As filed with the Securities and Exchange Commission on October 25, 1999Registration No. 333-
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 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 |
|||||
---|---|---|---|---|---|---|---|---|---|
Common Stock, $.01 par value | 500,000 | $22.00 | $11,000,000 | $3,058 |
(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.
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 OCTOBER 25, 1999
PROSPECTUS
[INTERNET VENTURES INC. LOGO]
500,000 Shares
Common Stock
$ per share
We are offering 500,000 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 range to be between $18 and $22 per share.
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All of
the 500,000 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.
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This
offering will be terminated upon the earlier of the sale of all
500,000 shares offered or the date on which our board of directors
decides to close this offering.
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Per Share
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Total if all
500,000 shares are sold |
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---|---|---|---|---|
Public Offering Price | $ | $ | ||
Discounts and Commissions | $ | $ | ||
Proceeds to us | $ | $ |
Investing in our common stock involves a high degree of
risk. See
Risk Factors
beginning on page 4.
We estimate that expenses related to the offering and
commissions to brokers and finders fees to finders will amount
to approximately $1,040,000 if all 500,000 shares are sold at $20
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
,
1999.
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.
[INSIDE FRONT COVER]
PeRKInet® and Internet Ventures® are our registered
trademarks. This prospectus also contains other trademarks and
tradenames of Internet Ventures, Inc. and other companies.
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. However,
these data are by their nature imprecise. Therefore, we caution
you not to rely only on these data.
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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
, 1999, 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. It may not contain all of the information that is
important to you. To understand this offering fully, you should read
this entire prospectus carefully, including the risk factors and our
financial statements.
Our Company
We provide dial-up and broadband Internet access and other
Internet services to approximately 30,000 customers in small- to
medium-sized communities in the western United States. Dial-up
Internet access provides data over a single telecommunication line.
Broadband Internet access provides multiple streams of data over a
communication medium and is a form of high-speed Internet access.
Our objective is to become a dominant Internet communications
provider in communities with populations under 500,000. Based on our
experience in these markets and our knowledge of the industry, 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.
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 113 million Internet users in the U.S. This number is expected
to increase to 248 million by the year 2002. Internet users want
fast, reliable Internet access.
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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In response to perceived market interest in low-priced,
high-speed Internet access, we offer a broadband Internet service
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 56K 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.
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
existing Internet service providers in our target markets
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Become a
dominant provider of Internet services in our target markets
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Launch
our PeRKInet® broadband Internet service in our target markets
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The Offering
Common stock offered..
500,000 shares
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Common stock outstanding prior to this offering, as
of September 15, 1999..
7,644,038
shares
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Use of Proceeds..
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To
finance acquisitions of Internet service providers within our
target markets
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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 September 15, 1999 and excludes the
following:
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199,330
shares of common stock issuable upon the exercise of warrants then
outstanding at a weighted average exercise price of $5.39 per
share;
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1,107,471
shares of common stock issuable upon the exercise of stock options
then outstanding at a weighted average exercise price of $3.39 per
share;
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125,579
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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635,757
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, |
Three Months
Ended
June 30, |
||||||||||||||
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1997
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1998
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1999
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1998
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1999
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Statement of Operations Data: | |||||||||||||||
Revenues | $ 1,365 | $ 2,755 | $ 4,370 | $ 970 | $ 1,521 | ||||||||||
Cost of revenues | 1,765 | 3,304 | 4,252 | 932 | 1,327 | ||||||||||
Expenses | 869 | 2,353 | 3,319 | 486 | 1,079 | ||||||||||
Net loss | (1,270 | ) | (2,902 | ) | (3,201 | ) | (448 | ) | (884 | ) | |||||
Net loss per share basic and diluted | (.27 | ) | (.54 | ) | (.51 | ) | (.08 | ) | (.12 | ) | |||||
Weighted average shares
outstanding used in
basic and diluted calculation |
3,968,277 | 5,311,624 | 6,268,217 | 5,780,921 | 7,081,254 | ||||||||||
Balance Sheet Data: | |||||||||||||||
Total assets | $ 2,021 | $ 2,913 | $ 3,898 | $ 2,763 | $ 4,229 | ||||||||||
Total liabilities | 1,457 | 3,055 | 2,994 | 1,583 | 2,752 | ||||||||||
Total stockholders equity (deficit) | 564 | (142 | ) | 904 | 1,180 | 1,477 | |||||||||
Working capital (deficit) | (751 | ) | (2,146 | ) | (1,820 | ) | (675 | ) | (880 | ) | |||||
Other Data: | |||||||||||||||
Number of dial-up subscribers at period end | 4,893 | 12,193 | 25,733 | 13,150 | 28,604 | ||||||||||
Number of PERKInet ® subscribers at period end | 5 | 965 | 1,540 | 1,100 | 1,642 | (1) | |||||||||
Total number of subscribers at period end | 4,898 | 13,158 | 27,273 | 14,250 | 30,246 | ||||||||||
Total number of communities served | 8 | 12 | 19 | 12 | 19 |
(1)
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Includes
service to 900 dormitory rooms pursuant to a contract between our
subsidiary, Internet On-Ramp, Inc., Eastern Washington University
and Davis Communications, Inc., which is the subject of
litigation. For a description of the litigation, see Legal
ProceedingsDavis Litigation.
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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
During our limited operating history, we have incurred
losses and expect to continue operating with net losses as we expand
our business in the future.
We incurred net losses of approximately $8.4 million from
inception in September 1995 through June 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 broadband
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 makes it difficult to predict
whether our business plan will be successful.
We began offering our services in September 1995. We compete
in the relatively new markets for Internet services. 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 have a material adverse
effect on our business, results of operations and financial
condition.
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 FCC requesting that it rule that Internet
service providers are entitled to commercial leased access over
cable systems. We devote 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. 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 have a material adverse effect on the growth of our company.
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
$5,448,685. 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 to 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 has requested further information about our convertible
debenture offering. 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 June 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 business, operating results and financial
condition will be materially adversely affected.
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 have a material adverse effect on
our business, results of operations and financial condition.
If competition 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 AT&T Corp., Sprint Corporation and MCI
WorldCom, Inc.;
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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 have a material adverse effect on 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. To date no such model or
competitor has emerged offering free broadband access to the Internet.
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 have a material adverse
effect on our business, operating results or financial condition.
If our third-party suppliers and local telecommunications
companies 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 of these disruptions could have a
material adverse effect on our business, operating results and
financial condition.
In addition, we are dependent on certain third-party suppliers
including Cisco Systems, Inc., Lucent Technologies, Inc. and Hybrid
Networks, Inc., for hardware components. Certain components used in
providing our network services are currently acquired from limited
sources. We also depend on third-party software vendors including
Netscape Communications Corp. and Microsoft Corporation to provide
us with much of our Internet software. Failure of our suppliers to
provide components and products in the quantities, at the quality
levels or at the time required by us, or an inability by us to
develop alternative sources of supply if required, could materially
adversely affect our ability to effectively support our customer
base in a timely manner and increase costs of expansion.
Our suppliers and cable, wireless/microwave and
telecommunications carriers 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 suppliers and 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
have a material adverse effect on our business, operating results
and financial condition.
We may have difficulty obtaining additional financing as
needed, which could limit our growth.
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 have a material
adverse effect on our business, operating results and financial
condition.
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 planned aggressive growth will strain our resources 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.
We may encounter problems associated with acquisitions,
joint ventures and strategic relationships.
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:
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the
diversion of managements attention;
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the
assimilation of the operations and personnel of the acquired
companies;
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the
potential disruption of our ongoing business;
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the
inability of management to maximize our financial and strategic
position by the successful incorporation of acquired technologies
and rights into our service offerings;
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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 system failure could
result in subscriber cancellations.
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.
Our business could be harmed by Internet security breaches.
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 which may have a material adverse effect on
our business, operating results and financial condition.
Our computer systems or those of third parties on which we
depend could fail due to Year 2000 problems, impairing our ability
to conduct business.
Because many computer systems were not designed to handle
dates beyond the year 1999, computer hardware and software may need
to be modified prior to the year 2000 in order to remain functional.
Due to our dependence on computer technology to conduct our
business, the Year 2000 issue could adversely affect our
business, financial condition and operating results in the following
ways:
|
Any
failure by one or more of our Internet service provider
subsidiaries will make it difficult for our customers to dial up
and access the Internet, which will have a material adverse effect
on our operating results and financial condition.
|
|
The
failure of the systems of our content providers or the systems
operated by other parties upon which we depend due to Year 2000
problems could interfere with our ability to provide Internet
services to our subscribers.
|
|
Uncertainty about the Year 2000 problem generally may cause
subscribers to reduce the level of their Internet activity
temporarily as they assess the effectiveness of our Year 2000
compliance efforts. As a result, we may experience a downturn in
activity for a period of time before and after January 1, 2000.
|
|
Any
significant Year 2000 problems which result in interruption of
service to our Internet customers could cause our users to
consider seeking alternate providers of Internet access, which
could result in a material adverse effect on our operating results
and financial condition.
|
Loss of services of key management personnel could
adversely affect our business.
We are highly dependent on the technical and managerial skills
of our key employees, including technical, sales, marketing,
information systems, financial and executive personnel, and on its
ability to identify, hire and retain additional personnel.
Competition for key personnel, particularly persons having technical
expertise, is intense, and there can be no assurance that we will be
able to retain existing personnel or to identify or hire additional
personnel. In particular, we are highly dependent on the continued
services of Donald A. Janke, our President.
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 any member of senior management. Our
inability to attract, hire or retain the necessary technical, sales,
marketing, information systems, financial and executive personnel,
or the loss of the services of any member of our senior management
team, could have a material adverse effect on our business,
operating results and financial condition.
Risks Related to Our Industry
If Internet usage does not continue to grow, 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, our business,
operating results and financial condition may be materially
adversely affected.
If we do not adapt to technology trends and evolving
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 the development of
high-quality multimedia by our content providers and our ability to
make it useful to subscribers.
One component of our strategy is to provide a more compelling
interactive experience to Internet users than is currently available
from some dial-up Internet service providers and online service
providers. We believe that, in addition to providing broadband,
high-performance Internet access, we must also promote the
development of high-quality local multimedia content. Our success in
providing this content depends on the ability of content providers
to create and support high-quality multimedia content and our
ability to aggregate content offerings in a manner that subscribers
find useful and compelling. There can be no assurance that we will
be successful in these endeavors. In addition, the market for
high-quality multimedia Internet content has only recently begun to
develop and is rapidly evolving, and there is significant
competition among Internet service providers and online service
providers for aggregating content. If the market fails to develop or
develops more slowly than expected, or if competition increases, or
if our content offerings do not achieve or sustain market
acceptance, our business, operating results and financial condition
will be materially adversely affected.
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. A number of
lawsuits have sought to impose liability for defamatory speech and
indecent materials. In one case, a court held that an Internet
service
provider could be found liable for defamatory matter provided through
its service, on the ground that the service provider exercised
active editorial control over postings to its service. Other courts
have held that Internet service providers and online service
providers may, under certain circumstances, be subject to damages
for copying or distributing copyrighted materials. The
Telecommunications Act prohibits and imposes criminal penalties and
civil liability for using an interactive computer service for
transmitting indecent or obscene communications, but appears to
limit this liability to the user and protects Internet service
providers as the provider of the access unless they play some larger
part in the act. A number of states have adopted or are currently
considering similar legislation and other legislation affecting
Internet service provider liability for what its subscribers
transmit or access has been or may be proposed by Congress. The
anti-indecency provisions of the Telecommunications Act were
declared unconstitutional by the United States District Courts for
the Eastern District of Pennsylvania and the Southern District of
New York, which have issued preliminary injunctions against their
enforcement. Although the United States Supreme Court has upheld
these decisions, its holding leaves open the possibility of the
passage of federal or state laws which are narrower in scope but may
still impose upon Internet service providers or online service
providers potential liability for materials carried on, or
disseminated through, their systems. 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 have a material adverse effect on us.
We operate in a highly regulated industry and may become
subject to government regulation.
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
materially adversely affect our business.
Risks Related to the Offering
The absence of a prior 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. Accordingly, an investor in the shares may not be able to
sell the shares readily.
We may apply for listing on the OTC Bulletin Board, but it is
uncertain whether we will qualify for 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.
6,683,448 million, or 82%, of our total outstanding
shares are 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, even if our business is doing
well.
After this offering, we will have outstanding approximately
8,144,038 shares of common stock if all 500,000 shares are sold. The
500,000 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 82%, or 6,683,448
shares, of our total outstanding shares will become available for
resale in the public market between 90 and 365 days after the date
of this prospectus due to requirements 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.
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.
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
June 30, 1999, the immediate dilution to new investors would have
been $18.82 per share, or 94%. 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 A. 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 500,000 shares
offered are sold, and based upon the shares outstanding as of
September 15, 1999, Donald A. Janke and our other executive officers
and directors will together beneficially own 32.3% 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 which 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.
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 1999
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.
The total proceeds we receive from the sale of our stock in
this offering will be $10,000,000 if the maximum number of shares
are sold, assuming an offering price of $20 per share. The estimated
offering expenses, the resulting amount of net proceeds and the use
of the net proceeds for various levels are outlined below.
GROSS PROCEEDS: | $2,000,000
|
$4,000,000
|
$6,000,000
|
$8,000,000
|
$10,000,000
|
||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Less offering expenses (1) | $ (320,000 | ) | $ (530,000 | ) | $ (680,000 | ) | $ (840,000 | ) | $(1,040,000 | ) | |||||||||||||||||||||
Net Proceeds | $1,680,000 | $3,470,000 | $5,320,000 | $7,160,000 | $8,960,000 | ||||||||||||||||||||||||||
USE OF PROCEEDS: | |||||||||||||||||||||||||||||||
Repayment of trade accounts payable
and notes payable |
$ 210,000 | $ 600,000 | $ 620,000 | $ 620,000 | $ 620,000 | ||||||||||||||||||||||||||
Purchase new PeRKInet® equipment (2) | $ 100,000 | $ 300,000 | $ 500,000 | $ 700,000 | $ 900,000 | ||||||||||||||||||||||||||
Network operations and customer
support regional center for PeRKInet ® expansion (3) |
$ 0 | $ 150,000 | $ 300,000 | $ 450,000 | $ 600,000 | ||||||||||||||||||||||||||
Sales and marketing to potential new
subscribers |
$ 168,000 | $ 172,000 | $ 350,000 | $ 350,000 | $ 250,000 | ||||||||||||||||||||||||||
Finance Internet service provider
acquisitions within our target markets and establish new Internet service provider sites (4) |
$ 656,000 | $1,550,000 | $2,510,000 | $3,870,000 | $5,300,000 | ||||||||||||||||||||||||||
New employee salaries | $ 168,000 | $ 170,000 | $ 175,000 | $ 200,000 | $ 250,000 | ||||||||||||||||||||||||||
New manager salaries | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | $ 100,000 | ||||||||||||||||||||||||||
Office rent and office overhead | $ 70,000 | $ 70,000 | $ 70,000 | $ 70,000 | $ 80,000 | ||||||||||||||||||||||||||
Acquired subscriber prepaid float (5) | $ 70,000 | $ 100,000 | $ 150,000 | $ 170,000 | $ 180,000 | ||||||||||||||||||||||||||
(1)
|
Includes
legal fees, expenses related to web page design and maintenance,
printing of offering statement, telephone systems, investor
inquiries, and investor relations. Offering expenses also include
an estimate of brokers commissions and finders fees which:
|
|
Assumes
that the first $2,000,000 of the offering will be sold only by
our officers, without commissions being paid; and that the
subsequent $2,000,000 increments may be sold by brokers or
finders who will receive a 10% commission on sales made only by
them, or by our officers without commissions.
|
|
Assumes
that if $4,000,000 is sold, $2,400,000 will be sold by us without
commissions and $1,600,000 will be sold by brokers at a 10%
commission.
|
|
Assumes
that if $6,000,000 is sold, $3,400,000 will be sold by us without
commissions and $2,600,000 will be sold by brokers at a 10%
commission.
|
|
Assumes
that if $8,000,000 is sold, $3,800,000 will be sold by us without
commission and $4,200,000 will be sold by brokers at a 10%
commission.
|
|
Assumes
that if $10,000,000 is sold, $3,800,000 will be sold by us
without commission and $6,200,000 will be sold by brokers at a
10% commission.
|
(2)
|
Cost of
PeRKInet® equipment installation for one site, including 200
cable modems, is estimated at $100,000. Assumes one equipment
installation if $2,000,000 is sold in the offering and two
additional installations in each $2,000,000 increment sold in the
offering.
|
(3)
|
Cost of
network operations and customer support center assumes initial
base cost of equipment, staff and overhead is $100,000; and
incremental costs per installation per year is $50,000; assumes
one center if $4,000,000 is sold in the offering, and one
additional center in each $2,000,000 increment sold in the
offering.
|
(4)
|
Assumes
40% of proceeds at an average total acquisition price per
subscriber of three times revenue for a combination of cash,
note, and stock if $2,000,000 is sold in the offering and 5%
increments for each additional $2,000,000 sold in the offering.
|
(5)
|
Assumes
a portion of subscribers acquired through acquisition have
prepaid their account which is taken as a deduction from the
Internet service provider purchase price.
|
The table above describes our best estimate of our use
of our net proceeds from this offering, based on our current plans
and estimates of anticipated expenditures. However, at this time,
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 above 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, interest-bearing obligations.
Though we continuously evaluate potential acquisitions,
we have no current agreement, commitment or understanding with
respect to any material acquisition.
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 June 30,
1999. The As Adjusted column includes our issuance and
sale of 500,000 shares of common stock at an assumed offering price
of $20 per share, after deducting the estimated commissions, finders
fees and offering expenses payable by us.
Capitalization
as of
June 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 7,081,254 shares issued and outstanding, actual; 7,581,254 shares issued and outstanding, as adjusted |
70,812 | 75,812 | ||||
Additional paid-in capital | 9,759,898 | 18,219,898 | ||||
Accumulated deficit | (8,353,521 | ) | (8,353,521 | ) | ||
Total stockholders equity and capitalization | $1,477,189 | $11,401,377 | ||||
The number of issued and outstanding shares of our
common stock as of June 30, 1999 excludes:
|
199,330
shares of common stock issuable upon the exercise of then
outstanding warrants at a weighted average exercise price of
$5.39 per share;
|
|
1,038,900 shares of common stock issuable upon the exercise of
then outstanding stock options at a weighted average exercise
price of $3.26 per share;
|
|
60,071
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
|
|
704,328
shares of common stock then available for future grants under our
stock option plans.
|
As of June 30, 1999, we had negative net tangible book
value of $147,540, or negative $0.02 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.
After the sale of the 500,000 shares of common stock in
this offering at an assumed offering price of $20 per share, and
after deducting the estimated commissions, finders fees and
offering expenses payable by us, our as adjusted net tangible book
value at June 30, 1999 would have been approximately $8,942,401, or
$1.18 per share. This represents an immediate dilution of $18.82
per share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:
Per share offering price | $20.00 | ||||
Net tangible book value per share as of June 30, 1999 | $(0.02 | ) | |||
Increase per share attributable to new investors | $ 1.20 | ||||
As adjusted net tangible book value per share after this offering | $ 1.18 | ||||
Dilution per share to new investors in this offering | $18.82 |
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 $20 per share.
Shares
Purchased |
Total
Consideration |
Average Price
Paid Per Share |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Number
|
Percent
|
Amount
|
Percent
|
|||||||||
Existing shareholders | 7,081,254 | 93 | % | $ 9,830,710 | 50 | % | $ 1.39 | |||||
New public investors | 500,000 | 7 | % | 10,000,000 | 50 | % | $20.00 | |||||
Total | 7,581,254 | 100.0 | % | $19,830,710 | 100.0 | % | ||||||
These calculations do not give effect to, as of June
30, 1999:
|
199,330
shares of common stock issuable upon the exercise of then
outstanding warrants at a weighted average exercise price of
$5.39 per share;
|
|
1,038,900 shares of common stock issuable upon the exercise of
then outstanding options at a weighted average exercise price of
$3.26 per share;
|
|
66,071
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
|
|
704,328
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 three months ended June 30,
1998 and 1999, and the balance sheet data as of June 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 three months ended June 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, |
Three Months
Ended June 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 | $ 876 | $ 1,489 | |||||||||||||||||||||||||||||||
System/consulting revenues | 123 | 227 | 317 | 124 | 92 | 32 | |||||||||||||||||||||||||||||||
Total revenues | 342 | 1,365 | 2,755 | 4,370 | 970 | 1,521 | |||||||||||||||||||||||||||||||
Cost of revenues | 379 | 1,765 | 3,304 | 4,252 | 932 | 1,327 | |||||||||||||||||||||||||||||||
Expenses: | |||||||||||||||||||||||||||||||||||||
Selling, general and administrative | 44 | 636 | 1,769 | 1,979 | 249 | 685 | |||||||||||||||||||||||||||||||
Depreciation | 2 | 68 | 226 | 338 | 69 | 106 | |||||||||||||||||||||||||||||||
Amortization | 12 | 165 | 325 | 802 | 137 | 245 | |||||||||||||||||||||||||||||||
Interest, net | | | 33 | 201 | 32 | 43 | |||||||||||||||||||||||||||||||
Total expenses | 58 | 869 | 2,353 | 3,319 | 486 | 1,079 | |||||||||||||||||||||||||||||||
Net loss | (95 | ) | (1,270 | ) | (2,902 | ) | (3,201 | ) | (448 | ) | (884 | ) | |||||||||||||||||||||||||
Net loss per share basic and diluted | (.04 | ) | (.27 | ) | (.54 | ) | (.51 | ) | (.08 | ) | (.12 | ) | |||||||||||||||||||||||||
Weighted average shares
outstanding |
2,319,866 | 3,968,277 | 5,311,624 | 6,268,217 | 5,780,912 | 7,081,254 | |||||||||||||||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||||||||||||
Current assets | $ 64 | $ 707 | $ 878 | $ 550 | $ 883 | $ 1,183 | |||||||||||||||||||||||||||||||
Property and
equipment, net of
accumulated depreciation |
120 | 711 | 898 | 1,478 | 879 | 1,421 | |||||||||||||||||||||||||||||||
Goodwill, net of amortization | 157 | 603 | 1,137 | 1,870 | 1,000 | 1,625 | |||||||||||||||||||||||||||||||
Other assets | 71 | ||||||||||||||||||||||||||||||||||||
Total assets | 412 | 2,021 | 2,913 | 3,898 | 2,763 | 4,229 | |||||||||||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||||||||||||
Current liabilities | 106 | 1,457 | 3,024 | 2,370 | 1,558 | 2,063 | |||||||||||||||||||||||||||||||
Notes payable | 86 | | 31 | 250 | 24 | 177 | |||||||||||||||||||||||||||||||
Capital lease obligations | | | | 20 | | 17 | |||||||||||||||||||||||||||||||
Debentures payable | | | | 354 | | 496 | |||||||||||||||||||||||||||||||
Total liabilities | 192 | 1,457 | 3,055 | 2,994 | 1,583 | 2,752 | |||||||||||||||||||||||||||||||
Total stockholders equity | 220 | 564 | (142 | ) | 904 | 1,180 | 1,477 | ||||||||||||||||||||||||||||||
Working capital (deficit) | (42 | ) | (751 | ) | (2,146 | ) | (1,820 | ) | (675 | ) | (880 | ) | |||||||||||||||||||||||||
Other Data: | |||||||||||||||||||||||||||||||||||||
Number of
dial-up subscribers at period
end |
1,333 | 4,893 | 12,193 | 25,733 | 13,150 | 28,604 | |||||||||||||||||||||||||||||||
Number of
PeRKInet® subscribers at
period end |
0 | 5 | 965 | 1,540 | 1,100 | 1,642 | (1) | ||||||||||||||||||||||||||||||
Total number of
subscribers at period
end |
1,333 | 4,898 | 13,158 | 27,273 | 14,250 | 30,246 | |||||||||||||||||||||||||||||||
Total number of communities served | 2 | 8 | 12 | 19 | 12 | 19 |
(1)
|
Includes service to 900 dormitory rooms pursuant to a contract
between our subsidiary, Internet On-Ramp, Inc., Eastern
Washington University and Davis Communications, Inc., which is
the subject of litigation. For a description of the litigation,
see Legal ProceedingsDavis Litigation.
|
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 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
Since June 30, 1999, the date of the most recent
financial statements contained in this prospectus, there have
been several significant events for our company. First, we
completed two acquisitions of Internet service providers which
expanded our presence in our existing markets. In July 1999, we
acquired Extent, Inc. for aggregate consideration of $199,710,
comprised of $66,670 in cash, a note in the principal amount of
$16,670 and 15,510 shares of our common stock (valued at
$116,370). In September 1999, we acquired Tomato Web Online for
aggregate consideration of $299,500, comprised of $191,500 cash
and the balance in notes. Second, in September 1999, we invested
an aggregate of $660,000 in InnerCite Corp., consisting of
$200,000 cash, a short term note in the principal amount of
$150,000 and a 12% convertible debenture in the principal amount
of $310,000. This investment gives us a 30% equity interest in
this Internet service provider which operates in one of our
existing markets. Third, we experienced a significant reduction
in our number of PeRKInet® subscribers due to notice of the
cancellation of our contract with Davis Communications, Inc. to
supply our PeRKInet® broadband access to 900 dormitory rooms
at Eastern Washington University in Spokane, Washington. See
Legal ProceedingsDavis Litigation.
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. 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 sales and marketing 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.
Sales and marketing costs, also a component of our
cost of revenues, consist of media and production and advertising
costs. 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. The increases in
marketing expense will have a negative impact on current earnings
in that we do not defer or capitalize marketing costs. Sales and
marketing costs accounted for approximately 6% of total cost of
revenues for the fiscal year ended March 31, 1999.
Selling, general and administrative expenses relate
primarily to corporate overhead, acquisition activities, legal
and accounting. 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. 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 June 30, 1999 Compared to Quarter
Ended June 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
June 30, 1998 |
Change |
Three Months Ended
June 30, 1999 |
|||||||
---|---|---|---|---|---|---|---|---|---|
Total revenues | $ 969,614 | 57 | % | $1,521,229 | |||||
Cost of revenues | 931,770 | 42 | % | 1,326,665 | |||||
Gross profit | 37,844 | 414 | % | 194,564 | |||||
Selling, general and administrative expenses | 248,684 | 175 | % | 684,674 | |||||
Depreciation and amortization | 205,413 | 71 | % | 350,775 | |||||
Interest expense | 32,111 | 35 | % | 43,416 | |||||
Net loss | $(448,364 | ) | 97 | % | $ (884,301 | ) | |||
Revenues. Total revenues for the quarter
ended June 30, 1999 rose 57% to $1,521,229 from $969,614 for the
same period last year. The increase in revenues during the
quarter ended June 30, 1999 reflects the growth in our number of
subscribers attributable to four Internet service provider
acquisitions, which accounted for 7,500 new subscribers, with the
balance attributable to internal growth. Broadband subscriber
revenues accounted for approximately 5% of total revenues, or
$70,832, for the quarter ended June 30, 1999.
Cost of Revenues. In the quarter ended June
30, 1999, total cost of revenues increased to $1,326,665 from
$931,770 for the quarter ended June 30, 1998, due to acquisitions
of Internet service providers. Gross profit increased 414% to
$194,564 for the quarter ended June 30, 1999 from $37,844 for the
comparable period last year. This enabled the absorption of some
corporate overhead, the increase of which was marginal compared
to the appreciation in revenue, gross profit, and scope of
operations.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased to 45% of
total revenues for the quarter ended June 30, 1999 versus 25% of
total revenues for the quarter ended June 30, 1998. The increase
is attributable to corporate activities including legal expenses
related to our leased access filings with the FCC, accounting
costs, and merger and acquisition costs expensed in the period.
Net Loss. A 71% increase in amortization and
depreciation expenses in the quarter ended June 30, 1999 from the
quarter ended June 30, 1998 contributed to an increase in net
loss for the quarter ended June 30, 1999 as compared to the
quarter ended June 30, 1998. The net loss for the quarter ended
June 30, 1999 was $884,301 as compared to a loss of $448,364 in
the quarter ended June 30, 1998.
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 20% of the selling,
general and administrative expenses for fiscal year ended March
31, 1998 is from marketing costs to establish us and our services
in the industry. There was also a significant cost to establish
the PeRKInet® concept and service. 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 an 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:
|
depreciation charges of $337,785;
|
|
amortization of goodwill of $570,820;
|
|
securities issued for services of $220,924; and
|
|
interest expense of $46,830 paid by issuance of our common
stock.
|
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 $658,574 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:
|
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);
|
|
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;
|
|
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.
|
|
K-FallsNet (National Computer Solutions, Inc.), an asset
purchase for $64,000 cash.
|
As of June 30, 1999, and as a result of additional
sales of our 12% convertible debentures, cash and cash
equivalents increased to $737,632 and we have no material bank
debt. Net cash used for operating activities was $842,916 in the
three month period ended June 30, 1999. This is primarily a
result of a net loss of $884,301 reduced by non-cash charges for:
|
depreciation charges of $92,949;
|
|
amortization of goodwill of $245,175; and
|
|
interest paid in the amount of $76,967 by issuance of our
common stock.
|
An increase in accounts receivable of $39,620 and
deferred interest of $116,997, coupled with a reduction in
accrued expenses impacted our cash used in operations.
Net cash used for investing activities in the three
month period ended June 30, 1999 was $67,673 for the purchase of
equipment and other assets. Net cash provided by financing
activities in the period was $1,440,631. Of this amount,
$1,450,374 was provided by issuance of our common stock or
conversions of our convertible debentures, and $141,408 was
provided by issuance of our 12% convertible debentures.
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 addition, our anticipated capital requirements
during the next twelve months depend on numerous factors,
including:
|
the rate of market acceptance and pricing of our services,
|
|
our ability to maintain and expand our customer base,
|
|
the rate of expansion of our network infrastructure,
|
|
the level of resources required to expand our market and sales
organization,
|
|
information systems and research and development activities,
|
|
the pricing and timing of acquisitions, and
|
|
the availability of hardware and software provided by
third-party vendors and other factors.
|
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.
In establishing the PeRKInet® service, we negotiated a
purchase contract with Hybrid Networks, Inc. to take delivery of
$1 million in PeRKInet® equipment on extended payment terms.
The equipment includes the cable headend hardware, as well as
subscriber modems, which are to be sold or rented to the
subscriber. Under the contract, we have a remaining balance of
approximately $55,000, which is payable $27,000 per month until
paid in full. The amount payable has been reclassified to accrued
liabilities.
Year 2000 Readiness
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.
We have identified three major areas determined to be
critical for successful Year 2000 compliance: (1) third party
vendors of network services and equipment, (2) customer systems
and the Internet, and (3) billing and management systems.
The vendors of the hardware and software used in our
core systems, such as router and authentication servers, indicate
that these products are Year 2000 compliant. In addition to
receiving these vendor assurances, we are testing all types of
core systems for operation with dates beyond January 1, 2000.
Further, we are currently evaluating all internal phone and
switching systems, and plan to resolve any issues prior to
October 31, 1999.
However, any significant Year 2000 disruption of the network
services or equipment provided to us by third-party vendors could
cause customers to consider seeking alternate providers or cause
an unmanageable burden on customer service and technical support,
which in turn could materially adversely effect our results of
operations, liquidity and financial condition. We are not
presently aware of any vendor-related Year 2000 issue that is
likely to result in this type of disruption.
Our customers maintain their Internet operations on
commercially available operating systems, which may be impacted
by Year 2000 complications. However, we do not expect customer
Year 2000 problems to result in a significant number of
cancellations. We depend on the continued operation of, and
widespread access to, the Internet. To the extent that the normal
operation of the Internet is disrupted by Year 2000, our results
of operations, liquidity and financial condition could be
materially adversely affected.
Additionally, we currently use several different
billing and customer management systems, most of which were
developed by the independent Internet service providers prior to
being acquired by us. Year 2000 compliance of these systems is
unknown. However, we have selected a standard billing and
customer management application, Billmax, which is represented by
its developer as Year 2000 compliant. All our operations will be
converted to Billmax prior to December 31, 1999.
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, we have connected our facilities to the
Internet redundantly, both in terms of backbone providers and in
terms of local loop facilities. Should any of our Internet
service providers be unable to provide subscribers with Internet
access as a result of Year 2000, we believe our redundant network
arrangements will adequately accommodate our dial-up access needs.
Total costs incurred in connection with our Year 2000
efforts have been and are expected to continue to be immaterial.
The estimates and conclusions included in this
discussion contain forward-looking statements and are based on
managements best estimates of future events. Our
expectations about risks, future costs and the timely completion
of any Year 2000 modifications may turn out to be incorrect and
any variance from these expectations could cause actual results
to differ materially from what has been discussed above. Factors
that could influence risks, amount of future costs and the
effective timing of remediation efforts include our success in
identifying and correcting potential Year 2000 issues and the
ability of third parties to appropriately address their Year 2000
issues.
Market Risk
We are exposed to the impact of interest rate
changes, changes in market values of investments and credit risk.
Interest Rate Risk. Short-term investments at
June 30, 1999 were $737,600. 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 provide dial-up and broadband Internet access and
other Internet services to approximately 30,000 customers in
small- to medium-sized communities in the western United States.
Our objective is to become a dominant Internet communications
provider in communities with populations under 500,000. Based on
our experience in these markets and our knowledge of the
industry, 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.
Our Internet services include:
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dial-up and broadband Internet access;
|
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local web hosting, advertising and storage of high-quality
audio and video streaming media; and
|
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systems integration and network design services.
|
In response to perceived market interest in
low-priced, high-speed Internet access, we offer a broadband
Internet service 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 at a minimum of 256Kbps, a
speed that is more than four times faster than conventional
56Kbps modems.
We believe we offer the following competitive
advantages:
|
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.
|
|
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.
|
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 30 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. These numbers are projected to double by 2002.
Residential users are a large portion of Internet
consumers. As of May 1999, the Internet penetration rate of U.S.
households was approximately 25%, according to industry data 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 general industry data, the
Internet is now the number one use for home computers.
Industry research indicates 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.
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 28.2 million
Internet-connected households by the end of 1998. An industry
survey predicts that by the year 2005, there will more than 300
million Internet users.
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Industry data
predicts 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. Internet
advertising spending will reach approximately $8 billion by
2002 according to eStats, a provider of online Internet
statistics.
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Cable TV
operators are just beginning to offer broadband Internet access
to their customers. Industry researchers estimate that 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 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.
Technologies to Increase Internet Bandwidth.
Several new technologies attempt to address the performance
problems of the Internet. While these technologies increase the
transmission speed of data from the user to the phone company,
they do not provide an end-to-end solution to the fundamental
performance constraints of the Internet architecture.
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Improved Modems. In early 1997, dial-up modems offering
peak data transmission speeds of 56Kbps were introduced for use
with Internet service providers over existing telephone lines.
However, we believe many Internet service providers do not yet
support this maximum transmission speed. Further, we believe
that the quality of local telephone lines deliver, on average,
substantially less than the 56Kbps speed. We also believe that
dial-up modems alone will not increase the speed of data
transmission sufficiently.
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Telecommunications-Based Technologies. There are two
types of telecommunications-based technologies available for
Internet applications. First, Integrated Services Digital
Network, or ISDN, technology uses telephone lines which are
maintained at higher standards than those for normal telephone
usage. These telephone lines enable peak data transmission
speeds of 128Kbps between the user and the Internet service
provider. Although ISDN technology has been available for
several years, it has not been widely used due to its high
cost. The second telecommunications-based technology is
Asymmetric Digital Subscriber Line, or ADSL, originally
developed to deliver video on demand. ADSL technology uses
existing twisted-pair telephone lines to transmit multimedia
and high-speed data. ADSL enables peak data transmission speeds
of 8.4 Mbps downstream from the Internet service provider to
the user and 640 Kbps upstream from the user to the Internet
service provider. However, typical implementations of these two
technologies result in data transmission speeds substantially
lower than their peak capacity due to imperfect maintenance.
Further, inherent technical deficiencies prevent it from
serving users who are more than about three miles from the
nearest central office, and it cannot be offered over some
phone lines at all according to the Vermont Department of
Public Service. Also, ADSL access is priced significantly
higher than other access services and we do not expect it to be
broadly available, and even less likely to be available in
smaller markets, in the near term.
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Wireless Technology. Satellite-delivered approaches
currently provide peak data transmission speeds of
approximately 400Kbps downstream and rely on dial-up modems and
the telephone network for upstream transmission. Due to the
necessity of dividing a finite amount of satellite bandwidth
among subscribers, these approaches can only service a finite
number of customers in a geographic area. Other wireless
offerings rely on ground-based radios instead of satellites.
These offerings include multi-channel, multi-point distribution
service (a one-way high-bandwidth digital broadcasting system),
and local multi-point distribution service (a two-way
high-bandwidth wireless digital broadcasting system). These
offerings are not yet widely available, require unobstructed
line-of-sight transmission paths and may require additional
radio frequency spectrum allocations, an entirely new
distribution infrastructure and new equipment (including
specialized radio modems).
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Cable Technology. In recent years, cable system
operators have been upgrading to hybrid fiber-coaxial cable to
offer two-way data transmission and Internet connections using
cable modems. However, we believe that the number of homes
capable of two-way cable Internet access remains just a
fraction of all homes passed by cable. Thus, a telephone line
connection from the home to the cable operator is required for
most customers using cable Internet access to send data over
the Internet.
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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 existing Internet service providers in our target
markets
|
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Become the dominant provider of Internet service in our target
markets
|
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Launch our PeRKInet® broadband Internet service
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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.
Our focus is to establish relationships with cable TV
operators within our target markets that do not plan to offer
two-way high-speed data services in the near future. We believe
that most of the cable TV operators in our target markets fall
into this category, based upon our internal research. 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.
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: Ventura,
Humboldt, Del Norte and San Joaquin Counties, California;
LaPlata, Mesa, and Montezuma Counties, Colorado; Kootanai County,
Idaho; Jackson, Josephine and Klamath Counties, Oregon; and
Spokane County, Washington. 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 |
||||||||||||
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% |
||||||||||||
Date
|
Event |
Significance |
|||||||
---|---|---|---|---|---|---|---|---|---|
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 633,100 homes or business locations as of
June 30, 1999. Of the 633,100 potential customers, 1,642
subscribed for our PeRKInet® service and 28,604
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 June 30, 1999.
Community |
Homes
Marketed |
Subscribers |
Other
Customers(3) |
Total |
Penetration Rate |
Number
of Months in Operation |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
PeRKInet® |
Dial-Up(2) |
PeRKInet® |
Dial-Up |
||||||||||||||||
Stockton, CA (including
Manteca, CA and Tracy, CA) |
145,000 | 1,430 | 38 | 1,468 | 0.00 | % | 0.99 | % | 42 | ||||||||||
Spokane, WA | 140,000 | 900 | (1) | 5,517 | 663 | 7,080 | 0.64 | % | 3.94 | % | 42 | ||||||||
Eureka, CA | 40,000 | 419 | 2,986 | 7 | 3,412 | 1.05 | % | 7.46 | % | 37 | |||||||||
Grand Junction, CO | 44,000 | 1,058 | 1,058 | 0.00 | % | 2.40 | % | 36 | |||||||||||
Coeur D Alene, ID | 38,000 | 1,559 | 22 | 1,581 | 0.00 | % | 4.10 | % | 34 | ||||||||||
Crescent City, CA | 9,400 | 479 | 479 | 0.00 | % | 5.10 | % | 30 | |||||||||||
Arcata, CA | 10,000 | 1,276 | 37 | 1,314 | 0.00 | % | 12.76 | % | 24 | ||||||||||
Ventura, CA | 90,000 | 139 | 689 | 828 | 0.15 | % | 0.77 | % | 21 | ||||||||||
Medford, OR | 50,000 | 179 | 652 | 99 | 930 | 0.36 | % | 1.30 | % | 22 | |||||||||
Ashland, OR | 17,700 | 4,155 | 898 | 5,053 | 0.00 | % | 23.48 | % | 19 | ||||||||||
Montrose, CO | 7,000 | 242 | 242 | 0.00 | % | 3.45 | % | 10 | |||||||||||
Cortez, CO | 8,000 | 314 | 314 | 0.00 | % | 3.93 | % | 10 | |||||||||||
Durango, CO | 15,000 | 5 | 4,275 | 1034 | 5,314 | 0.03 | % | 28.50 | % | 10 | |||||||||
Pagosa Springs, CO | 2,800 | 357 | 357 | 0.00 | % | 12.75 | % | 10 | |||||||||||
Grants Pass, OR | 29,000 | 2,830 | 2,830 | 0.00 | % | 9.76 | % | 10 | |||||||||||
Telluride, CO | 2,200 | 28 | 28 | 0.00 | % | 1.28 | % | 10 | |||||||||||
Klamath Falls, OR | 24,000 | 757 | 70 | 827 | 0.00 | % | 3.15 | % | 5 | ||||||||||
Totals | 633,100 | 1,642 | 28,604 | 2,869 | 33,115 | 0.26 | % | 4.52 | % |
(1)
|
Includes service to
900 dormitory rooms pursuant to a contract between our
subsidiary, Internet On-Ramp, Inc., Eastern Washington
University and Davis Communications, Inc., which is
the subject of litigation. For a description of the
litigation, see Legal ProceedingsDavis
Litigation.
|
(2)
|
Customer counts
include customers for which we authenticate access for
other Internet service provider customers for a
monthly fee per customer.
|
(3)
|
Other customers
include leased line, web and domain hosting revenues.
|
While we intend to
maintain a local presence in the nineteen communities
which we service, we are grouping 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 ads 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 Channel
s 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 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 in a narrowband environment, whereas the
local cable TV network is highly reliable in a broadband
environment. 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 for the
upstream data path (to the Internet) and the coaxial
cable TV plant for the downstream data path (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. Upstream data is moved
via telephone modems at up to 33.6Kbps or via a frame
relay connection at up to 128Kbps. 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 are the first to commercialize this
technology, which was launched in Ventura, California in
March 1997. PeRKInet® technology works as follows:
1. A subscribers computer is
connected via Ethernet to a cable modem. The cable
modem usually has three connections:
|
|
a coaxial connection
which accepts downstream transmissions from the cable
system or wireless cable signal,
|
|
a twisted pair
Ethernet connection that connects to the subscriber
s computer, and
|
|
a serial connection to
a modem provided by us that uses a standard telephone
line for upstream communication.
|
2. Upstream transmissions from the
subscriber may travel via any of several telephone
technologies directly to us and out through our leased
line connections to the Internet.
|
3. Information returning from the Internet
is bridged to the cable system at our local facility
and then travels directly to the subscribers
computer. A Head End Router (HER) unit bridges
downstream Internet protocol (IP) traffic onto a 64
Quadrature Amplitude Modulation (QAM) modulated signal
at the 44 MHz intermediate radio frequency (RF). The
modulated signal carrying the downstream content
travels via fiber, a studio transmitter link or other
suitable alternative from our facility to the cable
distribution head end, where it is converted via a
standard cable system hardware (i.e., General
Instruments C6U upconverter or equivalent) to the
allocated channel, and then travels directly to the
subscriber.
|
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, 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
In June 1999, we
expanded our efforts to provide PeRKInet® access via
local cable systems by filing a Petition for Declaratory
Ruling with the FCC that would, if it receives favorable
action, enhance our ability to compete in the broadband
Internet arena and provide PeRKInet® service to
customers in each of our target markets. This request
relates to Section 612 of the Communications Act.
The Communications
Act sets forth the purpose of leased access, to promote
competition in the delivery of video programming and to
assure that a variety of information sources are made
available to the public from cable systems. The
Communications Act notes a cable operator shall
designate channel capacity for commercial use by persons
unaffiliated with the operator. The section then
indicates the number of channels that must be provided
by system operators, and the procedure for requests and
fulfillment. The FCC has defined the formula by which
cable systems are to be paid for leased access channels.
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,
cable has 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. We feel that the attainment of leased
access is important because it will provide consumers
the access to the bandwidth necessary for the next
generation of Internet content and navigation. 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. We have no
assurance that the FCC will rule in favor of our
interpretation of the law.
Government Regulation
We provide Internet
services, in part, by means of data transmissions over
public telephone lines. These transmissions are governed
by regulatory policies establishing charges, terms and
conditions for wire line communications. We, as an
Internet access provider, are not currently subject to
direct regulation by the FCC or any other governmental
agency, other than the type and scope of regulation
applicable to businesses generally. In April 1998, the
FCC reaffirmed that Internet access providers should be
classified as unregulated information service
providers rather than regulated
telecommunications providers under the terms of
the Federal Telecommunications Act. As a result, we are
not currently subject to federal regulations applicable
to telephone companies and similar carriers merely
because we provide our services using telecommunications
services provided by third-party carriers. To date, no
state has attempted to exercise economic regulations
over Internet access providers.
However, 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 telecommunication service
subject to common carrier regulation. This ruling, if
made, would create substantial barriers to entry for
companies seeking to provide telephone-dependent
Internet services. The FCC has requested comments on
this petition, but has not set a deadline for issuing a
final decision. 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.
The
Telecommunications Act contains provisions that lift, or
establish procedures for lifting, certain restrictions
relating to the regional Bell operating companys
ability 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. In addition,
the Telecommunications Act allows the regional
Bell operating companies to provide electronic
publishing of information and databases. Competition
from these companies could have an adverse effect on our
business.
Furthermore, in
August 1998, the FCC proposed that if an incumbent
regional Bell operating company establishes a separate
affiliate to offer advanced telecommunications services,
such as those offered by us, and if that affiliate uses
the network on the same terms and conditions as offered
to the incumbent competitors, then the affiliate would
not be subject to certain obligations in the
Telecommunications Act that apply to incumbent regional
Bell operating companies. Rather, the affiliate would be
treated as a competitive carrier. If the FCC ultimately
adopts this or any similar proposal, we would likely
face increased competition from incumbent regional Bell
operating company affiliates and our access to providers
of broadband data technology could be curtailed.
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. Based upon recent
comments by the plaintiffs, it is anticipated that the
plaintiffs will file a demand for arbitration and that
we will become a party to the arbitration.
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.
We believe that the
allegations likely to be the subject of arbitration are
without merit. Further, we believe that we have a strong
defense to an arbitration based upon the statute of
limitations. However, if we lose we may be compelled to
return control of the Internet On-Ramp subsidiary to the
former owners.
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® broadband 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 have until November 6,
1999 to respond to the Ohio Division of Securities and
we intend to work with the Ohio Division of Securities
to bring a mutually acceptable conclusion to this
inquiry. This inquiry could result in a rescission offer
by us to the six people in Ohio who purchased in our
convertible debenture offering for an aggregate purchase
price of $55,500. This inquiry could delay or postpone
our initial registered public offering.
Employees
As of June 30, 1999,
we employed a total of 97 employees, of whom:
|
15 were in management
|
|
16 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 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.
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)
|
These options were
issued pursuant to our Executive Stock Incentive Plan
and were immediately exercisable.
|
(2)
|
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)
|
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 September 15, 1999, by:
|
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 September
15, 1999.
Name |
Beneficial Ownership of Common Stock
Prior to this Offering |
||||
---|---|---|---|---|---|
Number |
Percent |
||||
Donald A. Janke | 2,027,224 | (2) | 26.2% | ||
Daniel R. DiMicco | 79,424 | (3) | 1.0% | ||
Alfred M. Leopold(1) | 17,783 | (4) | 0.2% | ||
Marshall F. Sparks | 318,600 | (5) | 4.1% | ||
All
directors and executive officers
as a group (7 persons) |
2,742,088 | (6) | 34.3% |
(1)
|
Mr. Leopold did not
become a director of our company until September 27,
1999, however, his beneficial ownership information is
given as of September 15, 1999.
|
(2)
|
Includes 605,210
shares held by Mr. Jankes wife, Gabrielle Janke;
200,000 shares held by Mr. Jankes daughter,
Saskia Janke; and 94,000 shares of common stock
underlying currently exercisable options or options
exercisable within 60 days.
|
(3)
|
Includes 12,500 shares
of common stock underlying currently exercisable
options or options exercisable within 60 days.
|
(4)
|
Includes 1,748 shares
held jointly with Mr. Leopolds wife, Diane
Leopold; 1,417 shares held by his mother, Virginia
Leopold; 1,380 shares held by his brother, Joseph
Leopold; 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 nephew
s wife, Nathan and Vicki Leopold; and 11,571
shares underlying currently exercisable options or
options exercisable within 60 days. In addition,
subsequent to September 15, 1999, Mr. Leopold acquired
beneficial ownership of 25,557 shares, of which 7,273
shares are held jointly by Mr. Leopold and his wife
Diane; 727 shares were purchased through Mr. Leopold
s IRA; 727 shares were purchased through Mrs.
Leopolds IRA; 10,000 shares were purchased by
his brother, Joseph Leopold; 1,000 shares were
purchased by his brother and sister-in-law, Arthur and
Susan Leopold; 4,730 shares were purchased by John and
Virginia Leopold, his parents; and 1,100 shares were
purchased by Mark Leopold, his brother. See
Legal Proceedings and Certain Transactions.
|
(5)
|
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.
|
(6)
|
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 September 15, 1999, there were 7,644,038
shares of common stock outstanding, held of record by
approximately 1,200 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 Proceedings
Internet 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
8,144,038 shares of common stock outstanding if all
500,000 shares are sold. The 500,000 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 sold 909,090 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 6,683,448 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
September 15, 1999, we have outstanding:
|
warrants to purchase
199,330 shares of common stock which are exercisable,
|
|
options to purchase
1,107,471 shares of common stock, of which options to
purchase 899,413 shares of common stock are
exercisable,
|
|
debentures convertible
into 125,579 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 by our officers or
by registered brokers on a best efforts basis. 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 purchaser
s 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 purchaser
s 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 us in our discretion. Closings will be
held at our main office from time to time as soon as
practicable after the receipt by us of funds and
acceptable subscription agreements. At each closing, we
will deliver to purchasers whose subscription agreements
and funds we accept 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.
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 will be determined
by us in good faith. Among the factors to be considered
in determining the public offering price will be:
|
the history and
prospects of our business and the industry in which 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, 1999 and 1998, and unaudited Three Months Ended June 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 | ||||
Consolidated Financial Statements of Internet
Ventures, Inc.
Years Ended March 31, 1998 and 1997: |
|||||
Independent Auditors Report | F-17 | ||||
Consolidated Balance Sheets | F-18 | ||||
Consolidated Statements of Operations | F-19 | ||||
Consolidated Statement of Stockholders Equity (Deficit) | F-20 | ||||
Consolidated Statements of Cash Flows | F-21 | ||||
Notes to Consolidated Financial Statements | F-22 |
Board of Directors
Internet Ventures, Inc.
and Subsidiaries
Orange, California
We have audited the
accompanying consolidated balance sheets of Internet
Ventures, Inc. and Subsidiaries (the Company) as of
March 31, 1999 and 1998, and the related statements of
operations, stockholders equity (deficit) and cash
flows for the years then ended. 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,
1999 and 1998 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 $1,819,604 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
ASSETS |
June 30,
1999 |
March 31,
1999 |
March 31,
1998 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | |||||||||||||||||||
Current assets: | |||||||||||||||||||
Cash | $ 737,632 | $ 207,590 | $ 161,564 | ||||||||||||||||
Accounts receivable, net of allowance for bad debts Of
$120,171, $122,243 and $90,327, respectively |
179,707 | 140,087 | 79,902 | ||||||||||||||||
Modem inventory | | | 596,215 | ||||||||||||||||
Note receivable, officer-stockholder | 25,000 | 25,000 | | ||||||||||||||||
Deferred interest | 182,136 | 142,106 | | ||||||||||||||||
Other current assets | 58,721 | 35,497 | 40,107 | ||||||||||||||||
Total current assets | 1,183,196 | 550,280 | 877,788 | ||||||||||||||||
Property and equipment, net of accumulated
depreciation of
$739,492, $633,892 and $296,107, respectively |
1,421,405 | 1,478,099 | 898,175 | ||||||||||||||||
Goodwill, net of accumulated amortization of
$1,318,553,
$1,073,378 and $502,558, respectively |
1,624,729 | 1,869,904 | 1,136,978 | ||||||||||||||||
$4,229,330 | $3,898,283 | $2,912,941 | |||||||||||||||||
LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) |
|||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Accounts payable | $ 676,958 | $ 668,182 | $ 823,568 | ||||||||||||||||
Accrued expenses | 476,714 | 570,457 | 507,189 | ||||||||||||||||
Equipment financing by vendor | | 147,195 | 770,296 | ||||||||||||||||
Current maturities of notes payable | 703,884 | 762,761 | 745,959 | ||||||||||||||||
Current maturities of capital lease obligations | 44,289 | 44,289 | | ||||||||||||||||
Preferred stock redemption obligation | 161,476 | 177,000 | 177,000 | ||||||||||||||||
Total current liabilities | 2,063,321 | 2,369,884 | 3,024,012 | ||||||||||||||||
Notes payable, less current maturities | 176,705 | 250,455 | 31,337 | ||||||||||||||||
Capital lease obligations, less current maturities | 16,582 | 19,581 | | ||||||||||||||||
Debentures payable | 495,533 | 354,125 | | ||||||||||||||||
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,
7,081,254, 6,662,112 and 5,630,954 issued and outstanding |
70,812 | 66,621 | 56,310 | ||||||||||||||||
Additional paid-in capital | 9,759,898 | 8,306,837 | 4,069,020 | ||||||||||||||||
Accumulated deficit | (8,353,521 | ) | (7,469,220 | ) | (4,267,738 | ) | |||||||||||||
Total stockholders equity (deficit) | 1,477,189 | 904,238 | (142,408 | ) | |||||||||||||||
$4,229,330 | $3,898,283 | $2,912,941 | |||||||||||||||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
Three months
ended June 30, 1999 |
Three months
ended June 30, 1998 |
Year ended
March 31, 1999 |
Year ended
March 31, 1998 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(unaudited) | (unaudited) | |||||||||||
Revenues: | ||||||||||||
Recurring revenues | $1,489,433 | $ 877,661 | $4,245,461 | $2,437,982 | ||||||||
System/consulting revenues | 31,796 | 91,953 | 124,488 | 316,781 | ||||||||
Total revenues | 1,521,229 | 969,614 | 4,369,949 | 2,754,763 | ||||||||
Cost of revenues | 1,326,665 | 931,770 | 4,252,049 | 3,303,796 | ||||||||
Expenses: | ||||||||||||
Selling, general and administrative | 684,674 | 248,684 | 1,978,872 | 1,769,322 | ||||||||
Depreciation | 105,600 | 68,840 | 337,785 | 225,727 | ||||||||
Amortization of goodwill | 245,175 | 136,573 | 801,576 | 324,922 | ||||||||
Interest, net | 43,416 | 32,111 | 201,149 | 33,476 | ||||||||
Total expenses | 1,078,865 | 486,208 | 3,319,382 | 2,353,447 | ||||||||
Net loss | $ (884,301 | ) | $(448,364 | ) | $(3,201,482 | ) | $(2,902,480 | ) | ||||
Net loss per share basic and diluted | $ (.12 | ) | $ (.08 | ) | $ (.51 | ) | $ (.54 | ) | ||||
Weighted average shares outstanding | 7,081,254 | 5,780,912 | 6,268,217 | 5,311,624 | ||||||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
Years Ended March 31,
1999 and 1998
Preferred Stock |
Common Stock |
Additional
paid-in capital |
Accumulated
deficit |
Total |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Shares |
Amount |
||||||||||||||||
Balance at March 31,
1997, restated due to 100% stock dividend on July 15, 1998 |
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 | (161,600 | ) | (1,616 | ) | 14,160 | 142 | (191,676 | ) | (193,150 | ) | |||||||||
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
$472,782 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 and upon
conversion of debentures, net of $283,708 costs |
397,384 | 3,974 | 1,004,774 | 1,008,748 | |||||||||||||||
Net
loss for the year ended
March 31, 1999 |
(3,201,482 | ) | (3,201,482 | ) | |||||||||||||||
Balance at March 31,
1999 |
| | 6,662,112 | 66,621 | 8,306,837 | (7,469,220 | ) | 904,238 | |||||||||||
Stock
issued in kind as
interest on debentures |
15,515 | 155 | 116,842 | 116,997 | |||||||||||||||
Stock
issued with and upon
conversion of debentures, net of $142,096 costs |
403,627 | 4,036 | 1,336,219 | 1,340,255 | |||||||||||||||
Net
loss for the three
months ended June 30, 1999 (unaudited) |
(884,301 | ) | (884,301 | ) | |||||||||||||||
Balance at June 30, 1999
(unaudited) |
| $ | 7,081,254 | $70,812 | $9,759,898 | $(8,353,521 | ) | $1,477,189 | |||||||||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS
Three months ended
June 30, |
Year ended
March 31, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
1999 |
1998 |
1999 |
1998 |
|||||||||
(unaudited) | (unaudited) | |||||||||||
Cash flows provided by (used for) operating
activities: |
||||||||||||
Net loss | $ (884,301 | ) | $ (448,364 | ) | $(3,201,482 | ) | $(2,902,480 | ) | ||||
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities: |
||||||||||||
Depreciation | 92,949 | 68,241 | 337,785 | 225,727 | ||||||||
Amortization of goodwill | 245,175 | 136,573 | 570,820 | 324,922 | ||||||||
Securities issued for services | 6,877 | 220,923 | 220,924 | 521,066 | ||||||||
Interest paid with stock | 76,967 | | 46,830 | | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (39,620 | ) | (20,989 | ) | (60,185 | ) | (63,980 | ) | ||||
Inventory | | | | 36,155 | ||||||||
Deferred interest | (116,997 | ) | | | | |||||||
Other current assets | 8,195 | (23,224 | ) | 4,710 | (6,942 | ) | ||||||
Accounts payable | 8,776 | (452,721 | ) | (155,386 | ) | 477,023 | ||||||
Accrued expenses | (240,937 | ) | (163,271 | ) | 13,338 | 365,870 | ||||||
Equipment financing | | | (49,831 | ) | (57,279 | ) | ||||||
Total adjustments | 41,385 | (234,468 | ) | 929,005 | 1,822,562 | |||||||
Net cash used for operating activities | (842,916 | ) | (682,832 | ) | (2,272,477 | ) | (1,079,918 | ) | ||||
Cash flows used for investing activities: | ||||||||||||
Purchases of equipment | (36,254 | ) | (25,519 | ) | (894,765 | ) | (305,725 | ) | ||||
Acquisition of goodwill | | | (230,756 | ) | (410,000 | ) | ||||||
Other assets | (31,419 | ) | | | | |||||||
Issuance of note receivable, officer-stockholder | | | (25,000 | ) | | |||||||
Net cash used for investing activities | (67,673 | ) | (25,519 | ) | (1,150,521 | ) | (715,725 | ) | ||||
Cash flows provided by (used for) financing
activities: |
||||||||||||
Issuance of common stock | 1,450,374 | 1,550,305 | 3,585,918 | 1,312,625 | ||||||||
Issuance of debentures | 141,408 | | 354,125 | | ||||||||
Proceeds from notes payable | | | 211,666 | 635,612 | ||||||||
Payments on notes payable | (135,627 | ) | (284,367 | ) | (682,685 | ) | | |||||
Redemption of preferred stock | (15,524 | ) | | | (16,150 | ) | ||||||
Net cash provided by financing activities | 1,440,631 | 1,265,938 | 3,469,024 | 1,932,087 | ||||||||
Net increase in cash | 530,042 | 557,587 | 46,026 | 136,444 | ||||||||
Cash, beginning of year | 207,590 | 161,564 | 161,564 | 25,120 | ||||||||
Cash, end of year and/or period | $ 737,632 | $ 719,151 | $ 207,590 | $ 161,564 | ||||||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS
Three months ended
June 30, |
Year ended
March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
1999
|
1998
|
1999
|
1998
|
|||||
(unaudited) | (unaudited) | |||||||
Supplemental disclosures of noncash transactions: | ||||||||
Stock issued for net asset acquisitions | $ 83,971 | $ | $ | $107,450 | ||||
Stock issued for goodwill | $201,332 | $ | $252,350 | $448,291 | ||||
Notes issued for goodwill | $ | $ | $820,640 | $ | ||||
Stock issued for deferred interest | $ | $ | $142,106 | $ | ||||
Preferred stock redemption liability | $ | $ | $ | $177,000 | ||||
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,
1999 and 1998
(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 (ISP
s) 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 ISP
s 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 Company
s 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.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
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
Companys customer base, which is located
throughout the Western United States.
Revenue Recognition:
|
The Company
recognizes revenues when 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 are 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.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
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.
The Company
continually evaluates whether events and circumstances
have occurred subsequent to its acquisitions that would
indicate that the remaining useful life of goodwill may
warrant revision.
If factors indicate
that goodwill should be re-evaluated due to impairment,
the Company will use an estimate of the acquired business
s discounted future cash flows over the remaining
life of the goodwill in measuring whether the goodwill
is recoverable.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
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 June 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 three months ended June 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 Company
s 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 August 31,
1999.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
(5) Notes Payable:
A summary is as
follows:
1999
|
1998
|
||||||||
---|---|---|---|---|---|---|---|---|---|
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 is being renegotiated |
$ 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 |
192,576 | 119,007 | |||||||
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 | |||||||
1,013,216 | 777,296 | ||||||||
Less current maturities | 762,761 | 745,959 | |||||||
$ 250,455 | $ 31,337 | ||||||||
The scheduled
repayments of the notes balance at March 31, 1999 is as
follows:
Year ending March 31, | ||
2000 | $ 762,761 | |
2001 | 216,561 | |
2002 | 25,727 | |
2003 | 8,167 | |
$1,013,216 | ||
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
(6) 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 | ||
(7) 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.
Shareholders
representing 141,600 shares (see Note 9) have refused
the redemption and the conversion and have made certain
claims for value. The Company has recorded the
redemption liability of $177,000 for the years ended
March 31, 1998 and 1999
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 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. 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 422,800 shares of
common stock as of March 31, 1999. The unconverted
debenture balance at March 31, 1999 was $354,125. The
offering is still in process as of June 30, 1999.
(8) 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
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
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.
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 | ) | 369,000 | $ .25 .75 | $0.43 | |||||||
Forfeitures | 32,000 | (32,000 | ) | $ .25 .75 | $0.39 | |||||||
Balance March 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 | |||||||
Balance March 31, 1997 | 786,910 | 572,400 | $ .251.75 | $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 | |||||||
Balance March 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 | |||||||
Balance March 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.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1999 and 1998
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:
1999 |
1998 |
|||||
---|---|---|---|---|---|---|
Net loss, as reported | $(3,201,482 | ) | $(2,902,480 | ) | ||
Net loss, proforma | (3,696,119 | ) | (2,942,257 | ) | ||
Losses per share, as reported | (.51 | ) | (.54 | ) | ||
Losses per share, proforma | (.59 | ) | (.54 | ) |
(9) Acquisitions:
From inception
through March 31, 1999, the Company has acquired nine
operating internet access service providers (ISP
s), 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 Integrated 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:
Company |
Business |
Acquisition
date* |
Shares
Issued |
Share
Value |
Goodwill
Recorded |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Internet On Ramp, Inc. | ISP | Nov 1995 | **141,600 | $177,000 | $142,644 | |||||
CWWS Stockton, Inc. | ISP | Nov 1995 | **20,000 | 25,000 | 141,133 | |||||
Northcoast Internet | ISP | May 1996 | 343,706 | 257,780 | 271,496 | |||||
Optimal Systems, Inc. | Consulting | May 1996 | 201,334 | 151,001 | 140,733 | |||||
ITI2 Inc | ISP | Aug 1996 | 72,000 | 90,000 | 59,569 | |||||
Western Internet, Inc. | ISP | Feb 1997 | 72,000 | 126,000 | 133,346 | |||||
Computer Link, Inc. | Publication | May 1997 | 46,934 | 105,602 | 104,665 | |||||
Tidepool Internet | ISP | July 1997 | 20,658 | 46,480 | 69,315 | |||||
Infostructure, Inc. | ISP | Jan 1998 | 39,090 | 214,995 | 576,635 | |||||
Frontier Internet | ISP | Sept 1998 | 28,900 | 159,000 | 791,113 | |||||
Budget Internet | ISP | Sept 1998 | | | 496,699 |
*date from which subsidiary results of
operations are included in the financial statements.
|
**denotes preferred stock (see Note 7).
|
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Concluded)
Years Ended March 31,
1999 and 1998
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 1998, 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, |
||||||
---|---|---|---|---|---|---|
1999 |
1998 |
|||||
Revenues | $ 4,927,489 | $ 3,745,152 | ||||
Net loss | (3,232,257 | ) | (2,895,846 | ) | ||
Net loss per share | (.51 | ) | (.54 | ) |
(10) 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 | |
2003 | 32,053 | |
2004 | 950 | |
$580,444 | ||
(11) Contingencies:
The Company is
involved in 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.
See accompanying
independent auditors report.
Board of Directors
Internet Ventures, Inc.
and Subsidiaries
Orange, California
We have audited the
accompanying balance sheets of Internet Ventures, Inc.
and Subsidiaries (the Company) as of March 31, 1998 and
1997, and the related statements of operations,
stockholders equity (deficit) and cash flows for
the years then ended. 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,
1998 and 1997 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, 1998, current liabilities exceeded current
assets by $2,146,224 and there was a deficiency in net
assets of $142,408. 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
March 24, 1999
INTERNET VENTURES,
INC. AND SUBSIDIARIES
ASSETS |
March 31,
1998 |
March 31,
1997 |
||||
---|---|---|---|---|---|---|
Current assets: | ||||||
Cash | $ 161,564 | $ 25,120 | ||||
Accounts receivable, net of allowance for bad debts of
$90,327 and $44,171,
respectively |
79,902 | 15,922 | ||||
Modem inventory | 596,215 | 632,370 | ||||
Other current assets | 40,107 | 33,165 | ||||
Total current assets | 877,788 | 706,577 | ||||
Property and equipment, net of accumulated
depreciation of $296,107 and
$70,380, respectively |
898,175 | 710,727 | ||||
Goodwill, net of accumulated amortization of
$502,558 and $177,636,
respectively |
1,136,978 | 603,609 | ||||
$ 2,912,941 | $ 2,020,913 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
||||||
Current liabilities: | ||||||
Accounts payable | $ 823,568 | $ 346,545 | ||||
Accrued expenses | 507,189 | 141,319 | ||||
Equipment financing by vendor | 770,296 | 827,575 | ||||
Current maturities of notes payable | 745,959 | 141,684 | ||||
Preferred stock redemption obligation | 177,000 | | ||||
Total current liabilities | 3,024,012 | 1,457,123 | ||||
Notes payable, less current maturities | 31,337 | | ||||
Total liabilities | 3,055,349 | 1,457,123 | ||||
Stockholders equity (deficit): | ||||||
Preferred Stock$.01 par value, 10,000,000 shares
authorized, none and
161,600 issued and outstanding, respectively |
| 1,616 | ||||
Common Stock$.01 par value, 30,000,000 shares
authorized, 5,630,954 and
4,641,182 issued and outstanding |
56,310 | 46,410 | ||||
Additional paid in capital | 4,069,020 | 1,881,022 | ||||
Accumulated deficit | (4,267,738 | ) | (1,365,258 | ) | ||
Total stockholders equity (deficit) | (142,408 | ) | 563,790 | |||
$ 2,912,941 | $ 2,020,913 | |||||
See accompanying notes
to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF OPERATIONS
Year ended
March 31, 1998 |
Year ended
March 31, 1997 |
|||||
---|---|---|---|---|---|---|
Revenues: | ||||||
Recurring revenues | $2,437,982 | $1,106,484 | ||||
System/consulting revenues | 316,781 | 226,743 | ||||
Other revenues | | 31,468 | ||||
Total revenues | 2,754,763 | 1,364,695 | ||||
Cost of revenues | 3,303,796 | 1,764,971 | ||||
Expenses: | ||||||
Selling, general and administrative | 1,769,322 | 636,084 | ||||
Depreciation | 225,727 | 68,099 | ||||
Amortization of goodwill | 324,922 | 165,161 | ||||
Interest, net | 33,476 | | ||||
Total expenses | 2,353,447 | 869,344 | ||||
Net loss | $(2,902,480 | ) | $(1,269,620 | ) | ||
Net loss per share basic and diluted | $ (.52 | ) | $ (.27 | ) | ||
Weighted average shares outstanding | 5,311,624 | 3,968,277 | ||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
Years Ended March 31,
1998 and 1997
Preferred Stock |
Common Stock |
Additional
Paid-in capital |
Accumulated
deficit |
Total |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Shares |
Amount |
Shares |
Amount |
||||||||||||||||
Balance at March 31,
1996, 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 | ||||||||||||||||
Stock issued for services | 270,680 | 2,706 | 319,271 | ||||||||||||||||
Stock
issued for cash, net
of $64,723 costs |
419,438 | 4,194 | 570,748 | ||||||||||||||||
Net
loss for the year ended
March 31, 1997 |
(1,269,620 | ) | |||||||||||||||||
Balance at March 31,
1997, restated due to 2:1 stock split on July 15, 1998 |
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 | ||||||||||||||||
Stock issued for services | 182,078 | 1,820 | 519,246 | ||||||||||||||||
Stock
issued for cash, net
of $327,164 costs |
591,032 | 5,912 | 1,306,713 | ||||||||||||||||
Redemption of preferred | (161,600 | ) | (1,616 | ) | 14,160 | 142 | (191,676 | ) | |||||||||||
Net
loss for the year ended
March 31, 1998 |
(2,902,480 | ) | |||||||||||||||||
Balance at March 31,
1998, restated due to 2:1 stock split on July 15, 1998 |
| $ | 5,630,954 | $56,310 | $4,069,020 | $(4,267,738 | ) | $(142,408 | ) | ||||||||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS
Year ended
March 31, 1998 |
Year ended
March 31, 1997 |
|||||
---|---|---|---|---|---|---|
Cash flows provided by (used for) operating activities: | ||||||
Net loss | $(2,902,480 | ) | $(1,269,620 | ) | ||
Adjustments to reconcile net loss to net cash provided
by (used for)
operating activities: |
||||||
Depreciation | 225,727 | 68,099 | ||||
Amortization of goodwill | 324,922 | 165,161 | ||||
Securities issued for services | 521,066 | 321,977 | ||||
Changes in operating assets and liabilities: | ||||||
Accounts receivable | (63,980 | ) | 12,372 | |||
Inventory | 36,155 | | ||||
Other current assets | (6,942 | ) | (17,814 | ) | ||
Accounts payable | 477,023 | 265,213 | ||||
Accrued expenses | 365,870 | 120,222 | ||||
Equipment financing | (57,279 | ) | | |||
Total adjustments | 1,822,562 | 935,230 | ||||
Net cash used for operating activities | (1,079,918 | ) | (334,390 | ) | ||
Cash flows provided by (used for) investing activities: | ||||||
Purchases of equipment | (305,725 | ) | (351,881 | ) | ||
Acquisition of goodwill | (410,000 | ) | (10,000 | ) | ||
Other assets | | 70,780 | ||||
Net cash used for investing activities | (715,725 | ) | (291,101 | ) | ||
Cash flows provided by (used for) financing activities: | ||||||
Issuance of common stock | 1,312,625 | 574,942 | ||||
Proceeds from notes payable | 635,612 | 55,081 | ||||
Redemption of preferred stock | (16,150 | ) | | |||
Net cash provided by financing activities | 1,932,087 | 630,023 | ||||
Net increase in cash | 136,444 | 4,532 | ||||
Cash, beginning of year | 25,120 | 20,588 | ||||
Cash, end of year | $ 161,564 | $ 25,120 | ||||
Supplemental disclosures of noncash transactions: | ||||||
Stock issued for net asset acquisitions | $ 107,450 | $ 115,112 | ||||
Stock issued for Goodwill | $ 448,291 | $ 601,461 | ||||
Seller financed equipment contract | $ | $ 827,575 | ||||
Preferred stock redemption liability | $ 177,000 | $ | ||||
See accompanying notes
to consolidated financial statements.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
Years Ended March 31,
1998 and 1997
(1) Organization and
Basis of Presentation:
The Company was
formed in September 1995 to acquire selected traditional
local and regional Internet access Service Providers (ISP
s) in order to achieve economies of operation and
accelerated growth through centralized management. Since
inception, the Company has acquired seven operating ISP
s, a systems integration company, an internet
publications company and five asset acquisitions of
subscribers and equipment of marginal ISPs in its
market areas. All acquisitions have been accounted for
as purchases.
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. Other revenues of ISPs consist of web
design and hosting and consulting services. Revenues of
the consulting and publications subsidiaries are project
term limited. The 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 Company
s 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.
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
Companys customer base, which is located
throughout the Western United States.
Revenue Recognition:
|
The Company
recognizes revenues when earned in the period in which
the service is provided. Prepayments are deferred until
recognized. Installation fees are recognized when the
installation is complete.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1998 and 1997
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,
1998, the Company had net federal and state operating
loss carryforwards totaling approximately $4,268,000
that expire in various years through 2013. Deferred tax
assets resulting from the net operating loss
carryforwards are reduced in full by a valuation
allowance.
Modem Inventory:
|
The inventory is
comprised of cable modems purchased under a contract
with a PeRKInet® equipment supplier. These modems
are to be sold or rented to subscribers as their PeRKInet
® sites are installed. The inventory is 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).
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.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1998 and 1997
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 and weighted average calculations because they
are anti-dilutive.
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 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.
The Company
continually evaluates whether events and circumstances
have occurred subsequent to its acquisitions that would
indicate that the remaining useful life of goodwill may
warrant revision.
If factors indicate
that goodwill should be re-evaluated due to impairment,
the Company will use an estimate of the acquired business
s discounted future cash flows over the remaining
life of the goodwill in measuring whether the goodwill
is recoverable.
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).
(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 Company
s projections. A deferred payment
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1998 and 1997
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
September 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
beginning in October 1998.
(4) Notes Payable:
A summary is as
follows:
1998
|
1997
|
||||||||
---|---|---|---|---|---|---|---|---|---|
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 (5) of subsidiary operations,
interest from 0% to 18%,
partially secured by various assets of the Company, due in various installments through May 2002 |
119,007 | 46,196 | |||||||
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 | 30,000 | |||||||
8%
note payable to a shareholder of the Company, secured
by certain
equipment, due September 1997 |
25,000 | 40,000 | |||||||
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 | 25,488 | |||||||
777,296 | 141,684 | ||||||||
Less current maturities | 745,959 | | |||||||
$ 31,337 | $141,684 | ||||||||
(5) 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.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1998 and 1997
Shareholders
representing 141,600 shares (see Note 7) have refused
the redemption and the conversion and have made certain
claims for value. The Company has recorded the
redemption liability of $177,000 for the year ended
March 31, 1998.
(6) 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 200,000 shares
for issuance under each of the plans for an aggregate of
600,000 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, 1998, stock options have
been granted under the plans, net of forfeitures, for an
aggregate of 325,700 shares at exercise prices from $.50
to $5.00. Options representing 285,700 shares have
become vested and are exercisable. No options have been
exercised as of March 31, 1998.
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 | 600,000 | |||||||||
Granted | -184,800 | 184,800 | $ .501.50 | $0.87 | ||||||
Forfeitures | 16,000 | -16,000 | $ .501.25 | $0.78 | ||||||
Balance March 31, 1996 | 431,200 | 168,800 | $ .501.50 | $0.87 | 5.99 | |||||
Accretion | 79,655 | |||||||||
Granted | -127,400 | 127,400 | $1.50 3.50 | $2.01 | ||||||
Forfeitures | 10,000 | -10,000 | $1.50 1.50 | $1.50 | ||||||
Balance March 31, 1997 | 393,455 | 286,200 | $ .503.50 | $1.41 | 5.40 | |||||
Accretion | 100,930 | |||||||||
Granted | -53,000 | 53,000 | $4.50 5.00 | $4.78 | ||||||
Forfeitures | 13,500 | -13,500 | $1.50 4.50 | $3.50 | ||||||
Balance March 31, 1998 | 454,885 | 325,700 | $ .505.00 | $1.93 | 3.17 | |||||
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.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Years Ended March 31,
1998 and 1997
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 3.17 years to
5.99 years.
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:
1998 |
1997 |
|||||
---|---|---|---|---|---|---|
Net loss, as reported | $(2,902,480 | ) | $(1,269,620 | ) | ||
Net loss, proforma | (2,942,257 | ) | (1,344,187 | ) | ||
Losses per share, as reported | (.52 | ) | (.27 | ) | ||
Losses per share, proforma | (.52 | ) | (.29 | ) |
See Note 10 with
respect to subsequent stock split.
(7) Acquisitions:
From inception
through March 31, 1998, the Company has acquired seven
operating internet access service providers (ISP
s), a systems integration company and an
internet publications company, all of which have been
accounted for under the purchase method of accounting.
Goodwill has been appropriately recorded for each
acquisition (see Note 2).
The following is a
brief description of each transaction:
Company |
Business |
Acquisition
date* |
Shares
Issued |
Share
Value |
Goodwill
Recorded |
|||||
---|---|---|---|---|---|---|---|---|---|---|
Internet On Ramp, Inc. | ISP | Nov 1995 | **141,600 | $177,000 | $142,644 | |||||
CWWS Stockton, Inc. | ISP | Nov 1995 | **20,000 | 25,000 | 141,133 | |||||
Northcoast Internet | ISP | May 1996 | 171,853 | 257,780 | 271,496 | |||||
Optimal Systems, Inc. | Consulting | May 1996 | 100,667 | 151,001 | 140,733 | |||||
ITI2 Inc | ISP | Aug 1996 | 36,000 | 90,000 | 59,569 | |||||
Western Internet, Inc. | ISP | Feb 1997 | 36,000 | 126,000 | 133,346 | |||||
Computer Link, Inc. | Publication | May 1997 | 23,467 | 105,602 | 104,665 | |||||
Tidepool Internet | ISP | July 1997 | 10,329 | 46,480 | 69,315 | |||||
Infostructure, Inc. | ISP | Jan 1998 | 19,545 | 214,995 | 576,635 |
*date from which
subsidiary results of operations are included in the
financial statements
|
**denotes preferred
stock (see Note 5).
|
See Note 10 with
respect to subsequent stock split.
See accompanying
independent auditors report.
INTERNET VENTURES,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Concluded)
Years Ended March 31,
1998 and 1997
(8) 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, 1998:
Year ending March 31, | ||
1999 | $ 62,508 | |
2000 | 42,568 | |
2001 | 17,468 | |
2002 | 9,229 | |
2003 | 6,600 | |
Beyond five years | 40,200 | |
$178,573 | ||
(9) Contingencies:
The Company is
involved in 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.
(10) Subsequent
Events:
Subsequent to March
31, 1998, the Company sold approximately 360,000 shares
of common stock through a direct public offering under
Regulation A of the Securities Act of 1933. The Company
also has granted approximately 260,000 stock options
pursuant to the Stock Incentive Plans (Note 6). All
stock options granted subsequent to March 31, 1998 have
an exercise price of $11.00 per share. Additionally, the
Company has granted 20,000 warrants to certain officers
of the Company which have an exercise price of $11.00
per warrant.
On July 15, 1998
there was a 2:1 stock split with respect to the Company
s common stock.
Effective October 1,
1998, the Company authorized the sale of equity in a
Regulation D, 506 offering comprising 12% convertible
debentures 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. The activity in the offering since the
effective date has resulted in the requirement to issue
405,152 shares of common stock.
See accompanying
independent auditors report.
[INSIDE BACK COVER]
[INTERNET VENTURES INC.
LOGO]
500,000 Shares
Common Stock
$
per share
PROSPECTUS
, 1999
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 | $ 3,058 | |
California registration fee | 2,500 | |
NASD filing fee | 1,600 | |
Legal fees and expenses | 250,000 | |
Accounting fees and expenses | 15,000 | |
Printing | 30,000 | |
Transfer agent fees | 20,000 | |
Miscellaneous | 10,000 | |
Total | $332,158 | |
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 September 15, 1999 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
September 15, 1999, the Registrant granted stock options
to purchase an aggregate of 1,365,471 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 258,000 shares of common stock have
been forfeited and options to purchase 899,413 shares
are exercisable as of September 15, 1999. As of
September 15, 1999, 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 January 27, 1998, the Registrant issued an
aggregate of 323,676 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 $2.25 per share,
resulting in an aggregate value of the services provided
to the Registrant in exchange for the shares of
$547,483. 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
$5,448,685 in aggregate principal amount of Debentures,
together with the 686,980 corresponding shares of common
stock to approximately 432 investors, all except 34 of
which were accredited.
As of September 15, 1999, 602,740 shares were issued upon
conversion of $4,520,550 in principal amount of the
Debentures. In addition, as of September 15, 1999,
58,592 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 Registrant
s 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)(1) |
||||
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 | Cable
Internet Agreement between Internet Ventures, Inc. and
CoxCom, Inc., d/b/a Cox
Communications, dated January 14, 1998* |
||||
10.15 | Letter
of Agreement between Eastern Washington University,
Davis Communications, Inc., and
Optimal Systems Integrators, Inc., dated July 11, 1997* |
||||
10.16 |
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* | ||||
23.1 | Consent of Stonefield Josephson, Inc.* | ||||
23.2 | Consent Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5) | ||||
24 | Power of Attorney (included on signature page) | ||||
27 | Financial Data Schedule* |
* Filed herewith
(1)
|
To be filed by
amendment.
|
(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 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 October 22, 1999.
INTERNET
VENTURES
, INC
.
|
/S
/ DONALD
A. JANKE
|
By:
|
Donald A. Janke
|
Chairman of the
Board and President
|
POWER OF ATTORNEY
Each person whose
signature appears below hereby constitutes and appoints
Donald A. Janke, Marshall
F. Sparks and Christopher Matern, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Registration Statement on Form S-1 (including any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and all amendments thereto) and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
F. Sparks and Christopher Matern, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Registration Statement on Form S-1 (including any registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, and all amendments thereto) and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.
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) |
October 22, 1999 | |||||||
/
S
/ MARSHALL
F. SPARKS
Marshall F. Sparks |
Chief
Financial Officer
(principal financial and accounting officer) and Director |
October 22, 1999 | |||||||
/
S
/ DANIEL
R. DI
MICCO
Daniel R. DiMicco |
Director | October 22, 1999 | |||||||
/
S
/ ALFRED
M. LEOPOLD
Alfred M. Leopold |
Director | October 22, 1999 | |||||||
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)(1) |
||||
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 | Cable
Internet Agreement between Internet Ventures, Inc. and
CoxCom, Inc., d/b/a Cox
Communications, dated January 14, 1998* |
||||
10.15 | Letter
of Agreement between Eastern Washington University,
Davis Communications, Inc.,
and Optimal Systems Integrators, Inc., dated July 11, 1997* |
||||
10.16 |
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* |
Exhibit
Number |
Description |
||||
---|---|---|---|---|---|
23.1 | Consent of Stonefield Josephson, Inc.* | ||||
23.2 | Consent Katten Muchin & Zavis (contained in its opinion filed as Exhibit 5) | ||||
24 | Power of Attorney (included on signature page) | ||||
27 | Financial Data Schedule* |
*Filed herewith
(1)
|
To be filed by
amendment.
|