UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the quarterly period ended September 30, 1999.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number: 0-26661
VOYAGER.NET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3431501
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4660 S. HAGADORN RD SUITE 320
EAST LANSING, MI 48823
(Address of principal executive offices, including zip code)
(517) 324-8940
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of November 14, 1999, there were 31,650,108 shares of the Registrant's Common
Stock outstanding.
1
VOYAGER.NET, INC.
FORM 10-Q
SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998........................................... 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 1999 and 1998........ 4
Condensed Consolidated Statement of Stockholders' Equity for
the nine months ended September 30, 1999........................ 5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998........................ 6
Notes to Condensed Consolidated Financial Statements............ 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 10-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 19
Item 2. Changes in Securities........................................... 19-20
Item 4. Submission of Matters to a Vote of Security Holders............. 20-21
Item 6. Exhibits and Reports on Form 8-K................................ 22
SIGNATURES............................................................... 23
INDEX TO EXHIBITS........................................................ 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ......................... $ 17,722,233 $ 2,350,292
Accounts receivable, less allowances .............. 2,828,751 950,381
Prepaid and other assets .......................... 1,494,811 154,059
------------- ------------
Total current assets ............................. 22,045,795 3,454,732
Property and equipment, net ....................... 19,223,571 9,528,372
Intangible assets, net ............................ 54,452,125 28,741,650
Notes receivable, related party ................... 5,500,000 --
------------- ------------
Total assets ...................................... $ 101,221,491 $ 41,724,754
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of obligations under capital leases $ 1,578,264 $ 303,562
Notes payable, related party ...................... -- 2,252,713
Accounts payable .................................. 1,314,350 659,351
Other liabilities ................................. 3,298,829 855,727
Deferred revenue .................................. 9,174,187 5,625,627
------------- ------------
Total current liabilities ........................ 15,365,630 9,696,980
Commitments and contingencies ...................... -- --
Obligations under capital leases ................... 1,843,545 751,613
Long-term debt ..................................... -- 30,000,000
Stockholders' equity:
Preferred stock, Series A, 8% cumulative, non-
voting, $.01 par value, $100 redemption value ..... -- 8,274,819
Common stock, $.0001 par value .................... 2,712 1,792
Additional paid-in capital ........................ 112,129,038 3,214,748
Receivable for preferred and common stock ......... (6,000,000) (666,700)
Deferred compensation ............................. 86,420 1,008,420
Accumulated deficit ............................... (22,205,854) (10,556,918)
------------- ------------
Total stockholders' equity ...................... 84,012,316 1,276,161
Total liabilities and stockholders' equity ....... $ 101,221,491 $ 41,724,754
============= ============
The accompanying notes are an integral part of
the condensed consolidated financial statements.
3
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
Revenue:
Internet access service ......................... $ 12,581,368 $ 2,042,350 $ 31,524,130 $ 4,395,566
Other ........................................... 323,628 2,946 613,991 7,240
------------ ----------- ----------- -----------
Total revenue .................................... 12,904,996 2,045,296 32,138,121 4,402,806
------------ ----------- ----------- -----------
Operating expenses:
Internet access service costs ................... 3,971,575 817,571 10,363,256 1,616,811
Sales and marketing ............................. 1,791,275 389,925 3,989,344 794,939
General and administrative ...................... 3,867,622 657,531 9,412,224 1,477,951
Depreciation and amortization ................... 6,418,767 344,809 14,950,544 614,366
Compensation charge for issuance of common
stock and stock options ........................ 25,000 780,407 2,534,000 780,407
------------ ----------- ----------- -----------
Total operating expenses ......................... 16,074,239 2,990,243 41,249,368 5,284,474
------------ ----------- ----------- -----------
Loss from operations before interest
expense, net .................................... (3,169,243) (944,947) (9,111,247) (881,668)
Interest expense, net ............................ (188,361) (95,734) (2,002,430) (173,169)
------------ ----------- ----------- -----------
Net loss ......................................... (3,357,604) (1,040,681) (11,113,677) (1,054,837)
Preferred stock dividends ........................ (36,273) (82,998) (367,265) (182,998)
------------ ----------- ----------- -----------
Net loss applicable to common stockholders ....... $ (3,393,877) $(1,123,679) $(11,480,942) $(1,237,835)
============ =========== =========== ===========
Per Share Data:
Basic and diluted net loss per share applicable to
common stockholders ............................. $ (0.11) $ (0.06) $ (0.45) $ (0.08)
============ =========== =========== ===========
Weighted average common shares outstanding:
Basic and diluted ................................ 30,084,336 18,255,050 25,751,248 16,103,780
============ =========== =========== ===========
The accompanying notes are an integral part of
the condensed consolidated financial statements.
4
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
Preferred Stock Common Stock Additional
---------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
------- ----------- ---------- ------ ------------
Balance at January 1, 1999 .. 82,748 $ 8,274,819 22,216,308 $1,792 $ 3,214,748
Issuance of common stock ....... -- -- 1,240,000 100 7,354,900
Proceeds from initial public
offering ..................... -- -- 7,425,000 743 99,454,156
Proceeds from preferred stock .. -- -- -- -- --
Redemption of preferred stock .. (82,748) (8,274,819) -- -- --
Payment of preferred stock
dividends .................... -- -- -- -- --
Exercise of stock options and
vesting of restricted stock .. -- -- 768,800 77 2,105,234
Deferred compensation .......... -- -- -- -- --
Net loss ....................... -- -- -- -- --
------- ----------- ---------- ------ ------------
Balance at September 30, 1999 -- $ -- 31,650,108 $2,712 $112,129,038
======= =========== ========== ====== ============
Receivable
For Preferred Total
and Common Deferred Accumulated Stockholders'
Stock Compensation Deficit Equity
----------- ----------- ------------ ------------
Balance at January 1, 1999 .. $ (666,700) $ 1,008,420 $(10,556,918) $ 1,276,161
Issuance of common stock ....... (6,000,000) -- -- 1,355,000
Proceeds from initial public
offering ..................... -- -- 99,454,899
Proceeds from preferred stock .. 666,700 -- -- 666,700
Redemption of preferred stock .. -- -- -- (8,274,819)
Payment of preferred stock
dividends .................... -- -- (535,259) (535,259)
Exercise of stock options and
vesting of restricted stock .. -- (1,090,000) -- 1,015,311
Deferred compensation .......... -- 168,000 -- 168,000
Net loss ....................... -- -- (11,113,677) (11,113,677)
----------- ----------- ------------ ------------
Balance at September 30, 1999 $(6,000,000) $ 86,420 $(22,205,854) $ 84,012,316
=========== =========== ============ ============
The accompanying notes are an integral part of
the condensed consolidated financial statements.
5
VOYAGER.NET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
-------------------------------------
1999 1998
------------- ------------
Cash flows from operating activities:
Net loss ........................................... $ (11,113,677) $ (1,054,837)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization ...................... 14,950,544 614,366
Compensation charge for issuance of
common stock shares and options ................... 2,534,000 780,407
Changes in assets and liabilities excluding
effects of business combinations, net ............. (1,218,527) 1,356,700
------------- ------------
Net cash provided by operating activities .......... 5,152,340 1,696,636
Cash flows from investing activities:
Business acquisition costs, net of cash
acquired .......................................... (36,551,115) (29,153,979)
Purchase of property and equipment ................. (5,034,077) (1,415,594)
------------- ------------
Net cash used in investing activities .............. (41,585,192) (30,569,573)
Cash flows from financing activities:
Payments on capital leases ......................... (515,622) (105,754)
Advances from related party ........................ -- 4,047
Payments to related party .......................... (5,500,000) (25,521)
Payment of preferred stock dividends ............... (535,259) --
Payment of debt .................................... (60,200,000) --
Proceeds from initial public offering .............. 101,925,743 --
Payment of initial public offering expenses ........ (2,470,844) --
Redemption of preferred stock ...................... (8,274,819) --
Payment of note payable ............................ (2,016,847) --
Payment of bank financing fees ..................... (1,474,770) (1,325,530)
Proceeds from issuance of debt ..................... 30,200,000 26,400,000
Proceeds from note payable issuance ................ -- 2,800,000
Proceeds from common stock and stock option issuance 311 2,061
Proceeds from preferred stock ...................... 666,700 2,065,719
------------- ------------
Net cash provided by financing activities .......... 51,804,593 29,815,022
------------- ------------
Net increase in cash and cash equivalents .......... 15,371,741 942,085
Cash and cash equivalents at beginning of
period ............................................ 2,350,292 518,791
------------- ------------
Cash and cash equivalents at end of period ......... $ 17,722,033 $ 1,460,876
============= ============
The accompanying notes are an integral part of
the condensed consolidated financial statements.
6
VOYAGER.NET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
These condensed consolidated financial statements of Voyager.net, Inc. and
its subsidiaries (the "Company") for the three and nine months ended September
30, 1999 and 1998 and the related footnote information are unaudited and have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. These financial statements included herein
should be read in conjunction with the Company's audited consolidated financial
statements and the related notes to the consolidated financial statements as of
and for the year ended December 31, 1998, which are included in the Company's
prospectus filed with the Securities and Exchange Commission and dated July 20,
1999. In management's opinion, the accompanying unaudited financial statements
contain all adjustments (consisting of normal, recurring adjustments) which
management considers necessary to present the consolidated financial position of
the Company at September 30, 1999 and the results of its operations and cash
flows for the three month and nine month periods ended September 30, 1999 and
1998. Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results of operations
expected for the year ended December 31, 1999.
2. BUSINESS COMBINATIONS:
During the nine month period ended September 30, 1999, the Company
acquired certain assets used in connection with the Internet access service
business of sixteen entities as described below:
January 15, 1999, the Company purchased assets of Hoosier On-Line Systems,
Inc. for approximately $2,347,000. Approximately $2,030,000 was allocated to the
acquired customer base cost as a result of this transaction.
February 24, 1999, the Company purchased assets of Infinite Systems, Ltd.
for approximately $3,100,000. Approximately $2,538,000 was allocated to the
acquired customer base cost as a result of this transaction.
March 10, 1999, the Company purchased assets of Exchange Network Services,
Inc. for approximately $3,250,000. Approximately $2,803,000 was allocated to the
acquired customer base cost as a result of this transaction.
April 23, 1999, the Company acquired certain subscribers of StarNet, Inc.
for approximately $1,835,000. Approximately $2,000,000 was allocated to the
acquired customer base cost as a result of this transaction.
May 7, 1999, the Company purchased stock of GDR Enterprises, Inc. for
approximately $9,075,000. Approximately $9,018,000 was allocated to the acquired
customer base cost as a result of this transaction.
June 4, 1999, the Company purchased assets of Edgeware, Inc., d/b/a
PCLink.com, for approximately $1,896,000. Approximately $1,916,000 was allocated
to the acquired customer base cost as a result of this transaction.
June 17, 1999, the Company purchased assets of Core Digital
Communications, Inc. for approximately $1,285,000. Approximately $1,227,000 was
allocated to the acquired customer base cost as a result of this transaction.
June 25, 1999, the Company acquired the assets of American Information
Services, Inc. for approximately $1,111,000. Approximately $1,111,000 was
allocated to the acquired customer base cost as a result of this transaction.
7
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
September 10, 1999, the Company purchased assets from Data Management
Consultants, Inc. for approximately $2,073,000. Approximately $2,003,000 was
allocated to the acquired customer base cost as a result of this transaction.
September 10, 1999, the Company purchased assets from Net Direct for
approximately $4,519,000. Approximately $4,119,000 was allocated to the acquired
customer base cost as a result of this transaction.
September 15, 1999, the Company purchased assets from Raex for
approximately $4,308,000. Approximately $4,114,000 was allocated to the acquired
customer base cost as a result of this transaction.
September 23, 1999, the Company purchased assets from Internet Connection
Services, LLC for approximately $708,000. Approximately $545,000 was allocated
to the acquired customer base cost as a result of this transaction.
September 23, 1999, the Company purchased assets from MichWeb, Inc. for
approximately $521,000. Approximately $456,000 was allocated to the acquired
customer base cost as a result of this transaction.
October 4, 1999, the Company purchased assets of ComNet, LLC for
approximately $8,886,000. Approximately $8,147,000 was allocated to the acquired
customer base cost as a result of this transaction.
October 7, 1999, the Company purchased assets of TDI Internet Services,
Inc. for approximately $1,831,000. Approximately $1,871,000 was allocated to the
acquired customer base cost as a result of this transaction.
October 7, 1999, the Company purchased assets of Choice Dot Net, LLC for
approximately $1,765,000. Approximately $1,510,000 was allocated to the acquired
customer base cost as a result of this transaction.
The unaudited pro forma combined historical results, as if the entities
listed above (excluding ComNet, LLC, Choice Dot Net, LLC, and TDI Internet
Services, Inc.) had been acquired at the beginning of the nine months ended
September 30, 1999 and 1998, respectively, are included in the table below.
Additionally, the unaudited pro forma combined historical results, as if
Freeway, Inc., EXEC-PC, Inc. and Netlink Systems, LLC, which were acquired in
1998, had been acquired at the beginning of the nine months ended September 30,
1998 are included in the table below. The pro forma combined historical results
for CDL Corp., Internet-Michigan, Inc., Netimation, Inc., Add, Inc., StarNet,
Inc., American Information Services, Inc. and Internet Connection Services, LLC
were not deemed to be material and are not included for the nine months ended
September 30, 1999 and 1998.
(in thousands except per share data)
Nine Months Ended September 30,
------------------------------------
1999 1998
-------- --------
Revenue $ 39,553 $ 26,357
Net loss $(16,677) $(18,499)
Basic and diluted loss per share $ (0.66) $ (1.16)
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.
8
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT:
In July 1999, the Company re-negotiated its revolving available credit
facility with its bank group concurrent with its initial public offering (see
note 7) for a $60 million line of credit, with the option to extend to $70
million, on similar terms and conditions. The credit facility matures on June
30, 2005. The revolving credit facility agreement allows the Company to elect an
interest rate as of any borrowing date based on either the (1) prime rate, or
(2) LIBOR, plus a margin ranging from 0.5% to 2.75% depending on the ratio of
funded debt to EBITDA. The elected rate as of September 30, 1999 is
approximately 7.95%. Automatic and permanent reductions of the maximum
commitments begin June 30, 2001 and continue until maturity.
4. EARNINGS PER SHARE:
The impact of dilutive shares is not significant. Net loss per share is
computed using the weighted average number of common shares outstanding during
the period. Inclusion of common share equivalents of 3,983,847 would be anti-
dilutive and have been excluded from per share calculations.
5. Supplemental Disclosure of Cash Flow Information:
The following is the supplemental cash flow information for all periods
presented:
Nine months ended
September 30,
----------------------------------
1999 1998
------------ ------------
Cash paid during the period for interest ........... $ 1,755,097 $ 235,031
Noncash financing and investing activities:
In connection with the acquisitions described in
Note 2, liabilities were assumed as follows:
Fair value of assets acquired ..................... $ 41,286,245 $ 33,938,712
Business acquisition costs, net of cash
acquired ......................................... $(36,551,115) $(29,153,979)
------------ ------------
Liabilities assumed ................................ $ 4,735,130 $ 4,784,733
============ ============
Acquisition of equipment through capital lease ..... $ 2,434,099 $ 362,606
Issuance of compensatory common stock and options .. $ 2,534,000 --
6. STOCK-BASED COMPENSATION PLAN:
During the three months ended September 30, 1999, the Company granted
3,983,847 options to purchase common stock to certain members of management,
employees and non-employees. At the grant date, 558,000 options were fully
vested; 1,023,000 options will vest in two semi-annual installments; the
remaining 2,402,847 options vest in four equal annual installments beginning
July 20, 2000. These options were granted at not less than the fair market value
of the Company's common stock on the grant date. Therefore, no additional
compensation expense has been recognized in the three months ended September 30,
1999 for these options.
During the three months ended September 30, 1999, the Company recognized
compensation expense of $25,000 relating to options granted prior to July 1,
1999.
9
VOYAGER.NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INITIAL PUBLIC OFFERING:
On July 20, 1999, the Company completed its initial public offering in
which it sold 7,425,000 shares of common stock at $15.00 per share resulting in
net proceeds of $99,454,899. In addition, a total of 1,575,000 shares were
offered for sale by shareholders. Upon the closing of the offering, $60,622,173
of senior bank debt and accrued interest and fees were repaid, $8,810,078 of
preferred stock and cumulative dividends were redeemed, and $2,336,174 of
subordinated notes and accrued interest were repaid. The remainder of the
proceeds are to be used for general corporate purposes, including potential
acquisitions, and capital expenditures.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS OF THE COMPANY
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 sixteen Internet service providers with
approximately 124,000 subscribers in the aggregate. We currently operate the
largest dial-up Internet network in the Midwest in terms of geographic coverage,
with approximately 190 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
304,000 subscribers as of September 30, 1999, including approximately 8,700 Web
hosting subscribers, 1,450 dedicated Internet access accounts, 1,340 cable modem
customers and 530 DSL subscribers.
On July 20, 1999, the Company completed an initial public offering in
which it sold 7,425,000 shares of common stock at $15.00 per share resulting in
net proceeds of $99,454,899. In addition, a total of 1,575,000 shares were
offered for sale by shareholders. Upon the closing of the offering, $60,622,173
of senior bank debt and accrued interest and fees were repaid, $8,810,078 of
preferred stock and cumulative dividends were redeemed, and $2,336,174 of
subordinated notes and accrued interest were repaid. The Company intends to use
the remainder of the proceeds for general corporate purposes, including
potential acquisitions, and capital expenditures.
10
REVENUES AND EXPENSES
Our revenues are generally composed of:
-- dial-up Internet access services, which allow customers to access
the Internet through a local telephone call using standard modems in
computers;
-- dedicated Internet access services, which provide customers a
continuous high-speed connection to the Internet using traditional
copper telephone 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 cards.
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.
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, electronic 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.
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
11
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 absolute dollar basis as we continue to
execute our acquisition strategy and the expansion of our operations.
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 December 31, 1998 we have acquired sixteen Internet service
provider businesses in the Midwest totaling approximately 124,000 subscribers as
of October 8, 1999. Below is a summary of our completed acquisitions, with the
number of customers acquired at the respective date of acquisition:
Number of
Company Date Location Customers
------- -------- -------- ---------
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 Minneapolis, MN 5,500
Core Digital Communications, Inc. 6/17/99 Stevens Point, WI 4,000
American Information Services, Inc. 6/25/99 Chicago, IL 3,100
Data Management Consultants, Inc. 9/2/99 Hillsdale, MI 7,000
NetDirect 9/8/99 Indianapolis, IN 8,000
Raex 9/14/99 Canton, OH 12,000
Internet Connection Services, LLC 9/21/99 Kalamazoo, MI 2,200
MichWeb, Inc. 9/22/99 Cadillac, MI 1,400
ComNet, LLC 10/4/99 Central OH 19,000
Choice Dot Net, LLC 10/7/99 Cincinnati, OH 3,400
TDI InternetServices, Inc. 10/7/99 Monroe, MI 3,600
Our acquisition activity was initially 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. In July 1999, the Company re-negotiated its revolving available
credit facility with its bank group concurrent with its initial public offering
for a $60 million line of credit, with the option to extend to $70 million, on
similar terms and conditions. On July 20, 1999, the Company completed its
initial public offering in which it sold 7,425,000 shares of common stock at
$15.00 per share resulting in net proceeds of $99,454,899. Upon the closing of
the offering, $60,622,173 of senior bank debt and accrued interest and fees were
repaid, $8,810,059 of preferred stock and cumulative dividends were redeemed,
and $2,336,174 of subordinated notes and accrued interest were repaid. The
remainder of the proceeds are to be used for general corporate purposes,
including potential acquisitions, and capital expenditures.
Voyager.net is currently in various levels of acquisition discussions with
a number of Internet service providers in targeted markets in the Midwest.
However, there can be no assurance that the Company will successfully complete
any of the acquisitions we are currently evaluating.
12
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of
operations data for the three and nine months ended September 30, 1999 and 1998
as a percentage of revenue. This information should be read in conjunction with
the Company's consolidated financial statements and notes included in the
Company's public filings.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
------ ------ ------ ------
Revenue:
Internet access service .................. 97.5% 99.8% 98.1% 99.8%
Other .................................... 2.5 0.2 1.9 0.2
------ ------ ------ ------
Total revenue .............................. 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Internet access service costs ............ 30.5 40.0 32.1 36.7
Sales and marketing ...................... 13.8 19.1 12.4 18.1
General and administrative ............... 29.7 32.1 29.2 33.5
Depreciation and amortization ............ 49.4 16.9 46.4 14.0
Compensation charge for issuance of common
stock and stock options ................. 0.2 38.1 7.9 17.7
------ ------ ------ ------
Total operating expenses ................... 123.6 146.2 128.0 120.0
------ ------ ------ ------
Loss from operations before interest
expense, net .............................. (23.6) (46.2) (28.0) (20.0)
Interest expense, net ...................... (1.4) (4.7) (6.2) (3.9)
------ ------ ------ ------
Net loss ................................... (25.0)% (50.9)% (34.2) (23.9)%
====== ====== ====== ======
EBITDA Margin .............................. 25.4% 8.8% 26.3% 11.7%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
Revenues. Total consolidated revenues increased from $2.0 million for the
three months ended September 30, 1998 to $12.9 million for the three months
ended September 30, 1999, representing an increase of 531%. The revenue growth
was primarily driven by the increase in our customer base from approximately
118,000 at September 30, 1998 to approximately 304,000 at October 8, 1999. The
growth in customers was the result of both organic growth and acquisition
activity; we experienced internal growth from our effort to provide high quality
customer and technical service and support, geographic expansion in our coverage
areas and low customer churn rates. In addition, we introduced several new
service offerings, such as digital subscriber lines and long distance telephone
service, which generated additional revenue from our customer base.
Internet access service costs. Internet access service costs increased
from $0.8 million for the three months ended September 30, 1998 to $4.0 million
for the three months ended September 30, 1999. Internet access service costs as
a percent of revenue declined from 40.0% for the three months ended September
30, 1998 to 30.5% for the three months ended September 30, 1999 due to improved
telecommunication contracts and economies of scale. The increase in absolute
spending for the three months ended September 30, 1999 was primarily a result of
an increase in customers and their associated network expenses and an increase
in billing costs.
Sales and marketing. Sales and marketing expenses increased from $390,000
for the three months ended September 30, 1998 to $1.8 million for the three
months ended September 30, 1999. The increase in spending was primarily
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 19.1% for the three months ended September 30,
1998 to 13.8% for the three months ended September 30, 1999. The decrease in
sales and marketing expenses as a percentage of revenues reflects lower customer
acquisition costs attributable to customer care and referral programs spread
over a larger revenue base.
General and administrative. General and administrative expenses increased
from $0.7 million for the three months ended September 30, 1998 to $3.9 million
for the three months ended September 30, 1999. The absolute
13
increase in spending was due to the growth of our business and the
administrative functions necessary to support our growth, as well as incremental
costs associated with the public status of the Company. As a percentage of
revenue, general and administrative costs decreased from 32.1% for the three
months ended September 30, 1998 to 29.7% for the three months ended September
30, 1999. The decrease on a percentage basis represents leveraging of resources
across an increased customer base.
Depreciation and amortization. Depreciation and amortization expense
increased from $345,000 for the three months ended September 30, 1998 to $6.4
million for the three months ended September 30, 1999. This increase was
primarily a result of the amortization of intangible assets related to acquiring
our customer base since September 30, 1998, 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 $25,000 for the three months ended September 30, 1999
related to the issuance of common stock and stock options. 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 and a charge to reflect
vesting of previously issued common stock or options granted. We believe these
charges to be non-recurring in nature because we expect to issue all future
shares and stock options at prices which approximate market value. However, some
unvested options to purchase common stock will continue to vest over the next
four years, which will result in additional compensation expense of
approximately $135,000 in periods subsequent to September 30, 1999.
Interest income (expense), net. Interest expense, net increased from
$96,000 for the three months ended September 30, 1998 to $188,000 for the three
months ended September 30, 1999. This increase is the result of the higher
average balance on our $70.0 million line-of-credit which was used to fund
acquisitions completed during 1998 and 1999 prior to our initial public
offering; this line of credit was paid off on July 25, 1999 with proceeds from
the initial public offering.
Net loss. As a result of the above, we reported net loss of $1.1 million ,
or $.06 per share applicable to common stockholders, for the three months ended
September 30, 1998 as compared to net loss of $3.4 million, or $0.11 per share
applicable to common stockholders, for the three months ended September 30,
1999.
EBITDA. EBITDA increased from $180,000 for the three months ended
September 30, 1998 to $3.3 million for the three months ended September 30,
1999. As a percentage of revenues, EBITDA increased from 8.8% for the three
months ended September 30, 1998 to 25.4% for the three months ended September
30, 1999. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
Revenues. Total consolidated revenues increased from $4.4 million for the
nine months ended September 30, 1998 to $32.1 million for the nine months ended
September 30, 1999, representing an increase of 630%. The revenue growth was
primarily driven by the increase in our customer base from approximately 118,000
at September 30, 1998 to approximately 304,000 at September 30, 1999. This
substantial 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 customer churn rates. In addition, we introduced several new
service offerings, such as digital subscriber lines and long distance telephone
service, which generated additional revenue from our customer base.
Internet access service costs. Internet access service costs increased
from $1.6 million for the nine months ended September 30, 1998 to $10.4 million
for the nine months ended September 30, 1999. Internet access service costs as a
percent of revenue decreased from 36.7% for the nine months ended September 30,
1998 to 32.1% for the
14
nine months ended September 30, 1999 due to improved telecommunication contracts
and economies of scale. The increase in absolute spending for the nine months
ended September 30, 1999 was primarily a result of an 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.
Sales and marketing. Sales and marketing expenses increased from $0.8
million for the nine months ended September 30, 1998 to $4.0 million for the
nine months ended September 30, 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 18.1% for the nine months ended September 30, 1998 to 12.4%
for the nine months ended September 30, 1999. The decrease in sales and
marketing expenses as a percentage of revenue reflects lower customer
acquisition costs attributable to customer care and referral programs spread
over a larger revenue base.
General and administrative. General and administrative expenses increased
from $1.5 million for the nine months ended September 30, 1998 to $9.4 million
for the nine months ended September 30, 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 33.5% for the nine months ended September 30, 1998 to 29.2%
for the nine months ended September 30, 1999. The decrease on a percentage basis
represents leveraging of resources across an increased customer base.
Depreciation and amortization. Depreciation and amortization expense
increased from $0.6 million for the nine months ended September 30, 1998 to
$15.0 million for the nine months ended September 30, 1999. This increase was
primarily a result of the amortization of intangible assets related to acquiring
our customer base since September 30, 1998, 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 $780,000 for the nine months ended September 30, 1998 which
increased to $2.5 million for the nine months ended September 30, 1999 relating
to the issuance of common stock and stock options. The amount of these charges
was based on the issuance and grant of common stock and options at purchase and
exercise prices below fair market value and a charge to reflect vesting of
previously issued common stock or options granted. We believe these charges to
be non-recurring in nature because we expect to issue all future shares and
stock options at prices which approximate market value. However, some unvested
options to purchase common stock will continue to vest over the next four years,
which will result in additional compensation expense of approximately $135,000
in periods subsequent to September 30, 1999.
Interest income (expense), net. Interest expense, net increased from
$173,000 for the nine months ended September 30, 1998 to $2.0 million for the
nine months ended September 30, 1999. This increase is the result of the higher
average balance on our $70.0 million line-of-credit which was used to fund
acquisitions completed during 1998 and 1999; this line of credit was paid off on
July 25, 1999 with proceeds from the initial public offering.
Net loss. As a result of the above, we reported net loss of $1.2 million,
or $0.08 per share applicable to common stockholders, for the nine months ended
September 30, 1998 as compared to net loss of $11.5 million, or $0.45 per share
applicable to common stockholders, for the nine months ended September 30, 1999.
EBITDA (as defined). EBITDA increased from $0.5 million for the nine
months ended September 30, 1998 to $8.4 million for the nine months ended
September 30, 1999. As a percentage of revenues, EBITDA increased from 11.7% for
the nine months ended September 30, 1998 to 26.1% for the nine months ended
September 30, 1999.
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.
Our capital needs 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
15
the issuance of debt and notes payable and through private placements of our
securities, as further described below. On July 20, 1999, the Company completed
an initial public offering in which it raised net proceeds of approximately
$99.5 million. Upon closing of the offering $60.6 million of senior bank debt
and accrued interest and fees were repaid, $8.8 million of preferred stock and
cumulative dividends were redeemed, and $2.3 million of subordinated notes were
repaid. The Company intends to use the remainder of the proceeds for general
corporate purposes, including potential acquisitions and capital expenditures.
Net cash provided by operating activities was $5.2 million for the nine
months ended September 30, 1999, compared to net cash provided by operating
activities of $1.7 million for the nine months ended September 30, 1998. The
primary sources of cash from operating activities for the nine months ended
September 30, 1999 were $15.0 million in depreciation and amortization and a
$2.5 million compensation charge for issuance of common shares and options.
These sources were partially offset by the $11.1 million net loss.
Net cash used in investing activities was $41.6 million for the nine
months ended September 30, 1999, compared to net cash used in investing
activities of $30.6 million for the nine months ended September 30, 1998. Net
cash used in investing activities for the nine months ended September 30, 1999
consisted of $36.6 million to acquire thirteen Internet service provider
businesses and $5.0 million for the purchase of capital equipment. Cash used in
investing activities for the nine months ended September 30, 1998 related to
acquisition activity and the purchase of capital equipment.
Net cash provided by financing activities was $51.8 million for the nine
months ended September 30, 1999, compared to net cash provided by financing
activities of $29.8 million for the nine months ended September 30, 1998. The
primary sources of cash from financing activities for the nine months ended
September 30, 1999 was the proceeds from the Company's initial public offering
as discussed above, and use of proceeds from the Company's revolving credit
facility.
In September 1998, we entered into a $40.0 million revolving credit
facility with a bank group led by Fleet National Bank. On April 13, 1999, we
increased our availability under our credit facility to $70.0 million on similar
terms and conditions. In July 1999, we re-negotiated our credit facility
concurrent with our initial public offering for a $60 million line of credit,
with the option to extend to $70 million, on similar terms and conditions. At
September 30,1999, there was no amount outstanding. 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 0.5% to 2.75% depending upon our
funded debt to EBITDA ratio. The elected rate as of September 30, 1999 was
approximately 7.95%. Automatic and permanent reductions of the maximum
commitments begin June 30, 2001 and continue until maturity.
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 or 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 executive committee supervises our year 2000 readiness
program and we review our year 2000 program on a monthly basis.
16
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 ensure 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.
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 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.
17
FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, 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.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, from time to time, may be involved in various claims and
legal proceedings arising in the ordinary course of its business. The Company is
not currently a party to any such claims or proceedings, which, if decided
adversely to the Company, would likely either individually or in the aggregate
have a material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) In connection with its initial public offering (the "IPO"), the Company
effected a 1.24-for-1 stock spilt with respect to its Common Stock.
Further an amendment to the Company's certificate of incorporation was
approved by the Company's Board of Directors on June 10, 1999 and by its
stockholders on July 16, 1999 establishing a classified Board of Directors
and effecting certain other changes as described in Item 4(c) below,
affecting the rights of the holders of the Company's Common Stock.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities.
In May 1999, the Company issued 500,000 shares of Common Stock upon
exercise of an outstanding stock option under the Company's 1998 Stock
Option and Incentive Plan for an aggregate exercise price of $250.00 to an
employee of the Company in reliance upon the exemption from registration
under Rule 701 promulgated under the Securities Act of 1933, as amended.
(d) Use of Proceeds.
The Company completed its IPO in July 1999. The IPO was made pursuant to a
Registration Statement on Form S-1, originally filed with the Securities
and Exchange Commission on May 6, 1999, as amended (Commission File No.
333-77917), which was declared effective on July 20, 1999. The IPO
commenced on July 21, 1999 and terminated shortly thereafter after the
sale into the public market of all of the registered shares of Common
Stock.
The shares of Common Stock sold in the IPO were offered for sale by a
syndicate of underwriters represented by Donaldson, Lufkin & Jenrette
Securities Corporation, First Union Capital Markets Corp., CIBC World
Markets Corp. and DLJdirect Inc.
19
The Company registered an aggregate of 10,350,000 shares of Common Stock
(including 1,350,000 shares issuable upon the exercise of the
underwriters' overallotment option) in the IPO at a per share price of
$15.00, for an aggregate offering price of $155,250,000. As of the date of
the filing of this report, 9,000,000 registered shares have been sold at
an aggregate offering price of $135,000,000. Of the 9,000,000 shares sold
in the IPO, 7,425,000 shares were registered for the Company's account.
The Company incurred the following expenses in connection with the IPO:
Underwriting discounts and commissions ... $ 9.45 million
Other expenses ........................... 2.47 million
--------------
Total expenses ...................... $11.92 million
After deducting the expenses set forth above, the Company received
$99,454,899 in net proceeds from the IPO. The Company used approximately (a)
$60.6 million of the proceeds to repay borrowings under the Company's then
existing senior credit facility with Fleet National Bank, including fees and
accrued and unpaid interest, (b) $2.3 million to repay subordinated notes and
accrued interest (c) $8.8 million to redeem all of the outstanding shares of the
Company's Series A Preferred Stock in July 1999 and (d) $12.3 million for the
acquisition of other businesses.
Glenn Friedly, a director of the Company, received proceeds from the
redemption of the Series A Preferred Stock, as did Media/Communications Partners
II Limited Partnership and Media/Communications Investors Limited Partnership.
Each of John Hayes and Christopher Gaffney, directors of the Company, is a
member of the general partner of each of these funds. Messrs. Hayes and Gaffney
disclaim beneficial ownership of all such shares of Series A Preferred Stock and
proceeds of such redemption except to the extent of his pecuniary interest in
the shares held by Media/Communications Investors Limited Partnership.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The stockholders of the Company voted by written consent in lieu of a
special and annual meeting effective July 16, 1999 (the "Written Consent").
(b) As described in paragraph (c) below, on July 16, 1999, the Company's
stockholders approved the Amended and Restated Certificate of Incorporation
including designation of the Company's current directors, John G. Hayes, Glenn
R. Friedly, Christopher S. Gaffney, Gerald H. Taylor and Christopher P. Torto,
under a classified board arrangement.
(c) Pursuant to the Written Consent, the Company's stockholders approved
the Amended and Restated Certificate of Incorporation and the Second Amended and
Restated Certificate of Incorporation and approved amendments to the Company's
1998 Stock Option and Incentive Plan (the "Plan"). The votes for these proposals
were as follows:
20
Class Outstanding For
- ---------------------------------------------------------------------------------------------------
1. Approval of Amended and Restated Series A Preferred 82,748 82,748
Certificate of Incorporation/Second
Amended and Restated Certificate of Common 19,416,380 19,416,380
Incorporation
- ---------------------------------------------------------------------------------------------------
2. Amendments to the Plan Series A Preferred 82,748 82,748
Common 19,416,380 19,416,380
- ---------------------------------------------------------------------------------------------------
By adopting the Amended and Restated Certificate of Incorporation, the
stockholders approved the classification of the current Board of Directors as
follows:
Class I - Term Expires at Annual Meeting of Stockholders held in 2000:
Christopher P. Torto
Gerald H. Taylor
Class II - Term Expires at Annual Meeting of Stockholders held in 2001:
Christopher S. Gaffney
Class III - Term Expires at Annual Meeting of Stockholders held in 2002:
John G. Hayes
Glenn R. Friedly
The above described Amended and Restated Certificate of Incorporation became
effective in connection with the IPO and, among other things: (i) provides for
the classification of directors as described above; (ii) increases the number of
shares of Common Stock authorized to 50,000,000; (iii) prohibits action by
stockholders by written consent; (iv) provides that amendments to the Amended
and Restated Certificate of Incorporation shall require, in some instances, 66
2/3% of the outstanding shares entitled to vote with respect to such amendment.
(d) Not applicable.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
The following exhibits are filed as a part of this report:
3.4** Second Amended and Restated Certificate of Incorporation of
Voyager.net, Inc.
3.5** Amended and Restated By-Laws of Voyager.net, Inc.
10.31*** Promissory Note dated July, 1999 made by Christopher Torto in
favor of the Company.
10.33* Amended and Restated Credit Agreement dated as of July 26,
1999 by and among Voyager Information Networks, a wholly-owned
subsidiary of Voyager.net, Inc., and Fleet National Bank as
Agent and the Lenders identified therein (excluding Schedules
and Exhibits which the Company agrees to furnish
supplementally to the Commission upon request).
10.34* Employment Agreement dated as of September 15, 1999 between
Anthony Paalz and Voyager Information Networks, Inc.
10.35* Agreement Regarding Inventions, Non-competition and
Confidentiality dated as of September 15, 1999 between Anthony
Paalz and Voyager Information Networks, Inc.
27.1* Financial Data Schedule.
B. REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
___________________________________
* Filed herewith.
** Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (File No. 333-84987).
*** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-77917).
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VOYAGER.NET, INC.
Date: November 12, 1999 \s\ Dennis Stepaniak
-----------------------------------------------
Dennis Stepaniak
Senior Vice President, Chief Financial Officer,
and Treasurer
(Principal Financial Officer)
23
EXHIBIT INDEX
-------------
Exhibit
Number Description Page No.
------ ----------- --------
3.4** Second Amended and Restated Certificate of Incorporation of
Voyager.net, Inc.
3.5** Amended and Restated By-Laws of Voyager.net, Inc.
10.31*** Promissory Note dated July, 1999 made by Christopher Torto in
favor of the Company.
10.33* Amended and Restated Credit Agreement dated as of July 26, 1999 by and
among Voyager Information Networks, Inc., a wholly-owned subsidiary of
Voyager.net, Inc., Fleet National Bank as Agent and the Lenders
identified therein (excluding Schedules and Exhibits which the Company
agrees to furnish supplementally to the Commission upon request).
10.34* Employment Agreement dated as of September 15, 1999 between
Anthony Paalz and Voyager Information Networks, Inc.
10.35* Agreement Regarding Inventions, Non-competition and
Confidentiality dated as of September 15, 1999 between Anthony
Paalz and Voyager Information Networks, Inc.
27.1* Financial Data Schedule.
__________________________
* Filed herewith.
** Incorporated herein by reference to the Company's Registration Statement on
Form S-8 (File No. 333-84987).
*** Incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 333-77917).
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