liabilities or assets are recognized for the estimated future tax effects of temporary differences between book and tax accounting and operating loss and tax credit carryforwards. 2. Property and Equipment: Cost of property and equipment and depreciable lives are summarized as follows at December 31, 1998:
Depreciable Life-Years Equipment acquired under capital lease.................. $1,678,395 2 Computer equipment...................................... 431,993 5-7 Leasehold improvements.................................. 106,030 7 Furniture and fixtures.................................. 38,895 5-7 ---------- 2,255,313 Less accumulated depreciation......................... (946,091) ---------- Property and equipment, net......................... $1,309,222 ==========
Depreciation expense of approximately $622,000 was charged to operations in 1998. 3. Intangible Assets: Intangible assets consist of the following at December 31, 1998: Acquired customer base................................................. $66,050 Other.................................................................. 500 ------- 66,550 Less accumulated amortization........................................ (29,785) ------- Intangible assets, net................................................. $36,765 =======
4. Capital Leases: The Company leases computer equipment under capital leases expiring in various years through the year 2000. The assets under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The net F-52 GDR ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) book value of these assets as of December 31, 1998 is $1,029,396. Depreciation of assets under capital leases is included in depreciation expense. Future minimum lease payments under capital leases as of December 31, 1998 are as follows: 1999................................................................. $ 753,573 2000................................................................. 323,510 --------- Total minimum lease payments......................................... 1,077,083 Less amount representing interest.................................... (77,657) --------- Present value of net minimum lease payments.......................... $ 999,426 =========
The Company also leases office facilities and point of presence locations under operating lease agreements that expire in the years 1999, 2000, 2001, and 2002. The following is a schedule of future minimum rental payments under these leases: 1999................................................................... $ 49,707 2000................................................................... 35,765 2001................................................................... 15,258 2002................................................................... 7,596 -------- $108,326 ========
In addition to these leases, the Company also leases point of presence locations under lease terms of less than one year. Rent expense under all operating leases of approximately $57,959 was charged to operations in 1998. 5. Other Liabilities: Other liabilities consist of the following at December 31, 1998: Accrued payroll and related expenses................................... $19,733 Accrued profit sharing................................................. 45,935 Other.................................................................. 19,210 ------- $84,878 =======
6. Income Taxes: The components for income taxes at December 31, 1998 are as follows: Current federal income tax............................................. $19,000 Current state and local income taxes................................... 15,000 ------- Provision for income taxes............................................. $34,000 =======
F-53 GDR ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) A reconciliation of the statutory U.S. federal tax rate to the Company's effective tax rate at December 31, 1998 is as follows: U.S. federal statutory.................................................... 34.0% Effect of graduated tax rates............................................. (8.0) State and local income taxes.............................................. 21.0 ---- 47.0% ====
7. Notes Receivable, Related Party: In 1997, an officer of the Company borrowed $275,000 from the Company at an interest rate of ten percent. Principal and interest of $1,970 are due monthly through August 2027. Interest income on the note receivable in 1998 was approximately $21,000. 8. Retirement Savings Plan: In 1997, the Company established a retirement savings 401(k) plan for all employees. The Company can make discretionary contributions to the plan. Contributions charged to operations were approximately $50,000 in 1998. F-54 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- , 1999 [LOGO] Shares of Common Stock ---------------------- PROSPECTUS ---------------------- Donaldson, Lufkin & Jenrette First Union Capital Markets Corp. CIBC World Markets ------------ DLJdirect Inc. - ------------------------------------------------------------------------------- We have not authorized any dealer, salesperson or other person to give you written information other than this prospectus or to make representations as to matters not stated in the 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 Voyager.net have not changed since the date hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Until , 1999 (25 days after the date of this prospectus), all dealers that effect transactions in these shares of common stock 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 and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses payable by us in connection with the offering (excluding underwriting discounts and commissions):
Nature of Expense Amount ----------------- ------- SEC Registration Fee................................................ $31,970 NASD Filing Fee..................................................... 12,000 Nasdaq National Market Listing Fee.................................. * Accounting Fees and Expenses........................................ * Legal Fees and Expenses............................................. * Printing Expenses................................................... * Blue Sky Qualification Fees and Expenses............................ * Transfer Agent's Fee................................................ * Miscellaneous....................................................... * ------- TOTAL............................................................. $ =======
The amounts set forth above, except for the Securities and Exchange Commission, NASD Regulation, Inc. and Nasdaq National Market fees, are in each case estimated. - --------------------- * To be completed by amendment. Item 14. Indemnification of Directors and Officers In accordance with Section 145 of the Delaware General Corporation Law, Article VII of our second amended and restated certificate of incorporation provides that no director of Voyager.net be personally liable to Voyager.net, its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to Voyager.net or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) in respect of unlawful dividend payments or stock redemptions or repurchases, or (4) for any transaction from which the director derived an improper personal benefit. In addition, our first amended and restated certificate of incorporation provides that if the Delaware General Corporation Law is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Article V of our amended and restated by-laws provides for indemnification by Voyager.net of its officers and certain non-officer employees under certain circumstances against expenses, including attorneys fees, judgments, fines and amounts paid in settlement, reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceeding in which any such person is involved by reason of the fact that such person is or was an officer or employee of the registrant if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Voyager.net, and, with respect to criminal actions or proceedings, if such person had no reasonable cause to believe his or her conduct was unlawful. We have also entered into indemnification agreements with each of our directors. These agreements provide that we indemnify each of our directors to the fullest extent permitted under law and our by-laws, and provide for the advancement of expenses to each director. We have also obtained directors' and officers' insurance against certain liabilities. II-1 Item 15. Recent Sales of Unregistered Securities Set forth in chronological order below is information regarding the number of shares of capital stock issued by Voyager.net during the past three years. Also included is the consideration, if any, received by Voyager.net for the shares. There was no public offering in any transaction and we believe that each transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, by reason of Section 4(2) thereof, based on the private nature of the transactions and the financial sophistication of the purchasers, all of whom had access to complete information concerning Voyager.net and acquired the securities for investment and not with a view to the distribution thereof. In addition, we believe that the transactions described below with respect to issuances and option grants to our employees and consultants were exempt from the registration requirements of said Act by reason of Rule 701 promulgated thereunder. The share numbers and per share values set forth below do not give effect to the -for-1 stock split effected in connection with this offering. The share numbers and per share values set forth below with respect to Voyager Information Networks, Inc. do not give effect to the 20-for-1 stock split effected in September 1998. . On August 7, 1997, Voyager sold an aggregate 25,000 shares of series A preferred stock and 424,900 shares of common stock for an aggregate purchase price of $504,249 and 2,696 shares of preferred shares to Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership, respectively . On August 7, 1997, Voyager sold an aggregate 53,416 shares of restricted common stock under its 1997 Stock Option and Incentive Plan, including sales of 41,568, 5,924 and 5,924 shares to Messrs. Friedly, Baird and Heinze, respectively, for aggregate consideration of $415.68, $59.24 and $59.24, respectively . On January 15, 1998, Voyager sold 6,003 shares of restricted common stock to Alan Baird, a consultant to Voyager, under its 1997 Stock Option and Incentive Plan for aggregate consideration of $60.03 . On January 15, 1998, Voyager granted options to purchase an aggregate 91,984 shares of common stock at a per share exercise price of $.01 to certain of its employees, including options to purchase 67,984 shares of common stock to Mr. Williams, pursuant to its 1997 Stock Option and Incentive Plan . On February 20, 1998, Voyager granted Mr. Torto options to purchase 67,984 shares of common stock at a per share exercise price of $.01 pursuant to its 1997 Stock Option and Incentive Plan . On July 31, 1998, Voyager sold an aggregate 15,000 shares of series A preferred stock and an aggregate 182,100 shares of common stock, and issued demand promissory notes in the aggregate principal amount of $2,800,000, for an aggregate purchase price of $4,301,821 to Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership . On September 23, 1998, we granted options to purchase an aggregate 1,520,000 shares of our common stock at a per share exercise price of $.0005 to certain of our employees pursuant to our 1998 Stock Option and Incentive Plan, including options to purchase 1,400,000 shares of common stock to Mr. Williams . On September 23, 1998, we sold an aggregate 33,657 shares of series A preferred stock and an aggregate 360,000 shares of common stock to Media/Communications Partners II Limited Partnership and Media/Communications Investors Limited Partnership for an aggregate purchase price of $533,513 in cash and cancellation of demand promissory notes in the aggregate principal amount, plus interest, of $2,832,526 . On September 23, 1998, we sold 1,400,000 shares of restricted common stock to Mr. Torto under our 1998 Stock Option and Incentive Plan for aggregate consideration of $700 . On October 2, 1998, we sold an aggregate 400,000 shares of restricted common stock for an aggregate purchase price of $200 under the 1998 Stock Option and Incentive Plan, including sales of 200,000, 100,000 and 100,000 shares to Messrs. Torto, Shires and Michaels, respectively, for aggregate consideration of $100, $50 and $50, respectively II-2 . On January 1, 1999, we granted options to purchase an aggregate 135,000 shares of common stock at a per share exercise price of $6.00 to certain of our employees pursuant to our 1998 Stock Option and Incentive Plan . On January 11, 1999, we sold 300,000 shares of restricted common stock to Mr. deFaria under our 1998 Stock Option and Incentive Plan for aggregate consideration of $1.8 million . On January 11, 1999, we sold 700,000 shares of restricted common stock to Mr. Friedly under our 1998 Stock Option and Incentive Plan for aggregate consideration of $4.2 million . On May 3, 1999, we sold an aggregate 6,667 shares of series A preferred stock for an aggregate $666,700, including 5,147, 740, and 740 shares to Messrs. Friedly, Baird and Heinze, respectively, for aggregate consideration of $514,700, $74,000 and $74,000, respectively Item 16. Exhibits and Financial Statement Schedules (a) Exhibits *1.1 Form of Underwriting Agreement. **2.1 Stock Exchange Agreement dated as of September 23, 1998, by and among the Registrant and the parties named therein (excluding schedules, which the Registrant agrees to furnish supplementally to the Commission upon request). **2.2 Stock Purchase Agreement dated as of September 23, 1998 by and among the Registrant and the investors identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). *3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant. *3.2 Form of Second Amended and Restated Certificate of Incorporation of the Registrant (to be effective upon consummation of this offering). *3.3 Form of Amended and Restated By-laws of the Registrant. *4.1 Specimen certificate for shares of common stock, $.0001 par value, of the Registrant. *5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being offered. **10.1 Credit Agreement dated as of September 23, 1998 by and among the Registrant, Fleet National Bank, as agent, and the lenders identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). **10.2 First Amendment to Credit Agreement dated as of April 13, 1999 by and among the Registrant, the Agent and the lenders identified therein. **10.3 Amended and Restated Promissory Note made by the Registrant in favor of Horizon Cable I Limited Partnership. **10.4 Asset Purchase Agreement dated as of July 31, 1998 by and among the Registrant, Freeway, Inc. (n/k/a Offline, Inc.) and the other parties identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). **10.5 Asset Purchase Agreement dated as of September 23, 1998 by and among the Registrant, EXEC-PC, Inc. (n/k/a The Mahoney Group) and the other parties identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). 10.6 Asset Purchase Agreement dated as of October 2, 1998, effective September 30, 1998, by and among the Registrant, NetLink Systems, L.L.C., and the other parties identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). 10.7 Reseller Agreement dated as of April 13, 1999 by and among the Registrant and Millennium Digital Media Systems, L.L.C. *10.8 Employment Agreement dated as of February 20, 1998 between the Registrant and Christopher Torto, as amended.
II-3 **10.9 Employment Agreement dated as of January 15, 1998 between the Registrant and Michael Williams. *10.10 Employment Agreement dated as of October 2, 1998 between the Registrant and Christopher Michaels, as amended. **10.11 Employment Agreement dated as of October 2, 1998 between the Registrant and David Shires. **10.12 Employment Agreement effective as of January 11, 1999 between the Registrant and Osvaldo deFaria. **10.13 Employment Agreement dated as of March 18, 1999 between the Registrant and Dennis Stepaniak. **10.14 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of February 20, 1998 between the Registrant and Christopher Torto. **10.15 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of October 15, 1997 between the Registrant and Michael Williams. **10.16 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of November 11, 1998 between the Registrant and Osvaldo deFaria. **10.17 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of March 18, 1999 between the Registrant and Dennis Stepaniak. **10.18 Employee Non-Competition Agreement dated as of October 2, 1998 between the Registrant and Christopher Michaels. **10.19 Employee Non-Competition Agreement dated as of October 2, 1998 between the Registrant and David Shires. *10.20 Amended and Restated 1998 Stock Option and Incentive Plan. **10.21 Form of Incentive Stock Option and Restriction Agreement. **10.22 Form of Stock Purchase and Stock Restriction Agreement. 10.23 Promissory Note made by Osvaldo deFaria in favor of the Registrant. 10.24 Promissory Note made by Glenn Friedly in favor of the Registrant. **10.25 Promissory Note made by Christopher Torto dated April 13, 1999, in favor of the Registrant. **10.26 Form of Director Indemnification Agreement. *10.27 SNAP! Online Distribution Agreement dated as of February 12, 1998 by and between CNET, Inc. and the Registrant. 10.28 Planet Direct Internet Service Provider Agreement dated as of March 17, 1997 by and among Planet Direct Corporation and the Registrant (excluding Schedules and Exhibits which the Registrant agrees to furnish supplementally to the Commission upon request). *10.29 Telecommunications Services Agreement dated as of September 3, 1998 by and between IXC Communications Services, Inc. and the Registrant. 10.30 Stock Purchase Agreement dated as of May 7, 1999 by and among the Registrant, GDR Enterprises, Inc. and the other parties identified therein (excluding schedules and exhibits which the Registrant agrees to furnish supplementally to the Commission upon request). *10.31 Promissory Note made by Christopher Torto dated June , 1999, in favor of the Registrant. *16.1 Letter re: change in independent accountants. 21.1 Schedule of Subsidiaries of the Registrant. *23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto). 23.2 Consent of PricewaterhouseCoopers LLP. **24.1 Powers of Attorney. **27.1 Financial Data Schedule.
- --------------------- * To be filed by amendment to this registration statement. ** Previously filed. II-4 (b)Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts Except for the financial statement schedule listed above, all schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes to those statements. Item 17. Undertakings The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, 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 Act, and is, therefore, unenforceable. In the event that 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 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 of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a 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 of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement File No. 333-77917 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of Massachusetts, on June 11, 1999. Voyager.net, Inc. /s/ Dennis J. Stepaniak By:__________________________________ Dennis J. Stepaniak Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * President, Chief Executive June 11, 1999 ______________________________________ Officer and Director Christopher P. Torto (Principal Executive Officer) /s/ Dennis J. Stepaniak Chief Financial Officer June 11, 1999 ______________________________________ (Principal Financial Dennis J. Stepaniak Officer and Principal Accounting Officer) * Director June 11, 1999 ______________________________________ Glenn R. Friedly * Director June 11, 1999 ______________________________________ John G. Hayes * Director June 11, 1999 ______________________________________ Christopher S. Gaffney Director June 11, 1999 ______________________________________ David F. Dietz
/s/ Dennis J. Stepaniak *By:________________________ Attorney-in-fact II-6 VOYAGER.NET AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions ---------------------- Balance at Charged to Charged to Deductions for Balance at Beginning costs and other accounts end of of period expenses accounts(1) written off(2) period ---------- ---------- ----------- -------------- ---------- Description Year ended December 31, 1996: Allowance for doubtful accounts.............. $ -- $ 92,000 $ 2,000 $ 90,000 Valuation allowance for deferred tax assets... 216,000 524,000 740,000 Year ended December 31, 1997: Allowance for doubtful accounts.............. 90,000 199,000 249,000 40,000 Valuation allowance for deferred tax assets... 740,000 333,000 1,073,000 Year ended December 31, 1998: Allowance for doubtful accounts.............. 40,000 178,000 119,000 99,000 Valuation allowance for deferred tax assets... 1,073,000 1,157,000 2,230,000
- --------------------- (1) Describe non-income statement accounts charged. (2) Describe other changes to account balance. S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Voyager.net, Inc.: Our audits of the consolidated financial statements referred to in our report dated March 5, 1999 (except for Notes 17 for which the date is April 23, 1999) of Voyager.net, Inc. also included an audit of the financial statement schedule listed in Item 16(b) herein. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Grand Rapids, Michigan May 3, 1999 S-2
Exhibit Number Description Page No. ------- ----------- -------- *1.1 Form of Underwriting Agreement. **2.1 Stock Exchange Agreement dated as of September 23, 1998, by and among the Registrant and the parties named therein (excluding schedules, which the Registrant agrees to furnish supplementally to the Commission upon request). **2.2 Stock Purchase Agreement dated as of September 23, 1998 by and among the Registrant and the investors identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). *3.1 Form of Amended and Restated Certificate of Incorporation of the Registrant. *3.2 Form of Second Amended and Restated Certificate of Incorporation of the Registrant (to be effective upon consummation of this offering). *3.3 Form of Amended and Restated By-laws of the Registrant. *4.1 Specimen certificate for shares of common stock, $.0001 par value, of the Registrant. *5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being offered. **10.1 Credit Agreement dated as of September 23, 1998 by and among the Registrant, Fleet National Bank, as agent, and the lenders identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). **10.2 First Amendment to Credit Agreement dated as of April 13, 1999 by and among the Registrant, the Agent and the lenders identified therein. **10.3 Amended and Restated Promissory Note made by the Registrant in favor of Horizon Cable I Limited Partnership. **10.4 Asset Purchase Agreement dated as of July 31, 1998 by and among the Registrant, Freeway, Inc. (n/k/a Offline, Inc.) and the other parties identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). **10.5 Asset Purchase Agreement dated as of September 23, 1998 by and among the Registrant, EXEC-PC, Inc. (n/k/a The Mahoney Group) and the other parties identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). 10.6 Asset Purchase Agreement dated as of October 2, 1998, effective September 30, 1998, by and among the Registrant, NetLink Systems, L.L.C. and the other parties identified therein (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). 10.7 Reseller Agreement dated as of April 13, 1999 by and among the Registrant and Millennium Digital Media Systems, L.L.C. *10.8 Employment Agreement dated as of February 20, 1998 between the Registrant and Christopher Torto, as amended. **10.9 Employment Agreement dated as of January 15, 1998 between the Registrant and Michael Williams. *10.10 Employment Agreement dated as of October 2, 1998 between the Registrant and Christopher Michaels, as amended. **10.11 Employment Agreement dated as of October 2, 1998 between the Registrant and David Shires.
Exhibit Number Description Page No. ------- ----------- -------- **10.12 Employment Agreement effective as of January 11, 1999 between the Registrant and Osvaldo deFaria. **10.13 Employment Agreement dated as of March 18, 1999 between the Registrant and Dennis Stepaniak. **10.14 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of February 20, 1998 between the Registrant and Christopher Torto. **10.15 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of October 15, 1997 between the Registrant and Michael Williams. **10.16 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of November 11, 1998 between the Registrant and Osvaldo deFaria. **10.17 Agreement Regarding Inventions, Non-competition and Confidentiality dated as of March 18, 1999 between the Registrant and Dennis Stepaniak. **10.18 Employee Non-Competition Agreement dated as of October 2, 1998 between the Registrant and Christopher Michaels. **10.19 Employee Non-Competition Agreement dated as of October 2, 1998 between the Registrant and David Shires. *10.20 Amended and Restated 1998 Stock Option and Incentive Plan. **10.21 Form of Incentive Stock Option and Restriction Agreement. **10.22 Form of Stock Purchase and Stock Restriction Agreement. 10.23 Promissory Note made by Osvaldo deFaria in favor of the Registrant. 10.24 Promissory Note made by Glenn Friedly in favor of the Registrant. **10.25 Promissory Note made by Christopher Torto dated April 13, 1999, in favor of the Registrant. **10.26 Form of Director Indemnification Agreement. *10.27 SNAP! Online Distribution Agreement dated as of February 17, 1998 by and between CNET, Inc. and the Registrant. 10.28 Planet Direct Internet Service Provider Agreement dated as of March 17, 1997 by and among Planet Direct Corporation and the Registrant. *10.29 Telecommunications Services Agreement dated as of September 3, 1998 by and between IXC Communications Services, Inc. and the Registrant (excluding schedules and exhibits, which the Registrant agrees to furnish supplementally to the Commission upon request). 10.30 Stock Purchase Agreement dated as of May 7, 1999 by and among the Registrant, GDR Enterprises, Inc. and the other parties identified therein (excluding schedules and exhibits which the Registrant agrees to furnish supplementally to the commission upon request). *10.31 Promissory Note made by Christopher Torto dated June , 1999, in favor of the Registrant. *16.1 Letter re: change in independent accountants. 21.1 Schedule of Subsidiaries of the Registrant. *23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto). 23.2 Consent of PricewaterhouseCoopers LLP. **24.1 Powers of Attorney. **27.1 Financial Data Schedule.
- --------------------- * To be filed by amendment to this registration statement. ** Previously filed. EX-10.6 2 ASSET PURCHASE AGREEMENT Exhibit 10.6 ASSET PURCHASE AGREEMENT ------------------------ Agreement made as of September 26, 1998 by and between Voyager Information Networks, Inc., a Michigan corporation ("Buyer"), NetLink Systems, L.L.C., a Michigan limited liability company ("Seller"), and David Shires, Christopher Michaels and Edwin Quinones ("Principals"). WHEREAS, subject to the terms and conditions hereof, Seller desires to sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller, all of the properties, rights and assets used or useful in connection with the Internet service business of Seller (the "Business"). NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF ASSETS. 1.1 Sale of Assets. Upon the terms and subject to the conditions set -------------- forth in this Agreement, and the performance by the parties hereto of their respective obligations hereunder, Seller agrees to sell, assign, transfer and deliver to Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title and interest in and to all of the properties, assets and business of the Business of every kind and description, tangible and intangible, real, personal or mixed, and wherever located, but excluding the Excluded Assets (as defined in Section 1.2 below), including without limitation, the following: (a) Equipment. All free standing kiosks, servers, routers, modems, IP --------- addresses, computers, electronic devices, test equipment and all other fixed assets, equipment, furniture, fixtures, leasehold improvements, parts, accessories, inventory, office materials, software, supplies and other tangible personal property of every kind and description owned by Seller and used or held for use in connection with the Business, in each case together with any additions thereto between the date of this Agreement and the Closing Date (as defined below), all as set forth on Schedule 1.1(a) attached hereto --------------- (collectively, "Equipment"); (b) Contracts. All of the rights of Seller under and interest of --------- Seller in and to all contracts relating to the Business (other than the Excluded Contracts (as defined below)), including, without limitation, original contracts for the provision of Internet connectivity, dedicated service, web-hosting, web- domain, dial-up services, web-development and Internet commerce, a true, correct and complete list of which contracts is attached hereto as Schedule 1.1(b) --------------- (collectively, the "Contracts"); (c) Intellectual Property. All Intellectual Property (as defined in --------------------- Section 2.20), all as set forth on Schedule 1.1(c) attached hereto; --------------- (d) Licenses and Authorizations. All rights associated with the --------------------------- licenses, permits, easements, registrations and authorizations issued or granted to Seller by any governmental authority with respect to the operation of the Business, including, without limitation, those licenses and authorizations listed on Schedule 1.1(d) attached hereto, and all applications therefor, --------------- together with any renewals, extensions, or modifications thereof and additions thereto; (e) Current Assets; Accounts Receivable. All Current Assets of Seller ----------------------------------- (as such term is hereinafter defined) and all accounts receivable of Seller incurred in the ordinary course of business and which are included on Seller's balance sheet, as determined in accordance with generally accepted accounting principles ("GAAP"), consistently applied, a complete list of which is attached hereto as Schedule 1.1(e) ("Accounts Receivable"); (f) Goodwill. All of the goodwill of Seller in, and the going concern -------- value of, the Business, and all of the business and customer lists, proprietary information, and trade secrets related to the Business; and (g) Records. All of Seller's customer logs, location files and ------- records, employee records, and other business files and records, in each case relating to the Business. The assets, properties and business of Seller being sold to and purchased by Buyer under this Section 1.1 are referred to herein collectively as the "Assets." 1.2 Excluded Assets. There shall be excluded from the Assets and retained --------------- by Seller, to the extent in existence on the Closing Date, the following assets (the "Excluded Assets"): (a) Other Assets. All other assets of Seller which are not used or ------------ held for use in connection with the Business or otherwise necessary to the operation of the Business now or after the Closing Date as set forth on Schedule -------- 1.2(a) attached hereto; - ------ (b) Excluded Contracts. All of Seller's right, title and interest in, ------------------ to and under the Contracts listed on Schedule 1.2(b) attached hereto (the --------------- "Excluded Contracts"); (c) Insurance. All contracts of insurance (including any cash --------- surrender value thereof) and all insurance proceeds of settlement and insurance claims made by Seller on or before the Closing Date as set forth on Schedule -------- 1.2(c) attached hereto; - ------ (d) Tax Items. All claims, rights and interest in and to any refunds --------- for federal, state or local Taxes (as defined below) for periods prior to the Closing Date as set forth on Schedule 1.2(d) attached hereto; and --------------- (e) Corporate Records. All of Seller's corporate and other ----------------- organizational records. 2 1.3 Assumed Liabilities; Excluded Liabilities; Employees. ---------------------------------------------------- (a) Assumed Liabilities. Buyer shall, on and as of the Closing Date, ------------------- accept and assume, and shall become and be fully liable and responsible for, and other than as expressly set forth herein Seller shall have no further liability or responsibility for or with respect to, (a) liabilities and obligations arising out of events occurring on and after the Closing Date related to Buyer's ownership of the Assets and Buyer's operation of the Business after the Closing Date; (b) all obligations and liabilities of Seller which are to be performed after the Closing Date arising under the Contracts, including, without limitation, Seller's obligations to Subscribers under such Contracts for (i) Subscriber deposits held by Seller as of the Closing Date in the amount for which Buyer receives a credit pursuant to Section 1.6, (ii) Subscriber advance payments held by Seller as of the Closing Date for services to be rendered in connection with the Business in the amount for which Buyer receives a credit pursuant to Section 1.6, and (iii) the delivery of Internet connectivity service to Subscribers (whether under the Contracts or otherwise) after the Closing Date; (c) the Current Liabilities (as hereinafter defined) of Seller; and (d) any Long-term Liabilities or other liabilities or claims specifically assumed by Buyer in writing at the Closing and for which there is an adjustment to the Purchase Price pursuant to Section 1.6(b) hereof ((a), (b), (c) and (d) together, the "Assumed Liabilities"). The assumption of the Assumed Liabilities by Buyer hereunder shall not enlarge any rights of third parties under contracts or arrangements with Buyer or Seller or any of their respective affiliates or subsidiaries. No parties other than Buyer and Seller shall have any rights under this Agreement. (b) Excluded Liabilities. It is expressly understood that, except for -------------------- the Assumed Liabilities, Buyer shall not assume, pay or be liable for any liability or obligation of Seller of any kind or nature at any time existing or asserted, whether, known, unknown, fixed, contingent or otherwise, not specifically assumed herein by Buyer, including, without limitation, any liability or obligation relating to, resulting from or arising out of (i) the Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the employees of the Business, including, without limitation, any obligation to provide any amounts due to the employees under any pension, profit sharing or similar plan, bonus or other compensation plan, or related to vacation or other similar employee benefits, or (iii) any fact existing or event occurring prior to the Closing Date or relating to the operation of the Business prior to the Closing Date. The liabilities which are not assumed by Buyer under this Agreement are hereinafter sometimes referred to as the "Excluded Liabilities." (c) Employees, Wages and Benefits. ----------------------------- (i) Seller shall terminate all of its employees effective as of the Closing Date and Buyer shall not assume or have any obligations or liabilities with respect to such employees or such terminations, including, without limitation, any severance obligation. Seller acknowledges and agrees that Buyer has the right to interview and discuss employment terms and issues with such employees prior to and after the Closing. 3 (ii) Buyer specifically reserves the right, on or after the Closing Date, to employ or reject any of Seller's employees or other applicants in its sole and absolute discretion; provided that Buyer shall -------- provide to Seller a list of employees to whom Buyer intends to offer employment as of the Closing Date. Nothing in this Agreement shall be construed as a commitment or obligation of Buyer to accept for employment, or otherwise continue the employment of, any of Seller's employees, and no employee shall be a third-party beneficiary of this Agreement. (iii) Seller shall pay all wages, salaries, commissions, and the cost of all fringe benefits provided to its employees which shall have become due for work performed as of and through the day preceding the Closing Date, and Seller shall collect and pay all Taxes in respect of such wages, salaries, commissions and benefits. (iv) Seller acknowledges and agrees that Buyer shall not acquire any rights or interests of Seller in, or assume or have any obligations or liabilities of Seller under, any benefit plans maintained by, or for the benefit of any employees of Seller prior to the Closing Date, including, without limitation, obligations for severance or vacation accrued but not taken as of the Closing Date. 1.4 The Closing. The transactions contemplated by this Agreement shall ----------- take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at the offices of Voyager Information Networks, Inc., on October 2, 1998, or at such other time and place as shall be mutually agreed upon in writing by Buyer and Seller (the "Closing Date"). 1.5 Purchase Price. In consideration of the sale by Seller to Buyer of -------------- the Assets, and subject to the assumption by Buyer of the Assumed Liabilities and satisfaction of the conditions contained herein, Buyer shall pay to Seller at the Closing an amount (as adjusted in accordance with Section 1.6 below, the "Purchase Price") equal to $3,600,000 as follows: (a) Buyer shall deliver the sum of $3,240,000 to Seller by bank cashier's check or bank wire transfer pursuant to payment instructions delivered by Seller to Buyer at least two (2) business days prior to the Closing; and (b) Buyer shall deposit the sum of $360,000 (the "Escrow Deposit") with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow Agreement in the form attached hereto as Exhibit A (the "Escrow Agreement"). --------- The Escrow Deposit shall be held, administered and distributed in accordance with the terms of the Escrow Agreement, and shall be Buyer's remedy for any Disconnects (as defined in the Escrow Agreement) post-Closing and for any indemnification claims made pursuant to Section 10 hereof. 1.6 Adjustments to Purchase Price. The Purchase Price shall be adjusted ----------------------------- at the Closing in the manner set forth below: 4 (a) The Purchase Price will be increased or decreased, as the case may be, on a dollar-for-dollar basis, by the Working Capital Excess or Deficiency, as applicable, as of the opening of business on the Closing Date. For the purposes of this Agreement, the following terms shall have the following meanings: (i) "Working Capital" shall mean the difference between Seller's Current Assets and Current Liabilities; (ii) "Current Assets" shall mean and include all Accounts Receivable of Seller outstanding on the Closing Date with balances of forty-five (45) days or less, all prepaid expenses (including postal deposits), and all other current assets which have value to the business at the Closing and which are used in the operation of Seller's Business, in each case as determined in accordance with GAAP, consistently applied; (iii) "Current Liabilities" shall mean and include accounts payable, accrued expenses, all accrued but unpaid taxes, all deferred revenues and all other current liabilities incurred in the operation of Seller's Business and reflected on Seller's balance sheet, but shall not include the current portion of any bank debt or line of credit, in each case as determined in accordance with GAAP, consistently applied; (iv) "Deficiency" shall mean the amount by which the Current Liabilities exceeds the Current Assets; and (v) "Excess" shall mean the amount by which the Current Assets exceeds the Current Liabilities. (b) The Purchase Price shall be decreased, on a dollar-for-dollar basis, by the amount of any Long-term Liabilities that are assumed by Buyer at the Closing. For purposes hereof, "Long-term Liabilities" shall mean and include any term loans (including, without limitation, bank debt, lines of credit and the current portion of any other debt), capital leases, operating leases not stated or reserved for on the Seller's balance sheet and the other liabilities of Seller not listed on the Seller's balance sheet which are assumed by Buyer at the Closing, as determined in accordance with GAAP, consistently applied, and which are set forth on Schedule 1.6(b) attached hereto. In the --------------- event Seller elects to pay-off some of the Long-term Liabilities consisting of bank debt at the Closing, then the calculation thereof shall be decreased by such amount and Seller shall obtain a pay-off letter from the third-party lender to evidence the discharge of such obligation at the Closing and such payoff shall be made directly as part of the wire transfer of the Purchase Price. 5 (c) The Purchase Price shall be decreased, on a dollar for dollar basis, by the Revenues Adjustment Amount in the event total revenues for the calender month ended immediately prior to the Closing Date are less than $170,000, of which at least $165,000 shall be Recurring Revenues (the "Target Revenues"). For purposes hereof, the term "Revenues Adjustment Amount" shall equal the product obtained by multiplying (i) $1,818 by (ii) the quotient obtained by dividing (X) the Annualized Recurring Revenues Deficiency, by (Y) one thousand dollars ($1,000). For purposes hereof, the term "Recurring Revenues" shall mean and include all of Seller's revenues derived from Dial-up Subscribers (including e-mail only accounts), Dedicated Subscribers and Web- hosting/Domain-hosting Subscribers (as each such term is defined in Section 2.16 hereof) of Seller's Business, including, without limitation, deferred revenues (or earned income) and any other recurring revenue sources, but which shall specifically exclude any revenues derived by Seller from sales taxes, one-time sign-up fees, one-time contract revenues, and any other revenues which are the result of extraordinary promotions sponsored by or extraordinary marketing expenses incurred by Seller outside the ordinary course of Seller's Business and not consistent with Seller's past business practices, in each case determined on a monthly basis as of the end of the last completed calendar month prior to Closing. For purposes hereof, the term "Annualized Recurring Revenues Deficiency" shall equal the product of (i) the difference between (A) the Target Revenues and (B) Recurring Revenues, multiplied by (ii) twelve (12). (d) (i) No later than five (5) days prior to the Closing, Buyer and Seller shall prepare a statement to be attached hereto as Schedule -------- 1.6(d) (the "Estimated Adjustment Statement") which sets forth (i) the ----- Company's estimated Working Capital and the amount of any estimated Deficiency or Excess, as the case may be, as of the Closing Date, (ii) the Long-term Liabilities Adjustment and (iii) the Revenues Adjustment Amount ((i), (ii) and (iii) together, the "Estimated Adjustment"). The Purchase Price payable at the Closing shall be increased on a dollar-for-dollar basis to the extent of any positive Estimated Adjustment or decreased on a dollar-for-dollar basis to the extent of any negative Estimated Adjustment, as the case may be, set forth on such Estimated Adjustment Statement. (ii) No later than sixty (60) days following the Closing, Buyer shall prepare and deliver to Seller a statement (the "Final Adjustment Statement") setting forth the actual Working Capital, and the amount of any actual Deficiency or Excess, as the cash may be, as well as any other changes to the Estimated Adjustment, as of the Closing Date. Subject to Section 1.6(d)(iii) below, within ten (10) days following the delivery of such Final Adjustment Statement to Seller, Buyer or Seller, as the case may be, shall pay to the other party, by wire transfer of immediately available funds, the difference between the Estimated Adjustment, as shown on the Estimated Adjustment Statement, and the actual adjustment, as shown on the Final Adjustment Statement. (iii) In the event Seller objects to the Final Adjustment Statement, Seller shall notify Buyer in writing of such objection within the ten (10) day period following the delivery thereof, stating in such written objection the reasons therefor and 6 setting forth the Seller's calculation of Seller's actual Working Capital, Long-term Liabilities or Recurring Revenues at the Closing. Upon receipt by Buyer of such written objection, the parties shall attempt to resolve the disagreement concerning the Final Adjustment Statement through negotiation. Notwithstanding any other dispute resolution procedure provided for in this Agreement, if Buyer and Seller cannot resolve such disagreement concerning the Final Adjustment Statement within thirty (30) days following the end of the foregoing 10-day period, the parties shall submit the matter for resolution to a nationally recognized firm of independent certified public accountants not affiliated with either party, with the costs thereof to be shared equally by the parties. Such accounting firm shall deliver a statement setting forth its own calculation of the final adjustment to the parties within thirty (30) days of the submission of the matter to such firm. Any payment shown to be due by a party on the statement of such accounting firm shall be paid to the other party promptly but in no event later than five (5) days following the delivery of such statement by such according firm to the parties. 1.7 Purchase Price Allocation. At least ten (10) days prior to the ------------------------- Closing, Buyer and Seller shall agree on the allocation of the Purchase Price as set forth on Schedule 1.7 attached hereto. Such allocation shall be binding ------------ upon Buyer and Seller for all purposes (including financial accounting purposes, financial and regulatory reporting purposes and tax purposes). Buyer and Seller each further agrees to file its Federal income tax returns and its other tax returns reflecting such allocation, Form 8594 and any other reports required by Section 1060 of the Code. 1.8 Records and Contracts. To the extent not previously provided to --------------------- Buyer, at the Closing, Seller shall deliver to Buyer all of the Contracts, with such assignments thereof and consents to assignments as are necessary to assure Buyer of the full benefit of the same. Seller shall also deliver to Buyer at the Closing all of Seller's files and records constituting Assets. 1.9 Further Assurances. Seller, from time to time after the Closing at ------------------ the request of Buyer and without further consideration, shall execute and deliver further instruments of transfer and assignment and take such other action as Buyer may reasonably require to more effectively transfer and assign to, and vest in, Buyer the Assets free and clear of all Liens (as defined in Section 2.8). 1.01 Sales and Transfer Taxes. All sales, transfer, use, recordation, ------------------------ documentary, stamp, excise taxes, personal property taxes, fees and duties (including any real estate transfer taxes) under applicable law incurred in connection with this Agreement or the transactions contemplated thereby will be borne and paid by Seller, and Seller shall promptly reimburse Buyer for the payment of any such tax, fee or duty which Buyer is required to make under applicable law. 1.11 Transfer of Subject Assets. At the Closing, Seller shall deliver or -------------------------- cause to be delivered to Buyer good and sufficient instruments of transfer transferring to Buyer title to all of the Assets, together with all required consents. Such instruments of transfer (a) shall 7 contain appropriate warranties and covenants which are usual and customary for transferring the type of property involved under the laws of the jurisdictions applicable to such transfers, (b) shall be in form and substance reasonably satisfactory to Buyer and its counsel, (c) shall effectively vest in Buyer good and marketable title to all of the Assets free and clear of all Liens, and (d) where applicable, shall be accompanied by evidence of the discharge of all Liens against the Assets. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PRINCIPALS. In order to induce Buyer to enter into this Agreement, Seller and Principals jointly and severally hereby represent and warrant to Buyer as follows: 2.1 Organization; Subsidiaries. -------------------------- (a) Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Michigan, with full power and authority to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is currently conducted or proposed to be conducted. The copies of Seller's Articles of Organization and Operating Agreement, each as amended to date, heretofore delivered to Buyer's counsel are complete and correct. Seller is not in violation of any terms of its Articles of Organization and Operating Agreement. Seller is duly qualified to do business in the state of its organization, and is not required to be licensed or qualified to conduct its business or own its property in any other jurisdiction. (b) Seller has no subsidiaries and does not own any securities issued by any other business organization or governmental authority, except U.S. Government securities, bank certificates of deposit and money market accounts acquired as short-term investments in the ordinary course of its business. Seller does not own or have any direct or indirect interest in or control over any corporation, partnership, joint venture or entity of any kind. 2.2 Required Action. All actions and proceedings necessary to be taken by --------------- or on the part of Seller in connection with the transactions contemplated by this Agreement have been duly and validly taken, and this Agreement and each other agreement, document and instrument to be executed and delivered by or on behalf of Seller pursuant to, or as contemplated by, this Agreement (collectively, the "Seller Documents") has been duly and validly authorized, executed and delivered by Seller and no other action on the part of Seller or its members is required in connection therewith. Each of Seller and the Principals have full right, authority, power and capacity to execute and deliver this Agreement and each other Seller Document and to carry out the transactions contemplated hereby and thereby. This Agreement and each other Seller Document constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of each of Seller and the Principals enforceable in accordance with its respective terms. 8 2.3 No Conflicts. ------------ (a) The execution, delivery and performance by Seller of this Agreement and each other Seller Document does not and will not (i) violate any provision of the Articles of Organization or Operating Agreement of Seller, in each case as amended to date, (ii) constitute a violation of, or conflict with or result in any breach of, acceleration of any obligation under, right of termination under, or default under, any agreement or instrument to which Seller is a party or by which Seller or the Assets is bound, (iii) violate any judgment, decree, order, statute, rule or regulation applicable to Seller or the Assets, (iv) require Seller to obtain any approval, consent or waiver of, or to make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made or (v) result in the creation or imposition of any Lien on any of the Assets. (b) The execution, delivery and performance by the Principals of this Agreement and each other Seller Document does not and will not (i) constitute a violation of, or conflict with or result in any breach of, acceleration of any obligation under, right of termination under, or default under, any agreement or instrument to which any or all of the Principals are a party or by which any or all of the Principals are bound, (ii) violate any judgment, decree, order, statute, rule or regulation applicable to the Principals, (iii) require the Principals to obtain any approval, consent or waiver of, or to make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made, or (iv) result in the creation or imposition of any Lien on any of the Assets. 2.4 Taxes. ----- (a) Seller has paid or caused to be paid all federal, state, local, foreign and other taxes, including, without limitation, income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes, value- added taxes, gross receipts taxes, franchise taxes, capital stock taxes, employment and payroll-related taxes, withholding taxes, stamp taxes, transfer taxes, windfall profit taxes, environmental taxes and property taxes, whether or not measured in whole or in part by net income, and all deficiencies, or other additions to tax, interest, fines and penalties owed by it (collectively, "Taxes"), required to be paid by it through the date hereof whether disputed or not. (b) Seller has in accordance with applicable law filed all federal, state, local and foreign tax returns required to be filed by it through the date hereof, and all such returns correctly and accurately set forth the amount of any Taxes relating to the applicable period. A list of all federal, state, local and foreign income tax returns filed with respect to Seller for taxable periods ended on or after December 31, 1993, is set forth in Schedule 2.4 ------------ attached hereto, and said schedule indicates those returns that have been audited or currently are the subject of an audit. Seller has delivered to Buyer correct and complete copies of all federal, state, local and foreign income tax returns listed on said schedule, and of all examination reports and statements of deficiencies assessed against or agreed to by Seller with respect to said returns. 9 (c) Neither the Internal Revenue Service nor any other governmental authority is now asserting or, to the knowledge of Seller or the Principals, threatening to assert against Seller any deficiency or claim for additional Taxes. To the knowledge of Seller and the Principals, no claim has ever been made by an authority in a jurisdiction where Seller does not file reports and returns that Seller is or may be subject to taxation by that jurisdiction. There are no security interests on any of the Assets of Seller that arose in connection with any failure (or alleged failure) to pay any Taxes. Seller has never entered into a closing agreement pursuant to Section 7121 of the Internal Revenue Code of 1986, as amended (the "Code") (d) Except as set forth in Schedule 2.4, there has not been any ------------ completed or current audit of any tax return filed by Seller, and Seller has not been notified by any tax authority that any such audit is contemplated or pending. Except as set forth in Schedule 2.4, no extension of time with respect ------------ to any date on which a tax return was or is to be filed by Seller is in force, and no waiver or agreement by Seller is in force for the extension of time for the assessment or payment of any Taxes. (e) Seller has never been (and has never had any liability for unpaid Taxes because it once was) a member of an "affiliated group" (as defined in Section 1504(a) of the Code). Seller has never filed, and has never been required to file, a consolidated, combined or unitary tax return with any other entity. Seller does not own and has never owned a direct or indirect interest in any trust, partnership, corporation or other entity and therefore Buyer is not acquiring from Seller an interest in any entity. Except as set forth in Schedule 2.4, Seller is not a party to any tax sharing agreement. - ------------ (f) Seller is not a "foreign person" within the meaning of Section 1445 of the Code and Treasury Regulations Section 1.1445-2. (g) For purposes of this Agreement, all references to Sections of the Code shall include any predecessor provisions to such Sections and any similar provisions of federal, state, local or foreign law. 2.5 Compliance with Laws. Seller's operation of the Business and the -------------------- Assets is in compliance in all material respects with all applicable statutes, ordinances, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority (including the Federal Communications Commission), and Seller has not received notice of a violation or alleged violation of any such statute, ordinance, order, rule or regulation. 2.6 Insurance. The physical properties and tangible Assets are insured to --------- the extent disclosed in Schedule 2.6, and all insurance policies and ------------ arrangements of Seller in effect as of the date hereof are disclosed in said Schedule. Said insurance policies and arrangements are in full force and effect, all premiums with respect thereto are currently paid, and Seller is in compliance in all material respects with the terms thereof. Said insurance is adequate and customary for the business engaged in by Seller and is sufficient for compliance by Seller with all requirements of law and all agreements and leases to which Seller is a party. 10 2.7 Contracts. The Contracts constitute all leases, contracts and --------- arrangements, whether oral or written, under which Seller is bound or to which Seller is a party which relate to the Business or Assets. Schedule 1.1(b) --------------- attached hereto contains a true, correct and complete list of all Contracts. Each Contract is valid, in full force and effect and binding upon Seller and the other parties thereto in accordance with its terms. Neither Seller nor, to the knowledge of Seller and the Principals, any other party is in default under or in arrears in the performance, payment or satisfaction of any agreement or condition on its part to be performed or satisfied under any Contract, nor does any condition exist that with notice or lapse of time or both would constitute such a default, and no waiver or indulgence has been granted by any party under any Contract. Seller has not received notice of, and each of Seller and the Principals have no knowledge of, any fact which would result in a termination, repudiation or breach of any Contract. Seller has provided Buyer with true and complete copies of all of such Contracts. 2.8 Title. Seller has good and marketable title to all of the Assets free ----- and clear of all mortgages, pledges, security interests, charges, liens, restrictions and encumbrances of any kind (collectively, "Liens") whatsoever, except for the Liens set forth on Schedule 2.8. Upon the sale, assignment, ------------ transfer and delivery of the Assets to Buyer hereunder and under the Seller Documents, there will be vested in Buyer good, marketable and indefeasible title to the Assets, free and clear of all Liens. The Assets include all of the assets and properties (i) held for use by Seller to conduct the Business as presently conducted and (ii) necessary for Buyer to operate the Business in the same manner as such business is currently operated by Seller. All of the tangible Assets are in good repair, have been well maintained and are in good operating condition, do not require any material modifications or repairs, and comply in all material respects with applicable laws, ordinances and regulations, ordinary wear and tear excepted. Seller has delivered complete and true copies of all real property leases (the "Leases") set forth on Schedule -------- 1.1(b). Seller holds good, clear, marketable, valid and enforceable leasehold - ------ interest in the real property subject to the Leases (the "Leased Real Property"), subject only to the right of reversion of the landlord or lessor under the Leases, free and clear of all other prior or subordinate interests, including, without limitation, mortgages, deeds of trust, ground leases, leases, subleases, assessments, tenancies, claims, covenants, conditions, restrictions, easements, judgments or other encumbrances or matters affecting title, and free of encroachments onto or off of the leased real property. There are no material defects in the physical condition of any improvements constituting a part of the Leased Real Property, including, without limitation, structural elements, mechanical systems, roofs or parking and loading areas, and all of such improvements are in good operating condition and repair, have been well maintained. All water, sewer, gas, electric, telephone, drainage and other utilities required by law or necessary for the current or planned operation of the Leased Real Property have been installed and connected pursuant to valid permits, and are sufficient to service the Leased Real Property. 2.9 Litigation. Except as set forth in Schedule 2.9, Seller is not now ---------- ------------ involved in nor, to the knowledge of Seller and the Principals, is Seller threatened to be involved in any litigation or legal or other proceedings related to or affecting the Business or any Asset or 11 which would prevent or hinder the consummation of the transactions contemplated by this Agreement. Seller has not been operating the Business under, and the Business is not subject to, any order, injunction or decree of any court of federal, state, municipal or other governmental department, commission, board, agency or instrumentality. 2.10 Employees; Labor Matters. Seller employs approximately twenty-one (21) ------------------------ full-time employees and four (4) part-time employees and generally enjoys good employer-employee relationships. Seller shall provide to Buyer a list of the employees of Seller in connection with the Business at least ten (10) days prior to Closing, including the name, date of hire and wages of such employees. Seller is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it to the date hereof or amounts required to be reimbursed to such employees. Upon termination of the employment of any of said employees, neither Seller nor Buyer will by reason of the acquisition transaction or anything done prior to the Closing be liable to any of said employees for so-called "severance pay" or any other payments, except as set forth in Schedule 2.10. Seller does ------------- not have any policy, practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment, except as set forth in said Schedule. Seller is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, work place safety and health, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices, nor are there any strikes, slowdowns, stoppages of work, or any other concerted interference with normal operations existing, pending or, to the knowledge of Seller and the Principals, threatened against or involving Seller. No question concerning representation exists respecting any group of employees of Seller. There are no grievances, complaints or charges that have been filed against Seller under any dispute resolution procedure (including, but not limited to, any proceedings under any dispute resolution procedure under any collective bargaining agreement) that might have an adverse effect on Seller or the conduct of its business and no arbitration or similar proceeding is pending and no claim therefor has been asserted. No collective bargaining agreement is in effect or is currently being or is about to be negotiated by Seller. Seller has received no information to indicate that any of its employment policies or practices is currently being audited or investigated by any federal, state or local government agency. Seller is, and at all times since November 6, 1986 has been, in compliance with the requirements of the Immigration Reform Control Act of 1986. 2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of -------------------- ------------- the balance sheet of Seller as at August 31, 1998 (the "Base Balance Sheet") and the statements of income and expense of Seller for August 31, 1998 (collectively the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied consistently during the periods covered thereby (except for the absence of footnotes with respect to unaudited financials), are complete and correct and present fairly and accurately the financial condition of the Business at the dates of said statements and the results of operations of the Business for the periods covered thereby. As of the date of the Base Balance Sheet (the "Base Balance Sheet Date"), Seller had no liabilities or obligations of any 12 kind with respect to the Business, whether accrued, contingent or otherwise, that are not disclosed and adequately reserved against on the Base Balance Sheet. As of the date hereof and at the Closing, Seller had and will have no liabilities or obligations of any kind with respect to the Business, whether accrued, contingent or otherwise, that are not disclosed and adequately reserved against on the Base Balance Sheet. 2.12 Business Since the Base Balance Sheet Date. Since the Base Balance ------------------------------------------ Sheet Date: (a) there has been no material adverse change in the Business or in the Assets, operations or financial condition of the Business; (b) the Business has, in all material respects, been conducted in the ordinary course of business and in substantially the same manner as it was conducted before the date of the Base Balance Sheet Date; (c) there has not been any material obligation or liability (contingent or other) incurred by Seller with respect to the Business, whether or not incurred in the ordinary course of business; (d) there has not been any purchase, sale or other disposition, or any agreement or other arrangement, oral or written, for the purchase, sale or other disposition, of any material properties or assets of the Business, whether or not in the ordinary course of business; (e) there has not been any mortgage, encumbrance or lien placed on any of the Assets, nor any payment or discharge of a material lien or liability of Seller which was not reflected on the Base Balance Sheet; (f) there has not been any damage, destruction or loss, whether or not covered by insurance, adversely affecting the Business or Assets; (g) there has not been any change in the collection, payment and accounting policies used by Seller in the Business; and (h) there has not been any agreement or understanding, whether in writing or otherwise, for Seller to take any of the actions specified above. 2.13 Licenses. As of the date of this Agreement, Seller is the holder of -------- all licenses, permits and authorizations with respect to the Business (the "Authorizations"). The Authorizations constitute all of the licenses, permits and authorizations required for operation of the Business as now operated. All of the Authorizations are in full force and effect and no licenses, permits or authorizations of any governmental department or agency are required for the operation of the Business which have not been duly obtained. As of the date hereof, there 13 is not pending or, to the knowledge of Seller and the Principals, threatened any action by or before any governmental agency to revoke, cancel, rescind or modify any of the Authorizations, and there is not now issued or outstanding or, to the knowledge of Seller and the Principals, pending or threatened any order to show cause, notice of violation, notice of apparent liability, or notice of forfeiture or complaint against Seller with respect to the Business. 2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached ------------------- ------------- hereto, no approval, consent, authorization or exemption from or filing with any person or entity not a party to this Agreement is required to be obtained or made by Seller in connection with the execution and delivery of this Agreement and the Seller Documents and the consummation of the transactions contemplated hereby and thereby. All of the approvals, consents and authorizations listed on Schedule 2.14 shall be obtained by Seller at or prior to the Closing. - ------------- 2.15 Customers and Suppliers. Seller's relations with its customers and ----------------------- suppliers, including its Subscribers, are good and there are not pending or, to Seller's knowledge, threatened claims or controversies with any customer or suppliers that is material to the Assets or the Business. 2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the ----------- ---------------- date hereof, the Subscribers of the Business as listed by class, type and billing plan. As of the Closing Date, the Business will have no fewer than 7,100 Dial-up Subscribers, 67 Dedicated Subscribers and 400 Web-hosting and/or Domain-hosting Subscribers, all as set forth on Schedule 2.16(a) attached ---------------- hereto. For purposes of this Agreement, the terms "Subscriber" shall mean any active subscriber to Internet services offered by Seller in the Business who has subscribed to a service for at least one month and has paid at least one bill, including, without limitation, any person who receives dial-up Internet access through the Business (a "Dial-up Subscriber"), any person who receives Internet access from Seller offering higher data transmission rates than available from dial-up access (a "Dedicated Subscriber") and any person with a web page or domain name on Seller's server and to whom Seller provides Internet access (a "Web-hosting Subscriber"); provided, however, that "Subscriber" shall not -------- ------- include any person who is (i) more than forty-five (45) days delinquent in payment of such person's bill for such services provided by the Business and (ii) any person receiving complimentary Internet services or Internet services at a promotional discounted rate. Set forth on Schedule 2.16(b) attached hereto ---------------- is a listing of all such accounts which receive complimentary Internet services or Internet services at a promotional discounted rate. 2.17 Brokers. Except for Rampart Associates, Inc., whose fees shall be ------- paid by Seller at or prior to the Closing, Seller has not incurred, and will not incur, any liability for a commission or brokerage fee in connection with this Agreement or the transactions contemplated hereby. 2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable ------------------------------------- of Seller are or will be as of the Closing Date bona fide, valid and enforceable claims, subject to no 14 setoff or counterclaim and to Seller's knowledge are collectible in accordance with their terms. Seller has no accounts or loans receivable from any person, firm or corporation which is affiliated with Seller or from any member or employee of Seller, or from any of their respective spouses or family members. 2.19 Banking Relations. All of the arrangements which Seller has with any ----------------- banking institution are completely and accurately described in Schedule 2.19, ------------- indicating with respect to each of such arrangements the type of arrangement maintained (such as checking account, borrowing arrangements, safe deposit box, etc.) and the person or persons authorized in respect thereof. 2.20 Intellectual Property. --------------------- (a) Set forth on Schedule 2.20 hereto are all computer programs and ------------- related documentation sold, marketed, licensed and distributed by Seller (the "Products"). All of the Intellectual Property of Seller is set forth on Schedule 2.20 attached hereto. For purposes hereof, the term "Intellectual - ------------- Property" includes: (i) all patents, patent applications, patent rights, and inventions and discoveries and invention disclosures (whether or not patented) (collectively, "Patents"); (ii) the name "NetLink Systems", all trade names including "Net-Link", trade dress, logos, packaging design, slogans, Internet domain names, registered and unregistered trademarks and service marks and applications (collectively, "Marks"); (iii) all copyrights in both published and unpublished works, including, without limitation, all compilations, databases and computer programs, and all copyright registrations and applications, and all derivatives, translations, adaptations and combinations of the above (collectively, "Copyrights"); (iv) all know-how, trade secrets, confidential or proprietary information, customer lists, IP addresses, research in progress, algorithms, data, designs, processes, formulae, drawings, schematics, blueprints, flow charts, models, prototypes, techniques, Beta testing procedures and Beta testing results (collectively, "Trade Secrets"); (v) Seller's web-sites (including the domain name "www.net-link.net" and any other similar domain names; (vi) all goodwill, franchises, licenses, permits, consents, approvals, technical information, telephone numbers, and claims of infringement against third parties (the "Rights"); and (vii) all contracts relating to the Products and the Intellectual Property to which Seller is a party or is bound, including, without limitation, all nondisclosure and/or confidentiality agreements entered into by persons in connection with disclosures by Seller (collectively,"Assigned Contracts"). (b) Except as described in Schedule 2.20, Seller has exclusive ------------- ownership of, and has good, valid and marketable title to, all of the Intellectual Property, free and clear of any Liens, and has the right to use all of the Intellectual Property without payment to any third party. Seller's rights in all of such Intellectual Property are freely transferable. There are no claims or demands pending or, to the knowledge of Seller and the Principals, threatened of any other person pertaining to any of such Intellectual Property and no proceedings have been instituted, or are pending or, to the knowledge of Seller and the Principals, threatened against Seller and/or its members, employees and consultants which challenge the validity and 15 enforceability of Seller's rights in respect of the Intellectual Property. The Intellectual Property constitutes all of the assets of Seller used in designing, creating and developing the Products, and represent all of such Intellectual Property necessary for the operation of Seller's Business as currently conducted. All current employees, consultants and contractors of Seller have executed written instruments with Seller that assign to Seller all rights to any inventions, improvements, discoveries, or information relating to the business of Seller. No employee, consultant or contractor of Seller has entered into any agreement that restricts or limits in any way the scope or type of work in which the employee, consultant or contractor may be engaged or requires the employee, consultant or contractor to transfer, assign, or disclose information concerning his work to anyone other than Seller. (c) Schedule 2.20 sets forth a complete and accurate list and summary ------------- description of all of Seller's Patents. All of the issued Patents are currently in compliance with formal legal requirements (including without limitation payment of filing, examination and maintenance fees and proofs of working or use), are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date. In each case where a Patent is held by Seller by assignment, the assignment has been duly recorded with the U.S. Patent and Trademark Office and all other jurisdictions of registration. No Patent has been or is now involved in any interference, reissue, re-examination or opposition proceeding. To the knowledge of Seller and the Principals, there is no potentially interfering Patent of any third party. All products made, used or sold under the Patents have been marked with the proper patent notice. (d) Schedule 2.20 sets forth a complete and accurate list and summary ------------- description of all of Seller's Marks. All Marks that have been registered with the United States Patent and Trademark Office and/or any other jurisdiction are currently in compliance with formal legal requirements (including, without limitation, the timely post-registration filing of affidavits of use and incontestability and renewal applications), are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date. In each case where a Trademark is held by Seller by assignment, the assignment has been duly recorded with the U.S. Patent and Trademark Office and all other jurisdictions of registration. No Mark has been or is now involved in any opposition, invalidation or cancellation proceeding and, to the knowledge of Seller and the Principals, no such action is threatened with respect to any of the Marks. All products and materials containing a Mark bear the proper notice where permitted by law. (e) Schedule 2.20 sets forth a complete and accurate list and summary ------------- description of all of Seller's Copyrights. All the Copyrights have been registered with the United States Copyright Office and are currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any fees or taxes or actions falling due within ninety (90) days after the Closing Date. In each case where a Copyright is held by Seller by assignment, the assignment has been duly recorded with the U.S. Copyright Office and all 16 other jurisdictions of registration. None of the source or object code, algorithms, or structure included in the Products is copied from, based upon, or derived from any other source or object code, algorithm or structure in violation of the rights of any third party. Any substantial similarity of the Products to any computer program owned by any third party did not result from the Products being copied from, based upon, or derived from any such computer software program in violation of the rights of any third party. All copies of works encompassed by the Copyrights have been marked with the proper copyright notice. (f) Seller has taken all reasonable security measures (including, without limitation, entering into appropriate confidentiality and non-disclosure agreements with all members, employees, consultants and contractors of Seller and any other persons with access to the Trade Secrets) to protect the secrecy, confidentiality and value of all Trade Secrets. To the knowledge of Seller and the Principals, there has not been any breach by any party to any such confidentiality or non-disclosure agreement. The Trade Secrets have not been disclosed by Seller to any person or entity other than employees or contractors of Seller who had a need to know and use the Trade Secrets in the course of their employment or contract performance. Except as set forth on Schedule 2.20, ------------- (i) Seller has not directly or indirectly granted any rights or interests in the source code of the Products, and (ii) since Seller developed the source code of the Products, Seller has not provided, licensed or disclosed the source code of the Products to any person or entity. Seller has the right to use, free and clear of claims of third parties, all Trade Secrets. To the knowledge of Seller and the Principals, there is not any assertion that the use by Seller of any Trade Secret violates the rights of any third party. (g) Seller has the exclusive right to use, license, distribute, transfer and bring infringement actions with respect to the Intellectual Property. Except as set forth on Schedule 2.20, Seller (i) has not licensed or ------------- granted to anyone rights of any nature to use any of its Intellectual Property and (ii) is not obligated to and does not pay royalties or other fees to anyone for its ownership, use, license or transfer of any of its Intellectual Property. (h) All licenses or other agreements under which Seller is granted rights by others in Intellectual Property are listed in Schedule 2.20. All such ------------- licenses or other agreements are in full force and effect, to the knowledge of Seller and the Principals there is no material default by any party thereto, and all of the rights of Seller thereunder are freely assignable. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer, and Seller has no reason to believe that the licensors under the licenses and other agreements under which Seller is granted rights and has granted rights to others do not have and did not have all requisite power and authority to grant the rights purported to be conferred thereby. (i) All licenses or other agreements under which Seller has granted rights to others in Intellectual Property are listed in Schedule 2.20. All such ------------- licenses or other agreements are in full force and effect, and to the knowledge of Seller and the Principals there is no material default by any party thereto. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer. 17 (j) Seller has no obligation to any other person to maintain, modify, improve or upgrade the Products. (k) None of the Products manufactured and sold, nor any process or know-how used, by Seller infringes or is alleged to infringe any patent, trademark, service mark, trade name, copyright or other proprietary right or is a derivative work based on the work of any other person. (l) There are no (i) actions, suits, claims, investigations or other proceedings involving the Products, the Intellectual Property, or the Rights by or before any governmental authority or arbitrator pending or, to the knowledge of Seller and the Principals, threatened against Seller, or (ii) judgments, decrees, injunctions, or orders involving the Products, the Intellectual Property or the Rights of any governmental authority or arbitrator against Seller. Seller is not in default under any such judgment, decree, injunction or order. (m) The Products perform in accordance with their published specifications and documentation and as Seller has warranted to its customers. Except for hardware devices and components purchased from various manufacturers and vendors, Seller has reviewed the areas within its businesses and operations which could be adversely affected by, and has developed a program to address on a timely basis, the "Year 2000 Problem" (i.e., the risk that applications used by Seller or its suppliers and/or providers may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999). Seller reasonably believes that the "Year 2000 Problem" will not have any material adverse effect on the business or operations of Seller. 2.21 Absence of Restrictions. Seller has not entered into any other ----------------------- agreement or arrangement with any other party with respect to the sale, transfer or any other disposition or encumbrance of the Business or the Assets, in whole or in part. 2.22 Permits; Burdensome Agreements. Schedule 2.22 lists all permits, ------------------------------ ------------- registrations, licenses, franchises, certifications and other approvals (collectively, the "Approvals") required from federal, state or local authorities in order for Seller to conduct its Business. Seller has obtained all such Approvals, which are valid and in full force and effect, and is operating in compliance therewith. Such Approvals include, but are not limited to, those required under federal, state or local statutes, ordinances, orders, requirements, rules, regulations, or laws pertaining to environmental protection, public health and safety, worker health and safety, buildings, highways or zoning. Except as disclosed in Schedule 2.22, all such Approvals ------------- will be available and assigned to Buyer and remain in full force and effect upon Buyer's purchase of the Assets, and no further Approvals will be required in order for Buyer to conduct the business currently conducted by Seller subsequent to the Closing. Except as disclosed in Schedule 2.22 or in any other schedule ------------- hereto, Seller is not subject to or bound by any agreement, arrangement, judgment, decree or order which may materially and adversely affect its business or prospects, its condition, financial or otherwise, or any of its assets or properties. 18 2.23 Transactions with Interested Persons. Except as set forth in Schedule ------------------------------------ -------- 2.23 hereto, neither Seller, nor any member or supervisory employee of Seller - ---- or, to the knowledge of Seller or the Principals, any of their respective spouses or family members owns directly or indirectly on an individual or joint basis any material interest in, or serves as an officer or director or in another similar capacity of, any competitor or supplier of Seller, or any organization which has a material contract or arrangement with Seller. 2.24 Employee Benefit Programs. ------------------------- (a) Schedule 2.24 lists every Employee Program (as defined below) ------------- that has been maintained (as defined below) by Seller at any time during the three-year period ending on the Closing Date. (b) Each Employee Program which has ever been maintained by Seller and which has at any time been intended to qualify under Section 401(a) or 501(c)(9) of the Code has received a favorable determination or approval letter from the Internal Revenue Service ("IRS") regarding its qualification under such section and has, in fact, been continuously qualified under the applicable section of the Code since the effective date of such Employee Program. No event or omission has occurred which would cause any such Employee Program to lose its qualification under the applicable Code section. (c) Seller does not know, and has no reason to know, of any failure of any party to comply with any laws applicable to the Employee Programs that have been maintained by Seller. With respect to any Employee Program ever maintained by Seller, there has occurred no "prohibited transaction," as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the Code, or breach of any duty under ERISA or other applicable law (including, without limitation, any health care continuation requirements or any other tax law requirements, or conditions to favorable tax treatment, applicable to such plan), which could result, directly or indirectly, in any taxes, penalties or other liability to Buyer. To the knowledge of Seller, no litigation, arbitration, or governmental administrative proceeding (or investigation) or other proceeding (other than those relating to routine claims for benefits) is pending or threatened with respect to any such Employee Program. (d) Neither Seller nor any Affiliate (as defined below) (i) has ever maintained any Employee Program which has been subject to Title IV of ERISA (including, but not limited to, any Multiemployer Plan (as defined below)) or (ii) has ever provided health care or any other non-pension benefits to any employees after their employment is terminated (other than as required by part 6 of subtitle B of title I of ERISA) or has ever promised to provide such post- termination benefits. (e) With respect to each Employee Program maintained by Seller within the three (3) years preceding the Closing, complete and correct copies of the following documents (if applicable to such Employee Program) have previously been delivered to Buyer: (i) all 19 documents embodying or governing such Employee Program, and any funding medium for the Employee Program (including, without limitation, trust agreements) as they may have been amended; (ii) the most recent IRS determination or approval letter with respect to such Employee Program under Code Section 401 or 501(c)(9), and any applications for determination or approval subsequently filed with the IRS; (iii) the three most recently filed IRS Forms 5500, with all applicable schedules and accountants' opinions attached thereto; (iv) the summary plan description for such Employee Program (or other descriptions of such Employee Program provided to employees) and all modifications thereto; (v) any insurance policy (including any fiduciary liability insurance policy) related to such Employee Program; (vi) any documents evidencing any loan to an Employee Program that is a leveraged employee stock ownership plan; and (vii) all other materials reasonably necessary for Buyer to perform any of its responsibilities with respect to any Employee Program subsequent to the Closing (including, without limitation, health care continuation requirements). (f) For purposes of this section: (i) "Employee Program" means (A) all employee benefit plans within the meaning of ERISA Section 3(3), including, but not limited to, multiple employer welfare arrangements (within the meaning of ERISA Section 3(4)), plans to which more than one unaffiliated employer contributes and employee benefit plans (such as foreign or excess benefit plans) which are not subject to ERISA; and (B) all stock or cash option plans, restricted stock plans, bonus or incentive award plans, severance pay policies or agreements, deferred compensation agreements, supplemental income arrangements, vacation plans, and all other employee benefit plans, agreements, and arrangements not described in (A) above. In the case of an Employee Program funded through an organization described in Code Section 501(c)(9), each reference to such Employee Program shall include a reference to such organization. (ii) An entity "maintains" an Employee Program if such entity sponsors, contributes to, or provides (or has promised to provide) benefits under such Employee Program, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under such Employee Program, or if such Employee Program provides benefits to or otherwise covers employees of such entity, or their spouses, dependents, or beneficiaries. (iii) An entity is an "Affiliate" of Seller if it would have ever been considered a single employer with Seller under ERISA Section 4001(b) or part of the same "controlled group" as Seller for purposes of ERISA Section 302(d)(8)(C). (iv) "Multiemployer Plan" means a (pension or non-pension) employee benefit plan to which more than one employer contributes and which is maintained pursuant to one or more collective bargaining agreements. 20 2.25 Environmental Matters. --------------------- (a) Except as set forth in Schedule 2.25, (i) Seller has never ------------- generated, transported, used, stored, treated, disposed of, or managed any Hazardous Waste (as defined below); (ii) to Seller's knowledge, no Hazardous Material (as defined below) has ever been or is threatened to be spilled, released, or disposed of at any site presently or formerly owned, operated, leased, or used by Seller, or has ever been located in the soil or groundwater at any such site; (iii) to Seller's knowledge, no Hazardous Material has ever been transported from any site presently or formerly owned, operated, leased, or used by Seller for treatment, storage, or disposal at any other place; (iv) Seller does not presently own, operate, lease, or use, nor has it previously owned, operated, leased, or used any site on which underground storage tanks are or were located; and (v) no lien has ever been imposed by any governmental agency on any property, facility, machinery, or equipment owned, operated, leased, or used by Seller in connection with the presence of any Hazardous Material. (b) Except as set forth in Schedule 2.25, (i) To Seller's knowledge, ------------- Seller has no liability under, nor has it ever violated, any Environmental Law (as defined below); (ii) to Seller's knowledge, Seller, any property owned, operated, leased, or used by Seller, and any facilities and operations thereon are presently in compliance with all applicable Environmental Laws; (iii) Seller has never entered into or been subject to any judgment, consent decree, compliance order, or administrative order with respect to any environmental or health and safety matter or received any request for information, notice, demand letter, administrative inquiry, or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any Environmental Law; and (iv) Seller has no knowledge or reason to know that any of the items enumerated in clause (iii) of this subsection will be forthcoming. (c) Except as set forth in Schedule 2.25 hereto, to the knowledge of ------------- Seller and the Principals, no site owned, operated, leased, or used by Seller contains any asbestos or asbestos-containing material, any polychlorinated biphenyls (PCBs) or equipment containing PCBs, or any urea formaldehyde foam insulation. (d) Seller has, to the knowledge of Seller and the Principals, provided to Buyer copies of all documents, records, and information available to Seller concerning any environmental or health and safety matter relevant to Seller, whether generated by Seller or others, including, without limitation, environmental audits, environmental risk assessments, site assessments, documentation regarding off-site disposal of Hazardous Materials, spill control plans, and reports, correspondence, permits, licenses, approvals, consents, and other authorizations related to environmental or health and safety matters issued by any governmental agency. (e) For purposes of this Section 2.25, (i) "Hazardous Material" shall mean and include any hazardous waste, hazardous material, hazardous substance, petroleum product, oil, toxic substance, pollutant, contaminant, or other substance which may pose a threat to the 21 environment or to human health or safety, as defined or regulated under any Environmental Law; (ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or regulated under any Environmental Law; (iii) "Environmental Law" shall mean any environmental or health and safety-related law, regulation, rule, ordinance, or by-law at the foreign, federal, state, or local level, whether existing as of the date hereof, previously enforced, or subsequently enacted; and (iv) "Seller" shall mean and include Seller and all other entities for whose conduct Seller is or may be held responsible under any Environmental Law. 2.26 Disclosure. The representations, warranties and statements contained ---------- in this Agreement and in the certificates, exhibits and schedules delivered by Seller and the Principals to Buyer pursuant to this Agreement do not contain any untrue statement of a material fact, and, when taken together, do not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or statements not misleading in light of the circumstances under which they were made. There are no facts known to Seller or the Principals which presently or may in the future have a material adverse affect on the Business, properties, Assets, prospects, operations or (financial or other) condition of Seller which has not been specifically disclosed herein or in a Schedule furnished herewith, other than general economic conditions affecting the Internet services industry generally. SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER. As a material inducement to Seller entering into this Agreement, Buyer hereby represents and warrants to Seller as follows: 3.1 Organization. Buyer is a corporation duly organized, validly existing ------------ and in good standing under the laws of the State of Michigan. Buyer has all requisite power and authority to conduct its business as it is now conducted and to own, lease and operate its properties and assets. 3.2 Required Action. All actions and proceedings necessary to be taken by --------------- or on the part of Buyer in connection with the transactions contemplated by this Agreement have been duly and validly taken, and this Agreement and each other agreement, document and instrument to be executed and delivered by or on behalf of Buyer pursuant to, or as contemplated by, this Agreement (collectively, the "Buyer Documents") has been duly and validly authorized, executed and delivered by Buyer and no other action on the part of Buyer or its shareholders is required in connection therewith. Buyer has full right, authority, power and capacity to execute and deliver this Agreement and each other Buyer Document and to carry out the transactions contemplated hereby and thereby. This Agreement and each other Buyer Document constitutes, or when executed and delivered will constitute, the legal, valid and binding obligations of Buyer enforceable in accordance with its respective terms. 3.3 No Conflicts. The execution, delivery and performance by Buyer of ------------ this Agreement and each other Buyer Document does not and will not (a) violate any provision of the Articles of Incorporation or by-laws of Buyer, as amended to date, (b) constitute a violation of, or conflict with or result in any breach of, acceleration of any obligation under, right of 22 termination under, or default under, any agreement or instrument to which Buyer is a party or by which it is bound, (c) violate any judgment, decree, order, statute, rule or regulation applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver of, or to make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made. The officers who execute this Agreement and the other Buyer Documents contemplated hereby on behalf of Buyer have and shall have all requisite power to do so in the name of and on behalf of Buyer. 3.4 Brokers. Buyer has not retained any broker or finder or other person ------- who would have any valid claim against any of the parties to this Agreement for a commission or brokerage fee in connection with this Agreement or the transactions contemplated hereby. SECTION 4. COVENANTS OF SELLER. Seller covenants and agrees that, from the date hereof until consummation of the transactions contemplated hereby at the Closing, Seller shall: 4.1 Access to Premises and Records. Seller shall give Buyer and its ------------------------------ representatives, at reasonable times and with reasonable prior notice, free access to the properties, books and records of the Business and to the Assets and will furnish to Buyer and its representatives such information regarding the Business and the Assets as Buyer or its representatives may from time to time reasonably request in order that Buyer may have full opportunity to make a diligent investigation consistent with this Agreement. In addition to, and not in limitation of the foregoing, Seller shall provide Buyer with access to and copies of the records of all: (a) Accounts Receivable, (b) Subscriber billing, (c) pre-paid accounts, (d) accounts for which no remuneration is received by Seller and (e) general reports with respect to each category of service provided by the Business. 4.2 Continuity and Maintenance of Operations of the Business. Except as -------------------------------------------------------- to actions which Buyer has been advised and to which Buyer has consented to in writing, and except as specifically permitted or required by this Agreement, Seller shall: (a) Operate the Business in the ordinary course consistent with past practices, use its commercially reasonable efforts to keep available the services of the employees who are involved in the operation of the Business, and use reasonable best efforts to preserve any beneficial business relationships with Subscribers, customers, suppliers and others having business dealings with Seller relating to the Business; (b) Use and operate the Assets in a manner consistent with past practice and maintain the Assets in good operating condition, ordinary wear and tear excepted; (c) Maintain adequate inventories of spare Equipment consistent with past practices; (d) Maintain insurance upon the Assets in such amounts and types as in effect on the date of this Agreement as set forth in Schedule 2.6 attached ------------ hereto; 23 (e) Keep all of its business books, records and files in the ordinary course of business in accordance with past practices, and provide Buyer with access thereto upon its reasonable request; (f) Continue to implement its procedures for disconnection and discontinuance of service to subscribers whose accounts are delinquent in accordance with those in effect on the date of this Agreement; (g) Perform and comply in all material respects with the terms of the Contracts and keep such Contracts in full force and effect; and (h) Preserve the goodwill of the Business. 4.3 Negative Covenants. Seller shall not, without the prior written ------------------ consent of Buyer: (a) Sell, transfer, lease, assign or otherwise dispose of, or agree to sell, transfer, lease, assign or otherwise dispose of, any Assets; (b) Enter into any contract or commitment for the acquisition of goods or services relating to the Business (other than in the ordinary course of business) or which otherwise obligates Seller to perform in full or in part beyond the Closing Date; (c) Hire any new employees or enter into any employment arrangements or otherwise increase the salary or compensation of any existing employees; (d) Renegotiate, modify, amend or terminate any Contract; (e) Create, assume, or permit to exist, or agree to incur, assume or acquire, any Lien, claim or liability on the Assets; (f) Make any modifications or changes to the existing rate schedules or product offerings in effect with respect to the Business; (g) Offer or employ any sales discounts, free services or other extraordinary marketing practices or extraordinary promotions outside the ordinary course of business and not consistent with Seller's past practices; (h) Take any actions or permit its employees and agents to take any actions which would materially interfere with or preclude the transactions contemplated by this Agreement; and (i) Cause or permit the provision for any new and material pension, retirement or other employment benefits for employees who perform services in connection 24 with the conduct of the Business or any material increase in any existing benefits (other than as required by law). 4.4 Consents. Seller will use its reasonable best efforts to obtain, as -------- soon as practicable and at its expense, the consent of all third parties under the Contracts for which the prior approval of such third party is required pursuant to the terms of the Contract, in form and substance reasonably satisfactory to Buyer; provided, however, that "reasonable best efforts" for -------- ------- this purpose shall not require Seller to undertake extraordinary or unreasonable measures to obtain such approvals and consents, including, without limitation, the initiation or prosecution of legal proceedings or the payment of fees in excess of customary filing and processing fees. 4.5 Notification of Certain Matters. Seller shall promptly notify Buyer ------------------------------- of (i) any fact, event, circumstances or action the existence or occurrence of which would cause any of Seller's representations or warranties under this Agreement, or the disclosures in any schedules or exhibits attached hereto, not to be true in any material respect and (ii) any failure on its part to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. Seller shall promptly notify buyer in writing of the assertion, commencement or threat of any claim, litigation, proceeding or investigation in which Seller is a party or in which the Assets or Business may be affected and which could reasonably be expected to be material or which relates to the transactions contemplated hereby. 4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any -------------- materially adverse developments affecting the Assets or the Business which become known to Seller, including, without limitation, (i) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting any of the Assets or the Business, (ii) any material notice of violation, forfeiture or complaint under any material Contract, or (iii) anything which, if not corrected prior to the Closing Date, would prevent Seller from fulfilling any condition to Closing described in Section 6 hereof. 4.7 No Solicitation. Seller shall not, and Seller shall cause its --------------- members, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by Seller) and all other employees who perform services with respect to the operation of the Business not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal with respect to the Assets or the Business, or engage in any negotiations concerning, or provide to any other person any information or data relating to, the Business, the Assets or Seller for the purpose of, or have any discussions with, any person relating to, or otherwise cooperate in any way with or assist or participate in, facilitate or encourage, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any effort or attempt by any other person to seek or effect a transaction, or enter into a transaction with any person or persons, other than Buyer, concerning the possible sale of the Assets or Business, or the capital stock of Seller. Seller 25 shall promptly inform Buyer of any such inquiries or proposals and provide all pertinent documentation related thereto. 4.8 Cooperation. Seller shall use its reasonable best efforts to take all ----------- steps within its power and will cooperate with Buyer to cause to be fulfilled those of the conditions to Buyer's obligations to consummate the transactions contemplated by this Agreement that are dependent upon its actions, and to execute and deliver such instruments and take such other reasonable actions as may be necessary or appropriate in order to carry out the intent of this Agreement and consummate the transactions contemplated hereby. Without limiting the foregoing, Seller shall cooperate with all reasonable requests of Buyer and its counsel in connection with Buyer's due diligence investigation of the Business and Assets. 4.9 Expenses. Seller shall bear its own expenses incurred in connection -------- with the negotiation and preparation of this Agreement and in connection with all obligations required to be performed by it under this Agreement. 4.10 Financial Information. Seller shall, as promptly as practical after --------------------- such information become available, deliver to Buyer copies of Seller's monthly unaudited financial statements, prepared in accordance with GAAP, consistently applied, and in form and presentation as is reasonably acceptable to Buyer. 4.11 Consummation of Agreement. Subject to the provisions of Section 8 of ------------------------- this Agreement: (a) Seller shall use its reasonable best efforts to fulfill and perform all conditions and obligations on its part to be fulfilled and performed under this Agreement, and to cause the transactions contemplated by this Agreement to be fully carried out on or before October 15, 1998 and (b) Seller shall not take any action or omit to take any action that would or could reasonably be expected to (i) result in any of the representations and warranties of Seller being or becoming untrue in any respect that would cause Section 6.1 of this Agreement not to be satisfied, (ii) result in any conditions to Closing set forth in Section 6 of this Agreement not to be satisfied, or (iii) result in a material violation of any provision of this Agreement. 4.12 Confidentiality. Seller agrees that it and its representatives will --------------- hold in strict confidence, and will not use, any confidential or proprietary data or information obtained from Buyer with respect to its business or financial condition except for the purpose of evaluating, negotiating and completing the transactions contemplated hereby. Information generally known in Buyer's industry or which has been disclosed to Seller by third parties which have a right to do so shall not be deemed confidential or proprietary information for purposes of this Agreement. If the transactions contemplated by this Agreement are not consummated, Seller will return, and cause its respective officers, members, agents and representatives to return, to Buyer (or certify that they have destroyed) all copies of such data and information made available to Seller (and its officers, members, agents and representatives) in connection with the transaction. 26 SECTION 5. COVENANTS OF BUYER. Buyer covenants and agrees that, from the date hereof until consummation of the transactions contemplated hereby at the Closing, Buyer shall: 5.1 Cooperation. Buyer shall use its reasonable best efforts to take all ----------- steps within its power and will cooperate with Seller, to cause to be fulfilled those of the conditions to Seller's obligations to consummate the transactions contemplated by this Agreement that are dependent upon its actions and to execute and deliver such instruments and take such other reasonable actions as may be necessary or appropriate in order to carry out the intent of this Agreement and consummate the transactions contemplated hereby. 5.2 Notification of Certain Matters. Buyer shall promptly notify Seller ------------------------------- of any fact, event, circumstances or action the existence or occurrence of which would cause (i) any of Buyer's representations or warranties under this Agreement not to be true in any material respect and (ii) any failure on its part to comply with or satisfy in any material respect any covenant, condition, or agreement to be complied with or satisfied by it under this Agreement. 5.3 Expenses. Buyer shall bear its own expenses incurred in connection -------- with the negotiation and preparation of this Agreement and in connection with all obligations required to be performed by it under this Agreement. 5.4 Consummation of Agreement. Subject to the provisions of Section 8 of ------------------------- this Agreement: (a) Buyer shall use its reasonable best efforts to fulfill and perform all conditions and obligations on its part to be fulfilled and performed under this Agreement, and to cause the transactions contemplated by this Agreement to be fully carried out on or before October 15, 1998; and (b) Buyer shall not take any action or omit to take any action that would or could reasonably be expected to (i) result in any of the representations and warranties of Buyer set forth in this Agreement being or becoming untrue in any respect that would cause Section 7.1 of this Agreement not to be satisfied, (ii) result in any condition to the Closing set forth in Section 7 of this Agreement not being satisfied, or (iii) result in a material violation of any provision of this Agreement. 5.5 Confidentiality. Buyer agrees that it and its representatives will --------------- hold in strict confidence, and will not use, any confidential or proprietary data or information obtained from Seller with respect to its business or financial condition except for the purpose of evaluating, negotiating and completing the transactions contemplated hereby. Information generally known in Seller's industry or which has been disclosed to Buyer by third parties which have a right to do so shall not be deemed confidential or proprietary information for purposes of this Agreement. If the transactions contemplated by this Agreement are not consummated, Buyer will return, and cause its respective officers, members, agents and representatives to return, to Seller (or certify that they have destroyed) all copies of such data and information made available to Buyer (and its officers, members, agents and representatives) in connection with the transaction. 27 5.6 Full Disclosure. Buyer shall, upon request, provide Seller, its --------------- counsel, accountants and other authorized representatives with such information concerning Buyer as may be reasonably necessary for Seller to verify performance of and compliance with Buyer's respective representations, warranties, covenants, and conditions herein contained. SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER. Buyer's obligation to consummate the transactions contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, unless otherwise waived by Buyer in writing: 6.1 Accuracy of Representations and Warranties. The representations and ------------------------------------------ warranties of Seller contained in this Agreement shall be true and correct in all material respects at the Closing Date with the same effect as though made at such time and the representations and warranties of Seller contained in this Agreement which are qualified by materiality shall be true and correct in all respects as of the Closing Date with the same effect as though made at such time. 6.2 Performance of Agreements and Deliveries. Seller shall have performed ---------------------------------------- in all material respects all of its covenants, agreements and obligations under this Agreement which are to be performed or complied with by Seller prior to or upon the Closing Date and shall have delivered all documents and items required to be delivered at or prior to the Closing, including, without limitation: (a) A certificate, dated the Closing Date, from one of the members to the effect that the conditions set forth in Sections 6.1 and 6.2 have been satisfied; (b) A certificate, dated the Closing Date, from one of the members of Seller as to the charter, Operating Agreement, authority and the incumbency of all members executing the Seller Documents on behalf of Seller; (c) A certified copy of Seller's Articles of Organization from the Secretary of State of the State of Michigan; (d) An Amendment to the Articles of Organization and any other required documentation, which effect a change of Seller's name; (e) A certificate of good standing from the Secretary of State of the State of Michigan; and (f) Such other certificates and instruments reasonably requested by Buyer. 6.3 No Material Adverse Effect. None of the schedules, documents or other -------------------------- information to be furnished by Seller to Buyer pursuant to this Agreement, shall disclose any fact, circumstance or matter, or any change in or development in connection with any matter 28 disclosed in the original schedules or documents previously delivered by Seller to Buyer, which has, or could reasonably be expected to have, a material adverse effect on the Assets or on the Business; and there shall have been no other changes or developments affecting either the Assets or the Business since the Base Balance Sheet Date which have, or could reasonably be expected to have, a material adverse effect on the Assets or Business. 6.4 Asset Transfer. Seller shall have delivered to Buyer the following -------------- instruments of transfer and assignment in accordance with the provisions hereof, transferring to Buyer all of Seller's right, title and interest in and to the Assets, free and clear of all Liens: (a) A Bill of Sale in the form attached hereto as Exhibit B; --------- (b) An Assignment and Assumption Agreement in the form attached hereto as Exhibit C (the "Assignment and Assumption Agreement"); --------- (c) An Assignment of Patents and Trademarks in the form attached hereto as Exhibit D; --------- (d) An Assignment of Internet Domain Name in the form attached hereto as Exhibit E (the "Assignment of Internet Domain Name"); and (e) Such other instruments of transfer reasonably requested by Buyer. 6.5 Assignment of Contracts and Authorizations; Approvals. All Contracts ----------------------------------------------------- shall have been duly and validly assigned to Buyer by Seller, and all consents and approvals required in connection with the consummation of the transactions contemplated hereby under any Contract or Authorization or otherwise shall have been obtained in form and substance satisfactory to Buyer and without conditions materially and adversely affecting Buyer and which do not require Buyer to pay money to any party to any such Contract or Authorization in excess of amounts required to be so paid pursuant to the terms and conditions thereof. All such Contracts and Authorizations shall remain in full force and effect and shall not have been amended, modified or repudiated in any material respect by either party thereto. Neither Seller nor, to the knowledge of Seller and the Principals, the other party thereto, shall have breached or defaulted under any Contract or Authorization. Seller shall not have received notice of or have knowledge of any fact which could result in the termination, repudiation or breach of any Contract or Authorization. 6.6 Escrow Agreement. Seller shall have executed and delivered to Buyer ---------------- the Escrow Agreement and such Escrow Agreement shall be in full force and effect. 6.7 Non-competition Agreement. Seller and Edwin Quinones shall have ------------------------- executed and delivered to Buyer a Non-competition Agreement in substantially the form attached hereto as Exhibit F (the "Non-competition Agreement"), and such --------- Non-competition Agreement shall be in full force and effect. 29 6.8 Employment and Non-competition Agreement. David Shires and ---------------------------------------- Christopher Michaels each shall have executed and delivered to Buyer an Employment Agreement (the "Employment Agreement") on terms and conditions which are reasonably satisfactory to Buyer, and a Non-competition Agreement (the "Employee Non-competition Agreement") in substantially the form attached hereto as Exhibit G, and such Employment Agreement and Employee Non-competition --------- Agreement shall be in full force and effect. 6.9 Release of Liens. Seller shall have obtained and delivered to Buyer ---------------- at or prior to the Closing instruments (including UCC-3 termination statements) releasing any and all Liens on the Assets. 6.10 Revenues; Subscribers. Seller shall have delivered to Buyer (i) total --------------------- monthly revenues resulting in not less than $170,000 as of the Closing Date, of which at least $165,000 shall be from Recurring Revenues, and (ii) at least 7,100 Dial-up Subscribers, 67 Dedicated Subscribers and 400 Web-hosting/Domain- hosting Subscribers, and Seller shall have furnished Buyer with a certificate, dated as of the Closing Date, to that effect. 6.11 Opinion of Seller's Counsel. Buyer shall have received the opinion or --------------------------- opinions of Kreis, Enderle, Callander & Hudgins, P.C., counsel for Seller, dated the Closing Date, substantially in the form of Exhibit H attached hereto. --------- 6.12 MESA Notice. Seller shall have disclosed to Buyer, at least two (2) ----------- business days prior to the date of this Agreement, on forms provided by the Michigan Employment Security Agency ("MESA"), the amount of Seller's outstanding MESA tax liability, unreported MESA tax liability, MESA tax payments, MESA tax rates, five (5) years of cumulative unemployment benefit charges, a list of all current employees of Seller, and a listing of employees of Seller separated from employment in the most recent twelve (12) months immediately preceding the Closing. SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER. The obligation of Seller to consummate the transactions contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of the following conditions, unless waived by Seller in writing: 7.1 Accuracy of Representations and Warranties. The representations and ------------------------------------------ warranties of Buyer contained in this Agreement shall be true and correct in all material respects at the Closing Date with the same effect as though made at such time, and the representations and warranties of Buyer contained in this Agreement which are qualified by materiality shall be true and correct in all respects as of the Closing Date with the same effect as though made at such time. 7.2 Performance of Agreement and Deliveries. Buyer shall have performed --------------------------------------- in all material respects all of its covenants, agreements and obligations under this Agreement which are to be performed or complied with by Buyer prior to or upon the Closing Date and shall 30 have delivered all documents and items required to be delivered at or prior to the Closing, including, without limitation: (a) A certificate, dated the Closing Date, from the President of Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have been satisfied; (b) A certificate, dated the Closing Date, from Buyer's Secretary as to the charter, by-laws, authority and the incumbency of all officers executing the Buyer Documents on behalf of Buyer; (c) A certified copy of Buyer's charter from the Secretary of State of the State of Michigan; (d) A certificate of good standing from the Secretary of State of the State of Michigan; and (e) Such other certificates and instruments reasonably requested by Seller. 7.3 Executed Agreements. Buyer shall have delivered to Seller the ------------------- following agreements and instruments of transfer and assignment in accordance with the provisions hereof, and all of such agreements and instruments of transfer and assignment shall be in full force and effect: (a) The Escrow Agreement; (b) The Non-competition Agreement; (c) The Assignment and Assumption Agreement; and (d) The Assignment of Internet Domain Name. 7.4 Opinion of Buyer's Counsel. Seller shall have received the opinion or -------------------------- opinions of Goodwin, Procter & Hoar LLP, counsel for Buyer, dated the Closing Date, substantially in the form of Exhibit I attached hereto. --------- SECTION 8. DEFAULTS, REMEDIES, AND TERMINATION. 8.1 Seller's Default; Buyer's Remedies. ---------------------------------- (a) Seller's Default. Seller shall be deemed to be in default ---------------- hereunder upon the occurrence of (i) any warranties or representations of Seller set forth herein shall be untrue in any material respect at Closing or (ii) Seller shall fail to meet, comply with, or perform in any material respect any covenant, agreement, condition or obligation on its part required within the time limits and in the manner required in this Agreement. Seller shall have a period 31 not to exceed thirty (30) days from the Closing Date within which to cure any state of facts constituting a misrepresentation or breach of warranty. (b) Buyer's Remedies. In the event that Seller shall be deemed to be ---------------- in default hereunder, Buyer may, at Buyer's sole option, (i) terminate this Agreement, (ii) enforce specific performance of this Agreement against Seller, or (iii) exercise any other right or remedy Buyer may have at law or in equity by reason of such default including, but not limited to, the recovery of attorney's fees incurred by Buyer in connection herewith. 8.2 Buyer's Defaults; Seller's Remedies. ----------------------------------- (a) Buyer's Default. Buyer shall be deemed to be in default hereunder --------------- upon the occurrence of (i) any warranties or representations of Buyer set forth herein shall be untrue in any material respect at Closing or (ii) Buyer shall fail to deliver, at Closing, any of the items specified in Section 7 of the Agreement for any reason other than a default by Seller. Buyer shall have a period not to exceed thirty (30) days from the Closing Date within which to cure any state of facts constituting a misrepresentation or breach of warranty. (b) Seller's Remedies. In the event that Buyer shall be deemed to be ----------------- in default hereunder, Seller may, at Seller's sole option (i) terminate this agreement, (ii) enforce specific performance of this Agreement against Buyer, or (iii) exercise any other right or remedy Seller may have at law or in equity by reason of such default including, but not limited to, the recovery of attorney's fees incurred by Buyer in connection herewith. 8.3 Termination. This Agreement may be terminated at any time prior to ----------- the Closing by the mutual written consent of Buyer and Seller. 8.4 Manner of Exercise. In the event of the termination of this Agreement ------------------ by either Buyer or Seller pursuant to Sections 8.1, 8.2, or 8.3, notice thereof shall forthwith be given to the other party in accordance with the provisions set forth in Section 11 hereto and this Agreement shall terminate and the transactions contemplated hereunder shall be abandoned without further action by Buyer or Seller. 8.5 Effect of Termination; Liabilities. In the event of the termination ---------------------------------- of this Agreement pursuant to Sections 8.1, 8.2, or 8.3, and prior to the Closing, all obligations of the parties hereunder (other than pursuant to Sections 4.12 and 5.5 hereof) shall terminate, and neither Seller nor Buyer shall have any further liability hereunder, including for losses, liabilities, obligations, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses (including attorneys' fees) of any kind whatsoever. 32 SECTION 9. POST-CLOSING COVENANTS; SURVIVAL. 9.1 Use of Trade Names. After the Closing Date, neither Seller, nor any ------------------ person controlling, controlled by or under common control with Seller will for any reason, directly or indirectly, for itself or any other person, (a) use the name "NetLink Systems, L.L.C." or (b) use or disclose any trade secrets, confidential information, know-how, proprietary information or other intellectual property of Seller transferred pursuant to this Agreement. 9.2 Post-Closing Transitional Matters. For a period of ninety (90) days --------------------------------- following the Closing, Seller shall provide, without additional cost to Buyer, such assistance as is reasonably requested by Buyer in order to effect an orderly transition in the ownership and operation of the Assets. 9.3 Survival. All representations, warranties, covenants, agreements -------- and indemnities contained in this Agreement, or in any schedule, exhibit, certificate, agreement, document or statement delivered pursuant hereto, are material, shall be deemed to have been relied upon by the parties and, shall survive the Closing for a period of one (1) year (the "Expiration Date") regardless of any investigation conducted by or knowledge of any party hereto; provided, however, that no party shall be entitled to indemnification from the - -------- ------- other party pursuant to Section 10 hereof with respect to any liability or loss disclosed to such party in this Agreement or in any schedule, exhibit, certificate, agreement or document delivered pursuant hereto, it being understood that such liabilities are and shall be either an Assumed Liability or an Excluded Liability for purposes hereof. SECTION 10. INDEMNIFICATION. 10.1 Indemnification by Seller. ------------------------- (a) Seller hereby agrees to indemnify and hold harmless Buyer, its affiliates and its and their respective directors, officers, stockholders, partners, members, employees, and agents (individually, a "Buyer Indemnified Party" and collectively, "Buyer Indemnified Parties"), against and in respect of all losses, liabilities, obligations, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses (including the reasonable fees, disbursements and expenses of attorneys and consultants) of any kind or nature whatsoever, but net of the proceeds from any insurance policies or other third party reimbursement for such loss, to the extent sustained, suffered or incurred by or made against any Buyer Indemnified Party, to the extent based upon, arising out of or in connection with: (i) any breach of any representation or warranty made by Seller in this Agreement or in any schedule, exhibit, certificate, agreement or other instrument delivered pursuant to this Agreement; (ii) any breach of any covenant or agreement made by Seller in this Agreement or in any schedule, exhibit, certificate, financial statement, agreement or other instrument delivered pursuant to this Agreement; (iii) any claim made by any person or entity which relates to the operation of the Assets or the Business which arises in connection with or on the basis of events, acts, omissions, conditions or any other state of facts occurring on or existing 33 before the Closing Date; and (iv) any claim which arises in connection with any liability or obligation of Seller other than the Assumed Liabilities. 10.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless ------------------------ Seller and its members, employees and agents (individually, a "Seller Indemnified Party" and collectively, "Seller Indemnified Parties") at all times against and in respect of all losses, liabilities, obligations, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses (including the reasonable fees, disbursements and expenses of attorneys and consultants), of any kind or nature whatsoever, to the extent sustained, suffered or incurred by or made against any Seller Indemnified Party, to the extent based upon, arising out of or in connection with: (A) any breach of any representation or warranty made by Buyer in this Agreement or in any schedule, exhibit, certificate, agreement or other instrument delivered pursuant to this Agreement; (B) any breach of any covenant or agreement made by Buyer in this Agreement or in any schedule, exhibit, certificate, agreement or other instrument delivered pursuant to this Agreement; (C) any claim made against Seller which relates to, results from or arises out of Buyer's operation of the Assets or the Business from and after the Closing Date; and (D) the Assumed Liabilities. 10.3 Notice; Defense of Claims. ------------------------- (a) Notice of Claims. Promptly after receipt by an indemnified party ---------------- of notice of any claim, liability or expense to which the indemnification obligations hereunder would apply, the indemnified party shall give notice thereof in writing to the indemnifying party, but the omission to so notify the indemnifying party promptly will not relieve the indemnifying party from any liability except to the extent that the indemnifying party shall have been prejudiced as a result of the failure or delay in giving such notice. Such notice shall state the information then available regarding the amount and nature of such claim, liability or expense and shall specify the provision or provisions of this Agreement under which the liability or obligation is asserted. (b) Third Party Claims. With respect to third party claims, if within ------------------ twenty (20) days after receiving the notice described in clause (a) above the indemnifying party gives (i) written notice to the indemnified party stating that (A) it would be liable under the provisions hereof for indemnity in the amount of such claim if such claim were successful and (B) that it disputes and intends to defend against such claim, liability or expense at its own cost and expense and (ii) provides reasonable assurance, in writing, to the indemnified party that such claim will be promptly paid in full if required, then counsel for the defense shall be selected by the indemnifying party (subject to the consent of the indemnified party which consent shall not be unreasonably withheld) and the indemnified party shall not be required to make any payment with respect to such claim, liability or expense as long as the indemnifying party is conducting a good faith and diligent defense at its own expense; provided, however, that the assumption of defense of any such matters by the indemnifying party shall relate solely to the claim, liability or expense that is subject or potentially subject to indemnification. The indemnifying party shall have the right, with the consent of the indemnified party, which 34 consent shall not be unreasonably withheld, to settle all indemnifiable matters related to claims by third parties which are susceptible to being settled provided the indemnifying parties' obligation to indemnify the indemnified party therefor will be fully satisfied. The indemnifying party shall keep the indemnified party apprised of the status of the claim, liability or expense and any resulting suit, proceeding or enforcement action, shall furnish the indemnified party with all documents and information that the indemnified party shall reasonably request and shall consult with the indemnified party prior to acting on major matters, including settlement discussions. Notwithstanding anything herein stated, the indemnified party shall at all times have the right to fully participate in such defense at its own expense directly or through counsel; provided, however, if the named parties to the action or proceeding include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the expense of separate counsel for the indemnified party shall be paid by the indemnifying party. If no such notice of intent to dispute and defend is given by the indemnifying party, or if such diligent good faith defense is not being or ceases to be conducted, the indemnified party shall, at the expense of the indemnifying party, undertake the defense of (with counsel selected by the indemnified party), and shall have the right to compromise or settle (exercising reasonable business judgment), such claim, liability or expense. If such claim, liability or expense is one that by its nature cannot be defended solely by the indemnifying party, then the indemnified party shall make available all information and assistance that the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense. (c) Non-Third Party Claims. With respect to non-third party claims, ---------------------- if within twenty (20) days after receiving the notice described in clause (a) above the indemnifying party does not give written notice to the indemnified party that it contests to such indemnity, the amount of indemnity payable for such claim shall be as set forth in the indemnified party's notice. If the indemnifying party provides written notice to the indemnified party within such 20-day period that it contests such indemnity, the parties shall attempt in good faith to reach an agreement with regard thereto within thirty (30) days of delivery of the indemnifying party's notice. If the parties cannot reach agreement within such 30-day period, the matter may be submitted by either party for binding arbitration in accordance with the provisions of Section 12.10 hereof. SECTION 11. NOTICES. All notices and other communications required to be given hereunder, or which may be given pursuant or relative to the provisions hereof, shall be in writing and shall be deemed to have been given when delivered in hand or mailed, postage prepaid, by first class United States mail, certified return receipt requested as follows: If to Seller: NetLink Systems, L.L.C. ------------ 225 West Walnut Kalamazoo, Michigan 49007 Attn: David Shires 35 With a copy to: Kreis, Enderle, Callander & Hudgins, P.C. One Moorsbridge P. O. Box 4010 Kalamazoo, MI 49003 Attn: Matthew DePerno, Esq. If to Buyer: Voyager Information Networks, Inc. ----------- 4660 S. Hagadorn Road East Lansing, MI 48823 Attn: Christopher Torto With a copy to: Goodwin, Procter & Hoar LLP Exchange Place Boston, Massachusetts 02109 Attn: David F. Dietz, P.C. SECTIOn 12. MISCELLANEOUS. 12.1 Assignability; Binding Effect. This Agreement shall not be assignable ----------------------------- by Buyer or Seller except with the written consent of the other, except that Buyer may assign its rights hereunder either (i) to any affiliate of Buyer, provided, however, that no assignment by Buyer shall in any way affect Buyer's obligations or liabilities under this Agreement and Buyer acknowledges that it shall remain primarily liable under this Agreement in the event of such an assignment, (ii) as a result of any merger, reorganization or other consolidation, or (iii) in connection with the granting of a security interest to its senior lender. This Agreement shall be binding upon and shall inure to the benefit of, the parties hereto and their respective successors, and assigns. 12.2 Headings. The subject headings used in this Agreement are included -------- for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 12.3 Amendments; Waivers. This Agreement may not be amended or modified, ------------------- nor may compliance with any condition or covenant set forth herein be waived, except by a writing duly and validly executed by Buyer and Seller or, in the case of a waiver, the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege, or any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. 12.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any -------------- applicable bulk sales law and Seller agrees, to make full and timely payment when due of all amounts owed by such Seller to its creditors. Seller agrees to indemnify and hold Buyer harmless from, 36 and reimburse Buyer for, any loss, cost, expense, liability or damage (including reasonable counsel fees and disbursements and expenses) which Buyer may suffer or incur by virtue of the non-compliance by Seller with such laws. 12.5 Entire Agreement. This Agreement, together with the schedules and ---------------- exhibits hereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and cancels any and all prior or contemporaneous arrangements, understandings and agreements between them relating to the subject matter hereof. 12.6 Severability. In the event that any provision or any portion of any ------------ provision of this Agreement shall be held to be void or unenforceable, then the remaining provisions of this Agreement (and the remaining portion of any provision held to be void or unenforceable in part only) shall continue in full force and effect. 12.7 Governing Law. This Agreement and the transactions contemplated ------------- hereby shall be governed and construed by and enforced in accordance with the laws of the State of Michigan, without regard to conflict of laws principles. 12.8 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which shall constitute the same instrument. 12.9 Expenses. Each party shall pay its own expenses incident to the -------- negotiation, preparation and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of its counsel, accountants, and consultants for all activities of such counsel, accountants, and consultants undertaken pursuant to this Agreement, whether or not the transactions contemplated hereby are consummated. 12.10 Dispute Resolution. Any dispute arising out of or relating to this ------------------ Agreement or the breach, termination or validity hereof shall be finally settled by arbitration conducted expeditiously in accordance with the CPR Institute for Dispute Resolution Rules for Nonadministered Arbitration of Business Disputes (the "CPR Rules"). The CPR Institute for Dispute Resolution shall appoint a neutral advisor from its National CPR Panel. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. (S)(S)1-16, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration shall be Detroit, Michigan. Such proceedings shall be administered by the neutral advisor in accordance with the CPR Rules as he/she deems appropriate, however, such proceedings shall be guided by the following agreed upon procedures: (a) Mandatory exchange of all relevant documents, to be accomplished within forty-five (45) days of the initiation of the procedure; 37 (b) No other discovery; (c) Hearings before the neutral advisor which shall consist of a summary presentation by each side of not more than three hours; such hearings to take place in one or two days at a maximum; and (d) Decision to be rendered not later than ten (10) days following such hearings. Each of the parties hereto (a) hereby unconditionally and irrevocably submits to the jurisdiction of any United States District Court of competent jurisdiction located in the State of Michigan for the purpose of enforcing the award or decision in any such proceeding and (b) hereby waives, and agrees not to assert in any civil action to enforce the award, any claim that it is not subject personally to the jurisdiction of the above-named court, that its property is exempt or immune from attachment or execution, that the civil action is brought in an inconvenient forum, that the venue of the civil action is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court, and (c) hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement of the judgment of any such court. Each of the parties hereto hereby consents to service of process by registered mail at the address to which notices are to be given. Each of the parties hereto agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the other parties hereto. Final judgment against any party hereto in any such action, suit or proceeding may be enforced in other jurisdictions by suit, action or proceeding on the judgment, or in any other manner provided by or pursuant to the laws of such other jurisdiction; provided, -------- however, that any party may at its option bring suit, or institute other - ------- judicial proceedings, in any state or federal court of the United States or of any country or place where the other parties or their assets, may be found. Notwithstanding the foregoing, it is specifically understood and agreed that certain breaches of this Agreement will result in irreparable injury to the parties hereto, that the remedies available to the parties at law alone will be an inadequate remedy for such breach, and that, in addition to any other legal or equitable remedies which the parties may have, a party may enforce its rights by an action for specific performance and the parties expressly waive the defense that a remedy in damages will be adequate. 12.11 Third Party Rights. This Agreement is for the benefit of the parties ------------------ hereto and is not entered into for the benefit of, and shall not be construed to confer any benefit upon, any other party or entity. 12.12 Exhibits and Schedules. All exhibits and schedules referred to in ---------------------- this Agreement shall be deemed to be attached to and made a part of this Agreement. Buyer shall not be deemed to have actual or constructive notice of any fact, matter or item set forth in an exhibit or schedule for the purposes of any other representation, warranty, exhibit, or schedule 38 unless the appropriate facts, matters, or items set forth in such exhibit or schedule are specifically cross-referenced in such other representation, warranty, exhibit or schedule. [Remainder of page intentionally left blank] 39 IN WITNESS WHEREOF, Seller, Principals and Buyer have caused this Asset Purchase Agreement to be executed as of the date first above written. SELLER: NETLINK SYSTEMS, L.L.C. By: /s/ David Shires ------------------------------ Name: David Shires Title: Member PRINCIPALS: /s/ David Shires --------------------------------- David Shires /s/ Christopher Michaels --------------------------------- Christopher Michaels /s/ Edwin Quinones --------------------------------- Edwin Quinones BUYER: VOYAGER INFORMATION NETWORKS, INC. By: /s/ Christopher Torto ----------------------------- Name: Christopher Torto Title: Chief Executive Officer 40 EX-10.7 3 RESELLER AGREEMENT Exhibit 10.7 INTERNET RESELLER AGREEMENT THIS RESELLER AGREEMENT made this 13th day of April 1999 by and between Voyager Information Networks, Inc. ("Voyager") and Millennium Digital Media ("Reseller"). 1. Appointment. Subject to the terms and conditions of this Agreement, Voyager grants to Reseller the right to promote and provide to End Users the dial up Internet access services more specifically described on Exhibits A through D attached hereto (the "Voyager Products and Services"). Reseller agrees to exclusively promote Voyager Products and Services, however, nothing in this Agreement shall be deemed to preclude Voyager from distributing the Products and Services, as Voyager deems appropriate, or from appointing others to do so. 2. Voyager's Responsibilities. Depending upon the level of service chosen by the Reseller, Voyager shall provide the specific services listed in Exhibits A and B. 3. Reseller's Responsibilities. Depending upon the level of service chosen by the Reseller, Reseller shall provide the specific services listed in Exhibits A and B. 4. Price, Payment and Shipment. 4.1 Price. For each Voyager Product and Service option, Reseller shall pay to Voyager the prices as set forth in the applicable Exhibit attached hereto. Prices may be adjusted on an annual basis with 60 days advance written notification from Voyager. 4.2 Terms of Payment. Payment for Voyager Products and Services and any other charges under this Agreement are due within thirty (30) days after the date of receipt of an invoice from Voyager. If payment is not received within sixty (60) days, then Reseller shall be charged an interest rate equal to the lesser of one and one-half percent (1.5%) per month or the maximum amount permitted by the laws of the State of Michigan. 4.3 Taxes. All pricing under this Agreement is exclusive of taxes. Reseller shall pay any applicable federal, state, county, local or other governmental taxes, fees or duties now or hereafter imposed on the sale, export, use or possession of Voyager's Products and Services, or any export, use or possession of Voyager's Products and Services, or any other transaction contemplated by this Agreement, as well as any 1 penalties or interest thereon. 5. Maintenance and Support. Reseller acknowledges that routine maintenance and periodic system repairs, upgrades and reconfigurations provided by Voyager pursuant to this Agreement, public emergencies, force majeure events, restrictions imposed by law, acts of God, labor disputes and other situations, including mechanical or electronic breakdowns, may result in temporary impairment or interruption in Voyager's Internet Services. Reseller further acknowledges that Voyager does not guarantee continuous or uninterrupted service and reserves the rights from time to time to temporarily reduce or suspend service. Outside of formal maintenance hours on Mondays from 1am - 5am, Voyager shall notify Reseller of any other planned outages, maintenance or repairs, upgrades or reconfigurations within 48 hours from their schedule occurrence. In addition, Voyager shall notify Reseller of any other outages or events which interrupt service as they occur or Voyager becomes aware of such occurrence. 6. Ownership and Proprietary Rights. 6.1 Ownership. Voyager represents that it has the rights necessary to grant Reseller the right to market and sell the Voyager Products and Services pursuant to this Agreement. 6.2 Internet Ownership. Reseller hereby acknowledges that the Internet is not owned, operated, managed by or in any way affiliated with Voyager or any of its affiliates, and that it is a separate network of computers independent of Voyager. Reseller further acknowledges that use of the Internet is solely at the End User's risk and their use is subject to all applicable local, state, federal and international laws and regulations and that access to the Internet is dependent on numerous factors, technologies and systems, many of which are beyond Voyager's authority and control. 6.3 Proprietary Rights. Reseller acknowledges that ownership of all applicable copyrights and intellectual property rights in the Voyager Products and Services and applicable documentation shall remain vested in Voyager. Reseller shall not remove Voyager's copyright notices and other restricted rights legends or notices from the Products and documentation. 6.4 Unauthorized Use or Copying. Reseller shall not repackage, copy, modify or reproduce the Voyager Products and Services, or applicable 2 documentation in any way, nor shall Reseller permit any third party to do so. Reseller acknowledges that access to Voyager's network or any other networks connected to Voyager's network must comply with the rules appropriate for that other network and that the transmission of any material in violation of any federal or state regulations is prohibited, including, but not limited to, copyright material, material legally judged to be threatening or obscene, material protected by trade secret or material that is otherwise, in the sole discretion of Voyager, deemed to be proprietary, inappropriate or improper such as bulk e-mail messages. 6.5 Advertising. Any marketing and promotion, including but not limited to radio and television advertisements, billboards, newsletters, direct mail campaigns, and special promotions, shall contain such notices as may be specified by Voyager for approval, prior to use, distribution or disclosure, any advertising, promotion or publicity in which the Voyager Products or Services are described for any reason. 6.6 End User Pricing. Reseller shall submit to Voyager, for prior written approval, all End User price lists for Voyager Products and Services as outlined in the agreement. Any modifications to the End User Price lists shall be approved in writing by Voyager before Seller incorporates any such price changes. 6.7 IP Ownership. All IP addresses issued by Voyager for the purpose of supporting Reseller services, shall remain the sole property of Voyager and shall only be provided by Voyager upon request by Reseller and in compliance with Voyager's current IP issuance policies. Upon termination of this agreement, the Reseller shall cease using the Voyager issued IP's at Voyagers request. 7. Covenants of Reseller. 7.1 Covenants. Reseller shall make no representations or warranties on behalf of Voyager. In addition, Reseller shall not sell, transfer, publish, disclose, display or otherwise make available the Voyager Products or Services, or copies thereof, to others except as specifically set forth herein. 7.2 Indemnification. Reseller agrees to indemnify and hold harmless Voyager, its directors, officers, employees or agents from and against any claim, injury, loss or expense, including attorneys' fees, arising out of (i) the failure of Reseller to comply with the terms of this Agreement, 3 (ii) any misrepresentations of Reseller in connection with Voyager or the Products or Services, (iii) any other wrongful conduct of Reseller, its employees, representatives, agents or dealers, or (iv) any interruptions or omission of Service provided by Voyager hereunder. 8. Limitation of Liability. 8.1 Disclaimer of Warranties. THE VOYAGER PRODUCTS AND SERVICES AND APPLICABLE DOCUMENTATION ARE PROVIDED "AS IS". THIS INCLUDES LOSS OF DATA RESULTING FROM DELAYS, NONDELIVERIES, MISDELIVERIES OR SERVICE INTERRUPTION HOWEVER CAUSED. USE OF ANY INFORMATION OBTAINED BY VOYAGER'S NETWORK IS AT END USER'S OWN RISK. VOYAGER SPECIFICALLY DISCLAIMS ANY RESPONSIBILITY FOR THE ACCURACY OR QUALITY OF INFORMATION OBTAINED THROUGH ITS SERVICES. VOYAGER SPECIFICALLY DISCLAIMS ALL OTHER WARRANTIES EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AS TO ANY PRODUCTS OR SERVICES PROVIDED UNDER THIS AGREEMENT. 8.2 Limitation. IN NO EVENT SHALL VOYAGER BE LIABLE FOR ANY LOSS OR PROFIT OR ANY OTHER COMMERCIAL DAMAGE, INCLUDING BUT NOT LIMITED TO SPECIAL, INCIDENTAL, CONSEQUENTIAL OR OTHER INDIRECT DAMAGES UNDER ANY CAUSE OF ACTION ARISING OUT OF OR RELATING TO THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, CLAIMS ARISING FROM MALFUNCTION OR DEFECTS IN THE PRODUCTS OR NON-DELIVERY OF THE PRODUCTS, EVEN IF VOYAGER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 8.3 Amounts Paid. IN NO EVENT SHALL VOYAGER'S LIABILITY FOR ANY CLAIM ARISING OUT OF THIS AGREEMENT EXCEED THE AMOUNT PAID TO VOYAGER BY RESELLER UNDER THIS AGREEMENT FOR THE PRODUCT OR SERVICE WHICH IS THE SUBJECT OF SUCH A CLAIM 4 9. Term and Termination. 9.1 Term. This Agreement shall commence on April 13, 1999 and shall continue for an initial term of three (3) years. Thereafter, this Agreement shall automatically renew for additional one (1) year periods unless terminated by either party within sixty (6) days notice of the expiration date. 9.2 Termination. This Agreement may be terminated by either party with or without cause given ninety (90) days prior written notices to the other party. 9.3 Duties Upon Termination. Upon the termination or expiration of this Agreement for any reason: (1) Reseller's rights to promote Voyager Products and Services pursuant to Section 1 shall terminate; (b) Reseller shall promptly return to Voyager all materials provided to Reseller by Voyager hereunder; (c) each party shall promptly prepare an accounting of all sums (if any) due to each other, and each party shall pay the same within fifteen (15) days of receipt of an invoice, (d) Reseller shall promptly return and cease use of all IP addresses issued by Voyager. 10. Indemnification. 10.1 Intellectual Property. Voyager shall, at is expense, defend any claim against Reseller that use of the Voyager Products, as provided to Reseller under this Agreement, infringes a United States copyright, trade secret or other intellectual property right of any third party. Voyager shall pay any direct costs and damages attributable to such claim finally awarded by a court of competent jurisdiction against Reseller on such claim. Voyager shall have no liability for any such claim if Reseller is in material breach of this Agreement, or if the claim is based on use of or anything other than an unaltered Product as provided by Voyager, data or hardware, if such infringement would have been avoided by the use of the unaltered Product as provided by Voyager. 10.2 Cooperation by Reseller. Voyager shall have no obligations under Section 10.1 of this Agreement unless: (a) Voyager shall have been promptly notified of the suit or claim by Reseller and furnished by Reseller with a copy of each communication, notice or other action relating to said claim; 5 (b) Voyager shall have the right to assume sole authority to conduct the litigation or settlement of such a claim or any negotiations related thereto at Voyager's expense; and (c) Reseller shall provide reasonable information and assistance requested by Voyager at Reseller's expense in connection with such a claim. 11. Confidentiality. Any specifications, samples, technical information, lists of customers or potential customers or other proprietary business information or data, written, oral or otherwise, disclosed by Voyager to Reseller ("Confidential Information") shall remain the property of Voyager. Reseller agrees to hold all such Confidential Information in strict confidence and not to disclose such Confidential Information to any third party without Voyager's prior written consent. Upon expiration or termination of this Agreement for any reason, Reseller shall destroy all such Confidential Information in Reseller's possession. 12. General. 12.1 Jurisdiction and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan, without reference to its conflicts of laws provisions. Jurisdiction for litigation of any dispute, controversy or claim arising out of or in connection with this Agreement, shall be only in a federal or the state court having subject matter jurisdiction located in Lansing, Michigan. 12.2 Entire Agreement. This Agreement, including the Exhibits attached hereto, constitutes the entire agreement between the parties with respect to this subject matter hereof and supersedes all previous proposals, both oral and written, negotiations, representations, commitments, writings and any other communications between the parties. This Agreement may not be released, discharged, or modified except by a written amendment signed by both parties. 12.3 Independent Contractors. It is expressly agreed that Voyager and Reseller are acting hereunder as independent contractors. Under no circumstances shall any of the employees of one party be deemed the employees of the other for any purpose. 12.4 Notice. Any notice required to be given by either party to the other shall be deemed given if in writing and actually delivered or if deposited in the United States mail in registered or certified form with return receipt requested, postage paid, addressed to the last known address of the notified party. 12.5 Assignment. Neither party hereto may assign this Agreement without the 6 express written consent of the other party hereto, which consent shall not be unreasonably withheld. 12.6 Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other part or provision of this Agreement. 12.7 Waiver. No waiver by Voyager of any breach of any provisions hereof shall constitute a waiver unless made in writing signed by Voyager. IN WITNESS WHEREOF, each part hereto has executed this Agreement by a duly authorized representative as of the date set forth above. VOYAGER: RESELLER: Voyager Information Millennium Digital Media Networks, Inc. By: /s/ Christopher P. Torto By: /s/ John K. Brooke -------------------------------- ------------------------------------ Christopher P. Torto Chief Executive Officer Title: Chief Operating Officer ------------------------------ 7 EXHIBIT A Dial-up Internet Services and Rates for Voyager Owned POPs This level of service allows Reseller's End Users access into Voyager maintained POPs with additional network and support services. 1. Wholesale Rate for Voyager Services Provided (listed below): . $12.50 per customer/month (unlimited access) or . $6.50 per customer/month (light usage account for 10 hours with each additional hour at 75 cents). 2. Voyager provided services: . Internet Access. Voyager shall provide to each End User transport and routing from the Voyager point of presence ("POP") to the Internet via Voyager's high speed network. . Maintenance of POP and Network. Voyager to provide and maintain all POP, telephone circuits and network equipment. . Technical Support. Voyager shall provide technical support to End Users provided that the End User's equipment meets the minimum requirements described in Exhibit E attached hereto. . E-mail. Voyager shall provide each End User with one primary e-mail account as well as two additional e-mail addresses on Voyager's mail server and global delivery of Internet e-mail. . Personal Webspace. Voyager shall provide each End User with 5MB of personal disk space on Voyager's Webserver and access through an FTP account. . Billing Support. Voyager shall provide Reseller with access to Voyager's Web based customer database for real-time billing and account information on each End User account. . Sales and Marketing Support. Voyager shall provide Reseller with sample literature for use in Reseller's marketing and sales programs. 3. Reseller provided services: . Billing: Reseller shall originate End User Billing and respond to all End User billing questions. . Collections/Bad Debt: Reseller shall collect all End User accounts and manage bad debt. . Sales and Marketing: Reseller shall perform all sales and marketing related activities. 8 EXHIBIT B Internet Services and Rates for Reseller Owner Network - Use of Cable Modems (Connection to Voyager using Reseller's Infrastructure and Network) This level of service provides Internet access, email and personal web space services for Reseller End Users using Reseller's own network infrastructure. 1. Wholesale Rate for Voyager Services Provided: . Internet Bandwidth Transport Fee - See Exhibit D for detailed schedule of charges. . Plus: $6.00 per Customer 2. Voyager provided services: . Internet Access: Voyager shall provide to each End User transport and routing from the Voyager network operating center ("NOC") to the Internet via Voyager's high speed network. . Maintenance of Voyager Network - Voyager to provide and maintain all Voyager owned network circuits and equipment. . Technical Support. Voyager shall provide technical support related to Voyager's network, email and personal web space services. Support shall also be provided for Cable Modem customers for Cable Modem TCP/IP configurations, IP conventions, and e-mail problems. Voyager shall issue trouble tickets immediately to Reseller's Data Support staff upon unsuccessful resolution of any call. A weekly summary report shall be provided to Reseller of all transactions either successfully resolved or forwarded for Reseller field resolution. Voyager shall provide and maintain the appropriate number of dedicated 800/888 inbound phone lines to handle Cable Modem inbound call volume. . E-mail. Voyager shall provide each End User with one primary e-mail account as well as two additional e-mail addresses on Voyager's mail server and global deliver of Internet e-mail. . Personal Webspace. Voyager shall provide each End User with 5MB of personal disk space on Voyager's Webserver and access through an FTP account. . Billing Support. Voyager shall provide Reseller with access to Voyager's Web based customer database for real-time billing and account information on each End User account. . IP Addresses. Voyager shall provide valid Internic Registered IP addresses for all Reseller modems, servers, and routers. 3. Reseller provided services: . Reseller Network - Reseller to provide and maintain the Reseller network. . Transport to Voyager NOC - Reseller to provide for transport and routing from Reseller network to Voyager NOC. . Technical Support - Reseller to provide all technical support related to the Reseller network and all equipment (i.e. cable modems, etc.). . Billing: Reseller shall originate End User billing and respond to all End User billing questions. . Collections/Bad Debt: Reseller shall collect all End User accounts and manage bad debt. . Sales and Marketing: Reseller shall perform all sales and marketing related activities. 9 EXHIBIT C Internet Services and Rates for Dedicated Internet Access Voyager shall provide Reseller a shared or dedicated connection(s) to the Internet through Voyager's high-speed network from Voyager's office located at 4660 S. Hagadorn Road, Ste. 320, East Lansing, Michigan 48823. 1. Dedicated Connection - Internet Access and Usage Rates Port Install Charge (one-time setup): $250 Port Charge (Monthly): $375 per Mb Bandwidth Usage Charge (Monthly): $1.50 per kilobit (See calculation below) Bandwidth Usage Rate Calculation for sustained usage (sustained usage is measured by samples taken every 5 minutes). The highest maximum and average values are added together and divided by two. The sustained usage in kilobits is then multiplied by our kilobit rate of $1.50 per kilobit: Charge = [(max + average) sustained usage in kilobits] x $1.50 ______________ 2 3. Equipment Requirement for Dedicated Access Dedicated access to Voyager network will require, at a minimum, the following hardware and software at any premises where access is required: . A Cisco 2500 series or greater router with an IP feature set and a comparable (current) version of Cisco IOS: . Two CSUs approved by Voyager for the lease line connection (one CSU for each end of the circuit); . A V.35 cable to connect the router to the CSU; . A connection to a standard analog voice telephone line for out of band management of the router (optional); . A standard V.35 analog modem for out of band management of the router (optional); . A standard Voyager approved transceiver to interconnect the router to the customer's LAN/WAN. 10 EXHIBIT D End User Equipment Requirements for Dial-up Accounts For dial-in access to a Voyager maintained POP, End Users will require, at a minimum, the following hardware and software: . PC with Intel 486 (or equivalent) processor or Macintosh Classic 2 or newer computer with at least 8 MB of memory (16 MB is recommended); . Modem fully compliant with V. 32/42 bis and/or V.34 standards (NOTE: Modems drive by software emulation of these standards will not work); . A serial card with a 16550 UART chip; . Microsoft Windows 3.1 or higher or System 7; . Connection to a standard analog voice telephone line; and . Internet browser (Voyager to supply software if customer does not have browser). 11 EX-10.23 4 PROMISSORY NOTE MADE BY OSVALDO DEFARIA Exhibit 10.23 THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION. PROMISSORY NOTE --------------- Date: January 11, 1999 $450,000 FOR VALUE RECEIVED, the undersigned ("Debtor") hereby promises to pay to Voyager Holdings, Inc., a Delaware corporation ("Payee"), at such place or places as may be specified by Payee or any holder hereof, in legal tender of the United States of America, the principal amount of $450,000 (the "Principal"), which represents the amount equal to the fair market value of the 300,000 shares of common stock, par value $.0001 per share, of Payee purchased by Debtor pursuant to that Stock Purchase and Restriction Agreement on the date hereof (the "Shares"), with interest at the rate of 5.00% per annum, compounded annually, on the unpaid balance. Interest shall accrue commencing on the date hereof and shall be due and payable in full at the Repayment Date (as hereinafter defined). The Debtor shall pay to Payee, within ten (10) days after receipt thereof, the net after-tax proceeds from any sale by the Debtor of the Shares, in reduction of the Principal and accrued interest thereon until such time as such Principal and interest have been repaid in full. For purposes hereof, net after-tax proceeds refers to the amount received by the Debtor upon any sale of such Shares, less brokerage commissions or underwriting discounts, other expenses of every kind, including documentary, excise and other taxes, if any, directly relating to the sale and an amount equal to the federal, state and local taxes on any gain from such sale (as determined by multiplying the amount of such gain by the combined maximum federal, state and local tax rate applicable to the sale of such Shares by the Debtor, taking into account the holding period for such Shares and any federal income tax deduction for state and local income taxes). In any event, any Principal then unpaid shall be due and payable, with accrued interest thereon, on the fourth (4th) anniversary of date hereof (the "Repayment Date"). This Note is subject to the terms of and the payment hereof is secured by a certain Pledge Agreement dated as of the date hereof by and between Debtor and Payee (the "Pledge Agreement"). In case an Event of Default, as defined in the Pledge Agreement, shall occur, the aggregate unpaid balance of Principal and accrued interest thereon may be declared to be due and payable in the manner and with the effect provided in the Pledge Agreement. The obligation of the undersigned Debtor to pay the Recourse Amount (as hereinafter defined) shall be absolute and unconditional, and the Payee shall have full recourse against the Debtor's assets (including, but not limited to, the collateral pledged pursuant to the Pledge Agreement) to recover the Recourse Amount. The Recourse Amount as of any time shall mean 25% of the Principal, plus accrued interest as of such date, reduced by any payment of Principal made by or on behalf of the Debtor from any source. With respect to amounts due and payable hereunder in excess of the Recourse Amount, the Payee shall have no recourse against the Debtor or any of his assets other than the collateral pledged pursuant to the Pledge Agreement, and Payee shall look only to its rights as provided in the Pledge Agreement for the repayment of amounts in excess of the Recourse Amount. Debtor may discharge the obligations undertaken hereby, at any time, by repaying the outstanding Principal and accrued interest thereon, without penalty. Debtor may, without penalty, make a partial prepayment of Principal and/or accrued interest thereon in any amount at any time and may thereby reduce any required future payment hereunder by the amount of such prepayment. Debtor expressly waives presentment for payment, protest and demand, notice of protest, demand and dishonor and expressly agrees that this Note may be extended from time to time without in any way affecting the liability of Debtor. No delay or omission on the part of Payee in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. This Note may be changed, modified or terminated only by an agreement in writing that is signed by the Debtor and Payee. This Note shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, and shall be binding upon the successors and assigns of Debtor and inure to the benefit of Payee and its successors, endorsees and assigns. DEBTOR: /s/ Osvaldo deFaria ------------------- Name: Osvaldo deFaria 2 EX-10.24 5 PROMISSORY NOTE MADE BY GLENN FREIDLY Exhibit 10.24 THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, ASSIGNED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION. PROMISSORY NOTE --------------- Date: January 11, 1999 $1,050,000 FOR VALUE RECEIVED, the undersigned ("Debtor") hereby promises to pay to Voyager Holdings, Inc., a Delaware corporation ("Payee"), at such place or places as may be specified by Payee or any holder hereof, in legal tender of the United States of America, the principal amount of $1,050,000 (the "Principal"), which represents the amount equal to the fair market value of the 700,000 shares of common stock, par value $.0001 per share, of Payee purchased by Debtor pursuant to that Stock Purchase and Restriction Agreement on the date hereof (the "Shares"), with interest at the rate of 5.00% per annum, compounded annually, on the unpaid balance. Interest shall accrue commencing on the date hereof and shall be due and payable in full at the Repayment Date (as hereinafter defined). The Debtor shall pay to Payee, within ten (10) days after receipt thereof, the net after-tax proceeds from any sale by the Debtor of the Shares, in reduction of the Principal and accrued interest thereon until such time as such Principal and interest have been repaid in full. For purposes hereof, net after-tax proceeds refers to the amount received by the Debtor upon any sale of such Shares, less brokerage commissions or underwriting discounts, other expenses of every kind, including documentary, excise and other taxes, if any, directly relating to the sale and an amount equal to the federal, state and local taxes on any gain from such sale (as determined by multiplying the amount of such gain by the combined maximum federal, state and local tax rate applicable to the sale of such Shares by the Debtor, taking into account the holding period for such Shares and any federal income tax deduction for state and local income taxes). In any event, any Principal then unpaid shall be due and payable, with accrued interest thereon, on the fourth (4th) anniversary of date hereof (the "Repayment Date"). This Note is subject to the terms of and the payment hereof is secured by a certain Pledge Agreement dated as of the date hereof by and between Debtor and Payee (the "Pledge Agreement"). In case an Event of Default, as defined in the Pledge Agreement, shall occur, the aggregate unpaid balance of Principal and accrued interest thereon may be declared to be due and payable in the manner and with the effect provided in the Pledge Agreement. The obligation of the undersigned Debtor to pay the Recourse Amount (as hereinafter defined) shall be absolute and unconditional, and the Payee shall have full recourse against the Debtor's assets (including, but not limited to, the collateral pledged pursuant to the Pledge Agreement) to recover the Recourse Amount. The Recourse Amount as of any time shall mean 25% of the Principal, plus accrued interest as of such date, reduced by any payment of Principal made by or on behalf of the Debtor from any source. With respect to amounts due and payable hereunder in excess of the Recourse Amount, the Payee shall have no recourse against the Debtor or any of his assets other than the collateral pledged pursuant to the Pledge Agreement, and Payee shall look only to its rights as provided in the Pledge Agreement for the repayment of amounts in excess of the Recourse Amount. Debtor may discharge the obligations undertaken hereby, at any time, by repaying the outstanding Principal and accrued interest thereon, without penalty. Debtor may, without penalty, make a partial prepayment of Principal and/or accrued interest thereon in any amount at any time and may thereby reduce any required future payment hereunder by the amount of such prepayment. Debtor expressly waives presentment for payment, protest and demand, notice of protest, demand and dishonor and expressly agrees that this Note may be extended from time to time without in any way affecting the liability of Debtor. No delay or omission on the part of Payee in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. This Note may be changed, modified or terminated only by an agreement in writing that is signed by the Debtor and Payee. This Note shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, and shall be binding upon the successors and assigns of Debtor and inure to the benefit of Payee and its successors, endorsees and assigns. DEBTOR: /s/ Glenn Friedly ------------------ Name: Glenn Friedly 2 EX-10.28 6 PLANET DIRECT INTERNET SERV. PROV. AGREEMENT Exhibit 10.28 PLANET DIRECT INTERNET SERVICE PROVIDER AGREEMENT ------------------------------------------------- This Agreement is made between PLANET DIRECT CORPORATION ("PDC") with offices at 100 Brickstone Square, Andover, Massachusetts 01810 and Voyager Information Networks, Inc. (the "ISP"), with offices at 4660 S. Hagadorn Rd., Suite 320 East Lansing, MI and is made on this 17th day of March, 1997 ("Effective Date"). All capitalized terms have the meanings set forth herein. In consideration of the agreements and representations contained herein, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. 1.1 "PD Service" means PDC's entire present and future interactive ---------- communication and information service consisting of existing and future software products, services, and electronic and digital technologies and systems created in any and all forms by PDC (and/or others and licensed or otherwise provided to PDC) which are distributed, delivered or otherwise transmitted or made available electronically to users to be used by such users, including, without limitation, any and all documentation (all materials describing the programming, design, and use of any software included in the PD Service) accompanying such products, services, technologies and systems, any revisions, upgrades, enhancements, maintenance or new releases, new versions and/or add-ons to such products, services, technologies and systems, and original equipment manufacturer (OEM) versions of such products, services, technologies and systems. 1.2 "ISP/PD URL" means the URL http:// Voyager.planetdirect.com ---------- 1.3 "Registered Members" means subscribers (customers of ISP) and any ------------------ other end users who register for the PD Service through the ISP/PD URL. 2. RIGHTS GRANTED. 2.1 Name Exclusivity/License. The ISP will have the exclusive right to be ------------------------ associated with the ISP/PD URL and is given the non-exclusive and non- transferable license to provide access to the PD Service to Registered Members through the ISP/PD URL. 2.2 Co-Branding. PDC will brand and advertise the PD Service. This ----------- promotional activity will include cobranding the PD Service with the ISP. The ISP will be included in these promotions as deemed appropriate by mutual parties. 2.3 Trademarks. PDC shall have the right to use and publish in connection ---------- with the PC Service any present or future trade name or trademark or service mark of the ISP in connection with its Internet access service for purposes of cobranding the PD Service with the ISP, provided that all marks are so indicated by appropriate symbol or designation and attributed to the ISP. 2.4 Promotional Links. On the page represented by the ISP/PD URL, there ----------------- will be an area specified by PDC which will contain links for the ISP's use. 2.5 Complementary ISP Account. The ISP will provide PDC with a ------------------------- complementary ISP dial-up account, which account will remain functional during the Term of this Agreement. This account will enable PDC to monitor PD Service page loading performance and to assist in other trouble-shooting matters. 3. DELIVERY/INFRASTRUCTURE. PDC will make the PD Service available for access by the Registered Members by way of the Internet access service regularly maintained by the ISP for its subscribers. The PD Service will be served from computer servers operated and maintained by PDC or its designee. PDC shall retain complete control over pricing, presentation, updates and expansions of the entire PD Service, as well as the placement of advertising within the PD Service. The PD Service shall be owned exclusively by PDC, and PDC shall own all compilation copyrights with respect to the PD Service (to the extent not copyrightable by a third party) and other content created by or for PDC as part of the PD Service. 4. MARKETING/PROMOTION. The ISP agrees, at its expense, to use its best efforts to maximize use of the PD Service by its subscribers, prospective subscribers, and the Registered Members. These efforts will include, but not be limited to, promotional activities such as on-line advertising, print advertising, and newsletters. In addition, the marketing activities of the ISP will include the following: 4.1 Entry Link. Within (TBD) days of the effective Date of this ---------- Agreement, the ISP will create a prominent link (the "Entry Link") on the ISP's homepage, represented by the URL http://www.yoyager.net, to the page represented by the ISP/PD URL. PDC will provide ISP the graphics file to be placed in the Entry Link area. The dimensions of such link shall be at least 125x125 pixels. The ISP shall place this link so that it will appear without scrolling. The ISP will update the graphics file upon PDC forwarding a new or revised graphics file to the ISP. 4.2 E-mail Communication. The ISP will send out two (2) promotional e- -------------------- mails, provided by PDC, to the ISP's subscribers. The first e-mail will be sent out within one week of the placement of the Entry Link, and the second e-mail will be sent out within four (4) weeks of the first e-mail. These e-mails will encourage the subscribers to register for and try out the PD Service. Through the use of e-mails and other promotional activities throughout the Term of the agreement, the ISP will continue to (a) encourage the ISP's subscribers to register and try out the PD Service and (b) stimulate incremental usage of the PD Service by the Registered Members. 4.3 Default Browser Start Page. The ISP will encourage all subscribers to -------------------------- establish the page represented by the ISP/PD URL as their browser start page. 5. TECHNICAL AND ADMINISTRATIVE SUPPORT. PDC will provide training materials to ISP personnel on the PD Service which will enable the ISP to provide ongoing assistance to Registered Members with regard to technical, administrative and service-oriented 2 issues relating to (a) access to the PD Service and (b) the utilization and/or maintenance of the PD Service. PDC will provide "second level" support to the ISP for customer support issues related to the PD Service that ISP personnel are unable to resolve. 6. SALES OF ADVERTISEMENTS. 6.1 Advertisements Sold by PDC. Related to all banner advertisements that -------------------------- are sold by PDC and served by PDC (or PDC's designee) to the ISP's Registered Members, the ISP will receive a fee equal to 17% of the revenue per impression received by PDC. 6.2 Advertisements Serving. PDC has engaged a separate company to perform ---------------------- activities relating to the ad reservation system, the ad serving process, and log generation of ad serving data. 7. REMUNERATION. Any remuneration due hereunder shall be paid on a monthly basis and within 45 days following the end of each month. On an annual basis, PDC will have an independent auditor perform procedures related to the internal controls and procedures used by PDC to calculate the remuneration to ISPs that are under contract with PDC. 8. GENERAL WARRANTIES. The parties represent and warrant at all times and for the benefit of each party that (a) each party has full power and authority to enter into this Agreement and to convey the rights granted hereunder; (b) each party will perform all of its obligations under this Agreement. 9. INDEMNIFICATION. PDC has developed a "User Agreement" for users who register for the PD Service. Such User Agreement includes a provision that states that, if the user performs any prohibited activities (as defined in the User Agreement), the user will indemnify and hold harmless PDC and the ISPs that are under contract with PDC from any claims by third parties relating to such prohibited activities. In addition, PDC and ISP agree to indemnify, defend, and hold harmless the other party, and its successors, officers, directors, employees, agents and assigns, from and against any and all expenses and costs, including reasonable attorney's fees, arising out of any causes of action, claims or demands in connection with any claim which relates to the warranties, representations, and covenants made by such party to the other party, as set forth herein. If either party requests indemnification pursuant to this section, it will (a) give prompt written notice to the party from which indemnification is requested; (b) give that party the opportunity to control the defense of the action or claim, as well the opportunity to assign counsel in said defense; and (c) cooperate fully in said defense. 10. LIMITATION OF DIRECT LIABILITY. SECTIONS 8 AND 9 CONTAIN THE ONLY WARRANTIES MADE BY ISP AND PDC. ANY AND ALL OTHER WARRANTIES OF ANY KIND WHATSOEVER ARE EXPRESSLY EXCLUDED AND DISCLAIMED. WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, EACH PARTY DISCLAIMS ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WHETHER AS 3 TO THE PD SERVICE (WHICH IS PROVIDED HEREUNDER "AS IS") OR THE TECHNOLOGY DEPLOYED IN CONNECTION THEREWITH. TO THE EXTENT PERMITTED BY LAW, AND WITH THE EXCEPTION OF SECTION 9 ABOVE, NEITHER PARTY IS LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, ECONOMIC OR PUNITIVE DAMAGES INCURRED BY THE OTHER PARTY EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 11. DURATION/TERMINATION. This Agreement will be in effect for one year following the Effective Date (the "Initial Term") and shall be automatically extended for additional periods of one year each. Either party may terminate this Agreement, for any reason, by giving the other party 60 days notice, naming the termination date. As used herein, the "Term" means the Initial Term and any such extensions up to the date of termination as set forth in the termination notice. 12. CONFIDENTIALITY. Each party undertakes to retain in confidence (a) the terms and conditions of this Agreement and (b) all non-public information and know-how disclosed pursuant to this Agreement which is either designated as proprietary and/or confidential or, by the nature of the circumstances surrounding disclosure, ought in good faith to be treated as proprietary and/or confidential (collectively, "Confidential Information"); provided that each party may disclose the terms and conditions of this Agreement to its immediate legal and financial consultants in the ordinary course of its business or, in confidence, to its investors or potential investors. Each party agrees to use best efforts to protect Confidential Information, with precautions that are at least as great as those taken to protect its own confidential information. A party's disclosure of Confidential Information as required by governmental or judicial order is not prohibited by this Agreement, provided that the disclosing party gives the other party prompt notice of such order and assists in the procurement of an appropriate protective order (or equivalent) imposed on such disclosure. Nothing contained herein limits either party's right to develop products independently without the use of the other party's Confidential Information. To the extent not inconsistent with this section, any non- disclosure agreement(s) entered into between the parties prior to this Agreement are deemed incorporated herein by this reference. 13. MISCELLANEOUS. 13.1 No Inadvertent Waiver. No waiver of any breach of any provision of --------------------- this Agreement constitutes a waiver of any prior concurrent or subsequent breach of the same or any other provisions, and will not be effective unless made in writing and signed by an authorized representative of the waiving party. 13.2 Force Majeure. Neither party is liable for, and will not be ------------- considered in default or breach of this Agreement on account of, any delay or failure to perform as required by this Agreement as a result of any causes or conditions that are beyond such party's reasonable control and which such party is unable to overcome by the exercise of reasonable diligence. 4 13.3 Governing Law. This Agreement is governed by the laws of ------------- Massachusetts. The parties agree to submit to the jurisdiction of the courts of the Commonwealth of Massachusetts for the purpose of interpreting and enforcing any of the provisions of this Agreement. 13.4 Assignment. Neither this Agreement nor any interest herein may be ---------- assigned in whole or in part by either party, without the prior written consent of the other party, which shall not be unreasonably withheld. 13.5 Entire Agreement. This Agreement, along with any Schedule attached ---------------- hereto, embodies the entire agreement between the parties and supersedes all previous and contemporaneous agreements, understandings and arrangement with respect to the subject matter hereof, whether oral or written, and may be amended only by a written instrument duly signed by authorized representatives of ISP and PDC. 13.6 Specific Performance. In the event of any breach of this Agreement, -------------------- each party agrees that the nondefaulting party will not have an adequate remedy at law and, in addition to any other available remedies, shall be entitled to an injunction restricting the defaulting party from committing or continuing any violation of this Agreement and requiring specific performance of all terms and conditions hereof. 13.7 Survival. Sections 8, 9, 10 and 12 of this Agreement will survive -------- the termination of this Agreement 13.8 Severability. In the event that any provision contained in this ------------ Agreement should, for any reason, be held to be invalid or unenforceable in any respect, such unenforceable provisions shall be reduced in scope or duration to the extent necessary in order to make the same enforceable. 13.9 Public Announcements. Neither party will issue any press release, -------------------- advertising or other public announcement concerning its relationship with the other party without the written approval of the other party. Such approval will not be unreasonably withheld or delayed. If there is no response in five (5) business days, such approval shall be deemed as granted. 13.10 Compliance with Export Laws. ISP understands that PDC is subject to --------------------------- regulation by agencies of the United States Government which prohibit export or diversion of certain products to certain countries, including Cuba, Haiti, Iraq, Libya, Yugoslavia, North Korea, Iran, and Syria. The ISP agrees that it will comply in all respects with the export and reexport restrictions applicable to the PD Service licensed hereunder. 13.11 Relationship of Parties. Neither this Agreement, nor any terms and ----------------------- conditions contained herein, may be construed as creating or constituting a partnership, joint venture or agency relationship. 5 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. PLANET DIRECT CORPORATION ISP - ------------------------- --- By: /s/ Richard J. Orlando By: /s/ Michael L. Williams ---------------------------------- -------------------------------- Print Name: Richard J. Orlando Print Name: Michael L. Williams -------------------------- ------------------------ Title: Senior Vice President Sales Title: Chief Operating Officer ------------------------------- ----------------------------- 6 EX-10.30 7 STOCK PURCHASE AGREEMENT Exhibit 10.30 STOCK PURCHASE AGREEMENT ------------------------ Agreement made as of May 7, 1999 by and between Voyager Information Networks, Inc., a Michigan corporation ("Buyer"), GDR Enterprises, Inc., an Ohio corporation ("Seller"), and each of Ronald M. Rose, Luke A. Gain and Stephen L. Dona, as the shareholders of the Seller (collectively the "Shareholders"). WHEREAS, the Shareholders own of record and beneficially all of the issued and outstanding capital stock of Seller, consisting of 800 shares of Seller's common stock, no par value (the "Shares"); and WHEREAS, each of the Shareholders desires to sell all of the Shares owned by him to Buyer, and Buyer desires to acquire all of the Shares. NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: SECTION 1. PURCHASE AND SALE OF SHARES. 1.1 Purchase and Sale of Shares. In consideration of and in reliance upon - --------------------------- the representations, warranties and covenants contained herein and subject to the terms and conditions of this Agreement, at the Closing, each Shareholder shall sell to Buyer, and Buyer shall purchase from each Shareholder, the Shares listed opposite such Shareholder's name on Exhibit A attached hereto for the --------- purchase price set forth in Section 1.3. 1.2 The Closing. The transactions contemplated by this Agreement shall ----------- take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at the offices of Sebaly, Shillito & Dyer in Dayton, Ohio, on the date on which all of the conditions to closing set forth in Sections 6 and 7 of this Agreement have been satisfied or waived, or at such other time and place as shall be mutually agreed upon in writing by Buyer and Seller (the "Closing Date"). 1.3 Purchase Price. At the Closing, Buyer shall make the following -------------- payments by bank cashier's check or wire transfer of immediately available funds: (a) Buyer shall deposit the sum of Eight Hundred Thousand Dollars ($800,000) (the "Escrow Deposit") with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow Agreement in the form attached hereto as Exhibit B --------- (the "Escrow Agreement"). The Escrow Deposit shall be held, administered and distributed in accordance with the terms of the Escrow Agreement. (b) Buyer shall deliver to each Shareholder an amount equal to such Shareholder's percentage ownership of the outstanding Shares, as set forth opposite such Shareholder's name on Exhibit A attached hereto, multiplied by --------- Seven Million Four Hundred Sixty Thousand Dollars ($7,460,000) (as adjusted in accordance with Section 1.5 below, the "Purchase Price"). 1.4 Closing Deliveries; Payment of Purchase Price. --------------------------------------------- (a) At the Closing, each Shareholder shall deliver or cause to be delivered to Buyer certificates or other instruments representing all of the Shares owned by such Shareholder. Such stock certificates or other instruments shall be duly endorsed in blank for transfer or shall be presented with stock powers duly executed in blank with such signature guarantees and such other documents as may be reasonably required by Buyer to effect a valid transfer of such shares by such shareholder free and clear of any and all liens, encumbrances, charges or claims. (b) Buyer shall pay to each Shareholder such Shareholder's portion of the Purchase Price by wire transfer of immediately available funds to an account designated by such Shareholder (such account information to be provided to Buyer no later than two (2) business days prior to the Closing). 1.5 Adjustments to Purchase Price. The Purchase Price shall be adjusted ----------------------------- at the Closing in the manner set forth below: (a) The Purchase Price will be increased or decreased, as the case may be, on a dollar-for-dollar basis, by the difference between (i) the Seller's Estimated Net Working Capital (as defined herein) as of the opening of business on the Closing Date and (ii) Negative Seven Hundred Eighty Five Thousand Nine Hundred Eleven dollars ($-785,911.70 ), (the "Base Net Working Capital"). For purpose of this Section 1.5, the following terms shall have the following meanings: (i) "Current Assets" shall mean and include cash and cash equivalents, certificates of deposit and other marketable securities, subscriptions and accounts receivable for customer accounts incurred in the ordinary course of business (which shall not include accounts receivable owed by TDIN, Inc., GDR Enterprises, Inc., and EriNet Telecom, Inc.), inventory and supplies, prepaid expenses (including postal deposits), and other current assets used in the operation of the Business, in each case as determined in accordance with a manner consistent with Seller's and each Subsidiary's historical accounting methods ("Historical Accounting Methods"), consistently applied; provided, however, Current Assets shall also include $[__________] which is the - -------- ------- amount the Seller paid to National City Leasing Corporation on or prior to the Closing to pay off the equipment leases on Schedule 2.8. ------------ (ii) "Current Liabilities" shall mean and include accounts payable and accrued expenses, the current portion of any bank debt, all accrued but unpaid taxes, all deferred revenues and any other current liabilities (excluding any current liability for capital or operating leases) reflected on the balance sheet of the Company in each case as determined in accordance with Historical Accounting Methods consistently applied. 2 (iii) "Deficiency" shall mean the amount by which the Estimated Net Working Capital is less than the Base Net Working Capital. (iv) "Excess" shall mean the amount by which the Estimated Net Working Capital exceeds the Base Net Working Capital. (v) "Net Working Capital" shall mean the amount equal to Seller's (i) Current Assets minus (b) Current Liabilities, determined in accordance with Historical Accounting Methods, consistently applied by Seller. (b) Buyer and Seller shall prepare a statement to be attached hereto as Schedule 1.5 (the "Estimated Adjustment Statement") which sets forth the ------------ estimated amount of the Net Working Capital as of the Closing Date (the "Estimated Net Working Capital"). The Purchase Price shall be increased on a dollar-for-dollar basis to the extent of any estimated Excess (the "Estimated Net Working Capital Increase") or decreased on a dollar-for-dollar basis to the extent of any estimated Deficiency (the "Estimated Net Working Capital Decrease"), as applicable, as the case may be, set forth on such Estimated Adjustment Statement. (i) No later than sixty (60) days following the Closing, Buyer shall prepare and deliver to the Shareholders a statement (the "Final Adjustment Statement") setting forth the actual Net Working Capital ("Actual Net Working Capital") as of the Closing Date. Subject to subsection (ii) below, within ten (10) days following the delivery of such Final Adjustment Statement to the Shareholders' Representative (as defined in Section 1.6), Buyer or the Shareholders, as the case may be, shall pay to the other party, by wire transfer of immediately available funds, the difference on a dollar-for-dollar basis between the Estimated Net Working Capital Increase or the Estimated Net Working Capital Decrease, as applicable, as shown on the Estimated Adjustment Statement, and the Actual Net Working Capital Increase or the Actual Net Working Capital Decrease, as applicable, as shown on the Final Adjustment Statement; provided, -------- however, (i) the Shareholders shall any amount due to Buyer via a wire transfer - ------- from the Escrow Deposit and (ii) Buyer shall pay each Shareholder an amount equal to such Shareholder's percentage ownership of the outstanding Shares, as set forth opposite such Shareholder's name on Exhibit A attached hereto, --------- multiplied by amount due to the Shareholders collectively. For purposes of the Final Adjustment Statement, the following terms shall have the following meanings: (A) "Actual Net Working Capital Increase" shall mean the amount by which the Actual Net Working Capital exceeds the Base Net Working Capital. (B) "Actual Net Working Capital Decrease" shall mean the amount by which the Actual Net Working Capital is less than the Base Net Working Capital. (ii) In the event the Shareholders' Representative objects to the Final Adjustment Statement, the Shareholders' Representative shall notify Buyer in writing of such 3 objection within the ten (10) day period following the delivery thereof, stating in such written objection the reasons therefor and setting forth the Shareholders' calculation of Seller's actual Net Working Capital at the Closing. Upon receipt by Buyer of such written objection, the parties shall attempt to resolve the disagreement concerning the Final Adjustment Statement through negotiation. Notwithstanding any other dispute resolution procedure provided for in this Agreement, if Buyer and the Shareholders' Representative cannot resolve such disagreement concerning the Final Adjustment Statement within thirty (30) days following the end of the foregoing 10-day period, the parties shall submit the matter for resolution to a nationally recognized firm of independent certified public accountants not affiliated with either party, with the costs thereof to be shared equally by the parties. Such accounting firm shall deliver a statement setting forth its own calculation of the final adjustment to the parties within thirty (30) days of the submission of the matter to such firm. Any payment shown to be due by a party on the statement of such accounting firm shall be paid to the other party promptly but in no event later than five (5) days following the delivery of such statement by such according firm to the parties. 1.6 Shareholders' Representative. ---------------------------- (a) In order to efficiently administer the waiver of any condition or right of the Shareholders and the settlement of any dispute arising under the Agreement, the Shareholders hereby designate Ronald M. Rose as their representative (the "Shareholders' Representative"). (b) The Shareholders hereby authorize the Shareholders' Representative (i) to take all action necessary in connection with the waiver of any condition to the obligations of the Shareholders under this Agreement, the waiver of any right of the Shareholders hereunder, or the settlement of any dispute arising hereunder, (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 Shareholders by the terms of this Agreement. (c) In the event that the Shareholders' Representative dies, becomes legally incapacitated or resigns from such position, Luke A. Gain shall fill such vacancy and shall be deemed to be the Shareholders' Representative for all purposes of this Agreement; however, no change in the Shareholders' Representative shall be effective until Buyer is given notice of it by the Shareholders. (d) All decisions and actions by the Shareholders' Representative shall be binding upon all of the Shareholders, and no Stockholder shall have the right to object, dissent, protest or otherwise contest the same. (e) By their execution of this Agreement, the Shareholders agree that: 4 (i) Buyer shall be able to rely conclusively on the instructions and decisions of the Shareholders' Representative as to any actions required or permitted to be taken by the Shareholders or the Shareholders' Representative hereunder, and no party hereunder shall have any cause of action against Buyer for any action taken by Buyer in reliance upon the instructions or decisions of the Shareholders' Representative; (ii) all actions, decisions and instructions of the Shareholders' Representative shall be conclusive and binding upon all of the Shareholders and no Stockholder shall have any cause of action against the Shareholders' Representative for any action taken, decision made or instruction given by the Shareholders' Representative under this Agreement, except for fraud or willful breach of this Agreement by the Shareholders' Representative; (iii) remedies available at law for any breach of the provisions of this Section 1.6 are inadequate; therefore, Buyer and Seller shall be entitled to temporary and permanent injunctive relief without the necessity of proving damages if either Buyer or Seller brings an action to enforce the provisions of this Section 1.6; and (iv) the provisions of this Section 1.6 are independent and severable, shall constitute an irrevocable power of attorney, coupled with an interest and surviving death, granted by the Shareholders to the Shareholders' Representative and shall be binding upon the executors, heirs, legal representatives and successors of each Stockholder. (f) All fees and expenses incurred by the Shareholders' Representative shall be paid by the Shareholders. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND SHAREHOLDERS. In order to induce Buyer to enter into this Agreement, Seller and each of the Shareholders, jointly and severally, hereby represent and warrant to Buyer as of the date hereof and as of the Closing Date, as set forth below, provided, -------- for purposes of this Section 2, unless the context requires otherwise, "Seller" shall include Seller and each of its Subsidiaries (as defined below). To the extent any such representation and warranty is qualified by the "Knowledge of Seller," "Seller's Knowledge,""Known to Seller," "Knowledge of the Shareholders, "Shareholders' Knowledge," or "Known to the Shareholders" such Knowledge shall mean (i) the actual knowledge of Ronald M. Rose, Stephen L. Dona and Luke A. Gain and (ii) that knowledge which should have been obtained by such person after making such due inquiry and exercising the due diligence that a prudent business person in a similar circumstance should have made or exercised. 5 2.1 Organization; Capital Stock; Securities Owned. --------------------------------------------- (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Ohio. Seller has all requisite power and authority to conduct its business as it is now conducted or proposed to be conducted and to own, lease and operate its properties and assets. The copies of Seller's articles of incorporation and code of regulation each as amended to date, heretofore delivered to Buyer's counsel are complete and correct. Seller is not in violation of any term of its articles of incorporation and code of regulation. Seller is duly qualified to do business in the state of its incorporation and is duly qualified to do business as a foreign corporation in each jurisdiction where such qualification is required. (b) The authorized capital stock of Seller consists of 850 shares of Common Stock, no par value, of which 800 shares are duly and validly issued, outstanding, fully paid and non-assessable. There are no outstanding options, warrants, rights, commitments, preemptive rights or agreements of any kind for the issuance or sale of, or outstanding securities convertible into, any additional shares of capital stock of any class of Seller. Each of the Shareholders owns beneficially and of record the Shares set forth opposite such Shareholder's name on Exhibit A hereto, free and clear of any liens, --------- restrictions or encumbrances of any kind whatsoever. (c) Except as set forth in Schedule 2.1(c) attached hereto and except --------------- with respect to the Subsidiaries, Seller does not own any securities issued by any other business organization or governmental authority, except U.S. Government securities, bank certificates of deposit and money market accounts acquired as short-term investments in the ordinary course of its business. Except as disclosed on Schedule 2.1(c), Seller does not own nor have any direct --------------- or indirect interest in or control over any corporation, partnership, joint venture or entity of any kind. 2.2 Subsidiaries. ------------ (a) All of Seller's subsidiaries and investments in any other corporation or business organization are listed in Schedule 2.2 attached hereto ------------ (collectively, the "Subsidiaries" or individually, a "Subsidiary"). Each Subsidiary is a duly organized, validly existing corporation in good standing under the laws of the state of its incorporation with full corporate power and authority to own or lease its properties and to conduct its business in the manner and in the places where such properties are owned or leased or such business is currently conducted or proposed to be conducted. (b) All of the outstanding shares of capital stock of each Subsidiary are owned beneficially and of record by Seller free of any lien, restriction or encumbrance and said shares have been duly and validly issued and are outstanding, fully paid and non-assessable. Except as set forth in Schedule 2.2, ------------ there are no outstanding warrants, options or other rights to purchase or acquire any of the shares of capital stock of any Subsidiary, or 6 any outstanding securities convertible into such shares or outstanding warrants, options or other rights to acquire any such convertible securities. (c) The copies of each of the Subsidiaries' code of regulation certified by the Secretaries of State of each jurisdiction in which such Subsidiaries are organized and of each of the Subsidiaries' articles of incorporation, as amended to date, certified by Seller's Secretary, and heretofore delivered to Buyer's counsel, are complete and correct, and no amendments thereto are pending. None of the Subsidiaries is in violation of any term of its articles of incorporation or code of regulation. Each Subsidiary is duly qualified to do business as a foreign corporation in each jurisdiction where such qualification is required. 2.3 Required Action. All actions and proceedings necessary to be taken by --------------- or on the part of Seller and/or the Shareholders in connection with the transactions contemplated by this Agreement have been duly and validly taken, and this Agreement and each other agreement, document and instrument to be executed and delivered by or on behalf of Seller or the Shareholders pursuant to, or as contemplated by, this Agreement (collectively, the "Seller Documents") has been duly and validly authorized, executed and delivered by Seller or the Shareholders, as applicable, and no other action on the part of the Shareholders or Seller or its officers or directors is required in connection therewith. Seller and each of the Shareholders has full right, authority, power and capacity to execute and deliver this Agreement and each other Seller Document and to carry out the transactions contemplated hereby and thereby. This Agreement and each other Seller Document constitutes, or when executed and delivered will constitute, the legal, valid and binding obligation of Seller and each of the Shareholders enforceable in accordance with its respective terms. 2.4 No Conflicts. ------------ (a) The execution, delivery and performance by Seller of this Agreement and each other Seller Document does not and will not (i) violate any provision of the articles of incorporation or code of regulation of Seller or any of the Subsidiaries, in each case as amended to date, (ii) constitute a violation of, or conflict with or result in any breach of, acceleration of any obligation under, right of termination under, or default under, any agreement or instrument to which Seller or Subsidiaries is a party or by which Seller, or any of the Subsidiaries is bound, (iii) to Seller's Knowledge, violate any judgment, decree, order, statute, rule or regulation applicable to Seller or Subsidiaries, (iv) require Seller to obtain any approval, consent or waiver of, or to make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made or (v) result in the creation or imposition of any Lien on any of the Shares. (b) The execution, delivery and performance by each of the Shareholders of this Agreement and each other Seller Document does not and will not (i) constitute a violation of, or conflict with or result in any breach of, acceleration of any obligation under, right of termination under, or default under, any agreement or instrument to which any or all of the Shareholders are a party or by which any or all of the Shareholders are bound, (ii) to the 7 Shareholders' Knowledge violate any judgment, decree, order, statute, rule or regulation applicable to the Shareholders, (iii) require the Shareholders to obtain any approval, consent or waiver of, or to make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made, or (iv) result in the creation or imposition of any Lien on any of the Shares. 2.5 Taxes. ----- (a) Seller and each of the Subsidiaries have paid or caused to be paid all federal, state, local, foreign and other taxes, including, without limitation, income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes, value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes, employment and payroll-related taxes, withholding taxes, stamp taxes, transfer taxes, windfall profit taxes, environmental taxes and property taxes, whether or not measured in whole or in part by net income, and all deficiencies, or other additions to tax, interest, fines and penalties owed by Seller and Subsidiaries (collectively, "Taxes"), required to be paid by Seller or Subsidiaries through the date hereof whether disputed or not. (b) Seller and each of the Subsidiaries have withheld and collected all taxes required to have been withheld and collected and all such Taxes have been paid over to the appropriate governmental authorities. (c) Seller and Subsidiaries have in accordance with applicable law filed all federal, state, local and foreign tax returns required to be filed by Seller and Subsidiaries through the date hereof, and all such returns correctly and accurately set forth the amount of any Taxes relating to the applicable period. A list of all federal, state, local and foreign income tax returns filed with respect to Seller and Subsidiaries for taxable periods ended on or after December 31, 1993, is set forth in Schedule 2.5 attached hereto. Seller ------------ has delivered to Buyer correct and complete copies of all federal, state, local and foreign income tax returns listed on said schedule, and of all examination reports and statements of deficiencies assessed against or agreed to by Seller or Subsidiaries with respect to said returns. (d) Neither the Internal Revenue Service nor any other governmental authority is now asserting or, to the knowledge of Seller or the Shareholders, threatening to assert against Seller or Subsidiaries any deficiency or claim for additional Taxes. To the knowledge of Seller and the Shareholders, no claim has ever been made by an authority in a jurisdiction where Seller or Subsidiaries does not file reports and returns that Seller or any of the Subsidiaries is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of Seller or Subsidiaries that arose in connection with any failure (or alleged failure) to pay any Taxes. Neither Seller nor any of the Subsidiaries has entered into a closing agreement pursuant to Section 7121 of the Internal Revenue Code of 1986, as amended (the "Code"). 8 (e) There has not been any audit of any tax return filed by Seller or Subsidiaries, no audit of any tax return of Seller or Subsidiaries is in progress, and Seller has not been notified by any tax authority that any such audit is contemplated or pending. Except as set forth on Schedule 2.5 attached ------------ hereto, no extension of time with respect to any date on which a tax return was or is to be filed by Seller or Subsidiaries is in force, and no waiver or agreement by Seller or Subsidiaries is in force for the extension of time for the assessment or payment of any Taxes. (f) Neither Seller nor any of Subsidiaries have been (and has had any liability for unpaid Taxes because it once was) a member of an "affiliated group" (as defined in Section 1504(a) of the Code). Seller and Subsidiaries have never filed, and have never been required to file, a consolidated, combined or unitary tax return with any other entity. Seller and Subsidiaries do not own and has never owned a direct or indirect interest in any trust, partnership, corporation or other entity and therefore Buyer is not acquiring from Seller and Subsidiaries an interest in any entity. Seller and Subsidiaries are not a party to any tax sharing agreement. (g) Neither Seller nor any of Subsidiaries is a "foreign person" within the meaning of Section 1445 of the Code and Treasury Regulations Section 1.1445-2. (h) For purposes of this Agreement, all references to Sections of the Code shall include any predecessor provisions to such Sections and any similar provisions of federal, state, local or foreign law. 2.6 Compliance with Laws. To Seller's and the Shareholders' Knowledge, -------------------- Seller's and each of the Subsidiaries' operation of its business is in compliance in all material respects with all applicable statutes, ordinances, orders, rules and regulations promulgated by any federal, state, municipal or other governmental authority (including the Federal Communications Commission), and Seller has not received notice of a violation or alleged violation of any such statute, ordinance, order, rule or regulation. 2.7 Insurance. The physical properties and tangible assets of Seller are --------- insured to the extent disclosed in Schedule 2.7 attached hereto, and all ------------ insurance policies and arrangements of Seller in effect as of the date hereof are disclosed in said Schedule. Said insurance policies and arrangements are in full force and effect, all premiums with respect thereto are currently paid, and Seller is in compliance in all material respects with the terms thereof. Said insurance is adequate and customary for the business engaged in by Seller and is sufficient for compliance by Seller with all requirements of law and all agreements and leases to which Seller is a party. 2.8 Contracts. Schedule 2.8 attached hereto contains a true, correct and --------- ------------ complete list of all contracts to which Seller and any of the Subsidiaries is a party, including, without limitation, original contracts for the provision of Internet connectivity, dedicated service, web-hosting, web-domain, dial-up services, web-development and Internet commerce, all of 9 Seller's insurance contracts, all leases with respect to real property and all co-location agreements (collectively, the "Contracts"). The Contracts constitute all material leases, contracts and arrangements, whether oral or written, under which Seller or any of the Subsidiaries is bound or to which Seller or any of the Subsidiaries is a party. With respect to each oral agreement or understanding to which Seller is a party, Seller has provided a written summary of the material terms of each such agreement or understanding on Schedule 2.8. ------------ Each Contract is valid, in full force and effect and binding upon Seller and, to Seller's Knowledge, the other parties thereto in accordance with its terms. Neither Seller nor, to the knowledge of Seller and the Shareholders, any other party is in default under or in arrears in the performance, payment or satisfaction of any agreement or condition on its part to be performed or satisfied under any Contract, nor does any condition exist that with notice or lapse of time or both would constitute such a default, and no waiver or indulgence has been granted by any party under any Contract. Seller has not received notice of, and each of Seller and the Shareholders have no knowledge of, any fact which would result in a termination, repudiation or breach of any Contract. Seller has provided Buyer with true and complete copies of all of such Contracts, other than with respect to the oral agreements or understandings described on Schedule 2.8. ------------ 2.9 Title to Assets. --------------- (a) Seller has good and marketable title to, or subsisting leasehold interests in, all of its personal properties and assets which are material to the business of Seller free and clear of all mortgages, pledges, security interests, charges, liens, restrictions and encumbrances of any kind (collectively, "Liens") whatsoever except for the rights of the lessors under the leases set forth on Schedule 2.9(a)(i) attached hereto. All of the tangible ------------------ assets of Seller are in good repair, have been well maintained and are in good operating condition, do not require any material modifications or repairs, and comply in all material respects with applicable laws, ordinances and regulations, ordinary wear and tear excepted. Schedule 2.9(a)(ii) contains a ------------------- true and complete list of all free standing kiosks, servers, routers, modems, computers, electronic devices, test equipment and all other fixed assets, equipment, furniture, fixtures, leasehold improvements, parts, accessories, inventory, office materials, software, supplies and other tangible personal property of every kind and description owned by Seller and used or held for use in connection with the business of Seller. (b) Seller has delivered complete and true copies of all real property leases (the "Leases") set forth on Schedule 2.9(b) to Buyer. Seller holds good, --------------- clear, marketable, valid and enforceable leasehold interest in the real property subject to the Leases (the "Leased Real Property"), subject only to the rights of the landlord or lessor under the Leases, free and clear of all other prior or subordinate interests, including, without limitation, mortgages, deeds of trust, ground leases, leases, subleases, assessments, tenancies, claims, covenants, conditions, restrictions, easements, judgments or other encumbrances or matters affecting title, and free of encroachments onto or off of the leased real property. To the knowledge of Seller, there are no material defects in the physical condition of any improvements constituting a part of the Leased Real Property, including, without limitation, structural elements, mechanical 10 systems, roofs or parking and loading areas, and all of such improvements are in good operating condition and repair, have been well maintained. All water, sewer, gas, electric, telephone, drainage and other utilities required by law or necessary for the current or planned operation of the Leased Real Property have been installed and connected pursuant to valid permits, and are sufficient to service the Leased Real Property. Seller does not hold or own a fee interest in any real property. 2.10 No Litigation. Except as set forth in Schedule 2.10 attached hereto, ------------- ------------- Seller is not now involved in nor, to the knowledge of Seller and the Shareholders, is Seller threatened to be involved in any litigation or legal or other proceedings related to or affecting the business of Seller (including any Intellectual Property) or which would prevent or hinder the consummation of the transactions contemplated by this Agreement. Seller is not subject to any order, injunction or decree of any court of federal, state, municipal or other governmental department, commission, board, agency or instrumentality. 2.11 Employees; Labor Matters. Seller employs approximately eighteen (18) ------------------------ full-time employees and one (1) part-time employees and generally enjoys good employer-employee relationships. Seller shall provide to Buyer a list of the employees of Seller at the Closing, including the name, date of hire and wages of such employees. Seller is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed for it to the date hereof or amounts required to be reimbursed to such employees. Upon termination of the employment of any of said employees, neither Seller nor Buyer will by reason of the transactions contemplated hereby or anything done prior to the Closing be liable to any of said employees for so-called "severance pay" or any other payments, except as set forth in Schedule 2.11 attached hereto. Seller does not have any policy, ------------- practice, plan or program of paying severance pay or any form of severance compensation in connection with the termination of employment, except as set forth in said Schedule. To its knowledge, Seller is in compliance in all material respects with all applicable laws and regulations respecting labor, employment, fair employment practices, work place safety and health, terms and conditions of employment, and wages and hours. There are no charges of employment discrimination or unfair labor practices, nor are there any strikes, slowdowns, stoppages of work, or any other concerted interference with normal operations existing, pending or, to the knowledge of Seller and the Shareholders, threatened against or involving Seller. No question concerning representation exists respecting any group of employees of Seller. No collective bargaining agreement is in effect or is currently being or is about to be negotiated by Seller. Seller has received no information to indicate that any of its employment policies or practices is currently being audited or investigated by any federal, state or local government agency. Seller is, and at all times since November 6, 1986 has been, in compliance with the requirements of the Immigration Reform Control Act of 1986. 2.12 Financial Statements. Attached hereto as Schedule 2.12 are copies -------------------- ------------- of the balance sheet of Seller as at February 28, 1999 (the "Base Balance Sheet") and the statements of income and expense of Seller for the twelve (12) months ended December 31, 1998 11 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with Historical Accounting Methods applied consistently during the periods covered thereby (except for the absence of footnotes with respect to unaudited financial), are complete and correct and present fairly and accurately the financial condition of Seller at the dates of said statements and the results of operations of Seller for the periods covered thereby. As of the date of the Base Balance Sheet (the "Base Balance Sheet Date"), Seller had no liabilities or obligations of any kind, whether accrued, contingent or otherwise, that are not disclosed and adequately reserved against on the Base Balance Sheet. Except as disclosed on Schedule 2.12 attached hereto, as of the ------------- date hereof and at the Closing, Seller has and will have no liabilities or obligations of any kind, whether accrued, contingent or otherwise, that are not disclosed and adequately reserved against on the Base Balance Sheet. 2.13 Business Since the Base Balance Sheet Date. Except as disclosed on ------------------------------------------ Schedule 2.13 attached hereto, since the Base Balance Sheet Date: - ------------- (a) there has been no material adverse change in the assets, operations or financial condition of the business of Seller; (b) the business of Seller has, in all material respects, been conducted in the ordinary course of business and in substantially the same manner as it was conducted before the date of the Base Balance Sheet Date; (c) there has not been any material obligation or liability (contingent or other) incurred by Seller, whether or not incurred in the ordinary course of business, including, without limitation, any capital or operating leases with respect to equipment; (d) there has not been any purchase, sale or other disposition, or any agreement or other arrangement, oral or written, for the purchase, sale or other disposition, of any material properties or assets of Seller, whether or not in the ordinary course of business; (e) there has not been any mortgage, encumbrance or lien placed on any of the assets of Seller, nor any payment or discharge of a material lien or liability of Seller which was not reflected on the Base Balance Sheet; (f) there has not been any damage, destruction or loss, whether or not covered by insurance, adversely affecting the business of Seller; (g) there has not been any material change in Seller's pricing, marketing, customer service, billing, accounting, operational or promotional activities; and (h) there has not been any agreement or understanding, whether in writing or otherwise, for Seller to take any of the actions specified above. 12 2.14 Licenses. Schedule 2.14 attached hereto contains a list of all -------- ------------- licenses, permits and authorizations required for the operation of the business of Seller or Subsidiaries (the "Authorizations"). Seller is the holder of all such Authorizations. All of the Authorizations are in full force and effect and, to Seller's Knowledge, no licenses, permits or authorizations of any governmental department or agency are required for the operation of the business of Seller or Subsidiaries which have not been duly obtained. As of the date hereof, there is not pending or, to the knowledge of Seller and the Shareholders, threatened any action by or before any governmental agency to revoke, cancel, rescind or modify any of the Authorizations, and there is not now issued or outstanding or, to the knowledge of Seller and the Shareholders, pending or threatened any order to show cause, notice of violation, notice of apparent liability, or notice of forfeiture or complaint against Seller with respect to the business of Seller. 2.15 Approvals; Consents. Except as set forth on Schedule 2.15 attached ------------------- ------------- hereto, no approval, consent, authorization or exemption from or filing with any person or entity not a party to this Agreement is required to be obtained or made by Seller in connection with the execution and delivery of this Agreement and the Seller Documents and the consummation of the transactions contemplated hereby and thereby. All of the approvals, consents and authorizations listed on Schedule 2.15 shall be obtained by Seller at or prior to the Closing. - ------------- 2.16 Customers and Suppliers. Seller's relations with its customers and ----------------------- suppliers, including its Subscribers (as defined below), are good and there are not pending or, to Seller's knowledge, threatened claims or controversies with any customer or suppliers that is material to the business of Seller. 2.17 Subscribers. Schedule 2.17(a) attached hereto sets forth, as of the ----------- ---------------- date hereof, the Seller's Subscribers as listed by class, type and billing plan. For purposes of this Agreement, the terms "Subscriber" shall mean any active subscriber to Internet services offered by Seller who has subscribed to a service for at least one month and has paid at least one bill, including, without limitation, any person who receives dial-up Internet access and e-mail services from Seller (a "Dial-up Subscriber"), any person who receives dedicated Internet access from Seller offering higher data transmission rates than available from dial-up access (a "Dedicated Subscriber"), and any person with a Web page or domain name on Seller's server and to whom Seller provides Internet access (a "Web-hosting/Domain-hosting Subscriber"); provided, however, that -------- ------- "Subscriber" shall not include any person who is (i) more than thirty (30) days delinquent in payment of such person's bill for such services provided by Seller and (ii) any person receiving complimentary Internet services or Internet services at a promotional discounted rate. Set forth on Schedule 2.17(b) ---------------- attached hereto is a listing of all such accounts which receive complimentary Internet services or Internet services at a promotional discounted rate. Set forth on Schedule 2.17(c) attached hereto is Seller's policy and practice with ---------------- respect to the disconnection of Subscribers, with which Seller has, at all times since its inception, complied in all material respects. 13 2.18 Brokers. Seller has not retained any broker or finder or other ------- person who would have any valid claim against any of the parties to this Agreement for a commission or brokerage fee in connection with this Agreement or the transactions contemplated hereby. 2.19 Collectibility of Accounts Receivable. All of the accounts ------------------------------------- receivable of Seller are or will be as of the Closing Date bona fide, valid and enforceable claims, subject to no set off or counterclaim of which Seller has Knowledge and to the knowledge of Seller and the Shareholders, are collectible in accordance with their terms. Except as set forth on Schedule 2.19 attached ------------- hereto, Seller has no accounts or loans receivable from any person, firm or corporation which is affiliated with Seller or from any director, officer or employee of Seller, or from any of their respective spouses or family members. 2.20 Banking Relations. All of the arrangements which Seller has with any ----------------- banking institution are completely and accurately described in Schedule 2.20 ------------- attached hereto, indicating with respect to each of such arrangements the type of arrangement maintained (such as checking account, borrowing arrangements, safe deposit box, etc.) and the person or persons authorized in respect thereof. 2.21 Intellectual Property. --------------------- (a) Set forth on Schedule 2.21 attached hereto are all computer ------------- programs and related documentation sold, marketed, licensed and distributed by Seller (the "Products"). All of the Intellectual Property of Seller is set forth on Schedule 2.21 attached hereto. For purposes hereof, the term "Intellectual ------------- Property" includes: (i) all patents, patent applications, patent rights, and inventions and discoveries and invention disclosures (whether or not patented) (collectively, "Patents"); (ii) Seller's rights to the names Mall 2000, Inc., EriNet Telecom, Inc. and TDIN, Inc., all trade names, trade dress, logos, packaging design, slogans, any and all Internet domain names used or useful in the business of Seller, registered and unregistered trademarks and service marks and applications (collectively, "Marks"); (iii) all copyrights in both published and unpublished works, including, without limitation, all compilations, databases and computer programs, and all copyright registrations and applications, and all derivatives, translations, adaptations and combinations of the above (collectively, "Copyrights"), (iv) all trade secrets, confidential or proprietary information, customer lists, IP addresses, research in progress, algorithms, data, designs, processes, formulae, drawings, schematics, blueprints, flow charts, models, prototypes, techniques, Beta testing procedures, Beta testing results and identifiable know-how (collectively, "Trade Secrets"); (v) Seller's web-sites (including the domain names eri.net, erinet.com, mall2000.com, cfanet.com, tdin.net and tdin.com and any other similar domain names); (vi) all goodwill, franchises, licenses, permits, consents, approvals, technical information, telephone numbers, and claims of infringement against third parties (the "Rights"); and (vii) all contracts relating to the Products and the Intellectual Property to which Seller is a party or is bound, including, without limitation, all nondisclosure and/or confidentiality agreements entered into by persons in connection with disclosures by Seller (collectively,"Assigned Contracts"). 14 (b) Except as described in Schedule 2.21, Seller has exclusive ------------- ownership of, and has good, valid and marketable title to, all of the Intellectual Property, free and clear of any Liens, and has the right to use all of the Intellectual Property without payment to any third party. Seller's rights in all of such Intellectual Property are freely transferable. There are no claims or demands pending or, to the knowledge of Seller and the Shareholders, threatened of any other person pertaining to any of such Intellectual Property and no proceedings have been instituted, or are pending or, to the knowledge of Seller and the Shareholders, threatened against Seller and/or its officers, employees and consultants which challenge the validity and enforceability of Seller's rights in respect of the Intellectual Property. The Intellectual Property constitutes all of the assets of Seller used in designing, creating and developing the Products, and represent all of such Intellectual Property necessary for the operation of Seller's business as currently conducted. To Seller's Knowledge, no employee, consultant or contractor of Seller has entered into any agreement that restricts or limits in any way the scope or type of work in which the employee, consultant or contractor may be engaged or requires the employee, consultant or contractor to transfer, assign, or disclose information concerning his work to anyone other than Seller. (c) Schedule 2.21 sets forth a complete and accurate list and summary ------------- description of all of Seller's Patents. All of the issued Patents are currently in compliance with formal legal requirements (including without limitation payment of filing, examination and maintenance fees and proofs of working or use), are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date. In each case where a Patent is held by Seller by assignment, the assignment has been duly recorded with the U.S. Patent and Trademark Office and all other jurisdictions of registration. No Patent has been or is now involved in any interference, reissue, re-examination or opposition proceeding. To the knowledge of Seller and the Shareholders, there is no potentially interfering Patent of any third party. All products made, used or sold under the Patents have been marked with the proper patent notice. (d) Schedule 2.21 sets forth a complete and accurate list and summary ------------- description of all of Seller's Marks. All Marks that have been registered with the United States Patent and Trademark Office and/or any other jurisdiction are currently in compliance with formal legal requirements (including, without limitation, the timely post-registration filing of affidavits of use and incontestability and renewal applications), are valid and enforceable, and are not subject to any maintenance fees or taxes or actions falling due within ninety (90) days after the Closing Date. In each case where a Trademark is held by Seller by assignment, the assignment has been duly recorded with the U.S. Patent and Trademark Office and all other jurisdictions of registration. No Mark has been or is now involved in any opposition, invalidation or cancellation proceeding and, to the knowledge of Seller and the Shareholders, no such action is threatened with respect to any of the Marks. All products and materials containing a Mark bear the proper notice where permitted by law. 15 (e) Schedule 2.21 sets forth a complete and accurate list and summary ------------- description of all of Seller's Copyrights. All the Copyrights have been registered with the United States Copyright Office and are currently in compliance with formal legal requirements, are valid and enforceable, and are not subject to any fees or taxes or actions falling due within ninety (90) days after the Closing Date. In each case where a Copyright is held by Seller by assignment, the assignment has been duly recorded with the U.S. Copyright Office and all other jurisdictions of registration. None of the source or object code, algorithms, or structure included in the Products is copied from, based upon, or derived from any other source or object code, algorithm or structure in violation of the rights of any third party. Any substantial similarity of the Products to any computer program owned by any third party did not result from the Products being copied from, based upon, or derived from any such computer software program in violation of the rights of any third party. All copies of works encompassed by the Copyrights have been marked with the proper copyright notice. (f) The Trade Secrets have not been disclosed by Seller or officers, directors, employees, consultants of the Seller or any person with access to the Trade Secrets to any person or entity other than employees or contractors of Seller who had a need to know and use the Trade Secrets in the course of their employment or contract performance. Except as set forth on Schedule 2.21, (i) ------------- Seller has not directly or indirectly granted any rights or interests in the source code of the Products, and (ii) since Seller developed the source code of the Products, Seller has not provided, licensed or disclosed the source code of the Products to any person or entity. Seller has the right to use, free and clear of claims of third parties, all Trade Secrets. To the knowledge of Seller and the Shareholders, there is not any assertion that the use by Seller of any Trade Secret violates the rights of any third party. (g) Seller has the exclusive right to use, license, distribute, transfer and bring infringement actions with respect to the Intellectual Property. Except as set forth on Schedule 2.21, Seller (i) has not licensed or ------------- granted to anyone rights of any nature to use any of its Intellectual Property and (ii) is not obligated to and does not pay royalties or other fees to anyone for its ownership, use, license or transfer of any of its Intellectual Property. (h) All licenses or other agreements under which Seller is granted rights by others in Intellectual Property are listed in Schedule 2.21. All such ------------- licenses or other agreements are in full force and effect, to the knowledge of Seller and the Shareholders there is no material default by any party thereto, and all of the rights of Seller thereunder are freely assignable. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer, and Seller has no reason to believe that the licensors under the licenses and other agreements under which Seller is granted rights and has granted rights to others do not have and did not have all requisite power and authority to grant the rights purported to be conferred thereby. (i) All licenses or other agreements under which Seller has granted rights to others in Intellectual Property are listed in Schedule 2.21. All such ------------- licenses or other agreements are in full force and effect, and to the knowledge of Seller and the Shareholders 16 there is no material default by any party thereto. True and complete copies of all such licenses or other agreements, and any amendments thereto, have been provided to Buyer. (j) The Products perform in accordance with their published specifications and documentation and as Seller has warranted to its customers. Seller has reviewed the areas within its businesses and operations which could be adversely affected by, and has developed a program to address on a timely basis, the "Year 2000 Problem" (i.e., the risk that applications used by Seller or its suppliers and/or providers may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999). Seller and the Shareholders reasonably believe that the "Year 2000 Problem" will not have any material adverse effect on the business or operations of Seller. 2.22 Absence of Restrictions. Neither the Shareholders nor Seller has ----------------------- entered into any other agreement or arrangement with any other party with respect to the sale, transfer or any other disposition or encumbrance of the Shares or all or substantially all of the assets of Seller. 2.23 Transactions with Interested Persons. Except as set forth in ------------------------------------ Schedule 2.23 attached hereto, neither Seller, nor any Shareholder, officer, - ------------- supervisory employee or director of Seller or, to the knowledge of Seller or the Shareholders, any of their respective spouses or family members owns directly or indirectly on an individual or joint basis any material interest in, or serves as an officer or director or in another similar capacity of, any competitor or supplier of Seller, or any organization which has a material contract or arrangement with Seller. 2.24 Employee Benefit Programs. ------------------------- (a) Schedule 2.24 sets forth a list of every Employee Program that has ------------- been maintained by Seller or an Affiliate (as defined below) at any time during the six-year period ending on the Closing Date. (b) Each Employee Program which has ever been maintained by Seller or an Affiliate and which has been intended to qualify under Section 401(a) or 501(c)(9) of the Code has received a favorable determination or approval letter from the Internal Revenue Service ("IRS") regarding its qualification under such section and has, in fact, been qualified under the applicable section of the Code from the effective date of such Employee Program through and including the Closing Date (or, if earlier, the date that all of such Employee Program's assets were distributed). No event or omission has occurred which would cause any Employee Program to lose its qualification or otherwise fail to satisfy the relevant requirements to provide tax-favored benefits under the applicable Code Section (including without limitation Code Sections 105, 125, 401(a) and 501(c)(9)). Each asset held under any such Employee Program may be liquidated or terminated without the imposition of any redemption fee, surrender charge or comparable liability. No partial termination (within the meaning of Section 411(d)(3) of the Code) has occurred with respect to any Employee Program. 17 (c) Neither Seller nor any Affiliate knows of any failure of any party to comply with any laws applicable with respect to the Employee Programs that have ever been maintained by the Company or any Affiliate. With respect to any Employee Program ever maintained by Seller or any Affiliate, there has been no (i) "prohibited transaction," as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Code Section 4975, (ii) failure to comply with any provision of ERISA, other applicable law, or any agreement, or (iii) non-deductible contribution, which, in the case of any of (i), (ii), or (iii), could subject Seller or any Affiliate to liability either directly or indirectly (including, without limitation, through any obligation of indemnification or contribution) for any damages, penalties, or taxes, or any other loss or expense. No litigation or governmental administrative proceeding (or investigation) or other proceeding (other than those relating to routine claims for benefits) is pending or threatened with respect to any such Employee Program. All payments and/or contributions required to have been made (under the provisions of any agreements or other governing documents or applicable law) with respect to all Employee Programs ever maintained by Seller or any Affiliate, for all periods prior to the Closing Date, either have been made or have been accrued (and all such unpaid but accrued amounts are described on Schedule 2.24). ------------- (d) Neither Seller nor any Affiliate (i) has ever maintained any Employee Program which has been subject to title IV of ERISA or Code Section 412 or ERISA Section 302, including, but not limited to, any Multiemployer Plan or (ii) has ever provided health care or any other non-pension benefits to any employees after their employment is terminated (other than as required by part 6 of subtitle B of title I of ERISA) or has ever promised to provide such post- termination benefits. (e) With respect to each Employee Program maintained by Seller within the six years preceding the Closing Date, complete and correct copies of the following documents (if applicable to such Employee Program) have previously been delivered to Buyer: (i) all documents embodying or governing such Employee Program, and any funding medium for the Employee Program (including, without limitation, trust agreements) as they may have been amended to the date hereof; (ii) the most recent IRS determination or approval letter with respect to such Employee Program under Code Section 401(a) or 501(c)(9), and any applications for determination or approval subsequently filed with the IRS; (iii) the six most recently filed IRS Forms 5500, with all applicable schedules and accountants' opinions attached thereto; (iv) the six most recent actuarial valuation reports completed with respect to such Employee Program; (v) the summary plan description for such Employee Program (or other descriptions of such Employee Program provided to employees) and all modifications thereto; (vi) any insurance policy (including any fiduciary liability insurance policy or fidelity bond) related to such Employee Program; (vii) any registration statement or other filing made pursuant to any federal or state securities law and (viii) all correspondence to and from any state or federal agency within the last six years with respect to such Employee Program. (f) Each Employee Program required to be listed on Schedule 2.24 may ------------- be amended, terminated, or otherwise modified by Seller to the greatest extent permitted by applicable law, including the elimination of any and all future benefit accruals under any 18 Employee Program and no employee communications or provision of any Employee Program document has failed to effectively reserve the right of Seller or the Affiliate to so amend, terminate or otherwise modify such Employee Program. (g) Each Employee Program ever maintained by Seller (including each non-qualified deferred compensation arrangement) has been maintained in compliance with all applicable requirements of federal and state securities laws including (without limitation, if applicable) the requirements that the offering of interests in such Employee Program be registered under the Securities Act of 1933 and/or state "Blue Sky" laws. (h) Each Employee Program ever maintained by Seller or an Affiliate has complied with the applicable notification and other applicable requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, Health Insurance Portability and Accountability Act of 1996, the Newborns' and Mothers' Health Protection Act of 1996, the Mental Health Parity Act of 1996, and the Women's Health and Cancer Rights Act of 1998. (i) For purposes of this section: (i) "Employee Program" means (A) all employee benefit plans within the meaning of ERISA Section 3(3), including, but not limited to, multiple employer welfare arrangements (within the meaning of ERISA Section 3(40)), plans to which more than one unaffiliated employer contributes and employee benefit plans (such as foreign or excess benefit plans) which are not subject to ERISA; (B) all stock option plans, stock purchase plans, bonus or incentive award plans, severance pay policies or agreements, deferred compensation agreements, supplemental income arrangements, vacation plans, and all other employee benefit plans, agreements, and arrangements (including any informal arrangements) not described in (A) above, including without limitation, any arrangement intended to comply with Code Section 120, 125, 127, 129 or 137; and (C) all plans or arrangements providing compensation to employee and non- employee directors. In the case of an Employee Program funded through a trust described in Code Section 401(a) or an organization described in Code Section 501(c)(9), or any other funding vehicle, each reference to such Employee Program shall include a reference to such trust, organization or other vehicle. (ii) An entity "maintains" an Employee Program if such entity sponsors, contributes to, or provides benefits under or through such Employee Program, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under or through such Employee Program, or if such Employee Program provides benefits to or otherwise covers employees of such entity (or their spouses, dependents, or beneficiaries). (iii) An entity is an "Affiliate" of Seller if it would have ever been considered a single employer with the Company under ERISA Section 4001(b) or part of the same "controlled group" as Seller for purposes of ERISA Section 302(d)(8)(C). 19 (iv) "Multiemployer Plan" means an employee pension or welfare benefit plan to which more than one unaffiliated employer contributes and which is maintained pursuant to one or more collective bargaining agreements. 2.25 Environmental Matters. --------------------- (a) Except as set forth in Schedule 2.25, (i) Seller has never ------------- generated, transported, used, stored, treated, disposed of, or managed any Hazardous Waste (as defined below); (ii) to the knowledge of Seller and the Shareholders, no Hazardous Material (as defined below) has ever been or is threatened to be spilled, released, or disposed of at any site presently or formerly owned, operated, leased, or used by Seller, or has ever been located in the soil or groundwater at any such site; (iii) to the knowledge of Seller and the Shareholders, no Hazardous Material has ever been transported from any site presently or formerly owned, operated, leased, or used by Seller for treatment, storage, or disposal at any other place; (iv) Seller does not presently own, operate, lease, or use, nor has it previously owned, operated, leased, or used any site on which underground storage tanks are or were located; and (v) no lien has ever been imposed by any governmental agency on any property, facility, machinery, or equipment owned, operated, leased, or used by Seller in connection with the presence of any Hazardous Material. (b) Except as set forth in Schedule 2.25, (i) to the knowledge of ------------- Seller and the Shareholders, Seller has no liability under, nor has it ever violated, any Environmental Law (as defined below); (ii) to the knowledge of Seller and the Shareholders, any property owned, operated, leased, or used by Seller, and any facilities and operations thereon are presently in compliance with all applicable Environmental Laws; (iii) Seller has never entered into or been subject to any judgment, consent decree, compliance order, or administrative order with respect to any environmental or health and safety matter or received any request for information, notice, demand letter, administrative inquiry, or formal or informal complaint or claim with respect to any environmental or health and safety matter or the enforcement of any Environmental Law; and (iv) Seller has no knowledge or reason to know that any of the items enumerated in clause (iii) of this subsection will be forthcoming. (c) Except as set forth in Schedule 2.25 hereto, to the knowledge of ------------- Seller and the Shareholders, no site owned, operated, leased, or used by Seller contains any asbestos or asbestos-containing material, any polychlorinated biphenyls (PCBs) or equipment containing PCBs, or any urea formaldehyde foam insulation. (d) Seller has, to the knowledge of Seller and the Shareholders, provided to Buyer copies of all documents, records, and information available to Seller concerning any environmental or health and safety matter relevant to Seller, whether generated by Seller or others, including, without limitation, environmental audits, environmental risk assessments, site assessments, documentation regarding off-site disposal of Hazardous Materials, spill control plans, and reports, correspondence, permits, licenses, approvals, consents, and other authorizations related to environmental or health and safety matters issued by any governmental agency. 20 (e) For purposes of this Section 2.25, (i) "Hazardous Material" shall mean and include any hazardous waste, hazardous material, hazardous substance, petroleum product, oil, toxic substance, pollutant, contaminant, or other substance which may pose a threat to the environment or to human health or safety, as defined or regulated under any Environmental Law; (ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or regulated under any Environmental Law; (iii) "Environmental Law" shall mean any environmental or health and safety-related law, regulation, rule, ordinance, or by-law at the foreign, federal, state, or local level, whether existing as of the date hereof, previously enforced, or subsequently enacted; and (iv) "Seller" shall mean and include Seller and all other entities for whose conduct Seller is or may be held responsible under any Environmental Law. 2.26 Undisclosed Liabilities. Seller has no liabilities or obligations of ----------------------- any nature (whether known or unknown and whether absolute, accrued, contingent or otherwise) except for liabilities or obligations reflected on the Base Balance Sheet and current liabilities incurred in the ordinary course of business since the date thereof. 2.27 Indebtedness. Except as set forth in Schedule 2.27, Seller has no ------------ ------------- bank debt or indebtedness (other than pursuant to operating or capitalized lease obligations for leased equipment and other current liabilities). 2.28 Agreements. Except as set forth in Schedule 2.28, each such ---------- ------------- Shareholder who is employed by Seller is not a party to any non-competition, trade secret or confidentiality agreement with any party other than Seller. There are no agreements or arrangements not contained herein or disclosed in a Schedule hereto, to which such Shareholder is a party relating to the business of Seller or to such Shareholder's rights and obligations as a stockholder, director or officer of Seller. Such Shareholder does not own, directly or indirectly, on an individual or joint basis, any material interest in, or serve as an officer or director of, any customer, competitor or supplier of Seller, or any organization which has a contract or arrangement with the Seller. Such Shareholder has not at any time transferred any of the stock of Seller held by or for such holder to any employee of the Seller, which transfer constituted or could be viewed as compensation for services rendered to Seller by said employee. The execution, delivery and performance of this Agreement will not violate or result in a default or acceleration of any obligation under any contract, agreement, indenture or other instrument involving Seller to which such Shareholder is a party. 2.29 Disclosure. The representations, warranties and statements contained ---------- in this Agreement and in the certificates, exhibits and schedules delivered by Seller and the Shareholders to Buyer pursuant to this Agreement do not contain any untrue statement of a material fact, and, when taken together, do not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or statements not misleading in light of the circumstances under which they were made. There are no facts 21 known to Seller or the Shareholders which presently or may in the future have a material adverse affect on Seller's business, properties, assets, prospects, operations or (financial or other) condition of Seller which has not been specifically disclosed herein or in a Schedule furnished herewith, other than general economic conditions affecting the Internet services industry generally. SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER. As a material inducement to Seller and the Shareholders entering into this Agreement, Buyer hereby represents and warrants to Seller and the Shareholders as follows: 3.1 Organization. Buyer is a corporation duly organized, validly existing ------------ and in good standing under the laws of the State of Michigan. Buyer has all requisite power and authority to conduct its business as it is now conducted and to own, lease and operate its properties and assets. 3.2 Required Action; Authority. All actions and proceedings necessary to -------------------------- be taken by or on the part of Buyer in connection with the transactions contemplated by this Agreement have been duly and validly taken, and this Agreement and each other agreement, document and instrument to be executed and delivered by or on behalf of Buyer pursuant to, or as contemplated by, this Agreement (collectively, the "Buyer Documents") has been duly and validly authorized, executed and delivered by Buyer. Buyer has full right, authority, power and capacity to execute and deliver this Agreement and each other Buyer Document and to carry out the transactions contemplated hereby and thereby. This Agreement and each other Buyer Document constitutes, or when executed and delivered will constitute, the legal, valid and binding obligations of Buyer enforceable in accordance with its respective terms. 3.3 No Conflicts. The execution, delivery and performance by Buyer of ------------ this Agreement and each other Buyer Document does not and will not (a) violate any provision of the Articles of Incorporation or by-laws of Buyer, as amended to date, (b) constitute a violation of, or conflict with or result in any breach of, acceleration of any obligation under, right of termination under, or default under, any agreement or instrument to which Buyer is a party or by which it is bound, (c) violate any judgment, decree, order, statute, rule or regulation applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver of, or to make any filing with, any person or entity (governmental or otherwise) that has not been obtained or made. The officers who execute this Agreement and the other Buyer Documents contemplated hereby on behalf of Buyer have and shall have all requisite power to do so in the name of and on behalf of Buyer. 3.4 Brokers. Except for Rampart Associates, LLC, whose fees will be paid ------- by Buyer at or prior to the Closing, Buyer has not retained any broker or finder or other person who would have any valid claim against any of the parties to this Agreement for a commission or brokerage fee in connection with this Agreement or the transactions contemplated hereby. 22 3.5 Investment Intent. Buyer is acquiring the Shares for investment for ----------------- its own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended. SECTION 4. COVENANTS OF SELLER. Seller covenants and agrees that: 4.1 Access to Premises and Records. From the date hereof until ------------------------------ consummation of the transactions contemplated hereby at the Closing, Seller shall give Buyer and its representatives, at reasonable times and with reasonable prior notice, free access to the properties, books and records of Seller and will furnish to Buyer and its representatives such information regarding Seller as Buyer or its representatives may from time to time reasonably request in order that Buyer may have full opportunity to make a diligent investigation consistent with this Agreement. The foregoing shall include, without limitation, Buyer and its representatives conducting, at Buyer's expense, an audit of the accounting books and records of the Seller and the Subsidiaries. In addition to, and not in limitation of the foregoing, Seller shall provide Buyer with access to and copies of the records of all: (a) accounts receivable, (b) Subscriber billings, (c) pre-paid accounts, (d) accounts for which no remuneration is received by Seller and (e) general reports with respect to each category of service provided by Seller. 4.2 Continuity and Maintenance of Operations. Except as to actions which ---------------------------------------- Buyer has been advised and to which Buyer has consented to in writing, and except as specifically permitted or required by this Agreement, Seller shall: (a) Operate its business in the ordinary course consistent with past practices, use its commercially reasonable efforts to keep available the services of the employees who are involved in the operation of the business of Seller, and use commercially reasonable efforts to preserve any beneficial business relationships with Subscribers, customers, suppliers and others having business dealings with Seller; (b) Use and operate the business of Seller in a manner consistent with past practices and maintain Seller's assets in good operating condition, ordinary wear and tear excepted; (c) Maintain insurance upon the Seller's assets in such amounts and types as in effect on the date of this Agreement as set forth in Schedule 2.7 ------------ attached hereto; (d) Keep all of its business books, records and files in the ordinary course of business in accordance with past practices, and provide Buyer with access thereto upon its reasonable request; 23 (e) Continue to implement and enforce its procedures for disconnection and discontinuance of service to Subscribers whose accounts are delinquent in accordance with those in effect on the date of this Agreement; (f) Perform and comply in all material respects with the terms of the Contracts and keep such Contracts in full force and effect; and (g) Use its reasonable best efforts to preserve the goodwill of Seller. 4.3 Negative Covenants. Seller shall not, and Seller shall cause its ------------------ Subsidiaries not to, without the prior written consent of Buyer: (a) Sell, transfer, lease, assign or otherwise dispose of, or agree to sell, transfer, lease, assign or otherwise dispose of, any assets outside the ordinary course of business; (b) Make any change in the number of shares of its capital stock authorized, issued or outstanding or grant any option, warrant or other right to purchase, or to convert any obligation into, shares of its capital stock; (c) Amend its articles of incorporation or code of regulation; (d) Enter into any contract or commitment for the acquisition of goods or services (other than in the ordinary course of business) or which otherwise obligates it to perform in full or in part beyond the Closing Date; (e) Hire any new employees or enter into any employment arrangements or otherwise increase the salary or compensation of any existing employees; (f) Renegotiate, modify, amend or terminate any Contract; (g) Create, assume, or permit to exist, or agree to incur, assume or acquire, any Lien, claim or liability on its assets or the Shares; (h) Make any modifications or changes to the existing rate schedules or product offerings in effect; (i) Offer or employ any sales discounts, free services or other extraordinary marketing practices or extraordinary promotions outside the ordinary course of business and not consistent with past practices; (j) Take any actions or permit its employees and agents to take any actions which would materially interfere with or preclude the transactions contemplated by this Agreement; or 24 (k) Cause or permit the provision for any new and material pension, retirement or other employment benefits for employees who perform services in connection with Seller's business or any material increase in any existing benefits (other than as required by law). 4.4 Consents. Seller will use its reasonable best efforts to obtain, as -------- soon as practicable and at its expense, the consent of all third parties under the Contracts for which the prior approval of such third party is required pursuant to the terms of the Contract; provided, however, that "reasonable best -------- ------- effort" for this purpose shall not require Seller to undertake extraordinary or unreasonable measures to obtain such approvals and consents, including, without limitation, the initiation or prosecution of legal proceedings or the payment of fees in excess of customary filing, processing and documentation fees. 4.5 Notification of Certain Matters. Seller shall promptly notify Buyer ------------------------------- of (i) any fact, event, circumstances or action the existence or occurrence of which would cause any of Seller's representations or warranties under this Agreement, or the disclosures in any schedules or exhibits attached hereto, not to be true in any material respect and (ii) any failure on its part to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. Seller shall promptly notify buyer in writing of the assertion, commencement or threat of any claim, litigation, proceeding or investigation in which Seller is a party or in which the assets or business of Seller may be affected and which could reasonably be expected to be material or which relates to the transactions contemplated hereby. 4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any -------------- materially adverse developments affecting the assets or the business of Seller which become known to Seller, including, without limitation, (i) any damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting any of the assets or the business of Seller, (ii) any material notice of violation, forfeiture or complaint under any material Contract, or (iii) anything which, if not corrected prior to the Closing Date, would prevent Seller from fulfilling any condition to Closing described in Section 6 hereof. 4.7 No Solicitation. From the date of this Agreement until the earlier of --------------- (a) July 2, 1999 and (b) termination of this Agreement pursuant to Section 8.1, Seller shall not, and Seller shall cause its officers, employees, shareholders, agents and representatives (including, without limitation, any investment banker, attorney or accountant retained by Seller) and all other employees not to, initiate, solicit or encourage, directly or indirectly, any inquiries or the making of any proposal with respect to the assets or the business of Seller, or engage in any negotiations concerning, or provide to any other person any information or data relating to, the business or assets of Seller for the purpose of, or have any discussions with, any person relating to, or otherwise cooperate in any way with or assist or participate in, facilitate or encourage, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any effort or attempt by any other person to seek or effect a transaction, or enter into a transaction with any person or persons, other than Buyer, concerning the 25 possible sale of all or substantially all of the assets or business of Seller, or the capital stock of Seller. Seller shall promptly inform Buyer of any such inquiries or proposals and provide all pertinent documentation related thereto. 4.8 Confidentiality. Seller agrees that it and its representatives will --------------- hold in strict confidence, and will not use, any confidential or proprietary data or information obtained from Buyer with respect to its business or financial condition except for the purpose of evaluating, negotiating and completing the transactions contemplated hereby. Information generally known in Buyer's industry or which has been disclosed to Seller by third parties which have a right to do so shall not be deemed confidential or proprietary information for purposes of this Agreement. If the transactions contemplated by this Agreement are not consummated, Seller will return, and cause its respective officers, directors, agents and representatives to return, to Buyer (or certify that they have destroyed) all copies of such data and information made available to Seller (and its officers, directors, agents and representatives) in connection with the transaction. SECTION 5. COVENANTS OF BUYER. Buyer covenants and agrees that: 5.1 Confidentiality. Buyer agrees that, from the date hereof until --------------- consummation of the transactions contemplated hereby at the Closing, Buyer and its representatives will hold in strict confidence, and will not use, any confidential or proprietary data or information obtained from Seller at any time, prior to or after the date hereof with respect to its business or financial condition except for the purpose of evaluating, negotiating and completing the transactions contemplated hereby. Information generally known in Seller's industry or which has been disclosed to Buyer by third parties which have a right to do so shall not be deemed confidential or proprietary information for purposes of this Agreement. If the transactions contemplated by this Agreement are not consummated, Buyer will return, and cause its respective officers, directors, agents and representatives to return, to Seller (or certify that they have destroyed) all copies of such data and information made available to Buyer (and its officers, directors, agents and representatives) in connection with the transaction. 5.2 Notification of Certain Matters. Buyer shall promptly notify Seller ------------------------------- of (i) any fact, event, circumstances or action the existence or occurrence of which would cause any of Buyer's representations or warranties under this Agreement, or the disclosures in any schedules or exhibits attached hereto, not to be true in any material respect and (ii) any failure on its part to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it under this Agreement. Buyer shall promptly notify Seller in writing of the assertion, commencement or threat of any claim, litigation, proceeding or investigation in which Buyer is a party and which could reasonably be expected to be material or which relates to the transactions contemplated hereby. 26 5.3 Employees. From and after the Closing, each employee of Seller shall --------- be eligible to participate in any and all employee benefit plans of Buyer generally made available to similarly situated employees thereof on the same basis and without distinction. To the extent that any employee of Seller becomes a participant in any such plan, such employee shall be given credit under such plans for all service prior to the Closing with Seller, or any predecessor employer (to the extent such credit was given by Seller under a similar plan) and prior to the time such employee becomes such a participant, for the purposes of eligibility, waiting periods and vesting, but not for purposes of benefit accruals. In addition, if any employees of Seller employed as of the Closing become covered by a medical plan of Buyer or any of its affiliates, such medical plan shall not impose any exclusion on coverage for preexisting medical conditions with respect to these employees, which exclusion is not generally applicable to employees of Buyer or any of its affiliates. Notwithstanding the foregoing, nothing in this Agreement shall be interpreted or construed to confer upon the employees of Seller any right with respect to continuance of employment by Buyer, nor shall this Agreement interfere in any way with the right of Buyer to terminate the employee's employment at any time and nothing in this Agreement shall interfere in any way with the right of Buyer to amend, terminate or otherwise discontinue any or all plans, practices or policies of Buyer in effect from time to time. Finally, the parties hereto agree that Buyer in its sole discretion shall determine which employees are similarly situated; provided, however, that such determination shall be made in -------- ------- good faith and may not be based on whether the employee was, prior to the Closing, an employee of Seller. SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER. Buyer's obligation to consummate the transactions contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, unless otherwise waived by Buyer in writing: 6.1 Accuracy of Representations and Warranties. The representations and ------------------------------------------ warranties of Seller contained in this Agreement shall be true and correct in all material respects at the Closing Date with the same effect as though made at such time and the representations and warranties of Seller contained in this Agreement which are qualified by materiality shall be true and correct in all respects as of the Closing Date with the same effect as though made at such time. 6.2 Performance of Agreements and Deliveries. Seller shall have performed ---------------------------------------- in all material respects all of its covenants, agreements and obligations under this Agreement which are to be performed or complied with by Seller prior to or upon the Closing Date and shall have delivered all documents and items required to be delivered at or prior to the Closing, including, without limitation: (a) A certificate, dated the Closing Date, from the President of Seller to the effect that the conditions set forth in Sections 6.1 and 6.2 have been satisfied; 27 (b) A certificate, dated the Closing Date, from Seller's Secretary as to the articles of incorporation, code of regulation, authority and the incumbency of all officers executing the Seller Documents on behalf of Seller; (c) A certified copy of Seller's certificate of incorporation from the Secretary of State of the State of Ohio; (d) A certificate of good standing from the Secretary of State of the State of Ohio; and (e) Such other certificates and instruments reasonably requested by Buyer. 6.3 Release of Liens. Seller shall have obtained and delivered to Buyer ---------------- at or prior to the Closing instruments (including payoff letters, bills of sale and UCC-3 termination statements) releasing any and all Liens on the assets of Seller and the Subsidiaries (including, but not limited to, those certain equipment leases with National City Leasing Corporation as set forth in Schedule 2.15 attached hereto). - -------- ---- 6.4 Transfer of Vehicles. Seller shall have transferred to the -------------------- Shareholders ownership and possession of the three company vehicles listed on Schedule 6.4 and the Shareholders shall have personally assumed any and all - ------------ associated liabilities, and Buyer shall have received evidence thereof reasonably satisfactory to Buyer. 6.5 Opinion of Seller's Counsel. Buyer shall have received the opinion of --------------------------- Sebaly, Shillito & Dyer, counsel for Seller and the Shareholders, dated the Closing Date, substantially in the form of Exhibit C attached hereto. --------- 6.6 Monthly Revenues. The Seller shall have monthly revenues of at least ---------------- $380,000 from recurring sources, calculated by multiplying the number of Subscribers as of closing by the average yearly rate in effect for such Subscribers, by type, (excluding one-time set-up fees and other ancillary charges), and dividing by twelve, and Seller shall have furnished Buyer with a certificate, dated as of the Closing Date, to that effect. 6.7 Due Diligence. The result of Buyer's due diligence review of Seller ------------- shall be reasonably satisfactory to Buyer. 6.8 Material Adverse Change. There shall have been no material adverse ----------------------- change in the business, properties, assets, results of operations, financial condition or prospects of Seller since the date of this Agreement. 6.9 FIRPTA Certificate. Seller shall furnish a certificate stating, under ------------------ penalty of perjury, that Seller is not a foreign person for purposes of Section 1445 of the Code, and setting forth Seller's name, address and taxpayer identification number. 28 6.10 Discharge of Debt. Seller shall discharge any bank debt or other ----------------- Seller (and Subsidiary) indebtedness (other than pursuant to operating or capitalized lease obligations for leased equipment and any other current liabilities) described on Schedule 6.10 attached hereto at or prior to the ------------- Closing. 6.11 Non-competition Agreements. Seller and each of the Shareholders -------------------------- shall have executed and delivered to Buyer Non-competition Agreements in substantially the form attached hereto as Exhibit D. --------- 6.12 Subscribers. Seller shall have delivered to Buyer at least: ----------- (i) 19,000 Dial-up Subscribers; (ii) 35 Dedicated Subscribers; and (iii) 250 Web-hosting Subscribers, and Seller shall have furnished Buyer with a certificate, dated as of the Closing Date, to that effect. 6.13 Employee Benefit Plans. Seller shall have initiated procedures ---------------------- (including the adoption of corporate resolutions) for, and shall be diligently pursuing the completion, of the termination of (i) its current pension plan and profit sharing plans and (ii) any key-man insurance policies. 6.14 Termination of Employment Contract. Seller shall have terminated the ---------------------------------- employment contract dated January 2, 1996 with Mr. Luke Gain, and Buyer shall have received evidence reasonably satisfactory to Buyer to that effect. 6.15 Loan. Mr. Ron Rose shall have paid in full the loan receivable of ---- $170,000.00 and Buyer shall have received evidence reasonably satisfactory to Buyer to that effect. 6.16 Release. A release of Seller from all liabilities other than those ------- arising out of the transactions or agreements contemplated hereby, from each of the Shareholders in the form attached hereto as Exhibit E. --------- 6.17 Settlement of Litigation. Seller shall have entered into a ------------------------ settlement agreement with Computer Free America, Inc. v. Mall 2000, Inc. (Case --------------------------- --------------- Number 98-CV-0403) (the "CFA Dispute") and obtained from Computer Free America, Inc. a release of Seller, its predecessors and successors from all liabilities associated with the CFA Dispute and Buyer shall have received evidence reasonably satisfactory to Buyer to that effect. 6.18 Resignation of Officers and Directors. Prior to the Closing Date, ------------------------------------- each of the officers and directors of Seller and each Subsidiary shall have resigned effective as of the Closing Date. 6.19 Delivery of Stock Record Books. Seller shall have delivered to Buyer ------------------------------ original stock record books and minute books for Seller and each Subsidiary. 29 SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER AND THE SHAREHOLDERS. The obligation of Seller and each Shareholder to consummate the transactions contemplated by this Agreement is subject to the satisfaction, on or prior to the Closing Date, of the following conditions, unless waived by Seller in writing: 7.1 Accuracy of Representations and Warranties. The representations and ------------------------------------------ warranties of Buyer contained in this Agreement shall be true and correct in all material respects at the Closing Date with the same effect as though made at such time, and the representations and warranties of Buyer contained in this Agreement which are qualified by materiality shall be true and correct in all respects as of the Closing Date with the same effect as though made at such time. 7.2 Performance of Agreement and Deliveries. Buyer shall have performed --------------------------------------- in all material respects all of its covenants, agreements and obligations under this Agreement which are to be performed or complied with by Buyer prior to or upon the Closing Date and shall have delivered all documents and items required to be delivered at or prior to the Closing, including, without limitation: (a) A certificate, dated the Closing Date, from the President of Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have been satisfied; (b) A certificate, dated the Closing Date, from Buyer's Secretary as to the Articles of Incorporation, bylaws, authority and the incumbency of all officers executing the Buyer Documents on behalf of Buyer; (c) A certified copy of Buyer's Articles of Incorporation from the Secretary of State of the State of Michigan; and (d) A certificate of good standing from the Secretary of State of the State of Michigan. SECTION 8. TERMINATION. 8.1 Events of Termination. This Agreement and the transactions --------------------- contemplated by this Agreement may be terminated at any time prior to the Closing: (a) By the mutual written consent of Buyer and Seller. 30 (b) By the Shareholders, if they are not in breach or default hereunder: (i) if any representation or warranty of Buyer made herein is untrue in any material respect and such breach is not cured within thirty (30) days of Buyer's receipt of a notice from Seller that such breach exists or has occurred; (ii) if Buyer shall have defaulted in any material respect in the performance of any material obligation under this Agreement and such breach is not cured within thirty (30) days of Buyer's receipt of a notice from Seller that such default exists or has occurred; (iii) if the Closing has not occurred prior to July 2, 1999. (c) By Buyer, if it is not in breach or default hereunder: (i) if any representation or warranty of Seller made herein is untrue in any material respect and such breach is not cured within thirty (30) days of Seller's receipt of a notice from Buyer that such breach exists or has occurred; (ii) if Seller shall have defaulted in any material respect in the performance of any material obligation under this Agreement and such breach is not cured within thirty (30) days of Seller's receipt of a notice from Buyer that such default exists or has occurred; or (iii) if the Closing has not occurred prior to July 2, 1999. 8.2 Manner of Exercise. In the event of the termination of this Agreement ------------------ by either Buyer or Seller pursuant to Section 8.1 notice thereof shall forthwith be given to the other party in accordance with the provisions set forth in Section 11 hereto and this Agreement shall terminate and the transactions contemplated hereunder shall be abandoned without further action by Buyer or Seller. 8.3 Effect of Termination; Liabilities. In the event of the termination ---------------------------------- of this Agreement pursuant to Section 8.1, and prior to the Closing, all obligations of the parties hereunder (other than pursuant to Sections 4.7, 4.8 and 5.1 hereof) shall terminate, and neither Seller nor Buyer shall have any further liability hereunder, including for losses, liabilities, obligations, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses (including attorneys' fees) of any kind whatsoever; except upon termination of this Agreement pursuant to Sections 8.1(b)(i), 8.1(b)(ii), 8.1(c)(i) and 8.1(c)(ii), the Shareholders shall be entitled to any remedy which it may have, whether at law or in equity. 8.4 Waiver; Extension of Time for Performance. Seller may extend the time ----------------------------------------- for the performance of any of the obligations or other acts of Buyer hereunder, waive any inaccuracies 31 in the representations and warranties of Buyer contained herein or in any document delivered pursuant hereto, or waive compliance by Buyer with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by Seller. Buyer may extend the time for the performance of any of the obligations or other acts of Seller or the Shareholders hereunder, waive any inaccuracies in the representations and warranties of Seller or the Shareholders contained herein or in any document delivered pursuant hereto, or waive compliance by Seller or the Shareholders with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by Buyer. SECTION 9. SURVIVAL. 9.1 Survival of Warranties. Each of the representations, warranties, ---------------------- agreements, covenants and obligations herein or in any schedule, exhibit, certificate or financial statement delivered by any party to the other party incident to the transactions contemplated hereby are material, shall be deemed to have been relied upon by the other party and shall survive the Closing regardless of any investigation and shall not merge in the performance of any obligation by either party hereto. Each and every such representation and warranty shall survive for a period of one (1) year from the Closing Date (the "Expiration Date"); provided, however, that (i) all representations and -------- ------- warranties made pursuant to Subsections 2.1(b) and 2.2(b) shall never expire, (ii) all representations and warranties made pursuant to Sections 2.5, 2.9, 2.11, 2.12, 2.24 and 2.25 shall expire upon the expiration of the statute of limitations period applicable to actions related thereto plus a period of thirty (30) days, (iii) all claims based on intentional or fraudulent actions, misrepresentations or breaches shall expire upon the expiration of the statute of limitations period applicable to actions related thereto plus a period of thirty (30) days and (iv) if on or prior to the Expiration Date a specific set of facts shall have become known which may give rise to a claim for indemnification, and a Buyer Indemnified Party (as defined in Section 10.1) or a Seller Indemnified Party (as defined in Section 10.2) shall have given written notice to the Shareholders' Representative or Buyer respectively of such facts known by such Buyer Indemnified Party or Seller Indemnified Party at such time, then the right to indemnification with respect to such claim shall remain in effect without regard to when such matter shall be finally determined and disposed of by the negotiation of the parties or dispute resolution pursuant to Section 12.10. SECTION 10. INDEMNIFICATION. 10. Indemnification by the Shareholders. ----------------------------------- (a) Each of the Shareholders hereby agrees, jointly and severally, to indemnify and hold harmless Buyer, its affiliates and its and their respective directors, officers, shareholders, partners, members, employees, and agents (individually, a "Buyer Indemnified Party" and collectively, "Buyer Indemnified Parties"), against and in respect of all losses, liabilities, obligations, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses (including the reasonable fees, 32 disbursements and expenses of attorneys and consultants) of any kind or nature whatsoever, but net of the proceeds from any insurance policies or other third party reimbursement for such loss, to the extent sustained, suffered or incurred by or made against any Buyer Indemnified Party, to the extent based upon, arising out of or in connection with: (i) any breach of any representation or warranty made by Seller and the Shareholders in this Agreement or in any schedule, exhibit, certificate, agreement or other instrument delivered pursuant to this Agreement; (ii) any breach of any covenant or agreement made by Seller or the Shareholders in this Agreement or in any schedule, exhibit, certificate, financial statement, agreement or other instrument delivered pursuant to this Agreement; (iii) any claim made by any person or entity which relates to the operation of the business of Seller or the Subsidiaries which arises in connection with or on the basis of events, acts, omissions, conditions or any other state of facts occurring on or existing before the Closing Date; (iv) any undisclosed liabilities; (v) any liability or obligation arising out of, relating to or resulting from the vehicles, including any vehicle leases, to be retained by the Shareholders as set forth on Schedule 6.4; ------------ (vi) any liability or obligation arising out of, relating to or resulting from the CFA Dispute as defined in Section 6.17; (vii) any liability or obligation arising out of, relating to or resulting (A) from Seller's or the Subsidiaries' Taxes, including but not limited to Ohio state sales taxes, attributable to the periods, or portions thereof, ending on or before the Closing (which has not been paid or provided for or reserved against by Seller in the Base Balance Sheet included in the Financial Statements) or (B) as a result of or relating to any breach of any representation, warranty or covenant with respect to Taxes or tax related matters; (viii) any liability or obligation arising out of, relating to or resulting from the Seller's pension plan and profit sharing plans described in Section 6.13; (ix) any liability or obligation arising out of, relating to or resulting from the loan receivable of $170,000.00 described in Section 6.15; and (x) any liability or obligation arising out of, relating to or resulting from any bank debt or other Seller (and Subsidiary) indebtedness described on Schedule 6.10. ------------- 33 (b) Limitation on Indemnification by Shareholders. Notwithstanding --------------------------------------------- the foregoing, the right of the Buyer Indemnified Parties to indemnification under Section 10.1(a)(i) shall be subject to the following provisions: (i) No indemnification pursuant to Subsection 10.1(a)(i) above shall be payable to any Buyer Indemnified Party, unless the total of all claims for indemnification pursuant to Subsection 10.1(a)(i) shall exceed $75,000 in the aggregate (the "Shareholder Basket"), whereupon only the amount in excess of $75,000 shall be recoverable in accordance with the terms hereof; provided, -------- however, any claims relating to Subsections 2.1(b), 2.2(b), 2.5, 2.9, 2.11, - ------- 2.12, 2.24 and 2.25 shall not be subject to the Shareholder Basket and the right to indemnification with respect to such claim shall remain in effect on a dollar-for-dollar basis. (ii) The indemnification obligations of the Shareholders pursuant to Subsections 10.1(a)(ii) - 10(a)(x) above shall not be subject to the Shareholder Basket and the right to indemnification with respect to such claim shall remain in effect on a dollar-for-dollar basis; provided, however, fifty -------- ------- percent (50%) of any claims related to Ohio state sales taxes attributable to the periods, or portions thereof, ending on or before the Closing (which has not been paid or provided for or reserved against by Seller in the Base Balance Sheet included in the Financial Statements) shall be subject to the Shareholder Basket. 10.2 Indemnification by Buyer. ------------------------ (a) Buyer agrees to indemnify and hold harmless each of the Shareholders (individually, a "Seller Indemnified Party" and collectively, "Seller Indemnified Parties") at all times against and in respect of all losses, liabilities, obligations, damages, deficiencies, actions, suits, proceedings, demands, assessments, orders, judgments, costs and expenses (including the reasonable fees, disbursements and expenses of attorneys and consultants), of any kind or nature whatsoever, to the extent sustained, suffered or incurred by or made against any Seller Indemnified Party, to the extent based upon, arising out of or in connection with: (i) any breach of any representation or warranty made by Buyer in this Agreement or in any schedule, exhibit, certificate, agreement or other instrument delivered pursuant to this Agreement; (ii) any breach of any covenant or agreement made by Buyer in this Agreement or in any schedule, exhibit, certificate, agreement or other instrument delivered pursuant to this Agreement; and (iii) any claim made against Seller, any of the Subsidiaries, or any of the Shareholders which relates to, results from or arises out of (A) Buyer's ownership of the Shares, (B) Buyer's operation of the business of the Seller or the Subsidiaries or (C) any liability on the part of any Shareholder as a guarantor of, or a party to, any contract, lease, or other agreements of Seller set forth on Schedule 2.8 from and after the Closing Date. ------------ (b) Limitation on Indemnification by Buyer. Notwithstanding the -------------------------------------- foregoing, the right of the Seller Indemnified Parties to indemnification under Section 10.2(a) shall be subject to the following provisions: 34 (i) No indemnification pursuant to Subsection 10.2(a)(i) above shall be payable to any Seller Indemnified Party, unless the total of all claims for indemnification pursuant to Subsection 10.2(a) shall exceed $75,000 in the aggregate (the "Buyer Basket"), whereupon only the amount in excess of $75,000 shall be recoverable in accordance with the terms hereof. (ii) The indemnification obligations of Buyer pursuant to Subsections 10.2(a)(ii) - 10.2(a)(iii) above shall not be subject to the Buyer Basket and the right to indemnification with respect to such claim shall remain in effect on a dollar-for-dollar basis. 10.3 Notice; Defense of Claims. ------------------------- (a) Notice of Claims. Promptly after receipt by an indemnified party ---------------- of notice of any claim, liability or expense to which the indemnification obligations hereunder would apply, the indemnified party shall give notice thereof in writing to the indemnifying party, but the omission to so notify the indemnifying party promptly will not relieve the indemnifying party from any liability except to the extent that the indemnifying party shall have been prejudiced as a result of the failure or delay in giving such notice. Such notice shall state the information then available regarding the amount and nature of such claim, liability or expense and shall specify the provision or provisions of this Agreement under which the liability or obligation is asserted. (b) Third Party Claims. With respect to third party claims, if within ------------------ twenty (20) days after receiving the notice described in clause (a) above the indemnifying party gives (i) written notice to the indemnified party stating that (A) it would be liable under the provisions hereof for indemnity in the amount of such claim if such claim were successful and (B) that it disputes and intends to defend against such claim, liability or expense at its own cost and expense and (ii) provides reasonable assurance to the indemnified party that such claim will be promptly paid in full if required, then counsel for the defense shall be selected by the indemnifying party (subject to the consent of the indemnified party which consent shall not be unreasonably withheld) and the indemnified party shall not be required to make any payment with respect to such claim, liability or expense as long as the indemnifying party is conducting a good faith and diligent defense at its own expense; provided, however, that the assumption of defense of any such matters by the indemnifying party shall relate solely to the claim, liability or expense that is subject or potentially subject to indemnification. The indemnifying party shall have the right, with the consent of the indemnified party, which consent shall not be unreasonably withheld, to settle all indemnifiable matters related to claims by third parties which are susceptible to being settled provided the indemnifying parties' obligation to indemnify the indemnified party therefor will be fully satisfied. The indemnifying party shall keep the indemnified party apprised of the status of the claim, liability or expense and any resulting suit, proceeding or enforcement action, shall furnish the indemnified party with all documents and information that the indemnified party shall reasonably request and shall 35 consult with the indemnified party prior to acting on major matters, including settlement discussions. Notwithstanding anything herein stated, the indemnified party shall at all times have the right to fully participate in such defense at its own expense directly or through counsel; provided, however, if the named parties to the action or proceeding include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the expense of separate counsel for the indemnified party shall be paid by the indemnifying party. If no such notice of intent to dispute and defend is given by the indemnifying party, or if such diligent good faith defense is not being or ceases to be conducted, the indemnified party shall, at the expense of the indemnifying party, undertake the defense of (with counsel selected by the indemnified party), and shall have the right to compromise or settle (exercising reasonable business judgment), such claim, liability or expense. If such claim, liability or expense is one that by its nature cannot be defended solely by the indemnifying party, then the indemnified party shall make available all information and assistance that the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense. (c) Non-Third Party Claims. With respect to non-third party claims, ---------------------- if within twenty (20) days after receiving the notice described in clause (a) above the indemnifying party does not give written notice to the indemnified party that it contests such indemnity, the amount of indemnity payable for such claim shall be as set forth in the indemnified party's notice. If the indemnifying party provides written notice to the indemnified party within such 20-day period that it contests such indemnity, the parties shall attempt in good faith to reach an agreement with regard thereto within thirty (30) days of delivery of the indemnifying party's notice. If the parties cannot reach agreement within such 30-day period, the matter may be submitted by either party for binding arbitration in accordance with the provisions of Section 12.10 hereof. SECTION 11. NOTICES. All notices and other communications required to be given hereunder, or which may be given pursuant or relative to the provisions hereof, shall be in writing and shall be deemed to have been given when delivered in hand or mailed, postage prepaid, by first class United States mail, certified return receipt requested as follows: If to Seller: GDR Enterprises, Inc. ------------ c/o ERI Net Online Communications 5551 Far Hills Avenue Dayton, OH 45429 Attn: Ronald M. Rose 36 With a copy to: Sebaly, Shillito & Dyer 1300 Courthouse Place NE Dayton, OH 45402 Attn: Gale S. Finley, Esq. If to the Shareholders' Ronald M. Rose ----------------------- 6790 Vienna Woods Trail Representative: Dayton, OH 45459 -------------- With a copy to: Sebaly, Shillito & Dyer 1300 Courthouse Place NE Dayton, OH 45402 Attn: Gale S. Finley, Esq. If to the Shareholders: Ronald M. Rose ---------------------- 6790 Vienna Woods Trail Dayton, OH 45459 Luke A. Gain 325 North Monroe Xenia, OH 45385 Stephen L. Dona 8934 Kingsridge Drive Dayton, OH 45458 With a copy to: Sebaly, Shillito & Dyer 1300 Courthouse Place NE Dayton, OH 45402 Attn: Gale S. Finley, Esq. If to Buyer: Voyager Information Networks, Inc. ----------- 4660 S. Hagadorn Road Suite 320 East Lansing, MI 48823 Attn: Christopher Torto With a copy to: Goodwin, Procter & Hoar LLP Exchange Place Boston, Massachusetts 02109 Attn: David F. Dietz, P.C. 37 SECTION 12. MISCELLANEOUS. 12.1 Assignability; Binding Effect. This Agreement shall not be ----------------------------- assignable by Buyer or Seller except with the written consent of the other, except that Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or its owners, (b) as a result of any merger, reorganization or other consolidation, or (c) in connection with the granting of a security interest to its senior lenders. This Agreement shall be binding upon and shall inure to the benefit of, the parties hereto and their respective successors, and assigns. 12.2 Headings. The subject headings used in this Agreement are included -------- for purposes of convenience only and shall not affect the construction or interpretation of any of its provisions. 12.3 Amendments; Waivers. This Agreement may not be amended or modified, ------------------- nor may compliance with any condition or covenant set forth herein be waived, except by a writing duly and validly executed by Buyer and the Shareholders' Representative, or, in the case of a waiver, the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege, or any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. 12.4 Entire Agreement. This Agreement, together with the schedules and ---------------- exhibits hereto, constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and cancels any and all prior or contemporaneous arrangements, understandings and agreements between them relating to the subject matter hereof. 12.5 Severability. In the event that any provision or any portion of any ------------ provision of this Agreement shall be held to be void or unenforceable, then the remaining provisions of this Agreement (and the remaining portion of any provision held to be void or unenforceable in part only) shall continue in full force and effect. 12.6 Governing Law. This Agreement and the transactions contemplated ------------- hereby shall be governed and construed by and enforced in accordance with the laws of the State of Ohio without regard to conflict of laws principles. 12.7 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which shall constitute the same instrument. 12.8 Expenses. Each party shall pay its own expenses incident to the -------- negotiation, preparation and performance of this Agreement and the transactions contemplated hereby, including all fees and expenses of its counsel and accountants for all activities of such counsel and accountants undertaken pursuant to this Agreement, whether or not the transactions 38 contemplated hereby are consummated. The Shareholders shall pay all of the fees and expenses of both Seller and the Shareholders at or prior to the Closing. 12.9 Remedies. It is specifically understood and agreed that certain -------- breaches of this Agreement will result in irreparable injury to the parties hereto, that the remedies available to the parties at law alone will be an inadequate remedy for such breach, and that, in addition to any other legal or equitable remedies which the parties may have, a party may enforce its rights by an action for specific performance and the parties expressly waive the defense that a remedy in damages will be adequate. 12.10 Dispute Resolution. Any dispute arising out of or relating to this ------------------ Agreement or the breach, termination or validity hereof shall be finally settled solely and exclusively by arbitration conducted expeditiously in accordance with the CPR Institute for Dispute Resolution Rules for Nonadministered Arbitration of Business Disputes (the "CPR Rules"). The CPR Institute for Dispute Resolution shall appoint a neutral advisor from its National CPR Panel. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. (S)(S)1-16, and judgment upon the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The place of arbitration shall be Columbus, Ohio. Such proceedings shall be administered by the neutral advisor in accordance with the CPR Rules as he/she deems appropriate, however, such proceedings shall be guided by the following agreed upon procedures: (a) Mandatory exchange of all relevant documents, to be accomplished within forty-five (45) days of the initiation of the procedure; (b) No other discovery; (c) Hearings before the neutral advisor which shall consist of a summary presentation by each side of not more than three hours; such hearings to take place in one or two days at a maximum; and (d) Decision to be rendered not later than ten (10) days following such hearings. Each of the parties hereto (a) hereby unconditionally and irrevocably submits to the jurisdiction of any United States District Court of competent jurisdiction located in the State of Ohio for the purpose of enforcing the award or decision in any such proceeding and (b) hereby waives, and agrees not to assert in any civil action to enforce the award, any claim that it is not subject personally to the jurisdiction of the above-named court, that its property is exempt or immune from attachment or execution, that the civil action is brought in an inconvenient forum, that the venue of the civil action is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court, and (c) hereby waives and agrees not to seek any review by any court of any other jurisdiction which may be called upon to grant an enforcement 39 of the judgment of any such court. Each of the parties hereto hereby consents to service of process by registered mail at the address to which notices are to be given. Each of the parties hereto agrees that its submission to jurisdiction and its consent to service of process by mail is made for the express benefit of the other parties hereto. Final judgment against any party hereto in any such action, suit or proceeding may be enforced in other jurisdictions by suit, action or proceeding on the judgment, or in any other manner provided by or pursuant to the laws of such other jurisdiction. Notwithstanding the foregoing, the parties may enforce their rights under this Agreement in accordance with Section 12.9. 12.11 Third Party Rights. This Agreement is for the benefit of the ------------------ parties hereto and is not entered into for the benefit of, and shall not be construed to confer any benefit upon, any other party or entity. [End of text] 40 IN WITNESS WHEREOF, Seller, the Shareholders and Buyer have caused this Stock Purchase Agreement to be executed as of the date first above written. SELLER: GDR ENTERPRISES, INC. By: /s/ Ronald M. Rose --------------------------------- Name: Ronald M. Rose Title: President SHAREHOLDERS: /s/ Ronald M. Rose ------------------------------------- Ronald M. Rose /s/ Luke A. Gain ------------------------------------- Luke A. Gain /s/ Stephen L. Dona ------------------------------------- Stephen L. Dona BUYER: VOYAGER INFORMATION NETWORKS, INC. By: /s/ Dennis J. Stepaniak --------------------------------- Name: Dennis J. Stepaniak Title: Chief Financial Officer SHAREHOLDERS' REPRESENTATIVE /s/ Ronald M. Rose ------------------------------------- Ronald M. Rose 41 EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction of Incorporation - ---- ----------------------------- Voyager Information Networks, Inc. Michigan Voyager Data Services, Inc. Delaware Horizon Telecommunications, Inc. Delaware GDR Enterprises, Inc. Ohio Mall 2000, Inc. Ohio EriNet Telecom, Inc. Ohio TDIN, Inc. Ohio EX-23.2 9 CONSENT OF PRICEWATERHOUSE COOPERS LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of our report dated March 5, 1999, except for Note 17 for which the date is June 10, 1999, relating to the consolidated financial statements of Voyager.net, Inc., and our reports dated April 28, 1999 on our audits of Freeway, Inc., EXEC-PC, Inc. and Netlink Systems, L.L.C. and our report dated June 9, 1999 on our audit of GDR Enterprises, Inc. which appear in such Registration Statement. We also consent to the use of our report dated May 3, 1999 on the Financial Statement Schedule for the three years ended December 31, 1998 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our report. We also consent to the references to us under the heading "Experts" in such Registration Statement. /s/ PriceWaterhouseCoopers LLP Grand Rapids, Michigan June 11, 1999 -----END PRIVACY-ENHANCED MESSAGE-----