As filed with the Securities and Exchange Commission on May 1, 1998.
Registration No. 333-3860
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
Post-Effective Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
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e-NET, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 1711 52-1929282
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification
number)
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Address of principal place of business or intended principal place of business)
ROBERT A. VESCHI, President and Chief Executive Officer
e-NET, INC.
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-----------
Copy to:
CHARLES A. SWEET, Esq.
Williams & Connolly
725 Twelfth Street, N.W.
Washington, D.C. 20005
(202) 434-5000
-----------
Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration Statement becomes effective.
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
Explanatory Note
This registration statement is a Post-Effective Amendment to the
Registration Statement on Form SB-2, Registration No. 333-3860, declared
effective on April 7, 1997 (the "IPO Registration Statement"), which registered
a primary offering of securities by e-Net, Inc. (the "Company") and an offering
of securities by a selling securityholder ("Selling Securityholder"). Pursuant
to the IPO Registration Statement, the Company registered its initial offer,
issuance and sale of 1,725,000 shares of common stock, per value $.01 per share
("Common Stock") (of which 1,500,000 were issued and sold); the offer, issuance
and sale of 1,725,000 Redeemable Common Stock Purchase Warrants (the
"Warrants"); the offer, issuance and sale of 1,725,000 shares of Common Stock
underlying the Warrants; and 250,000 shares of Common Stock sold by the Selling
Securityholder. This Post-Effective Amendment relates to the Common Stock
underlying the Warrants.
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PROSPECTUS
e-Net, Inc.
1,725,000 Shares of Common Stock Underlying
1,725,000 Redeemable Common Stock Purchase Warrants
This Prospectus relates to the offering (the "Offering") by e-Net, Inc.
(the "Company" or "e-Net") of an aggregate 1,725,000 shares (the "Offered
Stock") of common stock, par value $.01 per share ("Common Stock") issuable upon
the exercise of Redeemable Common Stock Purchase Warrants (the "Warrants," and
collectively with the Offered Stock, the "Securities"). Each Warrant entitles
the holder to purchase one share of Common Stock at $5.25 per share (subject to
adjustment) exercisable through April 7, 2002. The Warrants are redeemable by
the Company for $.05 per Warrant, on not less than thirty (30) days nor more
than sixty (60) days written notice if the closing bid price for the Common
Stock equals or exceeds $10.00 per share during any thirty (30) consecutive
trading day period ending not more than fifteen (15) days prior to the date that
the notice of redemption is mailed, and provided there is then a current
effective registration statement under the Securities Act of 1933, as amended
(the "Act") with respect to the issuance and sale of Common Stock upon the
exercise of the Warrants. See "Description of Securities"
The Company's Common Stock and the Warrants are quoted on the Nasdaq
SmallCap Market ("Nasdaq") under the symbols "ETEL" and "ETELW," respectively.
On April 23, 1998, the closing prices of the Common Stock and Warrants as quoted
on the Nasdaq SmallCap Market were $11 7/8 and $6 5/8 respectively. No Warrants
may be exercised without the availability of a current Prospectus. The holders
of the Warrants do not have any of the rights, privileges or liabilities of the
Company stockholders prior to warrant exercise.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS," ON PAGES 5-9 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Discounts and Proceeds to the Company(1)
Public Commissions
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Per Share $5.25 None $5.25
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Total $9,056,250 None $9,056,250
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(1) Before deducting expenses payable by the Company estimated at $65,000.
The date of this Prospectus is April 30, 1998.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements made herein that are not historical are forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimate," "project," "intend," "expect," "believe," and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below under "Risk Factors."
For additional information regarding these and other risks and uncertainties
associated with the Company's business, see "Risk Factors" below, as well as the
Company's reports filed from time to time with the Commission.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Post-Effective Amendment to a Registration Statement on Form
SB-2 (as so amended , the "Registration Statement"), pursuant to the Act, with
respect to the offer, issuance and sale of the Offered Stock (the "Offering").
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. The statements contained in
this Prospectus as to the contents of any contract or other document identified
as exhibits in this Prospectus are not necessarily complete, and in each
instance, reference is made to a copy of such contract or document filed as an
exhibit to the Registration Statement, each statement being qualified in any and
all respects by such reference. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and exhibits thereof which may be inspected without charge at the
principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549.
In April 1997, the Company became subject to the reporting requirements of
the Securities Exchange Act of 1934, and in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its New York Regional Office, Room 1400, 7 World Trade Center,
New York, New York 10048; and at its Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of such material can be
obtained from the Public Reference Section at prescribed rates. The Company
intends to furnish its shareholders with annual reports containing audited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any
information that is incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such requests
may be directed to Stockholder Relations, e-Net, Inc., 12800 Middlebrook Road,
Suite 200, Germantown, Maryland 20874, telephone (301) 601-8700.
-ii -
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including notes thereto, appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety.
The Company
e-Net, Inc., a Delaware corporation ("e-Net" or the "Company"), develops,
produces, markets and supports open telecommunications software and related
hardware that enable, enhance, and manage telephone communications over the
Internet, private Internet Protocol ("IP") networks and "intranets," and other
types of digital data networks (collectively, "Digital Data Networks" or
"DDNs"). The Company's Telecom 2000(TM) products ("Telecom 2000 Products")
provide a user-friendly method of high fidelity telephone communications through
DDNs. Through the use of Telecom 2000 Products, organizations can reduce their
telephone expenses by extending their telephone services to remote offices and
mobile employees, in some cases bypassing long distance service charges, while
using their existing internal DDNs.
The Company believes that, due to demand for lower cost telephone service,
the market for telephony through DDNs, while in its early stages, holds
significant potential for growth. According to a recent report issued by the
technology industry analysis firm Frost and Sullivan, the market for Internet
telephony gateways is forecast to grow from $4.7 million in 1996 to $1.8 billion
in 2001. Although the Company has not participated in any of the formal research
contained in the Frost and Sullivan report and cannot endorse its methods or
conclusions, the Company generally believes that this market will grow
substantially and that its products are well positioned to capture a significant
share of this new, emerging market.
The Company owns U.S. Patent No. 5,526,353, "System and Method for
Communicating Audio Data over a Packet-Based Network" (the "353 Patent"). The
Company believes that the 353 Patent is the first patent that specifically
involves telephony through DDNs. The Company believes that the 353 Patent may
provide certain strategic and technological advantages in the emerging market
for telephony through DDNs. The Company can make no assurances, however, as to
the extent of the advantages or protection, if any, that may be granted to them
as a result of the 353 Patent. The Company's current and anticipated product
line is not wholly dependent on the validity or applicability of the 353 Patent,
and not all of the Company's products are covered by the 353 Patent.
The Company's Telecom 2000 Products enable telephony through DDNs. Telecom
2000 products generally provide high fidelity duplex voice and telefax through
DDNs, and also generally offer traditional telephony features like call waiting,
call holding, call transfer, conference calling, billing, voice-mail and the
like. The Company views its products as offering several competitive advantages.
First, Telecom 2000 Products facilitate low-cost DDN telephone service with
substantially the same operating features and the voice quality of the
traditional telephone service. Next, the use of Telecom 2000 Products can be
gradually implemented so that growth from small installations to large
installations can occur while the user maintains high levels of performance and
preserves a substantial amount of its prior technology investment. Finally, the
distributed architecture of Telecom 2000 Products is designed to avoid certain
problems associated with centralized systems, such as the risk of system-wide
telephony loss due to the malfunction of a single computer or PBX, limitations
on system growth and excessive hardware cost.
There are three classes of Telecom 2000 Products, two of which include
products that are available for delivery. The first class comprises the smallest
system with the lowest number of ports, and includes the Telecom 2000 Desktop
System, currently being sold, and the Telecom 2000 Consumer System, now under
development. The second class, Telecom 2000 Customer Premises-based Gateway
Systems, now available for delivery, comprises medium-sized systems with between
24 and 96 ports in a single chassis, serving as a
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"gateway" to DDNs, consolidating customer site-originated telephone calling for
DDN-based transport efficiency and lower cost than traditional methods. The
third class, Telecom 2000 Carrier-Class Gateways, now under development,
comprises gateway products with a large number of ports, which are expected to
offer over 1,000 simultaneous call capacity in a single chassis, to meet
interconnection and compression standards and to be appropriate for sales to
telephone carriers.
e-Net began to sell Telecom 2000 Products in July 1997 with the
introduction of the Telecom 2000 Desktop System. The Company announced the
Telecom 2000 Customer Premise Equipment Gateway Systems, also known as the
Telecom 2000 T1/E1 Digital Trunk Interface, in October 1997 and has begun to
take orders for it. In December 1997, the Company announced its development plan
for the Telecom 2000 Carrier-Class Gateway in conjunction with Summa Four, Inc.
The Company expects this product to be available for sales in September 1998.
The Company expects to announce its Telecom 2000 Retail Consumer system in March
1998 and expects this product to be available for sales in May 1998. In regard
to any future products, no assurances can be given that these dates will be met.
e-Net has established, and expects to continue to establish, a variety of
strategic relationships that are intended to result in the embedding of e-Net
telephony-enabling technology in various DDN devices. Examples of the Company's
existing strategic relationships follow:
Strategic Relationship Date Established Purpose
- ---------------------- ---------------- -------
Sprint Communications Company, LP March 1996 Main Carrier Internet
Services and voice-over
data product planning and
testing
Paradyne Corporation June 1997 Cooperative development and
marketing of Digital
Subscriber Line ("DSL")
technology
Magellan Network Systems, Inc. August 1997 Carrier-Class Gateway
Product applications
software
Summa Four, Inc. December 1977 Carrier-Class Gateway
Product hardware
resource/programmable
switch backplane
Com21, Inc. January 1998 Cable television modem
telephony
IDT Corporation April 19, 1998 Retail consumer product
telephone software bundling
and network access
In April 1997, the Company completed its initial public offering of
securities (the "Initial Public Offering") and gained the listing of its Common
Stock on the NASDAQ SmallCap Market as "ETEL." e-Net was founded in January
1995. The Company maintains principal executive offices at 12500 Middlebrook
Road, Germantown, Maryland, 20874, telephone number 301-601-8700.
See "Risk Factors," "Management" and "Certain Transactions" for a
discussion of certain factors that should be considered in evaluating the
Company and its business.
-2 -
The Offering
Securities Offered ......................... 1,725,000 shares of Common Stock
underlying 1,725,000 Warrants.
Each Warrant entitles the
registered holder thereof to
purchase one share of Common Stock
for $5.25 (subject to adjustment)
during the five-year period ending
on April 7, 2002.
Common Stock outstanding as of
April 23, 1998 ........................... 6,500,000 shares(1)
Warrants outstanding as of
April 23, 1998 ........................... 1,725,000 (2)
Warrants exercised as of April 23, 1998 .... - 0-
Common Stock Outstanding if all Warrants
are exercised ............................ 8,225,000
Estimated Net Proceeds if all Warrants
are exercised ............................ $9,056,250(3)
Use of Proceeds ............................ Administrative expenses, operating
costs and working capital,
including telecommunications
products support and development,
capital equipment, marketing and
sales. See "Use of Proceeds."
NASDAQ Small Cap Market Symbols ............ Common Stock: ETEL
Warrants: ETEL W
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(1) Excludes an aggregate of 2,600,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options and warrants.
(2) Does not include (a) the issuance to the Company's placement agent in a
private placement of 750,000 shares of Common Stock completed in April 15,
1998 (the "Private Placement") for nominal consideration of a five-year
warrant to purchase up to 75,000 shares of Common Stock at an exercise
price equal to $9.00 (the "Placement Agent's Warrant"), or (b) the
issuance to the underwriter for the Initial Public Offering of warrants to
purchase 150,000 shares of Common Stock and 150,000 warrants exercisable
for a five-year period ending on April 7, 2002 at exercise prices of $8.25
and $0.21, respectively (the "Underwriter's Warrant").
(3) Assumes exercise of all Warrants at an exercise price of $5.25 before
deducting expenses payable by the Company as estimated at $65,000.
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Selected Financial Information
The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Financial Statements."
Income Statement Items
From the Beginning
of
Operations
(June 8, 1995 to 12 Months Ended 9 Months Ended 9 Months Ended
March 31, 1996)(1) March 31, 1997 December 31, 1997 December 31, 1996
------------------ -------------- ----------------- -----------------
Sales $294,000 $549,000 $ 378,000 $ 439,000
Gross Profit 206,000 139,000 170,000 135,000
Income (Loss)
from Operations 90,000 (1,269,000) (2,394,000) (617,000)
Net Loss (537,000) (6,938,000) (2,322,000 (6,330,000)
Loss per Share $(.18) $(1.72) $(.41) $(1.59)
Weighted
Average Shares
Outstanding 3,017,808 4,034,247 5,695,455 3,972,727
Balance Sheet Items
As adjusted for
Historical Pro Forma Exercise
December 31, 1997 December 31, 1997(2) of Warrants (3)
----------------- -------------------- ---------------
Cash & Investments $3,149,000 $ 8,324,000 $17,316,000
Total Assets 4,883,000 10,058,000 19,050,000
Stockholders' Equity 4,423,000 9,598,000 18,590,000
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(1) The selected financial information from the beginning of operations (June
8, 1995) to March 31, 1996 does not include a pro forma adjustment to
reflect certain additional compensation expenses. "See "Financial
Statements."
(2) Pro forma balance sheet items illustrates the effect of net proceeds of
$5,175,000 received from the sale of 750,000shares of common stock in
April, 1998, in a private placement transaction.
(3) Adjusted to reflect the exercise of 1,725,000 warrants.
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RISK FACTORS
An investment in the securities being offered is speculative in nature,
involves a high degree of risk and should not be made by an investor who cannot
afford to lose its entire investment. Each prospective investor should carefully
consider the following risks and speculative factors, as well as the others
described elsewhere herein, before making an investment.
As described under "Forward-Looking and Cautionary Statements," certain
statements made herein that are not historical are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below.
History of Operating Losses and Accumulated Deficit; Expected Losses;
Uncertainty of Future Profitability
The Company has never recorded an operating profit and had an accumulated
deficit of approximately $9,800,000 as of December 31, 1997. The ability of the
Company to achieve profitability in the future largely depends on its ability to
generate revenues from its products and services. Given the Company's focus on
markets that are subject to rapid technological change (see "- Technological
Change; Market Acceptance of Evolving Standards"), and the Company's resulting
intention to continue to expend greater resources on research and development,
revenues must increase commensurately for the Company to achieve profitability.
In view of the Company's operating history, there can be no assurance that the
Company will be able to generate revenue that is sufficient to achieve
profitability, to maintain profitability on a quarterly or annual basis or to
sustain or increase its revenue growth in future periods. The Company's limited
capitalization may adversely affect the ability of the Company to raise
additional capital in the future and could impair the Company's ability to
invest in research and development, sales and marketing programs and other
operations, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Limited Operating History
The Company was incorporated in Delaware on January 9, 1995 and, as such,
faces the risks and problems associated with businesses in their early stages of
development and has a limited operating history upon which to base an evaluation
of its prospects. Such prospects should be considered in light of the risks,
expenses and difficulties frequently encountered in the expansion of a business
in an industry characterized by a substantial number of market entrants and
intense competition. See "Business."
No Assurance of Future Profitability or Payment of Dividends
The Company can make no assurances that the future operations of the
Company will result in additional revenues or will be profitable. Should the
operations of the Company be profitable, it is likely that the Company would
retain much or all of its earnings in order to finance future growth and
expansion. Therefore, the Company does not presently intend to pay dividends,
and it is not likely that any dividends will be paid in the foreseeable future.
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Immediate and Substantial Dilution
An investor in the securities offered hereby will experience immediate and
substantial dilution. As of December 31, 1997, the Company had a pro forma net
tangible book value of approximately $9,598,000, or approximately $1.48 per
share which reflects the effect of the Private Placement on April 15, 1998.
After giving effect to the sale of the securities offered hereby at $5.25 per
Share, after deducting estimated offering expenses, pro forma net tangible book
value would have been $18,590,000, or $2.26 per share. The result will be an
immediate dilution to new investors of $2.99.
Possible Need for Additional Financing
The Company intends to fund its operations and other capital needs for the
next 12 months substantially from the remaining proceeds of the Initial Public
Offering, the Private Placement and this Offering, but there can be no assurance
that such funds will be sufficient for these purposes. The Company may require
substantial amounts of the proceeds of the Initial Public Offering, the Private
Placement and this Offering for its future expansion, operating costs and
working capital. The Company has access to a $1,000,000 line of credit, which it
has not drawn upon; this line expires in May, 1998, and, while the Company
believes it will be renewed, no assurance can be given in this regard. The
Company has made no definitive arrangements to obtain future additional
financing, if required, and there can be no assurance that such financing will
be available, or that it will be available on acceptable terms. See "Summary -
Use of Proceeds."
Dependence on Management
The Company is principally dependent on its current management personnel
for the operation of its business. In particular, Robert A. Veschi, the
Company's president and chief executive officer, has played a substantial role
in the development and management of the Company, although there is no assurance
that additional managerial assistance will not be required. The analysis of new
business opportunities will be undertaken by or under the supervision of the
management of the Company. The Company has entered into an employment agreement
with Mr. Veschi. This employment agreement is terminable at will by Mr. Veschi
without penalty. Accordingly, if the employment by the Company of Mr. Veschi
terminates, or he is unable to perform his duties, the Company may be materially
and adversely affected. The Company has purchased key-man life insurance on Mr.
Veschi in the amount of $2 million. The Company is the owner and beneficiary of
this insurance policy. See "Business" and "Management."
Dependence on Highly Qualified Technical Personnel
The Company believes that its future success will depend in large part
upon its continued ability to recruit and retain highly qualified technical
personnel. Competition for highly qualified technical personnel is significant,
particularly in the geographic area in which the Company's operations are
located. No assurances can be made that the Company's relationship with its
employees will remain favorable to the Company. See "Business - Employees" and
"Management."
Technological Change; Market Acceptance of Evolving Standards
The markets the Company serves are subject to rapid technological change,
changing customer requirements, frequent new product introductions and evolving
industry standards that may render existing services and products obsolete. As a
result, the Company's position in its existing markets or other markets that it
may enter could be eroded rapidly by product advancements by competitors. The
life cycles of the Company's services and products are difficult to estimate.
Broad acceptance of the Company's products and services by customers is critical
to the Company's future success, as is the Company's ability to design, develop,
test and
-6 -
support new software products and enhancements on a timely basis that meet
changing customer needs and respond to technological developments and emerging
industry standards, particularly client/server and Internet communications and
security protocols. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of services and products, or that new services and
products and enhancements will meet the requirements of the marketplace and
achieve market acceptance. Further, because the Company has only recently
commenced sales of its Telecom 2000 Products, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in the Company's products, or, if discovered, successfully
corrected in a timely manner. If the Company is unable to develop and introduce
services and products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, financial condition
and results of operations would be materially and adversely affected.
Broad Discretion in Application of Proceeds
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of this Offering, in order to address changed
circumstances and opportunities. As a result of the foregoing, the success of
the Company will continue to be substantially dependent upon the discretion and
judgment of the management of the Company with respect to the application and
allocation of the net proceeds of the Company's initial public offering and of
the Offering contemplated hereby. Pending use of such proceeds, the net proceeds
of this Offering will be invested by the Company in temporary, short-term
interest-bearing obligations. See "Summary - Use of Proceeds."
Uncertain Protection of Patent, Trademark, Copyright and Proprietary Rights
In March 1996, the Company acquired all right, title and interest in and
to the 353 Patent. The Company believes that the 353 Patent is the first patent
that specifically involves telephony through DDNs. The Company also believes
that the 353 Patent may provide certain strategic and technological advantages
in the emerging market for telephony through DDNs. The Company can make no
assurances, however, as to the extent of the advantages or protection, if any,
that may be granted to the Company as a result of the 353 Patent.
The Company currently has other patent and trademark applications pending;
however, there can be no assurance that these applications will be granted, or,
if granted, will result in substantial value to the Company. The Company may
file additional patent, trademark and copyright applications relating to certain
of the Company's products and technologies. If patents, trademarks or copyrights
are granted, there can be no assurance as to the extent of the protection that
will be granted to the Company as a result of having such patents, trademarks or
copyrights or that the Company will be able to afford the expenses of any
litigation which may be necessary to enforce its proprietary rights. Failure of
the Company's patents, trademark and copyright applications may have a material
adverse effect on the Company's business. Except as may be required by the
filing of patent, trademark and copyright applications, the Company will attempt
to keep all other proprietary information secret and to take such actions as may
be necessary to prevent the disclosure of the results of its development
activities and protect its trade secrets under applicable law. Such steps are
expected to include the execution of nondisclosure agreements by key Company
personnel and may also include the imposition of restrictive agreements on
purchasers of the Company's products and services. There is no assurance that
the execution of such agreements will be effective to protect the Company, that
the Company will be able to enforce the provisions of such nondisclosure
agreements or that technology and other information acquired by the Company
pursuant to its development activities will be deemed to constitute trade
secrets by any court of competent jurisdiction.
-7 -
Substantial Competition
Businesses in the United States and abroad that are engaged in Internet
technologies, products and services are substantial in number and highly
competitive, particularly in the field of Internet and IP network telephony.
Many of the companies with which the Company intends to compete are
substantially larger and have substantially greater resources than the Company.
It is also likely that other competitors will emerge in the future. The Company
will compete with companies that have greater market recognition, greater
resources and broader capabilities than the Company. As a consequence, there is
no assurance that the Company will be able to successfully compete in the
marketplace. See "Business - Competition."
Additional Authorized Shares and Shares Eligible for Future Sale May Adversely
Affect the Market
The Company is authorized to issue 50,000,000 shares of its Common Stock,
$.01 par value per share. If all of the Offered Stock offered hereby is sold,
there will be a total of 8,225,000 shares of Common Stock issued and
outstanding. However, the total number of shares of Common Stock issued and
outstanding does not include up to 75,000 shares of Common Stock issuable upon
exercise of the Placement Agent's Warrant, up to 300,000 shares of Common Stock
issuable upon the exercise of the Underwriter's Warrants, and up to 500,000
shares of Common Stock issuable upon the exercise of employee stock options.
After reserving a total of 875,000 shares of Common Stock for issuance upon the
exercise of all other options and warrants, including the Placement Agent's
Warrant and the Underwriter's Warrants, if all of the Warrants are exercised,
the Company will have at least 40,900,000 shares of authorized but unissued
capital stock available for issuance without further shareholder approval. Any
issuance of additional shares of Common Stock may cause current shareholders of
the Company to suffer significant dilution, which may adversely affect the
market for the Company's Common Stock.
4,750,000 of the Company's 6,500,000 outstanding shares of Common Stock as
of April 23, 1998 are "restricted securities" and, in the future, may be sold
upon compliance with Rule 144 under the Act. Rule 144 provides, in essence,
that, if there is adequate current public information available concerning the
Company, an affiliate, or a person holding "restricted securities" for a period
of one year, may sell only an amount every three months equal to the greater of
(a) one percent of the Company's issued and outstanding shares, or (b) the
average weekly volume of sales during the four calendar weeks preceding the
sale. Nonaffiliates, however, may sell "restricted securities" without such
volume limitation if their shares are held for two years. Assuming that all of
the Warrants are exercised and the shares of Common Stock offered hereby are
sold, but that there is no exercise of any other issued and outstanding options
or warrants, the Company will have 8,225,000 shares of its Common Stock issued
and outstanding, of which 4,750,000 shares will be "restricted securities."
Based on these assumptions, a holder of "restricted securities" who has held
them for at least one year may sell under Rule 144 at least up to 82,250 shares
during each three-month period. In connection with the Initial Public Offering
and the Private Placement, the stockholders holding 4,000,000 of the Company's
restricted shares have agreed not to sell, transfer, assign or dispose of any
restricted shares of Common Stock prior to April 7, 1999. The sale of a
significant number of these shares in the public market may adversely affect the
market price of the Company's securities.
Prospective investors should be aware that future sales may have a
depressive effect on the price of the Company's Common Stock and, therefore, the
ability of any investor to market his shares may directly depend upon the number
of shares that are offered and sold.
Exercise of Warrants May Have Dilutive Effect on Market
The Company's outstanding warrants, including the Warrants, the
Underwriter's Warrants and the Placement Agent's Warrant, will provide, during
their term, an opportunity for the holder to profit, upon exercise, from a rise
in any market price of the Common Stock, with resulting dilution in the
ownership interest in the
-8 -
Company held by the then present stockholders. Holders of warrants most likely
would exercise those warrants and purchase the underlying Common Stock at a time
when the Company may be able to obtain capital by a new offering of securities
on terms more favorable than those provided by such Warrants, in which event the
terms on which the Company may be able to obtain additional capital would be
adversely affected.
Risks Inherent in Event of Warrant Redemption
Any holder who does not exercise his Warrant prior to the time the
Warrants are redeemed after notice by the Company will forfeit his rights to
purchase the shares of Offered Stock underlying the Warrants. In the event that
the Company determines to issue the redemption notice, holders of Warrants will
be confronted with certain risks associated therewith. Because the redemption
price is a nominal amount ($.05 per Warrant) upon redemption, investors may be
forced (i) to exercise their Warrants when it may be financially disadvantageous
for such holder to do so, (ii) to sell the Warrants, if a public trading market
exists, notwithstanding possible adverse market conditions, or (iii) to accept
the nominal redemption price. Under no circumstances shall the Company exercise
any of its Warrant redemption rights at any time that a current Prospectus is
not available so as to permit Warrant exercise.
Continuing Registration Required to Exercise Warrants
The Company will be able to issue shares of Offered Stock upon exercise of
the Warrants only if there is then a current prospectus relating to the Offered
Stock and only if such Offered Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Warrants reside. The Company is required to
file post-effective amendments to the related registration statement to reflect
in this Prospectus any facts or events arising after the effective date of the
registration statement or the most recent post-effective amendment thereto which
individually or in the aggregate, represent a fundamental change in the
information set forth therein In accordance with Section 10(a)(3) of the
Securities Act of 1933, when a prospectus is used more than nine months after
the effective date of the related registration statement, the information
contained therein generally must be as of a date not more than sixteen months
prior to such use. The Company has undertaken to keep current the registration
statement containing this Prospectus in order to permit the purchase and sale of
the Offered Stock underlying the Warrants, but there can be no assurance that
the Company will be able to do so. The Company may decide not to seek to qualify
for sale the shares of Offered Stock in all of the states in which the holder of
the Warrants reside and even if the Company seeks to so qualify, no assurance
can be given that such qualification will occur. The Warrants may be deprived of
any value and the market for the Warrants may be limited if a current prospectus
covering the Offered Stock is not kept effective or if such Offered Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Warrants then reside.
USE OF PROCEEDS
The Company intends to use the net proceeds from the exercise of the
Warrants to fund the sales and marketing of Telecom 2000 Products; for research
and development of other telecommunications products; and for other working
capital and general corporate purposes. The Company may also use a portion of
the net proceeds for the acquisition of businesses, products and technologies
that are complementary to those of the Company. No such acquisitions are being
negotiated as of the date of this Prospectus, and no portion of the net proceeds
has been allocated for any specific acquisition.
The Company reserves the right to allocate the proceeds of the Offering as
management may perceive its needs from time to time in response to these and
related contingencies. Pending such uses, the net proceeds will be invested in
short-term, interest bearing investment grade securities and money market
instruments.
-9 -
Although the Company is unable to predict the precise period for which the
proceeds from the Offering will provide financing, management believes that the
Company should have sufficient working capital to meet its cash requirements for
the 12 month period following the date of the Prospectus. Although the Company
currently has an unused $1,00,000 line of credit, the Company may need to seek
additional funds through other loans or other financing arrangements during this
period of time. No such other arrangements exist and there can be no assurance
that they may be obtained in the future should the need for additional financing
arise. See "Risk Factors - Possible Need for Additional Financing."
DILUTION
The difference between the per share exercise price of the Warrants per
share of Common Stock and the pro forma net tangible book value per share of
Common Stock after this Offering constitutes the dilution per share of Common
Stock to investors in this Offering.
As of December 31, 1997, the Company had pro forma net tangible book value
of $9,598,000 or $1.48 per share, derived from the Company's balance sheet as of
December 31, 1997 adjusted to give effect to the Private Placement on April 15,
1998. Net tangible book value per share means the tangible assets of the
Company, less all liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the Offered Stock at an assumed
price of $5.25 per share and estimated offering expenses, pro forma net tangible
book value would have been $18,590,000 or $2.26 per share. The result will be an
immediate increase in net tangible book value per share of $.78 (53%) to
existing shareholders and an immediate dilution to new investors of $2.99 (57%)
per share. As a result, public investors will bear most of the risk of loss
since their shares are being purchased at a cost substantially above the price
that existing shareholders acquired their shares. The following table
illustrates this dilution:
Public offering price of the Offered Stock ......................... $5.25
Pro forma net tangible book value per share, before the Offering.. $1.48
Increase per share attributable to the sale by the Company of the
Offered Shares ................................................. .78
-----
Pro forma net tangible book value per share, after the Offering..... 2.26
----
Dilution per share to new investors................................. 2.99
----
----
The following table summarizes the investments of all existing
stockholders and new investors after giving effect to the exercise of Warrants
and issuance of the Offered Shares.
Percentage Percent of Average
Shares of Total Aggregate Total Price
Purchased Shares Consideration Invested Per Share
--------- ------ ------------- -------- ---------
Existing Stockholders......... 6,500,000 79% $19,396,000 68% $2.98
Investors in this Offering.... 1,725,000 21% $ 8,992,000 32% $5.21
--------- --- ----------- --- -----
Total..................... 8,225,000 100% $28,388,000 100% $3.45
--------- --- ----------- --- -----
No assurance can be given as to the timing of the exercise of the Warrants
or whether any or all of the Warrants will be exercised. The foregoing analysis
assumes no exercise of any options or warrants other than the Warrants,
including the Placement Agent's Warrants and the Underwriter's Warrants. In the
event of any such options or warrants are exercised, the percentage ownership of
the investors in this Offering will be reduced and the dilution per share of
Common Stock to investors in this Offering will increase.
-10 -
MARKET PRICES OF COMMON STOCK
The Company's Common Stock and Warrants have been quoted in the Nasdaq
Smallcap Market under the symbols ETEL and ETEL W, respectively, since April 8,
1997. The following table sets forth the high and low closing sales price for
the Common Stock as reported by the Nasdaq Smallcap Market for the periods
indicated.
Period Common Stock
------ ------------
High Low
---- ---
April 8 - June 30, 1997 $ 5.8125 $ 3.8130
July 1 - September 30, 1997 $ 5.3750 $ 3.7500
October 1 - December 31, 1997 $ 9.1250 $ 4.8750
January 1 - March 31, 1998 $ 8.0000 $ 5.0000
CAPITALIZATION
(Dollars in thousands)
The following table sets forth the capitalization of the Company, as of
December 31, 1997 and as adjusted to reflect the sale of the Offered Stock. No
assurance can be given to the timing of exercise of the Warrants or whether all
or any of the Warrants will be executed. The table should be read in conjunction
with the Financial Statements and the notes thereto.
Historical Pro Forma(1) As Adjusted(2)
December 31, 1997 ------------ --------------
-----------------
Long-term debt ..................................... $-0- $-0- $-0-
Stockholders Equity
Common Stock, $.01 par value, 50,000,000 shares
authorized, 5,750,000 shares outstanding; pro
forma 6,500,000 shares outstanding reflecting
the issuance of shares after the April 1, 1998
private placement; 8,225,000 shares outstanding,
as adjusted .................................... 57,500 65,000 82,250
Stock Subscriptions Receivable ..................... (46) (46) (46)
Additional paid-in capital ....................... 14,163,090 19,330,590 28,305,340
Retained deficit ................................. (9,797,053) (9,797,053) (9,797,053)
---------- ---------- -----------
Total stockholders' equity ..................... $4,423,491 $9,598,491 $18,590,491
---------- ---------- -----------
Total capitalization ........................... $4,423,491 $9,598,491 $18,590,491
---------- ---------- -----------
- ----------
(1) The pro forma capitalization illustrates the effect of the sale of 750,000
shares of common stock in the April 1998 Private Placement.
(2) As adjusted to reflect the net proceeds of this Offering. Assumes no
exercise of any options or warrants other than the Warrants, including the
Underwriter's Warrants and the Placement Agent's Warrants;
-11-
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company does not anticipate the declaration or payment of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the development and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that any dividends of any kind will ever be paid by
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Sales increased by 87% to approximately $549,000 in the year ended March
31, 1997 from approximately $294,000 in the period ended March 31, 1996. The
increase in sales dollars was attributable to the increased delivery of the
Company's IntelliSeries Products and Help Desk Services. In the period ended
March 31, 1997, revenue mix, as a percentage of sales, among products and
services was 5% and 95%, respectively. Revenue mix among products and services
for the corresponding period in 1996 was 15% and 85%, respectively. For the year
ended March 31, 1997, the Company derived 78% and 21% of its sales from two
customers, respectively and 32%, 29%, 16%, and 13% from four customers,
respectively for the same period in 1996.
Cost of product sales and service increased by 364% to approximately
$410,000 in the year ended March 31, 1997 or 75% as a percentage of revenue as
compared to approximately $88,000 or 30% as a percentage of revenue in the
corresponding period in 1996. The dollar increase was largely attributable to
the increased business volume and the associated labor, overhead, consultant and
subcontract costs necessary to service the increased volume, as well as the
foregoing compensation during the start-up phase (see pro forma adjustment on
the Statement of Operations for the period from beginning of operations to March
31, 1996). The percentage increase was attributable to the proportional increase
in service revenues compared to product revenues.
General and administrative expense increased by 917% to approximately
$1,171,000 in the year ended March 31, 1997 from approximately $115,000 in the
corresponding period in 1996. The dollar and percentage increase were largely
due to the hiring of administrative and selling staff. The number of employees
of the Company engaged in general and administrative, selling, and research and
development activities increased from one at March 31, 1996 to 11 at March 31,
1997. The Company plans to make additional expenditures in the research and
development and the general, administrative and selling organizations as
necessary over the next twelve months.
Research and development costs increased to approximately $237,000 in the
year ended March 31, 1997 as compared to $0 in the corresponding period in 1996.
Research and development costs consist of hardware related development costs
associated with its Telecom 2000 Products and the $50,000 purchase price for
certain prototype boards, proprietary software code and research and development
in May 1996. The Company also incurred approximately $521,000 in capitalized
software development costs related to development of software for its Telecom
2000 Products in the year ended March 31, 1997. The Company plans to continue
research and development activities, however, future software development costs
will be capitalized in accordance with generally accepted accounting principles,
subject to judgements to be made as to technological feasibility of the
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software development efforts and recoverability. Upon release of software
products, ongoing development, maintenance and support costs will be expensed as
incurred.
Interest and financing charges net total was approximately $5,669,000 for
the year ended March 31, 1997 as compared to approximately $627,000 in the
corresponding period in 1996. The increase in interest and financing charges was
mainly due to approximately $5,385,000 in interest expense associated with
certain bridge loans and approximately $285,000 of costs associated with a
planned initial public offering of securities in 1996 which was abandoned in
September 1996. The extraordinary interest expense associated with the bridge
loans reflects the highly speculative nature of the loans at the time.
Traditional forms of short term asset based financing were not available to the
Company. Management therefore believed the funds provided by the loans were
critical to the Company to bring its products to market and justified the
issuance of the bridge unit securities as additional consideration for such
loans. The Company does not expect to encounter similar difficulty in obtaining
short term financing in the future. Therefore, financing expense of the
magnitude associated with the bridge financing is believed to be nonrecurring.
The Company's product lines are, in some cases ready for, and in other cases
being prepared for, commercial production. A portion of the proceeds from the
Company's initial public offering was used to fund the production of start-up
inventory necessary for initial deliveries to customers. By filling sales orders
and generating increases in accounts receivable and cash flow, management
believes traditional asset-based financing will be attainable to satisfy ongoing
working capital needs. In addition to successfully completing its initial public
offering in April, 1997, the Company also secured a $1,000,000 credit facility
(see Liquidity and Capital Resources below). In April, 1998, the Company sold
750,000 shares of common stock in the Private Placement, resulting in net
proceeds to the Company of approximately $5,175,000.
Loss from operations increased to approximately $1,269,000 in the year
ended March 31, 1997 as compared to income from operations of approximately
$90,000 in the corresponding period in 1996. The dollar increase in loss from
operations was largely attributable to the increase in research and development,
and selling, general and administrative costs, and cost of product sales and
service as discussed above. In future periods, gross margins may be affected by
price competition or changes in sales channels, increases in the costs of goods
or changes in the mix of products sold.
Loss before income taxes increased to approximately $6,938,000 in the year
ended March 31, 1997 as compared to loss before income taxes of approximately
$537,000 in the corresponding period in 1996. The dollar increase in loss before
income taxes was largely attributable to the increase in financing costs
associated with a private placement and operating costs as discussed above.
A valuation allowance has been established equal to the amount of income
taxes pending evidence that the Company will be able to generate taxable net
income which will be offset by the net tax loss carryforward in future years.
Financing expense associated with the issuance of bridge units is non-deductible
and is being treated as a capital transaction for income tax reporting purposes.
The use of net operating losses by the Company in the future to offset taxable
income may be limited to the event of a change in control of the Company in
accordance with Section 382 of the Internal Revenue Code.
Net loss for the year ended March 31, 1997 was approximately $6,938,000 or
($1.72) per share, compared to a pro forma net loss of approximately $775,000 or
($.26) per share for the same period in 1996. Pro forma data presented in the
accompanying statement of operations reflect the result of operations on a pro
forma basis had the officer been employed by the Company for the entire period
at a compensation level equal to that contained in the agreement disclosed in
Note F--Commitments and Contingent Liabilities.
-13-
Nine months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996
Sales for the nine months ended December 31, 1997 were approximately
$378,300, a decrease of 14% from the approximately $438,500 recorded for the
corresponding nine months of 1996. The revenue decline was due primarily to the
completion of several installation and support services contracts in 1996, and
an increased emphasis on development and preparation for the general
availability of the Company's T2000 product line. The services sales for the
nine months ended December 30, 1997, were primarily from one customer.
Gross profits for the nine months ended December 31, 1997 were
approximately $170,100 or 45% of sales, compared to the approximately $135,200
or 31% of sales for the corresponding quarter of 1996. The gross profit
percentage increase was due to the increased emphasis on product sales that have
a higher gross profit contribution than software installation and support
services sales.
Selling, general & administrative expenses for the nine months ended
December 31, 1997, were approximately $1,990,800, an increase of 235% over the
approximately $594,000 recorded for the corresponding nine months of 1996. The
dollar increase in these expenses over the prior year reflected additional
spending for personnel and programs consistent with the Company's emphasis on
its Telecom 2000 products. The increased spending level in the nine months of
1997 also reflected higher spending for programs and promotions needed to
generate and support product roll-out of, as well as substantial marketing
expenditures made in connection with the general availability of, the Company's
Telecom 2000 products.
Research & development expenses for the nine months ended December 31,
1997, were approximately $573,700, a 262% increase over the approximately
$158,700 recorded for the corresponding nine months of 1996. The increased
expenditures for research and development are due to the increase in number of
employees and other expenditures devoted to the general development of the
Company's technology products.
Other income (expense) charges for the nine months ended December 31,
1997, were approximately $71,900, a decrease from the approximately $(5,712,100)
recorded for the corresponding nine months of 1996. In the nine months ended
December 31, 1996, the Company's other income and expenses included several
one-time charges associated with the issuance of bridge loans which were
subsequently converted to equity of approximately $5,385,100, and the cost of an
abandoned stock registration of approximately $284,600. The Company also had an
increase in funds invested over the same period in 1996.
To date, inflation and seasonality have not had a material impact on the
Company's results of operations.
Liquidity and Capital Resources
The Company's operations to date have concentrated on continuing
development of its products, establishing acceptance of its software products in
the telecommunications industry, providing services to its existing customer
base and securing financing necessary to fund development, operations and
expansion of its business.
For the year ended March 31, 1997, the Company's principal uses of cash
were to fund the losses incurred and support the development of the Company's
products. For the year ended March 31, 1996, net cash was provided to the
Company by operating and financing activities.
For the year ended March 31, 1997, the Company's cash and cash
equivalents, invested cash and marketable securities decreased to approximately
$379,000 from approximately $558,000 as a result of the loss
-14-
incurred for the year along with the financing of capitalized software and fixed
assets. The Company has no significant capital asset commitments.
For the years ended March 31, 1997 the net cash used in operating
activities was approximately $1,187,000 and for the same period in 1996 the net
cash provided by operating activities was approximately $103,000, the increase
in cash used in operating activities of approximately $1,290,000 was due to net
losses from operations caused by increased research and development and selling,
general and administrative expenses.
For the year ended March 31, 1997 the net cash used in investing
activities was approximately $646,000 as compared to $0 for the same period in
1996. In 1997, investing consisted primarily of increases in capitalized
software development costs and purchases of capital equipment.
For the years ended March 31, 1997 and 1996 the net cash provided by
financing activities was approximately $1,655,000 and approximately $455,000,
respectively. For the year ended March 31, 1997, financing activities consisted
primarily of the issuance of bridge and convertible notes payable of
approximately $1,750,000, which were ultimately converted to common stock. For
the year ended March 31, 1996, financing activity consisted primarily of the
issuance of bridge notes payable of approximately $500,000, which were
ultimately converted to common stock.
In April 1997, the Company received net proceeds of approximately
$5,885,100 from an initial public offering of the Company's common stock and
common stock warrants. The Company also secured a $1,000,000 one year credit
facility in the nine months ended December 31, 1997, which is secured by
investments, receivables and fixed assets. The Company used approximately
$(2,131,200) in cash flows from operating activities, excluding changes in
assets and liabilities, during the nine months ended December 31, 1997, compared
to approximately $(916,400) for the corresponding nine months of 1996. The
increase in cash flows used in operating activities excluding changes in assets
and liabilities was mainly due to the increase in selling, general and
administrative expenses and research and development expenses discussed above.
The total net cash used by operating activities was approximately $(2,440,900)
for the nine months ended December 31, 1997, compared to approximately
$(911,100) for the corresponding nine months of 1996.
Cash used by investing activities totalled approximately $2,924,500 for
the nine months ended December 31, 1997 as compared to approximately $462,200
for the corresponding nine months of 1996. The main component of that investing
activity was the investment in short-term securities of approximately
$2,254,200, as well as continued expenditures for capitalized software
development and property and equipment of approximately $290,400 and $380,000,
respectively. The majority of the expenditures related to continued development
of the Company's Telecom 2000 Products.
Cash provided by financing activities totalled approximately $5,880,600
for the nine months ended December 31, 1997, compared to approximately
$1,484,200 for the corresponding period of 1996. The Company successfully
completed an initial public offering in April 1997, which yielded net proceeds
of approximately $5,885,100. The Company has access to a $1,000,000 credit line
secured by investments, fixed assets and receivables, but did not borrow against
that line of credit during the nine months ended December 31, 1997. This line of
credit expires in May, 1998; while the Company believes that it will be renewed,
no assurance can be given in this regard. In April, 1998, the Company sold
750,000 shares of Common Stock resulting in net proceeds to the Company of
approximately $5,175,000.
The Company expects to continue to make significant investments in the
future to support its overall growth. Currently, it is anticipated that ongoing
operations will be financed primarily from net proceeds of the initial public
offering and subsequent private placement, the line of credit facility, from
internally generated funds and from other potential financing sources under
consideration. The Company presently has a line of
-15-
credit, investments, and cash and cash equivalents on hand and believes that
these will be adequate to meet the Company's anticipated cash requirements
through March, 1999. However, while operating activities have provided and may
provide cash in certain periods, to the extent the Company has experienced or
experiences growth, the Company's operating and product development activities
have used and may use cash and consequently, such growth may require the Company
to obtain additional sources of financing. There can be no assurances that
unforeseen events may not require more working capital than the Company
currently has at its disposal, or that the Company will be able to obtain
financing from additional sources.
BUSINESS
The Company develops, produces, markets and supports open
telecommunications software and related hardware products that enable, enhance,
and manage telephone communications over the Internet, private IP networks and
"intranets," and other types of Digital Data Networks. The Company's Telecom
2000(TM) Products provide a user-friendly method of high fidelity telephone
communications through DDNs. Through the use of Telecom 2000, organizations can
reduce their telephone expenses by extending their telephone services to remote
offices and mobile employees, in some cases bypassing long distance service
charges, using their existing internal DDNs.
Company Background
Since its founding, the Company has focused on the development of
software-based telecommunications products that enable, enhance or manage
telephone communications. In the early 1990's, prior to the Company's founding,
its principal founder, President and Chief Executive Officer, Robert A. Veschi,
collaborated in developing telephony-over-data telecommunications products with
Arthur Henley and Scott Grau, two other founders of the Company. Working within
a corporation named Officecom, Inc., this product development effort included
the invention by Messrs. Henley and Grau of the technology covered by the 353
Patent. In order to continue this product development effort, in March 1996 the
Company acquired all right, title and interest in and to the 353 Patent from
Messrs. Henley and Grau in consideration of a five percent royalty against gross
profits from the sale of products covered by the 353 Patent. The Company
completed this intellectual property acquisition in April 1996 by purchasing all
of the assets of Officecom, Inc. for $50,000.
The Company purchased a set of products, licenses and contracts from a
Washington, DC area telecommunications firm, OctaCom, Inc., in May 1995. This
transaction included the assignment of contracts to provide services to Sprint
Communications Company, LP ("Sprint") and Comsat Corp., the acquisition of the
Company's IntelliCD(TM) and DebitBill(TM) products, and an exclusive license for
e-Net NMS(TM). The initial revenue and contract base for the Company was
established at this time.
The Company was awarded a contract known as Internet Protocol Dial
Services Support ("IP Dial Support") by Sprint in February 1996, under which
e-Net technical personnel provide Internet usage, management and maintenance
services to Sprint. Sprint expanded e-Net's IP Dial Support role in February
1997 by adding to the contract Sprint Frame-Relay network reporting using the
Company's Intelli-Series(TM) product.
The Company announced its first Telecom 2000 Products in April 1996.
Thereafter, the Company established two significant "beta" test sites for the
Telecom 2000 system: Intermedia Communication Incorporated ("ICI"), a
substantial regional competitive local exchange carrier ("CLEC"), in October
1996, and Sprint, a major long distance services provider, in November 1996.
These agreements provided e-Net with Telecom 2000 Product usage experience and
established references for e-Net with these two companies. Long
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distance services providers and CLECs, such as ICI and Sprint, are among the
Company's primary target customers for Telecom 2000 Products.
Having completed "beta" testing, in May 1997 the Company announced its IP
version of Telecom 2000. In July 1997, the Company began sales of Telecom 2000
Products with the introduction of the Telecom 2000 Desktop System. In August
1997, the Federal Communications Commission certified the Telecom 2000 Desktop
System for interconnection to public telephone systems, eliminating a regulatory
impediment to sales, and in October 1997 the Company announced that it had hired
its first Vice-President of Sales.
Industry Background
The Internet is a global web of computer networks. Developed over 25 years
ago, this "network of networks" allows any computer attached to the Internet to
talk to any other using the Internet Protocol. The Internet has traditionally
been subsidized by the U.S. federal government, and was historically used by
academic institutions, defense contractors and government agencies primarily for
remote access to host computers and for sending and receiving e-mail. As the
number of commercial entities that rely on the Internet for business
communications and commerce has increased, the level of federal subsidies has
significantly diminished, and funding for Internet infrastructure and backbone
operations has shifted primarily to the private sector.
In the mid-1990's, companies began to develop and market products that
delivered audio, including voice, over the Internet. Early Internet telephony
required cumbersome components to make Internet-based telephone calls, such as
personal computer speakers and microphones. In addition, participants in the
telephone call had to use identical software, running at the same time. Voice
quality was poor, with a half-duplex nature and with long delays; however, the
promise of this technology was established because the Internet telephone call
could seemingly be made "free," even over long international distances, and
because the extraordinary increase in users of the Internet began to create a
large target market for the products. See "-Competition."
"Voice-over-IP" refers to the transmission of voice as digital data on
IP-compatible networks, which include the Internet as well as
Internet-compatible, private "Intranets." IP networks are increasing in usage
and popularity as a function of an increase in the number of Internet users.
"Telephony" is distinguishable from "voice" in that voice is the sound of
speech, whereas "telephony" means voice coupled with features such as
full-duplex, call waiting, call holding, call transfer, conference calling,
billing, voice-mail and the like. Management believes that telephony on IP
networks is becoming more attractive because of the low cost of using IP
networks (especially the Internet), because of the growing number of IP network
users and because IP telephony products like e-Net's are improving their voice
sound quality. The Company believes that, due to the demand for lower cost
telephone service, the market for telephony through DDNs, while in its early
stages, holds significant potential for growth. According to a recent report
issued by the technology industry analysis firm Frost and Sullivan, market for
Internet telephony gateways is forecast to grow from $4.7 million in 1996 to
$1.8 billion in 2001. Although the Company has not participated in any of the
formal research contained in the Frost and Sullivan report and cannot endorse
its methods or conclusions, the Company generally believes that this market will
grow substantially and that its products are well positioned to capture a
significant share of this new, emerging market.
-17-
Telecom 2000(TM) Products
The Company's Telecom 2000 Products enable telephony through DDNs. Telecom
2000 Products provide high fidelity duplex voice and telefax through DDNs, and
also generally offer traditional telephony features such as call waiting, call
holding, call transfer, conference calling, billing, voice-mail and the like.
The Company views its products as offering several competitive advantages.
First, Telecom 2000 Products facilitate low-cost DDN telephone service with
substantially the same operating features and the voice quality of traditional
telephone service. Next, the use of Telecom 2000 Products can be gradually
implemented so that growth from small installations to large installations can
occur while the user maintains high levels of performance and preserves a
substantial amount of its prior technology investment. Finally, the distributed
architecture of Telecom 2000 Products is designed to avoid problems associated
with centralized systems, such as system-wide telephony loss due to the
malfunction of a single computer or PBX, limitations on system growth and
excessive hardware cost. There are three classes of Telecom 2000 Products, two
of which include products that are available for delivery.
Telecom 2000 Desktop - Small Systems
This product set, with sales commencing in July 1997, consists of e-Net's
award-winning Telecom 2000 Desktop system with two components, the
TS-Workstation card and the CO-Gateway card. This system uses the customer's
existing network computer installed base and its fixed-cost, available-capacity
LAN/WAN, including the Internet, to provide peer-to-peer toll-quality telephony,
with or without the use of a PBX.
The small systems product set also includes the Telecom 2000 Retail
Consumer product, which the Company expects will be announced and available in
May 1998. This product will be a half-card TS circuit set with a dial-up
functionality enabling Internet telephony for the individual consumer and home
use, is expected to be the lowest-priced Telecom 2000 Product offering and, in
management's view, offers a broad market potential. In combination with some of
the advanced Internet "chat-room" services, this product is designed to provide
a unique, secure, private-dialing-plan Internet telephony service with high
fidelity, at a low price.
Generally speaking, Telecom 2000 Desktop products are characterized by
embedded firmware, which can be placed on a computer integrated circuit board,
in the assembly of a modem (cable TV set-top, DSL box, ISDN pipe) or in a
router, switch or multiplexer. Telecom 2000 Desktop products start with one port
and scale up to 24 ports. When all products are announced, the price range of
the Telecom 2000 Desktop product set is expected to be between $100 and $5,000.
Telecom 2000 Customer-Premises-based Gateway - Medium Systems
The Telecom 2000 Customer-Premises-based Gateway product set was announced
in October 1997 and made available for shipment in February 1998. It provides
T1/E1 voice-over-data advantages, consolidates customer site-originated
telephone calling for data network-based transport and efficiency and delivers a
mid-level of data network call volume handling on a cost-effective basis.
Starting with 24 ports (T1 single span), the product is scaleable up to 96
channels per-chassis (and 192 ports in a dual back plane configuration). Each
chassis is capable of being interconnected to obtain single-device performance,
gaining more ports as a function of this "linking" or "ganging."
The resulting product suite delivers a customer site application of high
voice quality with a low per-port data network telephony price. When all
products are announced, the price range of the Telecom 2000
Customer-Premises-based Gateway product set is expected to be between $5,000 and
$50,000.
-18-
Telecom 2000(TM) Carrier-Class Gateway - Large Systems
The large systems product set, Telecom 2000 Carrier-Class Gateways, was
announced in December 1997, is under development and is anticipated to be ready
for delivery by September 1998. Of all Telecom 2000 Products, it will offer the
largest number of ports. It is designed to be scaleable from the equivalent of
four T1s up to 60 T1s, with high fidelity voice quality, and is intended to meet
fully all-existing and evolving standards for the emerging voice-over-IP carrier
market. The Company believes that, at the time of its introduction, this system
will be the only available DDN telephony technology offering over 1000
simultaneous call capacity in a single cost-effective, space-efficient chassis.
Each chassis is capable of being interconnected to obtain single-device
performance and greater port density, with no logical upward limitation on the
total number of ports.
The Telecom 2000 Carrier-Class Gateway is being designed to meet all
interconnection and compression standards, will be certified in most foreign
countries, and is designed to be fully NEBS-compliant for main long distance
carriers, alternate access carrier, local exchange carrier and CLEC customers.
When all products are announced, the price range of the Telecom 2000
Carrier-Class Gateways product set is expected to be between $100,000 and
$500,000.
Other Company Products and Services
e-Net NMS(TM) and IntelliSeries(TM)
The Company sells a proprietary, expert systems-based, user friendly,
object-oriented network and system management product called the e-Net NMS(TM)
network management system. e-Net NMS provides enterprises with a broad range of
capabilities for managing global telephone and data networks. This product
offers automated management of operating problems, system configuration, system
performance, system security, accounting, network traffic optimization and
re-routing, configuration and database management, and system failure detection.
e-Net has developed a set of products called IntelliSeries(TM) to provide
a simple, inexpensive network usage and billing reporting capability.
IntelliSeries uses imaging technology and is a general-purpose search and
retrieval engine that can be used in a wide variety of user applications. One of
e-Net's clients, Sprint, uses IntelliSeries products to provide its clients with
database access to their monthly call detail record data and frame relay
performance data.
The Company believes that Telecom 2000 Products and competitors'
voice-over-data products will gain usage on DDNs, and that this increase in
usage will create greater data volume on DDNs. The Company anticipates that this
volume growth will increase the opportunity for sales of data network management
and network reporting products like e-Net's NMS and IntelliSeries products. The
Company intends to couple sales and marketing of Telecom 2000 Products with
marketing activity for e-Net NMS and IntelliSeries Products.
-19-
Strategic Relationships
e-Net has established, and intends to continue to establish, a variety of
strategic relationships that are intended to result in the embedding of e-Net
telephony-enabling technology in various DDN devices. Strategic partners are
important to the Company because they have developed products or they deliver
services established in the DDN communications market, but have not yet
implemented telephony capability within those products or services.
To date, Sprint has been the Company's largest customer. The IP Dial
Support contract provided a significant increase in revenue to the Company, grew
the Sprint technology relationship, validated the efficacy of the use of the
IntelliSeries products and increased the Company's involvement in the
Internet-related business and technology. Arising out of the growing Sprint
technology relationship under the IP Dial Support contract, Sprint became a
"beta" test site for the Company's Telecom 2000 Product in November 1996.
In June 1997, the Company announced an agreement for cooperative marketing
with Paradyne Corporation. Under the agreement, e-Net's Telecom 2000 is
demonstrated and sold operating in conjunction with Paradyne's DSL technology
product called HotWire(TM). Headquartered in Largo, Florida, Paradyne is a
leading developer and provider of products and technologies that facilitate
high-speed access to networks worldwide for communications, computing and
information. The Company believes that Paradyne's DSL products are among the
best products, in terms of price and performance, in the telecommunications
industry. The Company believes that DSL products have a strong market potential.
DSL technology delivers digital data at high speeds on existing copper telephone
lines, and the Company expects that the Regional Bell Operating Companies
("RBOCs") may, at some point in the future, sell access to copper telephone
lines to digital data service providers at a lower price, "unbundled" from other
RBOC services. If so, digital data service providers and the home consumer will
have the opportunity to provide and acquire more information at a lower cost
with DSL. In particular, the Company's DDN telephony products could be used to
include telephone service in those digital data service packages at a low price.
In August 1997, the Company announced an agreement with Magellan Network
Systems, Inc., ("Magellan") for product development and software integration of
Magellan billing, voice-mail and other software with e-Net's Telecom 2000
Carrier-Class Gateway products. This cooperative development and marketing
arrangement is expected to give e-Net's Telecom 2000 Carrier-Class Gateway
products the carrier-class software applications required to address the needs
of large-call-volume customers. Magellan, a privately held corporation with
headquarters in Sunnyvale, California, is a supplier of the M4000 Enhanced
Services Platform, offering long distance switching, debit card, calling card,
international call-back and voicemail applications to domestic and international
carriers and service providers. All of these applications integrate with
Magellan's system management software, which provides sophisticated system
management and billing capabilities. Magellan Communications, Inc., a related
company, specializes in unified messaging systems and voice processing equipment
for many of the world's leading telephone companies.
In December 1997, the Company announced an agreement with Summa Four, Inc.
to build e-Net's Telecom 2000 Carrier-Class Gateway. This agreement provides a
preferential and discounted arrangement under which the two companies can
purchase and license each other's products in order to deliver, through their
respective sales channels, what the Company believes will be a unique product.
Because of Summa Four's price and performance, management believes that
embedding e-Net technology on Summa Four's existing product is the optimal
approach for designing and building the Telecom 2000 Carrier-Class Gateway.
Summa Four also utilizes the same family of microprocessor that e-Net uses,
which may reduce product development risk and delay. Summa Four is a leading
provider of open, programmable switching platforms that enable
telecommunications providers worldwide to build intelligent, flexible networks
that support the rapid deployment of new wireline and wireless services. An ISO
9001 certified company, Summa Four is
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headquartered in Manchester, New Hampshire, and has sales, service and support
offices in the United States, the U.K., Singapore and Japan.
In January 1998, the Company announced that it had been awarded a contract
from Com21, Inc. This agreement provides that e-Net will deliver certain of its
existing software to Com 21 and develop additional software for Com21. The
combined software delivered and developed by e-Net for Com21 is intended to be
used to integrate telephone and telefax capabilities into a cable television
modem embedded in the cable television control unit typically located on top of
the consumer's television set. This new system is expected to allow customers to
plug their telephone, telefax and/or computer into their cable television system
to take advantage of the speed of the cable system, which far exceeds the speed
of other home data network transmission lines. Customers of cable systems would
be able to make local calls without existing RBOC fees, and customers of cable
systems that are connected to cable systems in other localities would be able to
make long distance calls through the cable television system without incurring
the long distance toll charges assessed by traditional long-distance telephony
service carriers. The contract calls for e-Net to receive an up-front payment,
milestone payments and a per-unit royalty for the 30 months following the
introduction of the product. The contract is not exclusive, and the Company
hopes to expand its offering of telephony products in the cable television
market. Com21, which is located in Milpitas, California, develops, manufactures
and markets cable modem based communication systems. Its ComUNITY Access system
provides end-to-end Ethernet data communications over cable TV networks. The
underlying ATM architecture makes possible mixed media (voice, data, video)
applications from the same cable modem platform. Com21's systems serve business,
SOHO (small office, home office) and residential markets.
In April 1998, the Company signed a contract with IDT Corporation. Under
this agreement, the Company has a license to distribute IDT's Net2Phone software
with its Retail Consumer product. The agreement also permits e-Net's customers
who purchase its Telecom 2000 Retail Consumer product to make Internet telephone
calls on an ordinary telephone handset across IDT's Internet telephone network,
with the Company receiving six and one half per cent (6.5%) of IDT's gross
revenues arising from such use.
Sales and Marketing Strategy
The Company's primary sales and marketing strategy is to expand its sales
force and dedicate that force to creating strategic end-users and reseller
channels for the Company's products. This strategy commenced with the hiring of
the Company's first Vice-President of Sales in October 1997, and the subsequent
hiring of four new Account Managers. With this sales force in place, the Company
will seek to rapidly establish a few larger installed bases of users of Telecom
2000 Products.
With the over fifty corporate customers who have purchased the Telecom
2000 Starter Kit, an introductory unit of Telecom 2000 Desktop system, they
Company believes it is beginning to create a class of "strategic end users."
Management believes that many of these corporate enterprises have the capability
to evolve into multi-user Telecom 2000 customers. Therefore, a first priority of
the Company's business strategy is to take advantage of these accounts and
increase their usage of e-Net's products.
Management expects to further promote this sales strategy by the expansion
of distribution arrangements through distributors and systems integrators. The
Company intends to use a "channel sales" approach to penetrate its target
markets. These channels will be based upon "value-added" inventory/warehousing
capability, sales volume commitments, geographical positioning and other
factors. e-Net has and is developing relationships with carrier product
distributors, personal computer system integrators, complex information system
builders and managers, Government-oriented resellers and foreign-country located
dealers. The Company has existing reseller relationships with Unicent
Technologies, Inc., Government Technology Services, Inc., Socrates, Inc. and
Comtel Electronic Systems Gmbh. Several other major corporations have engaged in
-21-
significant product testing dialogue with the Company and have acquired products
for testing as a preliminary step toward developing more formal distribution
arrangements.
The Company adopted a number of additional sales techniques and has
targeted certain other markets in order to enhance its primary sales strategy.
These include: entering into royalty and licensing agreements for the Company's
intellectual products (such as the Com21 contract); stressing the advantages
offered by telephone usage on the Internet and private IP networks to the
increasing number of major corporations that make routine use of these DDNs;
marketing to the increasing numbers of small businesses and individuals that use
the Internet by stressing the cost advantages and ease of use of the Company's
products; marketing on the Internet itself, through the Company's web site, to
more directly target the existing Internet users who the Company believes are
more likely to recognize the advantages of the Company's products; marketing to
PC users through print and television advertisements, with sales promotions such
as trade shows and technology expositions, and other efforts to garner media
coverage; and through the Company's three-person telephone sales organization.
The market for the Company's software and services has only recently begun
to develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed products and services for
communication and commerce over DDNs. As is typical in the case of a new and
rapidly evolving industry, demand and market acceptance for recently introduced
products and services are subject to a high level of uncertainty. The industry
is young and has few proven products. While the Company believes that its
products offer significant advantages for telephony over DDNs, there can be no
assurance that DDN telephony will become widespread, or that the Company's
products for DDN telephony will become adopted for these purposes.
Government Regulation
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet or to Internet telephony. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted with respect to the Internet, covering
issues such as regulation of prices charged for this kind of telephony, user
privacy, and quality of products and services. The adoption of any such laws or
regulations may decrease the growth of the Internet or of Internet telephony,
which may in turn decrease the demand for the Company's products and increase
the Company's cost of doing business or otherwise have a material adverse effect
on the Company's business, operating results or financial condition. Moreover,
the applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain.
Patent, Trademark, Copyright and Proprietary Rights
In March 1996, the Company acquired all right, title and interest in and
to the 353 Patent. The Company believes that the 353 Patent is the first patent
that specifically involves telephony through DDNs. The Company believes that the
353 Patent may provide certain strategic and technological advantages in the
emerging market for telephony through DDNs. The Company can make no assurances,
however, as to the extent of the advantages or protection, if any, that may be
granted to the Company as a result of the 353 Patent. The Company's current and
anticipated product line is not wholly dependent on the validity or
applicability of the 353 Patent, and not all of the Company's products are
covered by the 353 Patent.
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The source code for the Company's proprietary software
is protected both as a trade secret and as a patented work, which the Company
believes is a competitive advantage. There can be no assurance, however, as to
the extent of
-22-
the advantages or protection, if any, that may be granted to the Company as a
result of its proprietary technology. See "Risk Factors -- Uncertain Protection
of Patent, Trademark, Copyright and Proprietary Rights." The Company also uses
certain technology that it purchases or licenses from third parties, including
software that is integrated with internally developed software and used in the
Company's products to perform key functions. Of particular note is certain
standards-based compression software that the Company currently licenses from
elemedia, an affiliate of Lucent Technologies, Inc. There can be no assurance
that these third party technology licenses will continue to be available to the
Company on commercially reasonable terms. Although the Company believes that it
is not unduly reliant on any of these third parties or their products, and the
Company is aware of alternate sources of supply, the loss of or inability to
maintain any of these technology licenses may result in delays or reductions in
product shipments until equivalent technology may be identified, licensed and
integrated. Any such delays or reductions in product shipments may materially
and adversely affect the Company's business, operating results and financial
condition.
Competition
The market for DDN products and services, including the telephony
application, is new, intensely competitive, rapidly evolving and subject to
rapid technological change. The Company expects competition to persist,
intensify and increase in the future, from start-up companies to major
technology and telecommunications companies. Almost all of the Company's current
and potential competitors have longer operating histories, greater name
recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources than the Company. Such competition
may materially and adversely affect the Company's business, operating results or
financial condition. See "Risk Factors - Substantial Competition."
The sets of competitors associated with the three classes of Telecom 2000
Products are:
DDN Telephony Small Systems
A number of companies in this field have developed low-speed, half-duplex
audio/voice communications software programs which use the Internet as a voice
network and deliver voice by means of PC-based software, mostly for home users.
These products compete with the Telecom 2000 Desktop Retail Consumer systems.
Some of these competing products use the telephone handset, while some rely on
PC-based speakers and microphones. Many of these products deliver voice sound
which is delayed or which contains echo and "jitter," producing overall low
quality, but some of these products are sold at a price substantially lower than
the Company's products. Generally designed for the home user market, these
competitor products have gained market share compared to e-Net, and some of the
competitors are large software corporations that specialize in home PC software,
giving them a competitive marketing advantage to e-Net due to their greater
distribution channel capacity and name recognition.
Some of the competitive products in this market provide computer telephony
Graphical User Interfaces ("GUIs") in accordance with the Microsoft Telephony
Applications Programmer Interface ("TAPI") standard, as does e-Net, while some
do not. The level of sophistication of the GUI varies among the competitors.
Some competitors of the Company have developed, produced and marketed products
strictly for Internet telephony, not for other DDNs, while other competitors do
not offer IP telephony but reside only on ATM-type DDNs. e-Net believes that its
products are well-positioned because they offer telephony on all DDNs, including
Ethernet in local area networks, which is relatively uncommon among its
competitors. Within this field of competitors, some companies have developed,
produced and marketed end-user/client application products that extend or
replace PBX devices with computer software technology, like e-Net, delivering
PBX-like features such as call waiting, call holding, call transfer, conference
calling, billing, voice-mail and the like.
-23-
Microsoft Corp., VocalTec Inc., NetSpeak Corp., Altigen Communications,
Inc., Sphere Communications, Inc. and Quicknet Technologies, Inc. are some of
the companies that compete with e-Net in the small systems market.
DDN Telephony Medium Systems
The companies that offer customer-premises-based gateway products
delivering voice over DDNs that compete with Telecom 2000
Customer-Premises-based Gateway systems are, in some cases, larger and have more
significant revenues than e-Net. The greater size and market share of such
companies may offer them greater distribution channel capacity and name
recognition. Most of these companies offer telephony software features residing
in computer file servers, so that all common telephone features such as
dial-tone and off-hook detection are centralized. This approach has allowed
these competitors to complete product development earlier in the technology
cycle than e-Net; however, the Company believes that its products are well
positioned now to gain market share due to the performance and cost advantages
of their distributed architecture.
VocalTec Inc., NetSpeak Corp., Micom Communications Corporation (a
wholly-owned subsidiary of Nortel Corporation), Vienna Systems, Inc., a
Newbridge Networks, Inc. affiliate, Clarent Corporation and Inter-Tel
Communications are some of the companies that compete with e-Net in the medium
systems market.
DDN Telephony Large Systems
To the knowledge of the Company, no competitive product has the intended
and announced features, performance or design of e-Net's Telecom 2000
Carrier-Class Gateway. However, the Company has reviewed a number of
competitors' announcements that make general reference to intentions to launch
or commence IP telephony products to enable voice for Internet service providers
and data communications carriers. Data product companies with announced plans of
this general nature that may compete with the Company in the future include
Cisco Systems, Inc., Lucent Technologies, Inc., 3Com Corporation, Cabletron
Systems, Inc., and Bay Networks, Inc.
Product Development
The Company's current development efforts are focused on new products,
product enhancements and implementing existing products within the three classes
of Telecom 2000 Products: the Telecom 2000 Desktop and Retail Consumer systems,
Telecom 2000 Customer-Premises-based Gateway, and the Telecom 2000 Carrier-Class
Gateway system.
DDN Telephony Small Systems
For the Telecom 2000 Desktop product, one development priority is the
improvement of DDN telephony network management software specific to the Telecom
2000 Desktop product. If very large numbers of Telecom 2000 Desktop product are
installed on an private DDN intranet, the Company believes that customers will
need network traffic engineering software to optimize the product's performance.
The Company also is enhancing the conference-calling capability of this product
to create a teleconferencing bridge that will extend the number of simultaneous
conference calls on the system from the current three-call maximum to a 24 call
maximum. Finally, the Company is finalizing the market version of its Telecom
2000 Retailer Consumer product. The Company believes that the development
activity associated with the Telecom 2000 Retail Consumer product will be
completed by May 1998 and that the development activity associated with the
Telecom 2000 Desktop product network management software and teleconferencing
bridge will be completed by September 1998.
-24-
DDN Telephony Medium Systems
A Company development priority for Telecom 2000 Customer-Premises-based
Gateway products is the implementation of a greater level of "voice
compression." Voice compression allows the products to transport more digital
telephony on DDNs without increasing the bandwidth of the DDN. DDN bandwidth is
valuable, and by compressing telephony, greater financial savings are gained by
users. The Company currently uses a relatively modest compression scheme, known
in the industry as "PCM," for its Telecom 2000 Customer-Premises-based Gateway
products. It expects to release "ADPCM" compression, which is a significantly
greater degree of compression, for Telecom 2000 Customer-Premises-based Gateway
products in March 1998. The Company plans to have available for delivery to
customers an even higher compression scheme by July 1998.
Greater voice compression, generally speaking, degrades voice quality for
DDN telephony, so that DDN telephony users choose between the benefits of low
bandwidth consumption and poor voice quality or the expense of higher bandwidth
consumption with better voice quality. The Company's developments seek to reduce
the lower voice quality of compression, and to allow customers to determine
which bandwidth cost/voice quality tradeoff best suits their needs.
DDN Telephony Large Systems
One of the Company's highest priorities is the Telecom 2000 Carrier-Class
Gateway product, currently under development in conjunction with Summa Four.
This product development also will address compression issues relevant to
Telecom 2000 Customer-Premises-Based Gateway products. Management believes that
standards compliance for compression is important for a product aimed at
telecommunications carriers. e-Net and Summa Four have chosen the compression
standard set under a scheme licensed for elemedia and known as G.723.1. Other
issues for development of this Carrier-Class gateway are maintaining
interoperability with DDN and IP telephony gateways made by other manufacturers
and insuring the efficient physical size and the environmental tolerance of the
product. The Company plans to complete development of the Telecom 2000
Carrier-Class Gateway product in September 1998.
These product developments are currently on schedule, but there can be no
assurance that product development will occur as expected or otherwise on a
timely and cost-effective basis, or, if introduced, that these products will
achieve market acceptance. See "Risk Factors -Technological Change; Market
Acceptance of Evolving Standards."
At December 31, 1997, the Company capitalized approximately $894,000, net
of amortization, in software product development costs. All other product
development costs have been expensed as incurred. The Company believes that
significant investments in research and development are required to remain
competitive. As a consequence, the Company intends to increase the amount of its
research and development expenditures in the future.
Employees
The Company believes that one of its key competitive advantages is its
technical experience and expertise. The Company's core development group
includes individuals who have developed and implemented telecommunications
network management software and other Internet and intranet related products and
services as such products and services have emerged as a recognized application
over the last twelve years. As of February 28, 1998, the Company had 30
employees, including 14 in Product Development, 5 in Sales, and 11 in Operations
and Administration.
-25-
Facilities
The Company leases approximately 5,500 square feet for its principal
executive offices, which are located at 12800 Middlebrook Road, Suite 200,
Germantown, Maryland 20874. The Company's Austin, Texas product development
facilities are approximately 4,000 square feet and are located at 12710 Research
Blvd., Austin, Texas 78759. The Company also leases approximately 1,500 square
feet for storage and excess capacity located at 12325 Hymeadow Drive, Austin,
Texas 78750. Base rental for the current premises is approximately $7,900,
$6,600, and $1,200 per month, respectively. The leases require the Company to
pay certain property taxes and certain operating expenses. The Company believes
that its current and anticipated facilities are suitable and adequate for its
operations.
MANAGEMENT
The officers and directors of the Company are as follows:
Name Age Title
---- --- -----
Alonzo E. Short 57 Chairman of the Board
Robert A. Veschi 34 President, Chief Executive
Officer, Director
Christina L. Swisher 32 Vice President, Operations and
Secretary
Donald J. Shoff 43 Vice President of Finance and Chief
Financial Officer
William W. Rogers, Jr. 55 Director
Clive Whittenbury, Ph.D. 61 Director
William L. Hooton 45 Director
Each of the directors of the Company currently holds office until his or
her successor is elected and qualified. At present, the Company's By-laws
provide for not less than one director nor more than nine directors. Currently,
there are five directors in the Company. The By-laws permit the Board of
Directors to fill any vacancy and such director may serve until the next annual
meeting of shareholders or until his successor is elected and qualified.
Officers serve at the discretion of the Board of Directors. There are no family
relationships among any officers or directors of the Company. Mr. Veschi has
served as a promoter of the Company and the consideration received for such
services has been limited to the compensation disclosed under " - Remuneration."
The officers of the Company devote full time to the business of the Company.
The principal occupation and business experience for each officer and
director of the Company for at least the last five years is as follows:
ALONZO E. SHORT, JR., Lt. Gen., USA (ret.), 57, has been chairman of the
board of the Company since January 1996. General Short has more than 30 years
experience in executive management, operations and the engineering, design and
development of large-scale telecommunications and data systems. General Short
-26-
retired from the service in 1994 following a career that included serving as
deputy commanding general (1988-1990) and commanding general (1990-1991) of the
U.S. Army Information Systems Command, a major information technology
organization, which was responsible for all telecommunications during the Desert
Shield/Desert Storm operation, among other responsibilities. From 1991 to 1994,
General Short was director of the Defense Information Systems Agency, a major
information technology organization which is responsible for telecommunications
and related services to the President of the United States, Secret Service,
Joint Chiefs of Staff, Secretary of Defense, among other high level federal
entities. From 1994-1997, General Short was president and chief executive
officer of MICAH Systems, Inc., a Washington, D.C. metropolitan area based
information, technologies management and consulting firm. In September 1997,
General Short joined Lockheed Martin , an aerospace, defense, and information
technology company, as a Vice-President. Since January 1996, General Short has
been instrumental in the organization and development of the business of the
Company.
ROBERT A. VESCHI, 34, has been president, chief executive officer, and a
director of the Company since January 1995. Mr. Veschi is the founder of the
Company, which began its operations in June 1995. Mr. Veschi has significant
experience in executive management, operations and the engineering, design and
development of telecommunications and computer products and systems. From 1986
to 1990, Mr. Veschi was manager of systems engineering for International
Telemanagement, Inc., a Washington, D.C. metropolitan area based information,
data and network systems firm. From 1990 to 1994, Mr. Veschi was a group
president of I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From December 1994 to May 1995, for
approximately six months, Mr. Veschi was president and chief executive officer
of Octacom, Inc., a Washington, D.C. metropolitan area based information, data
and network systems firm, and a wholly-owned subsidiary of Octagon, Inc., an
Orlando, Florida metropolitan area based publicly held technical services firm.
From July 1994 to May 1995, for approximately nine months, Mr. Veschi was a vice
president of telecommunications for Octagon, Inc., and from January 1995 to May
1995, for approximately four months, Mr. Veschi was a member of the board of
directors of such company. Since June 1995, Mr. Veschi has been instrumental in
the organization, development and promotion of the Company.
DONALD J. SHOFF, CPA, 43, has been vice president of finance and chief
financial officer since November 1997. Prior to that, Mr. Shoff was director of
finance and assisted the Company as a consultant prior to employment. Mr. Shoff
has 21 years of significant experience in both public accounting firms and with
high technology companies, both public and private. From 1977 to 1981, Mr. Shoff
was a staff accountant and senior accountant on the staff of local Washington,
D.C. public accounting firms. From 1982 to 1986, Mr. Shoff was the corporate
cost accounting manager and a group controller for Science Applications
International Corporation, a high technology products and professional services
public corporation, where he was responsible for the corporate cost accounting
functions and controllership of a high technology services operation group. From
1987 to 1992 and from 1993 to 1996, Mr. Shoff consulted independently and as a
Senior Manager of Grant Thornton LLP, a major accounting and management
consulting firm, with public and privately held high technology companies doing
business with the Federal government. From 1992 to 1993 Mr. Shoff was vice
president of finance and administration for Comsis Corporation, a Washington,
D.C. based privately held engineering and technology company doing business with
the Federal and various state governments. Mr. Shoff holds a B.B.A. degree from
the Pennsylvania State University and is a certified public accountant.
CHRISTINA L. SWISHER, 32, has been vice president of operations since
December 1996 and secretary of the Company since February 1997. Ms. Swisher has
significant experience in the computer networking management, systems and
operations. From 1991 to 1993, Ms. Swisher was a technical and graphics
specialist with the Air Force Association, a Washington, DC area based national
services organization, where she was responsible for technical and statistical
analyses. From 1993 to 1995, Ms. Swisher was the manager for computer networks
for computer network systems and operations for I-Net, Inc., a Washington, DC
metropolitan area based information, data and network systems firm. Since 1995,
Ms. Swisher has been director of technical services with the Company, becoming
vice president of operations in December 1996.
-27-
Since June 1995, Ms. Swisher has been instrumental in the organization and
development of the business of the company.
WILLIAM W. ROGERS, JR., 55, has been a director of the Company since
January 1997. Mr. Rogers has substantial senior management, operations and
technical and engineering services experience. From 1972 to 1987, Mr. Rogers was
a general manager engaged in operations, technical and engineering services for
Boeing Computer Services, Inc. From 1987 to 1989, Mr. Rogers was president and
chief executive officer of International Telemanagement , Inc., a McLean,
Virginia based telecommunications and systems engineering and services company.
From 1989 to 1991, Mr. Rogers was a vice president of Fluor-Daniel, where he was
responsible for telecommunications and systems integration services. Since 1991,
Mr. Rogers has been a vice president with Computer Sciences Corporation, a
McLean, Virginia based technology products, systems and services company, where
he is responsible for systems integration and related technical services. Since
January 1997, Mr. Rogers has been instrumental in the organization and
development of the Company. Mr. Rogers holds a B.A. degree from West Virginia
University.
WILLIAM L. HOOTON, 45, has been a director of the Company since January
1996. Mr. Hooton has substantial experience in the management, design,
operation, marketing and sales of image conversion systems, electronic imaging
system integration, data automation and high performance data storage
subsystems. From 1990 to 1993, Mr. Hooton was vice president of operations and
technical and business development of the Electronic Information Systems Group
of I-Net, Inc., a Washington, D.C. metropolitan area based information, data and
network systems firm. Since 1993, Mr. Hooton has been president and chief
executive officer of Q Corp., a Washington, D.C. metropolitan area high
technology consulting firm specializing in digital imaging systems and other
complex imagery in media. Since January 1996, Mr. Hooton has been a director of
the Company and has been instrumental in the organization and development of the
Company. Mr. Hooton holds a B.B.A. degree from the University of Texas.
CLIVE G. WHITTENBURY, PH.D., 61, has been a director of the Company since
June 1996. Dr. Whittenbury has substantial senior management, operations and
technical advisory experience. From 1972 to 1979, Dr. Whittenbury was a senior
vice president and, from 1976 to 1986, a director of Science Applications
International Corporation ("SAIC"), a La Jolla, California based major
international systems engineering firm with current annual revenues of
approximately $2 billion. Since 1979, Dr. Whittenbury has been executive vice
president and a director of the Erickson Group, Inc., a major international
diversified products firm. Since 1994, Dr. Whittenbury has been a director of
MVSI, Inc., a publicly held (NASDAQ: "MVSI") McLean, Virginia based laser vision
robotics company. Dr. Whittenbury is a member of the International Advisory
Board for the British Columbia Advanced Systems Institute, which manages
commercialization programs in technology at the three major Vancouver/Victoria
universities, a member of the Advisory Board of Compass Technology Partners, an
investment fund, and is chairman of the Advisory Board (Laser Directorate) for
the Lawrence Livermore National Laboratory. Dr. Whittenbury has also served as a
technical advisor to three U.S. Congressional Committees, the Grace Commission
and numerous major U.S. and foreign companies. Since June 1996, Dr. Whittenbury
has been instrumental in the organization and development of the Company. Dr.
Whittenbury holds a B.S. degree (physics) from Manchester University (England)
and a Ph.D. degree (aeronautical engineering) from the University of Illinois.
Remuneration
Executive Compensation
The following table sets forth annual remuneration of $100,000 or more
paid for the fiscal years ended March 31, 1996 and 1997 and proposed to be paid
for the fiscal year ended March 31, 1998 to certain officers and directors of
the Company:
-28-
The following table sets forth certain compensation information for the
fiscal years ended March 31, 1996, 1997 and 1998 with regard to the Company's
chief executive officer and one other executive officer whose combined salary
and bonus was $100,000 or more in fiscal year 1998 (the "Named Officers"):
Summary Compensation Table
Other
Annual
Name of Individual Position with Company Year Salary Bonus Compensation(1)
- ------------------ --------------------- ---- ------ ----- ---------------
Robert A. Veschi President, Chief Executive 1998 175,000 87,500 --
Officer, Director 1997 175,000 87,500 --
1996 -- 25,000 --
Christina L. Swisher Vice President, Operations 1998 88,333 21,000 --
and Secretary 1997 57,917 5,607 --
1996 6,250 4,167 --
- ----------
(1) The officers of the Company may receive remuneration as part of an overall
group insurance plan providing health, life and disability insurance
benefits for employees of the Company. The amount allocable to each Named
Officer cannot be specifically ascertained, but, in any event, did not in
any reported fiscal year exceed the lesser of $50,000 and such Named
Officer's combined salary and bonus. The Company has purchased key-man
term life insurance on Mr. Veschi in the amount of $2 million, which
designates the Company as the owner and beneficiary of the policy. The
Company has agreed to grant to Ms. Swisher options to purchase 60,000
shares of Common Stock, in consideration of services during fiscal year
1998. However, such options have not yet been granted by the Company and
the terms thereof have not yet been set.
Director Compensation
The directors of the Company, with the exception of Mr. Veschi, are
entitled to annual remuneration of $24,000 pursuant to oral agreements between
such directors and the Company. In addition, General Short receives $1,000 per
month under a consulting services agreement for his additional specific business
services on behalf of the Company.
Each outside director of the Company is entitled to receive reasonable
expenses incurred in attending meetings of the Board of Directors of the
Company. The members of the Board of Directors intend to meet at least quarterly
during the Company's fiscal year, and at such other times as duly called. The
Company presently has four outside directors.
Employment Agreement
The Company has entered into an employment agreement (the "Agreement")
with Robert A. Veschi, the president and chief executive officer of the Company,
dated as of April 1, 1996. The Agreement will expire on March 31, 2001. The
current annual salary under the Agreement is $175,000, which salary may be
increased to reflect annual cost of living increases and may be supplemented by
discretionary merit and performance increases as determined by the Board of
Directors of the Company. Mr. Veschi is entitled to an annual bonus equal to 50
percent of the salary provided under this Agreement, which bonus is not subject
to any performance criteria.
The Agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee benefits applicable to
employees and executives of the Company. The Agreement provides for the use of
an automobile, payment of
-29-
club dues and other fringe benefits commensurate with his duties and
responsibilities. The Agreement also provides for benefits in the event of
disability. The Agreement also contains non-compete provisions which are limited
in geographical scope to the Washington, D.C. metropolitan area.
Pursuant to the Agreement, Mr. Veschi's employment may be terminated by
the Company with cause or by Mr. Veschi with or without good reason. Termination
by the Company without cause, or by Mr. Veschi for good reason, would subject
the Company to liability for liquidated damages in an amount equal to Mr.
Veschi's current salary and a pro rata portion of his bonus for the remaining
term of the Agreement, payable in a lump sum cash payment, without any set-off
for compensation received from any new employment. In addition, Mr. Veschi would
be entitled to continue to participate in and accrue benefits under all employee
benefit plans and to receive supplemental retirement benefits to replace
benefits under any qualified plan for the remaining term of the Agreement to the
extent permitted by law.
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision that provides that the Company will, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as amended
from time to time ("DGCL"), indemnify all persons whom it may indemnify pursuant
thereto. To the fullest extent permitted by the DGCL, a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director. The provisions are
intended to afford directors protection against, and to limit their potential
liability for, monetary damages resulting from suits alleging a breach of the
duty of care by a director; they also diminish the potential rights of action
which might otherwise be available to shareholders by limiting the liability of
officers and directors to the maximum extent allowable under Delaware law and by
affording indemnification against most damages and settlement amounts paid by a
director of the Company in connection with any shareholders derivative action.
As a consequence of these provisions, stockholders of the Company will be unable
to recover monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within an exception under DGCL or under Delaware case law.
The provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of the
Company or any stockholder to obtain an injunction or any other type of
equitable relief in the event of a breach of fiduciary duty. Management of the
Company believes these provisions will assist the Company in securing and
retaining qualified persons to serve as directors. The Company is unaware of any
pending or threatened litigation against the Company or its directors that would
result in any liability for which such director would seek indemnification or
similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors has
resulted in a growing reluctance on the part of capable persons to serve as
members of boards of directors of public companies. The Company also believes
that the increased risk of personal liability without adequate insurance or
other indemnity protection for its directors could result in overcautious and
less effective direction and management of the Company. The limitation on
liability and indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Additionally, the Company has
procured directors liability insurance coverage, but there is no assurance that
it will provide coverage to the extent of the director's claims for
indemnification. In such event, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification and, the value of
the Company stock may be adversely affected as a result. There is also no
assurance that the Company will be able to continue to procure directors
liability insurance. It is uncertain whether the Company's directors would
continue to serve in such capacities if improved protection from liability were
not provided.
-30-
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 Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the Company's
Common Stock owned as of April 23, 1998 and, as adjusted, to reflect the sale of
the Offered Stock, by (i) each person who is known by the Company to own
beneficially more than five percent of the Company's Common Stock; (ii) each of
the Company's officers and directors; and (iii) all officers and directors as a
group. No assurance can be given as to the timing of exercise of the Warrants or
whether all or any of the Warrants will be exercised.
Percentage of Shares
--------------------
Number Before After
Name and Address Position with Company of Shares Offering Offering(1)
- ---------------- --------------------- --------- -------- -----------
Alonzo E. Short, Jr., Chairman of the
Lt. Gen., USA (ret.)(2) Board 90,000 1.38 1.09
Robert A. Veschi(3) President, Chief
Executive
Officer, Director 1,375,000 21.15 16.72
Christina Swisher(3) Vice President,
Secretary 120,000 1.85 1.46
Donald J. Shoff(3) Vice President,
Chief Financial
Officer 50,000 .77 .61
William L. Hooton(4) Director 50,000 .77 .61
Clive W. Whittenbury, Director 50,000 .77 .61
Ph.D.(5)
William W. Rogers, Jr.(6) Director 5,000 .08 .06
Edward Ratkovitch, Maj. Stockholder 500,000 7.69 6.08
Gen. USA (ret.)(7)
Arthur Henley(8) Stockholder 487,500 7.50 5.93
Thomas T. Prousalis(9) Stockholder 450,000 6.92 5.47
All Officers and
Directors as a
Group (7 persons) 1,740,000 26.77 21.16
- ----------
(1) Does not include the exercise of options or warrants other than the
Warrants, including the Placement Agent's Warrant and the Underwriter's
Warrant.
(2) c/o Lockheed Martin, 5203 Leesburg Pike, Suite 1501, Falls Church,
Virginia 22041.
(3) c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown, Maryland
20874.c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown,
Maryland 20874.
(4) 13333 Glen Taylor Lane, Herndon, Virginia 22071.
(5) 511 Trinity Avenue, Yuba City, California 95991. Does not include 250,000
shares owned by MVSI, Inc., of which Dr. Whittenbury is, to the Company's
knowledge, a director.
-31-
(6) c/o CASI, 14200 Park Meadow Drive, Suite 200, Chantilly, Virginia 20151.
(7) 1030 Delf Drive, McLean, Virginia 22101. Does not include 250,000 owned by
MVSI, Inc., of which Gen. Ratkovitch is, to the Company's knowledge, a
significant shareholder, chairman and chief executive officer.
(8) 10705 Bay Laurel Trail, Austin, Texas 78750.
(9) 1919 Pennsylvania Avenue, N.W., Suite 800, Washington, D.C. 20006. Does
not include 250,000 shares owned by MVSI, Inc., of which Mr. Prousalis is,
to the Company's knowledge, a significant shareholder.
CERTAIN TRANSACTIONS
In January 1995, in connection with the founding of the Company, the
Company issued 300 shares of its Common Stock to Alonzo E. Short, Jr., 4,332
shares to Robert A. Veschi, 400 shares to Christina L. Swisher, 167 shares to
William L. Hooten, 167 shares to Donald J. Shoff, 1,583 shares to Arthur Henley
and 1,500 shares to Thomas T. Prousalis, Jr. Each such founding shareholder was
assessed $0.01 per share for his or her Common Stock, which amount was
equivalent to its par value at the time. Taking into account a 600:1 stock split
effective as of March 1996 (the "Forward Split") and a 2:1 reverse stock split
effective as of March 1997 (the "Reverse Split"), each such shareholder acquired
at that time the equivalent of 90,000, 1,300,000, 120,000, 50,000, 50,000,
475,000 and 450,000 shares of today's Common Stock.
In March 1996, the Company was loaned $500,000 by Edward Ratkovitch,
$250,000 by Robert Foise, $200,000 by Armstrong Industries and $50,000 by Martin
Sumichrast. Principal and interest computed at the rate of eight percent
annually was to become due at the earlier of June 1, 1997 or the expected June
1996 closing date of a proposed initial public offering of Company securities.
As additional consideration for these loans, the Company issued 500,000 bridge
units to Mr. Ratkovitch, 250,000 to Mr. Foise, 200,000 to Armstrong Industries
and 50,000 to Mr. Sumichrast. Each bridge unit contained one share of Common
Stock, one Class A Warrant and one Class B Warrant. In June 1996, the loan
principal was converted into paid-in capital and accounted for as consideration
for the bridge units. The Class A Warrants and Class B Warrants were canceled in
March 1997 in exchange for each such shareholder receiving additional shares of
Common Stock such that, even taking the Reverse Split into account, each such
shareholder had 500,000, 250,000, 200,000 and 50,000 shares of today's Common
Stock.
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C. area based NASDAQ-listed technology products
and services company, in which the Company agreed to be acquired and become a
wholly-owned subsidiary of MVSI in an exchange of securities. To the Company's
knowledge, Edward Ratkovitch is a significant shareholder and the chairman and
chief executive officer of MVSI, Thomas T. Prousalis, Jr. is a significant
shareholder of MVSI and Clive Whittenberry is a director of MVSI. Pursuant to
the letter of intent, MVSI loaned the Company $500,000 for working capital. In
October 1996, the Company entered into an agreement to be acquired by MVSI,
subject to shareholder approval. MVSI loaned an additional $500,000 to the
Company in November 1996. However, in January 1997, the parties mutually agreed
to terminate the acquisition, primarily due to market conditions that involved a
significant decrease in the bid price of MVSI's common stock and, thereby, the
value of the purchase price.
As part of a mutual cooperation agreement, in January 1997 MVSI loaned the
Company an additional $250,000 under a convertible debenture. The aggregate
principal amount of the convertible debenture at that time was $1,275,081,
reflecting the total amount of loan advances made to the Company by MVSI. The
terms provided for outstanding principal to bear annual interest of nine
percent, and for principal to be convertible into Common Stock upon the
completion of the Company's initial public offering at a ratio calculated using
the offering price per share. In March 1997, MVSI converted the convertible
debenture into 250,000 shares of Common Stock.
-32-
In March 1996, the Company acquired all right, title and interest in the
353 Patent from Arthur Henley and Scott Grau in consideration of a five percent
overriding royalty interest against gross profits involving the use of the 353
Patent. The Company agreed to allocate $1,000,000 of its capital to develop and
exploit the market opportunities of the 353 Patent by December 31, 1996, or the
353 Patent would be subject to repurchase by its inventors. The Company
satisfied this commitment timely.
The Company paid legal fees of approximately $380,000 during the year
ended March 31, 1997, to Thomas T. Prousalis, Jr., an attorney who is a
significant stockholder of the Company, relating to the Initial Public Offering.
The Company also paid $100,000 during the year ended March 31, 1997, to Mr.
Prousalis for services relating to an offering that was abandoned in September
1996.
The Company rents an aircraft for business purposes from an entity owned
by Robert A. Veschi, the Company's President and Chief Executive Officer. For
the year ended March 31, 1997, the Company paid $27,796 for the rental of the
aircraft.
The Company entered into a consulting agreement with Alonzo E. Short, Jr.,
Lt. Gen., USA (ret.), the Chairman of the Board, to provide services for a fixed
monthly amount of $1,000. No amounts were paid to the stockholder during 1997.
DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.01 par value. There are presently 6,500,000 issued and
outstanding shares of Common Stock. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally available
therefor when, as and if declared by the Board of Directors and, upon
liquidation or dissolution of the Company, whether voluntary or involuntary, to
share equally in the assets of the Company available for distribution to
stockholders. All outstanding shares of Common Stock are validly authorized and
issued, fully paid and nonassessable, and all shares to be sold and issued as
contemplated hereby, will be validly authorized and issued, fully paid and
nonassessable. The Board of Directors is authorized to issue additional shares
of Common Stock, not to exceed the amount authorized by the Company's
Certificate of Incorporation, and to issue options and warrants for the purchase
of such shares, on such terms and conditions and for such consideration as the
Board may deem appropriate without further stockholder action. The above
description concerning the Common Stock of the Company does not purport to be
complete. Reference is made to the Company's Certificate of Incorporation and
By-laws which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of stockholders.
Each holder of Common Stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote. Since the shares of
Common Stock do not have cumulative voting rights, the holders of more than 50
percent of the shares voting for the election of directors can elect all the
directors if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any person to the Board of Directors.
Warrants
-33-
Each of the Warrants entitles the registered holder to purchase one share
of Common Stock. The Warrants are exercisable at a price of $5.25 (which
exercise price was arbitrarily determined) subject to certain adjustments. The
Warrants are entitled to the benefit of adjustments in their exercise prices and
in the number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Warrants may be exercised at any time and continuing thereafter until
April 7, 2002 unless such date extended by the Company. After the expiration
date, Warrant holders shall have no further rights. Warrants may be exercised by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price and any transfer tax, to
the Warrant Agent. If less than all of the Warrants evidenced by a warrant
certificate are exercised, a new certificate will be issued for the remaining
number of Warrants. Payment of the exercise price may be made by cash, bank
draft or official bank or certified check equal to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders
of the Company. The Company has the right at any time to redeem the Warrants, at
a price of $.05 per Warrant, by written notice to the registered holders
thereof, mailed not less than thirty (30) nor more than sixty (60) days prior to
the date of redemption. The Company may exercise this right only if the closing
bid price for the Common Stock equals or exceeds $10 per share during a thirty
(30) consecutive trading day period ending no more than fifteen (15) days prior
to the date that the notice of redemption is mailed, provided there is then a
current registration statement under the Securities Act of 1933, as amended (the
"Act") with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. If the Company exercises its right to call Warrants for
redemption, such Warrants may still be exercised until the close of business on
the day immediately preceding the date of redemption. If any Warrant called for
redemption is not exercised by such time, it will cease to be exercisable, and
the holder thereof will be entitled only to the repurchase price. Notice of
redemption will be mailed to all holders of Warrants or record at least thirty
(30) days, but not more than sixty (60) days, before the date of redemption. The
foregoing notwithstanding, the Company may not call the Warrants at any time
that a current registration statement under the Act is not then in effect.
The Warrants were issued in registered form pursuant to an agreement dated
April 8, 1997 (the "Warrant Agreement"), between the Company and American Stock
& Transfer Trust Company, New York, New York, as warrant agent (the "Warrant
Agent"). The Warrant Agreement permits the Company and the Warrant Agent,
without the consent of Warrant holders, to supplement or amend the Warrant
Agreement in order to cure any ambiguity, manifest error or other mistake, or to
address other matters or questions arising thereafter that the Company and the
Warrant Agent deem necessary or desirable and that do not adversely affect the
interest of any Warrant holder. The Company and the Warrant Agent may also
supplement or amend the Warrant Agreement in any other respect with the written
consent of holders of not less than a majority in the number of Warrants then
outstanding; however, no such supplement or amendment may (i) make any
modification of the terms upon which the Warrants are exercisable or may be
redeemed; or (ii) reduce the percentage interest of the holders of the Warrants
without the consent of each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an effective
registration statement, with a current prospectus on file with the Commission
covering the shares of Common Stock underlying the Warrants, and the issuance of
such shares to the holder must be registered, qualified or exempt under the laws
of the state in which the holder resides. See "Risk Factors - Continuing
Registration Required to Exercise Warrants."
-34-
Transfer Agent and Registrar
The transfer agent and registrar for the securities of the Company is
American Stock Transfer & Trust Company located at 40 Wall Street, New York, New
York 10005.
Reports to Securityholders
The Company will furnish to holders of its securities annual reports
containing audited financial statements. The Company may issue other unaudited
interim reports to its securityholders as it deems appropriate.
PLAN OF DISTRIBUTION
The Company shall issue the Offered Stock upon the exercise of the
Warrants by the holders thereof. Warrants may be exercised by surrendering the
certificate evidencing such Warrant, with the form of election to purchase on
the reverse side of such certificate properly completed and executed, together
with payment of the exercise price and any transfer tax, to the Warrant Agent.
If less than all of the Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price. The Company will
be prevented, however, from issuing Common Stock upon exercise of the Warrants
in certain circumstances. See "Risk Factors - Continuing Registration Required
to Exercise Warrants."
LEGAL PROCEEDINGS
e-Net, Inc. is not a party to any legal proceedings and, to the best of
its information, knowledge and belief, none is contemplated or has been
threatened.
LEGAL MATTERS
The validity of the Securities being offered hereby has been passed on for
the Company by Thomas T. Prousalis, Jr., Esq., Washington, D.C.
EXPERTS
The financial statements of e-Net, Inc. as of March 31, 1997 and 1996 and
for the year ended March 31, 1997 and for the period from beginning of
operations (June 8, 1995) to March 31, 1996 included in the Registration
Statement and this Prospectus have been included herein in reliance on the
reports dated May 2, 1997, of Grant Thornton LLP, Independent Certified Public
Accountants, and upon the authority of said firm as experts in accounting and
auditing.
With respect to the unaudited interim financial information included in
the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1997 included herein, Grant Thornton LLP has applied limited procedures in
accordance with professional standards for a review of such information.
However, as stated in their report dated January 19, 1998 included in the
Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1997, they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature of the
review procedures applied. Grant Thornton LLP is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their reports on the
unaudited interim financial information because those reports are not "reports"
or a "part" of the registration statement prepared or certified by an accountant
within the meaning of Sections 7 and 11 of the Securities Act.
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INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants.......................... F-2
AuditedFinancial Statements
Balance Sheets as of March 31, 1997 and 1996.............................. F-3
Statements of Operations for the year ended March 31, 1997 and for the
Period from beginning of operations (June 8, 1995) to March 31, 1996.... F-4
Statements of Cash Flows for the year ended March 31, 1997 and for the
Period from beginning of operations (June 8, 1995) to March 31, 1996.... F-5
Statements of Stockholders' Equity as of March 31, 1997................... F-6
Notes to Financial Statements............................................. F-7
Page
----
Report of Independent Certified Public Accountants..........................F-10
Audited Financial Statements
Balance Sheets as of December 31 and March 31, 1997.......................F-17
Statements of Operations for the three months ended December 31, 1997
and 1996................................................................F-18
Statements of Operations for the nine months ended December 31, 1997
and 1996................................................................F-19
Statements of Cash Flows for the nine months ended December 31, 1997
and 1996................................................................F-20
Statements of Stockholders' Equity as of December 31, 1997................F-21
Notes to Financial Statements.............................................F-22
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
e-Net, Inc.
We have audited the accompanying balance sheets of e-Net, Inc. (a Delaware
Corporation), as of March 31, 1997 and 1996, and the related statements of
operations, cash flows and stockholders' equity for the year ended March 31,
1997, and the period from the beginning of operations (June 8, 1995) to March
31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of e-Net, Inc.,
as of March 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended March 31, 1997, and the period from the beginning of
operations (June 8, 1995) to March 31, 1996, in conformity with generally
accepted accounting principles.
Grant Thornton, LLP
Vienna, Virginia
May 2, 1997
F-2
e-NET, INC.
BALANCE SHEETS
ASSETS
March 31,
1997 1996
----------- -----------
Current Assets
Cash and cash equivalents $ 379,441 $ 557,960
Accounts receivable 113,181 53,677
Prepaid expenses 14,800 --
----------- -----------
Total Current Assets 507,422 611,637
Deposits 7,530 --
Property, Plant and Equipment, Net 203,125 134,285
Deferred Initial Public Offering Costs 964,706 --
Software Development Costs 520,853 --
----------- -----------
$ 2,203,636 $ 745,922
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Stockholder/Officer notes payable $ -- $ 45,000
Accounts payable--trade 105,301 5,326
Accrued liabilities 330,580 22,787
Deferred revenue -- 20,000
Capital lease obligation 4,480 --
----------- -----------
Total Current Liabilities 440,361 93,113
Accrued Initial Public Offering Costs 887,843 --
Long-Term Debt -- 500,000
----------- -----------
Total Liabilities 1,328,204 593,113
Stockholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized, 4,250,000 and 3,750,000
shares outstanding at March 31, 1997
and 1996, respectively 42,500 37,500
Stock subscriptions and notes receivable (46) (125,100)
Unamortized cost of bridge financing -- (2,885,135)
Additional paid-in capital 8,307,627 3,662,600
Retained deficit (7,474,649) (537,056)
----------- -----------
Total Stockholders' Equity 875,432 152,809
----------- -----------
$ 2,203,636 $ 745,922
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
F-3
e-NET, INC.
STATEMENTS OF OPERATIONS
Period from
beginning of
operations
Year ended (June 8, 1995) to
March 31, 1997 March 31, 1996
-------------- --------------
Sales $ 549,037 $ 293,876
Operating Expenses
Cost of product sales and service 410,027 88,360
Selling, general and administrative 1,171,212 115,171
Research and development 236,846 --
----------- -----------
(Loss) Income from Operations (1,269,048) 90,345
Interest and Financing Charges
Interest expense--bridge financing (5,385,135) (614,865)
Cost of abandoned stock registration (284,575) --
Interest expense (19,356) (6,884)
Other expenses (442) (6,143)
Interest income 20,963 491
----------- -----------
Loss Before Income Taxes (6,937,593) (537,056)
Income Tax Provision -- --
----------- -----------
Net Loss $(6,937,593) $ (537,056)
----------- -----------
----------- -----------
Pro forma adjustment to reflect
additional compensation expense $ -- $ (237,500)
----------- -----------
Pro forma Net Loss $(6,937,593) $ (774,556)
----------- -----------
----------- -----------
Pro forma Loss per Share $ (1.72) $ (.26)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 4,034,247 3,017,808
The accompanying notes are an integral part of these statements.
F-4
e-NET, INC.
STATEMENTS OF CASH FLOWS
Period from
beginning of
operations
(June 8,
Year ended 1995) to
March 31, 1997 March 31, 1996
-------------- --------------
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $(6,937,593) $ (537,056)
Adjustments to reconcile net loss to
net cash from operating activities
Interest expense--private placement 5,385,135 614,865
Depreciation and amortization 34,402 30,715
Changes in operating assets and liabilities
(Increase) in accounts receivable (59,504) (53,677)
Increase in prepaid expenses and deposits (22,330) --
Increase in accounts payable and accrued
liabilities 432,849 28,113
(Decrease) increase in deferred revenue (20,000) 20,000
----------- -----------
Net Cash (Used in) Provided by Operating
Activities (1,187,041) 102,960
----------- -----------
Cash Flows from Investing Activities
Capital expenditures (125,502) --
Capitalized software development costs (520,853) --
----------- -----------
Net Cash Used in Investing Activities (646,355) --
----------- -----------
Cash Flows from Financing Activities
Proceeds from shareholder/officer loans -- 30,000
Payment of shareholder/officer loans (12,050) (25,000)
Payment of notes payable arising from
asset acquisition -- (50,000)
Proceeds from issuance of bridge notes payable 500,000 500,000
Proceeds from issuance of debt instrument
converted to equity 1,250,000 --
Payments on capital leases (6,210) --
Payment of public offering costs (76,863) --
----------- -----------
Net Cash Provided by Financing Activities 1,654,877 455,000
----------- -----------
Net (Decrease) Increase in Cash and
Cash Equivalents (178,519) 557,960
Cash and Cash Equivalents at Beginning
of Period 557,960 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 379,441 $ 557,960
----------- -----------
----------- -----------
Supplemental Disclosures:
Income Taxes Paid $ -- $ --
----------- -----------
----------- -----------
Interest Paid $ 6,284 $ 688
----------- -----------
----------- -----------
Noncash investing and financing activities
The Company issued 3,250,000 shares of common stock for notes receivable of
$155,000 during the period ended March 31, 1996. In June 1996, notes receivable
of $125,000 were canceled upon the return of 250,000 shares of common stock.
The Company issued 250,000 shares of common stock upon conversion of a
convertible debenture of $1,250,000, plus accrued interest of $25,081.
The accompanying notes are an integral part of these statements.
F-5
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Stock Unamortized
------------ Subscriptions Cost of Additional Total
No. of and Notes Bridge Paid-in Retained Stockholders'
Shares Amount Receivable Financing Capital Deficit Equity
------ ------ ---------- --------- ------- ------- ------
Balance, inception
Initial capitalization 3,000,000 $ 30,000 $ (100) $ -- $ (29,900) $ -- $ --
Contribution of assets
from stockholder/officer -- -- -- -- 75,000 -- 75,000
Sale of common stock for
note 250,000 2,500 (125,000) -- 122,500 -- --
Issuance of common stock
and additional capital
associated with the
financing cost from the
issuance of bridge units 500,000 5,000 -- (2,885,135) 3,495,000 -- 614,865
Net loss -- -- -- -- -- (537,056) (537,056)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1996 3,750,000 37,500 (125,100) (2,885,135) 3,662,600 (537,056) 152,809
Bridge loan converted to
capital -- -- -- 500,000 -- -- 500,000
Issuance of capital
common stock and
additional associated
with the financing costs
from the issuance
of bridge units 500,000 5,000 -- (3,000,000) 3,495,000 -- 500,000
Cancellation of note
receivables in exchange
for common stock (250,000) (2,500) 125,000 -- (122,500) -- --
Amortization of the
costs of bridge
financing -- -- -- 5,385,135 -- -- 5,385,135
Conversion of debt to equity 250,000 2,500 -- -- 1,272,581 -- 1,275,081
Reclassification
adjustment -- -- 54 -- (54) -- --
Net loss -- -- -- -- -- (6,937,593) (6,937,593)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 4,250,000 $ 42,500 $ (46) $ -- $ 8,307,627 $(7,474,649) $ 875,432
========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
e-Net, Inc., was incorporated on January 9, 1995, and the Company
commenced operations on June 8, 1995. The Company, with principal executive
offices in Germantown, Maryland, develops, markets, and supports open client,
server and integrated applications software that enables local, national and
international telephone communications, information exchange and commerce over
the Internet and private networks, principally located in the United States. The
Company also sells other products used in the management and billing of computer
network, telephone and computer usage.
The significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
Revenue Recognition
Revenue is recognized on the sale of software products upon shipment
unless future obligations exist wherein a portion of the revenue is deferred
until the obligation is satisfied. Revenue from services rendered is recognized
either as the services are rendered based upon fixed hourly rates or at
contractually determined fixed monthly fees.
For the year ended March 31, 1997, the Company derived 78% and 21% of its
sales from two customers, respectively.
For the period ended March 31, 1996, the Company derived 32%, 29%, 16% and
13% of its sales from four customers, respectively.
Accounts Receivable
Accounts receivable are stated at the unpaid balances, less allowance on
uncollectible accounts, if any. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may affect
collectibility of receivables. At March 31, 1997 and 1996, management deemed all
balances fully collectible and did not establish an allowance for uncollectible
accounts.
Use of Estimates in the Preparation of Financial Statements
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Property and Equipment
Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Depreciation is computed on equipment
and furniture, using a declining-balance method over a five-year period.
F-7
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Earnings per share for the periods from the beginning of operations to
March 31, 1996, are based upon weighted-average shares outstanding during the
period from June 1995, the date operations commenced, through March 31, 1996,
adjusted retroactively, where applicable, for the effect of a 600:1 stock split
effective as of March 1996 and a 2:1 reverse stock split effective as of March
1997. The weighted average shares outstanding also include the weighted-average
effect (17,808 shares) of 500,000 shares of common stock issued in March 1996,
pursuant to the issuance of the bridge units. The weighted-average effect of
bridge units issued in April 1996 has been accounted for in computing earnings
per share for the period ended March 31, 1996, and is not reflected in prior
period calculations inasmuch as the issuance of the securities was accounted for
at fair value as described in Note C. The effect of the issuance of 250,000
shares of Common Stock in March 1996 for a $125,000 promissory note has not been
reflected in weighted average shares outstanding because the note was canceled
in June 1996 in exchange for the return of all such shares.
Software Development Costs
In accordance with the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company has capitalized certain software development costs
incurred after establishing technological feasibility. Costs incurred prior to
such feasibility and certain hardware-related, development costs have been
expensed as incurred as research and development costs. Software costs will be
amortized over the estimated useful life of the software once the product is
available for general release to customers which release management estimates
will occur by October 1997. At March 31, 1997, the Company has capitalized
$520,853.
Critical to the recoverability of the capitalized software costs is the
generation of related sales sufficient to recover such costs. Should sufficient
sales fail to materialize, the carrying amount of capitalized software costs may
be reduced accordingly in the future.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
cash held in checking and investment accounts with maturities of three months or
less to be cash equivalents. The carrying amount approximates fair value because
of the short-term maturity of the instruments.
NOTE B--INITIAL PUBLIC OFFERING
In February 1997, the Company entered into a letter of intent with an
underwriter for a firm commitment initial public offering of securities
consisting of 1,500,000 shares of common stock and 1,500,000 warrants. In
connection with the offering, a 2:1 reverse stock split was approved by the
Company. In addition, in connection with the offering, the $1,275,081
convertible debenture described in Note C was converted to 250,000 shares of
common stock, and the outstanding Class A and Class B warrants were canceled,
resulting in 4,250,000 shares of common stock issued and outstanding prior to
the offering. On April 11, 1997, the shares were registered and the offering
closed with net proceeds to the Company of approximately $5,722,000. The Company
deferred costs incurred in connection with the offering of $964,706 at March 31,
1997, representing legal, accounting, underwriter fees, and printing costs
pending completion of the offering, at which time the costs will be charged to
paid-in capital. Such costs included legal fees of approximately $380,000 paid
to an attorney who is a stockholder of the Company. The liability associated
with the accrual of the costs has been classified as a noncurrent liability
because proceeds from the equity offering were used to retire the payable. Pro
forma data are represented below to reflect the balance sheet at March 31, 1997,
as if the offering had closed at year-end.
F-8
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE B--INITIAL PUBLIC OFFERING--Continued
Pro forma Pro forma
Historical Adjustment Balance Sheet
---------- ---------- -------------
Assets
Assets
Cash and cash equivalents $ 379,441 $ 5,722,282 $ 6,101,723
Deferred initial public offering costs 964,706 (964,706) --
Software development 520,853 -- 520,853
Other assets 338,636 -- 338,636
------------ ------------ ------------
Total Assets $ 2,203,636 $ 4,757,576 $ 6,961,212
------------ ------------ ------------
------------ ------------ ------------
Liabilities and Stockholders' Equity
Liabilities
Accrued liabilities $ 330,580 $ -- $ 330,580
Accrued initial public offering costs 887,843 (887,843) --
Other liabilities 109,781 -- 109,781
------------ ------------ ------------
Total Liabilities 1,328,204 (887,843) 440,361
Stockholders' Equity
Common stock 42,500 15,000 57,500
Additional paid-in capital, stock
subscriptions and notes receivable 8,307,581 5,630,419 13,938,000
Retained deficit (7,474,649) -- (7,474,649)
------------ ------------ ------------
Total Stockholders' Equity 875,432 5,645,419 6,520,851
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 2,203,636 $ 4,757,576 $ 6,961,212
------------ ------------ ------------
------------ ------------ ------------
A pro forma statement of operations is not presented, as the historical
statement of operations reflects the transactions for the entire period. Pro
forma share information is presented below.
Pro forma loss per share $ (1.25)
------------
------------
Pro forma weighted average shares outstanding 5,534,247
------------
------------
In March 1996, the Company entered into a letter of intent with an
underwriter for a firm commitment initial public offering of securities. The
offering was abandoned in September 1996. The Company paid $100,000 to an
attorney who is also a stockholder of the Company in return for services
rendered in connection with the offering. In addition, the Company has expensed
$284,575 of costs incurred in connection with the offering, which costs do not
benefit the 1997 offering described above.
F-9
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE C--SIGNIFICANT TRANSACTIONS
Convertible Debenture
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C., area based Nasdaq-listed technology products
and services company, whereby the Company agreed to be acquired and become a
wholly owned subsidiary of MVSI in an exchange of securities. Pursuant to the
terms of the letter of intent, an initial amount of $500,000 was loaned by MVSI
to the Company for working capital. In October 1996, the Company entered into an
agreement to be acquired by MVSI, which was subject to stockholder approval. An
additional $500,000 was loaned to the Company in November 1996. However, in
January 1997, the parties mutually agreed to terminate the acquisition,
principally due to market conditions, and, as part of a mutual cooperation
agreement, MVSI loaned the Company an additional $250,000 pursuant to the terms
of a convertible debenture.
The terms of the convertible debenture for the principal sum of
$1,275,081, reflecting the total amount of the loan advances made to the Company
by MVSI, provided that the outstanding principal balance bear interest at 9% per
annum. In March 1997, at MVSI's option, the principal was converted into 250,000
shares of common stock of the Company upon completion of an initial public
offering of the Company's securities, with the number of shares calculated using
the initial price per share of the offering, resulting in a total of 4,250,000
shares of Common Stock issued and outstanding prior to the date of the
prospectus. The 250,000 shares of Common Stock owned by MVSI were registered as
part of the offering and are restricted from sale for a period of 12 months from
the date of this offering, but may be released for sale during this period with
the consent of the Representative. Three principal stockholders of the Company
are stockholders of MVSI. A director of the Company is a director of MVSI.
Private Placement Transactions
In March 1996, the Company issued 250,000 shares of Common Stock to a
nonaffiliated investment banking firm in a private placement transaction for
aggregate consideration of $125,000, represented by a full recourse promissory
note for the entire purchase price. In June 1996, this promissory note was
canceled in exchange for the return of the 250,000 shares of Common Stock.
In March 1996, the Company was loaned $500,000 by a nonaffiliated person.
Principal and interest computed at the rate of eight percent per annum become
due at the earlier of June 1, 1997, or the closing date of the proposed initial
public offering of securities of the Company which was expected to occur in June
1996. As additional consideration for making such loan, the Company issued
500,000 bridge units each containing one share of Common Stock, one Class A
Warrant and one Class B Warrant to the lender. In June 1996, the loan principal
was converted to paid-in capital and accounted for as consideration for the
500,000 bridge units received in connection with the loan. Inasmuch as these
bridge units were issued in contemplation of a proposed offering, financing
expense related to the issuance of these securities of $3,000,000 was recorded
between the date of issuance and the anticipated offering date, with a
corresponding credit to paid-in capital. The value of $3,000,000 attributed to
issuance of the bridge units was computed using the offering price of the units
offered in the Company's proposed 1996 public offering less the amount of debt
converted to paid-in capital in June 1996. As of March 31, 1996, the Company had
accrued $614,865 of this financing expense. The Company recorded the loan of
$500,000 as a noncurrent liability at March 31, 1996. It is not practicable to
estimate the fair value of this debt, as there are no quoted market prices for
debt with similar terms. In June 1996, the bridge loans outstanding as of March
31, 1996, were converted and the unamortized financing expense was charged to
income at that time. The Class A Warrants and Class B Warrants were canceled in
March 1997 in exchange for such unaffiliated person receiving additional shares
of Common Stock such that, even after the 2:1 reverse stock split, he had
500,000 shares of Common Stock.
F-10
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE C--SIGNIFICANT TRANSACTIONS (Continued)
In April 1996, the Company was loaned $500,000 by three nonaffiliated
persons. Principal and interest computed at the rate of eight percent per annum
become due at the earlier of June 1, 1997, or the closing date of an initial
public offering of securities of the Company which was expected to occur in June
1996. As additional consideration for making such loan, the Company issued
500,000 bridge units identical to those issued in March 1996 as described above.
In June 1996, the loan principal was converted to paid-in capital and accounted
for as consideration for the 500,000 bridge units received in connection with
the loan. Inasmuch as these bridge units were issued in contemplation of the
proposed offering, financing expense related to the issuance of these securities
of $3,000,000 was recorded between the date of issuance and the date the loan
was converted to capital, with a corresponding credit to paid-in capital. The
value of $3,000,000 attributed to issuance of the bridge units was computed
using the offering price of the units in the Company's proposed 1996 public
offering less the amount of debt converted to paid-in capital in June 1996. The
Class A Warrants and Class B Warrants were canceled in March 1997 in exchange
for such unaffiliated persons receiving additional shares of Common Stock such
that, even after the 2:1 reverse stock split, they had 500,000 shares of Common
Stock.
Acquisitions
In June 1995, the Company acquired the rights and title to certain
tangible assets consisting primarily of computer equipment and peripherals,
certain products and intangible assets related thereto, and contract rights in
return for a promissory note of $50,000 and the release of the seller's
obligation valued at $75,000 for compensation formerly due to the president of
the Company. The Company allocated the entire purchase price of $125,000 to the
tangible assets acquired based upon their fair value. The portion of the
purchase price attributable to the release of the compensation obligation due to
the stockholder/officer was credited to additional paid-in capital. The entire
principal balance due under the promissory note and interest thereon was repaid
by the Company in March 1996.
In January 1996, the Company signed a letter of intent to purchase certain
assets from an entity of which two of the three owners are also stockholders of
the Company. These assets are prototype boards, proprietary software code and
existing research and development relating to specific computer software
products. In May 1996, the Company completed the purchase for cash of $50,000.
Management allocated the entire purchase price of $50,000 to research and
development expense and therefore, recorded a charge to operations in fiscal
year 1997 for that amount. The entity from which the assets were acquired was
dormant and contained no assets other than the intangible assets described
below. As a result, condensed financial statements of this entity have not been
presented.
In March 1996, the Company acquired the right, title and interest to
certain inventions and related patents ("Technology") from two individuals who
are also stockholders of the Company in an assignment of patent rights in return
for future royalties computed quarterly equal to 5% of gross profit from
products sold related to the acquired Technology. Royalties will be expensed in
the period in which related sales are recognized. The assignment agreement
provides for the right of the individuals to repurchase the Technology if the
Company fails to make reasonable efforts to develop and exploit the market
opportunities made available by the Technology. The agreement provides that the
Company allocate $1,000,000 of paid-in capital to develop and exploit the market
opportunities of the Technology by December 31, 1996, or the Technology will be
subject to repurchase by the inventors of the Technology. The Company satisfied
its commitment to allocate $1,000,000 towards the Technology as of March 31,
1997.
F-11
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE D--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Property and Equipment
Property and equipment consist of the following at March 31:
1997 1996
--------- ---------
Furniture and office equipment $ 258,590 $ 125,000
Airplane -- 40,000
Leasehold improvements 2,602 --
--------- ---------
261,192 165,000
Less accumulated depreciation (58,067) (30,715)
--------- ---------
Property and equipment--net $ 203,125 $ 134,285
--------- ---------
--------- ---------
Accrued Liabilities
Accrued liabilities consist of the following at March 31:
1997 1996
--------- ---------
Accrued salaries $ 43,042 $ 3,577
Accrued vacation 32,819 821
Accrued profit-sharing plan 32,216 4,063
Accrued bonuses 202,250 --
Accrued deferred rent 16,773 --
Accrued taxes and payroll liabilities 3,480 8,407
Interest payable -- 5,919
--------- ---------
$ 330,580 $ 22,787
--------- ---------
--------- ---------
Stockholder/Officer Notes Payable
Stockholder notes payable consist of the following at March 31:
1997 1996
--------- ---------
Loan from an officer of the Company,
bearing interest at 8% per annum
with principal and interest due
June 3, 1996. The note is
collateralized by an airplane $ -- $ 40,000
Loan from an officer of the Company,
bearing interest at 10% per annum
with payment of principal and
interest due June 15, 1996 -- 5,000
--------- ---------
$ -- $ 45,000
--------- ---------
--------- ---------
Management's estimate of the fair value of these liabilities is the
carrying value.
F-12
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE E--INCOME TAXES
For the period ended March 31, 1997, no provision for income taxes has
been reflected due to uncertainty as to the realizability of tax benefits
associated with net operating losses to date. Financing expense associated with
the issuance of bridge units is non-deductible and is being treated as a capital
transaction for income tax reporting purposes.
The income tax provision consists of the following for the period ended
March 31, 1997:
Deferred
Federal $ 465,927
State 87,470
Valuation allowance (553,397)
---------
Net provision $ --
---------
---------
The effective tax rate for the period ended March 31, 1997, was 0%. A
reconciliation between the U.S. federal statutory rate and the effective tax
rate follows:
Tax (benefit) at U.S. federal statutory rates $(2,358,782)
Increase (decrease) resulting from:
State tax (benefit) (274,729)
Permanent difference--financing expense private placement 2,081,437
Other permanent differences (4,016)
Valuation allowance 556,090
-----------
Income tax provision $ --
-----------
-----------
The Company's reporting period for tax purposes is the calendar year.
Taxes on the net loss for the period January through March is reflected in the
calculation of the deferred tax asset. A valuation allowance has been recognized
in an amount equal to the deferred tax asset.
The tax effect of temporary differences between the financial statement
amounts and tax bases of assets and liabilities which give rise to a deferred
tax asset is as follows at March 31, 1997:
Net loss for January 1 through March 31, 1997 $ 231,050
Accounts receivable (49,416)
Capitalized software (139,687)
Other assets (6,840)
Accounts payable and accrued expenses 44,592
Depreciation expense (7,193)
Net operating loss 483,584
Valuation allowance (556,090)
---------
Deferred taxes payable $ --
---------
---------
The use of net operating losses of the Company in the future to offset
taxable income may be limited in the event of a change in control of the Company
in accordance with Section 382 of the Internal Revenue Code.
F-13
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE F--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitment
As of March 31, 1996, the Company leased office space under a
month-to-month operating lease which provides for monthly rent payments of
$1,900.
In May and September 1996, the Company entered into two leases for office
space which provide for aggregate monthly rent payments of $7,530. At March 31,
1997, approximate future rental commitments are as follows:
Year ending March 31,
---------------------
1998 $107,124
1999 109,458
2000 100,306
2001 100,446
Thereafter 50,844
--------
$468,178
--------
--------
Rent expense for the year ended March 31, 1997, and the period ended March
31, 1996, totaled $78,996 and $6,341, respectively.
Employment Agreement
The Company entered into an employment agreement effective April 1, 1996,
with an officer. Minimum future annual salary commitments of the Company under
the agreements are as follows:
Year ending March 31, Salary Bonus Total
--------------------- ------ ----- -----
1998 $ 175,000 $ 87,500 $ 262,500
1999 175,000 87,500 262,500
2000 175,000 87,500 262,500
2001 175,000 87,500 262,500
---------- ---------- ----------
$ 700,000 $ 350,000 $1,050,000
---------- ---------- ----------
---------- ---------- ----------
The agreement also provides for bonuses upon certain performance criteria
of the Company and the determination of the Board of Directors. Pursuant to the
agreement, employment may be terminated by the Company with cause or by the
executive with or without good reason. Termination by the Company without cause,
or by the executive for good reason, would subject the Company to liability for
an amount equal to six months of the terminated executive's salary at the date
of termination plus comparable insurance benefits being received prior to
termination.
The accompanying financial statements reflect compensation paid and
accrued for services rendered, if any, by the officer at the salary level which
the Company believes is reasonable under the circumstances. Pro forma data
presented in the accompanying fiscal year 1996 statement of operations reflect
the result of operations on a pro forma basis had the officer been employed by
the Company for the entire period at a compensation level equal to that
contained in the above agreement.
F-14
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE G--RELATED PARTY TRANSACTIONS
The Company paid legal fees of approximately $380,000 during the year
ended March 31, 1997, to an attorney who is a stockholder of the Company
relating to the initial public offering that became effective in April 1997. The
Company also paid $100,000 during the year ended March 31, 1997, to the same
attorney and stockholder for services relating to the offering that was
abandoned in September 1996.
The Company rents an aircraft for business purposes from an entity owned
by the Company's president. For the year ended March 31, 1997, the Company paid
$27,796 for the rental of the aircraft.
The Company entered into a consulting agreement with the chairman of the
board to provide services for a fixed monthly amount of $1,000. No amounts were
paid to the stockholder during 1997.
NOTE H--DEFINED CONTRIBUTION PLAN
The Company established a Profit-Sharing Plan and Trust (the Plan) in
December 1995. Employees who were employed by the Company on the effective date
of the Plan (January 14, 1995) were automatically eligible for participation.
Employees hired after the effective date become eligible to participate if they
are at least 21 years of age and have completed one year of service with the
Company. Contributions are made at the discretion of management. Contributions
to the Plan for the year ended March 31, 1997, and for the period ended March
31, 1996, were $32,216 and $3,750, respectively.
F-15
Board of Directors
e-Net, Inc.
We have reviewed the accompanying balance sheet of e-Net, Inc. (a Delaware
Corporation), as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for nine month periods ended December 31,
1997 and 1996, and the statements of operations for the three month periods
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of March 31, 1997, and the related statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein), and in our report dated May 2, 1997, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of March
31, 1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Grant Thornton LLP
Vienna, Virginia
January 19, 1998
F-16
e-NET, INC.
BALANCE SHEETS
ASSETS
December 31, 1997 March 31, 1997
----------------- --------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 894,650 $ 379,441
Short-term investments 2,254,180 --
Accounts receivable 95,729 113,181
Inventory 233,144 --
Prepaid expenses 86,318 14,800
------------ ------------
Total Current Assets 3,564,021 507,422
Deposits and other assets -- 7,530
Property, Plant and Equipment, Net 371,152 203,125
Deferred Initial Public Offering Costs -- 964,706
Other Assets 54,000 --
Software Development Costs 894,172 520,853
------------ ------------
$ 4,883,345 $ 2,203,636
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade 69,722 105,301
Accrued liabilities 390,132 330,580
Capital lease obligation -- 4,480
------------ ------------
Total Current Liabilities 459,854 440,361
Accrued Initial Public Offering Costs -- 887,843
------------ ------------
Total Liabilities 459,854 1,328,204
Stockholders' Equity
Common stock, $.01 par value,
50,000,000 shares authorized,
5,750,000 and 4,250,000 shares
outstanding at September 30, and
March 31, 1997, respectively 57,500 42,500
Stock subscriptions (46) (46)
Additional paid-in capital 14,163,090 8,307,627
Retained deficit (9,797,053) (7,474,649)
------------ ------------
Total Stockholders' Equity 4,423,491 875,432
------------ ------------
$ 4,883,345 $ 2,203,636
------------ ------------
------------ ------------
The accompanying notes are an integral part of these statements.
F-17
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended December 31,
1997 1996
----------- -----------
Sales
Products $ 99,235 $ --
Services 65,505 114,389
----------- -----------
Total sales 164,740 114,389
Cost of product sold and service provided
Products 32,412 --
Services 65,003 117,739
----------- -----------
Total cost of product sold and service provided 97,415 117,739
Gross profit 67,325 (3,350)
Operating Expenses
Selling, general and administrative 818,544 157,644
Research and development 310,470 54,342
----------- -----------
Loss from Operations (1,061,689) (215,336)
Other Income (Expense)
Interest and financing expense -- 7,219
Other expenses (20,404) (20,250)
Interest income 48,128 4,773
----------- -----------
Loss Before Income Taxes (1,033,965) (223,594)
Income Tax Provision -- --
----------- -----------
Net Loss $(1,033,965) $ (223,594)
----------- -----------
----------- -----------
Loss per Share $ (.18) $ (.06)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 5,750,000 4,000,000
The accompanying notes are an integral part of these statements.
F-18
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended December 31,
1997 1996
----------- -----------
Sales
Products $ 128,176 $ 24,000
Services 250,079 414,517
----------- -----------
Total sales 378,255 438,517
Cost of product sold and service provided
Products 48,017 12,822
Services 160,045 290,487
----------- -----------
Total cost of product sold and service provided 208,062 303,309
Gross profit 170,193 135,208
Operating Expenses
Selling, general and administrative 1,990,798 593,971
Research and development 573,651 158,684
----------- -----------
Loss from Operations (2,394,256) (617,447)
Other Income (Expense)
Interest expense--bridge financing -- (5,385,135)
Cost of abandoned stock registration -- (284,575)
Interest and financing expense (5,158) (15,581)
Other expenses (101,082) (41,849)
Interest income 178,092 15,019
----------- -----------
Loss Before Income Taxes (2,322,404) (6,329,568)
Income Tax Provision -- --
----------- -----------
Net Loss $(2,322,404) $(6,329,568)
----------- -----------
----------- -----------
Loss per Share $ (.41) $ (1.59)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 5,695,455 3,972,727
The accompanying notes are an integral part of these statements.
F-19
e-NET, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended December 31,
1997 1996
----------- -----------
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $(2,322,404) $(6,329,568)
Adjustments to reconcile net loss to net
cash from operating activities
Interest expense--bridge financing -- 5,385,135
Depreciation and amortization 128,976 28,011
Stock-Based Compensation 62,244 --
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable 17,452 (76,364)
(Increase) in inventory (233,144) --
(Increase) in prepaid expenses,
deposits and other assets (117,987) (25,530)
Increase in accounts payable
and accrued liabilities 23,972 127,183
(Decease) in deferred revenue -- (20,000)
----------- -----------
Net Cash Used in Operating Activities (2,440,891) (911,133)
----------- -----------
Cash Flows from Investing Activities
Capital expenditures (290,353) (94,580)
Capitalized software development costs (379,969) (367,598)
Investment in short term securities (2,254,180) --
----------- -----------
Net Cash Used in Investing Activities (2,924,502) (462,178)
----------- -----------
Cash Flows from Financing Activities
Net proceeds from initial public offering
of common stock 5,870,082 --
Issuance of common stock 15,000 --
Payment of shareholder/officer loans -- (12,050)
Proceeds from issuance of bridge notes payable -- 500,000
Proceeds from issuance of long-term debt -- 1,000,000
Payments on capital leases (4,480) (3,719)
----------- -----------
Net Cash Provided by Financing Activities 5,880,602 1,484,231
----------- -----------
Net Increase in Cash and Cash Equivalents 515,209 110,920
Cash and Cash Equivalents at Beginning of Period 379,441 557,960
----------- -----------
Cash and Cash Equivalents at End of Period $ 894,650 $ 668,880
----------- -----------
----------- -----------
Supplemental Disclosures:
Income Taxes Paid $ -- $ --
----------- -----------
----------- -----------
Interest Paid $ 158 $ 6,284
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
F-20
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Stock
------------------------ Subscriptions Additional Total
No. of and Notes Paid-in Retained Stockholders'
Shares Amount Receivable Capital Deficit Equity
----------- ----------- ----------- ----------- ----------- -----------
Balance, April 1, 1997 4,250,000 $ 42,500 $ (46) $ 8,307,627 $(7,474,649) $ 875,432
Sale of common stock
in initial public offering 1,500,000 15,000 -- 5,793,219 -- 5,808,219
Stock-based compensation -- -- -- 62,244 -- 62,244
Net loss -- -- -- -- (2,322,404) (2,322,404)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 5,750,000 $ 57,500 $ (46) $14,163,090 $(9,797,053) $ 4,423,491
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
F-21
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements include the accounts of
e-Net, Inc. (the "Company"). Such statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the regulations of the Securities and Exchange Commission;
accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. The
results of operations for the quarter and nine months ended December 31, 1997
are not necessarily indicative of the results for the fiscal year ending March
31, 1998. The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
Inventory - Inventory is stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method. The elements of cost include
subcontracted costs and materials handling charges.
Software development costs - The Company has capitalized certain software
development costs incurred after establishing technological feasibility.
Software costs are amortized over the estimated useful life of the software once
the product is available for general release to customers. At December 31, 1997,
the Company has capitalized $900,822, net of accumulated amortization of $
6,650. Should sufficient product sales fail to materialize, the carrying amount
of capitalized software costs may be reduced accordingly in the future. The
costs associated with development of a software product prior to reaching the
point of technological feasibility and with a product's post-general
availability support are charged to research and development expense in the
period incurred.
Revenue recognition - Revenue is recognized on the sale of software products
upon shipment unless future obligations exist wherein a portion of the revenue
is deferred until the obligation is satisfied. Revenue from services rendered is
recognized either as the services are rendered based upon fixed hourly rates or
at contractually determined fixed monthly fees. The Company has recorded, as an
element of cost of product sales, an estimated accrual for product warranty
costs.
NOTE B--INITIAL PUBLIC OFFERING
In April 1997, the Company completed an initial public offering of
securities consisting of 1,500,000 shares of common stock and 1,725,000 common
stock warrants. In connection with the offering, the Company received proceeds
of $5,808,219 net of all expenses associated with the offering.
NOTE C--LINE OF CREDIT FACILITY
On May 31, 1997, the Company signed a one (1) year promissory note for a
$1,000,000 line of credit facility that is collateralized by investments,
receivables and fixed assets of the Company. To date, the Company has not
borrowed on this facility.
NOTE D--NON-QUALIFIED STOCK OPTION PLAN
In April, 1997, the Board of Directors approved the adoption of the e-Net,
Inc. 1997 Non-Qualified Stock Option Plan, including the allocation of up to
500,000 shares for option grants. The options are exercisable at fair market
value measured at the grant date with varying vesting schedules. Options granted
and vested under the plan in the nine months ended December 31, 1997 were
recorded as compensation expense of $62,244. Since the plan's inception, the
Company has granted 255,323 options, of which 115,990 are exercisable at
December 31, 1997.
NOTE E--INCOME TAXES
The Company has generated net operating losses since its inception. At
December 31, 1997, the Company recorded a valuation allowance in an amount equal
to the deferred tax asset due to the uncertainty of generating future taxable
income.
NOTE F--CONCENTRATION
Approximately 56% of the Company's accounts receivable balance at December
31, 1997, and approximately 75% of the Company's sales for the nine months ended
December 31, 1997, are from one customer.
F-22
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 9
Dilution.................................................................. 10
Market Prices of Common Stock............................................. 11
Capitalization............................................................ 11
Dividend Policy........................................................... 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 12
Business.................................................................. 16
Management................................................................ 26
Principal Stockholders.................................................... 31
Certain Transactions...................................................... 32
Description of Securities................................................. 33
Plan of Distribution...................................................... 35
Legal Proceedings......................................................... 35
Legal Matters............................................................. 35
Experts................................................................... 35
Index to Financial Statements............................................. F-1
Report of Independent Certified Public Accountants........................ F-2
e-Net, Inc.
1,725,000 Shares of Common Stock
Underlying 1,725,000 Redeemable
Common Stock Purchase Warrants
-----------
PROSPECTUS
-----------
April 30, 1998
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision that provides that the Company will, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as amended
from time to time ("DGCL"), indemnify all persons whom it may indemnify pursuant
thereto. To the fullest extent permitted by the DGCL, a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director. The provisions are
intended to afford directors protection against, and to limit their potential
liability for, monetary damages resulting from suits alleging a breach of the
duty of care by a director; they also diminish the potential rights of action
which might otherwise be available to shareholders by limiting the liability of
officers and directors to the maximum extent allowable under Delaware law and by
affording indemnification against most damages and settlement amounts paid by a
director of the Company in connection with any shareholders derivative action.
As a consequence of these provisions, stockholders of the Company will be unable
to recover monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within an exception under DGCL or under Delaware case law.
The provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of the
Company or any stockholder to obtain an injunction or any other type of
equitable relief in the event of a breach of fiduciary duty. Management of the
Company believes these provisions will assist the Company in securing and
retaining qualified persons to serve as directors. The Company is unaware of any
pending or threatened litigation against the Company or its directors that would
result in any liability for which such director would seek indemnification or
similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors has
resulted in a growing reluctance on the part of capable persons to serve as
members of boards of directors of public companies. The Company also believes
that the increased risk of personal liability without adequate insurance or
other indemnity protection for its directors could result in overcautious and
less effective direction and management of the Company. The limitation on
liability and indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Additionally, the Company has
procured directors liability insurance coverage, but there is no assurance that
it will provide coverage to the extent of the director's claims for
indemnification. In such event, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification and, the value of
the Company stock may be adversely affected as a result. There is also no
assurance that the Company will be able to continue to procure directors
liability insurance. It is uncertain whether the Company's directors would
continue to serve in such capacities if improved protection from liability were
not provided.
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 Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
II-1
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of expenses payable by the Company from
the net proceeds of the Offering, incurred by the Company in connection with the
issuance and distribution of the Offered Stock. All expenses are estimated.
SEC Registration and Filing Fee(1)............................ $-0-
NASD Registration and Filing Fee(1)........................... $-0-
Nasdaq Registration and Filing Fee(1)......................... $-0-
Financial Printing............................................ $5,000
Transfer Agent Fees........................................... $-0-
Accounting Fees and Expenses.................................. $10,000
Legal Fees and Expenses....................................... $25,000
Blue Sky Fees and Expenses.................................... $10,000
Miscellaneous................................................. $15,000
--------
Total..................................................... $65,000
- -----------
(1) Paid upon filing of the Registration Statement in connection with the
Initial Public Offering.
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth all securities of the Company in
private transactions not registered under the Act.
In January 1995, the Company issued 10,000 shares of its Common Stock to
16 persons, including the officers and directors of the Company, in a private
placement transaction in consideration of $100, or its par value at the time of
issuance. Taking into account the Splits, such shares of Common Stock were the
equivalent of 3,000,000 shares of today's Common Stock. The securities issued by
the Company in these transactions were "restricted" securities within the
meaning of that term as defined in Rule 144 and were issued pursuant to the
"private placement" exemption under Section 4(2) of the Act for sales of
securities by an issuer not involving any public offering. The purchasers in
these transactions were sophisticated and/or "accredited" investors as such
terms are used in Regulation D under the Act.
In March 1996, the Company issued 250,000 shares of its Common Stock to
ATG Group, Inc., a Brookville, New York based investment firm, in a private
placement transaction for aggregate consideration of $250,000, represented by a
full recourse promissory note for the entire purchase price. Taking into account
the Reverse Split, such shares of Common Stock were the equivalent of 125,000
shares of today's Common Stock. However, in June 1996, ATG Group, Inc. agreed to
cancel its shares of the Company's Common Stock in consideration of the
cancellation of its $250,000 promissory note.
In March 1996, the Company was loaned $500,000 by Edward Ratkovitch,
$250,000 by Robert Foise, $200,000 by Armstrong Industries and $50,000 by Martin
Sumichrast. Principal and interest computed at the rate of eight percent
annually was to become due at the earlier of June 1, 1997 or the expected June
1996 closing date of a proposed initial public offering of Company securities.
As additional consideration for these loans, the Company issued 500,000 bridge
units to Mr. Ratkovitch, 250,000 to Mr. Foise, 200,000 to Armstrong Industries
and 50,000 to Mr. Sumichrast. Each bridge unit contained one share of Common
Stock, one Class A Warrant and one Class B Warrant. In June 1996, the loan
principal was converted into paid-in capital and accounted for as consideration
for the bridge units. The Class A Warrants and Class B Warrants were canceled in
March 1997, in exchange for each such shareholder received additional shares of
Common Stock such that, even taking the Reverse Split into account, each such
shareholder had 500,000, 250,000, 200,000 and 50,000 shares of today's Common
Stock. The securities issued by the Company in these transactions were
"restricted"
II-2
securities within the meaning of that term as defined in Rule 144 and were
issued pursuant to the "private placement" exemption under Section 4(2) of the
Act for sales of securities by an issuer not involving any public offering. The
purchasers in these transactions were "accredited" persons as that term is used
in Regulation D under the Act.
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C. area based NASDAQ-listed technology products
and services company, in which the Company agreed to be acquired and become a
wholly-owned subsidiary of MVSI in an exchange of securities. To the Company's
knowledge, Edward Ratkovitch is a significant shareholder and the chairman and
chief executive officer of MVSI, Thomas T. Prousalis, Jr. is a significant
shareholder of MVSI and Clive Whittenberry is a director of MVSI. Pursuant to
the letter of intent, MVSI loaned the Company $500,000 for working capital. In
October 1996, the Company entered into an agreement to be acquired by MVSI,
subject to shareholder approval. MVSI loaned an additional $500,000 to the
Company in November 1996. However, in January 1997, the parties mutually agreed
to terminate the acquisition, primarily due to market conditions that involved a
significant decrease in the bid price of MVSI's common stock and, thereby, the
value of the purchase price.
As part of a mutual cooperation agreement, in January 1997 MVSI loaned the
Company an additional $250,000 under a convertible debenture. The aggregate
principal amount of the convertible debenture at that time was $1,275,081,
reflecting the total amount of loan advances made to the Company by MVSI. The
terms provided for outstanding principal to bear annual interest of nine
percent, and for principal to be convertible into Common Stock upon the
completion of the Company's initial public offering at a ratio calculated using
the offering price per share. In March 1997, MVSI converted the convertible
debenture into 250,000 shares of Common Stock. The securities issued by the
Company in these transactions were "restricted" securities within the meaning of
that term as defined in Rule 144 and were issued pursuant to the "private
placement" exemption under Section 4(2) of the Act for sales of securities by an
issuer not involving any public offering. The purchaser in this transaction was
an "accredited" person as that term is used in Regulation D under the Act.
In April 1998, the Company issued 750,000 shares of Common Stock in a
private placement to various investors at a price of $7.50 per share, or an
aggregate of $5,625,000. Pennsylvania Merchant Group served as the placement
agent for this transaction, for a fee of six percent of the gross proceeds of
the offering, or $337,500, plus a five year warrant to purchase 75,000 shares of
Common Stock at an exercise price of $9.00 per share. The securities issued by
the Company in these transactions were "restricted" securities within the
meaning of that term as defined in Rule 144 and were issued pursuant to the
exemption provided by Rule 506 of Regulation D under the Act for sales of
securities by an issuer not involving any public offering. The purchasers in
this transaction were "accredited" persons as that term is used in Regulation D
under the Act.
All of the foregoing restricted securities were appropriately marked with
a restrictive legend and were issued for investment purposes only and not with a
view to redistribution, absent registration. All of the foregoing purchasers
were fully informed and advised concerning the Registrant, its business,
financial and other matters. The Registrant was informed that each purchaser was
able to bear the economic risk of its investment and was aware that the
securities were not registered under the Act and cannot be re-offered or re-sold
until they have been so registered or until there is an available exemption from
the registration requirements of the Act. The Company's transfer agent and
registrar was instructed to mark "stop transfer" on its ledgers to assure that
these securities not be transferred absent registration or a determination that
there is an available exemption from the registration requirements of the Act.
II-3
Item 27. Exhibits
1.0 Underwriting Agreement.*
1.1 Agreement Among Underwriters.*
1.2 Selected Dealers Agreement.*
3.0 Certificate of Incorporation, filed January 9, 1995.*
3.1 Certificate of Correction to Certificate of Incorporation,
filed April 14, 1998
3.2 Certificate of Amendment to Certification of Incorporation,
filed April 14, 1998
3.3 By-laws, as amended.*
4.0 Specimen Copy of Common Stock Certificate.*
4.1 Form of Warrant Certificate.*
4.2 Form of Representative's Warrant Agreement.*
4.3 Form of Warrant Agreement.*
5.0 Opinion of Thomas J. Prousalis, Jr., Esq. *
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996.*
10.1 United States Patent, Notice of Allowance, dated January 23, 1996.*
10.2 Assignment of Patent Rights, dated March 22, 1996.*
10.3 Sprint Agreement, dated March 1, 1996.*
10.4 Financial Advisory Agreement.*
10.5 Merger and Acquisition Agreement.*
10.6 Mutual Cooperation Agreement, dated January 14, 1997.*
10.7 Lockheed Martin Agreement, dated January 3, 1997.*
10.8 Product Sales Agreement with Diamond Telecom.
10.9 Software Development Agreement with Com21.
10.10 Distributor Agreement with Comtel Electronic System GMBH.
10.11 Joint Market Agreement with Paradyne Corporation.
10.12 Product Sales Agreement with Paradyne Corporation
10.13 1997 Nonqualified Stock Option Plan.
10.14 Government Reseller Agreement dated August 27, 1997.
10.15 Memorandum of Understanding with Summa Four, Inc.
10.16 Net2Phone Bundling Agreement with IDT Corporation.
11.0 Computation of Per Share Loss.*
23.0 Consent of Thomas J. Prousalis *
24.0 Consent of Grant Thornton LLP.
25.0 Power of Attorney (contained on page II-6).
- ----------
*Previously filed.
II-4
Item 28. Undertakings
The undersigned Registrant hereby undertakes to provide to participating
broker-dealers, at the closing, certificates in such denominations and
registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement:
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3 or Form
S-8, and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section
13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Post-Effective Amendment to the Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, in the County of Montgomery, State of
Maryland, on April 30, 1998.
e-NET, INC.
By: /s/ Robert A. Veschi
-----------------------------
Robert A. Veschi
President
In accordance with the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment to the Registration Statement on Form
SB-2 has been signed by the following persons in the capacities and on the dates
stated. Each person whose signature appears below hereby constitutes and
appoints Robert A. Veschi as such person's true and lawful attorney-in-fact and
agent with full power of substitution for such person and in such person's name,
place and stead, in any and all capacities, to sign and to file with the
Securities and Exchange Commission, any and all amendments and post-effective
amendments to this Registration Statement, with exhibits thereto and other
documents in connection therewith, 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 in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or any
substitute therefor, may lawfully do or cause to be done by virtue thereof.
Name Title Date
- ---- ----- ----
/s/Alonzo E. Short, Jr.
- ----------------------------------------- Chairman of April 30, 1998
Alonzo E. Short, Jr., Lt. Gen., USA (ret.) the Board
/s/Robert A. Veschi President, Chief April 30, 1998
- ----------------------------------------- Executive Officer,
Robert A. Veschi Director
/s/Donald J. Shoff Chief Financial April 30, 1998
- ----------------------------------------- Officer (Chief
Donald J. Shoff Accounting Officer)
/s/William L. Hooton
- ----------------------------------------- Director April 30, 1998
William L. Hooton
- ----------------------------------------- Director April 30, 1998
Clive Whittenbury, Ph.D.
- ----------------------------------------- Director April 30, 1998
William W. Rogers, Jr.
II-6
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
Post-Effective Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------
e-NET, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXHIBIT INDEX
Exhibit
No. Document
- ------- --------
3.1 Certificate of Correction to Certificate of Incorporation, filed
April 14, 1998
3.2 Certificate of Amendment to Certification of Incorporation, filed
April 14, 1998
10.8 Product Sales Agreement with Diamond Telecom.
10.9 Software Development Agreement with Com21.
10.10 Distributor Agreement with Comtel Electronic System GMBH.
10.11 Joint Market Agreement with Paradyne Corporation.
10.12 Product Sales Agreement with Paradyne Corporation
10.13 1997 Nonqualified Stock Option Plan.
10.14 Government Reseller Agreement dated August 27, 1997.
10.15 Memorandum of Understanding with Summa Four, Inc.
10.16 Net2Phone Bundling Agreement with IDT Corporation.
24.0 Consent of Grant Thornton LLP.
25.0 Power of Attorney (contained on page II-6).