As filed with the Securities and Exchange Commission on February 10, 2000Registration No. 333-89657
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549Amendment No. 1toFORM S-1INTERNET VENTURES, INC.(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
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7370
(Primary Standard Industrial
Classification Code No.)
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36-067784
(I.R.S. Employer
Identification No.)
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1611 S. Catalina Ave., Suite 320, Redondo Beach, California 90277
(310) 543-4937
(Address, including zip code, and telephone number, including area
code, of registrants principal executive offices)
DONALD A. JANKE
INTERNET VENTURES, INC.
1611 South Catalina Avenue, Suite 320
Redondo Beach, California 90277, (310) 543-4937
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With copies to:
CHRISTOPHER
MATERN
2131 N. Larrabee,
Suite 6103
Chicago, IL 60614
(773) 281-7988
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PERRY J.
SHWACHMAN
DAVID J. KAUFMAN
Katten Muchin Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
(312) 902-5200
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date
of this Registration Statement.
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: x
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
delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: ¨
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered |
Amount
to be Registered |
Price
Per Share(1) |
Proposed
Maximum Aggregate Offering Price (1) |
Amount of
Registration Fee(2) |
|||||
---|---|---|---|---|---|---|---|---|---|
Common Stock, $.01 par value | 1,000,000 | $17.00 | $17,000,000 | $4,642 |
(1) Estimated solely for the purpose of
calculating the registration fee in accordance with Rule 457(a) under the
Securities Act of 1933, as amended.
(2) Of
the $4,642, $3,058 was paid to the Securities and Exchange Commission on
October 25, 1999.
The
Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 2000
PROSPECTUS
[INTERNET VENTURES INC. LOGO]
1,000,000 Shares
Common Stock
$17 per share
We are offering 1,000,000 shares of our common stock.
The Offering:
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This is our initial
registered public offering and our common stock is not currently listed on
an exchange or authorized for quotation on Nasdaq.
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We anticipate the price to
be $17 per share.
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All of the 1,000,000
shares will be offered and sold by the officers of our company or will be
offered and sold through registered brokers on a best efforts
basis.
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There is no minimum number
of shares required to be purchased in this offering, and no subscription
payments will be deposited into an escrow account. We reserve the right to
reject any offer to purchase shares in whole or in part. See Plan of
Distribution on page 52 for a discussion about the offer and sale of
these shares.
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This offering will be
terminated upon the earlier of the sale of all 1,000,000 shares offered or
the date on which our board of directors decides to close this
offering.
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Per
Share |
Total if all
1,000,000 shares are sold |
|||
---|---|---|---|---|
Public Offering Price | $17.00 | $17,000,000 | ||
Estimated Discounts and Commissions on shares sold through registered brokers | $ 1.50 | $ 1,500,000 | ||
Estimated Proceeds to us | $15.50 | $15,500,000 |
Investing in our common stock involves a high degree of risk. See
Risk Factors
beginning on page 4 for a discussion of factors you should consider before
deciding to buy our common stock.
We
estimate that expenses related to the offering and commissions to brokers
and finders fees to finders will amount to approximately $1,820,000 if
all 1,000,000 shares are sold at $17 per share. We will not pay commissions
in connection with sales of shares by our officers or employees.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this prospectus is
, 2000.
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities, and we are not soliciting offers to buy
these securities, in any state where the offer or sale is not
permitted.
[Map of western U.S. showing the locations of Internet Ventures
affiliates]
PeRKInet
® and Internet Ventures® are our registered trademarks. This
prospectus also contains other trademarks and tradenames of Internet
Ventures, Inc. and other companies.
Table of Contents
You should rely only on the
information contained in this prospectus. We have not authorized anyone to
provide you with information different from that contained in this
prospectus. We are offering to sell, and seeking offers to buy, shares of
our common stock only under circumstances and in jurisdictions where our
offers and sales are permitted. You should assume that the information
contained in this prospectus is accurate only as of the date on the front
cover of this prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
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Until
, 2000, all dealers that buy, sell or trade our common
stock, whether or not participating in this offering, may be required to
deliver a prospectus.
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This
summary highlights some of the information in this prospectus. To understand
this offering fully, you should read this entire prospectus carefully,
including the risk factors and our financial statements.
Our Company
We are an
Internet service provider for approximately 30,000 residential and
commercial end users in small- to medium-sized communities in the western
United States. We currently operate in nineteen communities located in
California, Colorado, Idaho, Oregon and Washington. Our objective is to
become a dominant Internet communications provider in communities with
populations under 500,000. Based on our four years of operating experience
in these smaller markets, we believe that a committed local presence in a
community will assist in establishing a strong customer base, providing us
with an advantage over our larger competitors.
We
provide Internet services including:
dial-up and broadband Internet access
local web hosting, advertising and storage of high-quality streaming
media
systems integration and network design services
Our
dial-up and broadband Internet access provides our subscribers with access
to the Internet via phone line, cable wire or wireless cable. Our web
hosting services provide local businesses with an electronic address where
the web page of that business is located. We provide local information, such
as local events, announcements, news and weather, and sell advertising on
these web pages. We also provide our customers with video and audio
programming, called streaming media, which we store on our local computer
files. Our systems integration and network design services are aimed at
providing local businesses with consulting and design advice for improving
computer systems and computer networks.
It is
widely recognized that the evolution of the Internet industry will have
enormous implications for the way individuals communicate, work, learn, and
entertain themselves. In 1998, there were 95.4 million Internet users in the
U.S. This number is expected to increase to 350 million by the year 2003. As
a result, we expect the demand for our services to increase in the
future.
We
believe Internet users want fast, reliable Internet access at a reasonable
cost. In response, we offer a high-speed Internet access under the brand
name PeRKInet®. Unlike other competing high-speed Internet access
technologies, which require substantial capital improvements, the PeRKInet
® solution uses existing cable TV and telephone technologies to offer
customers the ability to connect to the Internet more than four times faster
than conventional 56Kbps modems. However, we currently provide the PeRKInet
® service only to a limited number of subscribers in five of the
nineteen communities in which we operate and have encountered difficulty in
our efforts to create revenue sharing partnerships with cable systems
serving additional target markets.
We
incorporated in California on September 19, 1995. Our principal office is
located at 1611 South Catalina Avenue, Suite 320, Redondo Beach, California
90277 and our telephone number is (310) 543-4937. Our web site is located at
www.ivn.net. The information on our website is not incorporated by reference
into this prospectus.
Our Strategy
The key
elements of our strategy for becoming a leading Internet service provider
include the following:
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Acquire or form
relationships with existing Internet service providers in small- to
medium-sized communities in the western United States
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Become a dominant provider
of Internet services in these markets
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Launch our PeRKInet®
broadband Internet service in these markets
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Develop strategic
relationships to take advantage of other business
opportunities
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The Offering
Common stock offered..
1,000,000 shares
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Common stock outstanding prior to this offering, as of January 28,
2000..
7,678,970 shares
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Use of Proceeds..
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To finance Internet
service provide acquisitions or investments within our target markets
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To repay trade accounts
and notes payable
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To purchase broadband
access equipment to launch PeRKInet® in additional markets
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To expand network
infrastructure and customer support operations for PeRKInet®
technology
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To expand our sales and
marketing to potential new subscribers
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To provide working capital
for continued operations
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The number of shares of our common stock outstanding prior to this
offering is based on the number of shares of common stock outstanding as of
January 28, 2000 and excludes the following:
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178,580 shares of common
stock issuable upon the exercise of warrants then outstanding at a
weighted average exercise price of $5.42 per share;
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1,103,342 shares of common
stock issuable upon the exercise of stock options then outstanding at a
weighted average exercise price of $3.67 per share;
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81,507 shares of common
stock issuable upon conversion of our then outstanding 12% convertible
debentures;
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68,182 shares of common
stock issuable upon conversion of a then outstanding convertible note, in
addition to our 12% convertible debentures; and
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639,886 shares of common
stock then available for future grants under our stock option
plans.
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Summary Financial Information
(Dollars in thousands, except share, per share and other
data)
Fiscal Year Ended
March 31, |
Six Months Ended
September 30, |
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1997 |
1998 |
1999 |
1998 |
1999 |
|||||||||||
Statement of Operations Data: | |||||||||||||||
Revenues | $ 1,365 | $ 2,755 | $ 4,370 | $ 1,880 | $ 3,055 | ||||||||||
Cost of revenues | 1,765 | 3,304 | 4,252 | 1,836 | 2,803 | ||||||||||
Expenses | 869 | 2,353 | 3,319 | 1,371 | 2,367 | ||||||||||
Net loss | (1,270 | ) | (2,902 | ) | (3,201 | ) | (1,327 | ) | (2,114 | ) | |||||
Net loss per share basic and diluted | (.32 | ) | (.54 | ) | (.51 | ) | (.23 | ) | (.30 | ) | |||||
Weighted average shares outstanding
used in
basic and diluted calculation |
3,968,277 | 5,311,624 | 6,268,217 | 5,780,912 | 7,065,584 | ||||||||||
Balance Sheet Data: | |||||||||||||||
Total assets | $ 2,021 | $ 2,913 | $ 3,756 | $ 3,914 | $ 5,446 | ||||||||||
Total liabilities | 1,457 | 3,055 | 2,994 | 2,356 | 3,649 | ||||||||||
Total stockholders equity (deficit) | 564 | (142 | ) | 762 | 1,558 | 1,797 | |||||||||
Working capital (deficit) | (751 | ) | (2,146 | ) | (1,820 | ) | (1,186 | ) | (1,437 | ) | |||||
Other Data: | |||||||||||||||
Number of dial-up subscribers at period end | 4,893 | 12,193 | 25,733 | 18,132 | 26,538 | ||||||||||
Number of PERKInet® subscribers at period end | 5 | 965 | 1,540 | 1,239 | 1,049 | ||||||||||
Total number of subscribers at period end | 4,898 | 13,158 | 27,273 | 19,371 | 27,587 | ||||||||||
Total number of communities served | 8 | 12 | 19 | 12 | 20 |
Notes to Readers of this Prospectus
You
should keep in mind the following points as you read this
prospectus:
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Except where we indicate
differently, the information in this prospectus assumes that no one will
exercise any outstanding option or warrant.
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This prospectus contains
statistical data regarding the use of the Internet and Internet service
providers. We have taken these data from published information on these
subject matters.
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You
should carefully consider the risks and uncertainties described below, and
all of the other information included in this prospectus, before you decide
whether to purchase shares of our common stock.
Risks Related to Our Business
We
have incurred losses since we began operating in September 1995 and we
expect to continue operating with net losses as we expand our business in
the future.
We
incurred net losses of approximately $9.6 million from inception in
September 1995 through September 30, 1999, and therefore have accumulated an
earnings deficit, as well as negative working capital. We expect to continue
incurring net losses as we continue expending substantial resources on
sales, marketing and administration, and the development of PeRKInet®,
our high-speed Internet-over-cable access service. In addition, we currently
intend to substantially increase our capital expenditures and operating
expenses in order to expand our network to support additional expected
subscribers in existing and future markets and to market and provide our
services to a growing number of potential subscribers. In addition, we plan
to continue growing through acquisitions. As a result, we expect to incur
additional substantial operating and net losses for the foreseeable future,
and accordingly expect our earnings deficit to increase.
Our
limited operating history in the Internet service provider industry makes it
difficult to predict whether our business plan will be
successful.
We began
offering our services in September 1995. The market for Internet service
providers is relatively new and uncertain. Thus, you should evaluate our
chances of financial and operational success in light of the risks,
uncertainties, expenses, delays and difficulties associated with operating a
business in a relatively new and unproven market, many of which may be
beyond our control. Some of the risks that we face are described in the
following paragraphs. Our failure to address these risks could increase our
net losses and prevent us from becoming profitable.
If we
are not able to access the cable systems to launch our PeRKInet® service
in our target markets, a significant source of our future revenue and
earnings growth will be limited.
A key
element in our growth strategy is launching our PeRKInet® service in our
target markets. Our ability to launch our PeRKInet® technology depends
on our ability to gain access to cable systems. This requires either
establishing a voluntary carriage relationship with a cable operator in our
target markets or gaining access to the cable operators system by
virtue of the law, including the leased access provisions of the
Communications Act of 1934, as amended. We have carriage agreements in five
of the nineteen communities which we serve, but have encountered difficulty
in our efforts to create revenue sharing partnerships with cable systems
serving additional target markets. To gain cable access, we filed a petition
with the Federal Communication Commission (FCC) requesting that it rule that
Internet service providers are entitled to commercial leased access over
cable systems. We devoted a substantial amount of our resources to the
pursuit of leased access. We cannot be certain that we will obtain a
favorable determination from the FCC that our PeRKInet® service falls
within the scope of the leased access provisions; however, a February 4,
2000 Los Angeles Times article reported that the FCCs staff
recommended that the agency turn down our petition. In
addition, the FCC is not required to rule within a specified period of time on
our petition. A ruling might not come for several years during which time
new technology could become available to make the issue moot. Even if the
FCC rules in our favor, it is likely that the cable industry will appeal the
ruling. A final judicial decision could take several years, and again, new
technology could become available to make the issue moot. It is also not
clear what a favorable determination would mean for Internet service
providers. In addition to the access we desire, it could open us up to
additional regulation by both federal and state authorities. Also, our
promotion of leased access may have alienated some cable operators, which
might make it difficult for us to negotiate carriage agreements with cable
operators to introduce PeRKInet®. If we have difficulty gaining access
to cable systems, through either leased access or negotiated agreements with
cable operators, it will limit our subscriber base and our ability to
grow.
If the
price of our common stock declines, it is possible that the purchasers of
our 12% convertible debentures could pursue rescission claims against
us.
Prior to
the initial filing of the registration statement to which this prospectus
relates, we sold unregistered units of securities consisting of 12%
convertible debentures due 2001 and shares of our common stock pursuant to
Regulation D under the Securities Act. The aggregate purchase price for the
units was $5,417,972. Although an offering and sale of securities under
Regulation D constitutes a valid exemption from registration under the
Securities Act, we cannot be certain that the offering of our 12%
convertible debentures satisfied all of the requirements of Regulation D. If
we failed to satisfy all of the requirements to qualify the offering as
exempt from registration, each of the purchasers of our 12% convertible
debentures may have the right to require that we repurchase the 12%
convertible debentures and the shares of our common stock issued in
connection with the Regulation D offering at a price equal to the
consideration originally paid, or a cash equivalent, plus interest from the
date of the purchase. In addition, we may be subject to federal rescission
claims brought by the SEC. Any liability which we may have as a result of
such rescission claim would have a material adverse effect on our financial
condition, and we may not be able to satisfy any rescission claims without
raising further capital or reaching some other negotiated accommodation with
the purchasers of our 12% convertible debentures. If any rescission claims
are made, it could have the effect of delaying or postponing this offering.
The proceeds of this offering could be used to satisfy any rescission
claims. The Division of Securities of the Ohio Department of Commerce
requested further information about our convertible debenture offering and
in connection with our discussions with the Ohio Division of Securities we
agreed to offer the six Ohio purchasers the right to rescind their purchase
of securities which had an aggregate purchase price of $55,500. Additional
details about this inquiry are described in the Legal Proceedings section of
this prospectus under the caption Ohio Securities Inquiry.
We
have received a going concern opinion from our auditors, which may impair
the execution of our business strategy.
Our
independent auditors have included in their audit reports of and for the
fiscal years ended March 31, 1998 and 1999 that they are concerned with our
ability to continue as a going concern. Through September 30, 1999, we have
generated only limited revenues and have incurred losses. There can be no
assurance that we will be able to implement successfully our business
strategy or achieve significant revenues or profitable operations. These
factors raise substantial doubt about our ability to continue as a going
concern. There can be no assurance that our business strategy, if fully
executed, will enable us to continue as a going concern.
We may
not achieve or sustain profitability or positive cash flow from our
operations if demand for our dial-up and PeRKInet® services does not
materialize.
We cannot
predict whether our dial-up service or our PeRKInet® service will
achieve broad market acceptance at the prices we expect to charge. If
pricing levels are not achieved or sustained, or if our PeRKInet®
services do not achieve or sustain broad market acceptance, our ability to
generate revenue from our services will be impaired.
We
may not be able to retain our subscribers at our current pricing
levels.
Because
our sales, marketing and other costs of acquiring new subscribers are
substantial relative to the monthly fees derived from these subscribers, we
believe that our long-term success depends largely on our ability to retain
our existing subscribers, while continuing to attract new subscribers. We
continue to invest significant resources in our technical support
capabilities to provide high levels of customer service. We cannot be
certain that these investments will maintain or improve subscriber
retention. We believe that intense competition from our competitors, some of
which offer many free hours of service or other enticements for new
subscribers, has caused, and may continue to cause, some of our subscribers
to switch to our competitors services. In addition, some new
subscribers use the Internet only as a novelty and do not become consistent
users of Internet services and, therefore, may be more likely to discontinue
their service. These factors adversely affect our subscriber retention
rates. Any decline in subscriber retention rates could have a material
adverse effect on our business, financial condition and operating
results.
We do
not have exclusive rights to the equipment or technology used in connection
with our PeRKInet® service; we may not be able to protect the
intellectual property rights that we do hold against
infringement.
Our
success depends, in part, on our ability to provide a service not offered by
other Internet service providers. However, we do not have an exclusive right
to the equipment used to launch our PeRKInet® service. We expect our
competitors to offer services similar to our PeRKInet® service. This
competition may make it difficult to retain subscribers at price levels
sufficient to become profitable.
In
addition, our ability to provide a service not offered by other Internet
service providers requires that we preserve our trade secrets and other
proprietary rights. Our inability to preserve our intellectual property
rights could make it difficult to attract and retain subscribers at price
levels sufficient to become profitable.
If
competition for subscribers continues to increase, we could experience
reductions in profitability and revenue growth.
The
Internet services market in which we operate is extremely competitive and
highly fragmented. There are no substantial barriers to entry, and we expect
competition in this market to intensify in the future. Our current and
prospective competitors include many large companies that have substantially
greater financial, technical, marketing and other resources than our
company. We compete (or expect to compete in the future) directly or
indirectly with the following categories of companies:
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national and regional
Internet service providers such as Earthlink Networks, Inc., MindSpring
Enterprises, Inc., Rocky Mountain Internet, Inc., At Home Corporation,
RoadRunner and PSInet Inc.;
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established online service
providers such as America Online, Inc., Prodigy, Inc., Microsoft Network
and WebTV Networks Inc.;
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computer software and
technology companies such as Microsoft Corporation;
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national
telecommunications (long distance inter-exchange carriers) companies such
as Sprint Corporation and MCI WorldCom, Inc., which have agreed to merge,
and AT&T Corp.;
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regional Bell operating
companies;
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cable operators such as
Comcast Corporation, TeleCommunication, Inc. (which has been acquired by AT
&T), MediaOne Group, Adelphia Communications Corporation and Time
Warner, Inc.; and
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content aggregators such
as America Online, CompuServe, Excite@Home, Microsoft and Yahoo!,
Inc.
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Many of
our competitors offer (or may soon offer) technologies that compete with
some or all of our products and services. These technologies may have the
ability to provide higher speed, more reliable Internet access than our
PeRKInet® service. As high-speed Internet access becomes more prevalent,
we may have difficulty retaining or attracting new subscribers. This
increase in competition for subscribers could cause reductions in our
operating results and revenue growth.
In
addition, the Telecommunications Act contains certain provisions that lift,
or establish procedures for lifting, certain restrictions relating to the
ability of the regional Bell operating companies to engage directly in
the Internet access business. The Telecommunications Act also makes it easier
for national long distance carriers such as AT&T to offer local
telephone service and allows regional Bell operating companies to provide
electronic publishing of information and databases. Competition from these
companies could prevent us from expanding our business.
If our
competitors offer free Internet access, we may be forced to alter our
business plan.
An
evolving trend among Internet service providers is to offer free Internet
access to subscribers rather than charging a monthly service fee. National
and regional Internet service providers, like NetZero, have offered access
to the Internet at no initial or monthly cost to the subscriber. These
companies expect to derive niche markets of customers based upon targeted
web-advertising revenue streams. Such competitors may derive adequate
revenue streams from these new customer lists to sustain an operating
Internet service provider business and increase competition in our markets.
If these companies are successful at increasing the number of their
subscribers, our subscriber base may decrease causing us to lose monthly
revenue. If free Internet access becomes a dominant trend in our industry,
we may suffer competitively. If competition forces us to offer free Internet
access, we cannot guarantee that we will be able to generate enough revenue
from advertising to sustain our growth or become profitable.
We may
not compete effectively with other Internet service providers that have more
resources and experience than us.
Our
competitors may be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and devote substantially more
resources to developing Internet services. There can be no assurance that we
will be able to compete successfully against current or future competitors
or that competitive pressures we face will not materially adversely affect
our business, operating results or financial condition. Further, as a
strategic response to changes in the competitive environment, we may make
certain pricing, service or marketing decisions or enter into acquisitions
or new ventures that could increase our net operating loss and impair our
future profitability.
If
companies such as Pacific Bell, Sprint and Electric Lightwave discontinue
doing business with us, we may be unable to find adequate
replacements.
We rely
on local telephone, cable television, wireless/microwave and other companies
to provide data communications capacity via cable television lines, wireless
microwave signals, local telecommunications lines and leased long distance
lines. We are subject to potential disruptions in these cable, microwave and
telecommunications services and may have no means of replacing these
services, on a timely basis or at all, in the event of a disruption. Any
disruption in our service could cause our subscribers to switch their
service to one of our competitors. This could increase our net operating
loss and prevent us from becoming profitable.
Pacific
Bell, Sprint and Electric Lightwave also sell or lease services and products
to our competitors, and some of these carriers are, and in the future others
may become, our competitors. There can be no assurance that our
telecommunications carriers will not enter into exclusive arrangements with
our competitors or otherwise stop selling or leasing their services or
products to us, which could result in a loss of subscribers and a
corresponding increase in our net operating loss.
If
Hybrid Networks, Inc., our supplier of PeRKInet® equipment, fails to
provide the equipment we order, we may lose potential and existing PeRKInet
® subscribers.
We depend
on Hybrid Networks, Inc. for equipment used in our PeRKInet® service. We
are testing equipment from other manufacturers, but we have not yet
identified any alternative suppliers. If we are unable to obtain additional
equipment from Hybrid, we would not be able to sign up additional PeRKInet
® subscribers and we would not be able to replace any broken equipment
which could result in a loss of existing PeRKInet®
subscribers.
Our
history of losses and our expectation of continued losses could make it
difficult for us to obtain additional financing, which could make it
difficult to expand our business and possibly result in our inability to pay
current bills.
Any additional equity financing may be dilutive to our stockholders, and debt
financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and operational
matters. We will need additional financing to expand, and if we cannot
obtain additional financing as needed, we may be required to reduce the
scope of our operations or our anticipated expansion, which could result in
our inability to pay current bills resulting in insolvency.
Our
capital requirements depend on the following factors:
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the rate of market
acceptance of our services;
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our ability to maintain
and expand our customer base;
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the rate of expansion of
our network infrastructure;
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the level of resources
required to expand our marketing and sales organization;
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information systems and
research and development activities;
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the pricing and timing of
acquisitions; and
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the availability of
hardware and software provided by third-party vendors and other
factors.
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If these
capital requirements vary materially from those currently planned, we may
require additional financing sooner than anticipated. We have no commitments
for any additional financing, and there can be no assurance that these
commitments can be obtained on favorable terms, if at all.
Our
plan to expand by leveraged acquisitions of other Internet service providers
may make it difficult for us to maintain our operations and could impair the
quality and reliability of our service.
We have
expanded our operations since inception and intend to continue to expand our
operations aggressively to pursue existing and potential market
opportunities. This rapid growth has placed, and is expected to continue to
place, a significant strain on our managerial, operational and financial
resources. In particular, our expansion into additional markets will require
implementation of marketing efforts in new locations, as well as the
employment of qualified technical, marketing and customer support personnel
in these locations.
In order
to manage our growth, we must improve our operational systems, procedures
and controls on a timely basis. If the demands placed on our resources by a
growing subscriber base outpace our growth and operating plans, the quality
and reliability of our service may decline and our relationships with our
customers may be harmed as a result.
Many of
our acquisitions have included promissory notes to the sellers for a
significant portion of the purchase price. Those notes have been secured by
the business we acquired. If we continue acquiring companies using this
method and the acquired companies are unable to generate enough revenue to
repay these notes we will need to use additional financing, including some
of the proceeds from this offering, to repay those promissory notes. Our
continued growth will make it more difficult to repay both the existing
promissory notes and the promissory notes for future
acquisitions.
We may
encounter problems integrating the operations of new acquisitions, joint
ventures and strategic relationships, which could result in increased costs
and an increase in our net operating loss.
Our
future growth depends in part on our ability to acquire and successfully
integrate Internet service providers in our target markets. Although we are
actively pursuing acquisition targets, there can be no assurance that we
will successfully identify and acquire these companies on favorable terms.
We may face increased competition for acquisition opportunities, which may
inhibit our ability to consummate suitable acquisitions and increase the
costs of completing acquisitions. In addition, acquisitions involve
substantial risks, which include:
|
the diversion of management
s attention;
|
|
the assimilation of the
operations and personnel of the acquired companies;
|
|
the potential disruption
of our ongoing business;
|
|
the inability of
management to maximize our financial and strategic position by the
successful incorporation of acquired technologies and rights into our
service offerings;
|
|
the maintenance of uniform
standards, controls, procedures and policies; and
|
|
the impairment of
relationships with employees and customers as a result of changes in
management.
|
There is
no assurance that we will be successful in overcoming these risks or any
other problems encountered in connection with our acquisitions.
If we
were to proceed with one or more significant acquisitions in which the
consideration consists of cash, a substantial portion of our available cash
could be used to consummate the acquisitions and strategic relationships. If
we were to consummate one or more significant acquisitions in which the
consideration consists of stock, our shareholders could experience
significant dilution of their ownership of our stock. Further, many business
acquisitions must be accounted for as a purchase. Most of the businesses
that may become attractive acquisition candidates are likely to have
significant goodwill and intangible assets, and acquisition of these
businesses, if accounted for as a purchase, would typically result in
additional goodwill charges. If we consummate additional acquisitions in the
future that must be accounted for as purchases, these acquisitions would
likely increase our goodwill amortization expenses and increase net
losses.
Disruptions of our services due to telecommunications or computer
system failure could result in subscriber cancellations, which may result in
a loss of revenue.
Our
success largely depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and the Internet. As we expand
our operations and data traffic grows, the stress on our hardware and
traffic management systems will increase. In addition, our systems and
operations are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins and similar events. The
occurrence of a natural disaster, the failure of one of our systems or the
occurrence of other unanticipated problems could cause interruptions in our
services. Extensive or multiple interruptions in providing customers with
Internet access are a primary reason for customer decisions to cancel the
use of access services. Accordingly, any system failure that causes
interruptions in our operations could have a material adverse effect on our
business, results of operations and financial condition. We do not presently
have a formal disaster recovery plan and do not carry business interruption
insurance to compensate us for losses that may occur.
Internet security breaches could cause our subscribers to cancel
their service which may result in a loss of revenue.
Our
networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Internet service providers, including us, have in
the past experienced, and may in the future experience, interruptions in
service as a result of the accidental or intentional actions of Internet
users, current and former employees or others. Unauthorized access could
also potentially jeopardize the security of confidential information stored
in our computer systems, which may result in liability to our subscribers
and also may deter potential subscribers. Current security measures have
been circumvented in the past, and there can be no assurance that measures
implemented by us will not be circumvented in the future. Moreover, we have
no control over the security measures of local cable operators through whom
we offer our PeRKInet® service. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessations of service to our subscribers, which could result in subscriber
cancellations. Subscriber cancellations could increase our operating losses
and prevent us from becoming profitable.
Loss
of services of our president, Donald Janke, or our chief operating officer,
Reed Olson, could make it difficult to implement our business
plan.
We are
highly dependent on the technical and managerial skills of our president,
Donald Janke, and our chief operating officer, Reed Olson, and their ability
to identify, hire and retain additional personnel, particularly persons with
technical expertise.
We do not maintain key man life insurance on any of our employees; and any of
our employees may voluntarily terminate their employment at any time. We do
not have employment agreements or non-competition agreements with either
Donald Janke or Reed Olson or any other senior management member. If either
Donald Janke or Reed Olson were to resign, die or become disabled, we would
have difficulty replacing them. This could not only impede our growth, but
could also make it difficult to operate our exiting facilities.
We are
involved in pending litigation that could result in our inability to pay
current bills.
We are
currently involved in litigation that could result in our being unable to
pay our current bills if we are unable to raise sufficient proceeds from
this offering. We are involved in an arbitration with three of the former
owner of our Internet On-Ramp subsidiary. You can find a detailed
description of that arbitration on page 42. It is possible that we could
lose this arbitration and be liable for damages in excess of $1 million. We
would then have to satisfy the judgment from the proceeds of this offering.
If we were unable to use the proceeds to satisfy a judgment, then we might
have to sell one of our subsidiaries.
Even if
we win this arbitration, we will have substantial legal bills. Additionally,
our president, Donald Janke, and a former director, Matthew Matern, are also
named as defendants in this arbitration. If they are successful in defending
themselves, our companys by-laws require us to reimburse them for
their legal bills. The legal bills for both our company and reimbursement of
Mr. Janke and Mr. Matern are likely to exceed $100,000. If we are unable to
use the proceeds of this offering to pay those legal bills, then we may be
unable to pay our current bills because our revenue is less than our
expenses.
We are
also involved in litigation with Davis Communications and Eastern Washington
University concerning their termination of our PeRKInet® contract. You
can find a detailed description of that litigation on page 43. Our legal
bills for prosecuting this suit are likely to be in excess of $100,000. If
we do not win or obtain a favorable settlement, we could have difficulty
paying these legal fees and paying our other current bills because our
revenue is less than our expenses.
We may become
subject to risks of international operations.
As we
explore business opportunities internationally, we could become subject to
the risks of conducting business in foreign markets, including:
|
Foreign currency
fluctuations, which could result in reduced revenues or increased
operating expenses;
|
|
Inability to locate
qualified local partners and suppliers;
|
|
The burdens of complying
with a variety of foreign laws and trade standards;
|
|
Tariffs and trade
barriers;
|
|
Difficulty in accounts
receivable collection;
|
|
Potentially longer payment
cycles;
|
|
Foreign taxes;
|
|
Unexpected changes in
regulatory requirements (including the regulation of Internet access);
and
|
|
Uncertainty regarding
liability for information retrieved and replicated in foreign
countries.
|
If we
expand internationally, we will also be subject to general geopolitical
risks, such as political and economic instability and changes in diplomatic
and trade relationships, in connection with our proposed international
operations. There can be no assurance that the risks associated with our
proposed international operations will not materially and adversely affect
our business and financial results.
Risks Related to Our Industry
If
Internet usage does not continue to grow, our ability to increase our
subscriber base will become difficult and our business plan will not be
viable.
Market
acceptance of our services is substantially dependent upon the adoption of
the Internet for commerce, entertainment and communications. We cannot be
certain that Internet usage will continue to grow as it has in the past.
Critical issues concerning the commercial use of the Internet remain
unresolved and may affect the growth of Internet use, especially in the
business and consumer markets we target. Despite growing interest in the
commercial possibilities for the Internet, many businesses and consumers
have been deterred from purchasing Internet access services for a number of
reasons, including:
|
inconsistent quality of
service;
|
|
lack of availability of a
cost-effective, high-speed service;
|
|
a limited number of local
access points for corporate users;
|
|
inability to integrate
business applications on the Internet;
|
|
the need to deal with
multiple and frequently incompatible vendors;
|
|
inadequate protections of
the confidentiality of stored data and information moving across the
Internet; and
|
|
a lack of tools to
simplify Internet access and use.
|
The
adoption of the Internet for commerce and communications, particularly by
those individuals and enterprises that have historically relied upon
alternative means of commerce and communication, generally requires an
understanding and acceptance of a new way of conducting business and
exchanging information. In particular, enterprises that have already
invested substantial resources in other means of conducting commerce and
exchanging information, or in relationships with other Internet service
providers, may be slow to adopt a new strategy that may make their existing
personnel, infrastructure and Internet service provider relationships
obsolete. If the use of the Internet does not continue to grow, or evolves
in a way that we cannot address, then we may not grow enough to reach
profitability.
If we
do not adapt to Internet technology trends and evolving Internet industry
standards, we will not remain competitive or become
profitable.
The
market for Internet access is characterized by rapidly changing technology,
evolving industry standards, changes in subscriber needs, and frequent new
service and product introductions. Our future success will depend, in part,
on our ability to use leading technologies effectively, to continue to
develop our technical expertise, and to enhance existing services and
develop new services to meet changing subscriber needs on a timely and
cost-effective basis. There can be no assurance that we will be successful
in using new technologies effectively, developing new services or enhancing
existing services on a timely basis or that new technologies or enhancements
will achieve market acceptance.
We
believe that our ability to compete successfully also depends upon the
continued compatibility and interoperability of our services with products
and architectures offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, there can be no
assurance that industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a
timely fashion and maintain a competitive position in the market. In
addition, there can be no assurance that services or technologies developed
by others will not render our services or technology uncompetitive or
obsolete.
Our
business strategy depends on our ability to provide high quality audio,
video, text and graphics that subscribers will find useful.
If we do
not provide high quality audio, video, text and graphics content to our
subscribers, then we are likely to lose those customers to our competitors.
This would increase our net operating loss and make it more difficult to
become profitable.
The
law relating to the liability of Internet service providers is unsettled,
which may subject us to claims of copyright and trademark
infringement.
Because
materials will be downloaded and redistributed by subscribers and cached or
replicated by us in connection with the offering of our services, there is a
potential that claims may be made against us under both United States and
foreign law for negligence, copyright or trademark infringement, or other
theories based on the nature and content of materials. These types of claims
have been brought, sometimes successfully, against online service providers
in the past. In particular, copyright and trademark laws are evolving both
domestically and internationally, and there is uncertainty concerning how
broadly the rights afforded under these laws will be applied to online
environments. It is impossible for us to determine who all the potential
rights holders may be with respect to all materials available through our
services. The recently enacted federal Digital Millennium Copyright Act,
which creates a safe harbor from copyright infringement liability for
Internet service providers that meet certain statutory requirements, may
provide us with protection from certain copyright infringement liability
claims. However, a number of third parties have claimed that they hold
patents covering various forms of online transactions or online
technologies. Patent infringement claims relating to our services or
technologies could be asserted against us.
The
nature of our business could subject us to claims of defamation or
transmission of obscene or indecent materials.
The law
relating to liability of Internet service providers and online service
providers for information carried on or disseminated over their networks is
currently unsettled. It is possible that when the law is settled Internet
access providers, like us, could be held liable for the actions of their
subscribers regardless of whether they had knowledge of their subscribers
actions. This could require us to implement measures reducing
exposure to this liability, which may require the expenditure of substantial
resources or the discontinuation of certain product or service
offerings.
If we are
able to offer our PeRKInet® service on cable systems under the leased
access provisions of the Telecommunications Act, we may be liable under the
Telecommunications Act for transmission of obscene material that our PeRKInet
® customers access from the Internet. This liability and the defense of
these allegations may make it uneconomical to provide PeRKInet® via
leased access.
If the
Internet industry becomes subject to increased government regulation, we may
incur additional costs which will likely increase our operating
losses.
We
provide Internet services, in part, through data transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wire line communications. We are not
currently subject to direct regulation by the FCC or any other governmental
agency, other than regulations applicable to businesses generally. However,
in the future we could become subject to regulation by the FCC or other
regulatory agencies as a provider of basic telecommunications services. A
number of local telephone companies have asked the FCC to levy access
charges on enhanced service providers, which may be deemed to
include Internet service providers. Moreover, the public service commissions
of certain states are exploring the adoption of regulations that might
subject Internet service providers to state regulation.
In
addition, a number of proposals have been made at the federal, state and
local levels that could impose taxes on online commerce. The three-year tax
moratorium preventing state and local governments from taxing Internet
access, taxing electronic commerce in multiple states and discriminating
against electronic commerce is scheduled to expire on October 21, 2001. If
the moratorium ends, state and local governments could impose these types of
taxes or discriminate against electronic growth of online commerce and this
could significantly reduce our subscriber growth.
Risks Related to the Offering
The
absence of an active public market for our stock could impair your ability
to sell our stock at a profit or at all.
Our
common stock is not currently listed on an exchange or authorized for
quotation on Nasdaq. It is unlikely that an active trading market will
develop in the near term or that if developed, it will be sustained. In the
event a regular trading market does not develop, any investment in our
common stock would be highly illiquid. Furthermore, because our common stock
is not listed on an exchange or authorized for quotation on Nasdaq, it will
be subject to additional regulation if our stock price falls below $5.00 per
share. Accordingly, an investor in the shares may not be able to sell the
shares readily.
We intend
to seek a listing on the Nasdaq SmallCap Market or OTC Bulletin Board, but
it is uncertain whether we will qualify for either listing. In the event
that we are listed there is no way to predict the market price for our
common stock. The market price of our stock may have a material adverse
effect on our ability to raise additional capital through either debt or
equity.
6,718,380 shares, or 77%, of our total outstanding shares after
this offering if all 1,000,000 shares are sold will be restricted from
immediate resale but may be sold into the market in the near future. This
could cause the market price of our common stock to drop
significantly.
After
this offering, we will have outstanding approximately 8,678,970 shares of
common stock if all 1,000,000 shares are sold. The 1,000,000 shares we are
selling in this offering may be resold in the public market immediately. In
addition, 960,590 shares of common stock are freely tradeable, including
shares sold by us pursuant to Regulation A under the Securities Act and
other shares for which the restrictive legend was removed. The remaining
77%, or 6,718,380 shares, of our total outstanding shares after this
offering if all 1,000,000 shares are sold will become available for resale
in the public market between 90 and 365 days after the date of this
prospectus under the provisions of federal securities laws.
As
restrictions on resale end, the market price could drop significantly if the
holders of these restricted shares sell them or are perceived by the market
as intending to sell them.
The
offering price may not accurately reflect the value of our company and you
may not be able to resell our stock for a profit.
No
investment banker or appraiser has been consulted concerning this offering
or the fairness of the offering price of the shares. The offering price per
share of common stock in this offering was determined by us after
considering factors such as our anticipated results of operations and
current financial condition, estimates of our business potential and
prospects, the experience of our management, the economics of the industry
in general, the general condition of the equities market and other relevant
factors. The offering price is not to be considered a representation that
the common stock has a market value equal to the offering price or that they
could be resold at that price. The offering price is substantially higher
than the purchase price in recent sales of our common stock. In addition,
the offering price may bear no relationship to our actual value.
Our
stock is likely to be highly volatile.
We cannot
predict the extent to which investor interest will lead to an active trading
market in our stock or how liquid that market might become. The stock market
has experienced price and volume fluctuations. In particular, the market
prices of the securities of Internet-related companies have been especially
volatile. In the past, companies that have experienced volatility in the
market price have been the object of class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and diversion of our managements attention.
We
will have broad discretion in using the proceeds of this offering and we
will be relying on our managements judgment to allocate the
proceeds.
Management will have discretion over the allocation of the net proceeds from
the offering, as well as timing of the use of these funds. Consequently,
investors will be relying on managements judgment with only limited
information about its specific intentions for the use of the
proceeds.
You
will incur immediate dilution and will likely incur additional future
dilution.
The
offering price per share of the common stock offered is substantially higher
than the tangible book value per share of the outstanding common stock.
Investors purchasing shares in the offering will therefore incur immediate
and substantial dilution, and existing shareholders will receive a material
increase in the tangible book value per share of their shares of common
stock. As of September 30, 1999, the immediate dilution to new investors
would have been $15.25 per share, or 90%. In addition, investors purchasing
shares of common stock in the offering may bear most of the risk of economic
loss if we are not successful. Also, investors purchasing shares of common
stock in the offering will incur additional dilution to the extent
outstanding options, warrants and convertible debentures are exercised or
converted.
Donald
Janke, our President, owns a large percentage of our common stock and can
influence matters requiring stockholder approval.
Upon
completion of this offering, assuming all 1,000,000 shares offered are sold,
and based upon the shares outstanding as of January 28, 2000, Donald Janke
and our other executive officers and directors will together beneficially
own 30.7% of our outstanding common stock. Accordingly, our officers and
directors will have the ability to influence significantly the election of
our directors and most other stockholder actions.
Any
return on your investment in our stock will depend on your ability to sell
our stock at a profit.
Some
investors favor companies that pay dividends. We have never declared or paid
any dividends. We anticipate that we will not declare dividends at any time
in the foreseeable future. Instead, we will retain any earnings for use in
our business. As a result, your return on an investment in our stock will
likely depend on your ability to sell our stock at a profit.
Since
this offering is being made on a best efforts basis, there can be no
assurance that any or all of the shares will be sold.
The
shares will be offered and sold on a best efforts basis. There is no minimum
offering amount that is required to be sold before we may use the proceeds
of the offering. Funds tendered by prospective purchasers will not be placed
in escrow, but will be available for our use immediately upon acceptance,
for the purposes identified and in the amounts as estimated in the table
under Use of Proceeds. Lack of an escrow arrangement could cause
some risk to the initial investors in the event that insufficient capital is
raised in the offering. In addition, the offering could continue for a
significant period of time yet the offering price will remain the
same.
The
costs of this offering are substantial and may exceed the proceeds from this
offering if it is not successful.
If this
offering is not successful we may be unable to pay the costs of this
offering. To conduct this offering we have incurred and will continue to
incur significant costs for accounting, legal and printing services. If the
proceeds from this offering do not exceed the costs, we may have
insufficient costs to pay those expenses and our current liabilities. This
could require us to sell some of our operating subsidiaries, face insolvency
or file for bankruptcy.
This
prospectus contains forward-looking statements within the meaning of the
federal securities laws that are based on the beliefs of, assumptions made
by and information available to our management. Where possible we have used
words such as may, will, believe,
anticipate, intend, estimate,
expect, plan and similar expressions to identify
these forward-looking statements. Our actual results, performance or
achievements in 2000 and beyond may differ materially from those expressed
in, or implied by, these statements due to a number of factors, including
the risks described above and the occurrence of events described elsewhere
in this prospectus.
USE OF PROCEEDS
This is a
best efforts offering and there is no assurance that we will be successful
in selling any shares at an offering price of $17 per share. If the maximum
number of shares are sold at an offering price of $17 per share, the gross
proceeds we receive from the sale of our stock in this offering will be
$17,000,000. The estimated offering expenses, the resulting amount of net
proceeds and the priority in order of highest to lowest for the use of the
net proceeds for various levels are outlined below.
The
estimated offering expenses of $320,000 include legal and accounting fees,
printing and publishing costs, electronic distribution and web related
offering costs and brokerage commissions incurred in connection with this
offering. Our estimate of brokerage commissions includes brokers
commissions and finders fees based upon a 10% commission for amounts
raised above $2,000,000, which we believe may be sold by our officers
without commission.
The
following table reflects gross proceeds and net proceeds from the offering
ranging from the sale of none of the shares offered to the sale of 100% of
the shares offered. The table describes our best estimate of our use of net
proceeds from this offering, based on our current plans and estimates of
anticipated expenditures. At this time, however, we cannot precisely
determine the exact cost, timing and amount of funds required for our
specific uses. Our actual expenditures may vary from these estimates. We may
find it necessary or advisable to reallocate the net proceeds within the
uses outlined below or to use portions of the net proceeds for other
purposes. Pending these uses, we intend to invest the net proceeds of the
offering in short-term, investment grade obligations.
The
purchase of new PeRKInet® equipment as shown in the table below assumes
deployment of two PeRKInet® installations, including an additional 300
cable modems if 25% of the offering is sold, increasing to four
installations and 800 cable modems if 50% of the offering is sold, and six
installations and 1,500 cable modems if 100% of the offering is sold. The
cost of network operations and customer support centers assumes that the
initial cost of the equipment and overhead is $100,000 and that the
incremental cost per installation is $50,000.
While we
continuously evaluate potential acquisitions, we have no current agreement,
commitment or understanding with respect to any material acquisition or
investment transaction.
PERCENT OF OFFERING SOLD: | 0% | 25% | 50% | 100% | ||||||||
GROSS PROCEEDS: | $ 0 | $4,250,000 | $8,500,000 | $17,000,000 | ||||||||
Less offering expenses | $(320,000 | ) | $ (545,000 | ) | $ (970,000 | ) | $ (1,820,000 | ) | ||||
Net Proceeds | $(320,000 | ) | $3,705,000 | $7,530,000 | $15,180,000 | |||||||
USE OF PROCEEDS: | ||||||||||||
Repayment of trade
accounts payable, notes payable
and balance for working capital |
$ 0 | $ 990,000 | $1,310,000 | $ 2,130,000 | ||||||||
Purchase new PeRKInet ® equipment | $ 0 | $ 300,000 | $ 700,000 | $ 1,000,000 | ||||||||
Network operations
and customer support regional
center for PeRKInet® expansion |
$ 0 | $ 200,000 | $ 300,000 | $ 400,000 | ||||||||
Sales and marketing to potential new subscribers | $ 0 | $ 175,000 | $ 350,000 | $ 500,000 | ||||||||
Finance Internet
service provider acquisitions or
investments and establish new Internet service provider sites |
$ 0 | $1,700,000 | $4,500,000 | $10,600,000 | ||||||||
New employee salaries | $ 0 | $ 170,000 | $ 200,000 | $ 300,000 | ||||||||
New manager salaries | $ 0 | $ 100,000 | $ 100,000 | $ 150,000 | ||||||||
Office rent and office overhead | $ 0 | $ 70,000 | $ 70,000 | $ 100,000 |
We have
never paid cash dividends on our common stock and do not anticipate paying
cash dividends in the foreseeable future. We currently intend to retain any
future earnings to develop and expand our business.
The table
below shows our capitalization as of September 30, 1999. The As
Adjusted column assumes our issuance and sale of 1,000,000 shares of
common stock at an offering price of $17 per share, after deducting the
estimated commissions, finders fees and offering expenses payable by
us. Since this offering is made on a best efforts basis, however, there can
be no assurance that any or all of the shares will be sold.
Capitalization as of
September 30, 1999 |
||||||
---|---|---|---|---|---|---|
Actual |
As
Adjusted |
|||||
Stockholders equity: | ||||||
Preferred stock, $.01 par value,
10,000,000 shares
authorized and none issued and outstanding, actual; none issued and outstanding, as adjusted |
0 | 0 | ||||
Common stock, $.01 par value,
30,000,000 shares
authorized and 7,634,828 shares issued and outstanding, actual; 8,634,828 shares issued and outstanding, as adjusted |
76,348 | 86,348 | ||||
Additional paid-in capital | 11,303,576 | 26,473,576 | ||||
Accumulated deficit | (9,583,204 | ) | (9,583,204 | ) | ||
Total stockholders equity and capitalization | $1,796,720 | $16,976,720 | ||||
The number of issued and outstanding shares of our common stock as of
September 30, 1999 excludes:
|
178,580 shares of common
stock issuable upon the exercise of then outstanding warrants at a
weighted average exercise price of $5.42 per share;
|
|
908,613 shares of common
stock issuable upon the exercise of then outstanding stock options at a
weighted average exercise price of $3.36 per share;
|
|
125,840 shares of common
stock issuable upon conversion of our then outstanding 12% convertible
debentures;
|
|
68,182 shares of common
stock issuable upon conversion of a then outstanding convertible note, in
addition to our 12% convertible debentures; and
|
|
654,386 shares of common
stock then available for future grants under our stock option
plans.
|
As of
September 30, 1999, we had negative net tangible book value of $102,376, or
negative $0.01 per share of outstanding common stock. Net tangible book
value per share is equal to our total tangible assets less our total
liabilities, divided by the number of outstanding shares of common stock.
Dilution per share represents the difference between the price per share
paid by the investors in this offering and the adjusted net tangible book
value per share immediately after this offering.
Assuming
the sale of all 1,000,000 shares of common stock in this offering at an
offering price of $17 per share, and after deducting the estimated
commissions, finders fees and offering expenses payable by us, our as
adjusted net tangible book value at September 30, 1999 would have been
approximately $15,077,624, or $1.75 per share. This represents an immediate
dilution of $15.25 per share to new investors purchasing shares in this
offering. Since this offering is being made on a best efforts basis,
however, there can be no assurance that any or all of the shares will be
sold. The following table illustrates this per share dilution:
Per share offering price | $17.00 | ||||
Net tangible book value per share as of September 30, 1999 | $(0.01 | ) | |||
Increase per share attributable to new investors | $ 1.76 | ||||
As adjusted net tangible book value per share after this offering | $ 1.75 | ||||
Dilution per share to new investors in this offering | $15.25 |
The
following table summarizes, on a pro forma basis, the number of shares
purchased, the total consideration paid and the average price per share
paid, based upon an initial registered public offering price of $17 per
share and the sale of all 1,000,000 shares of common stock in this
offering.
Shares
Purchased |
Total
Consideration |
Average Price
Paid Per Share |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Number |
Percent |
Amount |
Percent |
|||||||||
Existing shareholders | 7,634,828 | 88 | % | $11,536,035 | 40 | % | $ 1.51 | |||||
New public investors | 1,000,000 | 12 | % | 17,000,000 | 60 | % | $17.00 | |||||
Total | 8,634,828 | 100.0 | % | $28,536,035 | 100.0 | % | ||||||
These
calculations do not give effect to, as of September 30, 1999:
|
178,580 shares of common
stock issuable upon the exercise of then outstanding warrants at a
weighted average exercise price of $5.42 per share;
|
|
908,613 shares of common
stock issuable upon the exercise of then outstanding options at a weighted
average exercise price of $3.36 per share;
|
|
125,840 shares of common
stock issuable upon conversion of our then outstanding 12% convertible
debentures;
|
|
68,182 shares of common
stock issuable upon conversion of a then outstanding convertible note, in
addition to our 12% convertible debentures; and
|
|
654,386 shares of common
stock reserved for future grants under our stock option plans.
|
To the extent any of these securities are exercised or converted,
there will be further dilution to new investors.
In this
section, we present our selected historical financial data. You should read
carefully the financial statements included in this prospectus, including
the notes to the financial statements. The selected data in this section are
not intended to replace the financial statements. We derived the statement
of operations data for the years ended March 31, 1997, 1998 and 1999, and
the balance sheet data as of March 31, 1997, 1998 and 1999, from our audited
consolidated financial statements in this prospectus. Those statements were
audited by Stonefield Josephson, Inc., independent auditors. We derived the
statement of operations data for the period from September 19, 1995, our
inception, to March 31, 1996 and the balance sheet data as of March 31, 1996
from our unaudited consolidated financial statements. We derived the
statement of operations data for the six months ended September 30, 1998 and
1999, and the balance sheet data as of September 30, 1998 and 1999, from our
unaudited consolidated financial statements in this prospectus. We believe
that the unaudited historical financial statements contain all adjustments
needed to present fairly the information included in those statements, and
that the adjustments made consist only of normal recurring adjustments.
Operating results for the six months ended September 30, 1999 are not
necessarily indicative of the results to be expected in the
future.
Period from
September 19, 1995 (our inception) to March 31, 1996 |
Fiscal Year Ended March
31, |
Six Months Ended
September 30, |
|||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1997 |
1998 |
1999 |
1998 |
1999 |
|||||||||||||||||||||||||||||||||
(Dollars in thousands, except share, per share and other data) | |||||||||||||||||||||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||||||||||||||
Recurring revenues | $ 219 | $ 1,106 | $ 2,438 | $ 4,245 | $ 1,769 | $ 2,999 | |||||||||||||||||||||||||||||||
System/consulting revenues | 123 | 227 | 317 | 124 | 110 | 56 | |||||||||||||||||||||||||||||||
Total revenues | 342 | 1,365 | 2,755 | 4,370 | 1,880 | 3,055 | |||||||||||||||||||||||||||||||
Cost of revenues | 379 | 1,765 | 3,304 | 4,252 | 1,836 | 2,803 | |||||||||||||||||||||||||||||||
Expenses: | |||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 44 | 636 | 1,769 | 1,979 | 895 | 1,399 | |||||||||||||||||||||||||||||||
Depreciation | 2 | 68 | 226 | 338 | 146 | 240 | |||||||||||||||||||||||||||||||
Amortization | 12 | 165 | 325 | 802 | 273 | 490 | |||||||||||||||||||||||||||||||
Interest, net | | | 33 | 201 | 56 | 237 | |||||||||||||||||||||||||||||||
Total expenses | 58 | 869 | 2,353 | 3,319 | 1,371 | 2,367 | |||||||||||||||||||||||||||||||
Net loss | (95 | ) | (1,270 | ) | (2,902 | ) | (3,201 | ) | (1,327 | ) | (2,114 | ) | |||||||||||||||||||||||||
Net loss per share basic and diluted | (.04 | ) | (.32 | ) | (.54 | ) | (.51 | ) | (.23 | ) | (.30 | ) | |||||||||||||||||||||||||
Weighted average shares
outstanding |
2,319,866 | 3,968,277 | 5,311,624 | 6,268,217 | 5,780,912 | 7,065,584 | |||||||||||||||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||
Current assets | $ 64 | $ 707 | $ 878 | $ 408 | $ 526 | $ 987 | |||||||||||||||||||||||||||||||
Property and equipment, net of
accumulated depreciation |
120 | 711 | 898 | 1,478 | 1,219 | 1,671 | |||||||||||||||||||||||||||||||
Goodwill, net of amortization | 157 | 603 | 1,137 | 1,870 | 2,152 | 1,899 | |||||||||||||||||||||||||||||||
Other assets | 71 | 17 | 889 | ||||||||||||||||||||||||||||||||||
Total assets | 412 | 2,021 | 2,913 | 3,756 | 3,914 | 5,446 | |||||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||
Current liabilities | 106 | 1,457 | 2,847 | 1,837 | 1,720 | 2,388 | |||||||||||||||||||||||||||||||
Notes payable | 86 | | 31 | 606 | 440 | 130 | |||||||||||||||||||||||||||||||
Capital lease obligations | | | | 20 | 20 | 26 | |||||||||||||||||||||||||||||||
Debentures payable | | | | 354 | | 944 | |||||||||||||||||||||||||||||||
Preferred Stock Redemption
Obligation |
| | 177 | 177 | 177 | 161 | |||||||||||||||||||||||||||||||
Total liabilities | 192 | 1,457 | 3,055 | 2,994 | 2,357 | 3,649 | |||||||||||||||||||||||||||||||
Total stockholders equity | 220 | 564 | (142 | ) | 762 | 1,558 | 1,797 | ||||||||||||||||||||||||||||||
Working capital (deficit) | (42 | ) | (751 | ) | (2,146 | ) | (1,961 | ) | (1,186 | ) | (1,436 | ) | |||||||||||||||||||||||||
Other Data: | |||||||||||||||||||||||||||||||||||||
Number of dial-up
subscribers at period
end |
1,333 | 4,893 | 12,193 | 25,733 | 18,132 | 26,538 | |||||||||||||||||||||||||||||||
Number of PeRKInet®
subscribers at
period end |
0 | 5 | 965 | 1,540 | 1,239 | 1,049 | |||||||||||||||||||||||||||||||
Total number of
subscribers at period
end |
1,333 | 4,898 | 13,158 | 27,273 | 19,371 | 27,587 | |||||||||||||||||||||||||||||||
Total number of communities served | 2 | 8 | 12 | 19 | 12 | 20 |
You
should read the following discussion along with our financial statements
and the related notes included in this prospectus. The following
discussion contains forward-looking statements that are subject to risks,
uncertainties and assumptions, including those discussed under Risk
Factors. Our actual results, performance and achievements in fiscal
year ended March 31, 2000 and beyond may differ materially from those
expressed in, or implied by, these forward-looking
statements.
Overview
We are
an Internet service provider focused on serving individuals and businesses
in small- to medium-sized communities in the western United States. Since
we began providing Internet access in September 1995, we have acquired 23
local Internet service providers in California, Colorado, Idaho, Oregon
and Washington. Expanding the capacity of an acquired Internet service
provider requires additional equipment infrastructure within the region,
while expanding the customer base is a function of quality customer
service, reliability and marketing. Increases in our number of subscribers
will cause our revenues to increase but will also cause our costs of
revenue, selling, general and administrative expenses, capital
expenditures, and depreciation and amortization to increase. We do not
capitalize and defer start-up expenses related to entering new
markets.
Our
results of operations are significantly affected by subscriber
cancellations. Subscriber acquisition expenses and the administrative
expenses of enrolling and assisting new subscribers are substantial, and
are charged in the current period. The failure to attract and retain
subscribers to our services, or an increase in the rate of subscriber
cancellations, would have a material adverse effect on us.
We have
experienced operating losses since our inception as a result of efforts to
build our network infrastructure and internal staffing, develop our
systems and expand into new markets. We expect to continue to focus on
increasing our number of subscribers and geographic coverage. Since we
have incurred net losses in each year of operation, we have had no income
tax liability. As of fiscal year ended March 31,1999, we had federal and
state operating loss carry-forwards totaling approximately $7,469,000 that
expire in various years through 2014.
Recent Events
Subsequent to our fiscal year end March 31, 1999, the date of the
most recent audited financial statements contained in this prospectus,
there have been several significant events for our company. First, we
completed two acquisitions of Internet service providers, expanding our
presence in our existing markets in Washington and Northern California.
The first of the two acquisitions occurred in July 1999 when we acquired
FutureLink, an Internet service provider in Spokane, Washington, for
aggregate consideration of $224,344, comprised of $91,304 in cash, a note
in the principal amount of $16,670 and 15,516 shares of our common stock
(valued at $116,370). The second acquisition occurred in September 1999
when we acquired TomatoWeb Online, an Internet service provider in
Sacramento, California, for aggregate consideration of $299,000, comprised
of $224,000 cash, a $50,000 note at 12% and the balance to be held in
escrow for six months subject to release at that time. Second, in
September 1999, we made a minority investment in InnerCite, Inc., an
Internet service provider in the Sacramento, California, market. This
investment consisted of $200,000 cash, a short term note in the principal
amount of $150,000 and a 12% convertible debenture from our Regulation D
offering in the principal amount of $310,000 together with the
corresponding shares of common stock. This investment, carried at cost,
gives us a 30% equity interest in an Internet service provider which
operates in our Northern California market. Third, our contract with Davis
Communications, Inc. to supply our PeRKInet® broadband access to 900
dormitory rooms at Eastern Washington University in Spokane, Washington
was terminated in July 1999. Cancellation of the contract reduced our
PeRKInet® subscriber count by 900 and annual revenues by $81,000. Net
profitability on the contract after depreciation and cost of goods sold
was approximately $51,000 on an annual basis. See Legal Proceedings
Davis Litigation for a description of the litigation on page
41 of this prospectus.
Revenues
Our
revenues are derived from:
Internet access
Local web hosting
Advertising sales
Storage of high-quality streaming media
Systems integration and network design services
Internet access revenues are recurring revenues from dial-up and
broadband access customers. Our customers typically prepay for their
service. Internet access revenues are received under prepaid term plans
pursuant to which subscribers prepay for longer terms at reduced monthly
rates or under month-to-month plans. We historically have experienced
better subscriber retention under prepaid term plans than under
month-to-month plans. We recognize revenue related to prepaid fees over
the period services are provided on a straight-line basis. Of our total
Internet access customers at March 31, 1999, 94% were dial-up customers
and 6% were PeRKInet® broadband customers. Our total average monthly
recurring revenue is approximately $17.45 per month per customer. Our
average monthly recurring revenue from broadband Internet customers is
approximately $30 per month per customer. Internet access revenues
represented approximately 96% of recurring revenues for the fiscal year
ended March 31, 1999. Our dial-up and broadband Internet services also
generate revenue through installation charges and equipment sales. Revenue
from these services accounted for less than 10% of total revenues for the
past two fiscal years.
Local
web hosting, which entails maintenance of a customers website,
produces approximately $20,000 per month. We recognize this revenue when
earned in the period service is provided. Local web hosting revenues
represented approximately 4% of recurring revenues for the fiscal year
ended March 31, 1999.
Advertising revenues, which are also recurring revenues, are
generated through promotional and content partnerships and online
advertising. An example is our agreement with the LookSmart, Ltd. Internet
directory, a search engine website, which was implemented at all of our
subsidiaries by August 1999. We receive $2.50 for every thousand viewers
that visit a page containing a third party advertisement placed by
LookSmart. Revenue from LookSmart and any other advertising is recognized
when received and to date is less than 0.5% of revenues. Additionally, we
are in the process of gathering content into a local portal to provide a
vehicle for local advertising in each of our markets. An example is
HumGuide
SM
, which provides a directory of business, government and
informational websites for Humboldt County, California, as well as
additional offerings such as regional news and movie listings. Advertising
revenues are recognized when earned. While we expect increased revenues
from advertising sales in the future, we expect that they will nonetheless
represent less than 1% of total revenues in fiscal year ended March 31,
2000.
We also
expect to derive recurring revenue from the storage of high-quality
streaming media. Our PeRKInet® broadband access technology delivers
access to more than 100 Internet-delivered television broadcast stations
and other programming. It is too soon, however, to determine the impact of
these revenue sources.
Systems
integration and network design services revenue is generated from
consulting services related to designing internal networks, assisting with
the purchase and installation of network equipment, and establishing
secure connections to the Internet. Pricing for consulting services varies
significantly depending upon the hours required to complete a project. We
recognize consulting revenues ratably over the period services are
provided. For the fiscal year ended March 31, 1999, systems integration
and network design services revenues accounted for 3% of total revenues.
We perceive these consulting services as ancillary revenue generated
during the normal course of providing our core monthly access
services.
Significant Costs and Expenses
Our costs
include:
|
|
Cost of
revenues
|
|
Selling,
general and administrative expenses
|
|
Depreciation
and amortization
|
Cost of
revenues includes telecommunications costs, operating costs and subscriber
retention and maintenance costs. The two main components of
telecommunications costs are local digital dial-up lines that connect
customers to us and digital tail circuits that connect us to the Internet
backbone providers. The Internet backbone refers to the traffic data
connecting portion of a network. One local phone line is required for
every ten customers at an average cost of $30 per month, or $3 per dial-up
customer. A 1.544 Mbps backbone circuit to the Internet backbone provider
can support 2,000 dial-up customers, as well as some content hosting and
high-speed dedicated access, at an average cost of $2000 per month.
Telecommunications costs accounted for approximately 32% of total cost of
revenues for the fiscal year ended March 31, 1999.
Operating costs, another component of cost of revenues, include
customer service and technical service, payroll and occupancy costs.
Operating costs also include the carriage agreements we have with cable
companies to provide our PeRKInet® broadband Internet service. Under
these agreements we pay cable TV operators a carriage fee ranging between
$3-8 per month per customer to use their cable TV system for data
delivery. Operating costs accounted for approximately 62% of total cost of
revenues for the fiscal year ended March 31, 1999 as compared to 70% in
the fiscal year ended March 31, 1998. The improvement in fiscal 1999 was
attributable to improved utilization of facilities and a reduction in our
receivables collection costs. Subscriber retention and maintenance costs
accounted for approximately 6% of total cost of revenues for the fiscal
year ended March 31, 1999 as compared to 4.2% in the fiscal year ended
March 31, 1998.
Selling, general and administrative expenses relate primarily to
corporate overhead, acquisition activities, legal and accounting.
Approximately 19% of selling, general and administrative expenses
represented the cost of advertising, promoting and developing dial-up and
PeRKInet® service within our existing regions in the fiscal year ended
March 31, 1999, as compared to 15% in the fiscal year ended March 31,
1998. Significant levels of marketing activity may be necessary in order
for us to increase our subscriber base in a given market to a size large
enough to achieve profitability. Selling, general and administrative
expenses will increase over time as the scope of our operations increases,
although we expect that these costs will be at least partially offset by
anticipated increases in revenue attributable to subscriber growth. The
increases in marketing expense will have a negative impact on current
earnings in that we do not defer or capitalize marketing costs. Selling,
general and administrative expenses decreased to 45% of revenues in fiscal
1999 from 64% of fiscal 1998 revenues, and we expect further reduction to
this percentage cost as the costs of administration and corporate overhead
increase at a rate below our anticipated revenue growth.
Depreciation expense is a result of capital investments in data
networking and related computer equipment required to provide Internet
access services and from fixed assets acquired in acquisitions. Plant and
equipment are depreciated over the useful life of the assets, typically
five years. Amortization expense is the result of our acquisitions. When
we acquire an Internet service provider, the excess of the purchase price
over the value of net assets acquired is recorded as goodwill. We amortize
goodwill over a three-year period as an expense to current
operations.
Results of Operations of Operations
Quarter Ended September 30, 1999 Compared to Quarter Ended
September 30, 1998
The
following table sets forth, for the periods indicated, certain information
relating to our companys operations, and the percentage change over
the prior comparable period.
Three
Months Ended September 30, 1998 |
Change |
Three
Months Ended September 30, 1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | |||||||||
Total revenues | $ 910 | 69 | % | $ 1,534 | |||||
Cost of revenues | 904 | 63 | % | 1,476 | |||||
Gross profit | 6 | 811 | % | 58 | |||||
Selling, general and administrative expenses | 636 | 12 | % | 714 | |||||
Depreciation and amortization | 224 | 70 | % | 380 | |||||
Interest expense | 24 | 700 | % | 194 | |||||
Net loss | $ (879 | ) | 40 | % | $(1,230 | ) | |||
Revenues. Total revenues for the quarter ended September 30,
1999 rose 69% to $1,534,258 from $910,144 for the same period last year.
The increase in revenues reflects the addition of over 7,000 subscribers
from acquisitions of Internet service providers, including DurangoNet,
Next Dimension, BudgetNet, K-Falls, Futurelink and TomatoWeb, which were
made during the previous twelve months. Internal growth of approximately
1,000 dial-up subscribers occurred between September 1998 and September
1999. PeRKInet® revenues, which are included in recurring revenues,
grew from approximately $10,000 in the quarter ended September 30, 1998 to
$89,000 in the quarter ended September 30, 1999 despite the cancellation
of the Davis Communications contract to provide service to 900 dormitory
rooms at Eastern Washington University. We ended the September 1999 period
with 1,049 PeRKInet® subscribers having added over 400 net new
subscribers in the last twelve months after excluding the Eastern
Washington University subscribers. Broadband subscriber revenues accounted
for approximately 6% of total revenues in the quarter ended September 30,
1999 compared to 1.2% in the quarter ended September 30, 1998. Consulting
and other revenues were less than 2% of total revenues in both
periods.
Cost
of Revenues. In the quarter ended September 30, 1999, total cost of
revenues increased to $1,476,120 from $903,795 for the quarter ended
September 30, 1998 largely due to increased costs from acquisitions of
Internet service providers. Gross profit increased 811% to $58,138 for the
quarter ended September 30, 1999 from $6,379 for the comparable period
last year. While total cost of revenues increased due to acquisitions, we
have consolidated certain functions into four operating regions. This
consolidation removes management redundancy among our subsidiaries,
centralizes billing in each region and moves certain accounts payable
functions to the corporate level. These actions reduce operating costs.
However, the full benefit of this consolidation was not yet realized as of
September 30, 1999. In addition, the absorption at the corporate level of
the accounting, legal and acquisition expenses of acquired subsidiaries
has resulted in expense reported in selling, general and administrative
expenses.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased to $713,728 for the quarter
ended September 30, 1999 from $635,597 for the quarter ended September 30,
1998. This increase is attributable to corporate activities including
legal expenses related to our leased access filings with the FCC,
accounting costs, and acquisition costs expensed in the period. However,
selling, general and administrative expenses decreased to 46% of total
revenues for the quarter ended September 30, 1999 compared to 70% of total
revenues for the quarter ended September 30, 1998.
Net
Loss. A 70% increase in amortization and depreciation expenses, a
$169,547 increase in interest expense related to issuance of our 12%
convertible debentures and acquisition debt contributed to the net loss
of $1,229,683 for the quarter ended September 30, 1999, which increased from
$878,547 in the quarter ended September 30, 1998. The net loss per basic
share increased 13% from $0.15 in the quarter ended September 30, 1998 to
$0.17 in the quarter ended September 30, 1999.
Six Months Ended September 30, 1999 Compared to Six Months
Ended September 30, 1998
The
following table sets forth, for the periods indicated, certain information
relating to our companys operations, and the percentage change over
the prior comparable period.
Six
Months Ended September 30, 1998 |
Change |
Six
Months Ended September 30, 1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | |||||||||
Total revenues | $ 1,880 | 63 | % | $ 3,055 | |||||
Cost of revenues | 1,836 | 53 | % | 2,803 | |||||
Gross profit | 44 | 472 | % | 253 | |||||
Selling, general and administrative expenses | 895 | 58 | % | 1,399 | |||||
Depreciation and amortization | 419 | 70 | % | 731 | |||||
Interest expense | 56 | 321 | % | 237 | |||||
Net loss | $(1,327 | ) | 59 | % | $(2,114 | ) | |||
Revenues. Revenues for the six month period ended September
30, 1999 increased 63% to $3,055,487. The increase was attributable to the
addition of 10,700 dial-up subscribers from five acquisitions of Internet
service providers including DurangoNet, Next Dimension, BudgetNet,
K-Falls, FutureLink and TomatoWeb made during the previous twelve months,
3,700 of which related to the DurangoNet transaction which closed in
September 1998 but were not included in our subscriber counts until
October 1998. Broadband revenues derived from PeRKInet® subscribers
were 5.2% of revenues in the six month period ended September 30, 1999
compared to less than 1% of revenues in the six month period ended
September 30, 1998. The Davis Communications contract for delivery of
PeRKInet® service to 900 dormitory rooms at Eastern Washington
University resulted in the loss of $20,000 of revenue in the most recent
period. Consulting and other revenue accounted for less than 2% of revenue
in the six month period ended September 30, 1999 and less than 1% of
revenues in the six month period ended September 1998.
Cost
of revenues. In the six month period ended September 30, 1999 total
cost of revenues increased 53% to $2,802,786 from $1,835,539 for the six
month period ended September 30, 1998. Operating costs were higher due to
the additional acquisitions in the more recent period, however the decline
in operating costs as a percent of revenues from 97.6% for the six month
period ended September 30, 1998 to 91.7% for the six month period ended
September 30, 1999 represents improvement achieved through reductions in
system staffing costs. Consolidation of certain corporate functions moved
operating expenses to the corporate level including legal, accounting and
acquisition activities. Our subsidiaries telecommunications and
labor costs were approximately 33% and 38% of revenues, respectively, in
the six month period ended September 30, 1999 compared to 30% and 40%,
respectively, in the period ended September 30, 1998. Occupancy costs and
subscriber retention costs were each approximately 6% of revenues in both
periods.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased to 45% of total revenues for
the six month period ended September 30, 1999 compared to 47% of total
revenues for the six month period ended September 30, 1998. The increase
is attributable to corporate activities including legal expenses related
to our leased access filings with the FCC, accounting costs, and
acquisition costs expensed in the period. Approximately $200,000 in legal
costs in the six month period ended September 30, 1999 is non-recurring as
it related to our leased access filings or litigation which has been
settled.
Interest expense. Since commencing issuance of our 12%
convertible debentures in October 1998, $5,417,972 in aggregate principal
amount was issued, of which $119,877 was issued for services and included
as issuance costs. During the period since issuance, some holders elected
to convert their debentures to
common stock such that at September 30, 1999 $943,800 in principal amount of
our 12% convertible debentures had not been converted. Interest on the
debentures in the amount of $233,079 was paid in common stock at the rate
of $7.50 per share at the election of the debenture holders. Convertible
debenture issuances and debt issued in connection with the BudgetNet,
DurangoNet and TomatoWeb acquisitions caused an increase in net interest
expense of $180,863 to $237,185 in the six month period ended September
30, 1999.
Net
Loss. A 70% increase in amortization and depreciation expenses,
coupled with the increase in interest expense contributed to the net loss
of $2,113,984 for the six month period ended September 30, 1999, which
increased from $1,326,910 in the six month period ended September 30,
1998. The net loss per basic share increased 30% to $0.30 from $0.23 per
share.
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended
March 31, 1998
The
following table sets forth for the periods indicated, certain information
relating to our companys operations, and the percentage change from
the prior year.
Fiscal Year
Ended March 31, 1997 |
Change |
Fiscal Year
Ended March 31, 1998 |
Change |
Fiscal Year
Ended March 31, 1999 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | |||||||||||||||
Total revenues | $ 1,365 | 102 | % | $ 2,755 | 59% | $ 4,370 | |||||||||
Cost of revenues | 1,765 | 87 | % | 3,304 | 29% | 4,252 | |||||||||
Gross profit (loss) | (400 | ) | 37 | % | (549 | ) | (121% | ) | 118 | ||||||
Selling, general and administrative expenses | 636 | 178 | % | 1,769 | 12% | 1,979 | |||||||||
Depreciation and amortization | 233 | 136 | % | 551 | 107% | 1,139 | |||||||||
Interest expense | N/A | N/A | 33 | 509% | 201 | ||||||||||
Net loss | $(1,270 | ) | 128 | % | $(2,902 | ) | 10% | $(3,201 | ) | ||||||
Revenues. Total revenues in the fiscal year ended March 31,
1999 increased 59% to $4,369,949 from $2,754,763 for the previous fiscal
year. The increase is attributable to a 111% increase in dial-up customers
and a 70% increase in PeRKInet® customers. This increase is also
attributable to a 36% increase in customer density in existing markets,
resulting from increases in our number of subscribers in our existing
markets due to Internet service provider acquisitions in those markets.
Four strategic Internet service provider acquisitions expanded operations
in each of our regions and added over 7,300 dial-up subscribers to our
company. Internal growth of existing systems and these acquisitions
contributed to the revenue growth. Recurring revenues, primarily
subscriber Internet access fees, accounted for 97% of our total revenues
in fiscal year ended March 31, 1999 and 88% in fiscal year ended March 31,
1998. This increase is attributable to the reasons described below for the
decrease in system consulting revenues. Through acquisitions and internal
growth total customers increased 108% in fiscal year ended March 31, 1999
over fiscal 1998. System consulting revenues declined to 3% of total
revenues in the fiscal year ended March 31, 1999 from 11% in the prior
year, due to a decreased emphasis in consulting and a shift in a portion
of system revenues, namely web hosting, to recurring revenues.
Cost
of Revenues. In fiscal year ended March 31, 1999, total cost of
revenues increased to $4,252,049 from $3,303,796 in fiscal year ended
March 31, 1998, due to growth resulting from our Internet service provider
acquisitions and the costs of providing services to our increased
subscriber base. Gross profit for the fiscal year ended March 31, 1999
improved to $117,900 from negative $549,033 in the prior fiscal year,
reflecting improved system density which enhances operating efficiencies,
reducing delivery costs per subscriber.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased from $1,769,322 for fiscal
year ended March 31, 1998 to $1,978,872 for fiscal year ended March 31,
1999. The consolidation of certain corporate and administrative functions
resulted in a decrease in the ratio of selling, general and administrative
expenses to total revenues from 64% in fiscal 1998 to 45% in fiscal
1999.
Net Interest Expense. For fiscal year ended March 31 1999, net
interest expense was $201,149 compared to $33,476 in the fiscal year ended
March 31, 1998. The increase was a result of increased borrowings from
acquisition activities and operating losses. A portion ($46,830) of the
interest expensed in fiscal year 1999 was paid by the issuance of common
stock.
Net
Loss. The net loss for fiscal year ended March 31, 1999 increased 10%,
principally due to increased amortization of goodwill and depreciation
charges associated with acquisitions and capital expenditures. The net
loss for fiscal year ended March 31, 1999 was $3,201,482, or $.51 per
share, as compared to a net loss of $2,902,000, or $.54 per share, for
fiscal year ended March 31, 1998.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended
March 31, 1997
Revenues. Total revenues for fiscal year ended March 31, 1998
increased 102% to $2,754,763 from $1,364,694 for fiscal year ended March
31, 1997. Revenues increased from the previous year due to the acquisition
of four Internet service providers which expanded two of our four regions
and added over 4,400 dial-up customers and a computer publication.
Internal growth from existing regions accounted for another 3,800 new
customers. Approximately 93% of our customers were dial-up and 7% were
PeRKInet at fiscal year end March 31, 1998. Through acquisitions and
internal growth total customers increased 168% in fiscal year 1998 over
1997.
Cost
of Revenues. In fiscal year ended March 31, 1998, cost of revenues
increased to $3,303,796 as compared to $1,764,971 for fiscal year ended
March 31, 1997, due to our Internet service provider acquisitions and
internal growth. The cost of revenues as a percentage of total revenues
was 179% in fiscal 1998, compared to 129% in fiscal 1997. The building of
infrastructure to accommodate growth for current and future periods caused
the relative increase. Total cost of revenues grew 87% while revenues grew
102% in the fiscal year ended March 31, 1998 as compared to fiscal
1997.
Selling, General and Administrative Expenses. There was a
significant increase in selling, general and administrative expenses in
fiscal year ended March 31, 1998 to $1,769,322 as compared to $636,084 in
fiscal year ended March 31, 1997, due to an increase in Internet service
provider acquisitions, as discussed above. The ratio of selling, general
and administrative expenses to total revenues increased from 46% in fiscal
1997 to 64% in fiscal 1998. The fiscal year ended March 31, 1998 amount
represents the costs of assembling our
management group, the majority of which is stock compensation and
cash consulting fees. In addition, approximately 15% of the selling,
general and administrative expenses for fiscal year ended March 31, 1998
is directly attributable to the marketing costs to establish us and our
services in the industry. This includes the marketing and promotional
costs to establish the PeRKInet® concept and service. None of our
customer acquisition costs is capitalized. We hired additional marketing
and administrative personnel, and a substantial portion of their
compensation was in the form of stock, which we expensed as
compensation.
Net
Loss. Net loss for the fiscal year ended March 31, 1998 was $2,902,480
as compared to net loss of $1,269,620 for fiscal year ended March 31,
1997. The net loss increase was attributed to an expansion in corporate
infrastructure to support projected growth, increases in amortization of
goodwill from the acquisitions and depreciation expense associated with
our capital spending program.
Liquidity and Capital Resources
Since
inception we have financed our operations through a combination of private
placements and a Regulation A public offering of common stock, issuances
of convertible debentures in a private placement, and seller and lease
financings. As of March 31, 1999, we had cash and cash equivalents of
$207,590 and no material bank debt. We had a negative working capital
position of $1,819,604 due in large part to $762,761 of current notes
payable to sellers from acquisitions, and also due to the trade accounts
and accrued expenses associated with the cost of producing
revenues.
We
have reported significant negative cash flows from operating activities in
each quarterly and fiscal period to date. Net cash used in operating
activities for the fiscal year ended March 31, 1999 was $2,272,477. This
is primarily a result of a net loss of $3,201,482 reduced by non-cash
charges for:
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depreciation
charges of $337,785;
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amortization of
goodwill of $570,820;
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securities
issued for services of $220,924; and
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interest
expense of $46,830 paid by issuance of our common stock.
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An increase in accounts receivable of $60,185 and reduction in
accounts payable of $155,386 impacted our cash used in operating
activities.
Net
cash used in investing activities was $1,150,521 in the fiscal year ended
March 31, 1999. These funds were used for capital expenditures, including
the purchase of property, equipment and improvements totaling $658,457 as
part of our expansion. In addition, four acquisitions were completed in
the fiscal year, financed with a combination of proceeds of our
convertible debenture sales, issuances of common stock and seller
financings.
Net
cash provided by financing activities in the fiscal year ended March 31,
1999 was $3,469,024. Funding activities included $3,585,918 resulting from
the issuance of common stock or conversion of our 12% convertible
debentures, and $354,125 from the issuance of our 12% convertible
debentures. Notes payable proceeds of $211,666 were net seller financings.
Acquisitions in the 1999 fiscal year include:
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Frontier
(DurangoNet), a stock purchase for aggregate consideration of $689,640,
comprised of $224,000 cash, notes in the aggregate principal of $355,640
and 28,900 shares of common stock (valued at $159,000);
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Budget Internet
(Oregon Wilderness Delivery Service), a stock purchase in the aggregate
amount of $425,000, comprised of $50,000 cash and a convertible note in
the principal amount of $375,000;
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Next
Dimensions, an asset purchase in the aggregate amount of $180,000
comprised of $90,000 cash and a note in the principal amount of $90,000,
which was repaid in May 1999.
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K-FallsNet
(National Computer Solutions, Inc.), an asset purchase for $64,064
cash.
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As of
September 30, 1999, and as a result of additional sales of our 12%
convertible debentures, cash and cash equivalents increased to $709,056
and we have no material bank debt. Net cash used for operating activities
was $1,165,264 in the six month period ended September 30, 1999. This is
primarily a result of a net loss of $2,113,984 reduced by non-cash charges
for:
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depreciation
charges of $240,443;
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amortization of
goodwill of $490,350; and
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interest paid
in the amount of $233,079 by issuance of our common stock.
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An increase in accounts receivable of $67,025, coupled with as
increase in accounts payable of $215,529, impacted our cash used in
operations.
Net
cash used for investing activities in the six month period ended September
30, 1999 was $1,637,775, comprised of $433,659 in purchases of equipment
including the fair market value of approximately $32,000 of equipment
acquired in the FutureLink and TomatoWeb acquisitions. The increase in
other assets of $888,812 was attributable to the InnerCite investment of
$660,000, investments in PeRKInet AG and deferred registration
costs.
Net
cash provided by financing activities in the period was $3,304,505. Of
this amount, $2,782,675 was provided by issuance of our common stock or
conversions of our convertible debentures, and $589,675 was provided by
issuance of our 12% convertible debentures which were sold in the period
and had not converted at September 30, 1999 and $150,000 was provided by
debt issuance associated with acquisitions. Net principal
payments on debt were $202,321, which was primarily on notes payable to
former owners of our subsidiaries. Cash in the amount of $15,524 was used
in the redemption of preferred stock. The preferred stock redemption
obligation of $161,476 represents the obligation on 141,600 preferred
shares. For a description of the preferred stock redemption obligation,
see footnote 13 to the financial statements provided on page F-18 of this
prospectus.
We
believe that the net proceeds from this offering, together with existing
cash and cash equivalents, will be sufficient to meet the payment of notes
payable from acquisitions, our operating expenses and capital requirements
for at least the next twelve months. Capital expenditures over the next
twelve months are estimated to be $400,000. After that twelve month
period, if cash generated from operations is insufficient to satisfy our
liquidity and capital expenditure requirements, we may need to raise
additional funds through public or private financing, strategic
relationships or other arrangements. In the event the proceeds from this
offering are less than 25% of the maximum amount of proceeds from this
offering, it may be necessary to sell or dispose of certain assets or
reschedule certain notes payable which come due in the next twelve months.
In addition, our anticipated capital requirements during the next twelve
months depend on numerous factors, including:
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the rate of
market acceptance and pricing of our services,
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our ability to
maintain and expand our customer base,
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the rate of
expansion of our network infrastructure,
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the level of
resources required to expand our market and sales
organization,
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information
systems and research and development activities,
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the pricing and
timing of acquisitions, and
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the
availability of hardware and software provided by third-party vendors
and other factors.
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For example, a favorable ruling by the FCC granting us leased
access may enable us to offer broadband Internet access on a much larger
scale. However, if we do not have sufficient working capital to take
advantage of that opportunity, it could dramatically impact our ability to
increase market share for our PeRKInet® broadband access service. The
timing and amount of capital requirements cannot be accurately predicted.
If capital requirements vary materially from those currently planned, we
may require additional financing sooner than anticipated.
While
we have not had the financial strength to obtain significant credit lines
to date, as the size and scope of our operations increase, we will attempt
to establish working capital and acquisition facilities. However, there
can be no assurance we will be successful in this effort. We operate with
trade credit established locally by our operating subsidiaries and by
utilizing lease financing for equipment. We have received lease financing
proposals for in excess of $250,000 to finance communications equipment
for our operating subsidiaries.
Year 2000 Disclosure
The
Year 2000 issue is the result of computer programs using a two-digit
formula, as opposed to four digits, to indicate the year. These computer
systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors.
To
date, we have not experienced any material interruptions in our operations
related to the Year 2000 issue. We have not incurred material costs with
respect to our Year 2000 remediation efforts and do not expect that future
costs will be material. However, if we, or third-party providers of
hardware, software and communications services fail to remedy any future
Year 2000 issues, the result could be lost revenues, increased operating
expenses, the loss of users and other business interruptions, any of which
could harm our business.
Our
most reasonably likely worst case scenario related to Year 2000 would be
for one or more of our network service providers to fail, thereby making
it difficult for subscribers to dial-up and access the Internet. However,
where financially feasible, our facilities have duplicate connections to
the Internet, both in terms
of backbone providers and in terms of local loop facilities. Should any of
our Internet service provider subsidiaries be unable to provide
subscribers with Internet access as a result of Year 2000, we believe our
duplicative network arrangements will adequately accommodate our dial-up
access needs.
Market Risk
We are
exposed to the impact of interest rate changes, changes in market values
of investments and credit risk.
Interest Rate Risk. Cash and short-term investments at
September 30, 1999 were $709,056. These investments consist of highly
liquid securities which may be converted to cash with minimal risk. While
the investments are subject to market interest rates, a hypothetical
increase in interest rates by 10% would not cause a material decline in
the value of the investments. To the extent we maintain cash in bank
deposit accounts which, at times, may exceed federally insured limits, we
would have market risk relating to those amounts.
To
mitigate the impact of fluctuations in interest rates, we generally enter
into fixed rate borrowing arrangements. We have no material market risk
relating to our outstanding notes, convertible debentures and capital
leases, which are all at fixed interest rates and thus are not sensitive
to changes in the general level of interest rates. At present, we have no
plans to enter into any hedging arrangement with respect to potential
future borrowings.
Investment Risk. We have market equity investments in several
privately-held companies for business and strategic purposes. These
investments are subject to fluctuations in fair market value.
Credit Risk. We have credit risk consisting primarily of
trade receivables. The concentration of credit risk is limited due to the
large number of customers comprising our customer base.
Overview
We are
an Internet service provider for approximately 30,000 residential and
commercial customers in small- to medium-sized communities in the western
United States. We currently operate in nineteen communities located in
California, Colorado, Idaho, Oregon and Washington. Our objective is to
become a dominant Internet communications provider in communities with
populations under 500,000. Based on our four years of operating experience
in these smaller markets, we believe that a committed local presence in a
community will assist in establishing a strong customer base, providing us
with an advantage over our larger competitors.
We
provide Internet services including:
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dial-up and
broadband Internet access
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local web
hosting, advertising and storage of high-quality streaming
media
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systems
integration and network design services
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Our
dial-up and broadband Internet access provides our subscribers with access
to the Internet using various communications mediums. Dial-up Internet
access provides a single stream of data over a telecommunication line.
Broadband Internet access provides multiple streams of data over a
communication medium, such as cable wire, a satellite or wireless cable,
and is a form of high-speed Internet access. Broadband refers to the
bandwidth of the vehicle of transmitting data. A broad bandwidth means
lots of data can be transmitted at the same time. This results in what if
referred to as high-speed Internet access. Comparing the flow of data
using broadband access to the flow of data using dial-up access is like
comparing the flow of water out of a fire hose to the flow of water out of
a garden hose. This analogy helps you to picture the power and speed at
which data travels when using broadband Internet access.
Our web
hosting services provide local businesses with an electronic address where
the web page of that business is located. We provide local information,
such as local events, announcements, news and weather, and sell
advertising on these web pages. We also provide our customers with video
and audio programming, called streaming media, which we store on our local
computer files. Our systems integration and network design services are
aimed at providing local businesses with consulting and design advice for
improving computer systems and computer networks.
We
believe Internet users want fast, reliable Internet access at a reasonable
cost. In response, we offer a high-speed Internet access under the brand
name PeRKInet®. Unlike other competing high-speed Internet access
technologies, which require substantial capital improvements, the PeRKInet
® solution uses existing cable TV and telephone technologies to offer
customers the ability to connect to the Internet more than four times
faster than conventional 56Kbps modems. However, we currently provide the
PeRKInet® service only to a limited number of subscribers in five of
the nineteen communities in which we operate and have encountered
difficulty in our efforts to create revenue sharing partnerships with
cable systems serving additional target markets.
We
believe we offer the following competitive advantages:
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Fast,
Reliable Internet Access. A recent survey conducted by Inter@ctive
Week lists connection quality, network performance and network capacity
as some of the most important factors for Internet users in selecting an
Internet service provider. With our PeRKInet® service, we believe we
will differentiate ourselves from our competitors in these important
customer preferences.
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Local
Presence. Our decentralized operation was modeled after the
operating structures of the cable TV industry, and allows us to provide
reliable and responsive customer service. We believe it is one of the
reasons for our gains in market share in each of our current markets
over competing national, centralized Internet service
providers.
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Use of
Existing Technology. By combining the capabilities of existing cable
and telephone technologies, our PeRKInet® service delivers broadband
Internet access without requiring substantial capital
improvements.
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Experienced
Management Team. We have assembled a skilled management team with
experience in the data communications and cable TV
industries.
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Strategic
Relationships. We have developed and will continue developing
relationships that help us differentiate our services, reduce marketing
costs and expand revenue opportunities.
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Industry Background
The
Internet. The Internet is a collection of computer networks connecting
millions of public and private computers around the world. In its
formative stages, the Internet was used by government agencies and
academic institutions to exchange information, publish research and
communicate through electronic mail, or e-mail. A number of factors,
including the proliferation of personal computers, the availability of
user-friendly software and the wide accessibility of an increasingly
robust network infrastructure, combined to allow users easy access to the
Internet and, in turn, produced rapid growth in the number of Internet
users.
The
emergence of the graphic, multimedia environment of the Internet, or the
Web, has resulted in the development of the Internet as a new mass
communications medium. The ease and speed of publishing and distributing
text, graphics, audio and video over the Internet has led to a tremendous
increase in Internet-based services, including chat rooms, online
magazines, news feeds, interactive games, online communities and a wealth
of educational and entertainment information. In addition, by eliminating
many of the costs involved in routine commercial transactions, such as
simple banking services and retail purchases, the Internet has become a
new medium for conducting business.
Growth of the Internet Access Market. The consumer online and
Internet services industry has evolved since the mid-1990s to embrace both
consumers and businesses. Industry sources call the Internet the
fastest-growing mass market media in history, reaching 50 million users
only five years after it was introduced. According to Worth magazine, 80
million people in the U.S. and nearly 200 million people worldwide use the
Internet. Those numbers are projected to double by 2002.
Residential users are a large portion of Internet consumers.
According to industry forecasts published in Private Cable & Wireless
Cable, as of May 1999, the Internet penetration rate of U.S. households
was approximately 25%, and is growing rapidly. Approximately one-third of
U.S. households are projected to be online by the end of 1999, and that
number is expected to increase to nearly two-thirds of households by the
end of 2003. This growth is spurred by the increasing affordability of
personal computers and by the Internets ability to provide, more
economically and efficiently, many of the functions historically provided
by mail, telephone and television. The evolution of the Internet industry
has had an enormous impact on the way individuals communicate, work,
learn, and entertain themselves. According to Private Cable & Wireless
Cable, the Internet is now the number one use for home
computers.
We
estimate, based on available market data, that during 1998, approximately
nine million U.S. households purchased $7.8 billion of goods and services
over the Internet, and projects that by 2003, 40 million households will
spend $108 billion for online goods and services. This represents a 69%
compound annual growth rate between 1998 and 2003 for purchases made using
the Internet. These projections are based on certain assumptions and
conditions and there can be no assurances that any of these projected
amounts will be achieved.
Sources of Revenue. Revenue from Internet access is expected
to grow dramatically in the United States over the next few years.
Internet service providers generated an estimated $6.8 billion in access
revenues in 1998, and that number should increase to approximately $15.3
billion by 2001. In addition, the retail Internet market is developing
rapidly.
Internet Access. There were
an estimated 95.4 million Internet-connected households by the end of
1998. An industry survey predicts that by the year 2003, there will more
than 350 million Internet users.
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We estimate, based on available
market data, that business-to-business buying of products and services
on the Internet will grow from $131.4 billion in 1999 to $1.55 trillion
by 2003. In addition, intense competition for customers in the portal
sector will result in portal companies making their sites more
attractive for advertisers, resulting in an increase in Internet
advertising revenues. A 1998 overview
report published by eStats, a provider of Internet statistics, indicates
that Internet advertising spending will reach approximately $8 billion
by 2002. These projections are based on certain assumptions and
conditions and there can be no assurances that any of these projected
amounts will be achieved.
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Cable TV operators are just
beginning to offer broadband Internet access to their customers.
According to Cable Datacom News, published by Kinetic Stategies Inc.,
cable operators in the U.S. and Canada will have more than 1.1 million
cable modems installed as of August 1, 1999, with over 800,000 of those
subscribers in the U.S. To be able to provide broadband Internet access
to their customers, many cable TV operators may need to partner with or
outsource to Internet companies that possess technical expertise in
building and managing data networks, and providing customer service to
personal computer and Internet users. Currently, the vast majority of TV
cable can only transmit broadband data one way (to the customers
home). Thus, a telephone line connection from the home to the cable
operator is required for the customer to send data over the Internet. We
believe that the majority of cable TV operators will use this asymmetric
solution to provide broadband data services to their
customers.
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Value-Added Services. In
addition to offering a wide range of connectivity solutions for consumer
and business applications, Internet communications companies will need
to offer customers a variety of value-added solutions to take full
advantage of the Internets capabilities. The principal value-added
services being offered today include web page hosting and design
capabilities, Intranet integration, security and Internet commerce
solutions and training services.
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Limitations of Internet Architecture and Bandwidth.
Currently, the potential of the Internet as a medium for communication,
education, entertainment and commerce remains unfulfilled due to problems
with its performance and reliability. The Internets performance
limitations stem from its basic architecture, which is not optimized for
distribution of data-intensive multimedia content. A key factor in whether
the Internet fulfills its promise as a communications medium is the span
of bandwidth available to transmit increasingly data-intensive material.
Bandwidth refers to the capacity to carry data over a connection. However,
limitations associated with any element in the system can result in
capacity limitations on the entire system, referred to as performance
bottlenecks, that slow data transmission speed to that of the weakest
link. For example, congestion occurs when the same data streams from
popular web site servers to millions of individual users. In addition,
dial-up users frequently encounter busy signals upon attempting to connect
to their Internet service providers and cannot readily access quality
multimedia content due to the slow speed of their modems. Because the
Internet is an interconnection of independently operated networks, there
is no single point of accountability or management to respond to
performance problems or to ensure optimized Internet traffic routing,
security or consistency of service. Therefore, no single Internet service
provider can offer an end-to-end solution to Internet bottlenecks. These
performance limitations frustrate and discourage users from fully using
the Internet as a convenient and effective information tool, a compelling
educational and entertainment resource, or a way to purchase goods and
services.
Our Strategy
We hope
to be the dominant Internet service provider for both dial-up and
broadband access in small- to medium-sized communities in the western
United States. Our strategy focuses on the 65% of homes passed by cable
that currently can only subscribe to a one-way cable data Internet service
using a telephone line connection for the return path. We target small- to
medium-sized communities in the western United States with populations
under 500,000. Based on our knowledge of the industry and our experience
in these markets, we believe there is less competition for Internet access
in our target markets from national companies, which devote substantially
more resources in marketing and providing service to larger metropolitan
areas. Similarly, we believe that major cable operators are not focused on
upgrading the systems to offer two-way data transmission in these
markets.
Key
elements of our strategy include:
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Acquire or form
relationships with existing Internet service providers in small- to
medium-sized communities in the western United States
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Become the
dominant provider of Internet service in these markets
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Launch our
PeRKInet® broadband Internet service in these markets
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Develop
strategic relationships to take advantage of other business
opportunities
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Acquire Existing Internet Service Providers. To gain initial
presence within our target markets, we intend to acquire existing Internet
service providers in the community. We focus on pursuing Internet service
providers that have strong technical teams and superior customer service.
We offer our acquisition targets the capital and expertise needed to
accelerate growth and a unique position to market our PeRKInet®
services through the local cable TV system. With a presence in the market
established, we implement a business plan designed to maintain
profitability while maximizing revenue growth. This business plan involves
an aggressive marketing program, an emphasis on providing superior
customer service and an efficient data network.
Become the Dominant Provider of Internet Service. To become a
dominant provider in our target markets, we market a wide range of
services and strive to maintain a strong local presence.
Market a Wide Range of
Services. Our fundamental marketing strategy involves delivering a
comprehensive array of Internet services in our local markets. These
services include dial-up and broadband Internet access, Web hosting and
design for multimedia sites, advertising, network planning and systems
integration and government consulting services. Once operating in a
market, new customers are acquired through word of mouth, referral
incentives, local advertising, telemarketing, acquisitions, affiliations
and co-promotion with local media. We will continue to focus our
marketing efforts on the local small-office, home-office, business,
education, and government markets during the remainder of 1999 and 2000.
These segments tend to be less sensitive to price and are more focused
on access speeds and product support. While our overall average monthly
churn rate (disconnections as a percentage of Internet customers) of
2.6% is lower than the industrys average of 5 to 6%, we feel that
focusing on these segments will reduce our churn rate
further.
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Maintain a Strong Local
Presence. We believe that a committed local presence offers us many
advantages:
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We can provide
location-specific services not offered by our competitors, such as local
training classes.
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We can take
advantage of market-specific opportunities that are only apparent to a
local company and are likely to be missed by our national competitors,
such as offering group discounts to local organizations.
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A local staff
of strong technical sales and customer service personnel offers superior
customer service and reliability.
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Therefore, we emphasize marketing on the local level to establish a
strong customer base and market dominance and to maintain and promote our
local brands. We believe that our monthly recurring revenue will then
increase due to customer retention and we will outperform larger Internet
companies in these smaller markets.
Launch PeRKInet®. The advantage of PeRKInet® over
other broadband access technologies is that it does not require
significant capital improvements, because it uses existing cable and
telephone technologies. PeRKInet® is not television-based web
browsing. Rather, it is full Internet access for personal computers or
local area networks, using a cable modem. PeRKInet® uses local
telephone lines to send information upstream (from the
computer to the Internet) and uses a broadband cable modem to receive
downstream traffic (from the Internet to the computer).
Because the majority of the data used while you browse the Internet is
downstream, this method maximizes PeRKInet®s speed
and improves Internet connections where it is most noticeable. Simply
stated, most Internet subscribers currently use local telephone lines and
modems that range between 14.4Kbps and 56Kbps. PeRKInet® delivers
access to the Internet over the same coaxial cable that brings you cable
TV at speeds between 256Kbps and 10 Megabits per secondeight to ten
times faster than most Internet services, and twice the speed of ISDN at
half of ISDNs cost.
We conducted market research to determine what strategies would be most
successful for cable TV operators to deliver high-speed data services to
their customers. Our research consisted of interviews of numerous cable TV
operators, asking detailed, in-depth questions of their opinions on
various Internet strategies. We found that most of the cable TV operators
in our target markets do not plan to offer two-way high-speed data
services in the near future. Our focus is to establish relationships with
cable TV operators within our target markets that fall into this category.
We believe that establishing these relationships is the best technical
solution for us to implement our PeRKInet® broadband Internet service.
Our goal is to enter into agreements with cable TV operators in our target
markets and pay them a carriage fee to use their cable TV system for our
PeRKInet® broadband Internet service. To date we have carriage
agreements with local cable systems in five of our target
markets.
Although we have carriage agreements in five of our markets, we have
encountered difficulty in our efforts with cable systems in other target
markets. As a result, in June 1999, we filed an administrative request
with the FCC that would, should it receive a favorable ruling, allow us to
gain access to cable systems in our other target markets under the
leased access provisions of federal law. More detailed
information about leased access and the relevant laws can be found below
under the heading Leased Access. We feel that the attainment
of leased access would significantly enhance our ability to compete in the
broadband Internet arena and provide PeRKInet® service to customers in
each of our target markets.
Develop Strategic Relationships. To take advantage of other
business opportunities, we intend to seek the development of strategic
relationships as we recognize additional market opportunities. The
additional opportunities we are currently exploring are described
below.
Strategic Alliances in the
Internet Marketplace. We want to develop relationships that will
help us expand revenue opportunities. Combining our local Internet
service provider presence and our experienced and skilled management
team with the unique strengths of other Internet businesses is an
effective way to help us expand revenue opportunities.
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Rockwindow
Television Network, Inc. We invested $30,000 in Rockwindow
Television Network, Inc, a development stage California corporation that
intends to introduce a new media medium, converging Internet with music
broadcasting to create an Internet network. Rockwindow Television plans
to provide broadband multi-media content in its original programming
using currently available means of Internet connections. Revenue will be
generated from subscriptions and pay per view fees to its Internet
network, advertising on the site, and the sale of music related
merchandise. We plan to provide Rockwindow Television with immediate
exposure to our customer base and with consulting services; however, to
date no definitive agreements have been entered into.
|
dinkyBIG
Corporation. dinkyBIG is an early-stage California
corporation, of which we own 20%. dinkyBIG intends to generate revenue
by contracting with owners of commercial buildings to provide the
building tenants with competitively priced convergent broadband services
for voice, data and video, including broadband Internet access. Although
we have not entered into any definitive agreements with dinkyBIG, it is
intended that we will use our expertise in cable, telephone and Internet
technologies to provide consulting services to dinkyBIG.
|
International Markets. To
explore Internet business opportunities abroad, we are currently
developing relationships in Germany and the Middle East. With an
investment of $60,000, we established PeRKInet AG in September 1999, a
German corporation of which we are the majority owner that was formed
with the intention of consolidating Internet service providers in
Germany and Austria in the same way we acquire and integrate local
Internet service providers while adding enhanced Internet access
technology to offer to subscribers. eMarketer, an online provider of
analysis, statistical estimates, projections and long-term trends for
the Internet, found that among Germany, France, and Great Britain,
German users view the most online content and spend the most time
online. We are also working to develop new business opportunities in the
Middle East, most notably the implementation of two-way, wireless
high-speed Internet in Kuwait and the creation of a customizable web
site that will offer users improved navigation through Middle
East-related web sites.
|
The Growth of Our Company
We have
acquired 23 local Internet companies in California, Colorado, Idaho,
Oregon and Washington since our formation as a California corporation on
September 19, 1995. We currently operate in the following 12
counties:
|
In California
Ventura, Humboldt, Del Norte and San Joaquin Counties
|
|
In Colorado
LaPlata, Mesa, and Montezuma Counties
|
|
In Idaho
Kootanai County
|
|
In Oregon
Jackson, Josephine and Klamath Counties
|
|
In Washington
Spokane County
|
The
significant events in the history of our company are summarized
below.
Date |
Event |
Significance |
|||||||
---|---|---|---|---|---|---|---|---|---|
September 1995 | Internet Ventures, Inc. Founded | Our company was incorporated in
California |
|||||||
November 1995 | Community Wide Web of
Stockton,
Inc. Acquired |
Established a presence in
Stockton,
California, through the purchase of a leading Internet service provider in that market |
|||||||
November 1995 | Internet On-Ramp, Inc. Acquired | Established a presence in
Spokane,
Washington, through the purchase of a leading Internet service provider in that market |
|||||||
May 1996 | Northcoast Internet, Inc. Acquired | Entered the Eureka, California, market | |||||||
May 1996 | Optimal Systems
Integrators, Inc.
Acquired |
Purchase of
this network planning and
systems integration services company enhanced our primary services as an Internet service provider |
|||||||
July 1996 | Information
Technology International,
Inc. Acquired |
Entered the
Grand Junction, Colorado,
market |
|||||||
July 1996 | Touchtone Network, Inc. Acquired | Consolidated
customers of local Internet
service providers in Stockton, California |
|||||||
September 1996 | Launch of
Internet-On-Ramp Internet
service in Idaho |
From our
Spokane-based Internet service
provider, Internet-On-Ramp, offered service in Coeur DAlene, Idaho |
|||||||
January 1997 | Digital City
Communications, Inc.
Acquired |
Consolidated customers of local Internet
service providers in Stockton, California |
|||||||
January 1997 | Windows on the World Acquired |
Entered the Crescent City, California,
market |
|||||||
February 1997 | Western
Internet Connections, Inc.
Acquired |
Increased our presence in the Grand
Junction, Colorado, market by 200% |
|||||||
March 1997 | PeRKInet® Introduced |
Our PeRKInet® service was first offered
on Avenue TV Cable in Ventura, California |
|||||||
May 1997 | Boudames
Investment Corporation, Inc.
Acquired |
Consolidated customers of local Internet
service providers in Stockton, California |
Date |
Event |
Significance |
|||||||
---|---|---|---|---|---|---|---|---|---|
May 1997 | VorTech Net World Access Acquired | Entered the Tracy, California, market | |||||||
June 1997 | Tide Pool, Inc. Acquired |
Increased presence in Arcata, California,
market by 50% |
|||||||
August 1997 | Medford Internet Acquired | Entered the Medford, Oregon, market | |||||||
December 1997 | Badas
Technologies, Inc. d/b/a Infostructure
Merger into Internet Ventures Oregon |
Entered the Ashland, Oregon, market | |||||||
February 1998 | Launch of PeRKInet® in Eureka, California |
Entered carriage agreement with Cox
Cable Humboldt to offer PeRKInet® service to 49,000 homes passed in Eureka, California |
|||||||
August 1998 | $29.95 PeRKInet
® Subscription Price
Introduced |
New, lower price introduced to attract
more subscribers by providing more economical service |
|||||||
September 1998 | DurangoNet, Inc. Acquired | Entered the Southwest Colorado market | |||||||
September 1998 | Oregon
Wilderness Delivery Systems, Inc.
d/b/a BudgetNet Acquired |
Entered the Grants Pass, Oregon, market | |||||||
September 1998 | Redwood
Country Online, a division of
Evergreen Technologies, Acquired |
Aggregated local content and web
hosting |
|||||||
September 1998 | HumGuide Internet Publishing Acquired |
Expanded our portfolio to provide
advertising services |
|||||||
January 1999 | Next Dimension Internet Acquired |
Increased our presence in the Spokane,
Washington, market by 25% |
|||||||
February 1999 | National
Computer Solutions, Inc. K-Falls
Acquired |
Entered the Klamath Falls, Oregon,
market |
|||||||
February 1999 | Internet
On-Ramp, Inc. Business Services
Established |
Integrated operations of Optimal Systems
Integrators |
|||||||
February 1999 | Launch of Wireless Cable PeRKInet® |
Multi-point distribution service
microwave spectrum was used for PeRKInet® for the first time in Medford, Oregon |
|||||||
July 1999 | Extent, Inc. d/b/a FutureLink Acquired |
Increased our presence in the Spokane,
Washington, market by 10% |
|||||||
July 1999 | Launch of
PeRKInet® on Ashland Fiber
Network |
Our first two-way cable launch of
PeRKInet® |
|||||||
September 1999 | Investment in InnerCite |
30% equity investment in an Internet
service provider with operations in El Dorado and Sacramento counties in California |
|||||||
September 1999 | Tomato Web Online Acquired |
Expanded our presence in the Central
Valley of California by 95% |
The acquisitions and events listed above provide us
with a current market of approximately 1,087,100 homes or
business locations as of September 30, 1999. Of these potential
customers, 1,049 subscribed for our PeRKInet® service and
26,538 subscribed for our dial-up Internet access
service.
The following chart demonstrates the number of subscribers we have
in each of the nineteen communities which we service and the
number of potential subscribers in each community as of
September 30, 1999.
Community |
Homes
Marketed |
Subscribers |
Equivalent
Customers Units(2) |
Total |
Penetration Rate |
Number
of Months in Operation |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
PeRKInet
® |
Dial-Up(1) |
PeRKInet
® |
Dial-Up |
|||||||||||||
Stockton, CA (including
Manteca and Tracy, CA) |
145,000 | 1,306 | 1,306 | 0.00% | 0.99% | 45 | ||||||||||
Spokane, WA | 140,000 | 4,692 | 468 | 5,160 | 0.00% | 3.35% | 45 | |||||||||
Eureka, CA | 40,000 | 594 | 2,857 | 3,451 | 1.50% | 7.14% | 40 | |||||||||
Grand
Junction, Montrose,
Cortez, Durango, Telluride, CO |
79,000 | 5 | 6,554 | 1,149 | 7,708 | 0.00% | 8.20% | 39 | ||||||||
Coeur DAlene, ID | 38,000 | 1,424 | 1,424 | 0.00% | 3.74% | 37 | ||||||||||
Crescent City, Arcata, CA | 19,400 | 805 | 805 | 0.00% | 4.10% | 33 | ||||||||||
Ventura, CA | 90,000 | 170 | 537 | 707 | 0.15% | 0.78% | 24 | |||||||||
Medford, OR | 50,000 | 243 | 490 | 56 | 789 | 0.48% | 0.98% | 25 | ||||||||
Ashland, OR | 17,700 | 37 | 2,918 | 847 | 3,802 | 0.20% | 16.48% | 22 | ||||||||
Grants Pass, OR | 29,000 | 2,897 | 2,897 | 0.00% | 10.00% | 13 | ||||||||||
Klamath Falls, OR | 24,000 | 715 | 28 | 743 | 0.00% | 2.98% | 8 | |||||||||
Sacramento, CA | 430,000 | 1,343 | 1,343 | 0.00% | 0.30% | 3 | ||||||||||
Totals | 1,087,100 | 1,049 | 26,538 | 2,548 | 30,135 | 0.09% | 2.44% | |||||||||
(1)
|
Customer counts include dial-up customers for
which we authenticate access for other Internet service
provider customers for a monthly fee per customer.
|
(2)
|
Other customers represent equivalent units
calculated to include leased line, web and domain
hosting revenues divided by an average monthly rate of
$20.
|
While we intend to maintain a local presence in the
nineteen communities which we service, we have grouped our
operations into four regional operating units. In addition to
the employees of our subsidiaries, we also maintain a small
corporate staff responsible for pursuing business development
through acquisitions and strategic partnerships and for
developing and managing company-wide administrative and
marketing services. This corporate structure and the regional
clustering of operations maximizes economies of scale,
centralizes certain administrative functions and provides cost
advantages over local competitors.
Our Strategy in Action
One market that demonstrates the successful
application of our business strategy is Eureka, California, in
Humboldt County. After identifying Eureka as an appropriate
target market, we:
|
Acquired Northcoast Internet, a full service
local internet company, in May 1996.
|
|
Entered into a carriage agreement with Cox
Cable Humboldt in February 1998 to offer its 49,000 customers
our PeRKInet® broadband Internet service.
|
|
Acquired HumGuide
SM
in September 1998 to provide
advertising services. HumGuide
SM
provides a directory of business, government
and information web sites for Humboldt County, with additional
offerings such as regional news and movie
listings.
|
|
Entered into an agreement with the LookSmart
Internet search service in February 1999 to provide our
customers with enhanced content and online search resources.
LookSmart provides their search tool on the Northcoast
Internet home page, and the home pages of all our subsidiary
Internet service providers, as well as ads and search sections
tailored to the local market.
|
|
Entered into an agreement with the Auto Channel
in December 1998 to provide carriage of selected video
programming via our PeRKInet® broadband Internet service.
The agreement enables PeRKInet® subscribers in Humboldt
County to download on demand a variety of weekly programs from
The Auto Channel, providing an excellent opportunity for
PeRKInet® to showcase the capabilities of broadband and
real-time streaming video over the Internet, which is like
watching television on your personal computer.
|
At the time of our acquisition of Northcoast
Internet, it was the fourth largest Internet communications
company in the Eureka market. Since our acquisition of
Northcoast Internet, we believe that we have established
ourselves as the largest local Internet communications company
in terms of both revenue and customers within that
market.
Products and Services
Internet Access and Content Hosting Service.
The majority of our current revenues come from Internet access
and content hosting services targeted at businesses, schools,
local governments and individuals. Internet access services
range from 28.8 Kbps dial-up service targeted to individuals to
high-speed dedicated T1 Internet access (1.5 Megabits per
second) targeted to businesses. As of March 31, 1999, we
provided 94% of our Internet access customers with traditional
dial-up access and 6% of our customers with broadband Internet
access. Of our broadband Internet customers, we provide access
to 95% through our phone-return cable modem PeRKInet®
broadband Internet service, while we provide access to the
remainder of our broadband customers through the use of other
technologies. These other broadband technologies include
Asymmetric Digital Subscriber Line in Grants Pass, Oregon,
wireless multi-point distribution service in Medford, Oregon and
unlicensed wireless in Durango and Grand Junction, Colorado. We
believe, however, that wired technology presents a better
delivery solution than the wireless alternatives.
Web content hosting services are targeted to
businesses and government agencies that want to set up web pages
on the Internet using our computer servers. These servers are
connected to the Internet via high-speed connections, maximizing
the transmission of this information to the Internet user or
customer. We presently host approximately 1,000 business web
sites served by a combined 20 Megabits per second Internet
bandwidth.
Advertising. In 1999, we entered into an
agreement with the LookSmart Internet search service to provide
their search tool on each of our subsidiary Internet service
providers home page, as well as advertisements and search
sections tailored to each local market. To further enhance and
differentiate our services, we also gather together local
sources of content. For example, in October 1998 we expanded our
portfolio with the acquisition of HumGuide
SM
. HumGuide
SM
provides a directory of business, government and
information web sites for Humboldt County, California. We
anticipate that HumGuide
SM
will serve as a model for the creation of a
Community Wide Web
SM
, our concept of gathering local content into a
local portal to enhance value for local subscribers.
Streaming Media Storage. We also store
streaming media content on our local servers. One example is
Eye on Durango, which presents live video broadcasts
of prominent city landmarks in Durango, Colorado. We also
reached an agreement with The Auto Channel in December
1998 that provides for carriage of selected video programming
via our PeRKInet® broadband Internet service. Under the
terms of the agreement, The Auto Channel is responsible
for acquiring and selecting programming to be mirrored on
PeRKInet®, and The Auto Channels Video2Net
subsidiary is responsible for digitizing the programming for
256Kbps distribution. We are responsible for distributing the
product via PeRKInet® and for promoting it to existing and
potential PeRKInet® subscribers.
Systems Integration and Network Design Services.
These services include designing internal networks,
assisting with the purchase and installation of the network
equipment, and establishing secure connections to the Internet.
We provide these services to local market corporations, small
businesses, and government agencies.
PeRKInet®
Our PeRKInet® service provides broadband
Internet-over-cable access at a minimum speed of 256Kbps for
individual PeRKInet® users. PeRKInet®s monthly fee
is $29.95, including cable modem rental, which we believe is one
of the lowest in the nation for broadband cable Internet access.
In addition, we offer a commercial version of PeRKInet®
suitable for use with intra-company computer networks at up to
Ethernet speed (10 Megabits per second) for $95 per month. Both
services provide maximized downstream speed (from the Internet
to the computer) while the upstream speed (from the computer to
the Internet) remains at traditional dial-up speed.
In addition to broadband Internet access, the
PeRKInet® service also includes local content and
interactive PC programming. PeRKInet® content is a
single-source portal of more than 75 Internet-delivered
television broadcast stations and other programming. The site
includes links to a unique combination of established broadcast
programming sources in 28 countries, including Bahrain TV,
Vatican TV, the Philippines Sarimanok News Network, WGBH,
which is the Boston public broadcasting station, and KTVB, an
NBC affiliate in Boise, Idaho. We hope to expand this portal
with local programming in each market through strategic
alliances with local television stations. All stations can be
viewed in a format comparable in size to a pocket television
screen.
We have carriage agreements with local cable and
wireless cable systems to offer our PeRKInet® broadband
Internet service to subscribers in the following
markets:
Location |
Cable
Partner |
||||
---|---|---|---|---|---|
Eureka, California | Cox Cable Humboldt | ||||
Ventura, California | Avenue TV Cable | ||||
Durango, Colorado | Hermosa Cable | ||||
Medford, Oregon | ATI, Medford (wireless) | ||||
Ashland, Oregon | Ashland Fiber Network |
Although we currently provide the PeRKInet®
service only to a limited number of subscribers, these
agreements collectively make the PeRKInet® service available
in approximately 140,000 homes passed by cable or line of sight
wireless.
The PeRKInet® Advantage. The advantage of
PeRKInet® over other broadband access technology is that it
does not require capital improvements, because it uses existing
cable and telephone technologies. The local telephone network is
highly reliable for dial-up Internet access, whereas the local
cable TV network is highly reliable for cable modem Internet
access. Both networks have a connection to substantially all of
the homes and businesses in the United States. By combining the
strengths of these two networks with our expertise and local
Internet communications presence, we believe we can deliver a
reliable solution to broadband Internet access with our PeRKInet
® service, using the telephone lines to transmit data from
your personal computer to the Internet and the cable television
lines to transmit data from the Internet to your personal
computer. In addition, to the extent a cable operator has
upgraded their system to carry two-way data transmission, our
PeRKInet® service can use this technology and provide
two-way cable Internet access.
The PeRKInet® Technology. PeRKInet®
delivers Internet access at a minimum of 256Kbps, a speed that
is more than four times faster than 56Kbps modems and a maximum
speed of approximately 10 Megabits per second, a speed that is
100 times faster than 56Kbps modems. A 56Kbps modem is the
fastest home dial-up modem available. Data is transmitted over
the Internet from the subscriber to the Internet via telephone
modems at up to 33.6Kbps or via a faster frame relay connection.
Customers receive data on a personal computer equipped with a
cable modem and Ethernet card. An Ethernet card is the hardware
equipment known as an interface board that connects the computer
to a local network of computers. The modem and Ethernet card can
be leased, much like todays cable boxes. The technology
used for PeRKInet® was developed and patented by Hybrid
Networks, Inc., and was tailored to an Internet service provider
solution rather than a cable solution. However, we do not have
exclusive rights to the equipment or technology used in
connection with our
PeRKInet® service. In June 1996, we also began purchasing
Hybrids phone return cable modem product line. We believe
we were the first to commercialize this technology, which was
launched in Ventura, California in March 1997. The diagram below
illustrates how our PeRKInet® technology works:
Competition
The markets for consumer and business Internet
services and online content are extremely competitive and highly
fragmented. There are no significant barriers to entry and we
expect that competition will intensify in the future. Many of
our competitors are offering or may soon offer technologies that
will attempt to compete with some or all of our products and
services. These technologies include Digital Subscriber Line
Services, satellite access and two-way cable Internet access. We
compete on the basis of transmission speed, reliability of
service, ease of access, price and performance, ease-of-use,
content quality, quality of presentation, timeliness of content,
customer support, brand recognition, operating experience and
revenue sharing. Our competitors include the
following:
Internet
Service Providers. Internet service providers, such as
Earthlink, FlashNet, MindSpring and Prodigy provide basic
Internet access to residential consumers and businesses,
generally using existing telephone network infrastructures.
This method is widely available and inexpensive. Barriers to
entry are low, resulting in a highly competitive and
fragmented market.
|
Long
Distance Carriers. Long distance carriers, such as AT
&T, GTE, MCI WorldCom and Sprint, which have agreed to
merge, have deployed large-scale Internet access networks and
sell connectivity to business and residential customers.
Regional Bell operating companies and other local exchange
carriers have also entered this field and are providing price
competitive services. Many carriers are offering diversified
packages of telecommunications services, including Internet
access service, to residential customers and could bundle such
services together, placing us at a competitive
disadvantage.
|
Wireless
Service Providers. Wireless service providers, including
Hughes Network Systems, MCI/WorldCom and Sprint, are
developing wireless Internet connectivity.
|
Online
Service Providers. Online service providers include
companies such as Excite@Home, America Online, RoadRunner and
WebTV that provide, over the Internet and on proprietary
online services, content and applications ranging from news
and entertainment to sports. These are services which
provide basic Internet connectivity, ease-of-use and consistency
of environment. In addition to developing their own content or
supporting other content developers, online service providers
often establish relationships with traditional broadcast and
print media outlets to bundle their content into the service.
For example, NBC provides Microsoft with multimedia news and
information programming over both cable TV and Microsoft
Network.
|
Content
Aggregators. Internet content aggregators seek to provide
a one-stop information source for Internet and
online users. Their success depends on capturing an audience,
providing ease-of-use and offering a range of content that
appeals to a broad audience. Their business models are
predicated on attracting and retaining an audience for their
set of offerings. Leading companies in this area include
America Online, CompuServe, Excite@Home, Microsoft and Yahoo!.
In this market, competition occurs in acquiring both content
providers and subscribers. The principal bases of competition
in attracting content providers include quality of
demographics, audience size, cost-effectiveness of the medium
and ability to create differentiated experiences. The
principal bases of competition in attracting subscribers
include richness and variety of content and ease of access to
the desired content. Proprietary online services like America
Online, CompuServe and Microsoft Network have the advantage of
a large customer base, industry experience, many content
partnerships and significant resources.
|
Cable-Based
Data Service Providers. Our competitors in the cable-based
services market are those companies that have affiliated with
cable companies or developed their own cable-based services
and market those services to unaffiliated cable system
operators with whom we would like to work. Excite@Home is a
publicly-held company whose principal affiliation is with the
major cable system operators including AT&T Broadband and
Internet Services, Century Cable Vision, Cox Cable, InterMedia
and others. Several cable system operators, including Time
Warner Inc., have deployed broadband Internet access services
over their existing local cable networks. Specifically, Time
Warner, which is the second largest cable company in the
United States, has established its own cable-based Internet
service provider called RoadRunner, which features a variety
of Time Warner publications and services. Time Warner markets
the RoadRunner service through Time Warners own cable
systems as well as the other cable system operators
nationwide. Others that have implemented their own cable-based
Internet services include Adelphia Communications Corporation,
BellSouth Corporation and Jones Intercable, Inc. Some of these
companies, such as Time Warner, have their own substantial
libraries of multimedia content, which could provide them with
a significant competitive advantage.
|
Leased Access
Our ability to provide our high-speed PeRKInet®
Internet access via cable depends on our ability to gain access
to local cable networks. In June 1999, we filed a Petition for
Declaratory Ruling with the FCC requesting that cable operators
be forced to carry independent Internet service providers on
their cable lines. Pursuant to Section 612 of the Communications
Act, cable operators must provide channel capacity for
commercial use by persons unaffiliated with the operator. These
designated channels are referred to as leased access channels.
If our petition receives favorable action, it will enhance our
ability to compete in the broadband Internet arena and provide
PeRKInet® service to customers in each of our target
markets.
Many cable operators and others opposed our petition
and filed written comments with the FCC. Since the leased access
rules specifically speak to video programming, many cable
industry leaders have taken the stance that Internet programming
is not included within the definition of video programming. Our
Petition for Declaratory Ruling asks the FCC to rule that
Internet programming is video programming entitled to leased
access. If the FCC rules in our favor, cable operators will be
forced to lease their cable lines to Internet service providers
for transmission of Internet programming. In the event a
favorable ruling is not promptly received, we will continue to
seek other means to provide our customers with broadband
Internet access. The FCC does not have a deadline by which to
rule, nor are we able to determine when the FCC will issue a
decision; however, a February 4, 2000 Los Angeles Times article
reported that the FCCs staff recommended that the agency
turn down our Petition for Declaratory Ruling. The FCC has not
yet made an announcement about our petition.
Government Regulation
We provide Internet services, in part, by means of
data transmissions over public telephone lines and cable
systems. Although our services are not currently subject to
regulation by the FCC or any other federal or state regulatory
agency, changes in the regulatory environment affecting
businesses that provide Internet connection and content on the
Internet could affect the nature, scope, prices and ability to
market our services successfully.
In the future, we could become subject to regulation
by the FCC or other federal agencies or by state regulatory
agencies or bodies. For example, a number of long distance
telephone carriers recently filed a petition with the FCC
seeking a ruling that Internet telephone service is a
telecommunications service subject to common carrier regulation.
This ruling, if made, would create substantial barriers to entry
for companies seeking to provide telephone-dependent Internet
service. The FCC is also considering whether providers of
Internet-based telephone services should be required to
contribute to the universal service fund, which subsidizes
telephone service for rural and low income consumers, or should
pay carrier access charges on the same basis as regulated
telecommunications providers. Also, a number of local telephone
companies have asked the FCC to levy access charges on
enhanced service providers, which may be deemed to
include Internet service providers. Although the Chairman of the
FCC has indicated his opposition to levying service charges
against Internet service providers, local interconnection
charges could be levied in the future. Moreover, the public
service commissions of certain states are exploring the adoption
of regulations that might subject Internet service providers to
state regulation. To the extent that we engage in the provision
of Internet or Internet-based telephone services, we may become
subject to FCC or state regulations with respect to these
activities. We cannot assure you that regulations will not
adversely affect our ability to offer certain enhanced business
services in the future.
Due to the increasing use of the Internet, it is
possible that additional laws and regulations may be promulgated
with respect to the Internet, covering issues such as content,
user privacy, pricing, libel, encryption standards, intellectual
property protection and infringement and technology export and
other controls. We cannot predict the effect, if any, that any
future regulatory changes or developments may have on the demand
for our Internet services or our ability to provide
them.
Proprietary Information
We do not hold any patents. The equipment we use to
provide Internet access to our customers consists, in part, of a
cable modem which is patented by Hybrid Networks, Inc., the
manufacturer of the equipment. We do not have an exclusive
technology license to use any of this equipment. It is our
policy to have our employees and consultants enter into
non-disclosure agreements with us when they begin working with
us. These agreements provide that confidential information
developed or made known during the course of their relationships
with us is owned by us or the applicable subsidiary and is to be
kept confidential except in specific circumstances. There can be
no assurance that the steps we have taken will be adequate to
prevent unauthorized use of our technology or that our
competitors will not independently develop technologies that are
substantially equivalent or superior to our
technology.
Legal Proceedings
WIC.net Proceedings. On April 7, 1998, the
former owners of our WIC.net subsidiary filed a demand for
arbitration with the American Arbitration Association, alleging
that we breached the contract for our acquisition of WIC.net. On
October 26, 1998, we filed a counterclaim in the arbitration,
alleging breaches of the selling shareholders employment
agreements, conversion, embezzlement, misappropriation of
corporate opportunities, fraud, deceit and misrepresentation. We
sought damages in the amount of $100,000.
On February 10, 1999, the former owners filed an
Amended Demand for Arbitration. They alleged breach of contract,
fraud, deceit, misrepresentation, wrongful termination and
violations of federal and state securities laws. They requested
rescission of the acquisition and employment agreements, damages
for breach of contract in the amount of $50,500; damages for
emotional distress in the amount of $300,000; repurchase of our
stock issued to them for an aggregate repurchase price of
$122,500 plus interest; and compensatory damages for lost
profits and business opportunities in the amount of
$1,000,000.
In related litigation, we filed two lawsuits
against the former owners of the WIC.net subsidiary in Colorado
state court. The first lawsuit, filed April 27, 1998, alleged
that the former owners wrongfully enjoined us from entering the
office of both the WIC.net subsidiary and our Information
Technologies International, Inc. subsidiary; wrongfully denied
us access to computer equipment; abused judicial process; and
breached their fiduciary duty through a usurpation of a
corporate opportunity by personally entering into a lease for
the subsidiarys office. The second suit filed August 17,
1998 sought a preliminary injunction against the same former
owners and alleged breach of the non-compete clause in their
employment agreements.
On July 26, 1999, the parties reached a settlement
agreement through American Arbitration Association mediation of
both the arbitration and the state court litigation. Under the
terms of the settlement, the former owners agreed to sell their
76,828 shares of our common stock at a price of $2.75 per share.
Of that amount, third parties purchased directly from the former
owners 72,000 shares, including 27,837 shares in the aggregate
bought by Alfred Leopold, a director of our company, and members
of his immediate and extended family, and we purchased the
remaining 4,828 shares. The former owners also agreed not to
compete with us until
March 26, 2000. On September 22, 1999 the parties closed the settlement, exchanging cash payments, shares of common stock and executed copies of the settlement agreements.
March 26, 2000. On September 22, 1999 the parties closed the settlement, exchanging cash payments, shares of common stock and executed copies of the settlement agreements.
Internet On-Ramp Litigation. On November 10,
1998, the former owners of our Internet On-Ramp subsidiary filed
suit in federal district court for the Eastern District of
Washington against our president, Donald Janke, and one of our
former directors, Matthew Matern. The suit alleges violations of
federal and Washington state securities laws and
misrepresentation. This suit involves the defendants
actions in their capacities as officers and directors of our
company.
The defendants filed motions asking the court to
dismiss the matter and to compel arbitration. The acquisition
agreement requires that disputes be resolved by binding
arbitration conducted by the American Arbitration Association in
Los Angeles.
On March 31, 1999, the judge stayed the case, ruling
that the matter should be resolved by arbitration in Los
Angeles. On May 21, 1999, the judge denied the plaintiffs
motion for reconsideration and he also denied their motion for
leave to file an interlocutory appeal.
On June 14, 1999, one of the four plaintiffs settled
her claims against us, our current and former directors and
officers. In exchange for a complete release, the plaintiff
tendered her 12,415 shares of preferred stock, which we called
for redemption in March 1998, for the redemption price of $1.25
per share.
On November 8, 1999 the three former owners of
Internet On-Ramp who had not settled their claims filed a demand
for arbitration. The arbitration demand named us as a defendant
and also named as defendants our president, Donald Janke, his
wife and a former director, Matthew Matern. In the arbitration
demand the plaintiffs allege that we breached the acquisition
contract, misrepresented the terms of the acquisition contract
and violated federal and Washington State securities laws. The
plaintiffs are demanding that we redeem their preferred stock
for $1.25 per share at a total price of $161,481.25. They are
also demanding an unspecified amount of monetary damages and
attorneys fees. However, the plaintiffs did indicate to
the American Arbitration Association in connection with paying
the filing fee that the plaintiffs believed their claims are
worth between $1 million and $5 million.
We believe that the allegations are without merit.
Further, we believe that we have a strong defense based upon the
statute of limitations. However, if we lose we may be liable for
a judgment in excess of $1 million. We do believe that the
defendants are entitled to redemption of their preferred shares
for $1.25 per share. Before the plaintiffs filed their lawsuit
in federal district court for the Eastern District of
Washington, we sent them checks for the redemption amount. The
plaintiffs refused to cash the checks and returned them
indicating that they believed that if they cashed the checks it
would prejudice their right to later file a lawsuit.
Davis Litigation. On September 20, 1999, our Internet
On-Ramp subsidiary filed suit in Washington state court against
Eastern Washington University and Davis Communications, Inc.
alleging breach of contract, defamation and breach of the duty
of good faith and fair dealing. The suit arises out of a
contract under which Internet On-Ramp was to supply our PeRKInet
® high-speed access service over Davis cable system in
Spokane, Washington, to 900 dormitory rooms at Eastern
Washington until September 2001, which represents approximately
half of our PeRKInet® subscribers. Davis and Eastern
Washington contracted with the ISP Channel on March 31, 1999 to
make the ISP Channel the exclusive provider of Internet access
to Davis customers (including the 900 dormitory rooms at
Eastern Washington). On July 16, 1999, Internet On-Ramp received
notice from Eastern Washington of termination of the contract
under which Internet On-Ramp was to supply PeRKInet®
service. Eastern Washington and Davis claim that our service was
unsatisfactory, but have not produced any supporting information
either in meetings with our attorneys or in response to Freedom
of Information Act requests. On September 15, 1999, the ISP
Channel announced its contract with Davis and Eastern
Washington.
We have conducted our own internal investigation,
reviewed our files and interviewed our personnel and found Davis
and Eastern Washingtons claims to be unfounded. We
do not believe that either Davis or Eastern Washington will
assert material counterclaims. However, the cost of prosecuting
this suit could exceed $100,000.
Ohio Securities Inquiry. We received a letter
dated October 6, 1999 from the Division of Securities of the
Ohio Department of Commerce which asserted that certain
statements on our web site may have constituted general
solicitation, which is prohibited under Regulation D of the
Securities Act. This letter relates to our offering of units of
securities consisting of 12% convertible debentures and shares
of our common stock pursuant to Regulation D prior to the filing
of the registration statement to which this prospectus relates.
We intend to work with the Ohio Division of Securities to bring
a mutually acceptable conclusion to this inquiry, including
offering the six people in Ohio who purchased in our convertible
debenture offering the right to rescind their purchase of
securities which had an aggregate purchase price of $55,500.
This inquiry could delay or postpone our initial registered
public offering.
Employees
As of September 30, 1999, we employed a total of 96
employees, of whom:
|
15 were in management
|
|
15 in administration
|
|
13 in marketing
|
|
17 in customer service
|
|
28 on the technical staff
|
|
8 in consulting
|
None of our employees is represented by a labor
union. We have not experienced any work stoppage and consider
relations with our employees to be good.
Properties
Our company and each of our subsidiaries currently
lease their office facilities (ranging in size from 800 square
feet to 2,100 square feet), generally under short term
leases.
Management believes that our facilities are adequate
for our current needs and that suitable additional space, should
it be needed, will be available to accommodate expansion of our
operations on commercially reasonable terms.
Directors and Executive
Officers
The following table contains certain information
with respect to our directors and our executive
officers.
Name |
Age |
Position |
||
---|---|---|---|---|
Donald A. Janke | 48 | President and Director | ||
Marshall F. Sparks | 58 | Chief Financial Officer and Director | ||
Daniel R. DiMicco | 49 | Director | ||
Alfred M. Leopold | 39 | Director | ||
Timothy P. McGrath | 52 | Vice President, Investor Relations | ||
Reed W. Olson | 44 | Chief Operating Officer | ||
Randy Strickley | 49 | Vice President, Finance |
Donald A. Janke is a co-founder of our
company and has served as President and a director of our
company since its inception in September 1995. From January 1994
to April 1995, Mr. Janke served as Manager of Cable Marketing
for Prodigy Services Company where he led the technical and
market trials of high-speed online service via cable with Cox
Communications in San Diego and Omaha, and with Viacom in Castro
Valley. From 1987 to 1993, Mr. Janke was a marketing
representative for Prodigy for southern California, marketing
the service to retail distribution channels, major Hollywood
studios, travel companies, and other industries. Prior to
joining Prodigy Services Company, Mr. Janke served as president
of CVN Infonet, Inc., Americas Local Electronic
Newspaper, a company he co-founded in 1984. Prior to 1984,
he held positions as Director of Marketing for Palmer
Communications, Regional Sales Manager for Century
Communications, and Sales Representative for US
Cable.
Marshall F. Sparks is a co-founder of our
company and has served as Chief Financial Officer and a director
of our company since its inception in September 1995. Mr. Sparks
is also a director of W30TC Inc., a development web site company
that maintains a web portal for investment research, and has
held that position since January 1994. In addition, Mr. Sparks
has been a principal of Hampton Financial Corporation, an
investment banking firm specializing in small capital emerging
growth companies, since 1994.
Daniel R. DiMicco has been a director of our
company since July 1999. Mr. DiMicco has been the Vice President
and General Manager of Nucor Corp and Nucor Yamato Steel since
March 1991, and was promoted in October 1999 to Executive Vice
President of Nucor Corp.
Alfred M. Leopold became a director of our
company in September 1999. Mr. Leopold has been president of
Leopold Enterprises, a business and financial consulting firm,
since May 1999. He also serves as executive director of the
Cornerstone Foundation, a non-profit organization devoted to
raising money for religious vocations. At the Franciscan
University of Steubenville in Steubenville, Ohio, Mr. Leopold
was Associate Director for Austrian Programs from June 1995 to
May 1999 after serving as Austrian Program Coordinator and
International Admissions Counselor since January 1991. Prior to
1991, he held the position of Marketing and Promotions Manager
for Veritas Communications, publishers of a Catholic youth
magazine and other youth-oriented resources, and for Marriott
Ownership Resorts, Inc.
Timothy P. McGrath has been the Vice
President of Investor Relations since October 1996. From 1993 to
1997, he was the General Manager of Cornerstone Enterprises, an
asset management and consulting company, and currently serves as
trustee for Cornerstone Enterprises and for the Monterey
Trust.
Reed W. Olson became Chief Operating Officer
of our company in October 1998, prior to which he served as our
Director of Network Planning, a position he began in May 1996.
From 1990 to 1996 he was the President of Optimal Systems
Integrators, Inc., which we subsequently purchased and whose
operations include reselling of local dedicated circuits to
small businesses, system integration and network planning for
medium-sized businesses, and government contracts for
outsourcing and broadband Internet access.
Randy Strickley joined our company in
September 1999 as Vice President, Finance. From 1997 to 1999, he
was Senior Vice President and Chief Financial Officer of The
Todd-AO Corporation, a Los Angeles based publicly-held video and
sound post production company serving the television and film
industries. From 1972 to 1997, he was with Bank of America,
where he was most recently a Managing Director in the U.S.
Corporate Group providing corporate finance, capital markets
products and merger and acquisitions services to businesses in
the entertainment/media and healthcare services
industries.
Committees of the Board of
Directors
On October 1, 1999 our board of directors
established a compensation committee consisting solely of
non-employee directors. The compensation committee provides a
general review of our compensation plans to ensure that they
meet corporate objectives and administers our stock option
plans. Also on October 1, 1999 our board of directors
established an audit committee comprised solely of independent
directors. The responsibilities of the audit committee include
recommending to our board of directors the independent public
accountants to be selected to conduct the annual audit of our
books and records, reviewing the proposed scope of the audit and
approving the audit fees to be paid, reviewing accounting and
financial controls with the independent public accountants and
our financial and accounting staff, and reviewing and approving
transactions between us and our directors, officers and
affiliates.
Compensation of Directors
Our directors do not receive any cash compensation
for their services as a director of our company. There is no
policy regarding option grants to directors, but historically we
have made a one-time grant of options to purchase 25,000 shares
of our common stock when a director joins the board.
Subsequently, from time to time in our discretion, we have also
given our non-employee directors an additional grant of options
to purchase 10,000 shares of our common stock. The exercise
price of all of these option grants is set at the fair market
value of our common stock on the grant date. In addition, we
reimburse our employee and non-employee directors for their
reasonable out-of-pocket expenses incurred in attending board
meetings.
Executive Advisory Board
At inception, we established an informal Executive
Advisory Board consisting of members appointed by our president,
whose role was to assist management with general business and
strategic planning advice as needed. The Executive Advisory
Board was active for three terms until 1997 after which its
operation was suspended because we determined that we had firmly
established our core business strategy at the time. Our
president has since resolved that it would be in the best
interests of our company to re-establish the Executive Advisory
Board in order to pursue success with todays expanding
business opportunities. Our president recently appointed Hussein
Al-Sayegh, a director and partner in several corporations
internationally, to the re-established Executive Advisory Board.
Al-Sayegh will be actively involved in our development of new
business opportunities in the Middle East. Our president intends
to add two more members to the Executive Advisory Board to
advise on capital formation and trading strategies.
Compensation Committee Interlocks and Insider
Participation
We currently have two non-employee directors, Daniel
DiMicco and Alfred Leopold. Prior to October 1, 1999, our board
of directors did not have any committees. Therefore, the full
board of directors, including Mr. Janke and Mr. Sparks who are
executive officers of our company, participated in deliberations
concerning executive officer compensation.
Executive Compensation
The following table contains information with
respect to all compensation paid by us during the fiscal years
ended March 31, 1997, 1998 and 1999 to our president. No
executive officer of our company received combined salary and
bonus in excess of $100,000 for the fiscal year ended March 31,
1999.
Summary Compensation
Table
Name and
Principal Positions |
Fiscal year
ended March 31, |
Annual
Compensation |
Long Term
Compensation |
All Other
Compensation($) |
||||||
---|---|---|---|---|---|---|---|---|---|---|
Salary($) |
Bonus($) |
Securities
Underlying Options(#) |
||||||||
Donald A. Janke Chairman and President (1) | 1999
1998 1997 |
84,000
72,200 0 |
0
0 0 |
10,000
0 0 |
0
0 1,875 |
(1)
|
While Mr. Janke was employed by our Company in
fiscal year ended March 31, 1997, he received no cash
compensation for his services in 1997. He did, however,
receive 20,000 shares of common stock, valued at $7,500, as
compensation for services during the period November 14, 1995
through May 14, 1996. The pro rata portion of this
compensation allocable to fiscal year ended March 31, 1997 is
$1,875.
|
Option Grants in Fiscal
1999
The following table contains information regarding
our grant of stock options to our president for the fiscal year
ended March 31, 1999.
Name |
Individual Grants |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Number of
Shares Underlying Options Granted(#)(1) |
Percentage
of Total Options Granted to Employees in Fiscal 1999(2) |
Exercise
Price ($/Sh) |
Expiration
Date |
Potential
Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (3) |
||||||||
5%
($) |
10%
($) |
|||||||||||
Donald A. Janke | 10,000 | 1.9% | 5.50 | 6/19/2003 | 15,195 | 33,578 |
(1)
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These options were issued pursuant to our
Executive Stock Incentive Plan and were immediately
exercisable.
|
(2)
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Based on 521,000 options granted to all
employees.
|
(3)
|
Potential realizable value is presented net of
the option exercise price, but before any federal or state
income taxes associated with exercise. It is calculated based
on a fair market value on the date of grant of $5.50 per share
and assuming that the fair market value on the date of the
grant appreciates at the indicated annual rates, compounded
annually, for the term of the option. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the SEC and
do not represent our estimate or projection of future
increases in the price of our common stock. Actual gains will
be dependent on the future performance of our common stock and
the option holders continued employment through the
vesting periods. The amounts reflected in the table may not be
achieved.
|
Fiscal 1999 Year-End Option
Values
The following table shows information regarding the
unexercised options held as of March 31, 1999 by our president.
Mr. Janke did not exercise any options during the fiscal year
ended March 31, 1999.
Name |
Number of
Shares
Underlying Unexercised Options as of March 31, 1999(#) |
Value of
Unexercised in-the-Money
Options as of March 31, 1999($)(1) |
||
---|---|---|---|---|
Exercisable/Unexercisable |
Exercisable/Unexercisable |
|||
Donald A. Janke | 94,000/0 | $424,000/$0 |
(1)
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The value per option is calculated by
subtracting the exercise price of the option from the fair
market value of our common stock as of March 31, 1999, which,
solely for the purposes of this calculation, we estimate to
have been $5.50 per share.
|
Option Plans
On October 24, 1995, we adopted the following stock
option plans to reward and provide incentives to our officers,
directors, employees, consultants and other eligible
participants: (i) the Executive Stock Incentive Plan, (ii) the
1995 Incentive Stock Option Plan, and (iii) the 1995 Stock
Incentive Plan. We have reserved 400,000 shares for issuance
under each of the plans. The number of shares reserved for
issuance under each plan will be increased each year by an
amount equal to one percent of the outstanding shares of common
stock at the beginning of each fiscal year, and by the number of
shares of common stock that equals 3-1/3% of the number of
shares of voting stock issued in connection with any
acquisition.
Stock Options. The option plans permit the
granting of (i) options to purchase shares of common stock
intended to qualify as incentive options under Section 422 of
the Internal Revenue Code and (ii) options that do not so
qualify. The maximum amount that may be earned as an incentive
stock option in any fiscal year by any one participant is
$100,000. The option exercise price of each option will be
determined by the board of directors, but any option meant to
qualify as an incentive option will have an exercise price of at
least 100% of the fair market value of the common stock on the
date of grant.
The term of each option will be fixed by the board
and may not exceed ten years from the date of grant. The board
will determine at what time or times each option may be
exercised and, subject to any provisions of the option plans,
the period of time, if any, after retirement, death, disability
or termination of employment during which options may be
exercised. Options may be made exercisable in installments, and
the exercisability of options may be accelerated by the
board.
Upon exercise of options, the option exercise price
must be paid in full (i) in cash, (ii) by delivering common
stock already owned by the participant, (iii) by the execution
and delivery of a note or other evidence of indebtedness (and
any security agreement thereunder) satisfactory to the board, or
(iv) by such other consideration as the board may approve prior
to the time the option is exercised.
Stock Appreciation Rights. The board may
approve the grant of a right to receive a number of shares or,
in the discretion of the board, an amount in cash or shares or a
combination of cash and shares, based on the increase in the
fair market value of the shares subject to the right during the
period specified by the board. These rights are called stock
appreciation rights, or SARS. The board may approve the grant of
SARs related to stock options.
Adjustments for Stock Dividends, Mergers and
Similar Events. The board will make appropriate adjustments
in outstanding awards to reflect common stock dividends, splits
and similar events. In the event of a merger or sale of our
company in which we are not the surviving corporation, the
board, in its discretion, may provide for substitution or
adjustment of outstanding awards.
Amendments and Termination. The board may at
any time terminate or amend the option plans, provided that
without approval of stockholders there shall be: (i) no increase
in the total number of shares covered by the option plans and
(ii) no change in the class of persons eligible to receive
options. In any event, no amendment may adversely affect any
then outstanding options without the consent of the participant
unless such amendment is required to enable the option to
qualify as an incentive stock option.
Amendments to Option Plans. On October 1,
1999, we adopted amendments to our option plans. These
amendments (i) provide for the plans to be administered by
non-employee directors once we become a reporting company, (ii)
restrict the exercise of options, SARs or warrants while shares
are offered pursuant to an effective registration statement,
(iii) provides for indemnification of the board by our company
and limits liability of stockholders, officers and directors in
connection with any claims arising from the plans and (iv)
contains additional provisions ensuring compliance with Section
16 of the Exchange Act and the rules promulgated
thereunder.
Directors and Officers
Insurance
We are exploring the possibility of obtaining
directors and officers liability insurance. However,
there is no assurance that we will be able to obtain this
insurance.
Indemnification of Officers and
Directors
We have not entered into individual indemnity
agreements with our officers and directors. However, our
Articles of Incorporation and By-Laws provide a blanket
indemnity and state that we will indemnify, to the fullest
extent under California law, our directors and officers against
certain liabilities incurred with respect to their service in
their capacities as officers and directors. In addition, our
Articles of Incorporation provide that the personal liability of
directors and officers for monetary damages will be eliminated
to the fullest extent permissible under California
law.
These provisions will not affect a directors
responsibilities under any other laws, including the federal
securities laws and state and federal environmental
laws.
Donald Janke and Marshall Sparks, both executive
officers and directors of our company, Timothy McGrath, an
executive officer, and Mark Millet, a former director and
executive officer, were involved in our founding and
organization. On September 20, 1995, the board of directors
authorized the issuance of an aggregate of 1,272,800 shares of
common stock, as founders stock, at a price of $.01 per
share, to Messrs. Janke, Millet, Sparks and Matthew Matern (who,
until December 1996, was an officer and director of our
company). In addition, the board authorized the sale of an
additional 179,000 shares of common stock in the aggregate to
Messrs. Janke, Millet and Matthew Matern at $.10 per share on
the same date.
On August 24, 1998, Mr. Janke borrowed $25,000 from
our company. Under the terms of the promissory note, the note
was to be repaid, both principal and 8% annual interest, on
August 31, 1999, but the due date has been extended to March 31,
2000. As security for the note, Mr. Janke pledged 5,000 shares
of our common stock.
On July 10, 1999, Alfred Leopold received options to
purchase 3,000 shares of common stock and on August 17, 1999, he
received options to purchase 8,571 shares, all at an exercise
price of $5.50 per share, pursuant to an arrangement he entered
with our company in connection with the offering of our 12%
convertible debentures. In September 1999, Mr. Leopold became a
director of our company.
On September 22, 1999, as part of the closing of the
settlement of the WIC.net arbitration, Mr. Leopold and members
of his immediate and extended family bought 27,837 shares of our
common stock directly from the former owners of WIC.net for cash
in the aggregate amount of $76,551.75.
The following table contains information regarding
the beneficial ownership of our common stock as of January 28,
2000, by:
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each person or group of affiliated persons
known by us to beneficially own more than 5% of the
outstanding shares of our common stock;
|
|
each of our directors;
|
|
our president; and
|
|
all of our directors and executive officers as
a group.
|
Unless otherwise indicated below, the persons in the
table have sole voting and investment power with respect to all
shares shown as beneficially owned by them. Beneficial ownership
is determined in accordance with the rules of the SEC. The
number of shares beneficially owned by a person and the
percentage ownership of that person include shares of our common
stock subject to options and warrants held by that person that
are currently exercisable or exercisable within 60 days of
January 28, 2000.
Name |
Beneficial Ownership of Common Stock
Prior to this Offering |
||||
---|---|---|---|---|---|
Number |
Percent |
||||
Donald A. Janke | 2,027,224 | (1) | 26.1% | ||
Daniel R. DiMicco | 79,424 | (2) | 1.0% | ||
Alfred M. Leopold | 44,007 | (3) | 0.6% | ||
Marshall F. Sparks | 318,600 | (4) | 4.1% | ||
All
directors and executive officers
as a group (7 persons) |
2,768,312 | (5) | 34.5% |
(1)
|
Includes 605,210 shares held by Mr. Janke
s wife, Gabrielle Janke; 200,000 shares held by Mr. Janke
s daughter, Saskia Janke; and 94,000 shares of common
stock underlying currently exercisable options or options
exercisable within 60 days.
|
(2)
|
Includes 12,500 shares of common stock
underlying currently exercisable options or options
exercisable within 60 days.
|
(3)
|
Includes 9,688 shares held jointly with Mr.
Leopolds wife, Diane Leopold; 727 shares held through
Mr. Leopolds individual retirement account; 727 shares
held through Mr. Leopolds wifes individual
retirement account; 1,417 shares held by his mother, Virginia
Leopold; 4,730 shares held by his parents, John and Virginia
Leopold; 11,380 shares held by his brother, Joseph Leopold;
1,100 shares held by his brother, Mark Leopold; 1,667 shares
held by his brother and sister-in-law, Arthur and Susan
Leopold, as joint tenants; 1,000 shares held by his nephew and
his nephews wife, Nathan and Vicki Leopold; and 11,571
shares underlying currently exercisable options or options
exercisable within 60 days.
|
(4)
|
Includes 100,000 shares held by Mr. Sparks as
trustee of the American Kestrel Profit Sharing Plan and 90,000
shares of common stock underlying currently exercisable
options or options exercisable within 60 days.
|
(5)
|
Includes 352,071 shares of common stock
underlying currently exercisable options or options
exercisable within 60 days.
|
General
The following summary describes the material terms
of our capital stock. It summarizes material provisions of our
articles of incorporation. Our organizational documents will be
filed as exhibits to the registration statement of which this
prospectus is a part.
Our articles of incorporation authorizes us to issue
30,000,000 shares of common stock and 10,000,000 shares of
preferred stock, including 500,000 shares of Series A preferred
stock. As of January 28, 2000, there were 7,678,970 shares of
common stock outstanding, held of record by approximately 1,514
shareholders, and no shares of Series A preferred stock
outstanding.
Common Stock
Holders of common stock are entitled to one vote per
share on all matters subject to shareholder vote, including the
election of directors. Subject to the rights of holders of any
outstanding preferred stock, holders of outstanding shares of
common stock are entitled to dividends and other distributions
as may be declared by our board of directors from legally
available funds. Holders of our common stock have no preemptive,
subscription, redemption or conversion rights. Subject to the
rights of holders of any outstanding preferred stock, upon our
liquidation, dissolution or winding up and after payment of all
prior claims, the holders of shares of common stock outstanding
at that time will be entitled to receive pro rata all of our
assets. All shares of common stock currently outstanding are,
and all shares of common stock offered by us in this offering,
when duly issued and paid for will be, fully paid and
nonassessable. Additional shares of authorized common stock may
be issued without shareholder approval.
Preferred Stock
We have designated 500,000 shares of preferred stock
as Series A preferred stock. The Series A preferred stock has a
preference in the payment of dividends and upon our liquidation.
The liquidation value of the shares of preferred stock is $1.25
per share. The shares of Series A preferred stock do not
otherwise participate in a liquidation, except to the extent of
dividends declared but not paid. Dividends are non-cumulative.
The Series A preferred stock may be redeemed by us at our option
at any time for $1.25 per share. The Series A preferred stock is
convertible at the option of the holder at any time into shares
of common stock at a one-to-one ratio. Holders of Series A
preferred stock are entitled to one vote per share, and these
votes may be cast with respect to any matter as to which the
holders of common stock have the right to vote.
On March 12, 1998, we noticed the redemption of the
Series A preferred stock. Four shareholders holding a total of
20,000 shares redeemed their stock for $1.25 per share or
converted their preferred stock into common stock. The remaining
four shareholders, holding 141,600 shares, filed suit against
our president and a former officer and director. One of the
four, however, settled her claims in exchange for a complete
release and the redemption price of her preferred shares,
although the remaining three continue to refuse to surrender
their preferred stock certificates in return for the redemption
price. This suit is discussed in more detail in the section
entitled Legal ProceedingsInternet On-Ramp
Litigation.
Our board of directors, without further stockholder
approval, may issue the remaining 9,500,000 shares of preferred
stock in one or more series from time to time and fix or alter
the designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions of the shares of
each series. The rights, preferences, limitations and
restrictions of different series of preferred stock may differ
with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking
fund provisions and other matters. Our board of directors may
authorize the issuance of preferred stock which ranks senior to
our common stock for the payment of dividends and the
distribution of assets on liquidation. In addition, our board of
directors can fix limitations and restrictions, if any, upon the
payment of dividends on our common stock to be effective while
any shares of preferred stock are outstanding. Our board of
directors, without stockholder approval, can also issue
preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of common
stock. Our issuance of preferred stock may delay, defer or
prevent a change in our control.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is U.S. Stock Transfer Corporation.
When we complete the offering, we will have a total
of approximately 8,678,970 shares of common stock outstanding if
all 1,000,000 shares are sold. The 1,000,000 shares sold in this
offering will be freely tradeable under federal securities law
unless they are purchased by our affiliates, as that term is
defined in Rule 144 under the Securities Act. In addition, we
issued 902,774 shares of common stock pursuant to Regulation A
under the Securities Act and lifted the restrictive legend for
an additional 51,500 shares of common stock. These 960,590
shares are also freely tradeable under federal securities law.
The remaining 6,718,380 shares are restricted, which means they
were originally sold in offerings that were not subject to a
registration statement filed with the SEC. These restricted
shares may be resold only through registration under the
Securities Act or under an available exemption from
registration, including the exemption provided by Rule
144.
In addition, as of January 28, 2000, we have
outstanding:
|
warrants to purchase 178,580 shares of common
stock which are exercisable,
|
|
options to purchase 1,103,342 shares of common
stock, of which options to purchase 923,113 shares of common
stock are exercisable,
|
|
debentures convertible into 81,507 shares of
common stock, and
|
|
a note convertible into 68,182 shares of common
stock.
|
Registration Rights
Holders of the 12% convertible debentures issued
from October 1, 1998 through August 17, 1999, have the right,
upon the expiration of a 12 month period following execution of
the debentures, to demand that we use our best efforts to
register under the Securities Act of 1933 any stock issued
pursuant to the debentures.
Shares Owned for One Year
In general, under Rule 144, a person who has
beneficially owned restricted shares for at least one year,
including a person who may be deemed our affiliate, would be
entitled to sell, within any three-month period, a number of
shares that does not exceed one percent of the number of shares
of our common stock then outstanding. Rule 144 is available for
sales beginning 90 days after the date of this prospectus. Sales
under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public
information about us. We are unable to estimate accurately the
number of restricted shares that will be sold under Rule 144
because this will depend in part on the market price of our
common stock, the personal circumstances of the seller and other
factors.
Shares Owned for Two Years by a
Non-Affiliate
Under Rule 144(k), a person who is not deemed to
have been our affiliate at any time during the 90 days preceding
a sale, and who has beneficially owned for at least two years
the shares proposed to be sold, would be entitled to sell these
shares under Rule 144(k) without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144. Therefore, 144(k) shares may be sold after we
complete this offering.
Compensatory Benefit Plans and
Contracts
Beginning 90 days after the date of this prospectus,
the shares of common stock issuable upon exercise of the options
granted by us prior to the effective date of the registration
statement will be eligible for sale in the public market through
Rule 701 under the Securities Act. Rule 701 covers shares issued
before an initial registered public offering under compensatory
benefit plans and contracts. In general, Rule 701 permits
resales of these shares beginning 90 days after the issuer
becomes subject to the reporting requirements of the Securities
Exchange Act in reliance upon Rule 144, but without compliance
with holding period requirements and other restrictions
contained in Rule 144.
Registration Statements for Employee Benefit
Plans
After we complete this offering, we intend to file
under the Securities Act one or more registration statements on
Form S-8 to register all of the shares of common stock reserved
for future grants under our stock option plans. These
registration statements are expected to become effective upon
filing and shares covered by these registration statements will
be freely tradeable under federal securities laws, subject to
vesting provisions and, in the case of affiliates only, to the
restrictions of Rule 144.
The shares will be offered and sold only in
California and New York by our officers or by registered brokers
on a best efforts basis.
Although we are discussing and expect broker
participation, we have not yet signed any agreements nor do we
have any understandings with brokers or dealers. Our officers
who will be selling these shares include:
|
Donald Janke, our President;
|
|
Tim McGrath, our Vice-President of Investor
Relations;
|
|
Marshall Sparks, our Chief Financial
Officer;
|
|
Randy Strickley, our Vice-President of Finance;
and
|
|
Joy Badua, our Vice-President of Regulatory
Affairs and Business Strategy.
|
We may pay a commission to brokers and finders
fees to finders up to 10% of the proceeds of the sales of the
shares arranged by these persons. We will not pay commissions in
connection with sales of shares by our officers.
We may, in our sole discretion, accept or reject any
potential purchasers subscription in whole or in part. We
are under no obligation to accept a potential purchasers
subscription. We may accept subscriptions for any amount of
shares up to and including the maximum amount of the offering;
we are not required to obtain any minimum level of subscriptions
in order to sell shares in the offering. Our executive officers,
directors, controlling persons, and affiliates may purchase
shares in the offering in any amount.
Funds tendered by prospective purchasers will not be
placed in escrow, but will be available for use by us
immediately upon acceptance. If the offering is terminated for
any reason without any sale of shares, or if a prospective
purchasers subscription agreement is rejected in whole or
in part for any reason, we will promptly return to the
prospective purchaser the funds which are not accepted, without
interest.
This offering will terminate on the date of our
receipt of funds and executed subscription agreements acceptable
to us for the entire amount of the offering, or an earlier date
as determined by our Board of Directors at their discretion. As
soon as practicable after the receipt by us of funds and
acceptable subscription agreements, the transfer agent will
deliver to the purchasers certificates for the number of shares
which we have agreed to sell to the purchasers.
We will offer the shares by various methods
including advertising on our web site, through banner
advertising, online public relations, electronic press releases
and web site engineering for the Internet search engines. We
will also make presentations to potential investors. We plan to
inform prospective purchasers that our prospectus is available
by electronic delivery upon request. We will also provide a
paper copy upon request. Because this offering will be made only
to residents of California and New York, access to and
electronic distribution of the preliminary and final prospectus
will be available only upon confirmation of California or New
York residency.
Determination of Offering
Price
Prior to this offering, there has been no public
market for our common stock. Consequently, the initial
registered public offering price for our common stock was
determined by us in good faith. Among the factors considered in
determining the public offering price are:
|
the history and prospects of our business and
the industry in which it competes;
|
|
an assessment of our management and the present
state of our development;
|
|
prevailing market conditions in the U.S.
economy and the industry in which we compete;
|
|
our revenues, operating cash flow and earnings
in recent periods;
|
|
the market capitalizations of other companies
which we believe to be comparable to us; and
|
|
estimates of our business
potential.
|
The validity of shares of common stock will be
passed upon on our behalf by Katten Muchin Zavis, Chicago,
Illinois.
Our consolidated financial statements for each of
our three fiscal years in the period ended March 31, 1999
included in this prospectus have been audited by Stonefield
Josephson, Inc., independent auditors, as stated in their report
appearing in this prospectus, and are included in reliance upon
the report given upon the authority of that firm as experts in
accounting and auditing.
On October 7, 1998, Arthur Andersen LLP resigned
from their engagement as our independent accountants. On
November 18, 1998, we engaged Stonefield Josephson to conduct an
audit of our consolidated balance sheets as of March 31, 1997,
1998 and 1999, and the related statements of operations,
stockholders equity and cash flows for the years then
ended.
During our two most recent fiscal years and the
subsequent interim period, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure. Arthur Andersen LLP did not issue any reports on the
financial statements for these periods and therefore no reports
contain an adverse opinion or disclaimer of opinion, nor were
any reports qualified or modified as to uncertainty, audit scope
or accounting principles.
We have filed a registration statement on Form S-1
with the SEC in connection with this offering. In addition,
after we complete this offering, we will be required to file
annual, quarterly and current reports, proxy statements and
other information with the SEC.
This prospectus is part of the registration
statement and does not contain all of the information included
in the registration statement and all of its exhibits,
certificates and schedules. Whenever a reference is made in this
prospectus to any contract or other document of ours, the
reference may not be complete and you should refer to the
exhibits that are a part of the registration statement for a
copy of the contract or document.
You may read and copy our registration statement and
all of its exhibits and schedules at the following SEC public
reference rooms:
450 Fifth
Street, N.W.
Judiciary Plaza
Room 1024
Washington, D.C. 20549
|
Seven
World Trade Center
Suite 1300
New York, NY 10048
|
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, IL 60661
|
You may obtain information on the operation of the
SEC public reference room in Washington, D.C. by calling the SEC
at 1-800-SEC-0330.
The registration statement is also available from
the SECs web site at http://www.sec.gov, which contains
reports, proxy and information statements and other information
regarding issuers that file electronically.
Page |
|||||
---|---|---|---|---|---|
Consolidated Financial Statements of Internet
Ventures, Inc.
Years Ended March 31, 1997, 1998 and 1999, and unaudited Six Months Ended September 30, 1999: |
|||||
Independent Auditors Report | F-2 | ||||
Consolidated Balance Sheets | F-3 | ||||
Consolidated Statements of Operations | F-4 | ||||
Consolidated Statement of Stockholders Equity (Deficit) | F-5 | ||||
Consolidated Statements of Cash Flows | F-6 | ||||
Notes to Consolidated Financial Statements | F-8 | ||||
INDEPENDENT AUDITORS
REPORT
Board of Directors
Internet Ventures, Inc. and
Subsidiaries
Redondo Beach, California
We have audited the accompanying consolidated
balance sheets of Internet Ventures, Inc. and Subsidiaries (the
Company) as of March 31, 1998 and 1999, and the related
statements of operations, stockholders equity (deficit)
and cash flows for the years ended March 31, 1997, 1998 and
1999. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our
audit.
We conducted our audits in accordance with
generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
financial position of Internet Ventures, Inc. and Subsidiaries
as of March 31, 1997, 1998 and 1999 and the results of its
operations and its cash flows for the years then ended, in
conformity with generally accepted accounting
principles.
The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As of March 31, 1999, current liabilities exceeded
current assets by $1,429,070 and there was an accumulated
deficit of $7,469,220. These factors raise substantial doubt
about the Companys ability to continue as a going
concern. These financial statements do not include any
adjustments that might be necessary should the Company be
unable to continue as a going concern.
STONEFIELD JOSEPHSON, INC.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
July 30, 1999
INTERNET VENTURES, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
ASSETS |
March 31,
1998 |
March 31,
1999 |
September 30,
1998 |
September 30,
1999 |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | (unaudited) | |||||||||||
Current assets: | ||||||||||||
Cash | $ 161,564 | $ 207,590 | $ 191,205 | $ 709,056 | ||||||||
Accounts
receivable, net of allowance for bad
debts of $90,327, $122,243, $132,615 and $122,243, respectively |
79,902 | 140,087 | 40,921 | 207,112 | ||||||||
Modem inventory | 596,215 | | 81,931 | | ||||||||
Note receivable, officer-stockholder | | 25,000 | | 25,000 | ||||||||
Other current assets | 40,107 | 35,497 | 211,947 | 45,645 | ||||||||
Total current assets | 877,788 | 408,174 | 526,004 | 986,813 | ||||||||
Property and equipment, net of accumulated
depreciation of $296,107, $633,892, $442,398 and $874,335, respectively |
898,175 | 1,478,099 | 1,219,351 | 1,671,316 | ||||||||
Other assets: | ||||||||||||
Goodwill, net of accumulated amortization of
$502,558, $1,073,378, $775,703 and $1,563,728, respectively |
1,136,978 | 1,869,904 | 2,151,644 | 1,899,096 | ||||||||
Investment in InnerCite, Inc. (Note 14) | | | | 660,000 | ||||||||
Other | | | 16,776 | 228,812 | ||||||||
Total other assets | 1,136,978 | 1,869,904 | 2,168,420 | 2,787,908 | ||||||||
$2,912,941 | $3,756,177 | $3,913,775 | $5,446,037 | |||||||||
LIABILITIES
AND
STOCKHOLDERS EQUITY (DEFICIT) |
||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ 823,568 | $ 668,182 | $ 412,422 | $ 883,711 | ||||||||
Accrued expenses | 507,189 | 570,457 | 354,630 | 336,375 | ||||||||
Equipment financing by vendor | 770,296 | 147,195 | | | ||||||||
Customer prepaids | | | | 207,520 | ||||||||
Current maturities of notes payable | 745,959 | 407,121 | 913,201 | 928,263 | ||||||||
Current maturities of capital lease obligations | | 44,289 | 39,374 | 32,146 | ||||||||
Total current liabilities | 2,847,012 | 1,837,244 | 1,719,627 | 2,388,015 | ||||||||
Notes payable, less current maturities | 31,337 | 606,095 | 439,833 | 129,672 | ||||||||
Capital lease obligations, less current maturities | | 19,581 | 19,581 | 26,354 | ||||||||
Debentures payable | | 354,125 | | 943,800 | ||||||||
Preferred stock contingency | 177,000 | 177,000 | 177,000 | 161,476 | ||||||||
Stockholders equity (deficit): | ||||||||||||
Preferred stock$.01 par value, 10,000,000 shares
authorized, none issued and outstanding |
| | | | ||||||||
Common
stock$.01 par value, 30,000,000 shares
authorized, 5,630,954, 6,661,312, and 6,236,812 7,634,828 issued and outstanding |
56,310 | 66,613 | 66,368 | 76,348 | ||||||||
Additional paid-in capital | 4,069,020 | 8,306,845 | 7,086,015 | 11,459,687 | ||||||||
Deferred interest | | (142,106 | ) | | (156,111 | ) | ||||||
Accumulated deficit | (4,267,738 | ) | (7,469,220 | ) | (5,594,649 | ) | (9,583,204 | ) | ||||
Total stockholders equity (deficit) | (142,408 | ) | 762,132 | 1,557,734 | 1,796,720 | |||||||
$2,912,941 | $3,756,177 | $3,913,775 | $5,446,037 | |||||||||
See accompanying notes to consolidated
financial statements.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
Year ended
March 31, 1997 |
Year ended
March 31, 1998 |
Year ended
March 31, 1999 |
Six months
ended September 30, 1998 |
Six months
ended September 30, 1999 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | (unaudited) | ||||||||||||||
Revenues: | |||||||||||||||
Recurring revenues | $1,106,484 | $2,437,982 | $4,245,461 | $1,769,412 | $2,999,183 | ||||||||||
System/consulting revenues | 226,743 | 316,781 | 124,488 | 110,346 | 56,304 | ||||||||||
Other revenues | 31,468 | | | | | ||||||||||
Total revenues | 1,364,695 | 2,754,763 | 4,369,949 | 1,879,758 | 3,055,487 | ||||||||||
Cost of revenues | 1,764,971 | 3,303,796 | 4,252,049 | 1,835,539 | 2,802,786 | ||||||||||
Expenses: | |||||||||||||||
Selling,
general and
administrative |
636,084 | 1,769,322 | 1,978,872 | 895,362 | 1,398,707 | ||||||||||
Depreciation | 68,099 | 225,727 | 337,785 | 146,291 | 240,443 | ||||||||||
Amortization of goodwill | 165,161 | 324,922 | 801,576 | 273,145 | 490,350 | ||||||||||
Interest, net | | 33,476 | 201,149 | 56,332 | 237,185 | ||||||||||
Total expenses | 869,344 | 2,353,447 | 3,319,382 | 1,371,130 | 2,366,685 | ||||||||||
Net loss | $(1,269,620 | ) | $(2,902,480 | ) | $(3,201,482 | ) | $(1,326,911 | ) | $(2,113,984 | ) | |||||
Net loss per share basic and diluted | $ (.32 | ) | $ (.54 | ) | $ (.51 | ) | $ (.23 | ) | $ (.30 | ) | |||||
Weighted average shares
outstanding |
3,968,277 | 5,311,624 | 6,268,217 | 5,780,912 | 7,065,584 | ||||||||||
See accompanying notes to consolidated
financial statements.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY (DEFICIT)
Years Ended March 31, 1997, 1998 and
1999
Preferred Stock |
Common Stock |
Additional
paid-in capital |
Deferred
interest |
Accumulated
deficit |
Total |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||
Balance at March 31, 1996, | ||||||||||||||||||||||
common stock restated due to 100%
stock dividend on July 15, 1998 |
161,600 | $1,616 | 3,195,372 | $31,954 | $ 281,986 | $ (95,638 | ) | $ 219,918 | ||||||||||||||
Purchase of assets and acquisitions | 755,692 | 7,556 | 709,017 | 716,573 | ||||||||||||||||||
Stock issued for services | 270,680 | 2,706 | 319,271 | 321,977 | ||||||||||||||||||
Stock issued for cash, net of $64,723 costs | 419,438 | 4,194 | 570,748 | 574,942 | ||||||||||||||||||
Net
loss for the year ended March 31,
1997 |
(1,269,620 | ) | (1,269,620 | ) | ||||||||||||||||||
Balance at March 31, 1997 | 161,600 | 1,616 | 4,641,182 | 46,410 | 1,881,022 | (1,365,258 | ) | 563,790 | ||||||||||||||
Purchase of assets and acquisitions | 202,502 | 2,026 | 553,715 | 555,741 | ||||||||||||||||||
Stock issued for services | 182,078 | 1,820 | 519,246 | 521,066 | ||||||||||||||||||
Stock
issued for cash, net of $327,164
costs |
591,032 | 5,912 | 1,306,713 | 1,312,625 | ||||||||||||||||||
Redemption of preferred | (154,520 | ) | (1,545 | ) | | | (191,605 | ) | (193,150 | ) | ||||||||||||
Conversion of preferred | (7,080 | ) | (71 | ) | 14,160 | 142 | (71 | ) | ||||||||||||||
Net
loss for the year ended March 31,
1998 |
(2,902,480 | ) | (2,902,480 | ) | ||||||||||||||||||
Balance at March 31, 1998 | | | 5,630,954 | 56,310 | 4,069,020 | (4,267,738 | ) | (142,408 | ) | |||||||||||||
Purchase of assets and acquisitions | 31,400 | 314 | 127,036 | 127,350 | ||||||||||||||||||
Stock issued for services | 40,168 | 401 | 220,523 | 220,924 | ||||||||||||||||||
Stock
issued for cash, net of $555,275
costs |
536,790 | 5,368 | 2,695,118 | 2,700,486 | ||||||||||||||||||
Stock
issued in kind as interest on
debentures |
25,416 | 254 | 190,366 | 190,620 | ||||||||||||||||||
Stock
issued with issuance of debentures,
net of $163,288 costs |
222,425 | 2,224 | 562,675 | 564,899 | ||||||||||||||||||
Stock
issued upon conversion of
debentures, net of $128,298 costs |
174,159 | 1,742 | 442,107 | 443,849 | ||||||||||||||||||
Deferred interest from issuance of common
stock |
(142,106 | ) | (142,106 | ) | ||||||||||||||||||
Net
loss for the year ended March 31,
1999 |
(3,201,482 | ) | (3,201,482 | ) | ||||||||||||||||||
Balance at March 31, 1999 | | | 6,661,312 | 66,613 | 8,306,845 | (142,106 | ) | (7,469,220 | ) | 762,132 | ||||||||||||
Purchase of assets and acquisitions | 15,516 | 155 | 116,215 | 116,370 | ||||||||||||||||||
Stock issued for services | 2,193 | 22 | 16,426 | 16,448 | ||||||||||||||||||
Stock
issued in kind as interest on
debentures |
32,527 | 325 | 246,759 | 247,084 | ||||||||||||||||||
Stock
issued with issuance of debentures,
net of $211,228 costs |
498,794 | 4,988 | 1,497,656 | 1,502,644 | ||||||||||||||||||
Stock
issued upon conversion of
Debentures, net of $179,935 costs |
424,486 | 4,245 | 1,275,786 | 1,280,031 | ||||||||||||||||||
Deferred interest from issuance of common
stock |
(14,005 | ) | (14,005 | ) | ||||||||||||||||||
Net
loss for the six months ended
September 30, 1999 (unaudited) |
(2,113,984 | ) | (2,113,984 | ) | ||||||||||||||||||
Balance at September 30, 1999
(unaudited) |
| $ | 7,634,828 | $76,348 | $11,459,687 | $(156,111 | ) | $(9,583,204 | ) | $1,796,720 | ||||||||||||
See accompanying notes to consolidated
financial statements.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Year ended
March 31, 1997 |
Year ended
March 31, 1998 |
Year ended
March 31, 1999 |
Six months
ended September 30, 1998 |
Six months
ended September 30, 1999 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | (unaudited) | ||||||||||||||
Cash flows provided by (used for)
operating activities: |
|||||||||||||||
Net loss | $(1,269,620 | ) | $(2,902,480 | ) | $(3,201,482 | ) | $(1,326,911 | ) | $(2,113,983 | ) | |||||
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities: |
|||||||||||||||
Depreciation | 68,099 | 225,727 | 337,785 | 146,291 | 240,443 | ||||||||||
Amortization of goodwill | 165,161 | 324,922 | 570,820 | 273,145 | 490,350 | ||||||||||
Stock issued for services | 321,977 | 521,066 | 220,924 | 220,924 | 30,500 | ||||||||||
Interest paid with stock | | | 46,830 | | 233,079 | ||||||||||
Changes in operating assets and
liabilities: |
|||||||||||||||
Accounts receivable | 12,372 | (63,980 | ) | (60,185 | ) | 38,981 | (67,025 | ) | |||||||
Inventory | | 36,155 | | | | ||||||||||
Other current assets | (17,814 | ) | (6,942 | ) | 4,710 | (171,841 | ) | (10,149 | ) | ||||||
Accounts payable | 265,213 | 477,023 | (155,386 | ) | (515,317 | ) | 215,529 | ||||||||
Accrued expenses | 120,222 | 365,870 | 13,338 | (349,585 | ) | (184,008 | ) | ||||||||
Equipment financing | | (57,279 | ) | (49,831 | ) | | | ||||||||
Total adjustments | 935,230 | 1,822,562 | 929,005 | (357,402 | ) | 948,719 | |||||||||
Net cash
used for operating
activities |
(334,390 | ) | (1,079,918 | ) | (2,272,477 | ) | (1,684,313 | ) | (1,165,264 | ) | |||||
Cash flows used for investing
activities: |
|||||||||||||||
Purchases of equipment | (361,881 | ) | (295,725 | ) | (697,457 | ) | (526,453 | ) | (433,659 | ) | |||||
Cash paid for acquisitions | | (420,000 | ) | (428,064 | ) | (274,000 | ) | (315,304 | ) | ||||||
Other assets | 70,780 | | | (16,776 | ) | (888,812 | ) | ||||||||
Issuance
of note receivable,
officer-stockholder |
| | (25,000 | ) | | | |||||||||
Net cash
used for investing
activities |
(291,101 | ) | (715,725 | ) | (1,150,521 | ) | (817,229 | ) | (1,637,775 | ) | |||||
Cash flows provided by (used for)
financing activities: |
|||||||||||||||
Proceeds
from issuance of
common stock, net |
574,942 | 1,312,625 | 3,585,918 | 2,647,128 | 2,782,675 | ||||||||||
Proceeds
from issuance of
debentures, net |
| | 354,125 | | 589,675 | ||||||||||
Proceeds from notes payable | 55,081 | 635,612 | 211,666 | | | ||||||||||
Payments on notes payable | | | (682,685 | ) | | | |||||||||
Proceeds from debt issuance | | | | 58,957 | 150,000 | ||||||||||
Principal payments on debt | | | | (174,902 | ) | (202,321 | ) | ||||||||
Redemption of preferred stock | | (16,150 | ) | | | (15,524 | ) | ||||||||
Net cash
provided by
financing activities |
630,023 | 1,932,087 | 3,469,024 | 2,531,183 | 3,304,505 | ||||||||||
Net increase in cash | 4,532 | 136,444 | 46,026 | 29,641 | 501,466 | ||||||||||
Cash, beginning of year | 20,588 | 25,120 | 161,564 | 161,564 | 207,590 | ||||||||||
Cash, end of year and/or period | $ 25,120 | $ 161,564 | $ 207,590 | $ 191,205 | $ 709,056 | ||||||||||
INTERNET VENTURES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Year ended
March 31, 1997 |
Year ended
March 31, 1998 |
Year ended
March 31, 1999 |
Six months
ended September 30, 1998 |
Six months
ended September 30, 1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | (unaudited) | ||||||||||
Supplemental disclosures of noncash
transactions: |
|||||||||||
Stock issued for net asset acquisitions | $115,112 | $107,450 | $127,350 | $ | $ | ||||||
Stock issued for goodwill | $601,461 | $448,291 | $ | $ 750,640 | $132,819 | ||||||
Debt issued for acquisitions | $ | $ | $ | $ 159,000 | $ 91,670 | ||||||
Transfer
of equipment contract to
accrueds |
$ | $ | $ | $(197,026 | ) | $ | |||||
Notes issued for goodwill | $ | $ | $820,640 | $ | $ | ||||||
Stock issued for deferred interest | $ | $ | $142,106 | $ | $ | ||||||
Preferred stock redemption liability | $ | $177,000 | $ | $ | $ | ||||||
Seller financed equipment contract | $827,575 | $ | $ | $ | $ | ||||||
Transfer
of inventory to property and
equipment |
$ | $ | $ 22,945 | $ 22,945 | $ | ||||||
Return
of inventory and reduction of
equipment financing |
$ | $ | $573,270 | $ 573,270 | $ | ||||||
See accompanying notes to consolidated
financial statements.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Years Ended March 31, 1997, 1998 and
1999
(1) General:
Going Concern:
|
As shown in the accompanying consolidated financial
statements, the Company has incurred losses from operations and
has deficits in working capital. These factors raise substantial
doubt about the Companys ability to continue as a going
concern.
Management is monitoring the status of its
indebtedness and is currently evaluating methods to reduce
costs, improve results of operations, and increase investment
capital. There can be no assurance that the Company will be
successful in its efforts. If the Company is unsuccessful in its
efforts, it may be necessary to undertake such other actions as
may be appropriate to preserve asset value. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Organization and Basis of
Presentation:
|
The Company was formed in September 1995 to acquire
selected traditional local and regional Internet access Service
Providers (ISPs) in order to achieve economies of
operation and accelerated growth through centralized management.
Since inception, the Company has acquired nine operating ISP
s, a systems integration company, an internet publications
company and seven asset acquisitions of subscribers and
equipment of marginal ISPs in its market areas. All
acquisitions have been accounted for as purchases. The systems
integration company stopped providing services to third parties
and the publications company was closed, both effective December
31, 1998.
The Company has experienced losses since its
inception as it continues to build a critical base of
subscribers in each of its operating subsidiaries that are
capable of generating monthly recurring revenue. Monthly
recurring revenue is a trade term reflecting subscriber revenue
billed on a monthly recurring basis until canceled by the
subscriber. Revenues of the consulting and publications
subsidiaries are project term limited. Other ISP revenue and the
consulting and publication revenue are combined and classified
as Systems/Consulting revenue. This caption can be described as
Non-recurring revenue in contrast to subscriber
recurring revenue. The Company intends to continue to acquire
additional ISPs in selected markets, which will result in
additional losses until such time as the aggregate subsidiary
revenues net of subsidiary expenses are of a scale to cover the
corporate management costs.
A high speed internet service over cable (termed
PeRKInet®) has been introduced by the Company to provide an
additional revenue source to the ISPs. PeRKInet® is
also intended to drive the selection of markets for ISP
acquisitions where the feasibility of PeRKInet® would be a
major factor in enhancing the addition of a traditional
ISP.
All of the Companys operations are conducted
through operating subsidiaries. No one subsidiary is more
significant than any other; therefore, disclosure of separate
significant subsidiary financial performance is not
presented.
(2) Significant Accounting
Policies:
Principles of Consolidation:
|
The financial statements include the accounts of the
Company and its operating subsidiaries. All material
intercompany transactions have been eliminated in
consolidation.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
Concentration of Credit Risk:
|
Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of
trade receivables. The concentration of credit risk is limited
due to the large number of customers comprising the Company
s customer base, which is located throughout the Western
United States.
Revenue Recognition:
|
The Company recognizes revenues as earned in the
period in which the service is provided. Prepayments are
deferred until recognized. Installation fees are recognized when
the installation is complete.
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 these estimates.
Cash Concentration:
|
The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such
accounts.
Income Taxes:
|
Deferred income taxes are reported using the
liability method. Deferred tax assets are recognized for
deductible temporary differences and deferred tax liabilities
are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
As of March 31, 1999, the Company had net federal
and state operating loss carryforwards totaling approximately
$7,469,000 that expire in various years through 2014. Deferred
tax assets resulting from the net operating loss carryforwards
are reduced in full by a valuation allowance.
Modem Inventory:
|
The inventory in 1998 was comprised of cable modems
purchased under a contract with a PeRKInet® equipment
supplier. These modems were to be sold or rented to subscribers
as their PeRKInet® sites were installed. The inventory was
recorded at the specific identification method of inventory
costing, which is not more than fair market value. A majority of
the modems were subsequently returned to the vendor (see Note
3). In 1999, all remaining modems are classified as fixed assets
as they will be loaned or rented to subscribers and are
depreciated when placed in service.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
Property and Equipment:
|
Property and equipment are stated at cost. Property
acquired through acquisition purchase transactions are recorded
at the fair market value at the time of acquisition.
Depreciation is provided over the estimated useful lives of the
assets, commencing when assets are placed in service. Property
and equipment includes certain PeRKInet® equipment purchased
in advance of operational needs which is expected to be placed
in service in the near term. The estimated useful life of all
classes of equipment is five years.
Customer Acquisition Costs:
|
Customer acquisition costs and advertising costs are
included in operating expenses as incurred.
Net Loss per Share:
|
The Company has adopted Statement of Financial
Accounting Standard No. 128, Earnings per Share (SFAS No.
128), which is effective for annual and interim financial
statements issued for periods ending after December 15, 1997.
SFAS No. 128 was issued to simplify the standards for
calculating earnings per share (EPS) previously
required by APB No. 15, Earnings Per Share. SFAS No. 128
replaces the presentation of primary EPS with a presentation of
basic and diluted EPS. Common stock equivalents have been
excluded from the net loss per share calculations because their
effect would reduce loss per share.
Fair Value:
|
Unless otherwise indicated, the fair values of all
reported assets and liabilities which represent financial
instruments, none of which are held for trading purposes,
approximate the carrying values of such amounts.
Goodwill:
|
The Companys policy is to grow by acquisition
using its stock at fair market value or cash to purchase a
business, its subscribers, assets or a combination of
subscribers and assets of a competitor in its market area.
Often, the realized value to the Company is greater than the
value of the equipment or other assets acquired. This economic
value and the value of the subscribers is recorded as an asset
and identified as goodwill.
Goodwill is recorded as an intangible asset, and
represents the difference between the price paid (fair market
value of securities or cash) in excess of the fair market value
of the equipment or other net assets acquired. Goodwill is
amortized over a period of three years on a straight-line basis
for each acquisition, beginning in the fiscal quarter following
the date of the respective acquisition, and is expensed against
current operations.
Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of:
|
The Company adopted the provision of FASB No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. This statement requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to expected future undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amounts of the assets exceed the
fair values of the assets. If an asset being tested for
recoverability was acquired in a purchase business combination,
the goodwill that arose in that transaction is included as part
of the asset grouping in determining recoverability.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
Stock-Based Compensation Plans:
|
The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock issued to
Employees (APB 25) and related interpretations in accounting for
its employee stock options. Under APB 25, no compensation
expense is recorded by the Company since the exercise price of
employee stock options granted by it equals the market price of
the underlying stock on the date of grant. The Company has
adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123).
New Accounting
Pronouncements:
|
The Company has adopted Statements of Financial
Accounting Standards No. 130 Reporting Comprehensive Income
and 131 Disclosures About Segments of an Enterprise
and Related Information. Adoption of these pronouncements
did not materially affect the financial statements.
Interim Financial Statements
(Unaudited):
|
The accompanying unaudited condensed financial
statements for the interim periods ended September 30, 1999 and
1998 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Regulation SX. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results
for the six months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year
ending March 31, 2000.
(3) Equipment Financing by
Vendor:
At the inauguration of the PeRKInet® service, a
commitment was made to the manufacturer of the PeRKInet®
equipment to purchase a substantial number of head end systems
and subscriber modems, sufficient for an estimated nine months
worth of installations based on the Companys projections.
A deferred payment arrangement was negotiated, which, after
substantial payments, was reduced to a note payable due over
twelve months beginning in June 1997. The note was rescinded in
December 1997, with subsequent authorization to return the
modems giving rise to a portion of the note. In 1998, 970 modems
were returned and the note was reduced by $573,270, leaving a
balance due to the supplier of approximately $200,000. This
amount is payable in monthly installments over a one year period
which began in October 1998.
(4) Note Receivable,
Officer-Stockholder:
The note bears interest at 8%, is unsecured and is
due on demand.
(5) Property and Equipment:
1998 |
1999 |
|||
---|---|---|---|---|
Network systems equipment | $ 915,404 | $1,329,660 | ||
Property and equipment | 161,800 | 263,963 | ||
Modems | 117,078 | 518,368 | ||
1,194,282 | 2,111,991 | |||
Less accumulated depreciation | 296,107 | 633,892 | ||
$ 898,175 | $1,478,099 | |||
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
(6) Notes Payable:
A summary is as follows:
1998 |
1999 |
|||
---|---|---|---|---|
Acquisition note payable to the former owners of
Frontier Internet. Interest at
10%, interest only payments due June 30, 1999, convertible into common stock at $5.50 per share, the note was extended to June 30, 2000 |
$ | $ 355,640 | ||
Acquisition note payable to the former owner of Budget
Net. Interest at 11%,
interest only monthly payments in the first year, principal and interest payments in the second year, unpaid principal and interest due in full on September 11, 2000, convertible into common stock at $5.50 per share |
| 375,000 | ||
Acquisition note for Next Dimension Internet, no
interest, due in 90 days.
This note was paid on May 4, 1999 |
| 90,000 | ||
Acquisition note payable to the former owners of
Infostructure. Interest at
8.5%, interest only payments due monthly, secured by the company acquired. This note was paid in full on February 12, 1999. |
290,000 | | ||
Note
convertible into stock at $11 per share, interest at 8.5%.
This note was
paid in full on December 16, 1998. |
250,000 | | ||
Working capital loans of subsidiary operations,
interest from 0% to 18%,
partially secured by various assets of the Company, due in various installments |
119,007 | 192,576 | ||
Unsecured note, interest at 8.5%. This note was paid in
full on June 15,
1998. |
50,000 | | ||
Unsecured note payable to a shareholder of the Company.
Interest at 14%,
principal and interest were paid in full on June 15, 1998. |
30,000 | | ||
8%
note payable to a shareholder of the Company, secured by
certain
equipment, due September 1997. |
25,000 | | ||
Acquisition note payable to the former owner of
Northcoast Internet. Interest
at 11%, monthly payments of $1,200, secured by certain equipment of the Company. This note was paid in full March 1, 1999. |
13,289 | | ||
777,296 | 1,013,216 | |||
Less current maturities | 745,959 | 407,121 | ||
$ 31,337 | $ 606,095 | |||
The scheduled repayments of the notes balance at
March 31, 1999 is as follows:
Year ending March 31, 2000 | $ 407,121 | |
2001 | 572,201 | |
2002 | 25,727 | |
2003 | 8,167 | |
$1,013,216 | ||
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
(7) Capital Lease Obligations:
Obligations under capitalized equipment leases, by
year, are as follows:
Year ending March 31, | ||
2000 | $ 32,357 | |
2001 | 32,357 | |
2002 | 21,604 | |
86,318 | ||
Less amounts representing interest | 22,448 | |
Present value of net minimum lease payments under capital leases | 63,870 | |
Less current maturities | 44,289 | |
$ 19,581 | ||
(8) Stockholders Equity:
The Company is authorized to issue 30,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock, the
rights and preferences of which may be determined by the Board
of Directors in its discretion. The Company has designated
500,000 shares of Preferred Stock as Series A Convertible
Preferred Stock (Series A Preferred). 161,600 shares
of Series A Preferred were issued during the year ended March
31, 1996 in conjunction with the acquisition of two operating
subsidiaries. The Series A Preferred has a liquidation value of
$1.25 per share and otherwise does not have a preference in
liquidation. The Series A Preferred may be redeemed by the
Company at its option at any time for $1.25 per share. The
Series A Preferred is convertible at the option of the holder at
any time into shares of Common Stock at a one-to-one ratio. In
March 1998, the Company noticed the redemption of the Series A
Preferred; 7,080 shares were converted and the redemption price
was tendered for the remaining 154,520 shares.
On July 15, 1998, there was a 100% stock dividend
with respect to the Companys common stock.
Effective October 1, 1998, the Company authorized
the sale of up to $5,000,000 of equity in a Regulation D, 506
offering comprising 12% convertible debentures, due December 31,
2001, and shares of common stock. The Company is required to
issue the shares of common stock involved in the units purchased
or as a result of the conversion of the debentures. Each unit is
composed of one share of common stock and one convertible
debenture. The purchase price for each unit was $7.50 and
consists of $7.50 in principal amount of debentures and one
share of common stock. The debentures are convertible into
common stock at the rate of $7.50 per share. The activity in the
offering has resulted in the requirement to issue 422,000 shares
of common stock as of March 31, 1999. The unconverted debenture
balance at March 31, 1999 was $354,125.
The following table is a condensed summary of the
sale of the units, the gross and net proceeds, and the
allocation of those proceeds. The information is being presented
to agree with summary amounts for each transfer of records to
U.S. Stock Transfer Corporation, the transfer agent of record.
Proceeds were allocated to the debenture liability initially and
then were allocated to common stock and additional paid-in
capital. Each unit sold included one share of common stock and
one convertible debenture. The majority of those debentures
which were converted occurred either immediately or within the
same month of their issuance. At fiscal year end March 31,1999,
48,266 shares and at September 30, 1999, 125,574 shares were
remaining to be issued upon conversion. Debentures in the
principal amount of $119,877 were issued for services rendered
through September 30, 1999, with $55,000 being attributed as a
cost of the offering and netted against the proceeds. All
debentures for services were converted upon
issuance.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
The final units were sold in July 1999.
Transfers |
Units
Sold |
Gross
Proceeds |
Net
Proceeds |
Common
Stock Issued with Units |
Common Stock
Issued upon conversion |
Net Proceeds Allocation |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Debentures |
Common
Stock
and Additional Paid in Capital |
||||||||||||||
December 31, 1998 | 104,337 | 768,792 | 633,298 | 104,337 | 70,004 | 251,898 | 381,400 | ||||||||
March 19, 1999 | 110,755 | 830,666 | 684,268 | 110,755 | 97,822 | 94,890 | 589,378 | ||||||||
March 31, 1999 | 7,333 | 55,000 | 45,307 | 7,333 | 6,333 | 7,337 | 37,970 | ||||||||
Balance at March 31, 1999 | 222,425 | 1,654,458 | 1,362,873 | 222,425 | 174,159 | 354,125 | 1,008,748 | ||||||||
May 12, 1999 | 74,034 | 555,250 | 497,540 | 74,034 | 65,368 | 68,771 | 428,769 | ||||||||
May 28, 1999 | 53,696 | 504,750 | 360,890 | 53,696 | 56,029 | (18,514 | ) | 379,404 | |||||||
June 28, 1999 | 78,250 | 586,898 | 525,898 | 78,250 | 76,250 | 15,871 | 510,027 | ||||||||
July 27, 1999 | 69,409 | 520,565 | 466,460 | 69,409 | 56,435 | 79,151 | 387,309 | ||||||||
September 16, 1999 | 131,255 | 984,428 | 882,111 | 131,255 | 80,920 | 399,436 | 482,676 | ||||||||
October 12, 1999 | 95,150 | 713,623 | 639,452 | 95,150 | 89,484 | 44,962 | 594,490 | ||||||||
Balance at September 30,
1999 (unaudited) |
724,219 | $5,417,972 | $4,735,223 | 724,219 | 598,645 | $943,800 | $3,791,423 | ||||||||
(9) Stock Incentive Plans:
In 1995, the Company adopted the following three
stock option plans to reward and provide incentives to its
officers, directors, employees, consultants and other eligible
participants: (a) the Executive Stock Incentive Plan, (b) the
1995 Incentive Stock Option Plan, (c) the 1995 Stock Incentive
Plan. The Company has reserved 400,000 shares for issuance under
each of the plans for an aggregate of 1,200,000 shares. The
number of shares reserved for issuance under each plan will be
increased by an amount equal to one percent of the outstanding
shares at the end of each fiscal year and by the number of
shares that equals 3 1
/3% of the number of common shares
issued in connection with any acquisition transaction. The
accretion of all plans at each fiscal year end aggregates 3% of
the outstanding voting shares and 10% of any shares issued in an
acquisition. As of March 31, 1999, stock options have been
granted under the plans, net of forfeitures, for an aggregate of
993,400 shares at exercise prices from $.25 to $5.50. Options
representing 664,000 shares have become vested and are
exercisable. No options have been exercised as of March 31,
1999.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
The following table describes the activity in the combined plans
for the periods:
Shares
available for options |
Number of
outstanding Shares |
Option
price range per share |
Weighted
average exercise price |
Weighted
average remaining life |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Plan adoptionOctober 1995 | 1,200,000 | |||||||||||
Granted | (369,600 | ) | 369,600 | $ .25 .75 | $0.43 | |||||||
Forfeitures | 32,000 | (32,000 | ) | $ .25 .75 | $0.39 | |||||||
BalanceMarch 31, 1996 | 862,400 | 337,600 | $ .25 .75 | $0.43 | 4.9 | |||||||
Accretion | 159,310 | |||||||||||
Granted | (254,800 | ) | 254,800 | $ .751.25 | $1.10 | |||||||
Forfeitures | 20,000 | (20,000 | ) | .75 .75 | $0.66 | |||||||
BalanceMarch 31, 1997 | 786,910 | 572,400 | $ .251.25 | $0.72 | 5.3 | |||||||
Accretion | 201,860 | |||||||||||
Granted | (106,000 | ) | 106,000 | $2.25 2.50 | $2.39 | |||||||
Forfeitures | 27,000 | (27,000 | ) | $ .752.25 | $1.92 | |||||||
BalanceMarch 31, 1998 | 909,770 | 651,400 | $ .252.50 | $0.94 | 2.0 | |||||||
Accretion | 172,058 | |||||||||||
Granted | (521,000 | ) | 521,000 | $ 5.50 | $5.50 | |||||||
Forfeitures | 179,000 | (179,000 | ) | $ .255.50 | $1.95 | |||||||
BalanceMarch 31, 1999 | 739,828 | 993,400 | $ .255.50 | $3.15 | 3.5 | |||||||
The adoption of Statement of Financial Accounting
Standards No. 123 (SFAS 123) requires the Company to
measure the effect of stock-based compensation of shares issued
for services and stock options granted based on fair value of
the shares when granted. The Company issues shares for services
and grants stock options only at exercise prices that represent
fair value based on the last sale of stock for cash to a third
party investor. All compensation of stock for services is
recorded as a current expense at the time of grant, which
generally represents the period of services for which the grant
is made.
Proforma information regarding net loss and losses
per share is required by SFAS 123, and has been determined as if
the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a
Black-Scholes option pricing model with an assumption of a
risk-free interest rate ranging between 4.75% and 6.67% and an
expected life ranging between 2.0 years to 5.3
years.
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
For purposes of proforma disclosures, the estimated fair value
of the options is amortized to expense over the options
vesting period. The Companys proforma net earnings and
earnings per share were as follows:
|
1997 |
1998 |
1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Net loss, as reported | $(1,269,620 | ) | $(2,902,480 | ) | $(3,201,482 | ) | |||
Net loss, proforma | (1,344,187 | ) | (2,942,257 | ) | (3,696,119 | ) | |||
Losses per share, as reported | (.32 | ) | (.54 | ) | (.51 | ) | |||
Losses per share, proforma | (.34 | ) | (.55 | ) | (.59 | ) |
(10) Acquisitions:
From inception through March 31, 1999, the Company
has acquired nine operating internet access service providers (
ISPs), a systems integration company and an
internet publications company, all of which were accounted for
under the purchase method of accounting. Goodwill has been
appropriately recorded for each acquisition (see Note 2).
Optimal Systems and Computor Link were absorbed into Internet On
Ramp in December 1998 and the associated unamortized goodwill
was written off to expense.
The following is a brief description of each
transaction:
Acquisitions
|
Company |
Business |
Acquisition
date* |
Shares
Issued |
Value
assigned to Shares |
Goodwill
Recorded |
Purchase
Price |
Cash
Consideration Paid |
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Internet On Ramp, Inc. | ISP | Nov 1995 | **141,600 | $177,000 | $142,644 | $177,000 | | ||||||||||||||||||||||
CWWS Stockton, Inc. | ISP | Nov 1995 | **20,000 | 25,000 | 27,139 | 25,000 | | ||||||||||||||||||||||
Northcoast Internet | ISP | May 1996 | 343,706 | 257,780 | 247,996 | 257,780 | | ||||||||||||||||||||||
Optimal Systems, Inc. | Consulting | May 1996 | 213,334 | 151,001 | 140,733 | 160,000 | | ||||||||||||||||||||||
ITI2 Inc | ISP | Aug 1996 | 72,000 | 90,000 | 59,569 | 90,000 | | ||||||||||||||||||||||
Western Internet, Inc. | ISP | Feb 1997 | 72,000 | 126,000 | 133,346 | 126,000 | | ||||||||||||||||||||||
Computer Link, Inc. | Publication | May 1997 | 46,934 | 105,602 | 104,665 | 105,602 | | ||||||||||||||||||||||
Tidepool Internet | ISP | July 1997 | 20,658 | 46,480 | 69,315 | 96,480 | 50,000 | ||||||||||||||||||||||
Infostructure, Inc. | ISP | Jan 1998 | 39,090 | 214,995 | 576,635 | 565,000 | 350,000 | ||||||||||||||||||||||
Frontier Internet | ISP | Sept 1998 | 28,900 | 159,000 | 791,113 | 689,640 | 224,000 | ||||||||||||||||||||||
Budget Internet | ISP | Sept 1998 | | | 496,699 | 425,000 | 50,000 | ||||||||||||||||||||||
Tomato Web (see Note 14) | ISP | Sept 1999 | | | 299,616 | 309,465 | 224,000 | ||||||||||||||||||||||
Futurelink (see Note 14) | ISP | Sept 1999 | 15,516 | 116,370 | 217,926 | 230,328 | 91,304 | ||||||||||||||||||||||
Purchase of assets | |||||||||||||||||||||||||||||
Company |
Business |
Acquisition
date* |
Shares
Issued |
Value
assigned to Shares |
Goodwill
Recorded |
Purchase
Price |
Cash
Consideration Paid |
||||||||||||||||||||||
TTN | | Sept 1996 | 25,696 | 32,120 | | 32,120 | | ||||||||||||||||||||||
Windows Net | | Jan 1997 | 28,956 | 59,672 | 23,500 | 50,673 | | ||||||||||||||||||||||
Digital City | | Jan 1997 | | | 7,200 | | 10,000 | ||||||||||||||||||||||
Stockton Net | | May 1997 | 66,344 | 124,004 | 50,000 | 134,004 | | ||||||||||||||||||||||
Vortech | | May 1997 | 29,476 | 64,660 | 57,677 | 74,660 | 10,000 | ||||||||||||||||||||||
Next Dimension/K Falls | | Feb 1999 | 2,500 | 13,750 | 261,323 | 257,814 | 154,064 |
*date from which subsidiary
results of operations are included in the financial
statements
**denotes preferred stock (see Note
8).
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
No significant cash consideration was received on
any of the above acquisitions or asset purchases. An adjustment
to Infostructure, Inc. of $45,400 was determined during the
allocation period and recorded during the year ended March 31,
1999.
Unaudited Proforma
Disclosures
|
The following unaudited proforma results of
activities assume that the acquisition of Frontier Internet and
Budget Internet occurred as of the beginning of 1997, after
giving effect to proforma adjustments. The proforma adjustments
represent interest expense on long-term debt incurred to fund
the acquisition and amortization of goodwill and deferred
financing costs. The proforma financial information is presented
for informational purposes only and may not necessarily be
indicative of the operating results that would have occurred had
these acquisitions been consummated as of the beginning of each
period presented, nor is it necessarily indicative of future
operating results.
Proforma
Years ended March 31, |
|||||||||
---|---|---|---|---|---|---|---|---|---|
1997 |
1998 |
1999 |
|||||||
Revenues | $2,355,084 | $3,745,152 | $4,927,489 | ||||||
Net loss | (1,262,986 | ) | (2,895,846 | ) | (3,232,257 | ) | |||
Net loss per share | (.32 | ) | (.54 | ) | (.51 | ) |
(11) Common Stock Issued for
Services:
The following is a summary by fiscal year of the
stock issued by the Company in exchange for services rendered by
others. Fair value was determined by the sale of the Company
s common stock to third party investors. The Company has
recorded the appropriate expense amount as it relates to the
services performed and the offset to stockholders equity.
All of these were non-cash issuances and is presented as such in
the consolidated financial statements.
Period
Ended |
Shares
Issued |
Value
Assigned |
Range Per
Share |
|||
---|---|---|---|---|---|---|
March 31, 1997 | 270,680 | $321,977 | $.375 $1.75 | |||
March 31, 1998 | 182,078 | $521,066 | $1.75 $5.50 | |||
March 31, 1999 | 40,168 | $220,924 | $ 5.50 | |||
September 30, 1999 (unaudited) | 2,193 | $ 16,448 | $ 7.50 |
(12) Commitments:
The following is a schedule by years of future
minimum rental payments required under operating leases that
have noncancellable lease terms in excess of one year as of
March 31, 1999:
Year ending March 31, | ||
2000 | $298,616 | |
2001 | 171,281 | |
2002 | 77,544 | |
2003 | 32,053 | |
2004 | 950 | |
$580,444 | ||
INTERNET VENTURES, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Years Ended March 31, 1997, 1998 and
1999
(13) Contingencies:
Shareholders representing 141,600 shares (see Note
10) have refused the redemption and the conversion and have made
unspecified claims for value. The shareholders filed a demand
for arbitration and claim in November 1999. In that claim, they
seek payment of the recorded contingency which is the redemption
price of the Series A preferred shares. In addition, they claim
unspecified damages and an award for attorney fees in connection
with their action. While the Company does not dispute the
recorded contingency, they believe that any assertions or claims
in the demand for arbitration are without merit and that the
dispute will be resolved in favor of the Company. The Company
has recorded the contingency of $177,000 for the years ended
March 31, 1998 and 1999.
The Company has sold unregistered units of
securities consisting of 12% convertible debentures due 2001 and
shares of common stock pursuant to Regulation D under the
Securities Act (Note 8). Although an offering and sale of
securities under Regulation D constitutes a valid exemption from
registration under the Securities Act, the Company cannot be
certain that the offering of the 12% convertible debentures
satisfied all of the requirements of Regulation D. If the
Company failed to satisfy all of the requirements to qualify the
offering as exempt from registration, each of the purchasers of
the Companys 12% convertible debentures may have the right
to require that the Company repurchase the 12% convertible
debentures and the shares of common stock issued in connection
with the Regulation D offering at a price equal to the
consideration originally paid, or a cash equivalent, plus
interest to the date of the purchase. In addition, the Company
may be subject to federal rescission claims brought by the SEC.
Any liability which the Company may have as a result of such
rescission claim may have a material adverse effect on its
financial condition, and the Company may not be able to satisfy
any rescission claims without raising further capital or
reaching some other negotiated accommodation with the purchasers
of the 12% convertible debentures. If any rescission claims are
made, it could have the effect of delaying or postponing the
Companys proposed public offering. The proceeds of this
offering could be used to satisfy any rescission claims. The
Division of Securities of the Ohio Department of Commerce has
requested further information about the convertible debenture
offering in that state which totaled $55,000.
The Company is involved in other various routine
legal proceedings incidental to the conduct of its normal
business operations. The Companys management believes that
none of these legal proceedings will have a material adverse
impact on the financial condition or results of operations of
the Company.
(14) Subsequent Events:
Acquisitions
|
In September 1999, the Company acquired two separate
Internet access service providers, Tomato Web and Futurelink.
These acquisitions were accounted for under the purchase method
of accounting. The terms of the acquisitions are disclosed in
more detail in Note 10.
In September 1999, the Company made a 30% equity
investment in InnerCite Corporation (InnerCite), an
internet access service provider with networking expertise. This
investment has been accounted for under the cost method of
accounting. The cost method is appropriate because majority
ownership of InnerCite is concentrated among a small group of
shareholders who operate InnerCite without regard to the views
of the Company. The Company entered into the transaction as a
passive investor without any interest or ability to have
significant influence. The valuation of the 30% interest was
placed at $660,000. The consideration given in exchange for the
30% investment was $200,000 cash, $310,000 of debentures from
the Regulation D, 506
offering (Note 8), and a 12% note payable (from 1/1/2000), due
March 31, 2001, subject to acceleration upon attaining
$1,000,000 in net proceeds from the proposed initial public
offering. The debentures will be converted and the underlying
stock sold with the proceeds being delivered directly to
InnerCite.
[INSIDE BACK COVER]
[INTERNET VENTURES INC. LOGO]
1,000,000 Shares
Common Stock
$17 per share
PROSPECTUS
, 2000
PART
II
Information Not Required in the
Prospectus
Item 13. Other
Expenses of Issuance and Distribution
The following table sets forth the estimated costs
and expenses, other than the broker commissions, payable by the
Registrant in connection with the sale of the common stock being
registered, all of which will be paid by the
Registrant.
Amount
to be Paid |
||
---|---|---|
SEC registration fee | $ 4,642 | |
California registration fee | 2,500 | |
NASD filing fee | 2,100 | |
Legal fees and expenses | 250,000 | |
Accounting fees and expenses | 15,000 | |
Printing | 30,000 | |
Transfer agent fees | 20,000 | |
Miscellaneous | 10,000 | |
Total | $334,242 | |
Item 14.
Indemnification of Directors and
Officers
The California Corporations Code and our Articles of
Incorporation and Bylaws provide for indemnification of the
directors and officers of the Registrant for liabilities and
expenses that they may incur in these capacities. The California
General Corporation Law permits a corporation through its
Articles of Incorporation to eliminate the personal liability of
its directors to the corporation or its shareholders for
monetary damages for breach of fiduciary duty of loyalty and
care as a director, with certain exceptions. The exceptions
include a breach of the directors duty of loyalty, acts or
omissions not in good faith or which involve intentional
misconduct or knowing violation of law, improper declarations of
dividends, and transactions from which the directors derived an
improper personal benefit. Our Articles of Incorporation
exonerates our directors from monetary liability to the fullest
extent permitted by this statutory provision.
We have been advised that it is the position of the
Securities and Exchange Commission that if the foregoing
provision is invoked to disclaim liability for damages arising
under the Securities Act, that provision is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Item 15. Recent
Sales of Unregistered Securities
Set forth below is a summary of transactions by the
Registrant from June 30, 1996 through January 28, 2000,
involving sales of the Registrants securities that were
not registered under the Securities Act. All share numbers and
per share prices give effect to the Registrants 100% stock
dividend issued as of July 15, 1998.
1. From the Registrants inception in September
1995 through January 28, 2000, the Registrant granted stock
options to purchase an aggregate of 1,392,471 shares of common
stock to employees, officers, directors, associates, advisors or
consultants under its stock option plans at exercise prices
ranging from $.25 to $5.50. Of these, options to purchase
289,129 shares of common stock have been forfeited and options
to purchase 923,113 shares are exercisable as of January 28,
2000. As of January 28, 2000, no options have been exercised.
These issuances are exempt from registration pursuant to Rule
701 under the Securities Act of 1933, as amended (the
Securities Act), as offered and sold pursuant to a
written employee benefit plan.
2. From November 16, 1995 through September 30,
1998, the Registrant issued warrants to purchase an aggregate of
212,632 shares of common stock to 15 investors. The exercise
prices of the warrants range from
$0.75 to $7.00, and have terms ranging from one to five years. Of
these, warrants to purchase an aggregate of 13,302 shares of
common stock have been canceled. These issuances are exempt from
registration pursuant to Section 4(2) under the Securities Act
as transactions by an issuer not involving any public
offering.
3. From July 31, 1996 through September 23, 1997,
the Registrant issued an aggregate of 803,868 shares of common
stock to 213 investors for cash purchase prices ranging from
$1.25 to $2.25 per share. The aggregate cash proceeds received
by the Registrant for the sale of all 803,868 shares was
$1,477,753. These issuances are exempt from registration
pursuant to Rule 1001 under the Securities Act (Rule 1001
) as issuances of securities for consideration not
exceeding $5,000,000.
4. From July 31, 1996 through September 31, 1999,
the Registrant issued an aggregate of 337,269 shares of common
stock to employees, directors, officers, consultants or advisors
in exchange for services provided to the Registrant. These
shares were valued at $1.00 to $7.50 per share, resulting in an
aggregate value of the services provided to the Registrant in
exchange for the shares of $626,633. These issuances are exempt
from registration under Rule 701 under the Securities Act as
offered and sold pursuant to a written compensation contract or
a written employee benefit plan.
5. On July 31, 1996, in connection with its
acquisition of Information Technologies International, Inc. (
ITI), the Registrant issued an aggregate of 72,000
shares of common stock (valued at $1.25 per share) to six
persons in exchange for all of the outstanding capital stock of
ITI (valued at $50,000) and the retirement of outstanding loans
to ITI in an aggregate principal amount of $40,000. These
issuances are exempt from registration under Rule 1001 under the
Securities Act as issuance of securities for consideration not
exceeding $5,000,000 and/or pursuant to Section 4(2) under the
Securities Act as transactions by an issuer not involving any
public offering.
6. On July 31, 1996, the Registrant issued 25,696
shares of common stock to Touch Tone Network, Inc. (Touch
Tone) in exchange for the assets of Touch Tone valued at
$32,120. This issuance is exempt from registration under Rule
1001 under the Securities Act as an issuance of securities for
consideration not exceeding $5,000,000 and/or pursuant to
Section 4(2) under the Securities Act as transactions by an
issuer not involving any public offering.
7. From November 13, 1996 through July 2, 1997, the
Registrant issued an aggregate of 28,600 shares of common stock
(valued at $1.25 per share) to seven stockholders of Community
Wide Web of Stockton (CWWS) in exchange for their
shares of CWWS common stock. These issuances are exempt from
registration under Rule 1001 under the Securities Act as
issuances of securities for consideration not exceeding
$5,000,000 and/or pursuant to Section 4(2) under the Securities
Act as transactions by an issuer not involving any public
offering.
8. On January 23, 1997, the Registrant issued 28,956
shares of common stock to one person in exchange for assets of
Windows on the World valued at $50,673. This issuance is exempt
from registration under Rule 1001 under the Securities Act of
1933 as an issuance of securities for consideration not
exceeding $5,000,000 and/or pursuant to Section 4(2) under the
Securities Act as a transactions by an issuer not involving any
public offering.
9. On February 10, 1997, the Registrant issued
72,000 shares of common stock to three stockholders of Western
Internet Connections, Inc. (WIC) in exchange for all
of the outstanding capital stock of WIC valued at $126,000.
These issuances are exempt from registration under Rule 1001 as
issuances of securities for consideration not exceeding
$5,000,000 and/or pursuant to Section 4(2) under the Securities
Act as transactions by an issuer not involving any public
offering.
10. On April 1, 1997, the Registrant issued 65,714
shares of common stock to Boudames Investment Corp. (
Boudames) in exchange for substantially all of the
assets of Boudames valued at $114,999.50. This
issuance is exempt from registration under Rule 1001 as an
issuance of securities for consideration not exceeding
$5,000,000 and/or pursuant to Section 4(2) under the Securities
Act as transaction by an issuer not involving any public
offering.
11. On May 9, 1997, the Registrant issued 46,934
shares of common stock to the three stockholders of ComputerLink
Publications, Inc. (ComputerLink) in exchange for
all of the capital stock of ComputerLink valued at $105,601.50.
These issuances are exempt from registration under Rule 1001
under the Securities Act as issuances of securities for
consideration not exceeding $5,000,000 and/or pursuant to
Section 4(2) under the Securities Act as transactions by an
issuer not involving any public offering.
12. On May 23, 1997, the Registrant issued 28,286
shares of common stock to three stockholders of VorTech Net
World Access (VorTech) in exchange for the assets of
VorTech valued at $63,643.50. These issuances are exempt from
registration under Rule 1001 under the Securities Act of 1933 as
issuances of securities for consideration not exceeding
$5,000,000 and/or pursuant to Section 4(2) under the Securities
Act as transactions by an issuer not involving any public
offering.
13. On July 30, 1997, the Registrant issued 20,658
shares of common stock to one person in exchange for the assets
of Tide Pool Internet valued at $46,480.50. This issuance is
exempt from registration under Rule 1001 under the Securities
Act of 1933, as amended, as an issuance of securities for
consideration not exceeding $5,000,000 and/or pursuant to
Section 4(2) under the Securities Act as a transaction by an
issuer not involving any public offering.
14. From November 17, 1997 through July 31, 1998,
the Registrant issued 902,774 shares of common stock at $5.50
per share in an offering pursuant to Regulation A under the
Securities Act. These shares were distributed as
follows:
|
707,556 shares of common stock to 501 investors
in exchange for cash in the aggregate amount of
$3,891,558.
|
|
71,334 shares of common stock to employees,
directors, trustees, officers, consultants or advisors in
exchange for services provided to the Registrant.
|
|
720 shares of common stock to one investor upon
exercise of a warrant with an exercise price of $5.50 per
share.
|
|
39,092 shares of common stock to fourteen
individuals in connection with the Registrants
acquisition of Badas Technologies, Inc.
|
|
800 shares of common stock to four investors in
exchange for services provided to the Registrant.
|
|
83,272 shares of common stock to fifteen
individuals in connection with the Registrants
acquisition of all of the outstanding capital stock of
DurangoNet, Inc.
|
15. In connection with its acquisition of Oregon
Wilderness Delivery Service, Inc., (Oregon Wilderness
), on September 24, 1998, the Registrant issued a
convertible note in the principal amount of $375,000 to the
former stockholder of Oregon Wilderness. The note is convertible
into shares of the Registrants common stock through the
exercise of warrants with an exercise price of $5.50 per share
which expire on September 1, 2000. This issuance is exempt from
registration pursuant to Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public
offering.
16. From October 1, 1998 through August 17, 1999,
the Registrant sold units of securities consisting of 12%
Convertible Debentures due 2001 (Debentures) and
shares of common stock. The purchase price for each unit was
$7.50 and consisted of $7.50 in principal amount of Debentures
and one share of common stock. The Registrant issued $5,417,972
in aggregate principal amount of Debentures, together with the
724,219 corresponding shares of common stock to approximately
432 investors, all except 34 of which were accredited.
As of January 28, 2000, approximately 640,890 shares were issued
upon conversion of $4,806,669 in principal amount of the
Debentures. In addition, as of January 28, 2000, 58,018 shares
in the aggregate were issued for interest due on the
Debentures. These issuances are exempt from registration
pursuant to Regulation D and/or Section 4(2) under the
Securities Act, as transactions by an issuer not involving any
public offering, in that the transactions involved the issuance
and sale by the Registrant of its securities to financially
sophisticated institutions or individuals who represented that
they were aware of the Registrants activities as well as
its business and financial condition, and who took the
securities for investment purposes and understood the
ramifications of the same. Each security holder represented that
they acquired the securities for investment for their own
account and not for distribution. All certificates representing
the securities issued in these transactions bear restrictive
legends.
17. On July 12, 1999, the Registrant issued 15,516
shares of common stock (valued at $7.50 per share) to five
individuals in connection with the Registrants acquisition
of all of the outstanding capital stock of Extent, Inc. d/b/a
FutureLink. These issuances are exempt from registration
pursuant to Section 4(2) of the Securities Act as transactions
by an issuer not involving any public offering.
Item 16. Exhibits
and Financial Statement Schedules
(a) Exhibits.
Exhibit
Number |
Description |
||||
---|---|---|---|---|---|
3.1 | Articles of Incorporation of Internet Ventures* | ||||
3.2 | Bylaws of Internet Ventures* | ||||
4.1 | Specimen common stock certificate* | ||||
4.2 | Form of 12% Convertible Debenture of Internet Ventures* | ||||
5 | Opinion of
Katten Muchin Zavis as to the legality of the securities being
registered (including
consent)** |
||||
10.1 | Internet Ventures Inc. Executive Stock Incentive Plan, as amended* | ||||
10.2 | Internet Ventures Inc. 1995 Incentive Stock Option Plan, as amended* | ||||
10.3 | Internet Ventures Inc. 1995 Stock Incentive Plan, as amended* | ||||
10.4 | Wireless Cable
Internet Revenue Sharing Agreement between Internet Ventures
and American
Telecasting of Medford, Inc. dated October 8, 1997* |
||||
10.5 | Basic
Provisions Agreement and Plan of Merger among Badas
Technologies, Inc. dba
Infostructure, Internet Ventures Oregon, Inc. and Internet Ventures dated December 22, 1997* |
||||
10.6 | Stock Pledge
Agreement among Internet Ventures Oregon, Inc. and Internet
Ventures and Jorge
Yant and Robert Down as trustees for the former shareholders of Badas Technologies, Inc. dated December 22, 1997* |
||||
10.7 | Stock Purchase
Agreement between Internet Ventures and certain stockholders
of DurangoNet,
Inc. dated September 3, 1998* |
||||
10.8 | Stock Purchase
Agreement between Internet Ventures and the former stockholder
of Oregon
Wilderness Delivery Service, Inc. dated September 11, 1998* |
||||
10.9 | Co-Branding
and Marketing Agreement between LookSmart, Ltd. and Internet
Ventures dated
January 4, 1999* |
||||
10.10 | Cable Internet
Revenue Sharing Agreement between DurangoNet, Inc. dba
Frontier Internet, a
wholly owned subsidiary of Internet Ventures, and Hermosa Cablevision, Inc. dated May 26, 1999* |
Exhibit
Number |
Description |
||||
---|---|---|---|---|---|
10.11 | Membership
Agreement between iBeam Broadcasting Corporation and Internet
Ventures, Inc.
dated August 23, 1999* |
||||
10.12 | Asset Purchase
Agreement between Internet Ventures, Inc. and Ronald E.
Miller, dba Tomato
Web Online, dated September 15, 1999, as amended September 15, 1999* |
||||
10.13 | Stock Purchase
Agreement between Innercite, Inc. and Internet Ventures, Inc.,
dated
September 17, 1999* |
||||
10.14 | Amendment to
Stock Purchase Agreement between Innercite, Inc. and Internet
Ventures, Inc.
dated November 4, 1999 (1) |
||||
10.15 | Cable Internet
Agreement between Internet Ventures, Inc. and CoxCom, Inc.,
d/b/a Cox
Communications, dated January 14, 1998* |
||||
10.16 | Letter of
Agreement between Eastern Washington University, Davis
Communications, Inc., and
Optimal Systems Integrators, Inc., dated July 11, 1997* |
||||
10.17 | Cooperative
Agreement between the City of Ashland, by and through its
Department of Electric
Utilities, Ashland Fiber Network Division and Internet Ventures Oregon, Inc., dated July 9, 1999* |
||||
16 | Letter from Arthur Andersen LLP dated October 8, 1999* | ||||
21 | Subsidiaries of the Registrant (1) | ||||
23.1 | Consent of Stonefield Josephson, Inc. (1) | ||||
23.2 | Consent Katten Muchin Zavis (contained in its opinion filed as Exhibit 5)** | ||||
24 | Power of Attorney* | ||||
27 | Financial Data Schedule(1) |
*Previously filed as an exhibit to the
Registrants registration statement on Form S-1 filed with
the SEC
on October 25, 1999.
on October 25, 1999.
**To be filed by later amendment.
|
(1)
|
Filed herewith.
|
(b) Financial Statement Schedules.
None.
Item 17.
Undertakings
The Registrant hereby undertakes:
(a) The undersigned registrant hereby
undertakes:
(1) To file,
during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
|
(i) To include
any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
|
(ii) To
reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range maybe reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the
changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in
the Calculation of Registration Fee table in the
effective registration statement.
|
(iii) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
|
(2) That, for
the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
|
(3) To remove
from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
|
(4) If the
registrant is a foreign private issuer, to file a
post-effective amendment to the registration statement to
include any financial statements required by Rule 3-19 of this
chapter at the start of any delayed offering or throughout a
continuous offering. Financial statements and information
otherwise required by Section 10(a)(e) of the Act need not be
furnished, provided, that the registrant includes in
the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph
(a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as
the date of those financial statements. Notwithstanding the
foregoing, with respect to registration statements on Form
F-3, a post-effective amendment need not be filed to include
financial statements and information required by Section
10(a)(e) of the Act or Rule 3-19 of this chapter if such
financial statements and information are contained in periodic
reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by
reference in the Form F-3
|
(b) Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the 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 Securities 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 Securities Act and
will be governed by the final adjudication of such
issue.
(c) For purposes of determining any liability under
the Securities Act, (a) 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 and (b) 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.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the Registrant has duly caused this Amendment No. 1
to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Redondo
Beach, and State of California, on February 9,
2000.
INTERNET
VENTURES
, INC
.
|
/S
/ DONALD
A. JANKE
|
By:
|
Donald A. Janke
|
Chairman of the Board and
President
|
Pursuant to the requirements of the Securities
Act of 1933, this Registration Statement has been signed below
by the following persons in the capacities and on the dates
indicated.
Signature |
Title |
Date |
|||||||
---|---|---|---|---|---|---|---|---|---|
/S
/ DONALD
A. JANKE
Donald A. Janke |
Chairman of
the Board and
President (principal executive officer) |
February 9, 2000 | |||||||
/S
/ DONALD
A. JANKE
*
Marshall F. Sparks |
Chief
Financial Officer
(principal financial and accounting officer) and Director |
February 9, 2000 | |||||||
/S
/ DONALD
A. JANKE
*
Daniel R. DiMicco |
Director | February 9, 2000 | |||||||
/S
/ DONALD
A. JANKE
*
Alfred M. Leopold |
Director | February 9, 2000 | |||||||
*By Donald A. Janke, Attorney-In-Fact |
EXHIBIT INDEX
Exhibit
Number |
Description |
||||
---|---|---|---|---|---|
3.1 | Articles of Incorporation of Internet Ventures* | ||||
3.2 | Bylaws of Internet Ventures* | ||||
4.1 | Specimen common stock certificate* | ||||
4.2 | Form of 12% Convertible Debenture of Internet Ventures* | ||||
5 | Opinion of
Katten Muchin Zavis as to the legality of the securities being
registered
(including consent)** |
||||
10.1 | Internet Ventures Inc. Executive Stock Incentive Plan, as amended* | ||||
10.2 | Internet Ventures Inc. 1995 Incentive Stock Option Plan, as amended* | ||||
10.3 | Internet Ventures Inc. 1995 Stock Incentive Plan, as amended* | ||||
10.4 | Wireless Cable
Internet Revenue Sharing Agreement between Internet Ventures
and
American Telecasting of Medford, Inc. dated October 8, 1997* |
||||
10.5 | Basic
Provisions Agreement and Plan of Merger among Badas
Technologies, Inc. dba
Infostructure, Internet Ventures Oregon, Inc. and Internet Ventures dated December 22, 1997* |
||||
10.6 | Stock Pledge
Agreement among Internet Ventures Oregon, Inc. and Internet
Ventures and
Jorge Yant and Robert Down as trustees for the former shareholders of Badas Technologies, Inc. dated December 22, 1997* |
||||
10.7 | Stock Purchase
Agreement between Internet Ventures and certain stockholders of
DurangoNet, Inc. dated September 3, 1998* |
||||
10.8 | Stock Purchase
Agreement between Internet Ventures and the former stockholder
of
Oregon Wilderness Delivery Service, Inc. dated September 11, 1998* |
||||
10.9 | Co-Branding
and Marketing Agreement between LookSmart, Ltd. and Internet
Ventures
dated January 4, 1999* |
||||
10.10 | Cable Internet
Revenue Sharing Agreement between DurangoNet, Inc. dba Frontier
Internet, a wholly owned subsidiary of Internet Ventures, and Hermosa Cablevision, Inc. dated May 26, 1999* |
||||
10.11 | Membership
Agreement between iBeam Broadcasting Corporation and Internet
Ventures,
Inc. dated August 23, 1999* |
||||
10.12 | Asset Purchase
Agreement between Internet Ventures, Inc. and Ronald E.
Miller, dba
Tomato Web Online, dated September 15, 1999, as amended September 15, 1999* |
||||
10.13 | Stock Purchase
Agreement between Innercite, Inc. and Internet Ventures, Inc.,
dated
September 17, 1999* |
||||
10.14 | Amendment to
Stock Purchase Agreement between Innercite, Inc. and Internet
Ventures,
Inc. dated November 4, 1999(1) |
||||
10.15 | Cable Internet
Agreement between Internet Ventures, Inc. and CoxCom, Inc.,
d/b/a Cox
Communications, dated January 14, 1998* |
||||
10.16 | Letter of
Agreement between Eastern Washington University, Davis
Communications, Inc.,
and Optimal Systems Integrators, Inc., dated July 11, 1997* |
||||
10.17 | Cooperative
Agreement between the City of Ashland, by and through its
Department of
Electric Utilities, Ashland Fiber Network Division and Internet Ventures Oregon, Inc., dated July 9, 1999* |
||||
16 | Letter from Arthur Andersen LLP dated October 8, 1999* | ||||
Exhibit
Number |
Description |
||||
---|---|---|---|---|---|
21 | Subsidiaries of the Registrant(1) | ||||
23.1 | Consent of Stonefield Josephson, Inc.(1) | ||||
23.2 | Consent Katten Muchin Zavis (contained in its opinion filed as Exhibit 5)** | ||||
24 | Power of Attorney* | ||||
27 | Financial Data Schedule(1) |
*Previously filed as an exhibit to
The Registrants registration statement on Form S-1 filed
with the SEC
on October 25, 1999. |
**To be filed by later amendment.
|
(1) Filed herewith.
|