As filed with the Securities and Exchange Commission on August 7, 2001
Registration No. _____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEXLAND, INC.
(Name of Registrant in Our Charter)
DELAWARE 3570 37-1356503
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification No.)
or Organization)
GREGORY S. LEVINE
1101 BRICKELL AVENUE 1101 BRICKELL AVENUE
NORTH TOWER, SUITE 200 NORTH TOWER, SUITE 200
MIAMI, FLORIDA 33131 MIAMI, FLORIDA 33131
(305) 358-7771 (305) 358-7771
(Address and telephone number (Name, address and telephone
of Principal number of agent for service)
Executive Offices and
Principal Place of Business)
Copies to:
Clayton E. Parker, Esq. Ronald S. Haligman, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 S. Biscayne Boulevard, Suite 2000 201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131 Miami, Florida 33131
(305) 539-3300 (305) 539-3300
Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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
===============================================================================================================
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Amount to be Offering Price Offering Registration
Securities to be Registered Registered Per Share(1) Price(1) Fee
- ---------------------------------------------------------------------------------------------------------------
Common Stock, Par Value $0.0001 Per Share 13,673,814 Shares $0.50 $6,836,907 $1,709.23
- ---------------------------------------------------------------------------------------------------------------
Total 13,673,814 Shares $0.50 $6,836,907 $1,709.23
===============================================================================================================
(1) Estimate solely for the purpose of calculating the registration fee pursuant to rule 457(c) under the
Securities Act of 1933. For the purposes of this table, we have used the average of the closing bid and
asked prices as of August 2,2001.
-----------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to completion, dated August 7, 2001
NEXLAND, INC.
13,673,814 SHARES OF COMMON STOCK
This prospectus relates to the resale of up to 13,673,814 shares of
Nexland's common stock by certain persons who are, or will become, stockholders
of Nexland. Of that total, a single stockholder will resell up to 10,000,000
shares of common stock in this offering that they received pursuant to an Equity
Line of Credit. Nexland is not selling any shares of common stock in this
offering and therefore will not receive any proceeds from this offering. We
will, however, receive proceeds from the sale of common stock under the Equity
Line of Credit. All costs associated with this registration will be borne by
Nexland. We have also agreed to pay Yorkville Advisors, LLC a fee of 8.4% of the
proceeds raised by us under the Equity Line of Credit.
The shares of common stock are being offered for sale on a "best efforts"
basis by the selling stockholders at prices established on the Over-the-Counter
Bulletin Board during the term of this offering. There are no minimum purchase
requirements. These prices will fluctuate based on the demand for the shares of
common stock.
The selling stockholders consist of:
o Cornell Capital Partners, L.P., which intends to resell up to
10,000,000 shares of common stock to be purchased under an Equity
Line of Credit Agreement, dated March 19, 2001.
o Persia Consulting Group, Inc., which intends to resell up to 126,000
shares of common stock.
o I-Medialink, Ltd., which intends to resell up to 15,000 shares of
common stock previously issued in connection with consulting
services provided to our Company.
o Fred R. Schmid and Summit Capital, which intend to resell up to
389,173 shares of common stock previously issued in connection with
the acquisition of Windstar Resources, Inc.
o Brent Nygaard, who intends to resell up to 29,615 shares of common
stock previously issued in connection with the acquisition of
Windstar Resources, Inc. and purchased in a private offering.
o Other selling stockholders, which intend to resell up to 3,114,026
shares of common stock purchased in private offerings.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning of
the Securities Act of 1933 in connection with the resale of common stock under
the Equity Line of Credit Agreement. Cornell Capital Partners, L.P. will pay
Nexland 80% of the market price of Nexland's common stock. The 20% discount on
the purchase of the common stock to be received by Cornell Capital Partners,
L.P. will be an underwriting discount.
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "XLND." On August 2, 2001, the last reported sale price of our common
stock on the Over-the-Counter Bulletin Board was $0.50 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PLEASE
REFER TO "RISK FACTORS" BEGINNING ON PAGE 6.
PRICE TO PUBLIC* PROCEEDS TO SELLING SHAREHOLDERS
Per share $0.50 $6,836,907
----- ----------
TOTAL $0.50 $6,836,907
===== ==========
- -----------------------
* This includes the resale of 10,000,000 shares of common stock by Cornell
Capital Partners, L.P. All proceeds from the resale of these shares will be paid
to the selling stockholders.
Except for Cornell Capital Partners, L.P., which is an underwriter in
connection with the resale of common stock under the Equity Line of Credit, no
other underwriter or any other person has been engaged to facilitate the sale of
shares of common stock in this offering. This offering will terminate 24 months
after the accompanying registration statement is declared effective by the
Securities and Exchange Commission. None of the proceeds from the sale of stock
by the selling stockholders will be placed in escrow, trust or any similar
account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT 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 ______ ___, 2001.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................3
FORWARD-LOOKING STATEMENTS....................................................15
SELLING STOCKHOLDERS..........................................................16
USE OF PROCEEDS...............................................................18
DILUTION......................................................................18
DIVIDEND POLICY...............................................................18
CAPITALIZATION................................................................18
SELECTED CONSOLIDATED FINANCIAL DATA..........................................19
EQUITY LINE OF CREDIT.........................................................20
PLAN OF DISTRIBUTION..........................................................22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...............................................23
DESCRIPTION OF BUSINESS.......................................................28
DESCRIPTION OF PROPERTY.......................................................32
LEGAL PROCEEDINGS.............................................................32
MANAGEMENT....................................................................32
PRINCIPAL SHAREHOLDERS........................................................39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................41
COMPARATIVE STOCK PERFORMANCE.................................................43
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND OTHER SHAREHOLDER MATTERS...........................................44
DESCRIPTION OF SECURITIES.....................................................45
EXPERTS.......................................................................46
LEGAL MATTERS.................................................................46
AVAILABLE INFORMATION.........................................................46
FINANCIAL STATEMENTS.........................................................F-1
- --------------------------------------------------------------------------------
We intend to distribute to our shareholders annual reports containing
audited financial statements. Our audited financial statements for the fiscal
year December 31, 2000 were contained in our Annual Report on Form 10-K.
i
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
OUR COMPANY
We believe that participation in the emerging Internet-based economy and
realization of the benefits and efficiencies facilitated by new Internet-enabled
business applications are becoming increasingly important for the small business
office market, as well as the Internet service providers and telephone companies
which provide Internet service to them. The small business office market
includes small businesses, home offices and remote offices. We believe the
Internet allows these businesses to communicate more effectively with their
suppliers and customers and to access and share critical business information
both internally and externally. Overall, we believe the Internet and the
business applications enabled by the Internet present tremendous opportunities
for businesses to improve communications, collaborate with partners, suppliers
and customers, perform important processes online and realize cost and
operational efficiencies that may position them to compete more effectively with
organizations that have greater resources and market presence.
Worldwide, there is an increasing demand for broadband access services.
The Internet is becoming increasingly popular to consumers for conducting
business and personal pursuits. Consequently, consumers are seeking high-speed,
low-cost solutions that enable them to benefit from advances in data transfer
speed. We believe that many small business offices have addressed their Internet
access problems with either inefficient or costly alternatives.
Our solution to these problems is our Internet Sharing Box (ISB) product
line. All of the ISB products allow multiple users in an office, workplace or
home to simultaneously share the same Internet connection while optimizing each
user's access speed, as well as providing firewall security protection to
prevent any unwanted access to the local network. Our products are designed to
support multiple operating systems such as Windows, Macintosh, UNIX and Linux,
while providing network security during the delivery and receipt of Internet
data packets.
Our products are designed to be compatible with traditional telephone and
data connections that operate at slow speeds, as well as high-speed
technologies, including integrated services digital networks, digital subscriber
lines and cable modems. In addition, our products extend the benefits of analog
technology by enabling multiple users to access the Internet simultaneously
through regular telephone lines and analog modems at up to 30 times the access
speed of a single analog connection. Our products offer the following key
benefits:
o Efficient shared Internet access for an entire office;
o Ease of installation and use;
o High-speed access;
o Low cost of ownership;
o Expandability and compatibility;
o Firewall protection; and
o Virtual private networks.
We primarily market and sell our products through North American-based
Internet service providers, value-added resellers and telephone companies.
ABOUT US
Our principal office is located at 1101 Brickell Avenue, North Tower,
Suite 200, Miami, Florida 33131. Our telephone number is (305) 358-7771. For a
copy of this prospectus, please contact us at the above address and telephone
number.
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE OFFERING
This offering relates to the resale of common stock by certain persons who
are, or will become, stockholders of our Company. The selling stockholders
consist of:
o Cornell Capital Partners, L.P., which intends to resell up to
10,000,000 shares of common stock to be issued under an Equity Line
of Credit Agreement, dated March 19, 2001.
o Persia Consulting Group, Inc., which intends to resell up to 126,000
shares of common stock.
o I-Medialink, Ltd., which intends to resell up to 15,000 shares of
common stock previously issued in connection with consulting
services provided to our Company.
o Fred R. Schmid and Summit Capital, which intend to resell up to
389,173 shares of common stock previously issued in connection with
the acquisition of Windstar Resources, Inc.
o Brent Nygaard, who intends to resell up to 29,615 shares of common
stock previously issued in connection with the acquisition of
Windstar Resources, Inc. and purchased in a private offering.
o Other selling stockholders, who intend to resell up to 3,114,026
shares of common stock purchased in private offerings.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $5.0 million. Cornell Capital Partners, L.P.
will purchase the shares of common stock for a 20% discount to the prevailing
market price of our common stock. Cornell Capital Partners, L.P. intends to
resell any shares purchased under the Equity Line of Credit at the then
prevailing market price. This prospectus relates to the shares of common stock
to be issued under the Equity Line of Credit.
COMMON STOCK OFFERED 13,673,814 shares by selling
stockholders
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING BEFORE THE 36,153,385 shares
OFFERING1
USE OF PROCEEDS We will not receive any proceeds of
the shares offered by the selling
stockholders. Any proceeds we receive
from the sale of common stock under
the Equity Line of Credit will be
used for general corporate purposes.
RISK FACTORS The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
OVER-THE-COUNTER BULLETIN BOARD SYMBOL XLND
- -------------------------
1 This table excludes 4,399,179 options and 3,089,184 warrants to
purchase shares of our Company's common stock. The 3,089,184 warrants that
our Company previously granted expire on August 15, 2001 and include
1,489,184 warrants that have an exercise price of $2.50 per share of
common stock and 1,600,000 warrants that have an exercise price of $5.00
per share of common stock.
2
- --------------------------------------------------------------------------------
RISK FACTORS
Our Company is subject to various risks which may materially harm our
business, financial condition and results of operations. YOU SHOULD CAREFULLY
CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION
IN THIS FILING BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. THESE ARE NOT THE
ONLY RISKS AND UNCERTAINTIES THAT WE FACE. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. For the year ended December 31, 2000 and
the year ended December 31, 1999, we sustained losses of $2.9 million and $0.1
million, respectively. Future losses are likely to occur. Our independent
auditors have noted that our Company may not have significant cash or other
material assets to cover its operating costs and to allow it to continue as a
going concern. Our ability to obtain additional funding will determine our
ability to continue as a going concern. Accordingly, we may experience
significant liquidity and cash flow problems if we are not able to raise
additional capital as needed and on acceptable terms. No assurances can be given
that we will be successful in reaching or maintaining profitable operations.
WE NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
We have relied on significant external financing to fund our operations.
Such financing has historically come from a combination of borrowings from and
sale of common stock to third parties and funds provided by certain officers and
directors. We may need to raise additional capital to fund our anticipated
operating expenses and future expansion. We cannot assure you that financing
whether from external sources or related parties will be available if needed or
on favorable terms. The sale of our common stock to raise capital may cause
dilution to our existing shareholders. Our inability to obtain adequate
financing will result in the need to curtail business operations. Any of these
events would be materially harmful to our business and may result in a lower
stock price.
WE HAVE BEEN THE SUBJECT OF A GOING CONCERN OPINION FROM OUR INDEPENDENT
AUDITORS
Our independent auditors have added an explanatory paragraph to their
audit opinions issued in connection with the 2000 and 1999 financial statements
which states that our Company may not have significant cash or other material
assets to cover its operating costs and to allow it to continue as a going
concern. Our ability to obtain additional funding will determine our ability to
continue as a going concern. Our financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
WE HAVE BEEN AND CONTINUE TO BE SUBJECT TO A WORKING CAPITAL DEFICIT AND
ACCUMULATED DEFICIT
We had a working capital deficit of $0.6 million and $0.2 million at
December 31, 2000 and 1999, respectively. We had an accumulated deficit of $3.2
million and $0.3 million at December 31, 2000 and 1999, respectively. Our
ability to obtain additional funding will determine our ability to continue as a
going concern. Accordingly, we may experience significant liquidity and cash
flow problems if we are not able to raise additional capital as needed and on
acceptable terms. No assurances can be given that we will be successful in
reaching or maintaining profitable operations.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
There has been a limited public market for our common stock and there can
be no assurance that an active trading market for our common stock will develop.
As a result, this could adversely affect our shareholders' ability to sell our
common stock in short time periods, or possibly at all. Our common stock has
experienced, and is likely to experience in the future, significant price and
3
volume fluctuations, which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results, announcements
by our competitors and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially.
WE HAVE BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME
Because we have been in business for a short period of time, there is
limited information upon which investors can evaluate our business. We were
incorporated on December 4, 1994 but did not begin significant operations until
the third quarter of 1999. You should consider the likelihood of our future
success to be highly speculative in view of our limited operating history, as
well as the complications frequently encountered by other companies in the early
stages of development, particularly companies in the highly competitive
technology industry.
WE HAVE HAD A HISTORY OF A LIMITED CUSTOMER BASE AND THIS MAY CONTINUE
At present, our customer base consists primarily of Internet service
providers, telephone companies, and value-added resellers. Our ability to
operate depends on increasing our customer base and achieving sufficient gross
profit margins. We cannot assure you that we will be able to increase our
customer base or to operate profitably. If any of our major customers stop or
delay their purchases of our products, our revenue and profitability would be
adversely affected. We anticipate that sales of our products to relatively few
customers will continue to account for a significant portion of our revenue. In
1999, sales to three customers accounted for 60% of our revenue, while in 2000,
sales to 10 customers accounted for 53% of our revenue. If these customers
cancel or delay their purchase orders, our revenue may decline and the price of
our common stock may fall. We cannot assure you that our current customers will
continue to place orders with us, that orders by existing customers will
continue at the levels of previous periods or that we will be able to obtain
orders from new customers. Although our financial performance depends on large
orders from a few key customers and resellers, we do not have binding
commitments from any of them.
WE MAY BE HARMED BY IMPORT RESTRICTIONS
Our imported materials are subject to certain quota restrictions and U.S.
customs duties, which are a material part of our cost of goods. A decrease in
quota restrictions or an increase in customs duties could harm our business by
making needed materials scarce or by increasing the cost of such materials.
WE MAY BE EXPOSED TO INTERNATIONAL BUSINESS AND CURRENCY FLUCTUATIONS
Although we are not dependent on international sales for a substantial
amount of our revenue (10% of total revenue in 1999 and in 2000), we still face
the risks of international business and associated currency fluctuations,
which might adversely affect our operating results. These risks include
potential regulation of our technology by foreign governments, general
geopolitical risks associated with political and economic instability,
changes in diplomatic and trade relationships, and foreign laws affecting the
Internet generally. Our risks of doing business abroad also include our ability
to develop and maintain distribution relationships on favorable terms. To the
extent we are unable to favorably renew our distribution agreements or make
alternative arrangements, revenue may decrease from our international
operations. In addition, delays in deliveries from our component suppliers could
cause our revenue to decline and adversely affect our results of operations.
OUR COMMON STOCK MAY BE DEEMED TO BE "PENNY STOCK"
Our common stock may be deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
4
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to resell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
OUR STOCK PRICE COULD DECLINE DUE TO FLUCTUATIONS IN THE DEMAND FOR OUR PRODUCTS
AND GENERAL ECONOMIC CONDITIONS
Fluctuations in consumer demand and the timing and amount of orders from
key customers contribute to the variability of our operating results. In
addition, any general economic downturn, whether real or perceived, could change
consumer spending habits and decrease demand for our products. As a result of
these and other factors, our operating results may fall below market analysts'
expectations in some future quarters, and our stock price may decline.
We are subject to all of the substantial risks inherent in an Internet
related business, any one of which may harm our ability to operate successfully.
These include, but are not limited to:
o Our inability to attract or retain customers;
o Our failure to anticipate and adapt to a developing market;
o Our inability to upgrade and develop competitive products; and
o Technical difficulties with product development.
In addition, we believe that many potential customers in our target
markets are not fully aware of the need for Internet security products and
services. Historically, only enterprises with substantial resources have
developed or purchased Internet security solutions. Also, there is a perception
that Internet security is costly and difficult to implement. Therefore, we will
not succeed unless we can educate our target markets about the need for Internet
security and convince potential customers of our ability to provide this
security in a cost-effective and easy-to-use manner. Although we have spent, and
will continue to spend, considerable resources educating potential customers
about the need for Internet security and the benefits of our products and
services, our efforts may be unsuccessful.
WE HAVE A SUBSTANTIAL AMOUNT OF STOCK THAT WILL BECOME AVAILABLE FOR RESALE
UNDER RULE 144, WHICH MAY HAVE AN ADVERSE EFFECT ON THE MARKET AND OUR ABILITY
TO OBTAIN EQUITY FINANCING
As of July 2, 2001, we have issued and outstanding 36,153,385 shares of
common stock of which 32,804,652 shares are "restricted securities" as that term
is defined under Rule 144 promulgated under the Securities Act. Future sales of
the restricted shares may be made under Rule 144. Such sales may have an adverse
effect on the then prevailing market price of the common stock, adversely affect
our ability to obtain future financing in the capital markets, and may create a
potential market overhang.
OUR ARTICLES OF INCORPORATION ALLOW AUTHORIZATION AND DISCRETIONARY ISSUANCE OF
BLANK CHECK PREFERRED STOCK WHICH COULD DELAY, DETER, OR PREVENT A TAKEOVER,
MERGER OR CHANGE OF CONTROL AND MAY PREVENT YOU FROM REALIZING A PREMIUM RETURN
Our Articles of Incorporation authorize the issuance of "blank check,"
preferred stock. The Board of Directors is empowered, without
shareholder approval, to designate and issue additional series of preferred
stock with dividend, liquidation, conversion, voting or other rights, including
the right to issue convertible securities with no limitations on conversion.
These designations and issuances, could:
o Adversely affect the voting power or other rights of the holders of
our common stock.
o Substantially dilute the common shareholder's interest.
o Depress the price of our common stock.
o Delay, deter, or prevent a merger, takeover or change in control
without any action by the shareholders.
5
OUR BUSINESS PLAN CONTEMPLATES FUTURE INTERNATIONAL OPERATIONS BUT THERE ARE
NUMEROUS RISKS AND UNCERTAINTIES IN OFFERING PRODUCTS OUTSIDE OF THE UNITED
STATES
We intend to expand into international markets. We currently have a
technology sharing business relationship with Nexland France, which precludes us
from marketing in Europe. We cannot be sure that we will be able to successfully
sell our products or adequately maintain operations outside North or South
America. In addition, there are certain risks inherent in operating a business
internationally. These include:
o Unexpected changes in regulatory requirements;
o Ability to secure and maintain the necessary physical and
telecommunications infrastructure;
o Challenges in staffing and managing foreign operations; and
o Employment laws and practices in foreign countries.
Any of these could adversely affect our proposed international operations.
Furthermore, some foreign governments have enforced laws and regulations on
content distributed over the Internet that are more restrictive than those
currently in place in the United States. In addition, companies located in
Taiwan perform our manufacturing. The current political tension between Taiwan
and Mainland China may impair our ability to import product from our
manufacturers. Anyone or more of these factors could adversely affect our
contemplated future international operations, and consequently, our
business.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR TO CONTINUE
USING INTELLECTUAL PROPERTY THAT WE LICENSE FROM OTHERS; WE MAY ALSO BE THE
SUBJECT OF INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS
We rely and intend to rely on a combination of pending patents, copyright,
trademark, service mark, and trade secret laws and contractual restrictions to
establish and protect certain of our proprietary rights. We have a patent
pending for certain technology, which is included in our family of Internet
sharing products. There can be no assurance that we will be able to obtain such
protection. Despite our efforts to protect our proprietary rights, we cannot
assure you that unauthorized parties will not copy or otherwise obtain and use
our data or technology or will not independently develop similar or competing
technology. We cannot assure you that these precautions will prevent
misappropriation or infringement of our intellectual property. Monitoring
unauthorized use of our products is difficult, and we cannot assure you that the
steps we have taken will prevent misappropriation of our technology or
intellectual property, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States.
Our industry is characterized by the existence of a large number of
patents and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the data
communications and networking markets have extensive patent portfolios with
respect to modem and networking technology. From time to time, third parties,
including these leading companies, have asserted and may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us. We expect that we
may increasingly be subject to infringement claims as the numbers of products
and competitors in the office market for shared Internet access solutions grow
and the functionality of products overlaps. As of the date of this filing, we
have not been the recipient of any such claims.
We may in the future initiate claims or litigation against third parties
for infringement of our proprietary rights to determine the scope and validity
of our proprietary rights. Any such claims, with or without merit, could be time
consuming, result in costly litigation and diversion of technical and management
personnel, or require us to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all. In the event of a
successful claim of infringement and our failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis,
our business would be harmed.
BECAUSE OF THE UNCERTAINTY ASSOCIATED WITH UNPROVEN BUSINESS MODELS, WE MAY BE
UNABLE TO ACHIEVE WIDESPREAD MARKET ACCEPTANCE
Since our business model is relatively new and unproven, we may not be
able to anticipate or adapt to a developing market. In addition, our success
will depend upon the widespread commercial acceptance of shared Internet access
products in the office and home markets. Businesses have only recently begun to
deploy shared Internet access products, and the market for these products is not
fully developed. If single Internet access devices currently utilized by many
6
offices are deemed sufficient even though they do not enable shared access, then
the market acceptance of our products may be slower than expected. Potential
users of our products may have concerns regarding the security, reliability,
cost, ease of use and capability of our products. We cannot accurately predict
the future growth rate or the ultimate size of the office or home markets.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO COMPETE WITH SIGNIFICANT PRICING
PRESSURE BY OUR COMPETITORS
As a result of increased competition in our industry, we expect to
encounter significant pricing pressure. We cannot be certain that we will be
able to offset the effects of any price reductions we may be forced to give to
our customers or that we will have the resources to compete successfully.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE LOSE MARKET SHARE
We compete in a new, rapidly evolving and highly competitive market. We
expect competition to persist and intensify in the future. Our current and
potential competitors offer a variety of competitive products, including shared
Internet access products offered by RAMP Networks, Flowpoint, Intel, Netopia,
Watchguard, Netscreen, Nortel, Cisco, Sonicwall, Linksys, Cayman Systems and
others, and high-end networking equipment offered by companies such as 3Com and
Nortel.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales, marketing, technical, manufacturing and
other resources and more established distribution channels. These competitors
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements or devote greater resources to the development,
promotion and sale of their products than we can. Furthermore, some of our
competitors may make strategic acquisitions or establish cooperative
relationships to increase their ability to rapidly gain market share by
addressing the needs of our prospective customers. These competitors may enter
our existing or future markets with solutions that may be less expensive,
provide higher performance or additional features or be introduced earlier than
our solutions. Given the market opportunity in the shared Internet access
market, we also expect that other companies may enter our market with better
products and technologies. If any technology is more reliable, faster, and less
expensive or has other advantages over our technology, then the demand for our
products and services would decrease, which would seriously harm our business.
We expect our competitors to continue to improve the performance of their
current products and introduce new products and technologies as industry
standards and customer requirements evolve. These new products and technologies
could supplant or provide lower cost alternatives to our products. To be
competitive, we must continue to invest significant resources in research and
development, sales and marketing, and customer support.
Increased competition is likely to result in price reductions, reduced
gross margins, longer sales cycles, and loss of market share, any of which would
seriously harm our business and results of operations.
The market for shared Internet access solutions is characterized by
rapidly changing technologies and short product life cycles. Our future success
will depend in large part upon our ability to:
o Identify and respond to emerging technological trends in the market;
o Develop and maintain competitive products;
o Enhance our products by adding innovative features that
differentiate our products from those of our competitors;
o Bring products to market on a timely basis and at competitive
prices;
o Respond effectively to new technological changes or new product
announcements by others; and
o Respond to emerging broadband access technologies.
The technical innovations required for us to remain competitive are
inherently complex, require long development cycles, and are dependent, in some
cases, on sole source suppliers. We will be required to continue to invest in
research and development in order to attempt to maintain and enhance our
existing technologies and products, but we may not have the funds available to
7
do so. Even if we have sufficient funds, these investments may not serve the
needs of customers or be compatible with changing technological requirements or
standards. Most development expenses are incurred before the technical
feasibility or commercial viability of new or enhanced products can be
ascertained. Revenue from future products or product enhancements may not be
sufficient to recover the associated development costs.
WE HAVE LIMITED MARKETING AND SALES CAPABILITY
Because of our limited working capital in the past, we have not had the
resources to fully implement our marketing and sales strategy. In order to
increase our revenues, we intend to implement a marketing and sales force with
technical expertise and marketing capability. There can be no assurance that we
will be able to:
o Establish and develop such a sales force;
o Gain market acceptance for our products;
o Obtain and retain qualified sales personnel on acceptable terms; and
o Meet our proposed marketing schedules or plans.
To the extent that we arrange with third parties to market our products,
the success of such products may depend on the efforts of such third parties.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS, TOGETHER, MAY BE
ABLE TO EFFECTIVELY EXERCISE CONTROL OVER ALL MATTERS SUBMITTED TO A VOTE OF
SHAREHOLDERS
Our executive officers, directors, and principal shareholders beneficially
own, in the aggregate, approximately 81% of our outstanding shares of common
stock. These shareholders, if acting together, will be able to effectively
control most matters requiring approval by our shareholders. These shareholders
can designate the members of our Board of Directors and can decide our
operations and business strategy. You may disagree with these shareholders'
decisions. Even if you do not like the members of our Board of Directors, you
will not be able to remove them from office. Additionally, these members of our
Board of Directors would be able to significantly influence a proposed amendment
to our charter, a merger proposal, a proposed sale of assets or other major
corporate transaction or a non-negotiated takeover attempt. Their influence may
not be beneficial to you. If they prevent or delay a merger or takeover, you may
not realize the premium return that shareholders may realize in conjunction with
corporate takeovers. Moreover, there are no preemptive rights in connection with
our common stock. Finally, cumulative voting in the election of our Directors is
not provided for. Accordingly, the holders of a majority of the shares of common
stock, present in person or by proxy, will be able to elect all of our
Directors.
WE HAVE NOT PAID NOR DO WE EXPECT TO PAY DIVIDENDS IN THE NEAR FUTURE
It is not anticipated that we will pay any dividends on our common stock
in the future. The Board of Directors intends to follow a policy of retaining
earnings, if any, for use in our business operations. As a result, the return on
your investment in us will depend upon any appreciation in the market price of
the common stock.
THE INSIDE SHAREHOLDERS RECEIVED SHARES FOR LESS CONSIDERATION THAN YOU ARE
ASKED TO PAY
The number of shares of common stock issued to our present shareholders
for cash, property and consulting services was arbitrarily determined and was
not the product of arm's length transactions. The inside shareholders received
shares of our common stock from $0.0104 to $0.1223 per share, which is
substantially less than you might pay.
THE OFFICERS AND DIRECTORS MAY BE ENTITLED TO INDEMNIFICATION FOR SECURITIES
LIABILITIES BY OUR COMPANY RESULTING IN SUBSTANTIAL EXPENDITURES FOR US AND
PREVENTING ANY RECOVERY FROM OFFICERS AND DIRECTORS
Our Articles of Incorporation provide that we may indemnify any Director,
officer, agent, and/or employee as to those liabilities and on those terms and
conditions as are specified in the Delaware Business Corporation Act. Further,
we may purchase and maintain insurance on behalf of any such persons whether or
not the corporation would have the power to indemnify such person against the
liability insured against. The foregoing could result in substantial
expenditures by us and prevent any recovery from our Directors, officers,
agents, and employees for losses incurred by us as a result of their actions.
8
Further, we have been advised that in the opinion of the Securities and Exchange
Commission, indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable.
WE HAVE EXPERIENCED NEGATIVE CASH FLOW WHICH COULD RESULT IN OUR INABILITY TO
FUND PROGRAMS AND CREATE A NEED FOR ADDITIONAL FINANCING
Since inception, we have experienced negative cash flow from operations
and we expect to continue to experience negative cash flow from operations for
the foreseeable future. Therefore, we have relied solely on limited
revenues, shareholder loans and the issuances of equity securities to fund our
operations. In particular, we may need to raise additional funds, especially if
our estimates of revenue, working capital and/or capital expenditure
requirements change or prove inaccurate or in order for us to respond to
technological or marketing hurdles or to take advantage of unanticipated
opportunities. We cannot be certain that additional financing, through the
issuance of equity securities or otherwise, will be available to us on favorable
terms when required, or at all. If adequate funds are not available, or are not
available on acceptable terms, we may not be able to take advantage of market
opportunities, develop new products or otherwise respond to competitive
pressures which could adversely affect our ability to achieve and sustain
positive cash flow and profitability in the future.
WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR MANUFACTURING
REQUIREMENTS; THE INABILITY OF OUR CONTRACT MANUFACTURERS TO PROVIDE US WITH
ADEQUATE SUPPLIES OF HIGH QUALITY PRODUCTS OR THE LOSS OF ANY OF OUR CONTRACT
MANUFACTURERS WOULD CAUSE A DELAY IN OUR ABILITY TO FULFILL ORDERS WHILE WE
OBTAIN A REPLACEMENT MANUFACTURER
We have developed an outsourced contract manufacturing capability for the
production of our products. Our primary relationship with our
contract manufacturers has been accomplished through Smerwick, Ltd., our Hong
Kong affiliate located in Taiwan. We rely on contract manufacturers to procure
components, assemble, test and package our products. We rely primarily on one
contract manufacturer for all of our product manufacturing and assembly, and if
we cannot obtain its services, we may not be able to ship products.
We outsource all of our hardware manufacturing and assembly primarily to
one manufacturer and assembly house. We employ Smerwick, Ltd. to coordinate all
manufacturing and packaging with this manufacturer. We do not have a long term
manufacturing contract with this manufacturer. To date, this manufacturer has
produced products with acceptable quality, quantity and cost, but there can be
no assurance it will be able or willing to meet our future demands. Our
operations could be disrupted if we have to switch to a replacement vendor or if
our hardware supply is interrupted for an extended period. While we believe
there are alternative manufacturing companies available at competitive prices,
any interruption in the operations of one or more of these contract
manufacturers or delays in their shipment of products would adversely affect our
ability to meet scheduled product deliveries to our customers and could result
in a loss in customer orders and revenue.
We intend to introduce new products and product enhancements that will
require us to rapidly achieve volume production by coordinating our efforts with
those of our suppliers and contract manufacturers. The inability of our contract
manufacturers to provide us with adequate supplies of high quality products or
the loss of any of our contract manufacturers would cause a delay in our ability
to fulfill orders while we obtain a replacement manufacturer. In addition, our
inability to accurately forecast the actual demand for our products could result
in supply, manufacturing or testing capacity constraints. These constraints
could result in delays in the delivery of our products or the loss of existing
or potential customers.
Although we perform random spot testing on manufactured products, we rely
on our contract manufacturers for assembly and primary testing of our products.
Any product shortages or quality assurance problems could increase the costs of
manufacturing, assembling or testing our products.
IF WE FAIL TO DEVELOP AND EXPAND OUR DISTRIBUTION CHANNELS OUR BUSINESS WILL
SUFFER
Our product distribution strategy focuses primarily on continuing to
develop and expand our distribution channels through Internet
service providers, value-added resellers, and telephone companies. If we
fail to develop and cultivate relationships with these customers, or if they are
not successful in their sales efforts, our product sales may decrease and our
operating results may suffer. Many of our resellers also sell products that
compete with our products. We cannot assure you that our customers will market
our products effectively or continue to devote the resources necessary to
provide us with effective sales, marketing and technical support.
9
OUR FINANCIAL RESULTS MAY PERIODICALLY VARY DUE TO FACTORS WHICH MAY AFFECT OUR
STOCK
Our operating results may vary due to factors unrelated to the progress of
our business and beyond our control. These factors include:
o Continued market acceptance of our products;
o Fluctuations in demand for our products and services;
o Variations in the timing of orders and shipments of our products;
o Timing of new product and service introductions by us or our
competitors;
o Our ability to obtain sufficient supplies of sole or limited source
components for our products;
o Unfavorable changes in the prices of the components we purchase;
o Our ability to attain and maintain production volumes and quality
levels for our products; and
o Our ability to integrate new technologies we develop or acquire into
our products.
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on the level of actual and anticipated business
activities. Research and development expenses will vary as we develop new
products. General and administrative expense fluctuations in past periods have
been due primarily to the level of sales and marketing expenses associated with
new product introductions. In the past, we have experienced fluctuations in
operating results.
WE ARE SUBJECT TO VARIOUS RISKS PERTAINING TO THE INTERNET INDUSTRY
Our revenue growth is dependent on the continued growth of broadband
access services, which are currently in early stages of development, and if such
services are not widely adopted or we are unable to address the issues
associated with the development of such services, our sales will be adversely
affected.
Sales of our products depend on the increased use and widespread adoption
of broadband access services, such as cable, digital subscriber lines,
integrated services digital networks, frame relay and point-to-point digital
circuits. These broadband access services typically are more expensive with
respect to the required equipment and ongoing access charges than is the case
with Internet dial-up access providers. Our business, prospects, results of
operations and financial condition would be materially adversely affected if the
use of broadband access services does not increase as anticipated or if our
customers' access to broadband services is limited. Critical issues concerning
the use of broadband access services are unresolved and will likely affect the
use of broadband access services. These issues include:
o Security;
o Reliability;
o Capacity;
o Congestion;
o Cost;
o Ease of access; and
o Quality of service.
If the market for products that provide broadband access to the Internet
fails to develop, or if it develops at a slower pace than we anticipate, our
business, prospects, results of operations and financial condition would be
materially adversely affected.
10
The broadband access service market is new and is characterized by rapid
technological change, frequent enhancements to existing products, new product
introductions, changes in customer requirements and evolving industry standards.
We may be unable to respond quickly or effectively to these developments. The
introduction of new products by competitors, market acceptance of products based
on new or alternative technologies, or the emergence of new industry standards,
could render our existing or future products obsolete, which would materially
adversely affect our business, prospects, results of operations and financial
condition.
The emergence of new industry standards might require us to redesign our
products. If our products fail to comply with widely adopted industry standards,
our customers and potential customers may not purchase our products. This would
have a material adverse effect on our business, prospects, results of operations
and financial condition.
Governmental regulations affecting Internet security could affect our
revenue. Any additional governmental regulation of imports/exports or the
failure to obtain required export approval of our encryption technologies could
adversely affect our international and domestic sales. The United States and
various foreign governments have imposed controls, export license requirements
and restrictions on the import and export of certain technologies, including
encryption technology. In addition, from time to time governmental agencies have
proposed additional regulations on encryption technology, such as requiring the
escrow and governmental recovery of private encryption keys. Additional
regulation of encryption technology could delay or prevent the acceptance and
use of encryption products and public networks for secure communications. This,
in turn, could decrease demand for our products.
In addition, some foreign competitors are subject to less stringent
controls on exporting their encryption technologies. As a result, they may be
able to compete more effectively than we can in the United States and
internationally.
THE PURCHASE OF SHARES IN OUR COMPANY WILL BE SUBJECT TO VARIOUS INVESTMENT
RISKS
Because our officers, directors, principal shareholders and their
affiliates beneficially own approximately 81% of our stock ownership, they will
be able to elect the Board of Directors and control all matters requiring
shareholder approval.
The price of our common stock has been volatile and may continue to
experience volatility.
The trading price of our common stock may fluctuate widely as a result of
a number of factors, most of which are outside our control. Some of these
factors include:
o Quarterly variations in our operating results;
o Announcements by our Company about the performance of our products
and our competitors' announcements about performance of their
products; and
o Changes in earnings estimates by analysts, or the failure to meet
the expectations of analysts.
In addition, the stock market has experienced extreme price and volume
fluctuations, which have particularly affected the market prices of many
technology and computer software companies and which have in some cases, been
unrelated to the operating performance of these companies.
CHARTER AND BYLAW PROVISIONS OF OUR COMPANY LIMIT THE AUTHORITY OF OUR
SHAREHOLDERS, AND THEREFORE MINORITY SHAREHOLDERS MAY NOT BE ABLE TO
SIGNIFICANTLY INFLUENCE THE COMPANY'S GOVERNANCE OR AFFAIRS
Our Board of Directors has the authority to issue shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by shareholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of our outstanding voting stock.
Substantial future sales of our common stock in the public market could
cause our stock price to fall. If our shareholders sell substantial amounts of
our common stock in the public market, including shares sold pursuant to the
Equity Line of Credit, from the conversion of debentures or issued upon the
exercise of outstanding options, the trading price of our common stock could
11
fall. Such sales also might make it more difficult for us to raise capital in
the future at a time and price that we deem appropriate.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key executives
and consultants, including Gregory S. Levine, our President and a Director of
our Company, and Martin Dell'Oca, our Chief Financial Officer and a Director of
our Company. The loss of the services of any of these people could materially
harm our business because of the cost and time necessary to replace and train
such personnel. Such a loss would also divert management attention away from
operational issues. We have entered into employment agreements with Mr. Levine
and Mr. Dell'Oca, respectively. We do not maintain key-man life insurance
policies on any of these people.
WE MAY BE UNABLE TO MANAGE GROWTH
Successful implementation of our business strategy requires us to manage
our growth. Growth could place an increasing strain on our management and
financial resources. To manage growth effectively, we will need to:
o Implement changes in certain aspects of our business;
o Enhance our information systems and operations to respond to
increased demand;
o Attract and retain qualified personnel; and
o Develop, train and manage an increasing number of management-level
and other employees.
If we fail to manage our growth effectively, our business, financial
condition or operating results could be materially harmed, and our stock price
may decline.
12
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 36,153,385 shares of common stock outstanding as of July 2, 2001 (assuming
no exercise of options), 3,348,733 shares are, or will be, freely tradable
without restriction, unless held by our "affiliates." The remaining 32,804,652
shares of common stock held by existing stockholders are "restricted securities"
and may be resold in the public market only if registered or pursuant to an
exemption from registration. Some of these shares may be resold under Rule 144.
Immediately following the effective date of this prospectus, including the
shares to be issued to Cornell Capital Partners, L.P., and upon conversion of
debentures, 13,673,814 shares of common stock will be freely tradeable without
restriction, unless held by our "affiliates."
Upon completion of this offering, and assuming all shares registered in
this offering are resold in the public market, there will be an additional
13,673,814 shares of common stock outstanding. All of these shares of common
stock may be immediately resold in the public market upon effectiveness of the
accompanying registration statement and the sale to the investor under the terms
of the Equity Line of Credit agreement.
In addition, we have issued options to purchase a total of 4,399,179
shares of our common stock at exercise prices ranging from $0.120 to $0.0927 per
share. We have also issued warrants to purchase a total of 3,089,184 shares of
our common stock at exercise prices of $2.50 per share and $5.00 per share,
respectively. All of the warrants expire on August 15, 2001 if unexercised.
EXISTING SHAREHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE LINE OF CREDIT
The sale of shares pursuant to the Equity Line of Credit and from
conversion of debentures will have a dilutive impact on our stockholders. As a
result, our net income per share could decrease in future periods, and the
market price of our common stock could decline. In addition, the lower our stock
price is the more shares of common stock we will have to issue under the Equity
Line of Credit to draw down the full amount. If our stock price is lower, then
our existing stockholders would experience greater dilution.
THE INVESTOR UNDER THE LINE OF CREDIT WILL PAY LESS THAN THE THEN-PREVAILING
MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the Equity Line of Credit will be
issued at a 20% discount to the lowest closing bid price for the 10 days
immediately following the notice date. These discounted sales could cause the
price of our common stock to decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell in the public market the shares of
common stock being registered in this offering. That means that up to 13,673,814
shares of common stock, the number of shares being registered in this offering,
may be sold. Such sales may cause our stock price to decline.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering, our common stock has traded on the Over-the-Counter
Bulletin Board. Our common stock is thinly traded compared to larger more widely
known companies in our industry. Thinly traded common stock can be more volatile
than common stock trading in an active public market. We cannot predict the
extent to which an active public market for the common stock will develop or be
sustained after this offering.
13
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED
We are dependent on external financing to fund our operations. Our
financing needs are expected, in part, to be provided from the Equity Line of
Credit. No assurances can be given that such financing will be available in
sufficient amounts or at all when needed, in part, because the amount of
financing available will fluctuate with the price and volume of our common
stock. As the price and volume decline, then the amount of financing available
under the Equity Line of Credit will decline.
14
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from the
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our Company's growth strategies, (c) anticipated trends in our Company's
industry, (d) our Company's future financing plans and (e) our Company's
anticipated needs for working capital. These statements may be found under
"Management's Discussion and Analysis or Plan of Operations" and "Business," as
well as in this prospectus generally. Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors, including, without limitation, the risks outlined under "Risk
Factors" and matters described in this prospectus generally. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this prospectus will in fact occur. In addition to the
information expressly required to be included in this prospectus, we will
provide such further material information, if any, as may be necessary to make
the required statements, in light of the circumstances under which they are
made, not misleading.
15
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. Pursuant to the Equity Line of Credit, Cornell Capital Partners,
L.P. has agreed to purchase up to $5.0 million of common stock from our Company.
None of the selling stockholders have held a position or office, or had any
other material relationship, with our Company, except as follows:
o Cornell Capital Partners, L.P. is the investor under the Equity Line
of Credit.
o Michael Dahlquist, Hong Zhu, Howard and Elaine Bull, Bonney
Goldstein, Robert Duch, Terry and Carol Conner, Daniel Grillo, Steve
Sevence, Adam Denish, Leonard Saltman, Robert Silverstein, Samuel
Henderson, Lufeng Investments, Paul Denish, Neil Jones and Paul
Dowden, all of whom intend to resell shares of common stock to be
issued upon conversion of debentures that were previously sold by
our Company.
o I-Medialink, Ltd. was a consultant to our Company.
o Fred R. Schmid was formerly the Chief Executive Officer and
President of our Company.
The table follows:
PERCENTAGE OF
PERCENTAGE O PERCENTAGE OF SHARES OUTSTANDING PERCENTAGE OF
OUTSTANDING OUTSTANDING TO BE SHARES TO BE OUTSTANDING
SHARES SHARES SHARES TO BE ACQUIRED ACQUIRED SHARES SHARES
BENEFICIALLY BENEFICIALLY SHARES ACQUIRED UPON UNDER THE UNDER THE TO BE BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE UNDERLYING CONVERSION OF LINE OF LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING OFFERING(1) DEBENTURES(2) DEBENTURES(3) CREDIT CREDIT(4) OFFERING OFFERING
- ----------- -------- ----------- ------------- ------------- ------ --------- -------- --------
Cornell Capital 0 0% 0 0% 10,000,000 21.7% 10,000,000 0%
Partners, L.P.
Persia Consulting 126,000 * 0 0% 0 0% 126,000 0%
Group, Inc.
Fred R. Schmid 366,422 1.0% 0 0% 0 0% 366,422 0%
Summit Capital 22,751 * 0 0% 0 0% 22,751 0%
I-Medialink, Ltd. 15,000 * 0 0% 0 0% 15,000 0%
Brent Nygaard 29,615 * 0 0% 0 0% 29,615 0%
Michael Dahlquist 0 0% 169,109 * 0 0% 169,109 0%
Hong Zhu 0 0% 563,698 1.5% 0 0% 563,698 0%
Howard and Elaine 0 0% 225,479 * 0 0% 225,479 0%
Bull
Bonney Goldstein 0 0% 112,740 * 0 0% 112,740 0%
Robert Duch 0 0% 112,740 * 0 0% 112,740 0%
Terry and Carol 0 0% 112,740 * 0 0% 112,740 0%
Conner
Daniel Grillo 0 0% 225,479 * 0 0% 225,479 0%
Steve Sevence 0 0% 112,740 * 0 0% 112,740 0%
Adam Denish 0 0% 112,740 * 0 0% 112,740 0%
Leonard Saltzman 0 0% 112,740 * 0 0% 112,740 0%
Robert Silverstein 0 0% 169,109 * 0 0% 169,109 0%
Samuel Henderson 0 0% 112,740 * 0 0% 112,740 0%
Lufeng Investments 0 0% 112,740 * 0 0% 112,740 0%
Paul Denish 0 0% 112,740 * 0 0% 112,740 0%
Neil Jones 0 0% 112,740 * 0 0% 112,740 0%
Paul Dowden 0 0% 394,589 * 0 0% 394,589 0%
Mario Colla 3,036 * 0 0% 0 0% 3,036 0%
Jason and Stacy 6,364 * 0 0% 0 0% 6,364 0%
Oletsky
Bruce Katzen 35,357 * 0 0% 0 0% 35,357 0%
Donald and Nancy 25,975 * 0 0% 0 0% 25,975 0%
Kipnis
Ron Halperin 4,287 * 0 0% 0 0% 4,287 0%
Mark Robson 4,000 * 0 0% 0 0% 4,000 0%
Howard and Barbara 10,000 * 0 0% 0 0% 10,000 0%
Katzen
Jon Chasen 8,772 * 0 0% 0 0% 8,772 0%
David Kubiliun 2,778 * 0 0% 0 0% 2,778 0%
Steve Silverman 8,772 * 0 0% 0 0% 8,772 0%
Michael Landen 10,894 * 0 0% 0 0% 10,894 0%
Mark Levitats 54,466 * 0 0% 0 0% 54,466 0%
Mark Gold 54,466 * 0 0% 0 0% 54,466 0%
Andrew and Michelle 10,000 * 0 0% 0 0% 10,000 0%
Gold
- ---------------------------------
* Less than 1%.
(1) Percentage of outstanding shares is based on 36,153,385 shares of
common stock outstanding as of July 2, 2001.
(2) These represent the number of shares of common stock that could be
acquired upon the conversion of debentures that were previously
purchased from our Company. The number of shares was calculated
assuming a $0.0887 market price for our Company's common stock.
(3) Percentage of outstanding shares is based on 36,153,385 shares of
common stock outstanding as of July 2, 2001, together with the
maximum number of shares of common stock that may be acquired upon
conversion of convertible debentures previously purchased by each
selling shareholder from our Company. The shares to be issued to each
selling shareholder upon conversion of debentures are treated as
outstanding for the purpose of computing that selling shareholder's
percentage ownership, but are not treated as outstanding for the
purpose of any other selling shareholder.
(4) Percentage of outstanding shares is based on 36,153,385 shares of
common stock outstanding as of July 2, 2001, together with the
10,000,000 shares of common stock that may be purchased by Cornell
Capital Partners, L.P. from our Company under the Equity Line of
Credit. The shares to be issued to Cornell Capital Partners, L.P.
under the Equity Line of Credit are treated as outstanding for the
purpose of computing Cornell Capital Partners, L.P.'s percentage
ownership.
16
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to our Company from the sale of shares of common stock in this
offering. However, our Company will receive the proceeds from the sale of shares
of common stock to Cornell Capital Partners, L.P. under the Equity Line of
Credit. The purchase price of the shares purchased under the Equity Line of
Credit will be equal to 80% of the average of the lowest closing bid price of
our common stock on the Over-the-Counter Bulletin Board for the 10 days
immediately following the notice date. All proceeds from the sale of the shares,
less estimated offering expenses of $60,000 and consultant fees of 8.4% of the
gross proceeds, under the Equity Line of Credit will be used for general
corporate purposes.
DILUTION
Since this offering is being made solely by the selling stockholders and
none of the proceeds will be paid to our Company, our net tangible book value
will be unaffected by this offering. Our net tangible book value, however, will
be impacted by the common stock to be issued under the Equity Line of Credit.
Our existing shareholders, however, would experience an increase in net tangible
book value per share if the net proceeds received by our Company under the
Equity Line of Credit exceeded our net tangible book value per share on the date
such proceeds are received.
The net tangible book value of our Company as of March 31, 2001 was
($772,614) or ($0.021) per share of common stock. Net tangible book value is
determined by dividing the tangible book value of our Company (total tangible
assets less total liabilities) by the number of outstanding shares of our common
stock.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock during
Fiscal 2000 and Fiscal 2001. Following this offering, our dividend practices
with respect to our common stock will be determined and may be changed from time
to time by our board of directors. We will base any issuance of dividends upon
our earnings, financial condition, capital requirements and other factors
considered important by our board of directors. Delaware law and our articles of
incorporation do not require our board of directors to declare dividends on our
common stock. We expect to retain all earnings, if any, generated by our
operations for the development and growth of our business and do not anticipate
paying any dividends to our stockholders for the foreseeable future.
CAPITALIZATION
The following table sets forth the total capitalization of our Company as
of March 31, 2001.
MARCH 31, 2001
(UNAUDITED)
--------------
Long-term Debt, Less Current Portion --
--------------
Stockholders' deficit:
Preferred stock, $0.0001 par value; 10,000,000 shares
authorized and no shares issued and outstanding 0
Common stock, $0.0001 par value; 50,000,000 shares
authorized and 36,153,385 issued and outstanding(1) 3,616
Additional paid-in capital 3,204,127
Unearned compensation (270,837)
--------------
Deficit (3,709,520)
--------------
Total stockholders' deficit (772,614)
--------------
Total capitalization --
==============
- ---------------------
(1) Excludes outstanding 2,283,000 options to purchase shares of our common
stock and 3,089,184 warrants to purchase shares of our common stock.
17
SELECTED CONSOLIDATED FINANCIAL DATA
The following statement of operations and balance sheet data of our
Company is set forth below for the three-month periods ended March 31, 2001 and
March 31, [2000] and for each year in the five-year period ended December 31,
2000. The information presented is derived from the consolidated financial
statements of our Company and should be read in conjunction with the
consolidated financial statements as of March 31, 2001 and 2000, and as of
December 31, 2000 and 1999 and each of the years in the three-year period ended
December 31, 1998 and the Notes thereto included elsewhere in this filing. We
did not begin significant operations until the third quarter of 1999. The
selected consolidated financial data as of March 31,2001 and for the three
months ended March 31, 2001 and 2000 are derived from unaudited consolidated
financial statements of our Company included elsewhere herein and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of the financial
information. Operating results for the interim periods are not necessarily
indicative of the results of our Company that may be expected for the entire
year.
PERIOD ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
(Unaudited)
- -------------------------------------- --------------------------- -----------------------------------------------------------------
2001 2000 2000(1) 1999(2) 1998 1997 1996
---------- ---------- ----------- ---------- ---------- --------- -------
STATEMENT OF OPERATIONS DATA:
Net sales $757,698 $208,607 $1,472,950 $263,338 $----- $----- $-----
Gross profit 316,065 122,875 738,586 134,027 ---- ----- -----
Net income (loss) (505,646) (423,256) (2,876,244) (131,343) (99,902) ----- ----
Net income (loss) per share (basic
and diluted) $(0.01) $(0.01) $(.08) $----- $----- $----- $-----
Dividends per share $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
Weighted average common shares
outstanding, basic 36,045,579 34,128,708 34,833,231 30,053,926 29,500,000 ----- -----
MARCH 31, DECEMBER 31,
(Unaudited)
- ----------------------------------------------------- ---------------- -----------------------------------------------------------
2001 2000 1999 1998 1997 1996
---------- ---------- ----------- ----------- ---------- ---------
BALANCE SHEET DATA:
Working capital (deficit) (843,699) $(69,000) $(157,858) $(2,430) $9,340 $-----
Total assets 386,759 485,728 147,250 11,906 14,776 -----
Long-term debt 0 0 174,317 87,136 0 -----
Stockholders' equity (deficit) (772,614) (255,422) (324,220) (85,326) 14,576 ----
- ------------------------------------------------------------------------------------------------------------------------------------
- -------------------------------
(1) During the quarter ended June 30, 2000, our Company recorded a charge to
compensation in connection with the issuance of 500,000 shares of common
stock valued at $1,125,000 resulting from the severance of our Company's
former Chief Executive Officer.
(2) See Note 11 in our Company's audited consolidated financial statements for
the years ended December 31, 2000 and 1999, which discusses the reverse
merger that occurred during the fourth quarter of 1999.
18
EQUITY LINE OF CREDIT
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell up to 10,000,000 shares of common stock for a total
purchase price of $5.0 million. If our Company requests an advance under the
Equity Line of Credit, Cornell Capital Partners, L.P. will purchase shares of
common stock of our Company for 80% of the lowest closing bid price on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the 10 days immediately following the notice date. Cornell
Capital Partners, L.P. intends to resell any shares purchased under the Equity
Line of Credit at the market price. This prospectus primarily relates to the
shares of common stock to be issued to Cornell Capital Partners, L.P. under the
Equity Line of Credit.
The effectiveness of the sale of the shares under the Equity Line of
Credit is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission.
ADVANCES. Pursuant to the Equity Line of Credit, we may periodically sell
shares of common stock to Cornell Capital Partners, L.P. to raise capital to
fund our working capital needs. The periodic sale of shares is known as an
advance. We may request an advance every 20 trading days.
MECHANICS. We may, at our discretion, request advances from Cornell
Capital Partners, L.P. by written notice, specifying the amount requested up to
the maximum advance amount. A closing will be held 11 trading days after such
written notice at which time we will deliver shares of common stock and Cornell
Capital Partners, L.P. will pay the advance amount. We have the ability to
determine when and if we desire to draw an advance.
COMMITMENT PERIOD. We may request an advance at any time during the
commitment period. The commitment period begins on the date the Securities and
Exchange Commission first declares the accompanying registration statement
effective. The commitment period expires on the earliest to occur of (i) the
date on which Cornell Capital Partners, L.P. has made advances totaling $5.0
million or (ii) two years after the Securities and Exchange Commission declares
the accompanying registration statement effective.
MAXIMUM ADVANCE AMOUNT. We may not request advances in excess of a total
of $5.0 million. In addition, each individual advance is subject to a maximum
advance amount based on an average daily volume of our Company's common stock.
The maximum amount of each advance is equal to 150% of the average daily volume
of our Company's common stock for the 40 trading days prior to the date of an
advance multiplied by 80% of the lowest closing bid price of our Company's
common stock for the 10 trading days immediately following the notice date of an
advance.
By way of illustration only, if we had requested an advance on July 16,
2001, then the 40-day average volume would have been approximately 11,170 and
the average of the lowest closing bid price of our common stock for the 10
trading days immediately following July 16, 2001 would have been $0.526.
Accordingly, the maximum advance amount would have been $7,050.50 (i.e., 150%,
multiplied by 11,170, multiplied by $0.526, multiplied by 80%).
NUMBER OF SHARES TO BE ISSUED. We cannot predict the actual number of
shares of common stock that will be issued pursuant to the Equity Line of
Credit, in part, because the purchase price of the shares will fluctuate based
on prevailing market conditions and we have not determined the total amount of
advances we intend to draw. Nonetheless, we can estimate the number of shares of
common stock that will be issued using certain assumptions. Assuming we drew
down the entire $5.0 million available under the Equity Line of Credit in a
single advance (which is not permitted under the terms of the Equity Line of
Credit) and the purchase price was equal to $0.50 per share, then we would issue
10,000,000 shares of common stock to Cornell Capital Partners, L.P. These shares
would represent 21.4% of our outstanding capital stock upon issuance. (This
assumes that our Company's total outstanding capital stock includes $255,000 of
debentures convertible into shares of common stock sold by our Company pursuant
to the Securities Purchase Agreement dated March 19, 2001, which are being
registered in this Registration Statement at a conversion rate of $0.50.) To
assist our stockholders in evaluating the number of shares of common stock that
could be issued to Cornell Capital Partners, L.P. at various prices, we have
prepared the following table. This table shows the number of shares of our
common stock that would be issued at various prices.
19
Purchase Price: $0.50 $0.60 $0.70 $0.85 $1.00
No. of Shares(1): 10,000,000 8,333,333 7,142,857 5,882,353 5,000,000
Total Outstanding(2): 46,663,385 44,911,718 43,660,527 42,335,738 41,408,385
Percent Outstanding(3): 21.4% 18.6% 16.4% 13.9% 12.1%
- ----------------------
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Partners, L.P., and the issuance of
common stock upon the conversion of $255,000 of debentures sold by our
Company pursuant to the Securities Purchase Agreement dated March 19,
2001, which are being registered in this Registration Statement. For the
purpose of calculating the total number of shares of common stock
outstanding, we are assuming a conversion price for the debentures that is
equal to the corresponding purchase price of common stock under the Equity
Line of Credit.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
REGISTRATION RIGHTS. We granted to Cornell Capital Partners, L.P. certain
registration rights. The registration statement accompanying this prospectus
will register such shares upon effectiveness. The cost of this registration will
be borne by us.
NET PROCEEDS. We cannot predict the total amount of proceeds to be raised
in this transaction, in part, because we have not determined the total amount of
the advances we intend to draw. However, we expect to incur expenses of
approximately $60,000 consisting primarily of professional fees incurred in
connection with registering 13,673,814 shares in this offering. In addition, we
are obligated to pay a cash fee equal to 8.4% of each advance.
USE OF PROCEEDS. We intend to use the net proceeds received under the
Equity Line of Credit for general corporate purposes and potentially to acquire
small, technically viable companies that will contribute to revenue, cash flow
and the future growth of our Company.
CONSULTANT. In connection with the Equity Line of Credit, we entered into
a Consulting Services Agreement with Yorkville Advisors, LLC (the "CONSULTANT").
Under this agreement, the Consultant will provide advising services relating to
our Company's financial status and capital structure. For these services, our
Company will pay the Consultant a cash consulting fee equal to 8.4% of each
advance under the Equity Line of Credit.
20
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our Company's common stock owned by the selling stockholders may be effected
directly to purchasers by the selling stockholders or by pledgees, donees,
transferees or other successors in interest, as principals or through one or
more underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of our
Company's shares of common stock are quoted or (ii) in transactions otherwise
than on the over-the-counter market or in any other market on which the price of
our Company's shares of common stock are quoted. Any of such transactions may be
effected at market prices prevailing at the time of sale, at prices related to
such prevailing market prices, at varying prices determined at the time of sale
or at negotiated or fixed prices, in each case as determined by the selling
stockholders or by agreement between the selling stockholders and underwriters,
brokers, dealers or agents, or purchasers. If the selling stockholders effect
such transactions by selling their shares of our Company's common stock to or
through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The selling
stockholders and any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning of
the Securities Act of 1933 in connection with the resale of common stock under
the Equity Line of Credit agreement. Cornell Capital Partners, L.P. will pay our
Company 80% of the lowest closing bid price of our Company's common stock on the
Over-the-Counter Bulletin Board or other principal trading market on which our
common stock is traded for the 10 days immediately following the notice date.
The 20% discount on the purchase of the common stock to be received by Cornell
Capital Partners, L.P. will be an underwriting discount. We retained Yorkville
Advisors, LLC as our consultant in connection with the Equity Line of Credit.
For its services, Yorkville Advisors, LLC will be paid a consulting fee
consisting of a cash payment of 8.4% of the gross proceeds raised in the Equity
Line of Credit.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. We will inform the selling stockholders that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
must be registered to sell securities in all fifty states. In addition, in
certain states the shares of common stock may not be sold unless the shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify the selling stockholders and their controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $60,000 as well as consulting fees of 8.4% of the gross proceeds
received under the Equity Line of Credit. We will not receive any proceeds from
the sale of any of the shares of common stock by the selling stockholders. We
will, however, receive proceeds from the sale of common stock under the Equity
Line of Credit.
The selling stockholders should be aware that the
anti-manipulation provisions of Regulation M under the Exchange Act may apply to
purchases and sales of shares of common stock by the selling stockholders, and
that there are restrictions on market-making activities by persons engaged in
the distribution of the shares. We will advise the selling stockholders that if
a particular offer of common stock is to be made on terms constituting a
material change from the information set forth above with respect to the Plan of
Distribution, then to the extent required, a Prospectus Supplement must be
distributed setting forth such terms and related information as required.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF OUR COMPANY AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ELSEWHERE IN THIS
PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE
"FORWARD-LOOKING STATEMENTS."
The following table sets forth, for the periods presented, the percentage
of net sales represented by certain items in our Company's consolidated
statements of operations:
PERCENTAGE OF NET SALES
--------------------------------------------------
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------
2001 2000 2000 1999 1998(1)
------- ------- ------- ------ -------
Total net sales 100.0% 100.0% 100.0% 100.0% N/A
Total cost of goods sold (58.3) (41.1) (50.0) (49.1) N/A
Gross profit 41.7 58.9 50.1 51.0 N/A
Operating expenses (107.7) (259.1) (243.9) (100.1) N/A
Income (loss) from (66.0) (200.3) (193.7) (49.2) N/A
operations
Interest expense (0.7) (2.7) (1.5) (0.7) N/A
Net Income (loss) (66.7) (202.9) (195.3) (50.0) N/A
(1) Actual product sales did not begin until January 1999; therefore, there
were no comparable sales in 1998. For fiscal year ended December 31, 1998,
our Company's total operating expenses were $99,902 and our net (loss) was
$99,902.
RESULTS OF OPERATIONS
OVERVIEW. The following is a discussion of our results of operations and
our liquidity and capital resources. Our Company sells Internet access "hardware
routers" for small office and home users. Our products allow multiple users in
an office or home to share one Internet connection simultaneously while
optimizing each user's access speed and providing a secure firewall (shield from
outside intrusion). Our products support existing telephone lines, as well as
emerging access technologies such as digital subscriber lines and cable modems
(faster than phone connections).
RESULTS OF OPERATIONS. The discussion of our historical results set forth
below addresses our historical results of operations for the three-month periods
ended March 31, 2001 and March 31, 2000 and the fiscal years ended December 31,
2000, December 31, 1999, and December 31, 1998. The predecessor companies,
Nexland LP and Nexland, Inc. (Florida) for 1998 and part of 1999 are included in
the historical comparison.
THREE-MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
(1) REVENUES. For the quarter ended March 31, 2001, our Company had
$757,698 in revenue consisting of sales of 4,529 units of Internet access
"hardware routers" for small office and home users. During the three months
ended March 31, 2000, our Company had sales of $208,607 from the sale of 763
units. During the three months ended March 31, 2001, our average selling price
per unit decreased by $106 per unit as compared to the same period in 2000. This
decrease resulted from our Company reducing its selling price to take advantage
of large volume sales opportunities.
22
(2) COST OF SALES. Cost of sales for the quarter ended March 31, 2001
was $441,633, as compared to $85,732 for the same period in 2000. Cost of sales
consisted substantially of the purchase price and in-bound freight of
pre-assembled finished goods inventory from subcontractors in Taiwan, Republic
of China. During the three months ended March 31, 2001, our average purchase
cost per unit decreased by $14 per unit as compared to the same period in 2000.
This decrease resulted from a combination of two factors, the first of which is
our Company's success in obtaining lower priced units from our supplier and also
as a result from our Company effectively modifying our product specifications
which resulted in a lower cost to purchase. While our Company expects the dollar
amount of purchases of pre-assembled finished goods inventory from
subcontractors to increase in the future as our Company increases sales, our
Company anticipates paying lower prices as a result of increased volume
purchases.
(3) GROSS PROFIT. The gross profit of our products was approximately 42%
for the quarter ended March 31, 2001, as compared to 59% for the same period in
2000. The decrease in the gross profit is attributable to reductions in our
selling prices to take advantage of volume sales opportunities. Our Company
expects pricing pressures from our competition, but we believe that we will
continue to lower our cost procurement from subcontractors by obtaining the
benefits of lower product costs through volume purchases. The gross margin could
be lower in the future.
(4) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $813,540 for the quarter ended March 31,
2001 as compared to $539,755 for the quarter ended March 31, 2000. The increase
of $273,785 is primarily the result of our growth in sales, and the increase in
personnel and other related costs, which are explained below. In this
connection, our payroll costs increased by $120,000, professional fees increased
by $66,000 and other operating expenses decreased by $46,000. During this
period, we had three transactions that resulted in non-cash expenditures by our
Company. A company controlled by one of our principal shareholders, incurred
research and development costs on our behalf for the further development of our
Internet access hardware routers. In this connection, we recorded as a capital
contribution $113,919, which represents the actual costs, incurred by this
company on our behalf, substantially consisting of technician salaries for
subcontractors located in Taiwan. We have no formal agreement with this company
and we are in the preliminary phase of evaluating the acquisition of this
company during the next 12 months. During the comparable period in 2000, our
Company did not incur any research and development costs, since we purchased
ready to sell finished goods inventory. In addition, our Company recorded a
charge of $62,499 in connection with the issuance of common stock to the Chief
Financial Officer to amortize his unearned compensation in accordance with his
employment agreement. Lastly, our Company incurred an expense of $88,591 in
connection with the issuance of common stock for consulting services relating to
venture capital and, or debt financing. Our Company expects to increase its
selling, general and administrative in the future in proportion to our Company's
anticipated growth in sales.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our Company has relied principally upon the proceeds of
private equity financings and loans to fund its working capital requirements and
capital expenditures. Our Company's net cash used in operating activities for
the quarter ended March 31, 2001 was ($19,226) compared to cash provided by
operating activities of $4,677 for the quarter ended March 31, 2000, a decrease
of $23,903. This decrease resulted from increases in our Company's net loss,
which included non-cash charges of (i) $62,499 for compensation in connection
with an employment agreement, (ii) $88,591 for consulting services paid with
common stock (iii) $113,919 contributed research and development services and
increases in receivables and inventories, offset by increases in accounts
payable, accrued professional fees and expenses, and due to related party
supplier. These increases resulted from the expansion of our Company's
operations.
Our Company's net cash provided by financing activities for the three
month period ended March 31, 2001 was $17 resulting from proceeds received from
the exercise of stock options. Our Company's short-term and long-term liquidity
requirements are expected to result from working capital needs to purchase
inventory and pay other operating expenses. Although our Company cannot
accurately predict the precise timing of its future capital, we estimate that we
will need to expend approximately $2,000,000, within the next twelve months. Our
Company estimates that of that amount (i) $1,000,000 will be for pre-assembled
finished goods inventory from subcontractors, (ii) $250,000 for sales and
marketing forces, (iii) $250,000 for professional fees and (iv) $500,000 for
other operating expenses, such as payroll, rent and office expenses.
Our Company has no assured available financial resources to meet its March
31, 2001 working capital deficit of $843,699 and future operating costs.
Our Company is seeking additional equity capital from private and public
offerings. There is no assurance, that our Company will be able to raise such
additional capital during the next 12 months. If our Company is unable to obtain
23
the necessary additional capital, our Company may be required to change its
proposed business plan and decrease its planned operations, which could have a
material adverse effect upon its business, financial condition, or results of
operations.
The management of our Company has taken the following steps to improve its
cash flow:
(a) On January 31, 2001, our Company, entered into a factoring agreement.
The agreement expires on January 31, 2002 or until terminated by either party
with proper notice given as defined. Our Company has assigned substantially all
of its accounts receivable to the factor, typically on a recourse basis. Our
Company may request advances up to 75% of the eligible receivables. The factor
charges our Company a commission equal to .0667% per day for each uncollected
receivable from the invoice date to the payment date of such invoice, plus
interest on advanced funds equal to the greater of 10% or the interest publicly
announced by Citibank N.A., plus 2%. Obligations due to the factor under the
factoring agreement are collateralized by "receivables", as defined. At March
31, 2001, $43,151 is due to factor.
(b) On March 19, 2001, we entered into an Equity Line of Credit Agreement.
Pursuant to the equity line of credit, an institutional investor agreed, if
requested by the Company, to purchase up to $5 million of our common stock at
80% of the lowest closing bid price of our Company's common stock on the
Over-the-Counter Bulletin Board for the 10 days immediately following the notice
date. The timing and amount of each sale and the number of debentures to be sold
is at our discretion, subject to various conditions. The dollar amount that our
Company can request under any individual sale is subject to the average trading
volume of our common stock for the preceding 40-day trading period. The maximum
term of the equity line of credit is two years from the date of the agreement.
The agreement contains various representations, warranties and covenants by us,
including limitations on our ability to sell common stock or common stock
equivalents, all assets, merge or enter into certain other transactions. There
were no amounts outstanding on the equity line of credit at March 31, 2001.
(c) On March 19, 2001, our Company also entered into Securities Purchase
Agreement with third-party investors and a Placement Agent Agreement to provide
up to $250,000 less certain fees and expenses of the placement agent by the
issuance of convertible debentures. The debentures bear interest at 6% per year
and convert into our Company's common stock as defined. In connection with the
issuance of such debentures, the difference between the conversion price and the
fair value of the common stock to which the debentures are convertible,
multiplied by the number of shares into which the debt is convertible at the
issuance date of the debt or the date at which the debentures become convertible
will be recorded as intrinsic value of the beneficial conversion feature and
charged to interest expense in our Company's statement of operations. Such
amounts may be material to our Company's 2001 financial statements. Through June
19, 2000, our Company issued debentures of $255,000 from which our Company
received net proceeds of approximately $195,540. There were no debentures
outstanding at March 31, 2001. The debenture holders are entitled to convert all
or part of the principal amount plus accrued interest into shares of our
Company's common stock equal to either (a) an amount equal to 120% of the
closing bid price of our Company's common stock as of the date of the debenture
issuance or (b) an amount equal to 80% of the lowest three closing bid prices of
our Company's common stock for the 10 days immediately preceding the date of
conversion of the debenture. Our Company is obligated to register the resale of
the conversion shares under the Securities Act of 1933. The debentures are
subordinate and junior in right of payment to all accounts payable of our
Company incurred in the ordinary course of business and/or bank debt of our
Company not to exceed $250,000. Our Company has the right to require the
debenture holders to convert any unpaid principal and accrued interest on the
debentures upon the five-year anniversary of the debenture issuance.
FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
REVENUES. For the year ended December 31, 2000, our Company had $1,472,950
in revenue consisting of sales of 6,696 units of Internet access "hardware
routers" for small office and home users. During the third quarter of 2000, our
Company opened an office in Victoria, B.C. Revenues relating to this office were
$263,960. Our Company expects sales to increase during the next 12 months from
this Canadian subsidiary. During 2000, our average selling price per unit
decreased by $132 per unit as compared to 1999. This decrease resulted from our
Company reducing its selling price to take advantage of large volume sales
opportunities. For the year ended December 31, 1999, our Company had $263,338 in
revenue consisting of sales of 750 units. Actual product sales did not begin
until January 1999; therefore, there are no comparable sales in 1998.
COST OF SALES. Cost of sales for the year ended December 31, 2000 was
$734,364. Cost of sales for the year ended December 31, 1999 was $129,311. Cost
of sales consisted substantially of the purchase price and in-bound freight of
pre-assembled finished goods inventory from subcontractors in Taiwan, Republic
of China. Actual sales did not begin until January 1999; therefore, there are no
costs of sales for 1998. During 2000, our average purchase cost per unit
decreased by $62 per unit as compared to 1999. This decrease resulted from a
combination of two factors, the first of which is our Company's success in
24
obtaining lower priced units from our supplier and also as a result from our
Company effectively modifying our product specifications which resulted in a
lower cost to purchase. While our Company expects the dollar amount of purchases
of pre-assembled finished goods inventory from subcontractors to increase in the
future as our Company increases sales, our Company anticipates paying lower
prices as a result of increased volume purchases.
GROSS PROFIT. The gross profit of our Company's products was approximately
50% during 2000. The gross profit of our Company's products was approximately
51% during 1999. Actual sales did not begin until January 1999; therefore, there
is no gross profit percentage in 1998. Our Company expects pricing pressures
from our competition, but will attempt to lower our cost procurement from
subcontractors by obtaining the benefits of lower product costs through volume
purchases. In order to maximize our Company's growth from sales, our Company may
in the future, reduce selling prices to take advantage of large volume sales
opportunities, thus, the gross margin could be lower in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses increased to $3,585,957 for the year ended
December 31, 2000 as compared to $263,664 for the year ended December 31, 1999
and $99,902 for the year ended December 31, 1998. The increase of $3,322,293
from 1999 to 2000 is primarily as a result of our growth, and associated
increase in personnel and other related costs, which are explained below. In
this connection, our payroll costs increased by $374,000, our facilities
expenses and office expense increased by $62,000, professional fees by $495,000,
samples to customers $77,000, travel and entertainment $44,000 and other
operating expenses by $126,000. During this period, we had seven transactions
that resulted in non-cash expenditures to our Company. A company controlled by
one of our principal shareholders, incurred research and development costs on
our behalf for the further development of our Internet access hardware routers.
In this connection, we recorded as a capital contribution $318,850, which
represents the actual costs, incurred by this company on our behalf,
substantially consisting of technician salaries for subcontractors located in
Taiwan. Our Company has no formal agreement with this company. During the
comparable period in 1999, our Company did not incur any research and
development costs, since we purchased ready to sell finished goods inventory. On
June 30, 2000, Mr. Dillon, our former Chief Executive Officer, resigned from his
position in our Company. In connection with his resignation, the 1,170,000
shares of common stock issued in connection with his employment agreement were
forfeited. Our Company, in consideration of the termination of the employment
agreement, issued 500,000 shares of common stock to the former executive. Such
shares were valued based on the then fair market value of our Company's common
stock at $1,125,000. In addition, our Company recorded a charge in the amount of
$166,664 in connection with the issuance of common stock to our Chief Financial
Officer to amortize his unearned compensation in accordance with his employment
agreement. Our Company also issued common stock valued at $248,000, the then
fair market value, pursuant to a penalty provision resulting from the late
filing of our form S-1. Our Company also issued common stock to a consultant
valued at $134,000, the then market value of the common stock. The consultant
was hired to help our Company raise capital. The contract was terminated
effective June 18, 2000. The Company recorded an expense for $77,000 in
connection with an extension of the time to exercise certain warrants and
$75,000 in connection with options granted during the year 2000.
Selling and administrative expenses for the year ended December 31, 1999
were $263,664 as compared to $99,902 for 1998. The increase in selling, general
and administrative expenses of $163,762 from 1998 to 1999 consisted of increases
in salaries, resulting from hiring new personnel of approximately $115,909,
including casual labor, postage of approximately $6,000, consulting of
approximately $6,000, rent of approximately $11,454, office supplies of
approximately $4,342, telephone expense of approximately $535, travel of
approximately $3,774 and other office expenses of approximately $16,000. Our
Company expects to increase our selling, general and administrative expenses in
the future in proportion to our Company's anticipated growth in sales.
DEPRECIATION. Depreciation expense increased to $5,914 for the year ended
December 31, 2000 as compared to $0 for the year ended December 31, 1999 and for
the year ended December 31, 1999, respectively.
INTEREST EXPENSE. Interest expense increased to $21,872 for the year ended
December 31, 2000 as compared to $1,087 for the year ended December 31, 1999 and
for the year ended December 31, 1999, respectively. The interest expense mainly
related to interest on notes payable to a principal shareholder, whose debt was
converted into equity during the latter part of 2000.
PROVISION FOR INCOME TAXES. No provision for income taxes was necessary in
2000, 1999 and 1998 due to the loss reported for such years (see Note 8 to the
financial statements). Further, given the uncertainties as to realization, the
deferred tax assets have been fully reserved.
25
GOING CONCERN QUALIFICATION
Our Company's auditors stated that the financial statements of our Company
for the years ended December 31, 1999 and December 31, 2000 were prepared on the
going-concern basis. For the years ended December 31, 2000 and 1999, our Company
incurred net annual losses of $2,876,244 and $131,343, respectively, and our
Company had a deficit of $3,203,874 and $327,360, respectively. These losses
raise substantial doubt about the ability of our Company to continue as a going
concern. Management believes that resources will be available from private
sources in 2001 to continue the marketing of our Internet sharing devices. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event our Company
cannot continue in existence.
Management has established plans intended to increase the sales of our
Company's products. Management intends to seek new capital from new equity
securities offerings to provide funds needed to increase liquidity, fund growth
and implement its business plan; however, no assurance can be given that our
Company will be able to raise any additional capital.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March 14, 2000, our Company dismissed Williams & Webster, P.S. Williams
& Webster, P.S.'s report on our financial statements did not contain an adverse
opinion or disclaimer of opinion or was not qualified or modified, as to
uncertainty, audit, scope or accounting principles. The decision to change
accountants was recommended and approved by our Company's Board of Directors.
During the two most recent fiscal years and during any subsequent interim
periods preceding the decision, there were no disagreements with Williams &
Webster, P.S. on any manner of accounting of principles or practice, financial
statement disclosure or auditing scope or procedure, which would have caused it
to make a reference to the subject matter of the disagreements in connection
with its report. The reason for our decision to change accounting firms was that
our business and administration is located in Miami, Florida. Williams &
Webster, P.S. is located in Spokane, Washington. Accordingly, on May 12, 2000,
we engaged the accounting firm of BDO Seidman, LLP to serve as our independent
accountants for the year ended December 31, 2000.
On July 2, 2001, our Company dismissed BDO Seidman LLP as its independent
certified public accountant. BDO Seidman's report on our Company's financial
statements for the fiscal year ended December 31, 2000 contained a modification
expressing substantial doubt about our Company's ability to continue as a going
concern. BDO Seidman's dismissal was approved by our Company's Board of
Directors. During our Company's most recent fiscal year, as well as any
subsequent interim period through July 2, 2001, there were no disagreements on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedures, which disagreements if not resolved to their
satisfaction would have caused them to make reference in connection with their
opinion to the subject matter of the disagreement. BDO Seidman communicated by
letter dated January 26, 2001 to the audit committee of our Company's Board of
Directors, three material weaknesses in internal controls relating to the
following areas: (1) recording significant transactions on a timely basis; (2)
lack of written policies setting forth our Company's policies and procedures
relating to accounting internal controls and safeguarding of corporate assets;
and (3) lack of financial personnel with a professional certification in
accounting or equivalent experience.
On July 2, 2001, our Company engaged Daszkal, Bolton, Manela, Devlin & Co.
("Daszkal Bolton") as its principal accountant to audit our Company's financial
statements. Our Company did not consult Daszkal Bolton on any matters during our
Company's two most recent fiscal years or any subsequent interim period prior to
engaging Daszkal Bolton.
26
DESCRIPTION OF BUSINESS
GENERAL
WindStar Resources, Inc., (before the name change to Nexland, Inc.) was
formed in Arizona on March 22, 1995, (under the name Turtleback Mountain Gold
Co., Inc.) to engage in the business of mineral exploration, and if warranted,
development and production, or the sale of precious minerals. WindStar
Resources, Inc. failed to achieve its goals and business objectives and in 1999
concluded it was no longer economical to continue as a public gold exploration
mining company. Nexland, Inc., was incorporated in Florida on December 4, 1994,
but was inactive until November 17, 1999 when it was acquired by us. Nexland LP,
a Florida limited partnership, formed on September 25, 1997, was an operating
company until November 15, 1999 when it assigned all of its partnership assets
to Nexland, Inc. in exchange for 17,000 of the latter's common shares.
On November 17, 1999, we acquired Nexland, Inc. in a reverse acquisition
transaction resulting in the change of our business from mining to computer
security equipment. We changed our name to "Nexland, Inc." on December 8, 1999.
As WindStar Resources, Inc., we never owned an operating mine and, prior to the
Nexland, Inc. acquisition, had no other revenue-producing mining activities.
Since our merger with Nexland, Inc., we have become a supplier of hardware
routers and Internet firewall devices and have shed all connection with the
mining business.
Our Internet Sharing Box product line allows multiple users on a local
area network to simultaneously share the same Internet connection while
optimizing each user's access speed, as well as providing firewall security. Our
Internet Sharing Box product line is intended to support multiple operating
systems, including Windows, Macintosh, UNIX and Linux. Our products are designed
to be compatible with existing telephone and data connection lines, as well as
integrated services digital networks and emerging access technologies, such as
digital subscriber lines and cable modem connections. An integrated services
digital network is an international telecommunications standard for providing
digital service from a customer's premises to a dial-up telephone network. A
digital subscriber line is a type of technology that increases the digital
capacity of ordinary telephone lines into a home or office. Digital subscriber
line speeds are tied to the distance between a customer and a telephone company.
Our products enable multiple users to securely access the Internet
simultaneously through regular telephone lines, slow speed data connections, or
high-speed digital connections. We primarily market and sell our products
through North American based Internet service providers, value-added resellers,
and telephone companies; however, in the past, we have had minor sales to direct
end-users. During fiscal year 2000, we made sales to over 100 customers.
EXPLANATION AND BACKGROUND OF THE INTERNET
The Internet is a global collection of interconnected computer networks
that transmit any combination of voice, video and/or data between users. The
Internet allows commercial organizations, educational institutions, government
agencies, and individuals to electronically communicate, access and share
information, and conduct business. As businesses have begun to use e-mail, file
transfer and area networks, commercial usage has become a major component of
Internet traffic.
In the mid-1990s, Internet service providers began to offer access,
e-mail, customized content, and other specialized services and products aimed at
allowing both commercial and residential customers to obtain and transmit
information, as well as access other available resources on the Internet.
The emergence of the Web, which is the graphical, multimedia environment
of the Internet, has resulted in the development of the Internet as a new mass
communication medium. The Internet has experienced rapid growth in recent years
as evidenced by the volume of Internet traffic and the increase in the number of
Internet users, Web sites and Internet-based applications. In addition, there
has been a proliferation of Internet-based services, including:
o chat rooms;
o online magazines;
o news feeds;
o interactive games;
27
o educational and entertainment information;
o development of online communities; and
o virtual private networking.
This rapid growth is expected to continue as businesses increasingly use
the Internet to access and share information and to interact with a large number
of geographically dispersed consumers and business partners. Furthermore, an
Internet-based economy is emerging as more businesses use the Internet to sell
products and services, implement electronic commerce initiatives and utilize new
generations of Internet-enabled business applications.
In our opinion, participation in this emerging Internet-based economy and
realization of the benefits and efficiencies facilitated by new Internet-enabled
business applications are becoming increasingly important for the small business
office market, as well as the Internet service providers and telephone companies
which provide Internet service to them. The small business office market
includes small businesses, home offices and remote offices. We believe the
Internet allows these businesses to communicate more effectively with their
suppliers and customers and to access and share critical business information
both internally and externally. Overall, we believe the Internet and the
business applications enabled by the Internet present tremendous opportunities
for businesses to improve communications, collaborate with partners, suppliers
and customers, perform important processes online and realize cost and
operational efficiencies that may position them to compete more effectively with
organizations that have greater resources and market presence.
INTERNET ACCESS TECHNOLOGIES FACILITATE NEW APPLICATIONS. Analog dial-up
modems, which utilize regular telephone lines and data connections, currently
represent the most widely utilized method of accessing the Internet. While many
markets worldwide will continue to depend on these slower speed Internet access
technologies, new high-speed and high transmission capacity Internet access
technologies, such as digital subscriber lines and cable modems, have emerged in
recent years.
THE BROADBAND MARKET - HIGH-SPEED ACCESS. Integrated services digital
networks are rapidly becoming available in the United States as a method to
transmit more data over existing telephone lines. Integrated services digital
networks are, in most markets, priced comparably to standard analog telephone
circuits. These networks transmit data at greater speeds than the analog dial-up
modems. However, new emerging access technologies offer even greater
transmission capacity, provide much faster access speeds and enable a variety of
new data intensive, multimedia and graphical applications. These broadband
markets include:
o Digital Subscriber Line, which is a method for moving data over
existing copper telephone lines, but at a much faster rate than a
regular telephone connection;
o Interactive Cable, which allows for communication across cable
infrastructure;
o cable modems and cable modem termination centers; and
o wireless transmissions, which are movements of packets of
information over airwaves.
As these access technologies become more affordable and widely available,
we believe they will present increasingly attractive alternatives for satisfying
the Internet access requirements of small business offices.
In addition, we believe the small business office environment will
experience an even greater need to access the Internet via these emerging
technologies as new generations of business applications emerge that larger
competitors will be able to access through relatively expensive, dedicated
high-speed leased lines. Furthermore, the higher cost of digital subscriber
lines and cable modem access technologies compared to analog technologies will
increase the need of small business offices to utilize shared Internet access
solutions that enable costs to be allocated across a greater number of users.
TODAY'S SMALL BUSINESS OFFICE INTERNET ACCESS ENVIRONMENT. Worldwide,
there is an increasing demand for broadband access services. The Internet is
becoming increasingly popular to consumers for conducting business and personal
pursuits. Consequently, these consumers are seeking high-speed, low-cost
solutions that enable them to benefit from advances in data transfer speed.
28
o SHARED ACCESS. Many small business offices have addressed the
Internet access problem by installing a single dedicated computer
that is connected to the Internet via a modem, an analog telephone
line and a single Internet service account shared by all users in
the office. This approach is inefficient because it requires users
to wait in line until the Internet terminal becomes available. In
addition, productivity is often reduced since many users fail to
access the Internet because it is not conveniently accessible from
their individual workplaces. As an alternative, some small business
offices have added additional modems, analog phone lines and
Internet service accounts for each employee requiring Internet
access. However, maintaining separate Internet connections for each
user is costly and difficult to manage. Moreover, neither of these
solutions enables shared Internet access among multiple users.
o EASE OF INSTALLATION AND USE. In our opinion, most small business
offices lack in-house information technology personnel, as well as
sufficient resources to hire outside consultants to implement and
maintain complex Internet access solutions. Therefore, small
business offices require Internet access solutions that are easy to
install, use, maintain and upgrade.
o AFFORDABILITY. Small business offices are often subject to budgetary
constraints. Therefore, the networking solutions that have been
widely adopted by larger organizations to accommodate shared access
often are prohibitively expensive for small business offices.
o EXPANDABILITY AND COMPATIBILITY. We believe small business offices
need Internet access solutions that accommodate their current
requirements and that can be expanded to accommodate additional
users as their businesses grow. In addition, many small business
offices seek solutions that meet these needs without having to
replace existing systems, invest significant capital in upgrades or
employ in-house information technology personnel. Many small
business offices have already made significant investments in
computer hardware, modems and software, and utilize widely available
analog access technologies. As a result, these small business
offices require Internet access solutions that are compatible with
existing hardware and software and flexible enough to support analog
access technologies, as well as emerging high-speed access
technologies.
In order to more fully participate in the evolving uses of the Internet,
we believe the small business office market will require easy-to-use, affordable
and expandable products that enable shared Internet access by multiple users and
that support a full range of existing and emerging Internet-enabled applications
and services.
THE BENEFITS OUR PRODUCTS ARE DESIGNED TO PROVIDE. Our products are
designed to provide a secure, shared Internet access solution. Our solution
allows multiple users in an office, workplace or home to simultaneously share
the same Internet connection. Our products are designed to support multiple
operating systems such as Windows, Macintosh, UNIX and Linux, while providing
network security during the delivery and receipt of Internet data packets.
Our products are designed to be compatible with traditional telephone and
data connections that operate at slow speeds, as well as high-speed
technologies, including integrated services digital networks, digital subscriber
lines and cable modems. In addition, our products extend the benefits of analog
technology by enabling multiple users to access the Internet simultaneously
through regular telephone lines and analog modems at up to 30 times the access
speed of a single analog connection. Our products offer the following key
benefits:
o EFFICIENT SHARED INTERNET ACCESS. The Internet Sharing Box product
line enables an entire office to share information, use e-mail, and
access the Internet independent of the access technology utilized.
Multiple users in an office can share a single Internet connection
and Internet service provider account.
o EASE OF INSTALLATION AND USE. We deliver a shared Internet access
solution. To facilitate easy installation, our Internet Sharing Box
product package contains step-by-step installation instructions and
easy-to-follow diagrams and illustrations for a variety of network
environments. Users can determine whether their computers are
appropriately configured to connect to our product. Our integrated
firmware, which is a category of memory chips that hold their
content without electrical power and is sometimes referred to as
"hard software", provides a single screen configuration to connect
the entire office to the Internet. Our products work within most
existing environments and operating systems, such as Windows,
Macintosh, UNIX and Linux.
29
o HIGH-SPEED ACCESS. Our Internet Sharing Box product line supports
all major Internet access technologies used by offices, including
traditional telephone and data connections, integrated services
digital networks, digital subscriber lines, and cable and wireless
connections.
o LOW COST OF OWNERSHIP. Our Internet Sharing Box product line is
designed to minimize installation, maintenance and Internet access
expenditures by enabling multiple users in an office to share a
single Internet connection and Internet service provider account. In
addition, the ease of installation and use of the Internet Sharing
Box product line enables small business offices to avoid hiring
in-house information technology personnel that might otherwise be
required to implement and maintain an effective Internet access
solution.
o EXPANDABILITY AND COMPATIBILITY. Our Internet Sharing Box product
line is designed to be compatible with most widely-used computers,
software, modems, and terminal adapters such as those manufactured
by 3Com, Cisco and Alcatel. This broad compatibility enables most
offices to leverage their prior technology investments by utilizing
our products with hardware and software that have already been
installed. In addition, our product line provides an office the
flexibility to expand Internet access as their needs require.
o FIREWALL PROTECTION. Our Internet Sharing Box products provide
firewall security among shared users. A firewall is a method for
keeping a network secure. Our products are also designed to keep
internal network traffic secure.
o VIRTUAL PRIVATE NETWORK. A virtual private network usually refers to
a network in which some of the parts are connected using the public
Internet, but data is transmitted in encrypted form, thus making the
network "virtually private." Our ISB2LAN product supports this
function.
A DESCRIPTION OF OUR PRODUCTS. We design and sell the Internet Sharing Box
(ISB) product line. The ISB products include the ISB SOHO, ISB Pro100, ISB
Pro400, ISB Pro800, ISB Pro800 Turbo and ISB Wave Base. The ISB products are
hardware routers that allow users, connected to the Internet to share their
Internet access at the same time using only one modem, one telephone line or
cable connection, and one Internet access account. In addition, the ISB series
of products are a "firewall," providing network security. The ISB products are
compatible with personal computers, PC, Macintosh, UNIX, NT, Linux computers and
any computer that uses a transmission control protocol/Internet protocol
(TCP/IP) browser interface.
All of the ISB products allow simultaneous and independent Internet access
for all users on a network, as well as firewall security protection to prevent
any unwanted access to the local network. All ISB products allow up to 253 users
to share one Internet connection.
o ISB SOHO - Designed specifically for shared Internet access and
Internet Security for the home or small officer user. The ISB SOHO
features simple installation and configuration. It connects to a
cable or digital subscriber line modem through an ethernet
connection to accommodate high speed data transmission. The ISB SOHO
has a high speed 4 port 10/100 switch and is great for Internet
games.
o ISB PRO100 - Designed specifically for shared Internet access and
Internet Security. The ISB Pro100 features simple installation and
configuration. The ISB Pro100 connects to a cable or digital
subscriber line modem through an ethernet connection to accommodate
high speed data transmission and has a high speed 1 port 10/100
switch with Duplex, over 8MB of Bi-Directional throughput to MAX out
the connection, Multi Session Ipsec, Multi Session PPPoE and a CAT5
Cable included.
o ISB PRO400 - Designed specifically for shared Internet access and
Internet Security, the ISB Pro400 features simple installation and
configuration. The ISB Pro400 connects to a cable or digital
subscriber line modem through an ethernet connection to accommodate
high speed data transmission and has a high speed 4 port 10/100
switch with Duplex, over 8MB of Bi-Directional throughput to MAX out
the connection, Multi Session IPsec, Multi Session PPPoE and a CAT5
Cable included.
o ISB PRO800 - Designed specifically for shared Internet access and
Internet Security, the ISB Pro800 features simple installation and
configuration and connects to a cable or digital subscriber line
modem through an ethernet connection to accommodate high speed data
transmission. The ISB Pro800 has a high speed 8 port 10/100 switch
with Duplex, over 8MB of Bi-Directional throughput to MAX out the
connection, Multi Session IPsec, Multi Session PPPoE and a CAT5
Cable included. Built for more demanding users.
o ISB PRO800 TURBO - Designed specifically for shared Internet access
and Internet Security the ISB Pro800 Turbo features simple
installation and configuration. The ISB Pro800 Turbo connects to a
cable or digital subscriber line modem through an ethernet
connection to accommodate high speed data transmission and has a
high speed 8 port 10/100 switch with Duplex, 2 modem ports, load
30
balance 2 broadband connections, double redundant connection backup,
over 8MB of Bi-Directional throughput to MAX out the connection,
Multi Session IPsec, Multi Session PPPoE and a CAT5 Cable included.
o ISB WAVE BASE - Designed specifically for shared Internet access and
Internet Security the ISB Wave Base features simple installation and
configuration and is an 802.11B (11MB) wireless Access Point. The
ISB Wave Base has a high speed 4 port 10/100 switch with Duplex,
over 8MB of Bi-Directional throughput to MAX out the connection,
Multi Session IPsec, Multi Session PPPoE and a CAT5 Cable included.
Designed for office laptop users.
BUSINESS STRATEGY. Our mission is to become a recognized provider of
Internet sharing and firewall security devices. We believe that in order to
accomplish our mission we need to be successful in completing the following
tasks:
o SATISFY CUSTOMERS. We believe that the Internet access solutions
currently offered by most personal computing and networking vendors
continue to be technically complex and generally unable to satisfy
the unique requirements of the work-at-home employee, telecommuter,
or home office user. Therefore, we believe the opportunity in these
markets is significant and we intend to continue to focus our
product development efforts, distribution strategies and support
services to satisfy the specific requirements of these market
segments.
o CONTINUING TO INTEGRATE EMERGING ACCESS TECHNOLOGIES INTO OUR
PRODUCTS. Our products are designed to support most major Internet
access technologies used by consumers. We believe our strategy of
developing products that are capable of being expanded will enable
our current and future customers to benefit from the deployment of
emerging, high-speed transmission technologies. Further, we believe
emerging, high-speed transmission technologies will increase the
demand in offices for shared Internet access solutions. Therefore,
we intend to support the commercialization of new high-speed
transmission technologies by pursuing partnering relationships with
high-speed transmission technology providers while continuing to
pursue the existing market for our traditional telephone and data
connection products.
o DEVELOP STRATEGIC ALLIANCES. In order to be apprised of industry
trends, to be compatible with emerging technologies and to be
recognized as a technologically savvy company, we have developed
relationships with various industry leaders, including Bell Canada,
Alaska Phone Company and Motorola.
SALES AND MARKETING OVERVIEW. Because of our limited financial resources
we have not had the resources to fully implement a marketing and sales force. In
order to increase our revenues, we will have to develop a marketing and sales
force with technical expertise and marketing capability. We anticipate that our
future sales staff will be employed both on an independent contractor basis and
as in-house employees.
We believe that the principal competitive factors for companies seeking to
use our type of products are product reliability and customer service.
We are developing our customer base through an active sales and marketing
campaign, primarily centered on building relationships with Internet service
providers and telephone companies. At present, we are concentrating our efforts
in North America. Unlike many of our competitors who target distributors and
retailers, our strategy is to target Internet service providers and telephone
companies. We believe these entities can target our ultimate consumer, the small
business office and home user. We believe that this approach will be more
efficient and less expensive than if we only use direct marketing or market our
products through value-added resellers and distributors.
o SALES STRATEGY. Currently, we primarily rely on direct sales to
generate new customers and to maintain relationships with existing
customers. We have six sales representatives. As our capacity and
operations grow we anticipate hiring regional sales engineers and a
Vice-President of Marketing and Sales to build an in-house direct
sales force.
31
o MARKETING STRATEGY. We plan to utilize a variety of marketing
techniques to generate awareness and inquiries.
o MAGAZINE/PROFESSIONAL JOURNAL/NEWSPAPER ADVERTISEMENT. We plan to
advertise in major telecommunications and Internet magazines
throughout the country using postcard inserts and other mail-in
techniques to foster inquiries and to solicit sales.
o WEBSITE. We have a website (www.Nexland.com) where information about
our Company and our services can be obtained. Users can also e-mail
a request for contact by one of our sales representatives at
Sales@Nexland.com. Interested parties can also call a toll-free
number (888-NEX-5264) and request informational literature.
o WEBSITE BANNER ADVERTISING. We currently utilize banner advertising
on selected websites, such as Microsoft LinkExchange, Practically
Networked and Carrick Solutions.
o EXPANSION STRATEGY: INTRODUCE NEW PRODUCTS AND SERVICES. Our
objective is to become a recognized provider of secured, shared
Internet access. We realize that in order to achieve this, we must
be innovative in our product design and functionality. In addition,
we must continue to establish strategic relationships.
COMPETITION. We compete in several different markets, each having its own
growth potential, expectations, customer base, and competitors. Some of our
competitors are affiliated with major international companies and, as a result,
are well financed and present a formidable challenge. We cannot be certain that
we will be able to compete with significant pricing pressure by our competitors.
Our current and potential competitors offer a variety of competitive
products, including shared Internet access products offered by Linksys, Netopia
and SMC and networking equipment products offered by Cisco, 3Com, Nortel and
Intel.
Many of our competitors are substantially larger than we are and have
significantly greater financial, sales and marketing, technical, and
manufacturing resources, as well as more established distribution channels.
These competitors may be able to respond more rapidly to emerging technologies
and changes in customer requirements, as well as devote greater resources to the
development, promotion and sale of their products. Furthermore, some of our
competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to gain market share. Our competitors may enter our existing or future markets
with solutions that may be less expensive, provide higher performance and
additional features or be introduced earlier than our solutions. Given the
market opportunity in the shared Internet access market, we also expect that new
competitors may enter our market with better products and technologies. If any
technology is more reliable, faster, less expensive or has other advantages over
our technology, then the demand for our products could decrease, which could
seriously harm our business.
We expect our competitors to continue to improve the performance of their
current products and to introduce new products and technologies as industry
standards and customer requirements evolve. These new products and technologies
may supplant or provide lower cost alternatives to our products. Successful new
product introductions or enhancements by our competitors could reduce the sales
or market acceptance of our products and services, perpetuate intense price
competition or make our products obsolete. To be competitive, we must invest in
research and development, sales and marketing, and customer support. We cannot
be sure that we will have sufficient resources to make such investments or that
we will be able to make the technological advances necessary to be competitive.
As a result, we may not be able to compete effectively against our competitors.
Our failure to maintain and enhance our competitive position within the market
may seriously harm our business. Increased competition is likely to result in
price reductions, reduced gross margins, and longer sales cycles, any of which
would seriously harm our business. We cannot be certain that we will be able to
compete successfully against current or future competitors or that competitive
pressures will not seriously harm our business.
On November 17, 1999, we entered into a Mutual Non-Competition Agreement
with Nexland, S.A. a French corporation, owned by several principal stockholders
of our Company. The agreement provides for the following:
o a five year non-competition period;
o Nexland France shall have exclusive sales rights to Europe;
32
o we shall have exclusive sales and marketing rights to North America,
South America, Central America and the Caribbean;
o if either party sells into the other's territory, the sales
contracts shall be assigned to the other party, and the assignee
shall pay the assignor 20% of the gross value of the contract.
INTELLECTUAL PROPERTY. We rely and intend to rely on a combination of
patent, copyright, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. We have one U.S. patent
pending relating to technology incorporated in our Internet Sharing Box product
line, consisting of an algorithm that allows the virtual private network
encrypted protocol to pass through our network address translation routers, thus
securing the communication from unintended third parties. In addition, we design
and implement proprietary coded "firmware" which is designed to make the
Internet Sharing Box products function.
We also intend to enter into confidentiality agreements with our employees
and consultants, and control access to and distribution of our documentation and
other proprietary information. We cannot assure you that others will not
independently develop similar or competing technology. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. We cannot assure you that
these precautions will prevent misappropriation or infringement of our
intellectual property. Monitoring unauthorized use of our products is difficult,
and we cannot assure you that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
Our industry is characterized by the existence of a large number of
patents and frequent claims and litigation regarding such patents and other
intellectual property rights. In particular, leading companies in the data
communication and networking markets have extensive patent portfolios with
respect to modem and networking technology. From time to time, these companies,
as well as others, have asserted and may assert exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are important to us. We expect that we may increasingly be
subject to infringement claims as the number of products and competitors in the
small business office market for shared Internet access solutions increase and
the functionality of products overlaps. In addition, we cannot assure you that
third parties will not assert additional claims or initiate litigation against
us or our manufacturers, suppliers or customers alleging infringement of their
proprietary rights with respect to our existing or future products. We may in
the future initiate claims or litigation against third parties for infringement
of our proprietary rights to determine the scope and validity of our proprietary
rights. Any such claims, with or without merit, could be time-consuming, result
in costly litigation and divert the attention of technical and management
personnel, or require us to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all. In the event of a
successful claim of infringement and our failure or inability to develop
non-infringing technology or license the proprietary rights on a timely basis,
our business, operating results and financial condition could be materially
adversely affected.
EMPLOYEES. As of July 2, 2001, we employed thirteen persons in Miami and
nine in Canada, including nine in operations and administration, one in
marketing, and five in customer support. We also employ seven commissioned and
salaried sales representatives. None of our employees is represented by a labor
union and we have experienced no work stoppages to date. We believe our employee
relations are good.
DESCRIPTION OF PROPERTY
In June 2000, we entered into a three-year lease for our offices located
at 1101 Brickell Avenue, 2nd Floor, North Tower, Miami, Florida 33131,
consisting of 7,500 square feet of corporate office space for $7,333 per month
plus tax for the first year, $14,808 for the second and $15,452 for the third.
For accounting purposes, rent expense is recorded on a straight-line basis.
In August 2000, Nexland Canada, our Canadian wholly-owned subsidiary,
entered into a one-year lease for an office located in Victoria, Canada,
consisting of 1,000 square feet of corporate office space for $1,000 per month
plus tax.
33
LEGAL PROCEEDINGS
The officers and directors of our Company believe that, to the best of
their knowledge, neither our Company nor any of its officers and directors are
parties to any legal proceeding or litigation. Further, the officers and
directors know of no threatened or contemplated legal proceedings or litigation.
34
MANAGEMENT
Our Company's present directors and executive officers are as follows:
NAME AGE POSITION
- ----------------------------- -------- -------------------------------------
Gregory S. Levine 33 President, Chairman of the Board of
Directors
Martin E. Dell'Oca 38 Chief Financial Officer, Secretary
and Director
I. Daniel Sultan 50 Chief Technology Officer and Director
TERM OF OFFICE
The terms of office of the current directors continue until the annual
meeting of shareholders, which the bylaws of our Company provide shall be held
on the third Friday of November of each year; officers are elected at the annual
meeting of the Board of Directors, which immediately follows the annual meeting
of shareholders. In August 2000 the Company had its annual meeting of
shareholders at which time the current directors were elected for an additional
term.
The following is a brief description of the background of the directors
and executive officers of our Company.
GREGORY SCOTT LEVINE, 33, President and Chairman of our Board of
Directors, received his Bachelor of Arts Degree in Speech, Communication and
English Writing from the University of Florida in 1989. In 1991, Mr. Levine
entered the computer industry as Purchasing Manager with All Exim, located in
Miami, Florida, where he was employed until 1995. From 1995 to 1997, Mr. Levine
worked as a self-employed consultant. In 1997, Mr. Levine was hired as the
Business Unit Manager for Mass Storage and Components for Computer
2000/AmeriQuest Technologies where he supervised the business unit and was
associated with the development of the OEM Memory Broker Desk. In 1998, when
C2000 sold AmeriQuest, Mr. Levine opened his own consulting firm, the HG America
Group, Inc., which served major industry telephone companies (AT&T, GTE, Bell
Atlantic) with Internet sharing and firewall products. Mr. Levine operated HG
America Group, Inc. until he joined our Company in December, 1998. None of Mr.
Levine's prior employers are affiliated with our Company.
MARTIN E. DELL'OCA, 38, became Chief Financial Officer and a member of the
Board of Directors of our Company in May 2000. During March and April 2000, Mr.
Dell'Oca was a self-employed consultant to our Company. From May 1998 to
December 1999, Mr. Dell'Oca served as Chief Financial Officer of CHS Dinexim
after Dinexim was sold to CHS. From 1995 to May 1998, Mr. Dell'Oca was the Chief
Financial Officer of Dinexim. Mr. Dell'Oca received his undergraduate degree in
Marine Science and Economics from the University of Miami in 1985 and a Masters
Degree in International Business from Florida International University in 1989.
ISRAEL DANIEL SULTAN, 50, is the founder of Nexland, Inc. and Chief
Technology Officer and a Director. Mr. Sultan began his career as a Nuclear
Physics System Programmer at the College de France Laboratory of Nuclear
Physics. In 1973, he started a software training center in France, which is
still in business today under the direction of his wife. In 1990, Mr. Sultan ran
IPC France, a startup PC manufacturer, which grew to obtain 5% of the French
market in three years, prior to being sold in 1993. In 1994, Mr. Sultan founded
Nexland, LP and is currently Technical Director of Nexland France and a
principal shareholder of our Company. Mr. Sultan assisted our Company in
becoming the first company to offer a digital subscriber line and cable modem
sharing device based upon the Internet protocol of pppoe (point-to-point over
ethernet). Mr. Sultan earned his Ph.D. in computing from the University of
Paris, Jussieu, in 1986.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following persons failed to make the filings specified below:
EXECUTIVE COMPENSATION
The following table shows all the cash compensation paid by our Company,
as well as certain other compensation paid or accrued, during the fiscal years
ended December 31, 2000, 1999 and 1998 to our Company's three highest paid
executive officers. No restricted stock awards, long-term incentive plan payouts
or other types of compensation, other than the compensation identified in the
35
chart below, were paid to these executive officers during these fiscal years. No
other executive officer earned a total annual salary and bonus for any of these
years in excess of $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------------- -------------------------------------------------------
AWARDS PAYOUTS
---------- ------------------------------------------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
RESTRICTED SECURITIES
NAME & PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
COMPENSATION YEAR SALARY ($) BONUS ($) COMPENSATION ($) AWARDS OPTIONS PAYOUTS COMPENSATION
- ---------------- ---- ---------- --------- ---------------- ---------- ----------- ------- --------------
Greg Levine 2000 $100,000 -0- $10,000 -0- 700,000(1) -0- -0-
President and 1999 $100,000 -0- -0- -0- -0- -0- -0-
Chairman of 1998 -- -- -- -- -- -- --
the Board
Martin Dell'Oca 2000 $92,667(2) -0- -0- $500,000(3) 400,000(4) -0- -0-
Chief 1999 -0- -0- -0- -0- -0- -0- -0-
Financial 1998 -- -- -- -- -- -- --
Officer and
Secretary
(1) Mr. Levine received 700,000 options, of which 550,000 are currently vested
and, commencing September 6, 2001, 37,500 options vest each year for a
4-year period.
(2) Mr. Dell'Oca received $76,000 as salary and $16,667 for consulting
services rendered to our Company from March 1 to April 30, 2000, prior to
his position as Chief Financial Officer.
(3) Mr. Dell'Oca received 200,000 shares of common stock of our Company on May
1, 2000. Such common stock is forfeitable by Mr. Dell'Oca if he resigns
from our Company prior to the expiration of his two year employment term
or if he is terminated for "cause." Our Company recorded the transaction
at a market value of $2.50 per share and is amortizing it over 24 months.
(4) Mr. Dell'Oca received 400,000 options, of which 250,000 are currently
vested and, commencing September 6, 2001, 37,500 options vest each year
for a 4-year period.
EMPLOYMENT AGREEMENTS
On May 1, 2000, our Company entered into a five-year employment agreement
with Mr. Levine. Pursuant to this agreement, Mr. Levine is employed as the
President of our Company. Mr. Levine has an annual base salary of $100,000,
which will increase to $150,000 upon our Company obtaining equity investments
and/or debt financing totalling in the aggregate of at least $1,000,000. In
addition, Mr. Levine will be entitled to incentive bonus compensation in an
amount to be determined by our Board of Directors. In the event that Mr.
Levine's employment is terminated by our Company without "cause," other than in
connection with a change of control, he is entitled to receive his salary for a
period of 12 months from the date of termination. The agreement provides that
Mr. Levine will not compete with our Company during his employment and for one
year thereafter.
On May 1, 2000, our Company entered into a two-year employment agreement
with Mr. Dell'Oca. Pursuant to this agreement, Mr. Dell'Oca is employed as the
Chief Financial Officer of our Company. Mr. Dell'Oca has an annual base salary
of $100,000, which will increase to $120,000 upon our Company obtaining equity
investments and/or debt financing totalling in the aggregate of at least
$1,000,000. In addition, Mr. Dell'Oca received 200,000 shares of common stock of
our Company, which will be forfeited by Mr. Dell'Oca if he resigns from his
employment prior to the expiration of the employment term or if he is terminated
for "cause." Mr. Dell'Oca has piggy-back registration rights with respect to his
stock in our Company. In the event that Mr. Dell'Oca's employment is terminated
by our Company on or after May 1, 2001 without "cause," other than in connection
with a change of control, he is entitled to receive his salary for a period of
12 months from the date of termination. The agreement provides that Mr. Dell'Oca
will not compete with our Company during his employment and for one year
thereafter.
36
The following table contains information regarding options exercised in
the year ended December 31, 2000 and the number of shares of common stock
underlying options held as of December 31, 2000 by our Company's executive
officers.
AGGREGATED OPTIONS/SAR EXERCISES
IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTIONS/SAR VALUES(1)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SAR'S OPTIONS/SAR'S
ACQUIRED ON VALUE AT FISCAL YEAR AT FISCAL YEAR
NAME EXERCISE REALIZED ($) END(1) END(2)
- ------------------ ----------- ------------ --------------- --------------
Gregory S. Levine -0- -0- Exercisable 550,000 $41,000
-0- -0- Unexercisable 150,000 --
Martin Dell'Oca -0- -0- Exercisable 250,000 $21,500
-0- -0- Unexercisable 150,000 --
- -------------------
(1) These grants represent options to purchase common stock. No SAR's have
been granted.
(2) The value of the unexercised in-the-money options were calculated by
determining the difference between the fair market value of the common
stock underlying the options and the exercise price of the options as of
December 29, 2000.
The following table contains information regarding grants of stock options
made during the year ended December 31, 2000 to our Company's executive
officers.
OPTION/SAR GRANTS TABLE
% TOTAL
NO. OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS/SARS IN FISCAL BASE PRICE
NAME GRANTED (#) YEAR (%) ($ PER SHARE) EXPIRATION DATE
- ------------------ ------------ ------------- --------------- ------------------
Gregory S. Levine 300,000 27.8% $0.120 November 27, 2010
100,000 9.1% $0.230 December 20, 2010
300,000 27.8% $0.843 September 6, 2010
Martin Dell'Oca 150,000 13.6% $0.120 November 27, 2010
100,000 9.1% $0.230 December 20, 2010
150,000 13.6% $0.843 September 6, 2010
COMPENSATION OF DIRECTORS
The shareholders elect all directors for a two-year term. No directors are
paid for their services on the Board, except that non-employee directors will be
granted options to purchase shares of our Company's common stock on an annual
basis. These options have an exercise price equal to the fair market value of
such stock on the date of grant, are immediately exercisable and have up to a
ten-year term.
STOCK INCENTIVE PLAN
On September 6, 2000, our Company adopted a Stock Incentive Plan, which
provides for the granting of 6,000,000 stock options and stock appreciation
rights to key employees. Options granted may be either "incentive stock
options," within the meaning of Section 422A of the Internal Revenue Code, or
non-qualified options.
37
PRINCIPAL SHAREHOLDERS
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of July 2, 2001, as to (i) each
person (or group of affiliated persons) known by us to own beneficially more
than 5% of our outstanding common stock, (ii) each of our directors, (iii) each
of our executive officers, and (iv) all directors and executive officers of our
Company as a group.
For the purpose of this table, beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. The number
of shares beneficially owned by a person includes shares of common stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of July 2, 2001. Shares issuable pursuant to such options are
deemed outstanding for computing the percentage ownership of the person holding
such options, but are not deemed outstanding for the purposes of computing the
percentage ownership of each other person.
38
COMMON STOCK
BENEFICIALLY OWNED
---------------------------
NAME AND ADDRESS
OF BENEFICIAL OWNER NUMBER PERCENTAGE(1)
----------------------------- --------------- --------------
I. Daniel Sultan 13,161,250(2)(3) 35.86%
P.O. Box 3783
Hallandale, Florida 33008
Andre Chouraqui 5,544,500 15.34%
Barker Road #2, House #9
The Peak, Hong Kong
Laurent Solomon(4) 5,044,500 13.95%
P.O. Box 9096
Daytona Beach, Florida
32120
Greg Levine 3,302,500(5)(6) 8.96%
P.O. Box 693267
Miami, Florida 33169
Yves Many(7) 2,522,250 6.98%
P.O. Box 693267
Miami, Florida 33169
Enrique Dillon 500,000 1.38%
c/o Nexland, Inc.
1101 Brickell Avenue
Suite 200, North Tower
Miami, Florida 33131
Martin Dell'Oca 600,000(8) 1.64%
385 Hampton Lane
Key Biscayne, FL 33149
All directors and 17,063,750 45.14%
executive officers
as a group (3 persons)
(1) Applicable percentage of ownership is based on 36,153,385 shares of common
stock outstanding as of July 2, 2001, together with applicable options for
each shareholder. Beneficial ownership is determined in accordance with
the rules of the Commission and generally includes voting an investment
power with respect to securities. Shares of common stock subject to
options that are currently exercisable or exercisable within 60 days of
July 2, 2001 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. The common stock
is the only outstanding class of equity securities of our Company.
(2) Includes 12,414,884 shares that are held of record by BH Investor Group,
LLC. This entity is controlled by Israel Daniel Sultan.
(3) Includes options owned by Mr. Sultan to acquire 550,000 shares of our
Company's common stock within 60 days of July 2, 2001.
(4) These shares are held of record by Fast-Access Group, LLC. This entity is
controlled by Laurent Solomon.
(5) Includes 2,522,250 shares that are held of record by Broadband Investor
Group, LLC. This entity is controlled by Greg Levine, our President.
(6) Includes options owned by Mr. Levine to acquire 700,000 shares of our
Company's common stock within 60 days of July 2, 2001.
(7) These shares are held of record by High-Speed Venture, LLC. This entity is
controlled by Yves Many.
(8) Includes 200,000 shares of our Company's common stock that were granted to
Mr. Dell'Oca pursuant to his employment agreement. These shares are
subject to forfeiture under certain conditions and are held in escrow
during the forfeiture period. Also includes options to acquire 400,000
share of our Company's common stock within 60 days of July 2, 2001.
To the knowledge of our management, there are no present arrangements or
pledges of securities of our Company, which may result in a change in control of
our Company.
39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our Company has not engaged in any transactions with management or others
in which the amount involved exceeds $60,000 other than the following:
On March 14, 2000, we entered into a five-year Consulting Agreement with
Nexland France, which provides for the following:
o $175,000 per annum to commence January 1, 2001 for consulting
services if we obtain at least $1,000,000 in financing;
o the consulting services will be performed by Israel Daniel Sultan,
Nexland LP's founder, and one of our principal shareholders and a
director of our Company;
o we may terminate the agreement without cause after December 31,
2001, other than in connection with a change of control, in which
case the consultant shall receive one year severance pay; and
o should the consultant be terminated, without cause, 90 days prior,
or one year subsequent, to a change of control, the consultant shall
be entitled to twice its annual fee. "Change of control" is defined
as any person or group (as defined by the Securities Exchange Act of
1934) obtaining 50% or more of our voting securities, or a
restructuring of our Company.
During 2000, our Company issued 30,000 shares of common stock to Mr. Fred
Schmid, former CEO and President of WindStar Resources, Inc., for management and
financial consulting services (consulting shares), which was recorded by a
charge to operations and credit to paid-in capital for $134,375. In addition,
our Company issued 39,213 shares of common stock to Mr. Schmid and Mr. Erik
Nelson, both of whom were former shareholders of WindStar Resources, Inc. as a
result of a late filing of our Company's Form S-1 (penalty shares), which
resulted in a charge to operations and a credit to paid-in capital for $247,532.
On September 20, 2000, we entered into a licensing agreement with Nexland,
S.A. Pursuant to the agreement we licensed to Nexland, S.A. the rights to
utilize the technology in Europe, Africa and the Middle East for 10 years.
On November 22, 2000 our Company entered into a settlement agreement in
which it agreed to dismiss a threatened lawsuit against Mr. Fred Schmid, Fred
Schmid Inc., Mr. Dale Runyon, a former principal shareholder of WindStar
Resources, Inc. and Mr. Erik Nelson (WindStar parties), and to terminate Mr.
Schmid's consulting agreement. In this connection, Messrs. Schmid and Nelson
agreed to escrow the consulting shares and the penalty shares with an escrow
agent and Mr. Dale Runyon agreed to return 800,000 shares of common stock that
were issued to him in a prior year. The settlement agreement provides that the
escrow agent holds the above-mentioned shares until such time as a Form S-1 is
declared effective by the Securities and Exchange Commission. After a Form S-1
is declared effective, the shares will be given to our Company. Upon completion
of the stock transfer and a Form S-1 being declared effective, the agreement
will be deemed to be fully performed and our Company will record the return of
these shares.
Our Company purchases all its Internet sharing devices from one supplier,
Smerwick, Ltd. The supplier is located in Taiwan, and its principal
shareholders, Laurent Solomon and Andre Chouraqui are also principal
shareholders of our Company. Purchases from this supplier aggregated $621,000
for 2000. Although there are a limited number of manufacturers of the particular
Internet sharing devices, management believes that other suppliers could provide
similar Internet sharing devices on comparable terms. A change in this supplier,
however, could cause a delay in manufacturing and affect results adversely.
On October 18, 2000, our Company entered into an agreement with Smerwick
Ltd., to issue 500,000 shares of our common stock to satisfy supplier debt of
$486,441. According to the agreement, our Company has the option (as defined) to
repurchase the 500,000 shares. In the event, Smerwick sells the shares for an
amount less than the supplier debt of $486,441, our Company will be indebted to
Smerwick for the shortfall. Since our Company is ultimately liable for repayment
of this obligation, our Company has not recorded the satisfaction of this
obligation for the 500,000 shares of issued stock. In this connection, our
Company has recorded the issuance of the 500,000 shares at par value, by
debiting paid in capital and crediting common stock.
40
As of December 31, 1999 our Company had a unsecured demand loan of
$174,317 from a principal shareholder, Israel D. Sultan. During 2000, our
Company and Mr. Sultan agreed to convert the then balance of the unsecured
demand loan plus interest of $196,367 into 196,367 shares of our common stock.
At the date of this transaction, our Company's common stock had a fair value of
$0.45 per share. Accordingly, our Company recorded the excess of the existing
obligation over the fair value of the common stock as a capital contribution.
A company controlled by one principal shareholder incurred research and
development costs on our Company's behalf for the further development of the
Internet access hardware routers. In this connection, our Company recorded as a
capital contribution $318,850, which represents the actual costs, incurred by
this company on our Company's behalf, substantially consisting of technician
salaries for subcontractors located in Taiwan. Our Company has no formal
agreement with this company.
41
COMPARATIVE STOCK PERFORMANCE
The following graph compares the performance of our Company's common stock
against the Russell 2000 and JP Morgan H & Q Computer Hardware Index for the
period commencing with the consummation on December 23, 1999 and ending on
December 31, 2000.
The graph assumes that $100 was invested on December 23, 2000 and that
dividends were reinvested.
================================================================================
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG NEXLAND, INC.,
THE RUSSELL 2000 AND THE JP MORGAN H & Q COMPUTER HARDWARE INDEX
================================================================================
DECEMBER 23, DECEMBER 31,
---------------- ------------------
1999 1999 2000
-------- -------- --------
Nexland, Inc. 100 94.12 3.76
Russell 2000 100 104.69 101.53
JP Morgan H & Q Computer 100 102.08 77.72
Hardware Index
[GRAPH]
42
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock is traded on the Over-the-Counter Bulletin Board market
under the symbol "XLND." There has been trading in our common stock since
December 23, 1999.
The following table sets forth, for each of the fiscal periods indicated,
the high and low bid prices for our common stock, as reported on the
Over-the-Counter Bulletin Board. These per share quotations reflect inter-dealer
prices in the over-the-counter market without real mark-up, markdown, or
commissions and may not necessarily represent actual transactions.
Calendar Year 2001
--------------------------------
High Bid Low Bid
--------------- ---------------
First Quarter $1.8438 $0.1900
Second Quarter $0.9000 $0.2700
Calendar Year 2000
--------------------------------
High Bid Low Bid
--------------- ---------------
First Quarter $7.8750 $3.750
Second Quarter $6.2500 $1.250
Third Quarter $2.3125 $0.625
Fourth Quarter $0.7500 $0.100
Calendar Year 1999
--------------------------------
High Bid Low Bid
--------------- ---------------
Fourth Quarter $7.8125 $5.125
On July 2, 2001, the closing trade price of the common stock as reported
on the Over-the-Counter Bulletin Board was $0.50. As of such date, there were
approximately 400 holders of record of our common stock.
We have not paid dividends in the past on any class of stock and we do not
anticipate paying dividends in the foreseeable future.
43
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The authorized capital stock of our Company consists of 50,000,000 common
shares, par value $0.0001 per share and 10,000,000 preferred shares, par value
$0.0001. As of July 2, 2001, we have 36,153,385 shares of our common stock
outstanding and no preferred shares have been issued. In addition, there are
4,399,179 options to purchase common stock outstanding. Immediately after this
offering, there will be an additional 13,673,814 shares of common stock
outstanding, all to be issued under the Equity Line of Credit. Our Company's
indebtedness consists of promissory notes in the amounts of Cdn. $171,796 and
Cdn $100,000. The following description is a summary of the capital stock of our
Company and contains the material terms of the capital stock. Additional
information can be found in the Articles of Incorporation and Bylaws filed with
this registration statement.
COMMON STOCK. Each share of common stock entitles the holder to one vote
on each matter submitted to a vote of our stockholders, including the election
of directors. There is no cumulative voting. Subject to preferences that may be
applicable to any outstanding preferred stock, stockholders are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors. Stockholders have no preemptive, conversion or other
subscription rights. There are no redemption or sinking fund provisions related
to the common stock. In the event of liquidation, dissolution or winding up of
our Company, stockholders are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding.
PREFERRED STOCK. The Board of Directors is authorized, subject to any
limitations prescribed by Delaware law, or the rules of any quotation system or
national securities exchange on which stock of our Company may be quoted or
listed, to provide for the issuance of shares of preferred stock in one or more
series; to establish from time to time the number of shares to be included in
each such series; to fix the rights, powers, preferences, and privileges of the
shares of such series, without any further vote or action by the shareholders.
Depending upon the terms of the preferred stock established by the Board of
Directors, any or all series of preferred stock could have preference over the
common stock with respect to dividends and other distributions and upon
liquidation of our Company or could have voting or conversion rights that could
adversely affect the holders of the outstanding common stock. Our Company has no
present plans to issue any shares of preferred stock.
OPTIONS. As of July 2, 2001, we have outstanding options to purchase
4,399,179 shares of our common stock consisting of the following:
NO. OF OPTIONS: EXERCISE PRICE:
--------------- ---------------
450,000 $0.120
300,000 $0.132
285,000 $0.230
338,000 $0.250
566,179 $0.300
1,000,000 $0.350
300,000 $0.400
150,000 $0.044
100,000 $0.045
610,000 $0.843
300,000 $0.927
LIMITATION OF LIABILITY: INDEMNIFICATION
Our Bylaws include an indemnification provision under which we have agreed
to indemnify directors and officers of our Company to fullest extent possible
from and against any and all claims of any type arising from or related to
future acts or omissions as a director or officer of our Company.
44
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
AUTHORIZED AND UNISSUED STOCK. The authorized but unissued shares of our
common and preferred stock are available for future issuance without our
shareholders' approval. These additional shares may be utilized for a variety of
corporate purposes including but not limited to future public or direct
offerings to raise additional capital, corporate acquisitions and employee
incentive plans.
TRANSFER AGENT
The transfer agent and register for our Company's common stock is Jersey
Transfer & Trust Co. Its address is 201 Bloomfield Avenue, Verona, New Jersey
07044.
EXPERTS
The financial statements for the year ended December 31, 2000 included in
the Prospectus have been audited by BDO Seidman, LLP, independent certified
public accountants to the extent and for the period set forth in their report
(which contains an explanatory paragraph regarding the Company's ability to
continue as a going concern) appearing elsewhere herein and are included in
reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
The financial statements for the year ended December 31, 1999 included in
the Prospectus have been audited by Williams & Webster, P.S., independent
certified public accountants to the extent and for the periods set forth in
their report (which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern) appearing elsewhere herein and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Kirkpatrick & Lockhart LLP, Miami, Florida.
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
Reports, registration statements, proxy and information statements, and
other information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of these materials may be obtained at
prescribed rates from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Securities and Exchange Commission maintains a site on the World Wide
Web (HTTP://WWW.SEC.GOV) that contains reports, registration statements, proxy
and information statements and other information. You may obtain information on
the Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330.
45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and
December 31, 2000 F-2
Consolidated Statements of Operations for the Three Months Ended
March 31, 2001 and March 31, 2000 (Unaudited) F-3
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2001 and March 31, 2000 (Unaudited) F-4
Notes to Consolidated Financial Statements (Unaudited) F-5
Reports of Independent Certified Public Accountants F-6-F7
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-8
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998 F-9
Consolidated Statements of Capital Deficit for the Years Ended
December 31, 2000, 1999 and 1998 F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998 F-11
Notes to Consolidated Financial Statements F-12
F-1
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 December 31, 2000
(Unaudited)
------------------------ ------------------
ASSETS
CURRENT
Cash $ 31,720 $ 59,523
Accounts receivable 155,527 119,131
Inventory 128,427 75,949
------------------------ ------------------
TOTAL CURRENT ASSETS 315,674 254,603
PROPERTY AND EQUIPMENT, less accumulated depreciation 38,085 32,072
DEPOSITS AND OTHER ASSETS 33,000 30,000
------------------------ ------------------
TOTAL ASSETS 386,759 316,675
======================== ==================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES
Accounts payable 89,946 56,876
Accrued professional fees 275,714 219,194
Accrued expenses 130,153 73,424
Due to factor 43,151 -
Due to related party supplier 523,053 401,819
Other liabilities 97,356 97,356
------------------------ ------------------
TOTAL LIABILITIES 1,159,373 848,669
CAPITAL DEFICIT
Preferred stock, $0.0001 par value; shares
authorized 10,000,000; no shares outstanding - -
Common Stock, $0.0001 par value; shares
authorized 50,000,000; 36,153,385 and 34,094,703 shares
issued and outstanding, respectively 3,616 3,603
ADDITIONAL PAID-IN CAPITAL 3,204,127 3,001,613
UNEARNED COMPENSATION (270,837) (333,336)
DEFICIT (3,709,520) (3,203,874)
------------------------ ------------------
TOTAL CAPITAL DEFICIT (772,614) (531,994)
------------------------ ------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 386,759 $ 316,675
======================== ==================
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-2
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
SALES $757,698 $208,607
COST OF SALES 441,633 85,732
------------------------ ------------
GROSS PROFIT 316,065 122,875
------------------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 813,540 539,755
Depreciation 2,616 840
------------------------ ------------
TOTAL OPERATING EXPENSES 816,156 540,595
------------------------ ------------
INTEREST EXPENSE 5,555 5,536
------------------------ ------------
NET (LOSS) ($505,646) ($423,256)
------------------------ ------------
PER SHARE AMOUNTS:
Net loss per common share, basic and diluted ($0.01) ($0.01)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES, BASIC AND DILUTED 36,045,579 34,128,708
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-3
NEXLAND, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
-------------- --------------
OPERATING ACTIVITIES
Net loss $(505,646) $(423,256)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Compensation charge in connection with employment agreement 62,499 -
Contributed research and development services 113,919 -
Expenses paid by issuance of common stock 88,591 332,054
Provision for bad debts - 8,996
Depreciation 2,616 840
(Increase) decrease in:
Accounts receivable (36,396) (34,626)
Inventory (52,478) (149,012)
Deposits and other assets (3,000) -
(Decrease) increase in:
Accounts payable 33,070 269,681
Accrued professional fees 56,520 -
Accrued expenses 56,729 -
Due to factor 43,151 -
Due to related party supplier 121,234 -
Other liabilities (35) -
--------------------- -------------
Total adjustments 486,420 427,933
--------------------- -------------
Net cash (used in) provided by operating activities (19,226) 4,677
--------------------- -------------
INVESTING ACTIVITIES
Purchases of property and equipment (8,594) (8,380)
--------------------- -------------
Net cash (used in) investing activities (8,594) (8,380)
--------------------- -------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options 17 160,000
--------------------- -------------
Net cash provided by financing activities 17 160,000
--------------------- -------------
Net (decrease) increase in cash (27,803) 156,297
Cash, beginning of period 59,523 4,231
--------------------- -------------
Cash, end of period $31,720 $160,528
===================== =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $5,555 $-
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
F-4
NEXLAND, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements as of March 31, 2001 and for the three months
ended March 31, 2001 and 2000 have been prepared in accordance with Regulation
S-X and include all adjustments (consisting only of normal recurring accruals),
which are necessary for a fair presentation for the periods presented. Certain
information and footnote disclosures normally included in the consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. The condensed consolidated balance sheet
information as of December 31, 2000 was derived from the audited consolidated
financial statements included elsewhere herein. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
Company's audited finacial statements included elsewhere herein. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. EARNINGS PER SHARE
Net loss per share of common stock is based on the weighted average
number of common shares outstanding during each period. Diluted loss per share
of common stock is computed on the basis of the weighted average number of
common shares and dilutive options and warrants outstanding. All outstanding
options and warrants have an anti-dilutive effect and are excluded from the
calculation.
3. CAPITAL DEFICIT
During the three months ended March 31, 2001 the Company issued 126,000
shares of its common stock pursuant to the consulting services agreement
relating to capital investment and recorded a charge to consulting fees (based
on the then market value of the common stock) with a corresponding credit to
equity in the amount of $88,591.
On February 1, 2001, the Company granted the following options under
the 2000 Stock Incentive Plan:
o To an employee of the Company, options to purchase up to 75,000
shares of common stock at an exercise price of $0.70 per share on
February 1, 2001 and 75,000 shares of common stock at an exercise
price not less than 100% of the fair market value of a share of
common stock on the grant date per share on February 1, 2002.
These options vest one-forth on each of the first, second, third
and forth anniversaries of the grant date. These options may be
exercised within 10 years of the date of grant.
F-5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
of Nexland, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Nexland, Inc. and
Subsidiary as of December 31, 2000 and the related consolidated statements of
operations, capital deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nexland, Inc. and
Subsidiary as of December 31, 2000, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the consolidated financial statements, the Company's dependence on outside
financing and losses since inception raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 14. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Miami, Florida
January 26, 2001
Except for Note 17, which is as of January 31 and March 19, 2001
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
F-6
Board of Directors
Nexland, Inc.
Miami, Florida
Independent Auditor's Report
----------------------------
We have audited the accompanying balance sheet of Nexland, Inc. as of December
31, 1999 and the related statements of operations and stockholders' equity, and
cash flows, for the years ended December 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 Nexland, Inc. as of December
31, 1999, and the results of its operations and its cash flows for the years
ended December 31, 1999 and 1998 in comformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 17 to the
financial statements, the Company's significant losses raise substantial doubt
about its ability to continue as a going concern. Management's plans regarding
the resolution of this issue are also discussed in Note 17. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As described in Note 18 to the financial statements, the Company's earlier
method of accounting for certain business combinations have been deemed
inappropriate. The Company has elected to correct these financial statements for
the effects of these combinations. Accordingly, 1999 and 1998 financial
statements have been restated.
William & Webster, P.S.
Spokane, Washington
March 13, 2000 (except for Note 18, as to which the date is May 12, 2000 and
Notes 2 and 10, as to which the date is March 3, 2001 - all note references are
to the originally filed financial statements.)
F-7
NEXLAND, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 1999
--------------- ---------------
ASSETS
CURRENT
Cash $ 59,523 $ 4,231
Accounts receivable (Note 17) 119,131 78,597
Inventory (Note 3) 75,949 56,467
--------------- ---------------
TOTAL CURRENT ASSETS 254,603 139,295
PROPERTY AND EQUIPMENT, less accumulated depreciation
(Note 4) 32,072 4,775
DEPOSITS AND OTHER ASSETS 30,000 3,180
--------------- ---------------
TOTAL ASSETS $ 316,675 $ 147,250
=============== ===============
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES
Accounts payable $ 56,876 $ -
Accrued professional fees 219,194 -
Accrued expenses 73,424 16,683
Due to related party supplier (Note 7(c)) 401,819 180,113
Other liabilities (Note 7(b)) 97,356 100,357
--------------- ---------------
TOTAL CURRENT LIABILITIES 848,669 297,153
NOTES PAYABLE - RELATED PARTY (Note 7(d)) - 174,317
--------------- ---------------
TOTAL LIABILITIES 848,669 471,470
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Notes 7, 12, 14 and 17)
CAPITAL DEFICIT (Notes 7, 9, and 10)
Preferred stock, $0.0001 par value; shares
authorized 10,000,000; no shares outstanding - -
Common Stock, $0.0001 par value ; shares
authorized 50,000,000, 36,027,378 and 34,094,703
issued and outstanding, respectively 3,603 3,410
ADDITIONAL PAID-IN CAPITAL 3,001,613 -
UNEARNED COMPENSATION (333,336) -
DEFICIT (3,203,874) (327,630)
--------------- ---------------
TOTAL CAPITAL DEFICIT (531,994) (324,220)
--------------- ---------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 316,675 $ 147,250
=============== ===============
See accompanying notes to the consolidated financial statements
F-8
NEXLAND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 1999 1998
------------ ---------------- -----------
SALES (Notes 5 and 13) $ 1,472,950 $ 263,338 $ -
COST OF SALES (Note 7(c)) 734,364 129,311 -
------------ ---------------- -----------
GROSS PROFIT 738,586 134,027 -
------------ ---------------- -----------
OPERATING EXPENSES:
Selling, general and administrative (Notes 7, 9 and 10) 3,585,957 263,664 99,902
Depreciation 5,914 - -
------------ ---------------- -----------
TOTAL OPERATING EXPENSES 3,591,871 263,664 99,902
------------ ---------------- -----------
INTEREST EXPENSE 21,872 1,706 -
OTHER EXPENSE 1,087 - -
------------ ---------------- -----------
NET (LOSS) $ (2,876,244) $ (131,343) $(99,902)
============= ================ ===========
PER SHARE AMOUNTS (Note 9)
Net loss per common share, basic and diluted $ (.08) $ - $ -
============= ================ ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 34,833,231 30,053,926 29,500,000
============= ================ ===========
See accompanying notes to the consolidated financial statements.
F-9
NEXLAND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
(NOTES 7, 9, 10, 11, 12 AND 17)
Additional
Common Paid-in Unearned
Stock Capital Compensation (Deficit) Total
---------------- --------------- ---------------- -------------- -------------
Balance, December 31, 1997 2950 $ 64,950 $ $ (53,324) $ 14,576
Net loss for the year - - - (99,902) (99,902)
---------------- --------------- ---------------- -------------- -------------
Balance, December 31, 1998 2950 64,950 - (153,226) (85,326)
Stock exchanged in reverse
acquisition recapitalization
of WindStar Resources, Inc. by
Nexland, Inc. 460 (64,950) - (43,061) (107,551)
Net loss for the year - - - (131,343) (131,343)
---------------- --------------- ---------------- -------------- -------------
Balance, December 31, 1999 3410 - - (327,630) (324,220)
Issuance of Common Stock for cash 25 115,302 - - 115,327
Issuance of equity instruments for
services 7 533,900 - - 533,907
Issuance of Common Stock in
connection with employment
agreement 20 499,980 (333,336) - 166,664
Issuance of Common Stock in
connection with severance
agreement 50 1,124,950 - - 1,125,000
Issuance of Common Stock in
connection with exercise of
warrants and options 21 212,334 - - 212,355
Conversion of debt to Common Stock 20 196,347 - - 196,367
Issuance of Common Stock to
stockholder 50 (50) - - -
Contributed research and
development services - 318,850 318,850
Net loss for the year - - (2,876,244) (2,876,244)
---------------- --------------- ---------------- -------------- -------------
Balance, December 31, 2000 3,603 $ 3,001,613 $ (333,336) $ (3,203,874) $ (531,994)
================ ================ ================ ============== =============
See accompanying notes to the consolidated financial statements.
F-10
NEXLAND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 15)
YEARS ENDED DECEMBER 31, 2000 1999 1998
---------------- ------------- ----------------
OPERATING ACTIVITIES
Net loss $ (2,876,244) $ (131,343) $ (99,902)
---------------- -------------- ----------------
Adjustments to reconcile net loss to net cash (used in) operating
activities:
Compensation charge in connection with employment agreement 166,664 - -
Compensation charge in connection with severance 1,125,000 - -
Expenses paid by issuance of Common Stock 381,907 - -
Contributed research and development services 318,850
Expense in connection with reduction of warrant exercise price 77,000 - -
Expense in connection with issuance of options to consultants 75,000 - -
Interest relating to conversion of debt to Common Stock 15,948 - -
Straight-lining of lease payments 36,000 - -
Depreciation 5,914 1,716 1,528
(Increase) decrease in:
Accounts receivable (40,534) (78,597) -
Inventory (19,482) (48,824) (7,643)
Deposits and other assets (26,820) (3,180) -
(Decrease) increase in:
Accounts payable 56,876 98,745 7,643
Accrued professional fees 219,194 - -
Accrued expenses 20,741 51,486 2,253
Due to related party supplier 221,706 - -
Other 3,101 - -
---------------- ------------- ---------------
Total adjustments 2,637,065 21,346 3,781
---------------- ------------- ---------------
Net cash (used in) operating activities (239,179) (109,997) (96,121)
---------------- ------------- ---------------
INVESTING ACTIVITIES
Purchase of property and equipment (33,211) (2,251) (532)
---------------- ------------- ---------------
Net cash (used in) investing activities (33,211) (2,251) (532)
---------------- ------------- ---------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options 212,355 - -
Proceeds from issuance of Common Stock 115,327 - -
Advances from stockholder - 114,781 87,136
Other - 1,675 -
---------------- ------------- ---------------
Net cash provided by financing activities 327,682 116,456 87,136
---------------- ------------- ---------------
Net increase (decrease) in cash 55,292 4,208 (9,517)
Cash, beginning of year 4,231 23 9,540
---------------- ------------- ---------------
Cash, end of year $ 59,523 $ 4,231 $ 23
================ ============= ===============
See accompanying notes to the consolidated financial statements
F-11
NEXLAND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Nexland, Inc. ("Nexland" or "the Company") was incorporated on December
4, 1994 under the laws of the State of Florida. The Company is engaged in the
production and distribution of Internet sharing boxes that provide security
solutions that include firewall, content filtering and virtual private
networking. It considers these operations to be organized in one reportable
segment. The Company's sales are principally to United States customers with the
balance to customers in Canada.
Effective November 17, 1999, the Company was merged with WindStar
Resources Inc. (WindStar) through a reverse merger (See Note 11).
NOTE 2 - SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Nexland,
Inc. and its subsidiary. All material intercompany balances and transactions
have been eliminated in the consolidation.
INVENTORIES
- -----------
Inventories are stated at the lower of cost or market, with cost being
determined on an average cost basis.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
ranging from three to seven years.
LONG-LIVED ASSETS
- -----------------
The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. The Company evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At such time the evaluations indicate
that the future undiscounted cash flows of the long-lived assets would not be
sufficient to recover the carrying value of such assets, the assets would be
adjusted to their fair values. Any long-lived assets held for disposal are
reported at the lower of their carrying amounts or fair value less cost to sell.
INCOME TAXES
- ------------
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
REVENUE RECOGNITION
- -------------------
Revenue is recognized when products are shipped.
F-12
ADVERTISING
- -----------
Advertising costs are charged to operations in the year incurred; such
amounts aggregated $38,878 in 2000, $10,364 in 1999 and $0 in 1998.
ESTIMATES
- ---------
The preparation of the consolidated 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NET LOSS PER COMMON SHARE
- -------------------------
Net loss per common share is calculated according to Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" which requires
companies to present basic and diluted earnings per share. Net loss per common
share - Basic is based on the weighted average number of common shares
outstanding during the year. Net loss per common share - Diluted is based on the
weighted average number of common shares and dilutive potential common shares
outstanding during the year.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
Foreign currency denominated assets and liabilities of subsidiaries
with local functional currencies are translated to United States dollars at
year-end exchange rates. The effects of translation are recorded in the
cumulative translation component of capital deficit. Exchange gains and losses
arising from transactions denominated in foreign currencies are translated at
average exchange rates. The Company began its foreign operations during the
latter part of 2000; the effects of any exchange adjustments were not material
during 2000, and accordingly, no amounts were recorded as a cumulative
translation component of capital deficit as of December 31, 2000.
RECLASSIFICATIONS
- -----------------
Certain 1999 and 1998 amounts have been reclassified to conform to the
2000 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44 (Interpretation 44), Accounting for Certain
Transactions Involving Stock Compensation. Interpretation 44 provides criteria
for the recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 is effective
July 1, 2000, with certain provisions that were effective retroactively to
December 15, 1998 and January 12, 2000. Adoption of Interpretation 44 did not
have a material impact on the Company's earnings or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenues in financial statements and required adoption no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
Company implemented SAB 101 effective January 1, 2000 and its adoption did not
have a material impact on the Company's earnings or financial position.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
F-13
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS 133
was amended by SFAS 138 in June 1999 and is effective, as amended, for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of
SFAS 133 on January 1, 2001 will not have a material impact on the Company's
earnings or financial position.
NOTE 3 - INVENTORY
Finished goods inventories at December 31, 2000 and 1999 consist of
Internet sharing devices held for resale.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, 2000 1999
---------------- --------------
Furniture and fixtures $ 23,715 $ 8,434
Office equipment 17,930 -
---------------- --------------
41,645 8,434
Less accumulated depreciation (9,573) (3,659)
---------------- --------------
$ 32,072 $ 4,775
================ ==============
NOTE 5 - DEPENDENCY ON A CUSTOMER
Approximately 18% of the Company's revenues were generated by one
customer in the financial industry sector in 2000 and none in 1999 and 1998.
NOTE 6 - CONCENTRATIONS OF CREDIT RISK
The Company manufactures and distributes Internet sharing boxes to
companies in diversified industries. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. At December 31, 2000 and 1999, accounts receivable from customers in
the financial industry sector were approximately $33,000 and $0, respectively.
Receivables generally are due within 30 days.
NOTE 7 - RELATED PARTY TRANSACTIONS
a. SETTLEMENT AGREEMENT
--------------------
During 2000, the Company issued 30,000 shares of Common Stock to Fred
Schmid, former CEO and President of WindStar, for management and financial
consulting services (CONSULTING SHARES), which was recorded by a charge to
operations and credit to paid-in capital and par value for $134,375. In
addition, the Company issued 39,213 shares of Common Stock to Schmid and Erik
Nelson, both of whom were former stockholders of WindStar, as a result of a late
filing of the Company's Form S-1 (PENALTY SHARES), which resulted in a charge to
operations and a credit to paid-in capital and par value for $247,532.
On November 22, 2000 the Company entered into a settlement agreement in
which it agreed to dismiss a threatened lawsuit against Fred Schmid, Fred Schmid
Inc., Dale Runyon, a former principal shareholder of WindStar and Erik Nelson
(WindStar parties), and to terminate Schmid's consulting agreement. In this
connection, Schmid and Nelson agreed to escrow the CONSULTING SHARES and the
PENALTY SHARES with an Escrow Agent and Dale Runyon agreed to return 800,000
TRANSFER SHARES of Common Stock that were issued to him in a prior year. The
settlement agreement provides that the escrow agent hold the above-mentioned
shares until such time as a Form S-1 is declared effective by the SEC. After a
Form S-1 is declared effective, the shares will be given to the Company. Upon
completion of the stock transfer and a Form S-1 being declared effective, the
agreement will be deemed to be fully performed and the Company will record the
return of these shares.
F-14
b. OTHER LIABILITIES
-----------------
In connection with the reverse merger, the Company assumed various
current liabilities. As of December 31, 2000 and 1999 such liabilities
aggregated $97,356 and $100,357, respectively.
c. DEPENDENCY ON A SUPPLIER
------------------------
The Company purchases all its Internet sharing devices from one
supplier, Smerwick, Ltd. The supplier is located in Taiwan, and its principal
shareholders, Laurent Solomon and Andre Chouraqui are also principal
shareholders of the Company. Purchases from this supplier aggregated $621,000,
$178,000 and $8,000 for 2000, 1999 and 1998, respectively. Although there are a
limited number of manufacturers of the particular Internet sharing devices,
management believes that other suppliers could provide similar Internet sharing
devices on comparable terms. A change in this supplier, however, could cause a
delay in manufacturing and affect results adversely.
On October 18, 2000, the Company entered into an agreement with
Smerwick Ltd., to issue 500,000 shares of its Common Stock to satisfy supplier
payables of $486,441. According to the agreement, the Company has the option (as
defined) to repurchase the 500,000 shares. In the event Smerwick sells the
shares for an amount less than the supplier debt of $486,441, the Company will
be indebted to Smerwick for the shortfall. Since the Company is ultimately
liable for repayment of this obligation, the Company has not recorded the
satisfaction of this obligation for the 500,000 shares of issued stock. In this
connection, the Company has recorded the issuance of the 500,000 shares at par
value, by debiting paid in capital and crediting Common Stock.
d. DUE TO PRINCIPAL STOCKHOLDER
----------------------------
As of December 31, 1999 the Company had an unsecured demand loan of
$174,317 from an officer and principal shareholder, Israel D. Sultan. During
2000, the Company and Mr. Sultan agreed to convert the then balance of the
$196,367 unsecured demand loan plus interest into 196,367 shares of Common
Stock. At the date of this transaction, the Company's Common Stock had a fair
value of $0.45 per share. Accordingly, the Company recorded the excess of the
existing obligation over the fair value of the Common Stock as a capital
contribution.
e. NONQUALIFIED OPTIONS TO LAW FIRM
--------------------------------
On December 31, 2000, the Company granted nonqualified options pursuant
to the 2000 Stock Incentive Plan to a law firm to purchase up to 238,000 shares
of Common Stock at an exercise price of $0.25 per share. The law firm and
certain partners therein are shareholders of the Company. These options vest
immediately and may be exercised within ten years of the date of grant. The
Company recorded the fair value of each option at the grant date by using the
Black-Scholes option pricing model. The fair value of these options amounting to
$38,000 was charged to operations in 2000.
f. CONTRIBUTED RESEARCH AND DEVELOPMENT
------------------------------------
A company controlled by one principal shareholder incurred research and
development costs on the Company's behalf for the further development of the
Internet access hardware routers. In this connection, the Company recorded as a
capital contribution of $318,850, which represents the actual costs, incurred by
this company on the Company's behalf, substantially consisting of technician
salaries for subcontractors located in Taiwan. The Company has no formal
agreement with this company. During the comparable period in 1999, the Company
did not incur any research and development costs, since it purchased ready to
sell finished goods inventory.
F-15
g. NEXLAND S.A.
------------
On November 17, 1999 the Company entered into a mutual non-competition
agreement with Nexland S.A., a French corporation owned by certain principal
stockholders of the Company. The agreement provides for:
o a five year non-competition period;
o Nexland France shall have exclusive sales rights to Europe;
o the Company shall have exclusive sales and marketing rights to
North America, South America, Central America and the
Caribbean;
o if either party sells into the other's territory, the sales
contracts shall be assigned to the other party, and the
assignee shall pay the assignor 20% of the gross value of the
contract.
On September 20, 2000, the Company entered into a licensing agreement
with Nexland, S.A. Pursuant to the agreement the Company licensed to Nexland,
S.A. the rights to utilize its technology in Europe, Africa and the Middle East
for 10 years.
NOTE 8 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At December 31,
2000, the Company had federal net operating losses (NOL) of approximately
$2,500,000. The NOL expires during the years 2019-2020. In the event of a change
in ownership of the Company, the utilization of the NOL carryforward will be
subject to limitation under certain provisions of the Internal Revenue Code.
Realization of any portion of the approximate $1,100,000 deferred
federal tax asset at December 31, 2000, resulting from the utilization of the
NOL, is considered more likely than not by management; accordingly, a valuation
of allowance has been established for the full amount of such asset.
Significant components of the Company's deferred tax liabilities and assets at
December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
------------- ------------- -------------
Deferred tax assets:
Professional and consulting fees 137,000 - -
Net operating loss carryforwards 963,000 9,500 -
Valuation allowance for deferred tax assets (1,100,000) (9,500) -
------------- ------------- -------------
Net deferred tax asset $ - $ - $ -
============= ============= =============
A reconciliation between actual income taxes and amounts computed by applying
the federal statutory rate of 34% to pre-tax loss before loss is summarized as
follows:
2000 1999(a) 1998(a)
--------------------------------------------------------------
U.S. Federal statutory rate on earnings (loss)
before income taxes $ (924,000) $ ( 44,657) $ (33,967)
State income tax, net of Federal benefit (158,000) - -
Increase in valuation allowance 1,090,500 - -
Other (8,500) 44,657 33,967
--------------------------------------------------------------
Income tax expense (benefit) $ - $ ________ $ ______
--------------------------------------------------------------
(a) Through November 16, 1999, these losses pertain to Nexland LP and
accordingly, for tax purposes, there is no corporate benefit.
F-16
NOTE 9 - COMMON STOCK
During 1998, the Board of Directors of WindStar authorized a 1-for-250
reverse stock split, thereby decreasing the number of issued and outstanding
shares and increasing the par value of each share to $0.0001.
On April 25, 2000, pursuant to an employment contract between the
Company and Enrique Dillon (the Chief Executive Officer at that time), the
Company issued 1,170,000 shares of Common Stock to him. On May 1, 2000, pursuant
to an employment contract between the Company and Martin Dell'Oca (Chief
Financial Officer) the Company issued 200,000 shares of Common Stock to him. In
connection with the employment agreement for Mr. Dell'Oca, the Company recorded
unearned compensation as a charge to capital deficit in the amount of $500,000
representing the fair value of the Common Stock at the date of grant. Such
amount is being amortized over the period of the employment agreement.
Amortization expense aggregated $166,664 during 2000.
On June 30, 2000, Mr. Dillon resigned from his position in the Company.
In connection with his resignation, the 1,170,000 shares of Common Stock issued
in connection with his employment agreement were forfeited. The Company in
consideration of the termination of the employment agreement issued 500,000
shares of Common Stock to the former executive. In connection therewith, the
Company recorded a charge to operations in the amount of $1,125,000 during 2000.
At December 31, 2000, 2,298,000 shares of Common Stock were reserved
for issuance under outstanding options and 3,702,000 shares of Common Stock were
reserved for the granting of additional shares. In addition, 3,089,203 shares of
Common Stock were reserved for issuance under warrants.
The following reconciles the components of the earnings per share (EPS)
computation:
For the years ended 2000 1999 1998
December 31,
---------------------------------------------------------------------------------------------------------------
Loss Shares Per Share Loss Shares Per Share Loss Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount Numerator Denominator Amount
Loss per common
share - basic: ($2,876,244) 34,833,231 $ (0.08) $ (131,343) 30,053,926 $ - $(99,902) 29,500,000 $ -
Effect of Dilutive
Securities
Options - - - - - - - - -
Warrants - - - - - - - - -
----------------------------------------------------------------------------- ------------------------------
Loss per common
share - assuming
dilution: $ (2,876,244) 34,833,231 $ (0.08) $ (131,343) 30,053,926 $ - $(99,902) 29,500,000 $ -
---------------------------------------------------------------------------------------------------------------
Options to purchase 2,298,000 shares of Common Stock prices ranging
from $0.12 to $0.927 per share were not included in the computation of loss per
share assuming dilution for 2000, as they would have an anti-dilutive effect.
There were no options to purchase Common Stock that would have a dilutive effect
on the computation of loss per common share in 1999 and 1998. Warrants to
purchase 3,089,203 shares of Common Stock at prices ranging from $2.50 to $5.00
per share were not included in the computation of loss per common share assuming
dilution for 2000, 1999 and for 1998 as they would have an anti-dilutive effect.
NOTE 10 - OPTIONS AND WARRANTS
On September 6, 2000, the Company adopted a Stock Incentive Plan (the
Plan), which provides for the granting of 6,000,000 stock options and stock
appreciation rights (SARs) to key employees. Options granted may be either
"incentive stock options," within the meaning of Section 422A of the Internal
Revenue Code, or non-qualified options.
The stock options are exercisable over a period determined by the Board
of Directors, but no longer than ten years after the date they are granted.
Information with respect to stock options under the Plan is as follows:
F-17
Year ended December 31 Price per share 2000
---------------------------------
Options outstanding at January 1 - -
Options granted $ 0.12 - 0.927 2,323,000
Options exercised/surrendered - -
Options cancelled $ 0.843 (25,000)
-------------
Options outstanding at December 31 - 2,298,000
Options available for grant under the - 3,702,000
Plan at December 31 ----------
Total reserved shares under the Plan - 6,000,000
Options exercisable under the Plan - 1,453,000
at December 31 =============
The following table summarizes information about stock options at
December 31:
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER OF OPTIONS WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
Range of Exercise Prices 2000 LIFE PRICE 2000 PRICE
------------------ ---------------- ------------ --------------- -------------
$0.12 - $0.132 750,000 9.91 $0.125 750,000 $0.125
$0.23 - $0.25 623,000 10.00 $0.241 553,000 $0.242
$0.843 to $0.927 925,000 9.75 $0.870 150,000 $0.843
-------------------- --------------------
2,298,000 1,453,000
A former officer of the Company's predecessor is entitled to purchase
up to 160,000 shares of the stock during the ten-year period commencing November
11, 1997 for exercise prices ranging from $0.25 to $2.50 per share, and up to
160,000 additional shares of stock, for the exercise price of $5.00 per share.
No options were granted or exercised during 1998 or 1999. In March 2000, options
were exercised at $1.00 per share with the Company receiving a total of
$160,000. Such amounts were issued outside of the Company's Stock Incentive
Plan.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for its stock option plan. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates for
awards under such plan consistent with the method of FASB Statement 123,
"Accounting for Stock-Based Compensation," the Company's net loss and loss per
share would have been reduced to the pro forma amounts indicated below:
2000 1999 1998
------------- ------------- -------------
Net (loss) as reported $ (2,876,244) $ (131,343) $ (99,902)
Net (loss) pro forma (3,422,565) (131,343) (99,902)
Basic earnings (loss) per share as reported (.08) - -
Basic earnings (loss) per share pro forma (.09) - -
The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option pricing model based on the following
assumptions:
YEAR ENDED DECEMBER 31, 2000
-----------------
Risk free interest rate 5.10% - 6.02%
Expected life 9.75 - 10 years
Expected volatility 49%
Dividend yield 0.0
In August 2000, in connection with a private placement, the Company
issued 254,741 shares of Common Stock at prices ranging from $0.12 to $0.45 per
share for cash of $115,327.
F-18
During 1996, the Company's predecessor (WindStar) issued 1,600,000
units in exchange for certain obligations. Each unit consisted of one share of
Common Stock, one "Class A Warrant" and one "Class B Warrant." Each "Class A
Warrant" may be exercised to purchase one share of Common Stock at exercise
prices ranging from $0.25 to $2.50 per share. Each "Class B Warrant" may be
exercised to purchase one share of Common Stock at an exercise price of $5.00.
The warrants are redeemable at any time upon the Company giving thirty days
written notice to the holder thereof at redemption price of $0.0025 per warrant.
The warrants are exercisable up to five years from the effective date of the
offering unless called sooner. In September 2000, private investors exercised
warrants to purchase 52,355 shares of the Company's Common Stock at $1.00 per
share. As of December 31, 2000, 1,489,203 "Class A Warrants" remain authorized
and outstanding (not exercised). No "Class B Warrants" have been exercised.
NOTE 11 - MERGER AND ACQUISITIONS
From inception until November 15, 1999, Nexland was inactive. On
November 15, 1999, the partners of Nexland LP assigned all their rights, title
and interest in partnership assets to Nexland, Inc. in exchange for 17,000
shares of Common Stock of Nexland, Inc. In a prior year, Mr. Israel D. Sultan, a
principal stockholder of Nexland, who owned 50% of Nexland LP was issued 3,000
shares of the Company's Common Stock for $3,000.
On November 17, 1999, WindStar acquired all of the outstanding Common
Stock of Nexland by exchanging each of its shares of Common Stock for 1,475
shares of WindStar. Nexland's shareholders received 29,500,000 shares of
WindStar for their 20,000 shares of Nexland's Common Stock. For accounting
purposes the acquisition has been treated as a reverse merger with Nexland as
the acquirer. WindStar was incorporated on March 22, 1995, under the laws of the
State of Arizona under the name of the Turtleback Mountain Gold Co., Inc. to
conduct business in the fields of mineral exploration, construction and mining.
WindStar has not realized any significant revenues from its planned operations.
The Company's unaudited pro forma consolidated results of operations
assuming the reverse merger occurred on January 1, 1998 is as follows:
PROFORMA
PROFORMA FOR THE YEAR ENDED DECEMBER 31, 1999: TOTAL
--------------
(UNAUDITED)
Revenue 263,338
Net loss (426,402)
Loss per share (0.01)
Weighted average number of Common Stock shares
outstanding 33,713,230
PROFORMA
PRO FORMA FOR YEAR ENDED DECEMBER 31, 1998: TOTAL
--------------
(UNAUDITED)
Revenue -
Net loss (260,566)
Loss per share (0.01)
Weighted average number of Common Stock shares
outstanding 33,662,223
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases commercial office space and office equipment under
lease agreements, which expire at various dates through 2003. The leases
generally contain renewal options and require that the Company pay for
utilities, insurance, property taxes, rental expense and maintenance. The
Company currently leases office space in Florida and in Canada. Rental expense
for 2000, 1999 and 1998 aggregated approximately $81,000, $19,081 and $8,546,
respectively. The Company has recorded the effect of straight-lining the rent
expense over the actual payments. In this connection, $36,000 is included in
accrued expenses as of December 31, 2000.
F-19
Minimum rental obligations under all noncancellable-operating leases
with terms of one year or more as of December 31, 2000, are as follows:
Years ending December 31, Amount
----------------
2001 $ 149,000
2002 182,000
2003 77,000
----------------
$ 408,000
================
NOTE 13 - OPERATIONS IN GEOGRAPHIC AREAS
ADJUSTMENTS CONSOLIDATED
UNITED AND
Year ended December 31, 2000 STATES CANADA ELIMINATIONS TOTAL
---------------------------- ------------- ------------- --------------- ------------------
Sales to unaffiliated customers $ 1,208,990 $ 263,960 $ $ 1,472,950
Transfers between geographic areas $ 160,781 $ $ (160,781) -
------------- ------------- --------------- ------------------
Total sales $ 1,369,771 $ 263,960 $ (160,781) $ 1,472,950
============= ============= =============== ==================
Operating profit (loss) $ (2,858,322) $ 5,037 $ $ (2,853,285)
============= ============= =============== ==================
Identifiable assets as of
December 31, 2000 $ 296,841 $ 80,664 $ (60,830) $ 316,675
============= ============= =============== ==================
Operating profit (loss) is total sales less operating expenses.
Identifiable assets are those assets of the Company that are identified
with operations in each geographic area. There were no operations outside the
United States in 1999 and 1998.
NOTE 14 - GOING CONCERN
The accompanying consolidated financial statements were prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations. Since
inception, the Company has been involved in the development of its Internet
sharing devices organizational infrastructure, and the performance
of preliminary marketing and sales. The Company's ultimate ability to attain
profitable operations is dependent upon obtaining additional financing and to
achieve a level of sales adequate to support its cost structure. During the year
ended December 31, 2000, the Company incurred losses of approximately $2.9
million, has a working capital deficiency of $594,066 and has $59,523 of cash,
all of which raises substantial doubt about the Company's ability to continue as
a going concern.
Management plans to undertake a comprehensive review of its ongoing
business to address reductions in its selling, general and administrative
expenses, including reductions in rent and professional fees. The Company is
involved in active ongoing negotiations with investment banks and other members
of the financial community to obtain additional sources of capital. Effective
February 1, 2001, it has begun factoring its receivables. As discussed in Note
17, the Company has taken the following steps to improve its cash flow for 2001:
o On January 31, 2001, the Company entered into a factoring agreement.
o On March 19, 2001, the Company entered into an agreement with an
institutional investor to purchase up to $5 million of the Company's
convetible debentures.
o The Company is in negotiations with potential purchasers of the
Company's Internet sharing boxes in substantial quantities.
F-20
Accordingly, there are no assurances that the Company will be
successful in achieving the above plans, or that such plans, if
consummated, will enable the Company to obtain profitable operations or
continue as a going concern.
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure is as follows:
2000 1999 1998
----------- ---------- ----------
Cash paid for interest $ - $ 1,706 $ -
Cash paid for taxes - - -
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures
about Fair Value of Financial Statements," requires estimated fair value amounts
to be determined by the Company's management using available market information
and other valuation methods. However, considerable judgement is required to
interpret market data in developing the estimates of fair value. Accordingly,
the estimates are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methods may have a material effect on the estimated fair value
amounts. Furthermore, the Company does not intend to dispose of a significant
portion of its financial instruments.
The Company's financial instruments consist principally of cash,
accounts receivable and notes payable. The carrying amounts of such financial
instruments approximated fair value at December 31, 2000 and 1999.
NOTE 17 - SUBSEQUENT EVENTS
(a) FACTORING
---------
On January 31, 2001, the Company entered into a factoring agreement.
The agreement expires on January 31, 2002 or until terminated by either party
with proper notice given as defined. The Company has assigned substantially all
of its accounts receivable to the factor, typically on a recourse basis. The
Company may request advances up to 75% of the eligible receivables. The factor
charges the Company a commission equal to .0667% per day for each uncollected
receivable from the invoice date to the payment date of such invoice, plus
interest on advanced funds equal to the greater of 10% or the interest publicly
announced by Citibank N. A., plus 2%. Obligations due to the factor under the
factoring agreement are collateralized by "receivables", as defined.
(b) LINE OF CREDIT
--------------
On March 19, 2001, the Company entered into a Line of Credit Agreement
(the " Credit Line"). Pursuant to the Credit Line, an institutional investor
agreed, if requested by the Company, to purchase up to $5 million of the
Company's debentures. The debentures are convertible into Common Stock at a
conversion price equal to a 20% discount of the market price of such stock, as
defined in the agreement. The timing of each sale and the number of debentures
to be sold is at the discretion of the Company, subject to various conditions,
including an effective registration of the conversion shares. The dollar amount
that the Company can request under any individual sale is subject to the average
trading volume of the Company's Common Stock for the preceding 40-day trading
period. The maximum term of the Credit Line is two years as defined. The
agreement contains various representations, warranties and covenants by the
Company, including limitations on the Company's ability to sell Common Stock or
Common Stock equivalents, sell assets, merge, or enter into certain other
transactions.
F-21
SECURITIES PURCHASE AGREEMENT
-----------------------------
On March 19, 2001, the Company entered into a Securities Purchase
Agreement with third party investors and a Placement Agent Agreement to provide
up to $250,000 less certain fees and expenses of the placement agent by the
issuance of convertible debentures. The debentures bear interest at 6% per year
and convert into the Company's Common Stock. Through April 19, 2001, the Company
issued debentures of $65,000 from which the Company received net proceeds of
approximately $43,000.
In connection with the issuance of such debentures, the difference
between the conversion price and the fair value of the Common Stock into which
the debentures are convertible, multipled by the number of shares into which the
debt is convertible at the issuance date of the debt or the date at which the
debentures become convertible will be recorded as intrinsic value of the
beneficial conversion feature and charged to interest expense in the Company's
statement of operations. Such amounts may be material to the Company's 2001
financial statements.
CONSULTING AGREEMENT
--------------------
In connection with entering into the Credit Line, the Company also
entered into consulting services agreement relating to capital investment and,
or debt financing. Under the agreement, the consultant will receive a fee equal
to 8.4% of the gross proceeds from each advance under the Credit Line. In
addition, on March 16, 2001, the Company issued 126,000 shares of its Common
Stock pursuant to the consulting services agreement.
The Company has granted the Credit Line investor, the consultant and
the placement agent certain registration rights. Pursuant to the registration
rights agreements, the Company is obligated to, among other things, register the
sale of the shares, in connection with the agreements referred to above.
Note 18 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
insert
2000 Quarter Ended March 31 June 30 (a) September 30 December 31
-----------------------------------------------------------------
Revenues $ 208,607 $ 241,270 $ 319,574 $ 703,499
Gross Profit $ 122,875 $ 149,807 $ 174,665 $ 291,239
Net income (loss) $ (423,256) $ (1,361,789) $ (480,474) $ (610,725)
Basic and diluted earnings (loss)
per common share $ (0.01) $ (0.04) $ (0.01) $ (0.02)
1999 Quarter Ended March 31 June 30 September 30 December 31 (b)
-----------------------------------------------------------------
Revenues $ 3,887 $ 31,015 $ 47,876 $ 180,560
Gross Profit $ (2,051) $ 9,612 $ (7,068) $ 133,534
Net income (loss) $ (7,616) $ (2,224) $ (71,355) $ (50,148)
Basic and diluted earnings (loss)
per common share - - - -
(a) During the quarter ended June 30, 2000, the Company recorded a charge
to compensation in connection with issuance of 500,000 shares of common
stock valued at $1,125,000 resulting from the severance of the
Company's former Chief Executive Officer.
(b) See footnote 11, which discusses the reverse merger that occurred
during the fourth quarter of 1999.
F-22
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE
ANY INFORMATION OR MAKE ANY
REPRESENTATIONS ABOUT NEXLAND, INC.,
EXCEPT THE INFORMATION OR
REPRESENTATIONS CONTAINED IN THIS
PROSPECTUS. YOU SHOULD NOT RELY ON
ANY ADDITIONAL INFORMATION OR
REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an ----------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
o except the common stock offered ---------------------
by this prospectus;
o in any jurisdiction in which the
offer or solicitation is not
authorized; 13,673,814 SHARES OF COMMON STOCK
o in any jurisdiction where the
dealer or other salesperson is
not qualified to make the offer NEXLAND, INC.
or solicitation;
o to any person to whom it is
unlawful to make the offer or
solicitation; or
o to any person who is not a __, 2001
United States resident or who is
outside the jurisdiction of the
United States.
The delivery of this prospectus or any
accompanying sale does not imply that:
o there have been no changes in
the affairs of Nexland, Inc.
after the date of this
prospectus; or
o the information contained in this
prospectus is correct after the
date of this prospectus.
-----------------------
45
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. All expenses will be paid by our Company.
Securities and Exchange Commission $ 1,700
Registration Fee
Printing and Engraving Expenses $ 5,000
Accounting Fees and Expenses $ 10,000
Legal Fees and Expenses $ 25,000
Blue Sky Qualification Fees and Expenses $ 10,000
Miscellaneous $ 8,300
-------
TOTAL $ 60,000
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
Our Company's bylaws provide that we have the power to indemnify any
officer or director against damages if such person acted in good faith and in a
manner the person reasonably believed to be in the best interests of our
Company. No indemnification may be made (i) if a person is adjudged liable
unless a Court determines that such person is entitled to such indemnification,
(ii) with respect to amounts paid in settlement without court approval or (iii)
expenses incurred in defending any action without court approval.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
On August 21, 1998, our Company issued 22,000 shares of common stock to
Baragan Mountain Mining, LLC valued at $2.50 per share for conversion of $55,000
of debt..
On October 23, 1998, our Company issued 41,520 shares of common stock
valued at $0.25 per share pursuant to the exercise of Class A Warrants of our
Company. All of these shares were purchased by unrelated persons.
On October 30, 1998, our Company issued 400 shares of common stock valued
at $0.25 per share pursuant to the exercise of Class A Warrants of our Company.
All of these shares were purchased by an unrelated person.
On November 6, 1998, our Company issued 6,000 shares of common stock
valued at $0.25 per share pursuant to the exercise of Class A Warrants of our
Company. All of these shares were purchased by an unrelated party.
On November 13, 1998, our Company issued 3,540 shares of common stock
valued at $0.25 per share pursuant to the exercise of Class A Warrants of our
Company. All of these shares were purchased by an unrelated party.
On February 23, 1999, our Company issued 2,000 shares of common stock
valued at $0.25 per share pursuant to the exercise of Class A Warrants of our
Company. All of these shares were purchased by unrelated parties.
On October 28, 1999, our Company issued 29,500,000 shares of common stock
pursuant to the acquisition of Windstar Resources, Inc.
On November 5, 1999, our Company issued 382,173 shares of common stock for
conversion of debt to equity. All of these shares were purchased by unrelated
parties.
On March 21, 2000, our Company issued 39,213 shares of common stock valued
at $6.31 per share to Erik Nelson in connection with a penalty for the late
filing of our Company's Form S-1 Registration Statement.
II-1
On March 21, 2000, our Company issued 160,000 shares of common stock
valued at $1.00 per share to Fred Schmid, our former Chief Executive Officer, in
connection with the exercise of options of our Company issued pursuant to the
acquisition of Windstar Resources, Inc.
On March 21, 2000, our Company issued 15,000 shares of common stock to
Fred Schmid, our former Chief Executive Officer and President. Of this issuance,
5,000 shares were valued at $4.00 per share, 5,000 shares were valued at $3.38
per share, and 5,000 shares were valued at $2.00 per share.
On May 5, 2000, our Company issued 1,170,000 shares of common stock to
Enrique Dillon, our former Chief Executive Officer, valued at $3.38 per share in
consideration of his employment. On July 7, 2000, Mr. Dillon subsequently
forfeited these shares and was issued 500,000 shares of common stock valued at
$2.25 per share pursuant to a severance agreement with our Company.
On May 5, 2000, our Company issued 200,000 shares of common stock valued
at $2.50 per share to Martin Dell'Oca, our Chief Financial Officer and a
Director, in consideration of his employment.
In July, 2000, our Company issued 6,313 shares of common stock valued at
$1.00 per share pursuant to the exercise of Class A Warrants of our Company. All
of these shares were purchased by unrelated parties.
In August, 2000, our Company issued 23,600 shares of common stock valued
at $1.00 per share pursuant to the exercise of Class A Warrants of our Company.
All of these shares were purchased by unrelated parties.
In September, 2000, our Company issued 19,359 shares of common stock
valued at $1.04 per share pursuant to the exercise of Class A Warrants of our
Company. All of these shares were purchased by unrelated parties.
On October 26, 2000, our Company issued 196,366 shares of common stock
valued at $1.04 per share to Daniel Sulton, a Director of our Company, for
conversion of debt to equity.
On October 26, 2000, our Company issued 500,000 shares of common stock
valued at $0.0001 per share to Andrei Chouraqui for conversion of debt to
equity.
Between October 26, 2000 and December 20, 2000, our Company issued 254,741
shares of common stock for cash of $128,761. These shares of common stock were
sold at prices ranging from $0.18 to $1.71 per share. All of these shares were
purchased by unrelated parties.
Between November 29, 2000 and December 9, 2000, our Company issued 3,083
shares of common stock valued at $1.00 per share pursuant to the exercise of
Class A Warrants of our Company. All of these shares were purchased by unrelated
parties.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding our Company so as to make an informed investment decision. More
specifically, our Company had a reasonable basis to believe that each purchaser
was an "accredited investor" as defined in Regulation D of the 1933 Act and
otherwise had the requisite sophistication to make an investment in our
Company's common stock.
II-2
ITEM 27. EXHIBITS.
---------
The following exhibits are filed as part of this registration statement:
The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.
The following documents are incorporated herein by reference from the
Registrant's Form S-1 Registration Statement filed with the Securities and
Exchange Commission (the "Commission"), Commission file #333-3074 on April 1,
1996 and declared effective by the Commission August 16, 1996:
NUMBER DOCUMENT
- ------ --------
3.1 Articles of Incorporation.
3.2 Amended Articles of Incorporation.
3.3 Bylaws of the Company.
4.1 Specimen certificate for Common Stock.
4.2 Specimen certificate for Class A Redeemable Warrants.
4.3 Specimen certificate for Class B Redeemable Warrants.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1997:
99.1 Stock Purchase Agreement.
99.2 Employment Agreement with Fred Schmid.
The following documents are incorporated herein by reference from the
Registrant's Form 10-K Annual Report for the period ended December 31, 1998:
3.3 Amended Articles of Incorporation dated December 31, 1997.
3.4 Amended Articles of Incorporation dated April 15, 1998.
The following documents are incorporated herein by reference from the
Registrant's Post Effective Amendment 1 to Form S-1 Registration Statement filed
with the Securities and Exchange Commission (the "Commission"),Commission file
#333-3074 on June 17,1998 and declared effective by the Commission June 19,1998:
3.3 Amended Articles of Incorporation dated December 31, 1997.
3.4 Amended Articles of Incorporation dated April 15, 1998.
The following documents are incorporated herein by reference from
the Registrant's Form 8-K Report filed on December 3, 1999:
2. Acquisition Agreement and Exhibits attached thereto.
The following documents are incorporated by reference from the
Registrant's Post-Effective Amendment 2 to Form S-1 Registration Statement filed
with the Commission, Commission file #333-3074 on April 3, 2000.
10.1 March 14, 2000, Consulting Agreement between Nexland S.A. and the
Company.
10.2 November 17, 1999, Mutual Non-Competition Agreement between
Nexland, S.A. and the Company.
10.3
November 17, 1999 Co-Operation Agreement between Smerwick, Ltd. and
the Company.
II-3
The following documents are incorporated by reference from the
Registrant's Form 8K filed with the Commission, Commission file
#333-3074 on May 12, 2000.
10.4 Employment Contract of Enrique Dillon.
10.5 Employment Contract of Martin Dell'Oca.
The following documents are incorporated by reference from the
Registrant's Form 10-K filed with the Commission on May 14, 2001:
4.4 2000 Stock Incentive Plan
10.6 Promissory Note dated August 1, 2000, by the Company payable to
Israel D. Sultan
10.7 Conversion Agreement dated October 26, 2000, between Israel D.
Sultan and the Company.
10.8 Line of Credit Agreement dated March 19, 2001, between Cornell
Capital Partners, L.P. and the Company.
10.9 Registration Rights Agreement dated March 19, 2001, between Cornell
Capital Partners, L.P. and the Company.
10.10 Escrow Agreement dated March 19, 2001, between Cornell Capital
Partners, L.P., the Company, Butler Gonzalez LLP and First Union
National Bank.
10.11 Form of Convertible Debenture
10.12 Consulting Services Agreement dated March 19, 2001, between
Yorkville Advisors Management, L.L.C. and the Company.
10.13 Securities Purchase Agreement dated March 19, 2001, between the
investors on Schedule I attached thereto (the "Investors") and the
Company.
10.14 Registration Rights Agreement dated March 19, 2001, between the
Investors and the Company.
10.15 Placement Agent Agreement dated March 19, 2001, between May Davis
Group, Inc. ("May Davis") and the Company.
10.16 Escrow Agreement dated March 19, 2001, between May Davis, the
Company and First Union National Bank.
The following documents are provided herewith:
5.1 Opinion re: Legality
23.1 Consent of Williams & Webster
23.2 Consent of Independent Certified Public Accountants
23.3 Consent of Kirkpatrick & Lockhart LLP
24.1 Power of Attorney
II-4
ITEM 28. UNDERTAKINGS.
------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933 (the "ACT");
(ii) 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 may be 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) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
Act, 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 bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer 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 small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this registration
statement to be signed on our behalf by the undersigned, in Miami, Florida.
NEXLAND, INC.
By:/s/ Gregory S. Levine
---------------------------------
Name: Gregory S. Levine
Title:President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sydney A. Harland his true and lawful
attorney-in-fact and agent, with full power of substitution and revocation, for
him and in his name, place and stead, in any and all capacities (until revoked
in writing), to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully for all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or is substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Gregory S. Levine President and Director August 7, 2001
- ------------------------
Gregory S. Levine
/s/ Martin Dell'Oca Chief Financial Officer and August 7, 2001
- ------------------------
Director
Martin Dell'Oca
/s/ Daniel Sultan Director August 7, 2001
- ------------------------
Daniel Sultan
II-6